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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2507402
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
420 LAPP ROAD, MALVERN, PENNSYLVANIA 19355
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(Address of principal executive offices) (Zip Code)
(610) 889-9898
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(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 24, 2001, there were 12,617,527 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, 2000
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets - September 30, 2000 and December 31, 2000 3
Consolidated Statements of Operations - Three Months Ended December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - Three Months Ended December 31, 2000 and 1999 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,
------------- -------------
2000 2000
---- ----
ASSETS
Current Assets:
Cash and cash equivalents....................................... $38,657,433 $39,004,544
Cash restricted for capital expenditures ....................... 4,141,689 4,203,475
Accounts receivable, net........................................ 8,394,304 8,294,888
Inventories, net................................................ 4,265,144 4,776,423
Deferred taxes.................................................. 464,346 464,346
Prepaid expenses................................................ 136,447 232,949
----------- -----------
Total current assets......................................... 56,059,363 56,976,625
----------- -----------
Property and Equipment:
Computers and test equipment.................................... 2,027,987 2,292,285
Corporate airplane.............................................. 2,989,591 2,989,591
Furniture and office equipment.................................. 405,150 406,166
Leasehold improvements.......................................... 54,299 54,299
Construction in process......................................... 330,112 1,303,493
----------- -----------
5,807,139 7,045,834
Less--Accumulated depreciation.................................. (1,683,973) (1,832,005)
----------- -----------
Net property and equipment................................... 4,123,166 5,213,829
----------- -----------
Deposits and Other Assets......................................... 359,986 584,732
----------- -----------
Deferred Taxes.................................................... 204,012 204,012
----------- -----------
$60,746,527 $62,979,198
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of note payable................................. $ 100,000 $ 100,000
Current portion of capitalized lease obligations................ 19,794 15,221
Accounts payable................................................ 1,856,048 1,483,895
Accrued expenses................................................ 2,964,947 3,597,126
Deferred revenue................................................ 173,975 70,471
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Total current liabilities.................................... 5,114,764 5,266,713
----------- -----------
Capitalized Lease Obligations .................................... 30,447 30,358
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Deferred Revenue.................................................. 543,820 526,203
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Long-Term Note Payable ........................................... 4,235,000 4,235,000
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Commitments and Contingencies
Shareholders' Equity:
Preferred stock, 10,000,000 shares authorized--
Class A Convertible stock, $.001 par value;
200,000 shares authorized, 0 shares issued
and outstanding at September 30, and December 31, 2000 ....... -- --
Common stock, $.001 par value; 75,000,000 shares authorized,
12,593,503 and 12,615,000 shares issued and outstanding at
September 30, 2000, and December 31, 2000, respectively....... 12,594 12,615
Additional paid-in capital...................................... 43,881,392 43,929,370
Retained earnings............................................... 6,928,510 8,978,939
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Total shareholders' equity................................... 50,822,496 52,920,924
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$60,746,527 $62,979,198
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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, 1999 December 31, 2000
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Revenues .......................... $6,337,442 $ 9,519,682
Cost of Sales ..................... 2,833,463 3,971,920
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Gross Profit ...................... 3,503,979 5,547,762
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Research and Development .......... 668,278 1,437,754
Selling, General and Administrative 816,701 1,526,255
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Operating Income .................. 2,019,000 2,583,753
Interest Income, net .............. 62,744 662,139
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Income Before Income Taxes ........ 2,081,744 3,245,892
Income Tax Expense ................ 780,744 1,195,462
------------ ------------
Net Income ........................ $1,301,000 $2,050,430
============ ============
Net Income Per Common Share
Basic ........................ $0.19 $0.16
Diluted ...................... $0.13 $0.15
Weighted Average Shares Outstanding
Basic ........................ 6,991,559 12,606,133
Diluted ...................... 9,747,492 13,311,708
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,
1999 2000
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Cash Flows From Operating Activities:
Net income ................................................ $1,301,241 $2,050,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 76,407 148,032
(Increase)/decrease in --
Accounts receivable ....................................... (1,313,760) 99,416
