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Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Innovative Solutions and Support, Incorporated
(Exact name of registrant as specified in its charter)
Pennsylvania 7371 23-2507402
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization)
420 Lapp Road
Malvern, Pennsylvania 19355
(610) 889-9898
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
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Geoffrey S. M. Hedrick
Chief Executive Officer
Innovative Solutions and Support, Incorporated
420 Lapp Road
Malvern, Pennsylvania 19355
(610) 889-9898
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Richard J. Busis, Esq. Andrew C. Lynch, Esq.
Cozen and O'Connor Jenkens & Gilchrist,
1900 Market Street A Professional Corporation
Philadelphia, Pennsylvania 19103 1919 Pennsylvania Avenue, N.W., Suite
(215) 665-2000 600
Washington, D.C. 20006
(202) 326-1521
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Securities to be Aggregate Offering Amount of
Registered Price (1) Registration Fee
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Common Stock, $.001 par value per share.. $40,000,000 $10,560
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 9, 2000
PROSPECTUS
shares
Innovative Solutions and Support, Incorporated
[LOGO]
Common Stock
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This is the initial public offering of common stock of Innovative Solutions
and Support, Incorporated. We are offering shares of our common stock. We
anticipate that the initial public offering price will be between $ and $
per share. We have applied to list our common stock on the Nasdaq National
Market under the symbol "ISSC."
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See "Risk Factors" beginning on page 5 for a discussion of factors that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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Per share Total
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Public offering price.......................................... $ $
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Underwriting discounts......................................... $ $
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Proceeds, before expenses, to us............................... $ $
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The underwriters may purchase up to an additional shares of common stock
from us at the initial public offering price, less the underwriting discount,
solely to cover over-allotments.
The shares of common stock will be ready for delivery in New York, New York
on or about , 2000.
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Friedman Billings Ramsey
Stifel, Nicolaus & Company, Incorporated
Janney Montgomery Scott LLC
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The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Cautionary Notice Regarding Forward-Looking Statements................... 12
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 17
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Page
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Business................................................................... 23
Management................................................................. 36
Certain Transactions....................................................... 42
Principal Shareholders..................................................... 43
Description of Capital Stock............................................... 45
Shares Eligible for Future Sale............................................ 48
Underwriting............................................................... 49
Legal Matters.............................................................. 51
Experts.................................................................... 51
Where You Can Find More Information........................................ 51
Index to Financial Statements.............................................. F-1
</TABLE>
The IS&S name and logo and the names of products offered by us are
trademarks, registered trademarks, service marks or registered service marks of
IS&S. All other trademarks and service marks appearing in this prospectus are
the property of their respective holders.
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PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing in us. You should read the entire prospectus
carefully, including the section entitled "Risk Factors" and our financial
statements and the accompanying notes, before making an investment decision.
Except as set forth in our financial statements or as otherwise specified in
this prospectus, all information in this prospectus: (1) assumes no exercise of
the underwriters' over-allotment option; and (2) reflects the conversion of all
of our outstanding shares of preferred stock into common stock upon the closing
of this offering. We have a September 30 fiscal year. In this prospectus, when
we refer to a specific fiscal year, it is the fiscal year ended September 30 of
the year mentioned. For example, fiscal year 1999 is the fiscal year ended
September 30, 1999.
Innovative Solutions and Support, Incorporated
Our Business
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 products measure
and display critical flight information, including air data, such as airspeed
and altitude, and engine and fuel data. Our strategy is to leverage the latest
technologies developed for the personal computer and telecommunications
industries into advanced, cost-effective solutions for the aviation industry.
Combined with our experience in the aviation industry, this strategy enables us
to develop high-quality avionics products, substantially reduce product times
to market and achieve cost savings over competing products. As a result, we
have increased our revenues from $10.6 million in fiscal year 1997 to $22.5
million in fiscal year 1999, and we recorded revenues of $6.3 million for the
three months ended December 31, 1999. Our income before income taxes increased
from $841,000 in fiscal year 1997 to $6.7 million in fiscal year 1999, and we
recorded income before income taxes of $2.1 million for the three months ended
December 31, 1999.
Our air data product line includes our reduced vertical separation minimum
(RVSM) products, which allow aircraft to comply with regulatory standards
necessary to fly aircraft at reduced vertical separations being phased in on
certain heavily traveled routes throughout the world. As a result of our
expertise and market position, in 1997 we were selected as the sole RVSM
supplier for the United States Air Force's retrofit of the KC-135 cargo
aircraft, which we believe to be one of the largest U.S. military RVSM retrofit
programs to date.
We recently introduced our flat panel display system, or Cockpit Information
Portal (CIP), which we believe is the largest primary flight display available
in the industry. Our CIP can replace a substantial number of the conventional
displays in the limited space of the cockpit. Our CIP also allows the display
of additional information now available to pilots, such as weather radar and
ground terrain maps, and can be adapted to display additional information that
we expect will become available or mandated in the future. We are also
developing technologies that complement our CIP and enhance the display of
cockpit information, such as our heads up display system.
Among our customers are some of the most substantial aircraft owners and
operators in the world, including the United States government, Northwest
Airlines Corporation, Air Canada, DHL Airways, Inc., Emery Worldwide Airlines,
Federal Express Corporation, The Boeing Company, Lockheed Martin Corporation,
Rockwell International Corporation, Bombardier Aerospace (the manufacturer of
Learjet), Pilatus Aircraft Ltd. and Gulfstream Aerospace Corporation.
1
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Market Opportunity
As air travel has increased over the past decade, U.S. and international
aviation organizations have sought ways to increase traffic flow on high
traffic routes. These organizations developed RVSM, which reduces vertical
separation between aircraft from 2,000 feet to 1,000 feet and thereby increases
available flight routes within a vertical airspace. RVSM has been in effect at
specified altitudes for certain North Atlantic routes since March 1997. RVSM
was phased in on certain Trans-Pacific air routes beginning in February 2000
and is scheduled to be phased in on Western Atlantic air routes beginning in
October 2000. Eurocontrol, the organization that oversees air traffic control
throughout Europe, plans to begin mandating RVSM on certain European routes in
January 2002. We anticipate that RVSM will continue encompassing more of the
world's airspace, including air routes over the United States, in the years to
come.
Because aircraft must have RVSM-compliant equipment in order to fly on RVSM
routes, aircraft not equipped with such equipment will not be permitted to fly
on many of the most popular and efficient routes. We believe that we are
currently one of three primary suppliers of RVSM products to the U.S. retrofit
market, and we intend to capitalize on our position as a leading provider of
reliable, cost competitive RVSM air data products.
Technological advances, particularly in the personal computer and
telecommunications industries, have increasing application in the avionics
industry. These advances, together with the growth in the amount of information
available to pilots and new regulatory mandates, have driven demand for state-
of-the-art avionics equipment. We designed our CIP to be the centerpiece of a
cockpit information management system. Our CIP will permit the organization and
display of various types of flight information that cannot currently be
displayed in cockpits, either because of space or technological limitations.
Strategy
Our objective is to become a premier supplier and integrator of cockpit
information. The key elements of our strategy are:
. Maintaining our leadership in the air data and RVSM markets. We believe
that we are one of the largest suppliers of air data and RVSM-compliant
products to the retrofit market in the United States. As RVSM routes
continue to be phased in over the next several years, we intend to
capitalize on our position as a leading provider of reliable, cost
competitive RVSM-compliant air data systems.
. Establishing leadership in the flat panel display market. We expect that
over the next several years, many aircraft will either be retrofitted or
newly manufactured with flat panel displays because of their display
capacity, versatility, visual appeal and lower cost of displaying
multiple cockpit instruments on a single flat panel display. We believe
that our CIP will become increasingly preferable over existing
conventional and flat panel displays because of its lower cost, larger
size and enhanced viewability.
. Continuing our engineering and product development successes. We plan to
continue using our innovative development processes to design
technologically advanced, cost competitive avionics products such as our
RVSM air data products and our CIP. We believe that by leveraging the
latest technologies developed for other industries, we will be able to
develop new leading-edge products or enhancements to our existing
products in a more time efficient and cost effective manner than our
competitors.
. Increasing our sales to the commercial air transport and corporate
aviation markets. We intend to strengthen and diversify our marketing
efforts to include additional end user markets of the aviation industry,
particularly the commercial air transport and corporate aviation markets,
while at the same time maintaining our position as a provider of avionics
products to government and military end users.
2
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. Expanding our international presence. We plan to increase our
international sales through the expansion of sales and marketing
personnel and foreign offices to respond to increased demand resulting
from the anticipated introduction of RVSM on air routes throughout the
world and the expected increasing interest in incorporating flat panel
displays in aircraft cockpits.
. Growth through acquisitions. We intend to pursue acquisitions as a means
of growing our business. We may seek to acquire developers or suppliers
of complementary products, technology or information, or we may acquire
suppliers of similar products as a means of increasing our product
offerings and market share.
General Information
We are a Pennsylvania corporation. Our principal executive offices are
located at 420 Lapp Road, Malvern, Pennsylvania 19355. Our telephone number is
(610) 889-9898. We maintain a web site at www.innovative-ss.com. Information
found on our web site does not constitute part of this prospectus.
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The Offering
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Common stock offered........................ shares
Common stock to be outstanding after the
offering................................... shares
Use of proceeds............................. For general corporate purposes,
including working capital,
product development of our flat
panel display and other
products, possible acquisitions,
to finance a portion of our new
facility and capital
expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...... ISSC
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The common stock to be outstanding after this offering excludes:
. 656,000 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000 at a weighted average exercise price of
$5.40 per share;
. warrants to purchase 342,402 shares of common stock at an exercise price
of $2.40 per share; and
. 295,812 shares of common stock reserved for issuance under our 1998 Stock
Option Plan.
