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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 0-31157
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2507402
------------ ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
720 Pennsylvania Drive, Exton, Pennsylvania 19341
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(610) 646-9800
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of January 31, 2002, there were 12,780,618 shares of the Registrant's
Common Stock, with par value of $.001, outstanding.
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INNOVATIVE SOLUTIONS AND SUPPORT, INC.
FORM 10-Q DECEMBER 31, 2001
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets - September 30, 2001 and December 31, 2001 3
Consolidated Statements of Operations - Three Months Ended December 31, 2000 and 2001 4
Consolidated Statements of Cash Flows - Three Months Ended December 31, 2000 and 2001 5
Notes to Financial Statements 6
Item 2. MANAGAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II OTHER INFORMATION 12
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. 13
Signatures 14
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2001 2001
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $42,769,837 $39,572,512
Cash restricted for capital expenditures .............................................. 317,465 --
Accounts receivable, less allowance for doubtful accounts of $100,000 at
September 30, 2001 and December 31, 2001, respectively............................... 8,330,126 10,715,256
Inventories............................................................................ 5,701,673 5,648,055
Deferred income taxes.................................................................. 652,535 652,535
Prepaid expenses....................................................................... 1,386,270 1,533,509
----------- -----------
Total current assets................................................................. 59,157,906 58,121,867
----------- -----------
Property and Equipment:
Computers and test equipment........................................................... 2,899,744 3,202,713
Corporate airplane..................................................................... 2,998,161 2,998,161
Furniture and office equipment......................................................... 422,288 511,847
Leasehold improvements................................................................. 54,299 --
Manufacturing facility................................................................. -- 6,125,751
Construction in progress............................................................... 3,949,298 --
----------- -----------
10,323,790 12,838,472
Less--Accumulated depreciation and amortization........................................ (2,238,916) (2,421,742)
----------- -----------
Net property and equipment............................................................. 8,084,874 10,416,730
----------- -----------
Deposits and Other Assets................................................................ 808,646 1,005,742
----------- -----------
Deferred Income Taxes.................................................................... -- --
----------- -----------
$68,051,426 $69,544,339
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of note payable........................................................ $ 100,000 $ 100,000
Current portion of capitalized lease obligations....................................... 15,696 14,282
Accounts payable....................................................................... 473,785 994,717
Accrued expenses....................................................................... 2,168,066 3,180,675
Deferred revenue....................................................................... 146,071 70,472
----------- -----------
Total current liabilities............................................................ 2,903,618 4,360,146
----------- -----------
Note Payable............................................................................. 4,235,000 4,235,000
----------- -----------
Capitalized Lease Obligations............................................................ 17,635 13,651
----------- -----------
Deferred Revenue......................................................................... 473,349 455,731
----------- -----------
Deferred Income Taxes.................................................................... 43,120 43,120
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized--Class A Convertible stock, $.001 par
value; 200,000 shares authorized, no shares issued and outstanding at September 30,
2001 and December 31, 2001........................................................... -- --
Common stock, $.001 par value; 75,000,000 shares authorized, 13,023,629 and
13,025,374 shares issued at September 30, 2001 and December 31, 2001,
respectively......................................................................... 13,024 13,025
Additional paid-in capital............................................................. 45,906,405 45,936,802
Retained earnings...................................................................... 14,459,275 15,736,864
Treasury stock, 250,000 shares at cost..... .......................................... -- (1,250,000)
----------- -----------
Total shareholders' equity........................................................... 60,378,704 60,436,691
----------- -----------
$68,051,426 $69,544,339
=========== ===========
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Three Months
Ended Ended
December 31, 2000 December 31, 2001
----------------- -----------------
Revenues .......................... $ 9,519,682 $7,308,466
Cost of Sales ..................... 3,971,920 2,730,129
------------ ------------
Gross Profit ...................... 5,547,762 4,578,337
------------ ------------
Research and Development .......... 1,437,754 1,127,735
Selling, General and Administrative 1,526,255 1,637,883
------------ ------------
Operating Income .................. 2,583,753 1,812,719
Interest Income ................... 662,139 241,440
Interest Expense .................. -- 26,243
------------ ------------
Income Before Income Taxes ........ 3,245,892 2,027,916
Income Tax Expense ................ 1,195,462 750,329
------------ ------------
Net Income ........................ $2,050,430 $1,277,587
============ ============
Net Income Per Common Share
Basic ........................ $0.16 $0.10
Diluted ...................... $0.15 $0.10
Weighted Average Shares Outstanding
Basic ........................ 12,606,133 12,932,565
Diluted ...................... 13,311,708 13,155,063
The accompanying notes are an integral part of these statements.