Inventories ............................................... (299,457) (511,279)
Prepaid expenses and other ................................ (225,512) (321,248)
Increase/(decrease) in --
Accounts payable .......................................... 160,920 (372,153)
Accrued expenses .......................................... 294,192 632,179
Deferred revenue .......................................... 25,536 (121,121)
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Net cash provided by operating activities ............... 19,567 1,604,256
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Cash Flows From Investing Activities:
Purchases of property and equipment ....................... (89,776) (1,238,695)
Restricted cash ........................................... -- (61,786)
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Net cash (used in) provided by investing activities ....... (89,776) (1,300,481)
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Cash Flows From Financing Activities:
Repayments on notes ....................................... -- --
Repayments on credit facility ............................. -- --
Repayments of capitalized lease obligations ............... (3,756) (4,662)
Proceeds from the issuance of stock ....................... 710,432 47,998
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Net cash (used in) provided by financing activities ....... 706,676 43,336
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents ......... 636,467 347,111
Cash and Cash Equivalents, Beginning of Year ................. 4,638,607 38,657,433
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Cash and Cash Equivalents, End of Year ....................... $5,275,074 $39,004,544
=========== ===========
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, 2000, the statements of operations
for the three months ended December 31, 1999 and 2000 and the statements of cash
flows for the three months ended December 31, 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 December 31, 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 Form 10K as filed with the Securities and Exchange Commission.
The results of operations for the three months ended December 31, 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
December 31,
1999 2000
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Weighted average shares outstanding:
Basic........................................... 6,991,559 12,606,133
Potentially dilutive securities:
Employee Stock Options.......................... 353,956 414,091
Preferred Stock................................. 1,941,353 0
Warrants........................................ 460,624 291,484
--------- ---------
Weighted average shares outstanding:
Diluted......................................... 9,747,492 13,311,708
========= =========
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. This program
continues 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.
7
Three Months Ended December 31, 2000 Compared to the Three Months Ended
December 31, 1999
Revenues. Revenues increased $3.2 million, or 50.2%, to $9.5 million for
the three months ended December 31, 2000 from $6.3 million in the three months
ended December 31, 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 $1.1 million, or 40.2%, to $4.0
million, or 41.7% of revenues, in the three months ended December 31, 2000 from
$2.8 million, or 44.7% of revenues, in the three months ended December 31, 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
$769,000, or 115%, to $1,438,000, or 15.1% of revenues, in the three months
ended December 31, 2000 from $668,000, or 10.5% of revenues, in the three months
ended December 31, 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 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 $710,000, or 86.9%, to $1.5 million, or 16.0% of revenues, in
the three months ended December 31, 2000 from $817,000, or 12.9% of revenues, in
the three months ended December 31, 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, net. Net interest income was $662,000 in the three months
ended December 31, 2000 as compared to net interest income of $63,000 in the
three months ended December 31, 1999. The increased interest income in the three
months ended December 31, 2000 was the result of higher average cash balances in
the period.
Income tax expense. We recognized an income tax expense of $1.2 million for
an effective rate of 36.8% for the three months ended December 31, 2000. In the
three months ended December 31, 1999 we recorded a tax expense $781,000 for an
effective rate of 37.5%. The decrease 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 $749,000, or 57.6%, to $2.1 million, or 21.5% 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 1.6 million for the
three months ended December 31, 2000 as compared to $20,000 for the three months
ended December 31, 1999. The increase is a result of higher net income combined
8
with a decrease in accounts receivable.
Net cash used in investing activities was $1.3 million for the three months
ended December 31, 2000 as compared to $90,000 for the three months ended
December 31, 1999, most of which related to purchases of property and equipment.
The increase in the three months ended December 31, 2000 was primarily due to
the Company's purchase of land for its new manufacturing facility.
Net cash flow provided by financing activities was $43,000 for the three
months ended December 31, 2000 as compared to $707,000 for the three months
ended December 31, 1999. This decrease was primarily due to the exercise of
fewer warrants during the three months ended December 31, 2000.
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 December 31, 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.
None.
12
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
13
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 5, 2001 By: /s/ James J. Reilly
- ---------------------- -----------------------------
James J. Reilly
Chief Financial Officer
(Principal Financial Officer)
14