**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**

** **
| **(Mark One)**                     |                                                                                                                                                                                                                                              |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                         | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  (Fee Required)**                                                                                                                                         |
|                               |                                                                                                                                                                                                                                              |
|                               | **For the fiscal year ended September  30, 2002**                                                                                                                                                                                                 |
|                               |                                                                                                                                                                                                                                              |
| **o**                              | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  (No Fee Required)**                                                                                                                                  |
|                               |                                                                                                                                                                                                                                              |
|                               | **For the transition period  from                 to                 ** |
|                               |                                                                                                                                                                                                                                              |
| **Commission File number 0-15318** |
|                                    |                                                                                                                                                                                                                                                   |  |

 

| **BALLISTIC RECOVERY SYSTEMS, INC.**                                                                 |
|------------------------------------------------------------------------------------------------------|
| (Name of Small  Business Issuer in its Charter)                                                      |
|                                                                                                 |   |   |
| **Minnesota**                                                                                        |   | **41-1372079** |
| (State or other  jurisdiction of incorporation or organization)                                      |   | (IRS Employer ID  Number) |
|                                                                                                 |   |   |
| **300  Airport Road, South St. Paul, Minnesota**                                                     |   | **55075-3541** |
| (Address of  Principal Executive Offices)                                                            |   | (Zip Code) |
|                                                                                                 |   |   |
| Issuer’s telephone  number including area code: **(651) 457-7491**                              |
|                                                                                                 |
| Securities registered  pursuant to Section 12(b) of the Act:   **None**                         |
|                                                                                                 |
| Securities registered  pursuant to Section 12(g) of the Act:   **Common Stock, $.01 par value** |
|                                                                                                 | (Title of Class) |
|                                                                                                      |  |  |  |

 

Check whether theIssuer (1) has filed all reports required to be filed by section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:  ý Yes  o No

 

Check if there isno disclosure of delinquent filers in response to Item 405 of Registration S-Bcontained in this form, and no disclosure will be contained, to the best of theIssuer’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-KSB or any amendment to this Form10-KSB. ý.

 

State Issuer’srevenues for the most recent fiscal year: $5,057,092.

 

Based upon theaverage bid and asked prices of the Issuer’s Common Stock, the aggregate marketvalue of the Common Stock held by Non-affiliates of the Issuer as of November11, 2002 was approximately $3,840,000.

 

Number of sharesoutstanding as of November 11, 2002:  6,209,736.

 

Index for exhibits is located on page 31.  This document contains 34 pages.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of theCompany’s Definitive Proxy Statement to be used in connection with the electionof directors at the 2003 annual shareholders meeting (the “Proxy Statement”)are incorporated by reference into Part III, Items 9-12 as follows:

 
| Part of Form 10-K |                                                                                | Portion of Proxy Statement |
|-------------------|-------------------------------------------------------------------------------------|----------------------------|
|              |                                                                                |                       |   |   |
| 1.                | Part III, Item 9.  Directors and Executive Officers of the Registrant.              |                       | 1. | Proposal 1: Election of  Directors. |
|              |                                                                                |                       |   |   |
| 2.                | Part III, Item 10.  Executive Compensation.                                         |                       | 2. | Proposal 1: Executive  Compensation. |
|              |                                                                                |                       |   |   |
|              |                                                                                |                       |   |   |
| 3.                | Part III, Item 11.  Security Ownership of Certain Beneficial Owners and Management. |                       | 3. | Common Stock Ownership  of Principal Shareholders and Management. |
|              |                                                                                |                       |   |   |
| 4.                | Part III, Item 12.  Certain Relationships and Related Transactions.                 |                       | 4. | Certain Relationships  and Related Transactions. |

 

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**PART I**

 

Item 1.  Description of Business

 

Ballistic RecoverySystems, Inc. (the “Company”) was incorporated in 1980 under the laws of theState of Minnesota.

 

(a)       Business Development 

 

The Company’s corebusiness is the design, manufacturing and marketing of whole-aircraft emergencyparachute recovery systems for use with general aviation and recreationalaircraft. The emergency parachute systems are intended for use in the event ofan in-air emergency and are designed to bring down the entire aircraft and itsoccupants under the parachute canopy. The Company believes it is the only USmanufacturer of whole aircraft recovery systems.  In addition, the Company has designed systems for use withvarious military and civilian unmanned aircraft markets.

 

Since itsinception, the Company has delivered over 17,000 systems that have beeninstalled on recreational and general aviation aircraft.  To date, the Company has documented 156lives saved through theuse of its systems in actual in-air emergencies.  The most recent of which was the first ever save in a certifiedgeneral aviation aircraft in October 2002.

 

The Company was founded to provide recreational aircraft parachutesystems for use in ultralight and experimental aircraft.  That segment of the business continues to bea consistent generator of revenues for the Company and accounted for 25% and42% of gross revenues for fiscal year 2002 and 2001, respectively.

 

The Company has also expanded its product line through the use ofself-funded development and outside engineering contracts in the area ofgeneral aviation aircraft.  The generalaviation market accounted for 75% and 58% of the Company’s revenues for fiscalyear 2002 and 2001, respectively. During the past several years, the Company’s primary general aviationproduct has been for the Cirrus SR20 (SR20) and SR22 manufactured by CirrusDesign Corporation (“Cirrus Design”). Cirrus Design, based in Duluth Minnesota is presently the world’s secondlargest manufacturer of single engine certified aircraft.  Both models of Cirrus Design aircraftutilize the Company’s parachute system as a standard equipment feature.  The Federal Aviation Administration (FAA)certified the SR20 in 1998 and the SR22 was certified in 2000.

 

The development of the system for the SR20 was a joint effort betweenthe Company and Cirrus Design under an agreement that began in 1994 andculminated with FAA certification of the SR20 in late 1998. Under terms of theagreement, 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. The Company shared in the costs to develop and certify the parachutesystem for this aircraft.  The SR22received FAA certification in November 2000 and also has the Company’s productinstalled as standard equipment.  TheSR22 is heavier and faster than the predecessor SR20.  The Company shared in the costs to develop the parachute systemfor the SR22 as well.  Cirrus Designannounced in April 2001 that it would introduce a diesel version of itsaircraft called the SR21TDi (SR21).  TheSR21 will be first introduced in the European market and is expected to be onthe market sometime in the next several years. This model, which is similar to the SR20 and SR22 aircraft, is expectedto utilize the Company’s parachute system as standard equipment as well.

 

In November 2000, the Company entered into an agreement with Charles F.Parsons (d.b.a. Millennium Aerospace) to provide specific funding for aparachute recovery system for the Cessna 172 model aircraft.  The funding was used towards research anddevelopment for the BRS-172 product, which received FAA certification in July2002.  The first customer delivery ofthe BRS-172 was made in September 2002. Under additional terms of the agreement, the Company has the right toselect factory direct sales, which the Company intends to pursue during fiscalyear 2003.

 

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In September 2000, the Company entered into an agreement with Charles F.Parsons (d.b.a. Millennium Aerospace) to provide its product for the Cessna150/152 model aircraft (the “BRS-150”). The product was re-certified in January 2002.  Under this agreement the Company developed a new rocket motorthat is used for the product which is marketed under an exclusive marketingagreement with Millennium Aerospace. The BRS-150 was originally certified by the FAA in early 1993 and wasthe first whole-aircraft parachute system certified by the FAA.

 

During the firstpart of fiscal year 2002, the Company was working under a contract with NASAthrough its Small Business Innovation Research (SBIR) program.  The contract, which was a Phase I feasibility study, covered a six monthperiod and is a firm-fixed grant for $68,571. The Phase I award is entitled “Advanced Aircraft Parachute RecoverySystem” and has been granted to allow the Company to investigate thefeasibility of developing parachute systems for larger and faster aircraft thanthose currently supported by the Company. The Phase I work was completed in May 2002 and the Company applied for afollow-on Phase II grant.  EffectiveSeptember 16, 2002, the Company was awarded a Phase II grant under a firm fixedcontract for $598,694 with a period of performance not exceeding 24 months.

 

Over the pastseveral years, the Company has been successful in establishing various thirdparty funding sources for its research and development.  Outside funding for research and developmentactivities is an ongoing objective for the Company; however, no assurances canbe made that the Company will be successful in this regard.

 

(b)       Narrative Description ofBusiness

 

**Principal Products**:

 

The Company’s principal product line is whole aircraft emergencyparachute recovery systems.  Thesystems, in an in-air emergency situation, may be activated by the pilotreleasing a parachute that is designed to open quickly, slow the decent of theaircraft, and lower the aircraft and its occupants safely to the ground toprevent or reduce human injury and damage to the aircraft. Possible parachuteusage scenarios include:  Mid-aircollision (loss of integrity or control); severe weather upset (wind shear,turbulence); power loss with poor visibility (night or IMC); loss of control(component failure or jam); engine out over hostile (unlandable) terrain;structural failure (age-weakened parts); pilot medical trauma (heart attack);overstress (due to aerobatics, violent weather).

 

General AviationProducts:

 

The Companyentered the general aviation market in the mid 1980’s when it began developmentof an emergency parachute recovery system for the Cessna 150/152 series ofaircraft.  In 1993, this system, knownas the GARD-150 (now called the “BRS-150”), received a Supplemental TypeCertificate (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 successful completion of theproduct for the Cessna 150/152, which generated media attention for both theproduct and the Company, created interest in the Company’s product by outsidecompanies.  The BRS-150 was notsuccessfully marketed as a product by the Company, and resulted in low salesvolumes.  However, at the close offiscal year 2000, the Company signed an agreement to reintroduce the BRS-150product under an exclusive marketing agreement with Charles F. Parsons (d.b.a.Millennium Aerospace).