4
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months For the Three Months
Ended December 31, Ended December 31,
2000 2001
---- ----
Cash Flows From Operating Activities:
Net income ................................................ $2,050,430 $1,277,587
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 148,032 222,038
Loss on disposal of assets ................................ -- 15,088
Stock issued to directors ................................. -- 39,000
(Increase)/decrease in --
Accounts receivable ....................................... 99,416 (2,385,130)
Inventories ............................................... (511,279) 53,618
Prepaid expenses and other ................................ (321,248) (344,335)
Increase/(decrease) in --
Accounts payable .......................................... (372,153) 520,932
Accrued expenses .......................................... 632,179 1,004,007
Deferred revenue .......................................... (121,121) (93,217)
----------- -----------
Net cash provided by operating activities ............... 1,604,256 309,588
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment ....................... (1,238,695) (2,568,980)
Restricted cash ........................................... (61,786) 317,465
----------- -----------
Net cash (used in) provided by investing activities ....... (1,300,481) (2,251,515)
----------- -----------
Cash Flows From Financing Activities:
Repayments of capitalized lease obligations ............... (4,662) (5,398)
Proceeds from the issuance of stock ....................... 47,998 --
Purchase of treasury stock................................. -- (1,250,000)
----------- -----------
Net cash (used in) provided by financing activities ....... 43,336 (1,255,398)
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents ......... 347,111 (3,197,325)
Cash and Cash Equivalents, Beginning of Year ................. 38,657,433 42,769,837
----------- -----------
Cash and Cash Equivalents, End of Period ..................... $39,004,544 $39,572,512
=========== ===========
The accompanying notes are an integral part of these statements.
5
1. Basis of Presentation:
Innovative Solutions and Support, Inc., (the "Company"), was incorporated
in Pennsylvania on February 12, 1988. The Company's primary business is the
design, manufacture and sale of flight information computers, electronic
displays and advanced monitoring systems to the military and governmental,
commercial air transport and corporate aviation markets.
The balance sheet as of December 31, 2001, the statements of operations for
the three months ended December 31, 2000 and 2001 and the statements of cash
flows for the three months ended December 31, 2000 and 2001 have been prepared
by the Company without audit. In the opinion of management, all adjustments,
consisting of normal and recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows at December 31, 2001
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10K as filed with the Securities and Exchange Commission.
The results of operations for the three months ended December 31, 2001 are not
necessarily indicative of the operating results for the full year.
2. Initial Public Offering
In August 2000, the Company completed its initial public offering of
3,450,000 shares of Common Stock at a price of $11.00 per share. The Company
received net proceeds of approximately $34 million from the offering. Upon the
closing of the offering, the outstanding shares of Preferred stock were
converted into 1,941,353 shares of Common stock.
3. Net income per Share
Net income per share ("EPS") is calculated using the principles of SFAS No.
128. On July 7, 2000, the Company's Board of Directors approved a split of the
Company's common shares on a 1.09624-to-1 basis. All references in the financial
statements to the number of common shares and to per share amounts have been
retroactively stated to reflect the common share split.
A reconciliation of weighted average shares outstanding -- appears below:
Three months ended
December 31,
2000 2001
--------- ----------
Weighted average shares outstanding:
Basic........................................... 12,606,133 12,932,565
Potentially dilutive securities:
Employee Stock Options.......................... 414,091 37,158
Preferred Stock................................. -- --
Warrants........................................ 291,484 185,340
--------- ----------
Weighted average shares outstanding:
Diluted......................................... 13,311,708 13,155,063
========= ==========
The weighted average number of shares for potentially dilutive employee
stock options was 396,030 for the three months ending December 31, 2001.