3
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Summary Financial Data
You should read the data set forth below together with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
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Year Ended September 30, Three Months Ended
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December 31, December 31,
1995 1996 1997 1998 1999 1998 1999
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(unaudited) (unaudited)
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Statement of Operations
Data:
Revenues................ $ 2,172,433 $ 6,685,682 $10,594,204 $14,682,313 $22,487,882 $3,855,822 $6,337,442
Cost of sales........... 1,847,207 5,322,424 7,007,523 8,480,549 10,570,009 2,183,798 2,833,460
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Gross profit........... 325,226 1,363,258 3,586,681 6,201,764 11,917,873 1,672,024 3,503,982
Research and
development............ 969,403 963,921 1,114,351 1,554,564 1,915,634 408,631 668,278
Selling, general and
administrative......... 851,512 1,634,199 1,567,896 2,492,509 3,333,977 628,948 816,565
----------- ----------- ----------- ----------- ----------- ---------- ----------
Total operating
expenses.............. 1,820,915 2,598,120 2,682,247 4,047,073 5,249,611 1,037,579 1,484,843
Operating income
(loss)................ (1,495,689) (1,234,862) 904,434 2,154,691 6,668,262 634,445 2,019,139
Interest (income)
expense, net........... -- (27,287) 63,813 224,121 (30,137) 17,250 (62,847)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income before income
(loss) taxes.......... (1,495,689) (1,207,575) 840,621 1,930,570 6,698,399 617,195 2,081,986
Income tax (expense)
benefit, net........... -- -- -- 2,013,802 (2,517,764) (231,988) (780,744)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net income (loss)....... $(1,495,689) $(1,207,575) $ 840,621 $ 3,944,372 $ 4,180,635 $ 385,207 $1,301,242
=========== =========== =========== =========== =========== ========== ==========
Net income per common
share:
Basic.................. $ (0.25) $ (0.20) $ 0.14 $ 0.65 $ 0.68 $ 0.06 $ 0.20
Diluted................ (0.25) (0.20) 0.11 0.50 0.50 0.05 0.15
Weighted average shares
outstanding:
Basic.................. 5,993,805 6,032,200 6,032,200 6,084,556 6,154,652 6,137,200 6,377,763
Diluted................ 5,993,805 6,032,200 7,803,120 7,855,476 8,396,285 8,200,207 8,887,287
Operating Data:
Gross profit margin.... 15.0% 20.4% 33.9% 42.2% 53.0% 43.4% 55.3%
Operating income (loss)
margin................ (68.8%) (18.5%) 8.5% 14.7% 29.7% 16.5% 31.9%
Revenues per employee
(1)................... $ 51,820 $ 114,210 $ 156,150 $ 192,798 $ 258,253 $ 48,048 $ 60,645
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December 31, 1999
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Actual As Adjusted (2)
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Balance Sheet Data:
Cash and cash equivalents......................... $ 5,275,073
Working capital................................... 10,397,859
Total assets...................................... 15,100,752
Debt and capital lease obligations, less current
portion.......................................... 42,437
Total shareholders' equity........................ 10,946,946
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(1) Revenues per employee represent our revenues for the period divided by the
average number of employees during the period. The average number of
employees equals the average of the number of employees at the beginning of
the period and at each month end during the period.
(2) Gives effect to the public offering of shares of common stock at an
assumed initial public offering price of $ per share, net of estimated
issuance costs of $ .
4
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RISK FACTORS
An investment in our shares is extremely risky. You should carefully
consider the following risks as well as the other information in this
prospectus before you decide to buy our common stock.
Risks Related to Our Business
Our business currently depends on sales of air data systems products, and we
cannot be certain that the market will continue to accept our products.
We currently derive a substantial majority of our revenues from the sale of
air data systems and related products. We expect that revenues from our air
data products will continue to account for a significant portion of our
revenues in the future. Accordingly, our business will be harmed if such
products do not continue to receive market acceptance. In particular, our
business will be negatively affected if our existing customers do not continue
to incorporate our products in their retrofitting or manufacturing of aircraft.
In seeking new customers, it may be difficult for our products to displace
competing air data products. Accordingly, we cannot assure you that potential
customers will accept our products or that existing customers will not abandon
them.
Our business currently depends on contracts with a limited number of customers
which use our products primarily for government-related contracts.
A substantial portion of our sales have been, and we expect will continue to
be, to general contractors or government agencies in connection with government
aircraft retrofit or original manufacturing contracts. Sales to government
contractors and government agencies accounted for approximately 76% and 95% of
our revenues during fiscal year 1999 and the three months ended December 31,
1999. Accordingly, our revenues and financial condition could be adversely
affected by government spending cuts, general budgetary constraints and the
complex and competitive government procurement processes.
Additionally, a substantial portion of our revenues have been from a
relatively limited number of government contractors, fleet operators and
aircraft manufacturers. We derived 76% of our revenues during fiscal year 1999
from three customers, two of which are government contractors, and 85% of our
revenues during the three months ended December 31, 1999 from four customers,
all of which are government contractors. We expect a relatively small number of
customers to account for a majority of our revenues for the foreseeable future.
As a result of our concentrated customer base, a loss of one or more of these
customers could adversely affect our business.
Our business currently derives a large portion of its revenues from one
military retrofit program.
A significant portion of our revenues is currently derived from the United
States Air Force KC-135 retrofit program in which we are a supplier of certain
avionics products. During fiscal year 1999 and the three months ended December
31, 1999, 64% and 62% of our revenues resulted from sales in connection with
this program. Our revenues and financial condition could be adversely affected
by governmental spending cuts with respect to this program or our loss of
business under this program.
Delays in providing our products to our customers may affect how much business
we receive.
Our product development efforts may not be successful, and we may encounter
significant delays in bringing our products to market. If our product
development efforts are not successful or are significantly delayed, our
business may be harmed. Delays in bringing to market new products or
enhancements to existing products could cause our customers to purchase
competitors' products, resulting in lost market share and adversely affecting
our business.
5
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Our growth depends in part on the development and marketing of flat panel
displays and other new products.
Although a substantial majority of our revenues has come from sales of air
data systems and related products, we expect to spend a large portion of our
research and development efforts and a significant portion of the proceeds of
this offering in developing and marketing our CIP and complementary products.
Our ability to grow and diversify our operations through the introduction and
sale of new products, such as flat panel displays, is dependent upon our
success in continuing product development and engineering activities as well as
our sales and marketing efforts and our ability to obtain requisite approvals
to sell such products. Our sales growth will also depend in part on the market
acceptance of and demand for our CIP and future products. We cannot be certain
that we will be able to develop, introduce or market our CIP or other new
products or product enhancements in a timely or cost-effective manner or that
any new products will receive market acceptance or necessary regulatory
approval.
We rely on third party suppliers for our products.
Our manufacturing process consists primarily of assembling components from
third party manufacturers. These third party components may not continue to be
available to us on commercially reasonable terms or in a timely fashion. If we
are unable to maintain relationships with key third party suppliers, the
development and distribution of our products could be delayed until equivalent
components can be obtained and integrated into our products. In addition,
substitution of certain components from other manufacturers may require FAA or
other approval, which could delay our ability to ship products.
Our government retrofit projects allow the government agency or government
contractor to terminate or modify their contracts with us.
Our government retrofit projects are generally pursuant to either a direct
contract with a government agency or a subcontract with the general contractor
to the government agency. Each contract includes various federal regulations
that impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience.
Upon alteration or termination of these contracts, we would normally be
entitled to an equitable adjustment to the contract price so that we may
receive the purchase price for items we have delivered and reimbursement for
allowable costs we have incurred. Most of our backlog is from government-
related contracts. Accordingly, because these contracts can be terminated, we
cannot assure you that our backlog will result in sales.
Our success depends on our management and our ability to attract and retain
additional personnel in a competitive market.
Our success depends on the efforts, abilities and expertise of our senior
management and certain other key personnel, including in particular our
Chairman and Chief Executive Officer, Geoffrey Hedrick. We generally do not
have employment agreements with our employees. There can be no assurance that
we will be able to retain such employees, the loss of some of whom could
adversely affect our business. We intend to continue hiring key management and
sales and marketing personnel. Competition for such personnel is intense, and
we may not be able to attract or retain additional qualified personnel.
Our rapid growth may strain our resources.
We expect our rapid growth to continue, causing significant strain on our
operational and administrative resources. We have grown from 72 employees in
1997 to approximately 115 employees as of March 31, 2000, and we expect to
continue hiring additional employees. Our future success will depend in part on
our ability to implement and improve our operational, administrative and
financial systems and controls and to manage, train and expand our employee
base. We cannot assure you that our current and planned personnel levels,
systems, procedures and controls will be adequate to support our future
operations. If inadequate, we may not be able to
6
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exploit existing and potential market opportunities. Any delays or difficulties
we encounter could impair our ability to attract new customers or enhance our
relationships with existing customers.
Our financial results may fluctuate in future periods.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:
. variations in demand for our products;
. the timing of the introduction of RVSM requirements on various flight
routes;
. the capital expenditure budgets of aircraft owners and operators and the
appropriation cycles of the U.S. government;
. changes in the use of our products, including non-RVSM air data systems,
RVSM systems and flat panel displays;
. delays in introducing or obtaining government approval for new products;
. new product introductions by competitors;
. changes in our pricing policies or the pricing policies of our
competitors; and
. costs related to possible acquisitions of technologies or businesses.
We plan to increase our operating expenses to expand our sales and marketing
operations and fund greater levels of product development. As a result, a delay
in generating revenues could cause significant variations in our operating
results from quarter to quarter.
We face intense competition and may be unable to compete successfully.
The markets for our products are intensely competitive and subject to rapid
technological change. Our competitors include Kollsman, Inc., Honeywell
International Inc., Rockwell International Corporation, Smiths Industries plc
and Meggitt Avionics Inc. Substantially all of our competitors have
significantly greater financial, technical and human resources than we do. In
addition, our competitors have much greater experience in and resources for
marketing their products. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and customer preferences or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may also have greater name recognition and more
extensive customer bases that they can use to their benefit. This competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share.
Our business may be negatively affected if our acquisition strategy is
unsuccessful.
One of our strategies is to acquire businesses or technologies that will
complement our existing operations. There can be no assurance that we will be
able to acquire or profitably manage acquisitions or successfully integrate
them into our operations. Furthermore, certain risks are inherent in our
acquisition strategy, such as the diversion of management's time and attention
and combining disparate company cultures and facilities, any of which could
adversely affect our operating results. The success of any acquisition will
depend in part on our ability to integrate effectively the acquired business
and its operations. Acquisitions may have an adverse effect on our operating
results, particularly in quarters immediately following the consummation of
such transactions, as we integrate the operations of the acquired businesses
into our operations. Once integrated, acquisitions may not achieve levels of
net sales or profitability comparable to those achieved by our existing
operations or otherwise perform as expected.
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Our success depends upon our ability to protect our proprietary rights, and
there is a risk of infringement.
Our success and ability to compete will depend in part on our ability to
obtain and maintain patent or other protection for our internally developed or
acquired technology and products, both in the United States and abroad. In
addition, we must operate without infringing the proprietary rights of others.
Patent protection involves complex legal and factual questions and, therefore,
is highly uncertain. If we are not successful in protecting our intellectual
property, our business could be adversely affected.
We currently hold three U.S. patents and have one U.S. patent application
pending. In addition, we have five international applications pending. We
cannot be certain that patents will issue on any of our present or future
applications. In addition, our existing patents or any future patents may not
adequately protect our technology if they are not broad enough, are
successfully challenged or other entities are able to develop competing methods
without violating the patents. Litigation relating to intellectual property is
often very time consuming and expensive. If a successful claim of patent
infringement were made against us or we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, our business could be adversely affected.
Risks Related to Our Industry
If we are unable to respond to rapid technological change, our products could
become obsolete.
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:
. adapt to rapidly changing technologies;
. adapt our products to evolving industry standards; and
. 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,
adversely affecting our business.
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 either 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 adversely affect our business. Furthermore, the
adoption of additional regulations or product standards, as well as changes to
the existing product standards, could harm our business. 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.
8
<PAGE>
Our products may have defects, and we may be subject to product liability
claims.
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, any of which could harm our business:
. the delay or loss of revenues;
. the cancellation of customer contracts;
. the diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; or
. 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.
Our business is subject to risks from international operations.
We expect to derive an increasing amount of our revenues from sales outside
the United States. 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, including, among others:
. differing regulatory requirements for products being installed in
aircraft;
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. political and economic instability;
. changes in diplomatic and trade relationships;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. 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 business.
Risks Related to Our Offering
We may not be able to raise needed capital in the future.