 

In 1994, theCompany entered into an agreement with Cirrus Design, a privately held companythat began development and certification of a four-place all composite generalaviation aircraft.  The FAA certifiedthe aircraft, known as the Cirrus Design SR20 (SR20), on October 23, 1998.  This is the first FAA certified aircraft tooffer one of the Company’s recovery systems as standard equipment.  The Company began delivering systems for theSR20 during fiscal year 1999 and

 

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continuing to thepresent.

 

During fiscal year2000, Cirrus Design began development and certification efforts for their nextgeneration aircraft called the SR22. The SR22 is a heavier and faster version of the SR20 and utilizes muchof the same parachute technology developed for the SR20.  The SR22 received FAA certification inNovember 2000 and was certified with the Company’s parachute system as astandard equipment component of the aircraft. Deliveries of parachute systems by the Company began in December 2000and continue to the present.  Thisbecame the third of the Company’s products that has received FAAcertification.  For fiscal year 2002,approximately 75% of the Company’s total revenues came from Cirrus Design.

 

InNovember 2000, the Company signed an agreement with Charles F. Parsons (d.b.a.Millennium Aerospace) relating to and received funding for a substantialportion of the development costs to develop and test a parachute recoverysystem for the Cessna 172 model aircraft. During fiscal year 2001, the Company received $200,000 in funding todevelop and test such a recovery system. The development and testing was completed in fiscal year 2002 and theCompany received FAA certification for the BRS-172 recovery system in July2002.

 

RecreationalAviation Products:

 

Recreationalaviation products include products designed and manufactured for use onunregistered aircraft such as ultralights and aircraft registered with the FAAas experimental.  The Companymanufactures these products and sells them directly to individuals and throughdealers and distributors who also market and sell the aircraft and relatedproducts.

 

Contract Researchand Development:

 

Contract researchand 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.

 

In November 2001,the Company entered into a contract with NASA for the Company’s second Phase ISBIR research grant.  The Company hasbeen a successful recipient of both Phase I and Phase II SBIR research grantsin prior years.  The contract, which was a Phase Ifeasibility study, was completed in May 2002 and was a firm-fixed grant for$68,571.  The Phase I award is entitled“Advanced Aircraft Parachute Recovery System” and was granted to allow theCompany 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. The Company was successful in its Phase II pursuit and effectiveSeptember 16, 2002 the Company began work under a two-year contract for a firmfixed award of $598,694.

 

**Manufacturing Operations andSuppliers:**

 

The Company’spersonnel in a South St. Paul, Minnesota facility perform assembly of theCompany’s product line.  The parachutesutilized by the Company are purchased from a certain key supplier althoughthere are other suppliers of parachutes. The Company manufactures its ownballistic devices and receives its solid fuel propellant from a single source.  The Company believes that there arealternate sources for solid fuel in the event that this source becomesunavailable.  Other components arepurchased from a variety of suppliers or internally produced.  The Company routinely searches for newvendors and believes alternate sources can be found should any of these vendorsbe unable to meet the Company’s needs. In addition, the Company possesses or can acquire the expertisenecessary for internal production of all key components.

 

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**Patents**:

 

On August 26,1986, United States Patent No. 4,607,814 was issued to the founder of the Company, for anexplosively deployed parachute system for ultralight aircraft.  The patent is effective until 2003 and hasbeen assigned to the Company.  Thispatent does not cover the solid fuel extraction device aspect of the systemscurrently being sold by the Company.

 

On September 5,1989, United States Patent No. 4,863,119 was issued to the Company on behalf oftwo of the Company’s employees for a “Parachute Reefing Device” as part of aparachute recovery system.  The twoemployees assigned the patent to the Company, which with the payment ofcontinuing maintenance fees is effective until 2006.  This patented feature is utilized in the Company’s general aviationline as well as in its recreational aviation products.  Current development projects also utilizethe reefing device as an integral design component.

 

On May 2, 2000,United States Patent No. 6,056,241 was issued to the Company on behalf of oneof the Company’s employees for a “Thin Film Parachute with Continuous LateralReinforcing Fibers”.  The employeeassigned the patent to the Company, which with the payment of continuingmaintenance fees is effective until 2017. The Company in connection with its NASA SBIR grant program that wascompleted during fiscal year 1999 developed this patented process. The Companydoes not have a current application for the patented process, but the Companyhopes that the patented process can be used in both military and civilianapplications complimenting or enhancing the Company’s current product line.

 

When the Companycompletes development of additional ballistic parachute recovery systems, itintends to apply for patents for such systems if possible.  There can be no assurance, however, that anypatents will be granted or, if granted that they will be of material benefit tothe Company.

 

**Seasonality:**

 

Typically, theCompany experiences 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 Single Customer:**

 

  During the fiscalyear ended September 30, 2002 and 2001, the Company was dependent on onecustomer, Cirrus Design Corporation, for 75%and 58% of the Company’s totalsales, respectively.  The Companysupplies parachute recovery systems to Cirrus from its general aviation productline.

 

  In itsrecreational aviation product line, the Company primarily distributes itsproducts through dealers and distributors who in turn sell to the end consumer. The Company believes that in the eventthat any individual dealers or distributors cease to represent the Company’srecreational aviation products, that alternative dealers or distributors can beestablished.

 

**Backlog of Orders:**

 

As of September30, 2002 and 2001, the Company had a backlog of orders totaling approximately$4,434,000 and $6,221,000, respectively. The backlogs included over $3.8million and $6.1 million of orders for the Cirrus Design aircraft,respectively.  This backlog is expectedto be filled within 12 to 24 months. The reduction in backlog for Cirrus Design is a result of Cirrus’ efforts to reduce leadtimes and increase production volumes to better serve its customers.  Cirrus Design is currently producingaircraft at levels which has made it the second largest producer of single

 

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engine piston aircraft in the world behind Cessna Aircraft Company.  Due to the backlog period involved,however, it is reasonably 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 readers who may utilizepublished bookings and backlog information as tools to forecast the Company’srevenue during a given timeframe since certain purchase orders may be subjectto cancellation and/or delivery schedule revision.

 

**Research and Development**:

 

A summary ofresearch and development is as follows:

 
|                                                                       |   | **2002** |    | **2001** |   |
|----------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Total  research and development expenditures                               |   | $        | 415,929 |     | $      | 265,090 |   |
|                                                                       |   |     |    |     |   |
| Revenues  recognized under contract research and development relationships |   | (112,741 | )       | (59,077  | )      |
|                                                                       |   |     |    |     |   |
| Research  and development, net                                             |   | $        | 303,188 |     | $      | 206,013 |   |

 

The source for the2002 outside funding was from Charles F. Parsons as part of an agreement fordevelopment and certification of the parachute system for the Cessna 172 modelaircraft, and from NASA under the Phase I SBIR grant.  The source of the 2001 outside funding was from Charles F.Parsons as part of the same agreement for development and certification of theparachute system for Cessna 172 model aircraft, and from Cirrus Design as partof a cost sharing agreement for the development and certification of the SR22parachute system.

 

**Competition**:

 

The Company sellsits ballistically deployed parachute recovery systems in the United States andinternationally.  The Company enteredinto a covenant not to compete agreement on October 26, 1995 with Second Chantz(“SCI”), whom the Company believes was the only domestic competitor forballistically deployed parachute systems for the domestic recreational aviationmarket.  Several foreign companies haveor are attempting to introduce new competitive products into the internationalrecreational aviation market. Competition is strong in the European marketbased on price, but the Company continues to pursue sales in that market.  At present, none of the foreign companieshave successfully entered the domestic market. The Company believes its current systems were the first in the marketand that its products and service are superior to its competitors.

 

The FAA, as partof the Cirrus Design SR20 and SR22 certification process, has certified theCompany’s product, which is standard equipment on those aircraft.  These are the first whole aircraft recoverysystem ever certified by the FAA as standard equipment.  The Company also holds Supplemental TypeCertificates for the recovery systems for the Cessna 150/152 and Cessna 172model aircraft.  At present, there areno other manufacturers with the FAA Supplemental Type Certificate or FAAcertification under a manufacturer’s Type Certificate necessary to install arecovery system for the general aviation market.  The Company is unaware of any other manufacturer performingcontract or self-funded research and development activities in an effort toobtain Supplemental Type Certificates or Type Certificates for any other FAAcertified aircraft.

 

Many companieswith resources and capabilities greater than those of the Company coulddevelop, manufacture and market a parachute recovery system competitive withthat of the Company, although the Company believes that such development andapproval could take several years to complete.

 

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**Environmental Compliance:**

 

The Companybelieves that it is in compliance with all current federal and stateenvironmental laws.

 

**Employees:**

 

As of September30, 2002, the Company had 20 full-time employees and one part-time employee atits South St. Paul facility.

 

Item2.             Descriptionof Property

 

The Company leasesa stand-alone 13,000 square foot office and production facility located atFleming Field Airport in South St. Paul, Minnesota.  The building is a World War II training hangar, which the Companyrenovated.

 

Item 3.    Legal Proceedings

 

The Company is notcurrently involved in any legal proceedings that are material to the business.

 

Item 4.    Submission of Matters to aVote of Security Holders

 

No matters weresubmitted to a vote of security holders through a solicitation of proxies orotherwise during the fourth quarter.

 

**PART II**

 

Item 5.    Market for Common Equity andRelated Shareholder Matters

 

(a)       Market Information

 

The Company’sstock is listed on the electronic bulletin board on the over the counter marketand on the pink sheets under the trading symbol of BRSI or BRSI.OB.  Several Internet stock tracking servicesshow the Company’s trading volumes with bid and ask prices as far back asAugust 1995.  Based on informationprovided by these Internet stock-tracking services, the Company believes thatthe asking price would be $0.84 and the bid price would be $0.84 as ofSeptember 30, 2002.