4. Concentrations
During the three months ended December 31, 2001 and 2000, the Company
derived 64% and 56% of its revenues from one customer, respectively. Accounts
receivable related to this customer totaled $8,466,945 at December 31, 2001. The
Company's existing supply arrangement for this will be completely fulfilled by
the second quarter of fiscal 2002 and will provide the Company with
approximately $5.7 million of revenue in such period. Should a new supply
arrangement not be obtained prior to or shortly after the expiration of the
existing arrangement, the Company may experience a significant reduction in
sales. This result may have a material adverse effect on the Company's operating
results and financial condition.
5. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
September 30, December 31,
2001 2001
------------ -----------
Raw materials and finished components $ 4,344,795 $ 4,428,955
Work-in-process 1,356,878 1,219,100
----------- -----------
$ 5,701,673 $ 5,648,055
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We design, manufacture and sell flight information computers, electronic
displays and advanced monitoring systems to the military and government,
commercial air transport and corporate aviation markets.
Our revenues are derived from the sale of our products to the retrofit
market and, to a lesser extent, original equipment manufacturers (OEMs). Our
customers include government and military entities and their commercial
contractors, aircraft operators, aircraft modification centers and various OEMs.
Although we occasionally sell our products directly to government entities, we
primarily have sold our products to commercial customers for end use in
government and military programs. These sales to commercial contractors are on
commercial terms, although some of the termination and other provisions of
government contracts are applicable to these contracts.
We record revenues when our products are shipped. Since fiscal year 1998,
the majority of our revenues have come from the sale of Reduced Vertical
Separation Minimum (RVSM) -compliant air data systems, including sales
6
to commercial contractors in connection with the United States Air Force KC-135
retrofit program. We are the sole supplier of these systems and components under
subcontracts with various commercial contractors for the retrofit program, which
covers the approximately 600 KC-135 aircraft currently in use. The Company's
existing supply arrangement with this customer will be completely fulfilled by
the second quarter of fiscal 2002. Should a new supply arrangement not be
obtained prior to or shortly after the expiration of the existing arrangement,
the Company may experience a significant reduction in net sales. This result may
have a material adverse effect on the Company's operating results and financial
condition.
We have recently begun marketing our flat panel display system, or Cockpit
Information Portal (CIP), and are in the process of obtaining the required
certifications. We expect to begin recording revenues from our flat panel
display during the second half of fiscal 2002.
Our cost of sales are comprised of material components purchased through
our supplier base and direct in-house assembly labor and overhead costs. Because
our manufacturing activities consist primarily of assembling and testing
components and subassemblies and integrating them into a finished system, we
believe that we can achieve flexible manufacturing capacity while controlling
overhead expenses. In addition, many of the components we use in assembling our
products are standard, although certain parts are manufactured to meet our
specifications. The overhead portion of cost of sales is primarily comprised of
salaries and benefits, building occupancy, supplies, and outside services costs
related to our production, purchasing, material control and quality departments
as well as warranty costs.
We intend to continue to invest in the development of new products and the
enhancement of our existing product line. We expense research and development
costs related to future product development as they are incurred.
Our selling, general and administrative expenses consist of marketing and
business development expenses, professional expenses, salaries and benefits for
executive and administrative personnel, facility costs, and recruiting, legal,
accounting and other general corporate expenses.
7
Three Months Ended December 31, 2001 Compared to the Three Months Ended
December 31, 2000
Revenues. Revenues decreased $2.2 million, or 23.2%, to $7.3 million for
the three months ended December 31, 2001 from $9.5 million in the three months
ended December 31, 2000. The decrease was primarily attributable to the economic
slowdown that curtailed commercial air transport orders coupled with a decline
in deliveries for the KC-135 program. We recognized $4.7 million in revenues
related to the KC-135 program in the first quarter of fiscal 2002 and $5.4
million in the first quarter of fiscal 2001.
Cost of Sales. Cost of sales decreased $1.2 million, or 31.2%, to $2.7
million, or 37.4% of revenues, in the three months ended December 31, 2001 from
$4.0 million, or 41.7% of revenues, in the three months ended December 31, 2000
The decrease in dollar amount of cost of sales was related to our decrease in
revenues, and the decrease as a percentage of revenues was primarily related to
a higher concentration of mature program deliveries.