We currently anticipate that the net proceeds from this offering, together
with our funds from operations, will be sufficient to meet our anticipated
capital needs for the foreseeable future. However, we may require additional
capital to finance our growth strategies and other activities in the future.
Our capital requirements will depend on many factors, including:
. the cost of developing new products;
9
<PAGE>
. the number and timing of any acquisitions; and
. the costs associated with our expansion.
To the extent that our existing sources of cash, plus any cash generated
from operations and from any financing arrangements we may enter into, together
with the net proceeds of this offering, are insufficient to fund our
activities, we may need to raise additional funds. If we issue additional stock
to raise capital, your percentage ownership in us would be reduced. Further,
such additional stock may have rights, preferences or privileges senior to
those you possess as a holder of our common stock. Additional financing may not
be available when needed and, if such financing is available, it may not be
available on terms favorable to us.
We have substantial discretion as to how to use the proceeds from this
offering.
We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on marketing as well as product development. We may also
use some of the proceeds to acquire other businesses, products or technologies
which would complement our existing products, expand our market coverage or
enhance our technological capabilities. We have no current agreements or
understandings regarding any acquisition. As a result, our management will have
broad discretion over how to use the funds provided by this offering.
There has been no prior public market for our common stock, and the price of
our common stock may be volatile.
Our common stock has never been traded in a public market, and an active
trading market for our common stock may not develop in the future. If an active
trading market does develop, it may not last and the trading price of the
shares being sold in this offering may fluctuate widely as a result of a number
of factors, many of which are outside our control. Some of these factors
include:
. quarter-to-quarter variations in our operating results;
. our announcements about the performance of our products as well as our
competitors' announcements about the performance of their products;
. changes in earnings estimates by, or failure to meet the expectations of,
securities analysts;
. regulatory action;
. increased price competition;
. developments or disputes concerning intellectual property rights; and
. general conditions in the economy or the aviation industry.
We are negotiating the initial offering price of the common stock with the
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of our common stock could fall below the initial public offering
price.
Our officers and directors will be able to exert significant control over our
future direction.
Our executive officers and directors will, in the aggregate, beneficially
own approximately % of our outstanding common stock following the completion
of this offering. These shareholders, if acting together, would be able to
significantly influence matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other
business combination transactions. See "Principal Shareholders."
10
<PAGE>
There may be an adverse effect on the market price of our stock as a result of
shares being available for sale in the future.
After this offering, we will have outstanding shares of common stock. This
total includes the shares we are selling in this offering, which generally may
be resold immediately in the public market. The remaining 8,320,800 shares will
become available for resale in the public market 180 days after the date of
this prospectus due to agreements these shareholders have with Friedman,
Billings, Ramsey & Co., Inc. However, Friedman, Billings, Ramsey & Co., Inc.
may, in its sole discretion, waive the restrictions under the lock-up
agreements and allow any shareholder to sell his or her shares at any time. As
restrictions on resale end, the market price of our common stock could drop
significantly if the holders of the restricted shares sell or are perceived by
the market as intending to sell their shares. In addition, holders of 3,098,600
shares of our common stock and holders of warrants exercisable for 342,402
shares of our common stock have rights to require us to register their shares
for sale with the Securities and Exchange Commission beginning 180 days
following the date of this prospectus. The exercise of these registration
rights and the sale of a large number of shares in the public market could
cause the market price of our common stock to fall. For a more detailed
description, see "Shares Eligible for Future Sale."
Purchasers of our common stock will experience immediate and substantial
dilution in the value of their shares.
The purchasers of the shares of common stock in this offering will
experience immediate and substantial dilution of the net tangible book value
per share of common stock from the initial public offering price. Based on an
assumed offering price of $ per share, as of December 31, 1999, the dilution,
on a pro forma basis giving effect to this offering, would have been equal to
$ per share with respect to the shares purchased in this offering. To the
extent that some or all outstanding options and warrants to purchase common
stock are exercised, there will be further dilution. See "Dilution."
Certain anti-takeover provisions may adversely affect our share price and
impede "change of control" transactions.
Our articles of incorporation and bylaws, as well as the corporate laws
under which we are governed, contain certain provisions that may have the
effect of discouraging certain transactions involving an actual or threatened
change of control transaction. Such provisions could limit the price that
certain investors might be willing to pay in the future for our stock. In
addition, shares of preferred stock may be issued by our board without
shareholder approval on such terms and conditions, and having such rights,
privileges and preferences, as our board may determine. The rights of the
holders of the common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. We currently have no plans to issue preferred stock. See "Description
of Capital Stock."
We have no intention to pay dividends.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
11
<PAGE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These forward-
looking statements concern our operations, economic performance and financial
condition and are based on our current expectations, assumptions, estimates and
beliefs about us and our industry. When we use words such as "believe,"
"expect," "anticipate," "estimate," "intend," "plan," "may" or similar
expressions, we are making forward-looking statements.
These statements are not guarantees of future performance and are subject to
certain risks, uncertainties and other factors, some of which are beyond our
control, which could cause our actual results to differ materially from our
expectations. Important factors that could cause actual results to differ from
expectations include, among others, the following:
. rapid and significant changes in technology;
. intense competition in our industry;
. changes in customer preferences and demand for our products or delays in
introducing new products;
. changes to government regulations relating to aircraft and aircraft
parts; and
. other general economic and business conditions.
Certain of these risks and other factors are described in "Risk Factors" and
elsewhere in this prospectus. We caution you not to place undue reliance on
forward-looking statements. These cautionary statements should not be construed
by you to be exhaustive, and they are made only as of the date of this
prospectus. We assume no obligation to update or revise the forward-looking
statements or to explain the reasons why actual results could differ from those
projected in the forward-looking statements.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be
approximately $ million, after deducting the underwriting discount and other
estimated expenses. If the underwriters fully exercise their over-allotment
option, we estimate that the net proceeds to us from the offering will be
approximately $ million, after deducting the underwriting discount and other
estimated expenses. For the purpose of estimating net proceeds, we are assuming
that the initial public offering price will be $ per share, which represents
the midpoint of the range set forth on the cover page of this prospectus.
We intend to use the net proceeds of this offering for product development,
including development of our flat panel display, to expand our sales and
marketing staff, to finance a portion of our new facility, for possible
acquisitions of complementary businesses, technologies or product lines and for
general corporate purposes and working capital. We do not currently have any
understandings with respect to any specific acquisitions.
We have not yet determined the actual expenditures to be made with the net
proceeds of this offering. Therefore, we cannot estimate the amounts to be used
for each purpose discussed above. The amounts and timing of these expenditures
may vary significantly depending on a number of factors, such as the amount of
cash generated by our operations. Accordingly, our management will have broad
discretion in the application of the net proceeds.
Until we use the net proceeds of the offering, we intend to invest the funds
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We currently
intend to retain future earnings, if any, for use in our business, and,
therefore, we do not anticipate declaring or paying any dividends in the
foreseeable future. Payments of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion. In addition, our credit facility restricts
our ability to pay dividends.
13
<PAGE>
CAPITALIZATION
The following table sets forth our actual and pro forma, as adjusted cash
and cash equivalents, capitalized lease obligations and total capitalization as
of December 31, 1999. Our pro forma, as adjusted capitalization gives effect
to:
. the conversion of all outstanding shares of preferred stock into
1,770,920 shares of common stock upon the closing of this offering;
. the issuance and sale of the shares of common stock offered by us in
this offering; and
. the application of the estimated net proceeds from the sale of our common
stock based on an assumed initial public offering price of $ per share
and after deducting underwriting discounts and estimated offering
expenses payable by us.
You should read this table in conjunction with the financial statements and
the notes to those statements and the other financial information included in
this prospectus.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------
Pro Forma,
Actual As Adjusted
----------- -----------
<S> <C> <C>
Cash and cash equivalents.......................... $ 5,275,073
=========== ====
Current portion of capitalized lease obligations... $ 23,423
=========== ====
Capitalized lease obligations, net of current
portion........................................... $ 42,437
----------- ----
Shareholders' equity:
Preferred stock................................... 177
Common stock...................................... 6,430
Additional paid-in-capital........................ 9,460,144
Retained earnings................................. 1,480,195
----------- ----
Total shareholders' equity....................... 10,946,946
----------- ----
Total capitalization........................... $10,989,383
=========== ====
</TABLE>
This table excludes an aggregate of 1,038,402 shares issuable upon exercise
of stock options and warrants outstanding as of December 31, 1999, plus an
additional 375,812 shares reserved for issuance in connection with future
grants under our stock option plans.
14
<PAGE>
DILUTION
Purchasers of common stock in this offering will experience immediate and
substantial dilution. Our net tangible book value at December 31, 1999 was
$10.9 million, or $1.33 per share, as adjusted to give effect to the
conversion of all outstanding shares of preferred stock into common stock. Net
tangible book value per share represents the amount of our total tangible
assets less our total liabilities and divided by the total number of shares of
common stock outstanding, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and
the net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale of shares of
common stock offered by us at an assumed initial public offering price of $
per share, and after deducting the underwriting discount and estimated
offering expenses, our pro forma net tangible book value at December 31, 1999
would have been $ , or $ per share. This represents an immediate increase in
net tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Net tangible book value per share as of December 31, 1999........ $1.33
Increase per share attributable to new investors.................
-----
Pro forma net tangible book value per share after the offering.....
---
Dilution per share to new investors................................ $
===
</TABLE>
The following table summarizes, on a pro forma basis to reflect the
adjustments described above, the difference between the total consideration
paid and the average price per share paid by our existing shareholders and the
new investors purchasing shares of common stock in this offering at an assumed
initial public offering price of $ per share (before deducting the
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
----------------- ------------------ Average Price
Number Percent Amount Percent Per Share
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 8,200,800 % $9,256,751 % $1.13
New investors............. % $ % $
--------- ---- ---------- ----
Totals.................. 100% $ 100%
========= ==== ========== ====
</TABLE>
The foregoing computations are based on the number of shares of common
stock outstanding as of December 31, 1999 and exclude:
. 576,000 shares of common stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $4.32 per share;
. warrants to purchase 462,402 shares of common stock at an exercise price
of $2.40 per share; and
. 375,812 shares of common stock reserved for issuance under our 1998 Stock
Option Plan.
When and if any of the options or warrants are exercised, there could be
further dilution to new investors.