 

The followingtable sets forth the estimated high and low bid prices for the periodsindicated.  The estimated bid pricesshown are based on information from several Internet stock-tracking services.These figures are estimates or averages and do not necessarily represent actualtransactions.

 
|          |   |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|---------------|--------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
|          |   |   |               |   |                |   |               |   |                |   |
| Common Stock: |   |   |               |   |                |   |               |   |                |
| 2002          | High   |   | $                  | 1.03   |                | $      | 1.53               |   | $                   | 1.12   |   | $ | 1.05 |   |
|          | Low    |   | $                  | 0.76   |                | $      | 0.98               |   | $                   | 0.86   |   | $ | 0.80 |   |
|          |   |   |               |   |                |   |               |   |                |   |
| 2001          | High   |   | $                  | 0.78   |                | $      | 1.41               |   | $                   | 1.01   |   | $ | 1.00 |   |
|          | Low    |   | $                  | 0.41   |                | $      | 0.39               |   | $                   | 0.66   |   | $ | 0.65 |   |

 

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(b)       Holders

 

As of November 11,2002, the Company estimates there were approximately 1,500 beneficial owners ofthe Company’s common stock.

 

(c)       Dividends

 

The Company declared adividend in the amount of $0.02 per share, payable February 22, 2002 to allCommon Shareholders of Record on February 8, 2002.

 

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Results of Operations:**

 

Year ended September 30,2002 compared to September 30, 2001

 

Sales

 

Sales for 2002were $5,057,092, a 34.2% increase from the $3,768,727 for 2001.  The increase is attributed to the Company’snew general aviation products.  In thecurrent fiscal year, revenues derived from the Company’s general aviationproducts accounted for approximately 75% of revenues compared to 58% in theprior fiscal year.  The Company’sprimary customer, Cirrus Design, is expected to exceed fiscal year 2002manufacturing volumes for its aircraft throughout the next fiscal year for bothits SR20 and SR22 models.  As a result,the Company is forecasting further growth in 2003 in its general aviationrevenues.  However, volume projectionsand timing of those volumes is uncertain at this time.  Cirrus had reduced their backlog by the endof the current fiscal year compared to the prior fiscal year by increasingproduction volumes in an effort to better serve its customers with shortenedlead-times.  Accordingly, no assurancecan be given that general aviation revenues will increase as anticipated.

 

The Company’srecreational aviation business has dipped below prior year levels.  The Company extended its backlog at the endof the current fiscal year as a result of increased production volume demandsfor its general aviation products. Taking the increased backlog into consideration, the reduction inrecreational aviation business was approximately 8.5% from the prior year.  Within the recreational aviation business,the international markets for the Company’s products have been affected by anumber of factors.  These factorsinclude a strong US currency that raises the cost of the Company’s exports,increased competition in Europe, and increasing government regulations thatmake it more challenging to transport the Company’s product abroad.  The Company has expanded its efforts toimprove international business for its recreational aviation products, butthere can be no assurances that these efforts will produce increased sales forthe Company.

 

Gross Margin

 

For 2002, grossmargin as a percentage of revenues was 40.1% compared to 37.6% for 2001.  Despite increases in raw materials and laborcosts, the improved gross margin is the result of leveraging the Company’soperations personnel and manufacturing overhead over a larger revenuebase.  The Company’s gross marginpercentage has varied each year, and each quarter, in both a positive andnegative fashion due to a variety of factors including customer and specificproduct mix, inventory provisions, pricing adjustments to customers for volumepurchases, and volume related efficiencies. Such variations will probably continue to impact gross marginpercentages in future reporting periods.

 

Selling, Generaland Administrative

 

Selling, general andadministrative costs increased 30.9% for 2002, which is primarily due toincreased staffing and salary adjustments, advertising, trade show activity,travel and business development expenses, insurance costs and shareholderrelated expenditures.  Selling, generaland administrative costs as a percentage of revenues have decreased to 17.3%for 2002 as compared to 17.7% for 2001.   Expenditures in this category are expected to increase as the Companyaccelerates its efforts to expand the general aviation market whilestrengthening the recreational market sales.

 

###### Research and Development

 

Outsidefunding has offset a portion of research and development costs for bothyears.  Net research and developmentcosts were 47.2% higher on a comparative basis.  On a percentage of revenues basis, year to date research anddevelopment expenditures were 6.0% compared to 5.5% in the prior year.  Expenditures are up as a result ofadditional staffing and material acquisitions for specific projects.  Research and development is an integral partof the growth strategy for the Company, and the Company believes that they

 

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willcontinue to play an important role in the Company’s success.  This role will include not only that offuture product developments, but in the expansion of currently developedproducts for additional applications. In addition to self-funded research and development, the Company willcontinue to look for sources for further outside funding of research anddevelopment, but there can be no assurances that the Company will be successfulin those efforts.

 

#### **Income before Income Taxes**

 

For 2002, income beforeincome taxes was $801,490 or 15.8% of revenues compared to $424,488 or 11.3% ofrevenues in 2001.  As the Companyexpands into different aircraft markets and expands its product applications,market conditions will determine ultimate sales levels and profitability.

 

Income TaxesExpense (Benefit)

 

A net expense wasrecorded for 2002 which was offset by valuing the remainder of the netoperating loss carryforwards (NOL’s). 2002 marks the full valuation of all remaining NOL’s for the Company.  A net benefit was recorded in 2001 and was aresult of the valuation of the Company’s NOL’s.  The benefit was recorded based on the Company’s ability todemonstrate that there was a reasonable likelihood of being able to utilize thecarryforwards to offset State and Federal taxes on future taxable income.  Future income tax expense will be determinedby actual profitability levels adjusted for book and tax timing differences.

 

#### **Earnings per Share**

 

Net income of $604,801for 2002 was 12.0% of revenues or $0.10 per share, as compared to net income of$599,010, which was 15.9% of revenues or $0.10 per share for 2001.  The comparative reduction as a percentage ofsales is a result of prior year utilization of NOL’s to increase income aftertaxes.

 

**Liquidity and Capital Resources:**

 

Management intends to fundits operations out of its current revenues with the exception of its contractresearch and development projects.  Asof September 30, 2002, the Company had cash and cash equivalents of $997,629.  Based upon the Company’s currentprojections, the Company believes that it has sufficient cash from reserves andcash flow to finance operations through the next twelve-month period. TheCompany has also established a line-of-credit for use in operations asrequired.  The current line-of-credit isfor $250,000 and is established on an annual renewal basis with the currentagreement expiring December 31, 2002. The Company has no balance currently outstanding under theline-of-credit.  Management believesthat the current business operation, along with the line-of-credit, is adequateto support the ongoing operations of the Company during the next twelve-monthperiod and will maintain and adjust expenses as necessary to improveprofitability. The Company will continue to look for non-equity sources to fundcontract research and development projects, but there can be no assurances thatthe Company will be successful in its efforts.

 

The Company anticipatesbeing able to expand its product line to include other certified andnon-certified aircraft as the recovery system gains further marketacceptance.  The Company is in ongoingdiscussions with domestic and foreign companies that have expressed interest inutilizing certain of the Company’s products. These companies produce both certified and non-certified aircraft.  No assurance can be made as to the futurebenefits that will be derived from these discussions.

 

TheCompany’s general aviation product is standard equipment on the Cirrus DesignSR20 and SR22 model aircraft.  TheCompany delivered 367 units in fiscal year 2002 as compared to 200 units forthe prior fiscal year.  As of thebeginning of November 2002, Cirrus Design has firm orders for 320 SR20 and SR22models, which will include the Company’s parachute systems.  Cirrus Design has delivered 611 aircraft todate as of the same time period.  CirrusDesign expects to be able to fill the backlog of firm orders during the next 24months.  The backlog of orders is areduction from the same prior year period as a result of Cirrus Design’sefforts to reduce lead times and increase production volumes to better serveits customers.  Future productionvolumes for the Cirrus Design aircraft, and therefore, the Company’s parachutesystems, will be

 

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dictatedby ultimate market demands for Cirrus Design’s products.  Accordingly, the Company is, and will likelybe, dependent on Cirrus Design for a material portion of its revenues in fiscalyear 2003.  Any negative impact onCirrus Design’s sales would negatively impact the Company’s projected revenues.

 

InNovember 2000, the Company entered into an agreement with Charles F. Parsons,which provided $200,000 of the funding necessary to develop and certify aparachute recovery system for the Cessna 172 aircraft.  The agreement provided funding that wasutilized to offset a portion of the expenditures necessary for thatproject.  On July 11, 2002, the FAA notified the Company that it had granted thesupplemental type certificate to the Company for the BRS-172.  The first customer installation wascompleted in September 2002 and a second was completed in October 2002.  The Company is in the process of a fulltransition of the BRS-172 system into production and training installationfacilities to perform customer installations. Although any licensed Airframe and Power plant Mechanic can install thesystem, the Company is recommending the use of a trained installation facilityto reduce costs to the customer.  TheBRS-172 is being marketed and distributed under an exclusive marketing arrangementwith Aerospace Marketing in conjunction with factory support.  Although certified, there can beno assurances that the system will sell in volumes that will have a materialimpact on the Company.