Research and development. Research and development expense decreased
$310,000, or 21.6%, to $1.1 million or 15.4% of revenues, in the three months
ended December 31, 2001 from $1.4 million or 15.1% of revenues, in the three
months ended December 31, 2000. The decrease in research and development
spending was a result of a decrease in revenue. As a percentage of revenue,
research and development expense was consistent quarter over quarter. The
overall level of research and development expense reflects our continued
commitment to product development and new product introductions.
Selling, general and administrative. Selling, general and administrative
expenses increased $112,000, or 7.3%, to $1.6 million, or 22.4% of revenues, in
the three months ended December 31, 2001 from $1.5 million or 16% of revenues,
in the three months ended December 31, 2000. The increase in dollar amount
reflects our investment in additional sales support. The increase as a
percentage of revenue is due to lower revenues in the current quarter.
Interest income. Interest income was $241,000 in the three months ended
December 31, 2001 as compared to interest income of $662,000 in the three
months ended December 31, 2000. The decreased interest income in the three
months ended December 31, 2001 was primarily the result of lower interest rates
in the period and lower invested amounts.
Interest expense. Interest expense was $26,000 in the three months ended
December 31, 2001 as compared to $0 in the three months ended December 31, 2000.
The increase was due to the fact that interest is no longer being capitalized as
part of the cost of the company's new manufacturing facility. The facility was
placed into service in November, 2001.
Income tax expense. We recognized an income tax expense of $750,000 for an
effective rate of 37% for the three months ended December 31, 2001. In the three
months ended December 31, 2000 we recorded a tax expense $1.2 million for an
effective rate of 37%. The decrease is due to a decline in net income.
Net income. As a result of the factors described above, our net income
decreased $773,000 or 37.7%, to $1.3 million, or 17.5% of revenues.
Liquidity and Capital Resources
Our main sources of liquidity have been cash flows from operations,
borrowings and the proceeds of initial public offering in August 2000. We
require cash principally to finance inventory, accounts receivable and payroll.
Our cash flow provided from operating activities was $310,000 for the three
months ended December 31, 2001 as compared to $1.6 million for the three months
ended December 31, 2000. The decrease is a result of lower net income combined
8
with an increase in accounts receivable.
Our cash used in investing activities was $2.3 million for the three months
ended December 31, 2001 as compared to $1.3 for the three months ended December
31, 2000. The increase in the three months ended December 31, 2001 was primarily
due to the Company's completion of its new manufacturing facility.
Net cash flow used in financing activities was $1.3 million for the three
months ended December 31, 2001 as compared to $43,000 for the three months ended
December 31, 2000. This use of cash was primarily due to the acquisition of
250,000 shares of treasury stock at a cost of $5 per share.
In August 2000, the Company completed its initial public offering of
3,450,000 shares of Common Stock at a price of $11.00 per share. The Company
received net proceeds of approximately $34 million from the offering.
Our future capital requirements depend on numerous factors, including
market acceptance of our products, the timing and rate of expansion of our
business and other factors. We have experienced increases in our expenditures
since our inception consistent with growth in our operations, personnel and
product line, and we anticipate that our expenditures will continue to increase
in the foreseeable future. We believe that our cash and cash equivalents,
together with the net proceeds from our initial public offering and any new
credit facility we may enter into, will provide sufficient capital to fund our
operations for at least the next twelve months. However, we may need to raise
additional funds through public or private financings or other arrangements in
order to support more rapid expansion of our business than we anticipate,
develop and introduce new or enhanced products, respond to competitive
pressures, invest in or acquire businesses or technologies or respond to
unanticipated requirements or developments. If additional funds are raised
through the issuance of equity securities, dilution to existing shareholders may
result. If insufficient funds are available, we may not be able to introduce new
products or compete effectively in any of our markets, which could hurt our
business.
RISK FACTORS
This report includes a number of forward-looking statements that reflect
our current views with respect to future events and financial performance. We
use words such as anticipates, believes, expects, future, and intends, and
similar expressions to identify forward-looking statements. There are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements, including:
- -most of our sales are of air data systems products, and we cannot be certain
that the market will continue to accept these or our other products.