15
<PAGE>
SELECTED FINANCIAL DATA
Our statement of operations data for 1997, 1998 and 1999 and the balance
sheet data as of September 30, 1998 and 1999 have been derived from the
financial statements, which have been audited by Arthur Andersen, LLP,
independent public accountants, and are included in this prospectus. Our
statement of operations data for 1996 and the balance sheet data as of
September 30, 1996 and 1997 have been derived from our audited financial
statements, audited by Arthur Andersen, which are not included in this
prospectus. Our statement of operations data for 1995 and the balance sheet
data as of September 30, 1995 are unaudited. You should read the data set forth
below together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended September 30, Three Months Ended
----------------------------------------------------------------- -------------------------
December 31, December 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 2,172,433 $ 6,685,682 $10,594,204 $14,682,313 $22,487,882 $3,855,822 $6,337,442
Cost of sales........... 1,847,207 5,322,424 7,007,523 8,480,549 10,570,009 2,183,798 2,833,460
----------- ----------- ----------- ----------- ----------- ---------- ----------
Gross profit........... 325,226 1,363,258 3,586,681 6,201,764 11,917,873 1,672,024 3,503,982
Research and
development............ 969,403 963,921 1,114,351 1,554,564 1,915,634 408,631 668,278
Selling, general and
administrative......... 851,512 1,634,199 1,567,896 2,492,509 3,333,977 628,948 816,565
----------- ----------- ----------- ----------- ----------- ---------- ----------
Total operating
expenses.............. 1,820,915 2,598,120 2,682,247 4,047,073 5,249,611 1,037,579 1,484,843
Operating income
(loss)................. (1,495,689) (1,234,862) 904,434 2,154,691 6,668,262 634,445 2,019,139
Interest (income)
expense, net........... -- (27,287) 63,813 224,121 (30,137) 17,250 (62,847)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes........... (1,495,689) (1,207,575) 840,621 1,930,570 6,698,399 617,195 2,081,986
Income tax (expense)
benefit, net........... -- -- -- 2,013,802 (2,517,764) (231,988) (780,744)
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net income (loss)....... $(1,495,689) $(1,207,575) $ 840,621 $ 3,944,372 $ 4,180,635 $ 385,207 $1,301,242
=========== =========== =========== =========== =========== ========== ==========
Net income per common
share:
Basic.................. $ (0.25) $ (0.20) $ 0.14 $ 0.65 $ 0.68 $ 0.06 $ 0.20
Diluted................ (0.25) (0.20) 0.11 0.50 0.50 0.05 0.15
Weighted average shares
outstanding:
Basic.................. 5,993,805 6,032,200 6,032,200 6,084,556 6,154,652 6,137,200 6,377,763
Diluted................ 5,993,805 6,032,200 7,803,120 7,855,476 8,396,285 8,200,207 8,887,287
Operating Data:
Gross profit margin.... 15.0% 20.4% 33.9% 42.2% 53.0% 43.4% 55.3%
Operating income (loss)
margin................ (68.8%) (18.5%) 8.5% 14.7% 29.7% 16.5% 31.9%
Revenues per employee
(1)................... $ 51,820 $ 114,210 $ 156,150 $ 192,798 $ 258,253 $ 48,048 $ 60,645
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
----------- ---------- ---------- ---------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $1,407,519 $ 328,451 $ 484,281 $ 102,150 $ 4,638,607 $ 5,275,073
Working capital
(deficit).............. 439,396 (846,370) 140,212 3,387,163 8,557,052 10,397,859
Total assets............ 4,308,123 3,732,425 4,839,520 9,029,168 12,612,189 15,100,752
Debt and capital lease
obligations, less
current portion........ 42,396 115,286 27,845 46,379 45,764 42,437
Total shareholders'
equity (deficit)....... 610,219 (597,356) 368,265 4,564,637 8,935,272 10,946,946
</TABLE>
- ---------------------
(1) Revenues per employee represent our revenues for the period divided by the
average number of employees during the period. The average number of
employees equals the average of the number of employees at the beginning of
the period and at each month end during the period.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the financial
statements and notes appearing elsewhere in this prospectus. The following
discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results may differ significantly from those
projected in these forward-looking statements as a result of many factors
including, but not limited to, those discussed in "Risk Factors," "Cautionary
Notice Regarding Forward-Looking Statements" and elsewhere in this prospectus.
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 RVSM-compliant air data
systems, including sales 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. The retrofit program covers the approximately 600 KC-135 aircraft
currently in use, and as of December 31, 1999, we have delivered 141 KC-135
ship sets for retrofit installation. 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
that sales of our flat panel display will become a meaningful source of revenue
during fiscal year 2001.
Our cost of sales are comprised of material components purchased through our
supplier base, 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 as well as 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 that
complement our current product offerings. Research and development expenses are
incurred for customer-sponsored programs and for future product development.
Research and development costs incurred for customer-sponsored programs are
charged to cost of sales when products are shipped. 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, recruiting, legal,
accounting and other general corporate expenses.
17
<PAGE>
Results of Operations
The following table sets forth our statement of operations expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
Three
Months
Ended
Fiscal Year Ended December
September 30, 31,
------------------- ------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 66.1 57.8 47.0 56.6 44.7
----- ----- ----- ----- -----
Gross profit............................ 33.9 42.2 53.0 43.4 55.3
Research and development.................. 10.6 10.5 8.5 10.6 10.5
Selling, general and administrative....... 14.8 17.0 14.8 16.3 12.9
----- ----- ----- ----- -----
Operating income........................ 8.5 14.7 29.7 16.5 31.9
Interest (income) expense, net............ 0.6 1.6 (0.1) 0.5 (1.0)
----- ----- ----- ----- -----
Income before income taxes................ 7.9 13.1 29.8 16.0 32.9
Income tax benefit (expense), net......... -- 13.8 (11.2) (6.0) (12.4)
----- ----- ----- ----- -----
Net income.............................. 7.9% 26.9% 18.6% 10.0% 20.5%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended December 31, 1999 Compared to the Three Months Ended
December 31, 1998
Revenues. Revenues increased $2.4 million, or 64.4%, to $6.3 million for the
three months ended December 31, 1999 from $3.9 million for the three months
ended December 31, 1998. The increase was primarily attributable to RVSM
product shipments for the KC-135 program. We recognized revenues related to
this program of $1.3 million for the three months ended December 31, 1998 and
$3.9 million for the three months ended December 31, 1999.
Cost of Sales. Cost of sales increased $600,000, or 29.7%, to $2.8 million,
or 44.7% of revenues, for the three months ended December 31, 1999 from $2.2
million, or 56.6% of revenues, for the three months ended December 31, 1998.
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
$259,000, or 63.5%, to $668,000, or 10.5% of revenues, for the three months
ended December 31, 1999 from $409,000, or 10.6% of revenues, for the three
months ended December 31, 1998. 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 $188,000, or 29.8%, to $817,000, or 12.9% of revenues, for
the three months ended December 31, 1999 from $629,000, or 16.3% of revenues,
for the three months ended December 31, 1998. The increase in dollar amount
reflects our investment in personnel and infrastructure to support our
continued growth. The decrease in selling, general and administrative expenses
as a percentage of revenues was primarily due to economies associated with
increased revenues.
Interest (income) expense, net. Net interest income was $63,000 for the
three months ended December 31, 1999 as compared to net interest expense of
$17,000 for the three months ended December 31, 1998. Interest income for the
three months ended December 31, 1999 was due to higher cash balances during the
period. Net interest expense for the three months ended December 31, 1998 was
due to outstanding borrowings under our credit facility.
18
<PAGE>
Income tax (expense) benefit, net. Income tax expense was $781,000 for the
three months ended December 31, 1999 compared to an income tax expense of
$232,000 for the three months ended December 31, 1998. The increased amount was
the direct result of higher income before tax. Effective tax rates remained
unchanged period to period.
Net income. As a result of the factors described above, our net income
increased $915,000, or 237.8%, to $1.3 million, or 20.5% of revenues, for the
three months ended December 31, 1999 from $385,000, or 10.0% of revenues, for
the three months ended December 31, 1998.
Year Ended September 30, 1999 Compared to the Year Ended September 30, 1998
Revenues. Revenues increased $7.8 million, or 53.2%, to $22.5 million in the
year ended September 30, 1999 from $14.7 million in the year ended September
30, 1998. The increase was principally due to shipments of RVSM air data
systems for the KC-135 aircraft, which contributed $14.5 million of revenues
during the year ended September 30, 1999 compared to $4.2 million of revenues
in fiscal year 1998.
Cost of Sales. Cost of sales increased $2.1 million, or 24.6%, to $10.6
million, or 47.0% of revenues, in the year ended September 30, 1999 from $8.5
million, or 57.8% of revenues, in the year ended September 30, 1998. The
increase in dollar amount of cost of sales 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.
Research and development. Research and development expense increased
$300,000, or 23.2%, to $1.9 million, or 8.5% of revenues, in the year ended
September 30, 1999 from $1.6 million, or 10.5% of revenues, in the year ended
September 30, 1998. 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 in fiscal year 1999. 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 $800,000, or 33.8%, to $3.3 million, or 14.8% of revenues,
in the year ended September 30, 1999 from $2.5 million, or 17.0% of revenues,
in the year ended September 30, 1998. The dollar increase was primarily related
to the hiring of executive personnel in general management and sales and
marketing. The decrease as a percent of revenues reflects economies associated
with increased revenues.
Interest (income) expense, net. Net interest income was $30,000 in the year
ended September 30, 1999 as compared to net interest expense of $224,000 in the
year ended September 30, 1998. The interest income in the year ended September
30, 1999 was the result of higher average cash balances in the period. Net
interest expense in the year ended September 30, 1998 was the result of
borrowings under our credit facility.
Income tax (expense) benefit, net. We recognized an income tax expense of
$2.5 million or an effective rate of 37.6% in the year ended September 30,
1999. In the year ended September 30, 1998 we recorded a tax benefit in the
amount of $2.0 million as a result of establishing a tax-based asset to reflect
prior net operating loss carryforwards. During fiscal year 1999 we utilized all
of our net operating loss carryforwards from previous periods. We expect that
going forward we will generally be subject to normal tax rates without the
benefit of net operating loss carryforwards.
Net income. As a result of the factors described above, our net income
increased $300,000, or 6.0%, to $4.2 million, or 18.6% of revenues, with a $2.5
million tax expense, for the year ended September 30, 1999 from net income of
$3.9 million for fiscal year 1998, or 26.9% of revenues, with a $2.0 million
tax benefit.
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Year Ended September 30, 1998 Compared to the Year Ended September 30, 1997
Revenues. Revenues increased $4.1 million, or 38.6%, to $14.7 million in the
year ended September 30, 1998 from $10.6 million in the year ended September
30, 1997. The increase in revenues was principally due to the following
customer programs: Northwest Airlines DC-9 Fuel Quantity Indicator program;
Delta Airlines 727 program; and the Parker DC-10 Fuel Quantity Indicator
program.
Cost of Sales. Cost of sales increased $1.5 million, or 21.0%, to $8.5
million, or 57.8% of revenues, in the year ended September 30, 1998 from $7.0
million, or 66.1% of revenues, in the year ended September 30, 1997. The
increase in dollar amount of cost of sales 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.
Research and development. Research and development expense increased
$500,000, or 39.5%, to $1.6 million, or 10.5% of revenues, in the year ended
September 30, 1998 from $1.1 million, or 10.6% of revenues, in the year ended
September 30, 1997. The increase was primarily due to the introduction of our
air data display unit and altimeter/altitude alerter.
Selling, general and administrative. Selling, general and administrative
expenses increased $900,000, or 59.0%, to $2.5 million, or 17.0% of revenues,
in the year ended September 30, 1998 from $1.6 million, or 14.8% of revenues,
in the year ended September 30, 1997. The increase was principally due to
management, sales and marketing related expenses.
Interest (income) expense, net. Net interest expense was $224,000 for the
year ended September 30, 1998 as compared to net interest expense of $64,000
for the year ended September 30, 1997. The increase in net interest expense for
the year ended September 30, 1998 was due to a higher level of borrowing to
support our growth.
