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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 JUNE 30, 2000
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)
420 LAPP ROAD, MALVERN, PENNSYLVANIA 19355
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(610) 889-9898
--------------
(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 No X
As of September 13, 2000, there were 12,593,503 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 JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. FINANCIAL STATEMENTS (unaudited)
Balance Sheets - September 30, 1999 and June 30, 2000 3
Statements of Operations - Three and Nine Months Ended June 30, 1999 and 2000 4
Statements of Cash Flows - Nine Months Ended June 30, 1999 and 2000. 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.
BALANCE SHEETS
(unaudited)
September 30, June 30,
1999 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................... $ 4,638,607 $ 2,962,902
Accounts receivable ..................................................... 3,413,771 7,725,991
Inventories ............................................................. 3,496,773 3,863,676
Deferred taxes .......................................................... 23,530 23,530
Prepaid expenses ........................................................ 66,104 312,517
------------ ------------
Total current assets ............................................... 11,638,785 14,888,616
------------ ------------
Property and Equipment:
Computers and test equipment ............................................ 1,646,659 5,059,200
Furniture and office equipment .......................................... 341,042 350,407
Leasehold improvements .................................................. 50,205 50,205
------------ ------------
2,037,906 5,459,812
Less--Accumulated depreciation .......................................... (1,292,716) (1,532,156)
------------ ------------
Net property and equipment ......................................... 745,190 3,927,656
Deposits and Other Assets .................................................... 24,202 134,744
------------ ------------
Deferred Taxes ............................................................... 204,012 204,012
------------ ------------
$ 12,612,189 $ 19,155,028
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capitalized lease obligations ........................ 23,831 20,760
Accounts payable ........................................................ 888,052 2,356,472
Accrued expenses ........................................................ 1,385,143 1,457,494
Deferred revenue ........................................................ 784,707 167,975
------------ ------------
Total current liabilities .......................................... 3,081,733 4,002,701
------------ ------------
Capitalized Lease Obligations ................................................ 45,764 34,245
------------ ------------
Deferred Revenue ............................................................. 549,420 561,438
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, 500,000 shares authorized--Class A Convertible stock,
$.001 par value; 200,000 shares authorized, 177,092 shares issued and
outstanding (liquidation value of $4,250,208 at June 30, 2000) ....... 177 177
Common stock, $.001 par value; 10,000,000 shares authorized,
6,766,213 and 7,180,240 shares issued and outstanding at September 30,
1999 and June 30, 2000, respectively ................................. 6,766 7,180
Additional paid-in capital .............................................. 8,749,376 9,747,394
Retained earnings ....................................................... 178,953 4,801,893
------------ ------------
Total shareholders' equity ......................................... 8,935,272 14,556,644
------------ ------------
$ 12,612,189 $ 19,155,028
============ ============
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- ------------- -------------
Revenues .......................... $6,849,415 $10,091,429 $15,763,366 $23,650,216
Cost of Sales ..................... 3,166,894 4,361,126 7,861,772 10,761,005
------------ ------------ ------------ ------------
Gross Profit ...................... 3,682,521 5,730,303 7,901,594 12,889,211
------------ ------------ ------------ ------------
Research and Development .......... 521,379 910,878 1,399,299 2,268,180
Selling, General and Administrative 813,142 1,391,747 2,016,295 3,441,607
------------ ------------ ------------ ------------
Operating Income .................. 2,348,000 3,427,678 4,486,000 7,179,424
Interest Income (Expense), net .... 19,229 78,863 (11,548) 214,174
------------ ------------ ------------ ------------
Income Before Income Taxes ........ 2,367,229 3,506,541 4,474,452 7,393,598
Income Tax Expense ................ 889,784 1,350,018 1,681,835 2,770,658
------------ ------------ ------------ ------------
Net Income ........................ $1,477,445 $2,156,523 $2,792,617 $4,622,940
============ ============ ============ ============
Net Income Per Common Share
Basic ........................ $0.22 $0.30 $0.41 $0.66
Diluted ...................... $0.16 $0.22 $0.31 $0.47
Weighted Average Shares Outstanding
Basic ........................ 6,765,791 7,180,240 6,740,493 7,049,122
Diluted ...................... 9,338,343 9,834,129 9,098,829 9,765,930
The accompanying notes are an integral part of these statements.