- -we currently have a limited number of customers that use our products,
primarily for government-related contracts, making us reliant on these customers
and government needs.
- -our business currently derives a large portion of its revenues from one
military retrofit program, which will be completed in the second quarter of
fiscal 2002.
- -the growth of our customer base could be limited by delays or difficulties in
completing the development and introduction of our CIP or other planned
products or product enhancements.
- -we rely on third party suppliers for the components of our air data systems
products, and any interruption in the supply of these components could hinder
our ability to deliver our products.
- -our market in general and our customers have been adversely affected by the
events of September 11th.
9
- -our government retrofit projects allow the government agency or government
contractor to terminate or modify their contracts with us.
- -we depend on our key personnel to manage our business effectively, and if we
are unable to retain our key employees, our ability to compete could be harmed.
- -if we do not manage our rapid growth, improve existing processes and implement
new systems, procedures and controls, we may use resources, including your
investment, inefficiently and our ability to serve our customers and capitalize
on market opportunities may suffer.
- -our revenue and operating results may vary significantly from quarter to
quarter, which may cause our stock price to decline.
- -our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:
o variations in demand for our products;
o the timing of the introduction of RVSM requirements on various flight
routes;
o the capital expenditure budgets of aircraft owners and operators and
the appropriation cycles of the U.S. government;
o changes in the use of our products, including non-RVSM air data
systems, RVSM systems and flat panel displays;
o delays in introducing or obtaining government approval for new
products;
o new product introductions by competitors;
o changes in our pricing policies or the pricing policies of our
competitors; and
o costs related to possible acquisitions of technologies or businesses.
o our inability to replace the KC-135 RVSM contract.
- -our competition includes other manufacturers of air data systems and flight
information displays against whom we may not be able to compete successfully.
- -we may not be able to identify or complete acquisitions or we may consummate an
acquisition that adversely affects our operating results.
- -our success depends on our ability to protect our proprietary rights, and there
is a risk of infringement. If we are unable to protect and enforce our
intellectual property rights, we may be unable to compete effectively.
Risks Related to Our Industry
If we are unable to respond to rapid technological change, our products could
become obsolete and our reputation could suffer.
Future generations of air data systems, engine and fuel displays and flat
panel displays embodying new technologies or new industry standards could render
our products obsolete. The market for aviation products is subject to rapid
technological change, new product introductions, changes in customer preferences
and evolving industry standards. Our future success will depend on our ability
to:
o adapt to rapidly changing technologies;
10
o adapt our products to evolving industry standards; and
o develop and introduce a variety of new products and product
enhancements to address the increasingly sophisticated needs of our
customers.
Our future success will also depend on our developing high quality,
cost-effective products and enhancements to our products that satisfy the needs
of our customers and on our introducing these new technologies to the
marketplace in a timely manner. If we fail to modify or improve our products in
response to evolving industry standards, our products could rapidly become
obsolete.
Our products must obtain government approval before we can sell them.
Our products are currently subject to direct regulation by the U.S. Federal
Aviation Authority (FAA), its European counterpart, the Joint Aviation
Authorities (JAA), and other comparable organizations. Our products and many of
their components must be approved by the FAA, the JAA or other comparable
organizations before they can be used in an aircraft. To be certified, we must
demonstrate that our products are accurate and able to maintain certain levels
of repeatability over time. Although the certification requirements of the FAA
and the JAA are substantially similar, there is no formal reciprocity between
the two systems. Accordingly, even though some of our products are FAA-approved,
we may need to obtain approval from the JAA or other appropriate organizations
to have them certified for installation outside the United States.
Significant delay in receiving certification for newly developed products
or enhancements to our products or losing certification for our existing
products could result in lost sales or delays in sales. Furthermore, the
adoption of additional regulations or product standards, as well as changes to
the existing product standards, could require us to change our products and
underlying technology. Some products, from which we expect to generate
significant future revenues, including our CIP, have not received regulatory
approval. We cannot assure you that we will receive regulatory approval on a
timely basis or at all.
Because our products utilize sophisticated technology and are deployed in
complex aircraft cockpit environments, problems with these products may arise
that could seriously harm our reputation for quality assurance and our business.