Income tax (expense) benefit, net. We were not required to pay income taxes
in fiscal year 1997 due to net operating loss carryforwards from prior periods.
A tax-based asset was established to reflect the net operating loss
carryforwards in fiscal year 1998. For this reason, a tax benefit in the amount
of $2.0 million was reflected in the fiscal year 1998.
Net income. As a result of the factors described above, our net income
increased $3.1 million, or 369.2%, to $3.9 million, or 26.9% of revenues, in
the year ended September 30, 1998 from $841,000, or 7.9% of revenues, for the
year ended September 30, 1997.
Recent Developments
To accommodate for our future growth, we have initiated plans to build a new
facility that increases our space from 27,000 square feet to approximately
40,000 square feet. We expect the cost of this new facility, including land
acquisition, to be between $5.0 million and $6.0 million. We intend to finance
approximately $4.0 million of this cost with industrial development bonds.
We have also entered into an agreement with Pilatus Business Aircraft, Ltd.
to purchase a PC 12 aircraft for approximately $3.0 million. This aircraft will
serve as a test bed for our new air data and flat panel products and also as a
sales/marketing tool for demonstrating our products to our aviation customers.
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Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations data for the five quarters ended December 31, 1999. The data have
been prepared on the same basis as the audited financial statements contained
in this prospectus, and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the quarterly
results of operations. This information should be read in conjunction with our
audited financial statements and the notes thereto included elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
December 31, March 31, June 30, September 30, December 31,
1998 1999 1999 1999 1999
------------ --------- -------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $3,856 $5,058 $6,849 $6,725 $6,337
Gross profit............ $1,672 $2,547 $3,683 $4,016 $3,504
Operating income........ $ 634 $1,500 $2,352 $2,182 $2,019
Net income.............. $ 385 $ 930 $1,477 $1,389 $1,301
Gross profit margin..... 43.4% 50.4% 53.8% 59.7% 55.3%
Operating income
margin................. 16.5% 29.7% 34.3% 32.4% 31.9%
Net income as a percent
of revenues............ 10.0% 18.4% 21.6% 20.6% 20.5%
</TABLE>
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.
Our cash flow provided from operating activities was $20,000 for three
months ended December 31, 1999 as compared to $143,000 for the three months
ended December 31, 1998. The decline is the result of higher accounts
receivable, inventory and prepaid expenses in the three months ended December
31, 1999 more than offsetting higher net income during such period.
Cash flow provided by operating activities for fiscal year 1999 was $6.0
million as compared to cash used of $39,000 for fiscal year 1998. The increase
in fiscal year 1999 was primarily due to higher net income, adjusted for the
deferred portion of the income tax expense, and a decrease in accounts
receivable balances. This increase was partially offset by a decrease in
accounts payable. Our cash used in operating activities for fiscal year 1997
was $501,000 and primarily reflected the increase in inventories and accounts
receivable and a decrease in deferred revenue.
Our cash used in investing activities was $90,000 for the three months ended
December 31, 1999 as compared to $134,000 for the three months ended December
31, 1998, all of which related to purchases of property and equipment.
Our cash used in investing activities for fiscal year 1999 was $592,000 as
compared to cash used of $238,000 for fiscal year 1998. The increase in fiscal
year 1999 was due to the purchase of property and equipment. Our cash used in
investing activities in fiscal year 1997 was $35,000 and primarily reflected
purchases of equipment.
We expect that our aggregate capital expenditures will be approximately $7.5
million during fiscal year 2000. Included in this amount is approximately $4.0
million of the between $5.0 million and $6.0 million we expect to spend in
connection with our new facility, and $3.0 million we expect to spend on the
purchase of our Pilatus PC 12 aircraft. We intend to finance a portion of our
new facility with industrial development bonds, and we have not yet determined
how we will finance the purchase of the aircraft.
Cash flow provided by financing activities was $707,000 for the three months
ended December 31, 1999 as compared to $30,000 for the three months ended
December 31, 1998. This increase was primarily due to the
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exercise of warrants during the three months ended December 31, 1999. Our cash
used in financing activities for fiscal year 1999 was $832,000 as compared to
cash used of $105,000 for fiscal year 1998. The increase in cash used was
primarily due to an increase in the repayment of borrowings during fiscal year
1999. Cash flows provided by financing activities in fiscal year 1997 were
$693,000 and reflected proceeds from the issuance of notes payable offset by
the repayment of capitalized lease obligations.
We currently have a credit facility which provides 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%. The credit
facility expires in May 2000, is collateralized by our assets and requires us
to maintain certain financial covenants. We are currently negotiating with our
lender and intend to enter into a new credit facility providing for increased
borrowing limits.
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 this 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.
Inflation
We do not believe that inflation has had a material effect on our financial
position or results of operations during the past three years. However, we
cannot predict the future effects of inflation.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
Management believes that SAB 101 will have no material effect on our financial
position or results of operations.
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BUSINESS
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 strategy is to
leverage the latest technologies developed for the personal computer and
telecommunications industries into advanced, cost-effective solutions for the
aviation industry. We believe that this approach, combined with our experience
in our industry, enables us to develop high-quality avionics products,
substantially reduce product times to market and achieve cost advantages over
the products offered by our competitors. Our strategy has also allowed us to
rapidly increase our revenues and earnings. We have increased our revenues from
$10.6 million in fiscal year 1997 to $22.5 million in fiscal year 1999, and we
recorded revenues of $6.3 million for the three months ended December 31, 1999.
Our income before income taxes increased from $841,000 in fiscal year 1997 to
$6.7 million in fiscal year 1999, and we recorded income before income taxes of
$2.1 million for the three months ended December 31, 1999.
Historically, we have focused our efforts on developing and marketing air
data systems that measure, calculate and display critical flight information,
such as airspeed and altitude, and instruments that measure engine and fuel
data, primarily for use in the aircraft retrofit market and also for the OEM
market. Since fiscal year 1997, a substantial portion of our revenues has been
from the sale of air data systems that bring aircraft into compliance with
government regulations, including the reduced vertical separation minimum, or
RVSM, requirements that are being phased in by regulatory authorities on
certain heavily traveled flight routes. We believe that we are currently one of
three primary suppliers of RVSM products to the U.S. retrofit market. As a
result of our expertise, we were selected as the sole supplier of RVSM systems
and components in connection with the United States Air Force's KC-135 retrofit
program, which we believe to be the largest U.S. military RVSM retrofit
programs to date.
Advances in technology are making available to pilots increasing amounts of
information that enhance both the safety and efficiency of flying. However, the
limited amount of space in the cockpit coupled with inefficiencies associated
with currently used displays inhibits the display and integration of this
information in a user friendly manner.
We have recently introduced our flat panel display system, or Cockpit
Information Portal (CIP), which is the first in a series of new products
designed to enhance the management and integration of cockpit information. Our
CIP has a large, 15 inch diagonal high-resolution screen which can integrate
and replace virtually all of the space-consuming conventional displays
currently used in cockpits. Our CIP is the centerpiece of our cockpit
information management system that organizes and displays a multitude of flight
information that may be mandated by regulation or that is or will become
available to pilots in the future. This information may be generated from a
variety of sources, including our RVSM air data system, our engine and fuel
instrumentation, a predictive weather information system or from third-party
data and information products. In addition, we are in the process of developing
technologies relating to other products to be incorporated with our CIP, such
as a heads up display system designed to project critical flight data onto
cockpit windshields for easy reference by pilots.
In December 1999, we entered into a memorandum of understanding with Pilatus
Business Aircraft, Ltd. to offer our CIP on the Pilatus PC 12, initially for
use on the co-pilot side of the cockpit. Pilatus will offer our CIP on the PC
12 for use on the pilot's side of the cockpit after our display receives the
requisite FAA certification for such use, which we expect to receive by the end
of calendar year 2000.
We believe that we are positioned to maintain our competitive position
because of our innovative engineering capabilities, which have allowed us to
leverage technology developed at significant cost by others for the personal
computer and telecommunications industries. These capabilities have also
allowed us to successfully develop high-quality avionics products and bring
them to market relatively quickly at what we believe to be lower development
and production costs than our competitors.
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Our Industry
A wide range of information, including airspeed, altitude and fuel levels,
is critical for the proper and safe operation of aircraft. With advances in
technology, new types of information to assist pilots, such as weather radar
and ground terrain maps, are becoming available for display in cockpits. We
believe that aircraft cockpits will increasingly become information centers,
capable of delivering additional information that is either mandated by
regulation or demanded by pilots to assist them in the safe and efficient
operation of aircraft.
There are three general types of flight data: air data, which includes
aircraft speed, altitude and rates of ascent and descent; equipment data, such
as fuel and oil quantity and other engine measurements; and alternative source
information, which is information not originating on the aircraft, including
weather radar and surface terrain maps. Air data calculations are based
primarily on air pressure measurements derived from sensors on the aircraft.
Equipment data are determined by measuring various indices such as temperature,
volume and pressure within an aircraft's engines and other mechanical
equipment. Alternative source information is typically derived from satellites
or equipment located on land and fed by satellite or radio signals to the
aircraft. All types of information are then displayed in the cockpit for
reference by the pilots.
Traditionally, flight data and other cockpit information were displayed on a
series of separate analog dials. In the early 1980s, digital displays using
cathode ray tubes began to replace some of the individual analog displays.
Recently, the industry has begun to develop color flat panel displays using
liquid crystal displays (LCD) to replace some of the traditional analog or
digital displays. We expect that the ability to display more information in a
space-efficient and customizable platform will become increasingly important as
additional information, such as weather radar and surface terrain maps, becomes
mandated by regulation or demanded by pilots. Accordingly, we believe that flat
panel displays, which can integrate and display a "suite" of information, will
increasingly replace individual displays as the method for delivering and
ordering the information displayed in the cockpit.
Frost & Sullivan, an aviation consultancy, estimates that worldwide sales of
avionics products in the markets related to our current and expected products
was approximately $6 billion during 1999 and projects these markets to grow 42%
to $8.8 billion in 2005.
Air Data and Reduced Vertical Separation Minimum (RVSM)
Pilots use air data for a number of important purposes, including
maintaining safe separation from other aircraft. Until recently, aircraft on a
similar flight path at altitudes exceeding 29,000 feet have been required to
maintain a vertical separation of at least 2,000 feet. As air travel has
increased over the past decade, U.S. and international aviation organizations
have sought ways to increase traffic flow on high traffic routes. These
organizations have developed reduced vertical separation minimums, or RVSM, for
adoption on certain highly traveled routes to reduce vertical separation
between aircraft from 2,000 feet to 1,000 feet. RVSM increases available flight
routes within a vertical airspace, thereby increasing the number of aircraft
that can fly on high traffic routes.
Safe travel on RVSM routes requires that an aircraft's altimeter be
extremely accurate, and aircraft flying RVSM routes must have RVSM-certified
equipment. RVSM-certified altimeters must be able to measure altitude to within
25 feet at an altitude of 30,000 feet. In contrast, non-RVSM systems need only
be accurate within 180 feet at 30,000 feet.
RVSM has been in effect for certain North Atlantic routes since March 1997
and is currently mandated between the altitudes of 31,000 and 39,000 feet on
these routes. RVSM is scheduled to be mandated between 29,000 and 41,000 feet
on these North Atlantic routes by January 2002. RVSM was phased in on certain
Trans-Pacific air routes beginning in February 2000 and is scheduled to be
phased in on Western Atlantic air routes beginning in October 2000.