4
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months For the Nine Months
Ended June 30, Ended June 30
1999 2000
---- ----
Cash Flows From Operating Activities:
Net income ................................................ $2,792,617 $4,622,940
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 163,902 239,440
(Increase)/decrease in --
Accounts receivable ....................................... 626,323 (4,312,220)
Inventories ............................................... (832,263) (366,903)
Prepaid expenses and other ................................ (10,214) (356,955)
Increase/(decrease) in --
Accounts payable .......................................... (1,193,263) 1,468,420
Accrued expenses .......................................... 1,939,122 72,351
Deferred revenue .......................................... 625,476 (604,714)
----------- -----------
Net cash provided by operating activities ............... 4,111,700 762,359
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment ....................... (383,794) (3,421,906)
----------- -----------
Cash Flows From Financing Activities:
Repayments on notes ....................................... (250,000) --
Repayments on credit facility ............................. (550,000) --
Repayments of capitalized lease obligations ............... (51,311) (14,590)
Proceeds from the exercise of stock options ............... -- 998,432
----------- -----------
Net cash (used in) provided by financing activities ..... (851,311) 983,842
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents ......... 2,876,595 (1,675,705)
Cash and Cash Equivalents, Beginning of Year ................. 102,150 4,638,607
----------- -----------
Cash and Cash Equivalents, End of Year ....................... $2,978,745 $2,962,902
=========== ===========
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 June 30, 2000, the statements of operations for the
three and nine months ended June 30, 1999 and 2000 and the statements of cash
flows for the nine months ended June 30, 1999 and 2000 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 June 30, 2000 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 Final Prospectus, which makes up a part of the Registration
Statement on Form S-1 (File No. 333-36584) as filed with the Securities and
Exchange Commission. The results of operations for the three and nine months
ended June 30, 2000 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 -- basic to the
weighted average shares outstanding -- diluted appears below:
Three months ended Nine months ended
June 30, June 30,
1999 2000 1999 2000
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic........................................... 6,765,791 7,180,240 6,740,493 7,049,122
Potentially dilutive securities:
Employee Stock Options.......................... 226,157 405,444 121,582 384,821
Preferred Stock................................. 1,941,353 1,941,353 1,941,353 1,941,353
Warrants........................................ 405,042 307,092 295,401 390,634
--------- --------- --------- ---------
Weighted average shares outstanding:
Diluted......................................... 9,338,343 9,834,129 9,098,829 9,765,930
========= ========= ========= =========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We were founded in 1988, and 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. Assuming the
government exercises its options for the remaining aircraft, we expect the
program to continue through fiscal year 2002.
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 have entered into an agreement with Pilatus Business
Aircraft, Ltd. to offer our CIP in their PC 12 business aircraft. We expect to
begin recording revenues from our flat panel display during fiscal year 2001.
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, business travel, 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.
Nine Months Ended June 30, 2000 Compared to the Nine Months Ended June 30, 1999
Revenues. Revenues increased $7.9 million, or 50.0%, to $23.7 million for
the nine months ended June 30, 2000 from $15.8 million for the nine months ended
June 30, 1999. The increase was primarily attributable to RVSM product shipments
for the KC-135 program.
Cost of Sales. Cost of sales increased $2.9 million, or 36.9%, to $10.8
million, or 45.5% of revenues, for the nine months ended June 30, 2000 from $7.9
million, or 49.9% of revenues, for the nine months ended June 30, 1999. The
increase in dollar amount was related to the increase in revenues, and the
decrease as a percentage of revenues was primarily related to cost containment
resulting from our Six Sigma program, a process evaluation program designed to
increase efficiency.
Research and development. Research and development expenses increased
$869,000, or 62.1%, to $2.3 million, or 9.6% of revenues, for the nine months
ended June 30, 2000 from $1.4 million, or 8.9% of revenues, for the nine months
ended June 30, 1999. This increase in dollar amount was primarily due to
engineering efforts related to the introduction of new products, including our
flat panel display, an engine pressure ratio transmitter, a low-cost altimeter
and ongoing enhancements and improvements to existing products. The increase in
research and development spending reflects our continued commitment to product
development and new product introductions.