Our products use complex system designs and components that may contain
errors, omissions or defects, particularly when we incorporate new technologies
into our products or we release new versions or enhancements of our products.
Despite our quality assurance process, errors, omissions or defects could occur
in our current products, in new products or in new versions or enhancements of
existing products after commercial shipment has begun. We may be required to
redesign or recall those products or pay damages. Such an event could result in
the following:
o the delay or loss of revenues;
o the cancellation of customer contracts;
o the diversion of development resources;
o damage to our reputation;
o increased service and warranty costs; or
o litigation costs.
Although we currently carry product liability insurance, this insurance may
not be adequate to cover our losses in the event of a product liability claim.
Moreover, we may not be able to maintain such insurance in the future.
11
We face risks associated with international operations that could cause our
financial results to suffer or make it difficult to market our products outside
of the United States.
We expect to derive an increasing amount of our revenues from sales outside
the United States, particularly in Europe. We have limited experience in
marketing and distributing our products internationally. In addition, there are
certain risks inherent in doing business on an international basis, such as:
o differing regulatory requirements for products being installed in
aircraft;
o legal uncertainty regarding liability;
o tariffs, trade barriers and other regulatory barriers;
o political and economic instability;
o changes in diplomatic and trade relationships;
o potentially adverse tax consequences;
o the impact of recessions in economies outside the United States; and
o variance and unexpected changes in local laws and regulations.
Currently, all of our international sales are denominated in U.S. dollars.
An increase in the value of the dollar compared to other currencies could make
our products less competitive in foreign markets. In the future, we may conduct
sales in local currencies, exposing us to changes in exchange rates that could
adversely affect our results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are exposed to market risks primarily as a result
of changes in interest rates. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company's exposure to
market risk for changes in interest rates relates to its cash equivalents and an
industrial revenue bond. The Company's cash equivalents consist of funds
invested in money market accounts, which bear interest at a variable rate, while
the industrial revenue bond carries an interest rate that is consistent with 30-
day tax-exempt commercial paper. As the interest rates are variable, and we do
not engage in hedging activities, a change in interest rates earned on the cash
equivalents or paid on the industrial revenue bond would impact interest income
and expense along with cash flows, but would not impact the fair market value of
the related underlying instruments.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
None.
12
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held on October 31, 2001,
the following proposals were approved by the margins indicated.
Number of Shares
Voted For Withheld
----------- ----------
1. To elect two Class I directors to the
board of directors for a term of three
(3) years.
Ivan M. Marks 6,665,340 0
Robert H. Rau 6,665,340 0
Glenn R. Bressner, Robert E. Mittelstaedt, Jr., Geoffrey S. M. Hedrick, Winston
J. Churchill and Benjamin A. Cosgrove constitute Class II and III directors
whose terms continued after the annual meeting.
Number of Shares
Voted Voted With- Broker
For Against held Non-Votes
--------- --------- ------- -----------
2. To approve amendments to the Company's 1998
Stock Option Plan, as amended, to increase
the number of shares authorized under the
plan from 866,920 shares to 1,259,350 shares. 5,223,578 1,441,762 0 0
Number of Shares
Voted Voted
For Against Withheld
--------- --------- ---------
3. To ratify and approve the Company's 1998 Stock
Option Plan to comply with the requirements of
Section 162(m) of the Internal Revenue Code. 6,553,272 112,068 0
Number of Shares
Voted
Voted For Against Withheld
--------- --------- ---------
4. To ratify the appointment of Arthur Andersen LLP
as the independent auditors of the Company's
financial statements for the fiscal year ending
September 30, 2001. 6,647,065 18,275 0
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on November 20, 2001 to notify the public of
its next Annual Meeting of Shareholders on Thursday, January 31, 2002 and
announced an open market stock repurchase program.
The Company filed a Form 8-K on December 18, 2001, which changed the date
of the Annual Meeting of Shareholders to February 28, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE SOLUTIONS & SUPPORT, INC.
Date: February 13, 2002 By: /s/ James J. Reilly
- ----------------------- -----------------------------
James J. Reilly
Chief Financial Officer
(Principal Financial Officer)
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