 

Atthe beginning of November 2001, the Company entered into a contract with NASAthrough it’s Small Business Innovation Research (SBIR) grant program.  The Phase I grant was a six-monthfeasibility study to explore the possibility of the Company’s ability to developrecovery systems for use of faster and larger aircraft, such as the newgeneration of light jets that are currently being developed by a number ofdifferent companies.  The contract was afirm-fixed contract for $68,571.  In May2002, the Company completed its work under the Phase I grant and submitted itsreports and a proposal for a Phase II grant. The Company received the Phase II contract, which was effectiveSeptember 16, 2002.  The Phase II grantis for a firm-fixed grant of $598,694 over a two-year period.  The Phase II grant will allow the Company tocontinue its research and development that it began during the Phase Iaward.  No assurances can be made thatif the Phase II is successful, that it will result in future products andrevenues for the Company.

 

The Company anticipates aneed to make capital improvements to its current production facility as well asexpenditures to increase inventory levels during the fiscal year and beyond asa result of the production of general aviation recovery systems and furthermarket penetration.  It is currently theintention of the Company to fund the expenditures through current operations aswell as revenues generated by those units.

 

The Private SecuritiesLitigation Reform Act of 1995 provides “safe harbor” for forward-lookingstatements.  Certain informationincluded in this Form 10-KSB and other materials filed or to be filed by theCompany with the Securities and Exchange Commission (as well as informationincluded in oral statements or other written statements made or to be made bythe Company) contain statements that are forward-looking, such as statementsrelating to plans for research projects, anticipated Cirrus delivery orders andschedules, development, anticipated delivery orders and schedules for theCessna 172 system and the Cessna 150/152 system, success of contracts for NASASBIR research projects, other business development activities as well as othercapital spending, financial sources, and the effects of competition.  Such forward-looking information involvesimportant risks and uncertainties that could significantly affect anticipatedresults in the future and, accordingly, such results may differ from thoseexpressed in any forward-looking statements made by or on behalf of theCompany.  These risks and uncertaintiesinclude, but are not limited to, dependence on Cirrus Design, the eliminationof funding for new research and development projects, the decline in registeredand unregistered aircraft sales, potential product liability claims, dependenceon discretionary consumer spending, dependence on existing management, generaleconomic conditions, changes in federal or state laws or regulations.

 

12

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Item 7.  Financial Statements and Supplementary Data

 
| (1)    | Financial Statements  for the years ended September 30, 2002 and 2001:                                   |
|--------|----------------------------------------------------------------------------------------------------------|
|   |                                                                                                     |
|   | Independent Auditors’  Report                                                                       |
|   |                                                                                                     |
|   | Balance Sheets as of September 30, 2002  and 2001                                                        |
|   |                                                                                                     |
|   | Statements  of Operations for the years ended September 30, 2002 and 2001                                |
|   |                                                                                                     |
|   | Statements of  Shareholders’ Equity for the years ended September 30, 2002 and 2001                 |
|   |                                                                                                     |
|   | Statements  of Cash Flows for the years ended September 30, 2002 and 2001                                |
|   |                                                                                                     |
|   | Notes to Financial  Statements                                                                           |
|   |                                                                                                     |
| (2)    | Financial Statement  Schedules of Supplemental Information are no longer required under Regulation  S-B. |

 

13

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**Callahan,Johnston & Associates, LLC**

**CertifiedPublic Accountants and Consultants**

7400 Lyndale AvenueSouth, Suite 140

Minneapolis, MN  55423

(612) 861-0970 Fax (612)861-5827

 

INDEPENDENT AUDITORS’ REPORT

 

Shareholders andBoard of Directors

Ballistic RecoverySystems, Inc.

South St. Paul,Minnesota

 

We have auditedthe accompanying balance sheets of Ballistic Recovery Systems, Inc. as ofSeptember 30, 2002 and 2001 and the related statements of operations,shareholders’ equity, and cash flows for the years then ended.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes anassessment of the accounting principles used and significant estimates made bymanagement, as well as an evaluation of the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Ballistic Recovery Systems, Inc. as ofSeptember 30, 2002 and 2001, and the results of operations, cash flows andchanges in shareholders’ equity for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 
|                                          |
|-----------------------------------------------|
| /s/ Callahan, Johnston  & Associates, LLC |   |
|                                          |
| Callahan, Johnston  & Associates, LLC     |
| Minneapolis, Minnesota                        |
| November 8, 2002                              |

 

14

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PART II - Item 7. Financial Statements

 

BALLISTIC RECOVERY SYSTEMS, INC.

BALANCE SHEETS

September 30, 2002 and 2001

 
|                                                                                                                                |   | **2002**  |      | **2001**   |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|------------|--------|
| ASSETS                                                                                                                              |   |      |      |       |   |
| Current  assets:                                                                                                                    |   |      |      |       |   |
| Cash                                                                                                                                |   | $         | 997,629   |       | $      | 667,608 |   |
| Accounts  receivable - net of allowance for doubtful accounts of $10,000 and $10,000,  respectively                                 |   | 78,945    |      | 17,388     |   |
| Inventories                                                                                                                         |   | 827,898   |      | 686,402    |   |
| Deferred  tax asset - current portion                                                                                               |   | 419,000   |      | 280,000    |   |
| Prepaid  expenses                                                                                                                   |   | 48,371    |      | 14,113     |   |
| Total  current assets                                                                                                               |   | 2,371,843 |      | 1,665,511  |   |
|                                                                                                                                |   |      |      |       |   |
| Furniture,  fixtures and leasehold improvements                                                                                     |   | 367,405   |      | 198,006    |   |
| Less  accumulated depreciation                                                                                                      |   | (170,387  | )         | (127,066   | )      |
| Furniture,  fixtures and leasehold improvements - net                                                                               |   | 197,018   |      | 70,940     |   |
|                                                                                                                                |   |      |      |       |   |
| Other  assets:                                                                                                                      |   |      |      |       |   |
| Patents  less accumulated amortization of $8,681 and $7,995, respectively                                                           |   | 2,984     |      | 3,670      |   |
| Deferred  tax asset - long-term portion                                                                                             |   | —    |      | 220,000    |   |
| Long-term  prepaid expenses                                                                                                         |   | 103,211   |      | —     |   |
| Other  intangible assets less accumulated amortization of $46,258 and $35,978,  respectively                                        |   | 5,140     |      | 15,419     |   |
| Covenant  not to compete less accumulated amortization of $262,444 and $224,501,  respectively                                      |   | 116,994   |      | 154,937    |   |
| Total  other assets                                                                                                                 |   | 228,329   |      | 394,026    |   |
|                                                                                                                                |   |      |      |       |   |
| Total  assets                                                                                                                       |   | $         | 2,797,190 |       | $      | 2,130,477 |   |
|                                                                                                                                |   |      |      |       |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                           |   |      |      |       |   |
|                                                                                                                                |   |      |      |       |   |
| Current  liabilities:                                                                                                               |   |      |      |       |   |
| Accounts  payable                                                                                                                   |   | $         | 51,582    |       | $      | 106,353 |   |
| Customer  deposits                                                                                                                  |   | 192,754   |      | 86,061     |   |
| Accrued  payroll                                                                                                                    |   | 75,172    |      | 41,902     |   |
| Other  accrued liabilities                                                                                                          |   | 342,402   |      | 213,525    |   |
| Current  portion of covenant not to compete                                                                                         |   | 36,354    |      | 32,584     |   |
| Current  liabilities                                                                                                                |   | 698,264   |      | 480,425    |   |
|                                                                                                                                |   |      |      |       |   |
| Long-term  bank note and covenant, less current portions                                                                            |   | 89,816    |      | 126,169    |   |
|                                                                                                                                |   |      |      |       |   |
| Shareholders’  equity:                                                                                                         |   |      |      |       |   |
| Common  stock ($.01 par value; 10,000,000 shares authorized; 6,209,736 and 6,119,701  shares, respectively, issued and outstanding) |   | 62,098    |      | 61,197     |   |
| Additional  paid-in capital                                                                                                         |   | 2,764,197 |      | 2,761,347  |   |
| Accumulated  deficit                                                                                                                |   | (817,185  | )         | (1,298,661 | )      |
| Total  shareholders’ equity                                                                                                    |   | 2,009,110 |      | 1,523,883  |   |
| Total  liabilities and shareholders’ equity                                                                                    |   | $         | 2,797,190 |       | $      | 2,130,477 |   |

 

The AccompanyingNotes are an Integral Part of these Financial Statements.

 

15

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BALLISTIC RECOVERY SYSTEMS, INC.

STATEMENTS OF OPERATIONS

Years Ended September 30, 2002 and 2001

 
|                                           |   | **2002**  |      | **2001**  |   |
|------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Sales                                          |   | $         | 5,057,092 |      | $      | 3,768,727 |   |
| Cost  of sales                                 |   | 3,030,189 |      | 2,353,385 |   |
|                                           |   |      |      |      |   |
| Gross  profit                                  |   | 2,026,903 |      | 1,415,342 |   |
|                                           |   |      |      |      |   |
| Selling,  general and administrative           |   | 873,690   |      | 667,452   |   |
| Research  and development, net                 |   | 303,188   |      | 206,013   |   |
|                                           |   |      |      |      |   |
| Income  from operations                        |   | 850,025   |      | 541,877   |   |
|                                           |   |      |      |      |   |
| Other  income (expense):                       |   |      |      |      |   |
| Interest  expense                              |   | (16,855   | )         | (29,183   | )      |
| Intangible  amortization                       |   | (48,223   | )         | (48,223   | )      |
| Other  - net                                   |   | 16,543    |      | (39,983   | )      |
|                                           |   |      |      |      |   |
| Income  before income taxes                    |   | 801,490   |      | 424,488   |   |
|                                           |   |      |      |      |   |
| Income  taxes expense (benefit)                |   | 196,689   |      | (174,522  | )      |
|                                           |   |      |      |      |   |
| Net  income                                    |   | $         | 604,801   |      | $      | 599,010 |   |
|                                           |   |      |      |      |   |
| Basic  earnings per share                      |   | $         | 0.10      |      | $      | 0.10 |   |
|                                           |   |      |      |      |   |
| Weighted  average number of shares outstanding |   | 6,184,925 |      | 6,095,903 |   |
|                                           |   |      |      |      |   |
| Diluted  earnings per share                    |   | $         | 0.10      |      | $      | 0.10 |   |
|                                           |   |      |      |      |   |
| Weighted  average number of shares outstanding |   | 6,314,092 |      | 6,114,202 |   |

 

The Accompanying Notes are an Integral Part of theseFinancial Statements.