Eurocontrol, the organization that oversees air traffic control throughout
Europe, plans to begin mandating RVSM on certain European routes in January
2002. We anticipate that RVSM will continue encompassing more of the world's
airspace, including air routes over the United States, in the years to come.
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Because aircraft must have RVSM-certified equipment in order to fly on RVSM
routes, aircraft not equipped with RVSM-compliant equipment will not be
permitted to fly on many of the most popular and efficient routes as RVSM
continues to be phased in. RVSM compliance requires numerous modifications and
upgrades to non-compliant air data systems, requiring in most cases that an
aircraft's air data computers and altimeters be replaced or significantly
upgraded. In addition to being mandated for certain heavily traveled routes,
RVSM also offers significant operating benefits, including:
. Greater availability of fuel-efficient routes. RVSM regulations are or
will become applicable to certain airspace between 29,000 and 41,000
feet. This airspace is desirable because the majority of aircraft engines
currently in use are designed to be most fuel efficient at these
altitudes. According to the National Business Aircraft Association
(NBAA), fuel costs represent approximately 40% of the operating expenses
of an aircraft, and aircraft that fly at the RVSM altitudes may achieve
fuel savings of approximately 5% or more compared to other altitudes. In
addition, aircraft traveling at fuel-efficient altitudes can carry less
fuel than would be required if they were traveling at lower altitudes,
thus allowing these aircraft to carry more revenue-generating freight,
passengers or other cargo.
. Reduced flight times. As RVSM is phased in for various air corridors,
aircraft that are equipped with RVSM-certified equipment will benefit by
being permitted to fly at the most efficient altitudes and on the most
direct routes, both of which decrease flight time and fuel consumption,
thereby putting their operators at a competitive advantage.
Flat Panel Displays
Air data and other flight information have traditionally been displayed on
analog instrumentation and, more recently, individual digital displays. Within
the last five years, color flat panel displays have begun to be used in
aircraft cockpits. Flat panel displays are LCD screens that can replicate the
display of one or a suite of analog or digital displays on one screen. Like
other instrumentation, flat panel displays can be installed in new aircraft or
used to replace existing displays in aircraft already in use.
Flat panel displays are becoming increasingly popular in the aviation
industry, and we expect that demand for this product will grow substantially
for a number of reasons, including:
. Ability to display additional important information. Because of space
limitations in the cockpit and technology limitations, conventional
displays generally convey less information than can now be accommodated
on flat panels. Flat panel displays allow for the consolidation of the
various types of conventional instrumentation, such as altimeters and
airspeed indicators, and the display of additional information, such as
weather radar and surface terrain maps, in a limited space.
. Increased reliability and accuracy. Flat panel displays are more reliable
than conventional mechanical displays. They have a higher mean time
between failures, increasing in some instances from 500 hours for typical
mechanical displays to 15,000 hours for flat panel displays. In addition,
flat panel displays are more accurate than conventional displays due to
their microprocessor-based digital technology.
. Configuration and display options. Our flat panel display can be
configured or programmed to provide different or additional information
without the need to replace instrumentation. This flexibility should
allow flat panel displays to be upgraded relatively quickly to display
new information that is either mandated by regulation or desired by
pilots.
Engine and Fuel Displays
Equipment data, such as engine- and fuel-related data, traditionally have
been displayed on conventional solid state displays. Equipment data displays
convey fuel and oil levels and provide information on engine activity,
including oil and hydraulic pressures, temperature and liquid oxygen levels.
This instrumentation includes individual and multiple displays clustered
throughout an aircraft's cockpit. Engine and fuel displays tend to be replaced
more frequently than other displays due to normal wear-and-tear. As the
information
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displayed by this instrumentation is vital for safe and efficient flight,
aircraft operators continue to purchase individual conventional engine and fuel
displays to replace older or non-functioning displays.
Strategy
Our objective is to become a leading supplier and integrator of cockpit
information. Key elements of our strategy include:
Maintaining our leadership in the air data and RVSM markets. We believe that
we are one of the largest suppliers of air data and RVSM-compliant products to
the U.S. retrofit market. As RVSM routes continue to be phased in over the next
several years, we anticipate many aircraft will be retrofitted with RVSM-
compliant air data systems. The RVSM retrofit market has a limited number of
competitors, and we intend to capitalize on our position as a leading provider
of reliable, cost competitive RVSM air data products.
Establishing leadership in the flat panel display market. We expect that
over the next several years, many aircraft will either be retrofitted or newly
manufactured with flat panel displays. Given the versatility, visual appeal and
lower cost of displaying a series of instruments and other flight-relevant
information on a single flat panel, we believe that flat panel displays will
increasingly replace individual analog and digital instruments. We also believe
that our CIP has significant benefits over the flat panel displays currently
offered by our competitors, including its lower cost, larger size and enhanced
viewability. Accordingly, we believe that these advantages will allow us to
generate significant revenues from our CIP and gain significant market share
within this market.
Continuing our engineering and product development successes. We have
developed innovative products by combining our avionics, engineering and design
expertise with commercially available technologies, components and products
from non-aviation applications, including the personal computer and
telecommunications industries. We believe our processes allow us to bring
products to market quickly and to control our development costs. Our CIP, which
we expect will be larger, display more information and cost less than the flat
panel displays offered by our competitors, is an example of our ability to
engineer a superior product through the selective application of non-avionics
technology. We currently are developing technologies relating to other products
intended to be incorporated with our CIP, such as a heads up display system
designed to project critical flight data onto cockpit windshields for easy
reference by pilots.
Increasing our sales to the commercial air transport and corporate aviation
markets. While we currently sell our products to commercial and corporate
aircraft operators and other retrofitters, our products have been predominantly
used in the government and military end user markets. We intend to strengthen
and diversify our marketing efforts to include all end user markets of the
aviation industry, particularly the commercial air transport market, including
national and regional carriers and other fleet operators, the corporate
aviation market, primarily through aircraft modification centers, as well as
the OEM market. We have begun building a sales and marketing force dedicated to
expanding our sales efforts to these markets while at the same time maintaining
our position as a provider of avionics products in connection with government
and military contracts.
Expanding our international presence. We plan to increase our international
sales through expanding sales and marketing personnel and adding foreign
offices. As RVSM and flat panel displays become more prevalent throughout the
world, we believe that European and other international aircraft operators and
aircraft modification centers will accelerate their retrofitting activities,
thereby increasing the demand for RVSM products and flat panel displays. We
have recently expanded our international presence by hiring sales personnel in
London. We intend to further expand our international sales presence in
conjunction with the anticipated introduction of RVSM on other air routes
throughout the world.
Growth through acquisitions. We intend to pursue acquisitions as a means of
growing our business with respect to both information management products and
content, and we have identified profiles of the types of companies we would
like to acquire. We may seek to acquire developers or suppliers of
complementary
26
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products, technology or information, or we may acquire suppliers of similar
products as a means of increasing our product offerings and market share.
Our Products
Our current line of products includes:
Air Data and RVSM Systems and Components
Our air data and RVSM products calculate and display various measures of air
data, such as aircraft speed, altitude and rate of ascent and descent. These
systems consist of a number of components, including internally-mounted
precision pressure sensors, a computer system and a cockpit display. The
sensors collect air pressure data from calibrated openings in the skin of an
aircraft. The computers process the raw data and convert it, using advanced
proprietary algorithms developed by us, into useful information. Displays in
the cockpit then convey the information to pilots.
Our air data systems are highly accurate with respect to the collection and
interpretation of raw air pressure data from specifically selected locations on
the aircraft. We utilize state-of-the-art, highly sensitive digital sensors
capable of gathering the requisite air pressure data. The software in our
computer systems incorporates proprietary mathematical algorithms that
interpret the air data to measure altitude, air speed and vertical speed. Our
algorithms account for time, speed and temperature variations as well as the
variations inherent in the diverse profiles of different types of aircraft so
that our products continuously provide accurate data over the requisite range
of altitudes and atmospheric conditions for the type of aircraft in which the
product is installed.
The functionality of our traditional non-RVSM air data systems and our RVSM
systems is similar. However, our RVSM systems use advanced sensors to gather
air pressure data and customized algorithms to interpret the data, thus
allowing the system to more accurately calculate altitude and to qualify for
RVSM certification.
We sell individual components as well as partial and complete air data
systems. Our components and systems include:
. digital air data computers, which calculate various air data parameters
such as altitude, airspeed, vertical speed, angle of attack and other
information derived from the measure of air pressure;
. integrated air data computers and display units, which calculate and
convey air data information;
. altitude displays, which convey aircraft altitude measurements;
. airspeed displays, which convey various types of airspeed measurements
including vertical airspeed and rates of ascent and descent; and
. altitude alerters, which allow the pilot to select a desired cruising
altitude that the aircraft will reach and maintain.
We believe that we are able to sell our products at lower prices than our
competitors because our development costs are reduced by adapting commercially
available components and technology from other applications into our avionics
products and because of our focus on designing products that can be
manufactured on a cost-effective basis.
Our revenues from sales of air data and RVSM systems and components were
$18.2 million, or 81% of our total revenues, for fiscal year 1999 and $6.3
million, or 100% of our total revenues, for the three months ended December 31,
1999.
Flat Panel Display
We have developed a large, high-resolution flat panel display that can
replace virtually all of the conventional analog and digital displays currently
used in a cockpit and can also display additional information
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that is not now commonly displayed in the cockpit. Our CIP is capable of
displaying nearly all types of air data, engine and fuel data and alternative
source information. As technology and information delivery systems further
develop, we expect additional information, such as surface terrain maps, to
be commonly displayed in the cockpit. We have designed our CIP to be capable of
displaying information generated from a variety of sources, including our RVSM
air data system, our engine and fuel instrumentation and third-party data and
information products.
Our CIP can interpret, configure and display air data and equipment data
from our own products and other manufacturers' data products. The "open
architecture" characteristics of the cockpit instrumentation market enables our
CIP products to be adapted to work in most cockpit instrumentation systems. In
addition, we have designed our CIP to be able to host and integrate a heads up
display that we are developing to project important flight information onto an
aircraft's cockpit windshield for easy reference by pilots.
We believe the advantages of our CIP compared to conventional displays
include:
. Ability to display additional important information. Because of space
limitations in the cockpit and technology limitations, conventional
displays generally convey less information than can now be accommodated
on flat panels. Flat panel displays allow for the consolidation of the
various types of conventional instrumentation, such as altimeters and
airspeed indicators, and the display of additional information. As
technology and information delivery systems further develop, we expect
there to be a demand to display increasing amounts of information that
become available in the limited space of the cockpit.
. Configuration and display options. Our CIP can be configured or
programmed to provide different or additional information without the
need to replace instrumentation. We expect that this flexibility will
become increasingly important as technology advances and regulatory
mandates drive the display of additional types of data in cockpits.
. Enhanced situational awareness. Our CIP facilitates quick orientation
recognition, or "situational awareness," of pilots by providing
significant flight critical information on one display in a manner that
simulates traditional instrumentation dials. In addition, the vibrant
colors of our CIP are visually attractive and easy to read compared to
conventional instrumentation.