Selling, general and administrative. Selling, general and administrative
expenses increased $1.4 million, or 70.7%, to $3.4 million, or 14.6% of
revenues, for the nine months ended June 30, 2000 from $2.0 million, or 12.8% of
revenues, for the nine months ended June 30, 1999. The increase in dollar amount
and as a percentage of revenues reflects our investment in personnel and
infrastructure to support our continued growth.
Interest income (expense), net. Net interest income was $214,000 for the
nine months ended June 30, 2000 as compared to net interest expense of $12,000
for the nine months ended June 30, 1999. Net interest income for the
7
nine months ended June 30, 2000 was due to higher cash balances during the
period. Net interest expense for the nine months ended June 30, 1999 was due to
outstanding borrowings under our credit facility and lower cash balances.
Income tax expense. Income tax expense was $2.8 million for the nine months
ended June 30, 2000 compared to an income tax expense of $1.7 million for the
nine months ended June 30, 1999. The increased amount was the direct result of
higher income before tax. Effective tax rates decreased to 37.5% for the nine
months ended June 30, 2000 from 37.6% for the nine months ended June 30, 1999
due to a difference in the effective state tax rates.
Net income. As a result of the factors described above, our net income
increased $1.8 million, or 65.5%, to $4.6 million, or 19.5% of revenues, for the
nine months ended June 30, 2000 from $2.8 million, or 17.7% of revenues, for the
nine months ended June 30, 1999.
Three Months Ended June 30, 2000 Compared to the Three Months Ended
June 30, 1999
Revenues. Revenues increased $3.2 million, or 47.3%, to $10.1 million for
the three months ended June 30, 2000 from $6.9 million in the three months ended
June 30, 1999. The increase was principally due to shipments of RVSM air data
systems for the KC-135 aircraft.
Cost of Sales. Cost of sales increased $1.2 million, or 37.7%, to $4.4
million, or 43.2% of revenues, in the three months ended June 30, 2000 from $3.2
million, or 46.2% of revenues, in the three months ended June 30, 1999. The
increase in dollar amount of cost of sales was related to our increase in
revenues, and the decrease as a percentage of revenues was primarily related to
cost containment resulting from our Six Sigma program.
Research and development. Research and development expense increased
$390,000, or 74.7%, to $911,000, or 9.0% of revenues, in the three months ended
June 30, 2000 from $521,000, or 7.6% of revenues, in the three months ended June
30, 1999. The dollar increase in research and development expense was primarily
due to engineering efforts related to the introduction of new products,
including our flat panel display, an engine pressure ratio transmitter, a
low-cost altimeter and ongoing enhancements and improvements to existing
products. 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 $579,000, or 71.2%, to $1.4 million, or 13.8% of revenues, in
the three months ended June 30, 2000 from $813,000, or 11.9% of revenues, in the
three months ended June 30, 1999. The increase in dollar amount and as a
percentage of revenues reflects our investment in personnel and infrastructure
to support our continued growth.
Interest income (expense), net. Net interest income was $79,000 in the
three months ended June 30, 2000 as compared to net interest income of $19,000
in the three months ended June 30, 1999. The increased interest income in the
three months ended June 30, 2000 was the result of higher average cash balances
in the period.
Income tax expense, net. We recognized an income tax expense of $1.4
million for an effective rate of 38.5% for the three months ended June 30, 2000.
In the three months ended June 30, 1999 we recorded a tax expense $890,000 for
an effective rate of 37.6%. The increase is due to a difference in the effective
state tax rates.
Net income. As a result of the factors described above, our net income
increased $679,000, or 46.0%, to $2.2 million, or 21.4% of revenues.
Liquidity and Capital Resources
Our main sources of liquidity have been cash flows from operations and
borrowings. We require cash principally to finance inventory, accounts
receivable and payroll.
Net cash flow provided from operating activities was $762,000 for the nine
months ended June 30, 2000 as compared to $4.1 million for the nine months ended
June 30, 1999. The decrease is a result of higher net income that
8
was more than offset by increases in accounts receivable.