 

16

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BALLISTIC RECOVERY SYSTEMS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended September 30, 2002 and 2001

 
|                                                 |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Equity(Deficit)** |   | **Share-  holders’  Equity** |   |
|------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|
| **Number of  Shares**                                |   | **Amount**        |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Balance  9/30/00                                     |   | 5,905,798         |   | $                                | 59,058 |                             | $      | 2,646,236                         |   | $ | (1,897,671 | ) | $ | 807,623 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Restricted  Stock issued under financing arrangement |   | 200,000           |   | 2,000                            |   | 108,000                          |   | —                            |   | 110,000 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Issuance  of stock in lieu of director fees          |   | 11,492            |   | 115                              |   | 7,135                            |   | —                            |   | 7,250 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Net  stock issued under cashless transaction         |   | 2,411             |   | 24                               |   | (24                              | )      | —                            |   | — |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Net  income                                          |   | —            |   | —                           |   | —                           |   | 599,010                           |   | 599,010 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Balance  9/30/01                                     |   | 6,119,701         |   | $                                | 61,197 |                             | $      | 2,761,347                         |   | $ | (1,298,661 | ) | $ | 1,523,883 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Issuance  of stock in lieu of director fees          |   | 3,750             |   | 38                               |   | 3,712                            |   | —                            |   | 3,750 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Net  stock issued under cashless transaction         |   | 86,285            |   | 863                              |   | (863                             | )      | —                            |   | — |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Dividend  declaration                                |   | —            |   | —                           |   | —                           |   | (123,325                          | )      | (123,325 | ) |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Net  income                                          |   | —            |   | —                           |   | —                           |   | 604,801                           |   | 604,801 |   |
|                                                 |   |              |   |                             |   |                             |   |                              |   |   |   |
| Balance  9/30/02                                     |   | 6,209,736         |   | $                                | 62,098 |                             | $      | 2,764,196                         |   | $ | (817,185 | ) | $ | 2,009,109 |   |

 

The Accompanying Notes are an Integral Part of theseFinancial Statements.

 

17

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BALLISTIC RECOVERYSYSTEMS, INC.

STATEMENTS OF CASH FLOW

Years Ended September 30,2002 and 2001

 
|                                                                       |   | **2002** |    | **2001** |   |
|----------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Cash  flows from operating activity:                                       |   |     |    |     |   |
| Net  income                                                                |   | $        | 604,801 |     | $      | 599,010 |   |
| Adjustments  to reconcile net income to net cash  from operating activity: |   |     |    |     |   |
| Deferred  income tax                                                       |   | 81,000   |    | (200,000 | )      |
| Depreciation  and amortization                                             |   | 54,287   |    | 38,465   |   |
| Amortization  of covenant not to compete                                   |   | 37,943   |    | 37,944   |   |
| Inventory  valuation reserve                                               |   | —   |    | 75,000   |   |
| Stock  issued in lieu of board fees                                        |   | 3,750    |    | 7,250    |   |
| Provision  for bad debts                                                   |   | —   |    | 7,500    |   |
| (Increase)  decrease in:                                                   |   |     |    |     |   |
| Accounts  receivable                                                       |   | (61,557  | )       | 73,503   |   |
| Inventories                                                                |   | (141,496 | )       | 84,707   |   |
| Prepaid  expenses                                                          |   | (34,258  | )       | (14,113  | )      |
| Long-term  prepaid expenses                                                |   | (103,211 | )       | —   |   |
| Increase  (decrease) in:                                                   |   |     |    |     |   |
| Accounts  payable                                                          |   | (54,771  | )       | (37,637  | )      |
| Customer  deposits                                                         |   | 106,693  |    | 11,368   |   |
| Accrued  expenses                                                          |   | 162,147  |    | 154,650  |   |
|                                                                       |   |     |    |     |   |
| Net  cash flows from operating activities                                  |   | 655,328  |    | 837,647  |   |
|                                                                       |   |     |    |     |   |
| Cash  flows from investing activities:                                     |   |     |    |     |   |
| Capital  expenditures                                                      |   | (169,399 | )       | (44,775  | )      |
|                                                                       |   |     |    |     |   |
| Net  cash flows from investing activities                                  |   | (169,399 | )       | (44,775  | )      |
|                                                                       |   |     |    |     |   |
| Cash  flows from financing activities:                                     |   |     |    |     |   |
| Net  borrowing under line-of-credit agreement                              |   | —   |    | (220,600 | )      |
| Proceeds  form sale of stock                                               |   | —   |    | 110,000  |   |
| Principal  payments on debt                                                |   | —   |    | (19,318  | )      |
| Principal  payments on covenant not to compete                             |   | (32,583  | )       | (29,204  | )      |
| Dividend  payment                                                          |   | (123,325 | )       | —   |   |
|                                                                       |   |     |    |     |   |
| Net  cash flows from financing activities                                  |   | (155,908 | )       | (159,122 | )      |
|                                                                       |   |     |    |     |   |
| Increase  (decrease) in cash                                               |   | 330,021  |    | 633,750  |   |
| Cash  - beginning of year                                                  |   | 667,608  |    | 33,858   |   |
|                                                                       |   |     |    |     |   |
| Cash  - end of period                                                      |   | $        | 997,629 |     | $      | 667,608 |   |

 

The Accompanying Notes are an Integral Part of theseFinancial Statements.

 

18

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BALLISTIC RECOVERYSYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDEDSEPTEMBER 30, 2002 AND 2001

 

1.               Summary ofSignificant Accounting Policies

 

Nature of Business

 

Ballistic RecoverySystems, Inc. (the “Company”) designs, manufactures and distributes rocketdeployed whole-aircraft emergency parachute systems for use on general aviationand recreational aircraft. The emergency parachute systems are intended for usein the event of an in-air emergency and are designed to bring down the entireaircraft and its occupants under the parachute canopy.

 

The Company hasalso been successful in its efforts to expand its product line through the useof company-sponsored development and outside engineering contracts in the areaof general aviation aircraft.  TheCompany is currently producing and selling emergency recovery systems for twofour-place general aviation aircraft, known as the Cirrus Design SR20 (SR20)and SR22.  The products were developedin a joint effort between the Company and Cirrus Design.  These aircraft were certified by the FederalAviation Administration (FAA) in 1998 and 2000, respectively, and features theCompany’s parachutes as standard equipment. In January 2002, the Company recertified its system for the Cessna150/152 model aircraft with an updated rocket motor and container.  The first customer delivery followingrecertification of the BRS-150 was made in November 2002.  In November 2001, the Company entered into acontract to develop and market a product for the Cessna 172 model of aircraft.  The development was completed andcertification by the FAA was received in July 2002.  The first customer delivery of the BRS-172 was made in September2002.  The Company’s products are soldboth domestically and internationally.

 

Use of Estimates

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

##### Cash Concentrations

 

Bank balancesexceeded federally insured levels during 2002 and 2001.

 

AccountsReceivable

 

The Company sellsto domestic and foreign companies.  TheCompany grants uncollateralized credit to certain customers, but most customershipments are prepaid or shipped cash on delivery (COD).  In addition, the Company’s research anddevelopment projects are billed to its customers on an uncollateralized creditbasis with terms of between net 15 and net 30 days.  The estimated loss that management believes is probable isincluded in the allowance for doubtful accounts.  Due to uncertainties in the collection process, however, it is atleast reasonably possible that management’s estimate will change during thenext year.  That amount cannot beestimated.

 

Legal Matters

 

The Company is notcurrently involved in any legal proceedings that are material to the business.

 

19

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### Customer Concentration

 

One majorcustomer, Cirrus Design Corporation, represented 75%and 58% of the Company’stotal sales in fiscal year 2002 and 2001, respectively.  This customer also accounted for 84% (or$75,000) and 0% of accounts receivable at September 30, 2002 and 2001,respectively.  The Company suppliesparachute systems to Cirrus from its general aviation product line.

 

In itsrecreational aviation product line, the Company primarily distributes itsproducts through dealers and distributors who in turn sell to the endconsumer.  The Company believes that inthe event that any individual dealers or distributors cease to represent theCompany’s products, that alternative dealers or distributors can beestablished.

 

Inventories

 

Inventories arerecorded at the lower of cost (determined on a first-in basis) or market.Approximately 1/3 of the inventory on hand at the end of fiscal year 2002 and2001 related to unique components used in products for the Company’s majorcustomer as referred to above.  Theestimated loss that management believes is probable is included in theinventory valuation allowance.  Due touncertainties, however, it is at least reasonably possible that management’sestimate will change during the next year. That amount cannot be estimated.

 

Customer Deposits

 

The Companyrequires order deposits from most of its domestic and internationalcustomers.  These deposits representeither partial or complete down payments for orders.  These down payments are recorded as customer deposits.  The deposits are recognized as revenue whenthe product is shipped.

 

Fixed Assets

 

Fixed assets arestated at cost. Depreciation is computed using the straight-line method overthe estimated useful lives of the related assets, ranging from three to tenyears. 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;significant renewals and betterments are capitalized. Deduction is made forretirements resulting from renewals or betterments.