. Lower purchase and operating cost. Our CIP represents a substantial cost
savings over the suite of analog gauges and digital displays it can
replace. For example, the OEM purchase and installation of our CIP would
cost an aircraft manufacturer approximately 40% less than would the
purchase and installation of equivalent conventional mechanical displays.
Our CIP should also be less expensive to maintain than conventional
mechanical and electronic displays.
. Greater reliability. Our CIP has a greater mean time between failures
than many of the displays it can replace and should have fewer failures
than conventional mechanical gauges.
. Reduced space and weight requirements. Heavy instrumentation decreases
flight efficiencies, and cockpit display space for flight instrumentation
is very limited. Our CIP weighs less and takes up less space than the
suite of instrumentation it is designed to replace.
We believe the advantages of our CIP compared to the flat panel displays of
our competitors include:
. Large screen size. At 15 inches diagonal (12 by 9), we believe that our
CIP is the largest primary flight display available in the industry. Our
CIP can display significant critical flight management information on one
screen, eliminating the need for pilots to scan multiple displays or page
through multiple parameter screens. The larger screen size permits the
display of additional flight information compared to several smaller
stand-alone screens.
. Lower purchase price. We have priced our CIP at a substantially lower
cost compared to the cost at which our competitors are offering their
products. We expect our CIP to cost less than half the price of many of
the smaller flat panel displays currently being offered by our
competitors.
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. Enhanced viewability. Our proprietary design and fabrication process
enhances the viewability of our CIP based on brightness, contrast and
viewing angle. Among other things, our brightness, contrast and
viewability enhancements allow our product to offer:
. Increased viewing angle and color resolution. The vibrant colors,
sharp contrast and high resolution of our display, in conjunction
with our proprietary screen coating treatment, enable pilots to view
the screen at almost 170 degrees, a wider viewing angle than other
flat panel displays, without color or intensity distortion.
. Reduced visual "wash-out." The enhanced brightness of our product
reduces visual "wash-out" in varying or high sunlight environments,
allowing pilots to read the display with minimal color or intensity
degradation.
. Use of standard commercial glass. Many of our competitors incorporate
into their flat panel displays customized glass screens purchased from
single source suppliers. Such customized purchasing can be extremely
costly and subjects these competitors to risks associated with single
source purchasing. In contrast, our CIP is manufactured with the largest
standard commercially available glass that is used in the laptop computer
industry. It is available for purchase from multiple suppliers and is
substantially less expensive than the customized glass used by these
competitors.
Flat panel displays, like other cockpit instrumentation, require FAA
approval before installation in non-military aircraft. We are in the process of
seeking "non-hazardous" approval of the display pursuant to which we will be
permitted to install our CIP on certain aircraft for non-essential use,
including, for example, on the co-pilot side of aircraft requiring operation by
just one pilot. In addition, we are in the process of seeking FAA-approval of
our CIP for essential use by pilots, initially for the Pilatus PC 12. We expect
to receive non-hazardous approval during the first half of calendar year 2000
and essential approval by the end of calendar year 2000. After we obtain FAA
approval for essential use in the Pilatus PC 12, we will still need approval to
place our CIP in other types of aircraft. See "Business--Government
Regulation."
In December 1999, we entered into a memorandum of understanding with Pilatus
Business Aircraft, Ltd. to offer our CIP on the Pilatus PC 12, initially for
use on the co-pilot side of the cockpit upon. Pilatus will offer the CIP on the
PC 12 for pilot-side use upon our receiving the requisite certification from
the FAA for such use.
Engine and Fuel Displays
We develop, manufacture and market engine and fuel displays. Our solid state
multifunction displays convey information with respect to fuel and oil levels
as well as engine activity, such as oil and hydraulic pressures, temperature
and liquid oxygen levels. This instrumentation includes individual and multiple
displays clustered throughout an aircraft's cockpit. Our displays can be used
in conjunction with our own engine and fuel data equipment or that of other
manufacturers.
Engine and fuel displays are vital to the safe and proper flight of aircraft
and are found in all aircraft. In addition, the accurate conveyance of engine
and fuel information is critical for the monitoring of engine stress and the
maintenance of engine parts. Engine and fuel displays tend to be replaced more
frequently than other displays and have remained largely unchanged since their
introduction due to their low cost, standard design and universal use.
We believe that our engine and fuel displays are extremely reliable, and we
have designed them to be programmable to adapt easily without major
modification to most modern aircraft. Our products have been installed on
Lockheed Martin C-130H aircraft, Boeing DC-9 and DC-10 aircraft and U.S. Air
Force A-10 aircraft.
Our revenues from the sale of our engine and fuel displays were $3.9
million, or 17% of total revenues, in fiscal year 1999. Although we did not
record any revenues from the sale of engine and fuel displays during the
quarter ended December 31, 1999, we continue to market our engine and fuel
displays and anticipate sales of these products during fiscal year 2001.
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Customers
Our customers include, among others, the United States government, Northwest
Airlines Corporation, Air Canada, DHL Airways, Inc., Emery Worldwide Airlines,
Federal Express Corporation, The Boeing Company, Lockheed Martin Corporation,
Rockwell International Corporation, Bombardier Aerospace (the manufacturer of
Learjet), Pilatus Aircraft Ltd. and Gulfstream Aerospace Corporation.
Retrofit Market
Historically, the majority of our sales have come from the retrofit market.
Among other reasons, we have pursued the retrofit market because of its
continued rapid growth in response to the increasing need to support the
world's aging fleet of aircraft.
Updating an individual aircraft's existing electronics equipment has become
increasingly common as new technology makes existing instrumentation outdated
while the aircraft is still structurally and mechanically sound. Retrofitting
an aircraft is generally a substantially less expensive alternative to
purchasing a new aircraft. We expect our main customers in the retrofit market
to be:
. government and military contractors;
. aircraft operators; and
. aircraft modification centers.
Government and Military Contractors. Since 1988, we have sold products to
both commercial contractors and military end users in connection with
government aircraft retrofit programs. To date, a majority of our annual sales
have been in connection with these programs. For example, we sell various
products to Boeing and Rockwell International relating to contracts with
government entities, including the United States Air Force, to retrofit
aircraft. In addition, we sell our products directly to government entities.
Government-related projects are generally under either a subcontract with the
prime contractor, such as Boeing, or a direct contract with the appropriate
government agency. The majority of our government project sales are to
commercial contractors pursuant to commercial off-the-shelf equipment
contracts. As defense spending has decreased over the past decade, the
government's desire for cost-effective retrofitting of aircraft has led it to
increasingly purchase commercial off-the-shelf equipment rather than requiring
the development of specially designed products, which are usually more costly
and take a longer time to develop. These contracts tend to be on commercial
terms, although some of the termination and other provisions of government
contracts described below are typically applicable to these contracts.
Among the products we sell to these programs are digital air data systems,
airspeed indicators and altimeters. During fiscal year 1999 and the three
months ended December 31, 1999, we sold approximately 93% and 95% of our RVSM
systems and related components to government and military contractors. Our
participation in these retrofit programs has been the result of our direct
solicitation of both the general contractors of such projects and the
contracting government entities. Our revenues from government and military end
users were $16.9 million, or 76% of total revenues, for fiscal year 1999 and
$6.0 million, or 95% of total revenues, for the quarter ended December 31,
1999.
Each government-related contract includes various federal regulations that
impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience.
Upon such alteration or termination, we would normally be entitled to an
equitable adjustment to the contract price so that we may receive the purchase
price for already delivered items and reimbursement for allowable costs
incurred.
Aircraft Operators. We also sell our products to aircraft operators,
including commercial airlines, overnight delivery services and corporate
carriers. Our products are used mostly in the retrofitting of aircraft
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owned or operated by these customers, which generally retrofit and maintain
their aircraft themselves. Our commercial fleet customers include Northwest
Airlines, Air Canada, DHL, Emery and Federal Express. We sell these customers a
range of products from fuel quantity indicators to RVSM air data systems.
During fiscal year 1999 and the three months ended December 31, 1999, we sold
approximately 7% and 5% of our RVSM systems and related components to our
commercial aircraft customers. Our revenues from sales to aircraft operators
were $2.9 million, or 13% of total revenues, for fiscal year 1999, and we had
no such sales for the three months ended December 31, 1999.
Aircraft Modification Centers. According to the FAA, there are approximately
6,500 private and corporate jets in service in the United States. The primary
retrofit market for private and corporate jets is through aircraft modification
centers, which repair and retrofit private aircraft in a manner similar to the
way auto mechanics service a person's car. We are beginning to market our
products to a number of aircraft modification centers throughout the United
States. We believe that our RVSM and non-RVSM air data systems and related
components will be used by aircraft modification centers to update older or
outdated air data systems.
We anticipate that retrofitting of air data systems by aircraft modification
centers, and thus the demand for our RVSM products, will increase significantly
as RVSM is increasingly phased-in on many of the world's most popular flight
routes. Furthermore, we anticipate that as flat panel displays gain popularity,
aircraft modification centers will become significant customers of our flat
panel product for aircraft owners seeking to upgrade their display systems. We
currently do not have revenues from sales to aircraft modification centers.
However, we anticipate that sales to aircraft modification centers will begin
during fiscal year 2000.
OEM Market
We also market our products to original equipment manufacturers,
particularly manufacturers of corporate and private jets as well as contractors
of military jets. Customers of our products include Bombardier (the
manufacturer of Learjet), Pilatus, Gulfstream, Boeing and Lockheed.
Certain jet manufacturers currently equip their aircraft with traditional
non-RVSM air data systems. However, we believe that most aircraft manufacturers
will begin equipping their aircraft with RVSM-compliant air data systems in
anticipation of the expected increasing use of RVSM throughout the world. In
addition, we expect that as flat panel displays become increasingly popular,
OEMs will begin manufacturing an increasing percentage of their aircraft with
flat panel displays, either as standard or optional equipment.
Our revenues from the sale of products to OEMs were $2.6 million, or 11% of
total revenues, for fiscal year 1999 and $335,000, or 5% of total revenues, for
the three months ended December 31, 1999.
Backlog
As of December 31, 1999, our backlog was $28.9 million, $18.2 million of
which we expect will be sold during the last three quarters of fiscal year 2000
and $10.7 million of which we expect will be sold in fiscal year 2001.
Our backlog consists solely of orders believed to be firm. In the case of
contracts with government entities, orders are only included in backlog to the
extent funding has been obtained for such orders. Our backlog does not include
an unexercised order of approximately $22 million under a government contract
with respect to the United States Air Force's KC-135 RVSM air data installation
program. We expect the government to begin exercising this order during fiscal
year 2001.
Sales and Marketing
We have generally focused our sales efforts on government and military
entities and contractors, aircraft operators and OEMs, and more recently on
aircraft modification centers. However, we intend to increase our sales efforts
with respect to the commercial and corporate aviation markets in the future. To
date, we have
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made substantial use of third-party sales representatives for our sales
efforts. We compensate these third-party sales representatives through
commissions.
In December 1999, we hired a Vice President of Marketing and Business
Development and additional full-time marketing and sales personnel to undertake
sales efforts to our domestic customers and to direct our European sales
programs and operations. In February 2000, we opened a sales office in London
responsible for marketing our products throughout Europe, Africa and the Middle
East. In addition, we intend to add sales representatives to begin marketing
efforts in South America, Korea and Japan. Such additions will allow us to
expand our marketing efforts to a more global focus. We expect to compensate
our direct sales force through a combination of base salary and commissions.