Net cash used in investing activities was $3.4 million for the nine months
ended June 30, 2000 as compared to $384,000 for the nine months ended June 30,
1999, all of which related to purchases of property and equipment. The increase
in the nine months ended June 30, 2000 was primarily due to the Company's
purchase of a Pilatus PC 12 aircraft. The aircraft will serve as a test bed for
our new air data and flat panel products, as a sales/marketing tool for
demonstrating our products to our customers and will be utilized for business
travel.
Net cash flow provided by financing activities was $984,000 for the nine
months ended June 30, 2000 as compared to cash used of $851,000 for the nine
months ended June 30, 1999. This increase was primarily due to the exercise of
warrants during the nine months ended June 30, 2000. In contrast, the use of
funds during the nine months ended June 30, 1999 was attributable to repayment
of loans and capital lease obligations.
At June 30, 2000 we had a credit facility, which provided for borrowings of
up to $1.0 million, increasing to $2.0 million under certain circumstances. The
credit facility bears interest at the higher of the prime rate plus 1.5% or the
bank's cost of funds, as defined in the credit facility, plus 2.5%. As of June
30, 2000, we had no amounts outstanding under the credit facility. The credit
facility expired in August 2000. We are currently negotiating with our lender
and intend to enter into a new credit facility providing for increased borrowing
limits.
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, the loss of which could reduce our revenues.
- -the growth of our customer base could be limited by delays or difficulties in
completing the development and introduction of our 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.
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.
- -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
Most of our cash equivalents and capital lease obligations are at fixed
interest rates and therefore the fair market value of these instruments is
affected by changes in market interest rates. As of June 30, 2000, all of our
cash equivalents matured within 1 day and we had the ability to immediately
liquidate our investments. Therefore, we believe that we are exposed to
immaterial levels of market risk.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On August 3, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File number 333-36584), relating to the
initial public offering of our Common Stock, $.001 par value per share. The
offering commenced on August 3, 2000 and terminated upon the sale of all
3,450,000 shares covered by the Registration Statement were sold. The managing
underwriters for the offering were Friedman, Billings, Ramsey & Co., Inc.,
Stifel, Nicolaus & Company, Inc., and Janney Montgomery Scott LLC.
The aggregate gross proceeds from the offering were $37.95 million. We
incurred expenses of approximately $3.7 million, of which $2.7 million
represented underwriting discounts and commissions and approximately $1.0
million represented other expenses related to the offering. Until utilized, we
are investing the net proceeds of approximately $34 million in cash and cash
equivalents.
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Item 4. Submission of Matters to a Vote of Security Holders
On June 29, 2000, the Company held an Annual Meeting of Shareholders. The
shareholders voted, either in person or by proxy, on the following matters:
(i) To approve the Amended and Restated Articles of Incorporation of the
Company;
(ii) To approve the Amended and Restated Bylaws of the Company; and
(iii) To elect a classified Board of Directors.
The results of the shareholder votes were as follows:
Proposal 1 -- Approval of the Amended and Restated Articles of Incorporation of
the Company:
For Against Abstain
----------- ----------- -----------
8,069,709 0 0
Proposal 2 -- Approval of the Amended and Restated Bylaws:
For Against Abstain
----------- ----------- -----------
8,069,709 0 0
Proposal 3 -- Election of a classified Board of Directors:
For Against Withheld
------------ ----------- ------------
Class I
Joel Adams 8,069,709 0 0
Ivan Marks 8,069,709 0 0
Class II
Glen Bressner 8,069,709 0 0
Robert Mittelstaedt, Jr. 8,069,709 0 0
Class III
Geoffrey Hedrick 8,069,709 0 0
Winston Churchill 8,069,709 0 0
Benjamin Cosgrove 8,069,709 0 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Form 8-K on August 10, 2000 making an Item 5
disclosure announcing its revenue and net income for the third quarter
of fiscal 2000, which ended June 30, 2000.
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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: September 15, 2000 By: /s/ James J. Reilly
- ------------------------ -----------------------------
James J. Reilly
Chief Financial Officer
(Principal Financial Officer)
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