 

Intangibles

 

Patents are recordedat cost and are being amortized on a straight-line method over 17 years.  The covenant not to compete is recorded atcost and is being amortized using the straight-line method over the ten-yearterm of the agreement.  Other intangibleassets are recorded at cost and are being amortized on a straight-line methodover five years.

 

Stock-BasedConsideration

 

The Company hasapplied the fair value based method of accounting for employee and non-employeestock-based consideration and/or compensation in accordance with FASB Statement123.

 

20

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ComprehensiveIncome

 

SFAS No. 130establishes standards for the reporting and disclosure of comprehensive incomeand its components which will be presented in association with a company’sfinancial statements.  Comprehensiveincome is defined as the change in a business enterprise’s equity during aperiod arising from transactions, events or circumstances relating to non-ownersources, such as foreign currency translation adjustments and unrealized gainsor losses on available-for-sale securities. It includes all changes in equity during a period except those resultingfrom investments by or distributions to owners.  For the fiscal years ended September 30, 2002 and 2001, netincome and comprehensive income were equivalent.

 

Fair Value ofFinancial Instruments

 

SFAS No. 107,“Disclosures About Fair Value of Financial Instruments” requires disclosure ofthe estimated fair value of financial instruments as follows:

 

*Short-term Assets and Liabilities*:

 

 The fair values of cash, accounts receivable,accounts payable, accrued liabilities, and short-term debt approximate theircarrying values due to the short-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 ratescurrently available to the company for debt with similar terms and maturities.

 

EarningsPer Share

 

TheCompany has implemented FASB 128: Earnings Per Share.  Basic EPS excludes dilution and is computed by dividing netincome by the weighted-average number of common shares outstanding for theyear.  Diluted EPS reflects thepotential dilution from stock options and is computed using the treasury stockmethod.  Under the treasury stock methodstock options are assumed to have been exercised at the beginning of the periodif the exercise price exceeds the average market price during the period.

 
| **Dates  Outstanding**                               |   | **Shares  Outstanding** |   | **Days  Outstanding** |   | **Weighted  Average Shares** |    |
|------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|------------------------------|---------|
|                                                 |   |                    |   |                  |   |                         |    |
| 10/1/01 to  9/30/02                                  |   | 6,119,701               |   | 365                   |   | 6,119,701                    |    |
| 11/13/01 to  9/30/02                                 |   | 3,750                   |   | 320                   |   | 3,288                        |    |
| 01/10/02 to  9/30/02                                 |   | 86,285                  |   | 262                   |   | 61,936                       |    |
|                                                 |   |                    |   |                  |   |                         |    |
| Weighted-Average  Shares for basic EPS               |   |                    |   |                  |   | 6,184,925                    |    |
|                                                 |   |                    |   |                  |   |                         |    |
| Incremental  shares from assumed exercise of options |   |                    |   |                  |   | 129,167                      |    |
|                                                 |   |                    |   |                  |   |                         |    |
| Adjusted  Weighted-Average Shares for diluted EPS    |   |                    |   |                  |   | 6,314,092                    |    |
|                                                 |   |                    |   |                  |   |                         |    |
| Income available  to common stockholders             |   |                    |   |                  |   | $                            | 604,801 |   |
|                                                      |        |                         |        |                       |        |                              |         |  |

 

21

----

 

Income Taxes

 

Timing differencesrelate primarily to: allowances for doubtful accounts; inventory valuationallowances; and accrued expenses not currently deductible.  Beginning in fiscal year 1997 and continuingto the present, a deferred tax asset, net of a valuation reserve, is reflectedfor future benefit of the Company’s net operating loss carry forwards and nettiming differences.  At the end offiscal year 2002, the Company had fully valued its net operating loss carry forwards.

 

Research andDevelopment Costs

 

Research anddevelopment costs are charged to expense as incurred.

 

AdvertisingExpenses

 

Non-directresponse advertising expenses are recognized in the period incurred.  Non-direct response advertising expenses totaled$81,839 in 2002 and $68,045 in 2001.

 

2.               New ProductDevelopment, Research and Development Funding and Income Recognition

 

 Upon satisfaction of contingencies on November2, 2000, an agreement between the Company and Charles F. Parsons (d.b.a. MillenniumAerospace) dated October 26, 2000 became effective.  The purpose of the agreement was to provide specific funding fora parachute recovery system for the Cessna 172 model aircraft to be developedand certified by the Company.  TheAgreement called for an investment by Parsons of $200,000.  The investment took the form of an equityinfusion valued at $110,000 for 200,000 restricted shares of the Company’sCommon Stock and $90,000 for research and development.  The funding was used to offset research anddevelopment costs for the BRS-172 product. On July 11, 2002, the FAA notifiedthe Company that it had granted the supplemental type certificate to theCompany for the BRS-172.  The firstcustomer delivery of the BRS-172 was completed in September 2002.  Now certified, Parsons will expand marketingand distribution of the BRS-172 system. The Company has been working on the transition from engineering toproduction and has been working to train installation facilities for theproduct.  Although any certifiedAirframe and Power plant Mechanic can install the product, the Company isencouraging customers to utilize the installation facilities to minimize costsand ensure factory quality installations.

 

Forthe past several years, the Company’s primary general aviation products havebeen for the Cirrus Design SR20 and SR22 Aircraft (SR20 and SR22).  The SR20 aircraft received Federal AviationAdministration (FAA) certification in October 1998 and includes the Company’sparachute system as a standard equipment feature. The development of the systemfor the SR20 was a joint effort between the Company and Cirrus Design under anagreement that began in 1994 and culminated with FAA certification of the SR20in late 1998. Under terms of the agreement, the Company has retained thedeveloped technology for the parachute systems in general and Cirrus Design hasretained the developed technology that is specific to their individualaircraft.  The Company shared in thecosts to develop and certify the parachute system for this aircraft.  The SR22 received FAA certification inNovember 2000 and has the Company’s product installed as standard equipment aswell.  The SR22 is heavier and fasterthan the predecessor SR20.  The Companyalso shared in the costs to develop the parachute system for the SR22.

 

22

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CirrusDesign announced in April 2001 that it would introduce a diesel version of itsaircraft called the SR21TDi (SR21).  TheSR21 will be first introduced in the European market and is expected to be onthe market sometime in the next several years. This model, which is similar to the SR20 and SR22 aircraft, is expected to utilize the Company’s parachute system as standardequipment as well.

 

In September 2000, the Company entered into an agreement to bring backits product for the Cessna 150/152 model aircraft (the “BRS-150”).  The Company received the revisedsupplemental type certificate on January 9, 2002.  The product will be marketed under an exclusive marketingagreement with an outside company.

 

On November 2, 2001, the Company entered into a contact with NASAthrough its Small Business Innovation Research (SBIR) program.  The contract, which is a Phase I feasibilitystudy, covers a six month period and is a firm-fixed grant for $68,571.  The Phase I award is entitled “AdvancedAircraft Parachute Recovery System” and was granted to allow the Company toinvestigate the feasibility of developing parachute systems for larger andfaster aircraft than those currently supported by the Company.  The Company completed the Phase I contractin May 2002 and applied for a Phase II grant. Effective September 16, 2002, the Company began work under a Phase IIgrant to continue the research that was begun during Phase I.  The contract award was for $598,694 andcovers a 24-month period.

 

3.               Purchase andSupply Agreement

 

OnSeptember 17, 1999, the Company entered into a Purchase and Supply Agreementwith Cirrus Design Corporation (Cirrus), the manufacturer of the SR20 and SR22aircraft that utilize the Company’s parachute system as standardequipment.  Under the Agreement, Cirrushas been issued four warrants to acquire an aggregate of up to 1.4 millionshares of restricted Company stock.  Inorder to execute the warrants, Cirrus must meet certain purchase levels of theCompany’s emergency parachute systems for the SR20, SR22 and derivativeaircraft over the subsequent five years. The purchase levels that must be achieved along with the correspondingnumber of shares under each warrant and warrant strike price are as follows:

 
| **Warr #** |   | **Exercise  Period** |   | **Warrant  Shares** |   | **Exercise  Price per  Warrant Share** |   | **Purchase  Commitment** |
|------------|--------|----------------------|--------|---------------------|--------|----------------------------------------|--------|--------------------------|
| 1          |   | 01-2002 to 02-2003   |   | 250,000             |   | $                                      | 1.00   |                     | 250 units in calendar  2002 |
| 2          |   | 01-2003 to 02-2004   |   | 250,000             |   | $                                      | 1.00   |                     | 400 units in calendar  2003 |
| 3          |   | 01-2003 to 02-2004   |   | 250,000             |   | $                                      | 1.25   |                     | 400 units in calendar  2003 |
| 4          |   | 01-2004 to 02-2005   |   | 650,000             |   | $                                      | 1.25   |                     | 500 units in calendar  2004 |

 

Ifthe minimum purchase levels are met, then Cirrus has the right to exercise thewarrant during the exercise period for the stated exercise price.  In the event that Cirrus does not meet theminimum purchase levels, Cirrus will forfeit the right to exercise thecorresponding warrant.

 

Cirrushas met their minimum purchase commitment for the first warrant period and hasa right to exercise up to 250,000 shares at an exercise price of $1.00 pershare.  This warrant will expire inFebruary 2003 if it is not exercised.

 

23

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IfCirrus fulfills their purchase commitments and exercises their warrants, theimpact on equity may be as follows (Assumes equity contributions based on theexercise of all warrants near the end of the exercise period):

 
| **Fiscal Year** |   | **Equity Contribution** |      |
|-----------------|--------|-------------------------|-----------|
| 2003            |   | $                       | 250,000   |   |
| 2004            |   | 562,500                 |      |
| 2005            |   | 812,500                 |      |
| Total           |   | $                       | 1,625,000 |   |

 

4.               Covenant Not toCompete

 

OnOctober 26, 1995 the Company entered into an agreement with the president andmajority shareholder of Second Chantz Aerial Survival Equipment, Inc. (SCI),whereby SCI ceased all business activities, and SCI’s president and majorityshareholder entered into a ten-year covenant not to compete with theCompany.  The payments required underthis agreement contained a non-interest-bearing portion and a portion thatbears interest at a rate below the Company’s incremental borrowing rate.  Under generally accepted accountingprinciples the future payments were discounted at the Company’s incrementalborrowing rate.

 

The4% ten year note calls for monthly payments of $4,036 through October2005.  Payments under this agreement areunsecured.

 

Thepresent value of the Company’s obligation under this agreement was recorded asan intangible asset and is being amortized over ten years as shown in theaccompanying financial statements.

 

Futurepayments under this agreement are as follows:

 
|       |   | **Future  Dollars** |    | **Present  Dollars** |   |
|------------|--------|---------------------|---------|----------------------|--------|
|       |   |                |    |                 |   |
| 2003       |   | 48,436              |    | 36,354               |   |
| 2004       |   | 48,436              |    | 40,561               |   |
| 2005       |   | 48,436              |    | 45,255               |   |
| Thereafter |   | 4,036               |    | 4,002                |   |
|       |   | $                   | 149,344 |                 | $      | 126,172 |   |
|            |        |                     |         |                      |        |  |  |

 

TheCompany also granted SCI’s president an option to purchase 50,000 shares of theCompany’s common stock at an exercise price of $.25.  This option expires October 2005.

 

5.               Long-Term Debt

 

OnNovember 5, 1996, the Company signed a note payable with the bank in the amountof $70,030.  The purpose of the loan wasto pay for renovations to the current production facility that the Company tookpossession of on October 1, 1996.  Thescheduled maturity date of the note was November 5, 2001, but was paid off bythe Company in September 2001.

 

24

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6.               Other FinancialInformation

 

Inventories

 

Inventoriesconsisted of the following at September 30, 2002 and 2001:

 
|               |   | **2002** |    | **2001** |   |
|--------------------|--------|----------|---------|----------|--------|
| Raw  materials     |   | $        | 701,230 |     | $      | 519,511 |   |
| Work  in process   |   | 106,799  |    | 134,971  |   |
| Finished  goods    |   | 19,869   |    | 31,920   |   |
| Total  Inventories |   | $        | 827,898 |     | $      | 686,402 |   |

 

Fixed Assets

 

Fixed assetsconsisted of the following categories at September 30, 2002 and 2001:

 
|                                 |   | **2002** |    | **2001** |   |
|--------------------------------------|--------|----------|---------|----------|--------|
| Office  furniture and equipment      |   | $        | 149,201 |     | $      | 115,725 |   |
| Manufacturing  equipment             |   | 124,332  |    | 82,281   |   |
| Airplane  – sales and marketing |   | 93,872   |    | —   |   |
| Total  fixed assets                  |   | $        | 367,405 |     | $      | 198,006 |   |

 

DepreciationExpense

 

Depreciationexpense totaled $43,321 in 2002 and $25,795 in 2001.

 

Long-Lived Assets

 

In accordance withSFAS 144, Accounting For The Impairment Of Long-Lived Assets And For Long-LivedAssets To Be Disposed Of, the Company reviews its long-lived assets andintangibles related to those assets periodically to determine potentialimpairment by comparing the carrying value of the long-lived assets outstandingwith estimated future cash flows expected to result from the use of the assets,including cash flows from disposition. Should the sum of the expected future cash flows be less than thecarrying value, the Company would recognize an impairment loss.  An impairment loss would be measured bycomparing the amount by which the carrying value exceeds the fair value of thelong-lived assets and intangibles.  Todate, management has determined that no impairment of long-lived assets exists.

 

Export Sales

 

The Company’sinternational sales are made through independent representatives in variousforeign countries.  International salesas a percentage of total sales were 6% in 2002 and 7% in 2001.

 

Major Suppliers

 

During the fiscalyears ended September 30, 2002 and 2001, the Company purchased its parachutesfrom a certain key vendor. The Company manufactures its own ballistic devices,but the fuel for the ballistic devices is purchased from a single source.  The Company routinely searches for newsuppliers and feels alternate sources can be found should any of thesesuppliers be unable to meet the Company’s needs.

 

25

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### Related Party

 

The Companycontracts with an officer/shareholder of the Company to coordinate itsadvertising.  Total advertising expenseswere $81,839 and $60,178 for fiscal year 2002 and 2001,respectively, with$39,460 and $36,405, respectively of these total being paid to thisindividual.  The advertising ratescharged are at or below current market rates. The Company owed this related party nothing as of September 30, 2002 or2001.

 

### Profit Sharing Plan

 

The Companyadopted a defined contribution profit sharing plan in fiscal year 2000, whichcovers most of its employees.  TheCompany contribution to this plan totaled $46,312 in 2002 and $25,239 in 2001.

 

7.               Line-of CreditBorrowings

 

The Company has a $250,000 line-of-credit for use in operations.  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 December31, 2002.  The line calls for a variableinterest rate of 1.5% over the bank’s index rate.  At September 30, 2002 and 2001 there were no outstanding balancesunder the line of credit.  The Companyexpects to renew the line each year following the review of its financialresults and projections with the bank.

 

8.               Income Taxes

 

Incometaxes consisted of the following at September 30:

 
|                                           |   | **2002** |     | **2001** |   |
|------------------------------------------------|--------|----------|----------|----------|--------|
| Current:                                       |   |     |     |     |   |
| Federal                                        |   | $        | —   |     | $      | — |   |
| State                                          |   | (65,187  | )        | (24,478  | )      |
| State alternative minimum  tax and minimum fee |   | (1,000   | )        | (1,000   | )      |
|                                           |   | (66,187  | )        | (25,478  | )      |
| Deferred:                                      |   |     |     |     |   |
| Federal                                        |   | (130,502 | )        | 188,433  |   |
| State                                          |   | —   |     | 11,567   |   |
|                                           |   | (130,502 | )        | 200,000  |   |
|                                           |   |     |     |     |   |
| Income tax benefit (expense)                   |   | $        | (196,689 | )        | $      | 174,522 |   |

 

26

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Thereconciliation between expected federal income tax rates is as follows:

 
|                                                           |   | **2002**   |     | **2001**    |   |
|----------------------------------------------------------------|--------|------------|----------|-------------|--------|
|                                                           |   | **Amount** |     | **Percent** |   | **Amount** |   | **Percent** |   |
|                                                           |   |       |     |        |   |   |   |   |   |
| Expected federal tax                                           |   | $          | (272,500 | )           | (34.0  | )% | $ | (141,550 | ) | (34.0 | )% |
| Surtax exemption                                               |   | —     |     | —      |   | — |   | — |   |
| State income tax, net of federal tax  benefit                  |   | (50,200    | )        | (6.3        | )      | (26,927 | ) | (6.5 | ) |
| Valuation and utilization of net operating  loss carryforwards |   | 127,011    |     | 15.8        |   | 343,999 |   | 82.6 |   |
| State minimum fee                                              |   | (1,000     | )        | (.1         | )      | (1,000 | ) | (.2 | ) |
|                                                           |   |       |     |        |   |   |   |   |   |
| Income tax benefit (expense)                                   |   | $          | (196,689 | )           | (24.6  | )% | $ | 174,522 |   | 41.9 | % |

 

Differencesbetween accounting rules and tax laws cause differences between the bases ofcertain assets and liabilities for financial reporting purposes and taxpurposes.  The tax effects of thesedifferences, to the extent they are temporary, are recorded as deferred taxassets and liabilities under SFAS 109, and consisted of the following:

 
|                               |   | **2002** |    | **2001** |   |
|------------------------------------|--------|----------|---------|----------|--------|
| Deferred tax assets:               |   |     |    |     |   |
| Allowance for doubtful accounts    |   | $        | 4,400   |     | $      | 4,300 |   |
| Inventory valuation allowance      |   | 54,750   |    | 54,700   |   |
| Section 263A adjustment            |   | 28,950   |    | 24,000   |   |
| Depreciation                       |   | (4,500   | )       | (9,800   | )      |
| Amortization                       |   | 9,000    |    | 6,700    |   |
| Vacation accrual                   |   | 15,700   |    | 7,500    |   |
| Other accruals                     |   | 16,700   |    | 22,500   |   |
| Net operating loss carryforwards   |   | 294,000  |    | 538,100  |   |
|                               |   |     |    |     |   |
| Gross deferred tax asset           |   | 419,000  |    | 648,000  |   |
| Valuation allowance                |   | —   |    | (148,000 | )      |
|                               |   |     |    |     |   |
| Net deferred tax asset             |   | 419,000  |    | 500,000  |   |
| Deferred tax liability             |   | —   |    | —   |   |
| Net deferred tax asset (liability) |   | $        | 419,000 |     | $      | 500,000 |   |
|                               |   |     |    |     |   |
| Current deferred tax asset         |   | $        | 419,000 |     | $      | 280,000 |   |
| Long-term deferred tax asset       |   | —   |    | 220,000  |   |
|                               |   |     |    |     |   |
| Net deferred tax asset (liability) |   | $        | 419,000 |     | $      | 500,000 |   |

 

27

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Therecognized deferred tax asset is based upon expected utilization of the netoperating loss carryforwards and reversal of certain timing differences.  The Company has assessed its past earningshistory and trends, sales backlog, budgeted sales, and expiration dates ofcarryforwards and has determined that it is more likely than not that $419,000of deferred tax assets will be utilized. The remaining valuation allowance of $148,000 at September 30, 2001 waseliminated in fiscal year 2002.

 

AtSeptember 30, 2002, the Company has carryforwards available to offset futuretaxable income as follows:

 
|            |   | **Federal** |    | **State  NOL** |   |
|-----------------|--------|-------------|---------|----------------|--------|
| **Regular NOL** |   | **AMT NOL** |    |
|            |   |        |    |           |   |   |   |
| 2005            |   | $           | —  |           | $      | 57,000 |   | $ | — |   |
| 2006            |   | 105,000     |    | 126,000        |   | — |   |
| 2007            |   | 113,000     |    | 106,000        |   | — |   |
| 2008            |   | 457,000     |    | 450,000        |   | — |   |
| 2009            |   | 181,000     |    | 175,000        |   | — |   |
| 2013            |   | 9,000       |    | 8,000          |   | — |   |
|            |   |        |    |           |   |   |   |
|            |   | $           | 865,000 |           | $      | 922,000 |   | $ | — |   |

 

9.               Common Stock

 

Stock Options

 

The Company hasissued options to various directors, officers, employees and others on adiscretionary basis.  Transactionsduring 2002 and 2001, for these issuances were as follows:

 
|                                           |   | **Number  Of Shares** |   | **Option  Price  Range per Share** |   |
|------------------------------------------------|--------|-----------------------|--------|------------------------------------|--------|
|                                           |   |                  |   |                               |   |
| Balance  at September 30, 2000                 |   | 472,262               |   | $0.25 to $1.25                     |   |
| Granted                                        |   | 195,000               |   | $0.4375 to  $0.9063                |   |
| Converted  to stock under cashless transaction |   | (5,000                | )      | $0.453                             |   |
| Expired                                        |   | (166,012              | )      | $0.453 to $0.50                    |   |
|                                           |   |                  |   |                               |   |
| Balance  at September 30, 2001                 |   | 496,250               |   | $0.3125 to $1.25                   |   |
|                                           |   |                  |   |                               |   |
| Granted                                        |   | 80,000                |   | $1.38                              |   |
| Converted  to stock under cashless transaction |   | (137,497              | )      | $0.25 to $0.3125                   |   |
| Forfeited                                      |   | (6,667                | )      | $0.4375                            |   |
| Expired                                        |   | (15,000               | )      | $0.4375 to $1.25                   |   |
|                                           |   |                  |   |                               |   |
| Balance  at September 30, 2002                 |   | 417,086               |   | $0.25 to $1.38                     |   |

 

28

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At September 30,2002:

 
| Options  vested and exercisable |   | 382,082 |   |
|---------------------------------|--------|---------|--------|
| Shares  available for options   |   | 0       |   |

 

Stock Warrants

 

In connection withthe Purchase and Supply Agreement with Cirrus Design Corporation, Cirrus has been issued four warrants toacquire an aggregate of up to 1.4 million shares of restricted Companystock.  In order to execute thewarrants, Cirrus must meet certain purchase levels of the Company’s emergencyparachute systems for the SR20, SR22 and derivative aircraft over a five-yearperiod.

 

Cirrushas met their minimum purchase commitment for the first warrant period and hasa right to exercise up to 250,000 shares at an exercise price of $1.00 pershare.  This warrant will expire inFebruary 2003 if it is not exercised.

 

10.         Commitments andContingencies

 

Leases

 

The Company leasesits production facility on an airport in South St. Paul, Minnesota. Totalrental expense for operating leases during 2002 and 2001 was $38,854 and  $37,877, respectively.  The Company bought out the remaining portionof its five-year sublease with its landlord in September 2002.  This buyout resulted in short-term prepaidlease expense of $27,258 at September 30, 2002 and long-term prepaid lease expenseof $103,211 as reflected in the accompanying financial statements.  This buyout allowed the Company to become adirect lessee with the City of South St. Paul. This arrangement gives the Company certain advantages under the leaseagreement.

 

Future minimumlease payments required on non-cancelable operating leases at September 30,2002 are as follows:

 
| 2003   |   | 14,876 |   |
|--------|--------|--------|--------|
| 2004   |   | 14,876 |   |
| 2005   |   | 14,876 |   |
| 2006   |   | 14,876 |   |
| 2007   |   | 14,876 |   |
| 2008   |   | 3,719  |   |
|   |   |   |   |
|   |   | $      | 78,099 |   |
|        |        |        |        |  |

 

11.         Supplemental Cash FlowInformation

 
|            |   | **2001** |   | **2001** |   |
|-----------------|--------|----------|--------|----------|--------|
| Cash  paid for: |   |     |   |     |   |
| Interest        |   | $        | 16,855 |     | $      | 29,183 |   |
| Income  taxes   |   | 34,631   |   | 1,994    |   |
|                 |        |          |        |          |        |  |  |

 

29

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Summary ofnon-cash activity:

 

•                    Common stockwas issued in lieu of director’s fees of $3,750 and $7,250, for 2002 and 2001,respectively.

 

•                    Options toacquire 134,497 shares and 5,000 shares of the Company’s common stock wereconverted into 86,285 shares and 2,411 shares of the Company’s common stock ina cashless transaction on January 10, 2002 and February 21, 2001, respectively.

 

30

----

 

Item8.             Changesin and Disagreements with Accountants on Accounting and Financial Disclosures

 

There have been nodisagreements with the Company’s independent certified public accountants onaccounting principles or practices or financial statement disclosures.

 

**PART III**

 

Item9.             Directors,Executive Officers, Promoters and Control Persons:  Compliance with Section 16(a) of the Exchange Act

 

The informationrequired by this item is incorporated by reference from the Proxy Statement.

 

Item 10.       Executive Compensation

 

The informationrequired by this item is incorporated by reference from the Proxy Statement.

 

Item11.       SecurityOwnership of Certain Beneficial Owners and Management

 

The informationrequired by this item is incorporated by reference from the Proxy Statement.

 

Item12.       CertainRelationships and Related Transactions

 

The informationrequired by this item is incorporated by reference from the Proxy Statement.

 

**PART IV**

 

Item13.       Exhibits,Lists and Reports on Form 8-K.

 

(a)                                 Exhibits

 
| **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 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. |

 

31

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(b)                                TheCompany did not file any Current Reports on Form 8-K during the fourth quarterended September 30, 2002.

 

Item 14.       Control and Procedures

 

Under the supervision and with theparticipation of our management, including our principal executive andfinancial officer, we have evaluated the effectiveness of the design andoperation of our disclosure controls and procedures within 90 days of thefiling date of this annual report, and, based on their evaluation, ourprincipal executive and financial officer have concluded that these controlsand procedures are effective.  Therewere no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the date of hisevaluation.

 

Disclosure controls and procedures are ourcontrols and other procedures that are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our principalexecutive and financial officer, as appropriate to allow timely decisionsregarding required disclosure.

 

32

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

BALLISTIC RECOVERY SYSTEMS, INC.

 
| By     | /s/ Mark B. Thomas                                                                         |   |
|--------|--------------------------------------------------------------------------------------------|--------|
|   | Mark B. Thomas                                                                             |
|   | Principal Executive  Officer, Principal Financial Officer and Principal Accounting Officer |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**              |   | **Title** |   | **Date**           |   |
|----------------------------|--------|-----------|--------|--------------------|--------|
|                       |   |      |   |               |   |
|  /s/ Darrel D. Brandt |   | Director  |   | December 11,  2002 |   |
| Darrel D. Brandt           |   |      |   |               |   |
|                       |   |      |   |               |   |
|  /s/ Boris Popov      |   | Director  |   | December 11,  2002 |   |
| Boris Popov                |   |      |   |               |   |
|                       |   |      |   |               |   |
|  /s/ Robert L. Nelson |   | Director  |   | December 11,  2002 |   |
| Robert L. Nelson           |   |      |   |               |   |
|                       |   |      |   |               |   |
|  /s/ Thomas H. Adams  |   | Director  |   | December 11,  2002 |   |
| Thomas H. Adams            |   |      |   |               |   |
|                       |   |      |   |               |   |
| /s/ Mark B. Thomas         |   | Director  |   | December 11,  2002 |   |
| Mark B. Thomas             |   |      |   |

 

 

## **CEO/CFO Certification of Financial Statements**

 

Pursuant to 18U.S.C. Statute 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, the undersigned hereby certifies in his capacity as an officer ofBallistic Recovery Systems, Inc. (the “Company”) that (a) the Annual Report ofthe Company on Form 10-KSB for the period ended September 30, 2002 fullycomplies with the requirements of Section 13(a) of the Securities Exchange Actof 1934 and (b) the information contained in such report fairly presents, inall material respects, the financial condition of the Company at the end ofsuch period and the results of operations of the Company for such period.

 

 
|                    | By     | /s/ Mark B. Thomas                                   |   |
|-------------------------|--------|------------------------------------------------------|--------|
|                    |   | Mark B. Thomas                                       |
|                    |   | Chief Executive Officer  and Chief Financial Officer |
|                    |   |                                                 |
| Dated December 11, 2002 |   |                                                 |

 

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**CERTIFICATION REQUIRED UNDER SECTION 302 OF THESARBANES-OXLEY ACT**

 

I, Mark B. Thomas, certify that:

 

1.                                       I have reviewed this annual report on Form10-KSB of Ballistic Recovery Systems, Inc.;

 

2.                                       Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                                       I am responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,particularly during the period in which this annual report is being prepared;

 

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)  presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)  all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       I have indicated in this annual reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  December 11, 2002 | /s/ Mark B. Thomas                                   |   |
|-------------------------------|------------------------------------------------------|--------|
|                          | By Mark B. Thomas                                    |
|                          | Chief Executive Office  and Chief  Financial Officer |

 

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