We believe that our ability to provide prompt and effective repair and
upgrade service is critical to our marketing efforts. As part of our customer
service program, we have implemented a 24-hour hotline that customers can call
with respect to product repair or upgrade concerns. We employ five field
service engineers to service our equipment and, depending on the service
required, we may either dispatch a service crew to make necessary repairs or
request that the customer return the product to us for repairs or upgrades at
our main facility. In the event repairs or upgrades are required to be made at
our facility, we provide spare products for use by our customers during the
repair time. Our in-house turnaround repair times average 15 days and
turnaround upgrade times average 30 days. Before returning our products to
customers, all repaired or upgraded products are retested for airworthiness.
In connection with our customer service program, we typically provide our
customers with a two-year warranty on new products. We also offer our customers
extended warranties of varying terms for additional fees.
Product Development
We focus our product development efforts on developing innovative products
in response to customer needs and bringing those products to market quickly and
at commercially viable prices. Our model is based on applying our engineering
and software solutions to existing technologies and readily available
components developed for other applications and customizing such technologies
for use in the aviation industry. Our goal is to achieve quick product
development cycle times and create highly reliable but low cost designs that we
can sell profitably at a lower price than our competitors.
Our product development process has proven successful as we have been able
to quickly and effectively satisfy customer product demands, allowing us to
leverage our development capabilities to obtain new contracts with our
customers. For example, we designed a standard altimeter for the U.S. Air Force
F-16. We were able to quickly and cost effectively reengineer our F-16
altimeter and integrate existing technology to win an air data contract to
provide altimeters for Lockheed Martin's C-130 retrofit program shortly
thereafter.
We believe our products also reflect core technical strengths. For air data
systems, we have successfully integrated precision digital pressure sensors
with software algorithms that permit accurate air data signal generation. Our
CIP incorporates proprietary technology designed to provide high contrast and
wide viewing angles for our color flat panel display.
All of our products are controlled primarily by embedded microprocessors
and, accordingly, more than half of our engineering product development efforts
are directed towards software development. Our engineers direct much of their
efforts to digital electronic circuit design, analog circuit design, aircraft
systems engineering and mechanical and manufacturing process design.
Our product development process is highly integrated, involving our
customers and engineers as well as our internal purchasing, manufacturing and
quality control personnel. Our development program is ISO 9001 certified and
meets FAA requirements with respect to hardware, software and overall system
performance. Each product development program is led by a project engineer who
is responsible for overseeing the various processes involved in the development
efforts for the product.
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As part of our product development process, we conduct various testing,
including environmental simulation, software and overall systems testing.
Environmental simulation testing involves subjecting our products to extreme
temperature, humidity, altitude and vibration conditions to evaluate whether
the products continue to operate properly and meet our performance
specifications. In addition, we subject our products to extreme electromagnetic
fields testing to simulate the effects of lightening strikes on aircraft. We
also undertake product testing to determine that our software properly
functions under various operating conditions.
Government Regulation
The manufacture and installation of our products in aircraft owned and
operated in the United States is governed by U.S. Federal Aviation
Administration (FAA) regulations. The most significant of these regulations
focus on Technical Standard Order (TSO) and Type Certificate (TC) or
Supplemental Type Certificate (STC) certifications. The FAA recommends that
avionics products be TSO-certified. A TSO sets forth the minimum general
standards that a certain type of equipment should meet. TSO certification is a
declaration by the FAA that a product meets such consensus standards and
guidelines and that it is certified to be used in aircraft. For example, all
altimeters, including RVSM and non-RVSM versions, have the same TSO, which sets
forth the various general requirements that an altimeter must meet to be TSO-
certified, such as life cycle, software, environmental and other standards.
TSO-certified avionics products are preferred by retrofitters and OEMs because
they act as an industry-wide stamp of approval and streamline the TC/STC
approval process, described below. The TSO certification process typically
takes approximately two to three months and consists of product testing,
including environmental simulation, software and overall system testing.
The FAA requires that all avionics products receive TC or STC certification
upon their installation in aircraft. TC certification is required for
installation by an OEM, and STC certification is required for retrofitting
installation. When an avionics product is installed in an aircraft, the FAA
conducts an inspection and systems tests on the aircraft and such newly
installed product. The TC and STC process includes ground analyses and test
flights to determine whether the product is functioning properly in the
aircraft. Upon satisfactory completion of these tests, a product is TC- or STC-
certified, meaning the aircraft can be flown with the installed
instrumentation. The TC and STC approval procedures typically last one to four
months, depending on the complexity of the equipment being certified.
With respect to our RVSM air data products, the FAA also requires that these
products be RVSM-certified before they are used in flight. This certification
process may be undertaken in conjunction with the TC/STC certification process.
RVSM certification requires ground and flight tests and an analysis of flight
data to ensure the accuracy, reliability, system safety and mean time between
failure rates of the product. The RVSM certification process typically lasts
one to three months.
Sales of our products to European or other non-U.S. owners of aircraft also
typically require approval of the Joint Aviation Authorities (JAA), the
European counterpart of the FAA, or another appropriate governmental agency.
Currently, 18 European countries are members of the JAA. JAA certification
requirements for the manufacturing and installation of our products in
European-owned aircraft mirror the FAA regulations. Much like the FAA
certification process, the JAA has established a process for granting TSOs, TCs
and STCs. Certification by the JAA or other appropriate governmental agencies
is generally granted upon demonstration that the equipment is accurate and able
to maintain certain levels of repeatability over time.
In addition to product-related regulations, we are also subject to the
government's procurement regulations with respect to sales of our products to
government entities or government contractors. These regulations dictate the
manner in which products may be sold to the government and set forth other
requirements which must be met in order to do business with or on behalf of
government entities. For example, pursuant to such regulations, the government
agency or general contractor may alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience.
Upon such alteration or termination, we would normally be entitled to an
equitable adjustment to the contract price so that we may receive the purchase
price for already delivered items and reimbursement for allowable costs
incurred.
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Manufacturing, Assembly and Materials Acquisition
Our manufacturing activities consist primarily of assembling and testing
components and subassemblies and integrating them into a finished system. We
believe that this method allows us to achieve relatively flexible manufacturing
capacity while lowering overhead expenses. We generally purchase the components
for our products from third-party vendors and assemble them in a clean room
environment to reduce impurities and improve the performance of our products.
Many of the components we purchase are standard products, although certain
parts are made to our specifications.
We attempt to maintain minimal inventory and order component part supplies
only as we expect to need them, based on our sales plan. Through our weekly
"Sales Inventory Operation Planning" process, we match our production and
inventory needs with our sales forecasts. In addition to improving our
inventory management, these techniques have enabled us to lower our direct
labor costs from 8.0% of revenues in fiscal year 1997 to 3.5% of revenues in
fiscal year 1999.
When appropriate, we enter into long-term supply agreements and use our
relationships with long-term suppliers to improve product quality and
availability and to reduce delivery times and product costs. In addition, we
are continually identifying alternative component suppliers for important
component parts. Using component parts from new suppliers in our products
generally requires FAA certification of the entire finished product if the
newly sourced component varies significantly from our original drawings and
specifications. To date, we have not experienced delay in the delivery of our
products caused by the inability to obtain either component parts or FAA
approval of products incorporating new component parts.
Quality Assurance
Product quality is of vital importance to our customers, and we have taken
steps to enhance the overall quality of our products. We utilize the Six Sigma
program, which is a process evaluation program based on the premise that
efficient companies can reduce to a very low level the number of defects and
inefficient processes. Under this program, we are continuously seeking to
improve our operational efficiencies, including our design and manufacturing
processes and, thus, the general quality of our products. In particular, our
Six Sigma program allows us to analyze our development processes and reduce the
risks inherent in shortening our development cycle times. In effect, Six Sigma
has allowed us to improve our product quality and cycle times. Our employees
are required to attend an in-house training session that teaches them the
principles and application of our Six Sigma program.
In addition, we are ISO 9001 certified. ISO 9001 standards are an
international consensus on effective management practices with the goal of
ensuring that a company can consistently deliver its products and related
services in a manner that meets or exceeds customer quality requirements. ISO
9001 standards set forth the requirements a company's quality systems must meet
to achieve a high standard of quality. As an ISO 9001-certified manufacturer,
we can represent to our customers that we maintain high quality industry
standards in the education of our employees and the design and manufacture of
our products. In addition, our products undergo extensive quality control
testing prior to being delivered to customers. As part of our quality assurance
procedures, we maintain detailed records of test results and our quality
control processes.
Our Competition
The market for our products is highly competitive and characterized by
several industry niches in which a number of manufacturers specialize. Our
competitors vary in size and resources, and a number of our competitors are
much larger and have substantially greater resources than we do. With respect
to air data systems and related products, our principal competitors include
Kollsman Inc., Honeywell International Inc., Rockwell International
Corporation, Meggitt Avionics Inc. and Smiths Industries plc. Of these
competitors, only Honeywell, Rockwell and Smiths currently manufacture products
which compete with our RVSM products. With respect to flat panel displays, our
principal competitors currently include Honeywell, Rockwell, Meggitt and
Smiths. However, because the flat panel display industry is a new and evolving
market, as the demand for flat panel displays increases, we may face
competition in this area from additional companies in the future.
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We believe that the principal competitive factors in the markets in which we
compete are cost, development cycle time, responsiveness to customer
preferences, product quality, technology, reliability and breadth of product
line. We believe that our significant and long-standing customer relationships
reflect our ability to compete favorably with respect to these factors.
Intellectual Property and Proprietary Rights
We rely on patents to protect our proprietary technology. We currently hold
three U.S. patents and have one U.S. patent application pending relating to our
technology. In addition, we have five international patent applications
pending. Certain of these patents and patent applications cover technology
relating to air data measurement systems and RVSM calibration techniques while
others cover technology relating to flat panel display systems and other
aspects of our CIP solution. While we believe that these patents have
significant value in protecting our technology, we also believe that the
innovative skill, technical expertise and know-how of our personnel in applying
such technology reflected in the patents would be difficult, costly and time
consuming to reproduce.
While there are no pending lawsuits against us regarding the infringement of
any patents or other intellectual property rights, we cannot be certain that
such infringement claims will not be asserted against us in the future.
Our Employees
As of March 31, 2000, we had 115 employees, 74 of whom were in our
manufacturing and assembly operations, 16 in product development, 5 in customer
service and field support and 20 in general administrative and corporate
positions.
Our future success also depends on our ability to attract, train and retain
highly qualified personnel. We plan to hire additional personnel, including in
particular sales and marketing personnel, during the next twelve months.
Competition for such qualified personnel is intense and we may not be able to
attract, train and retain highly qualified personnel in the future.
None of our employees is represented by a labor union, and we consider our
relationship with our employees to be good.
Our Facilities
We lease approximately 27,000 square feet in an office complex located in
suburban Philadelphia. This space is used for administrative purposes, product
development and the assembly of our products. To accommodate for our future
growth, we have initiated plans to build a new facility in suburban
Philadelphia that increases our space to approximately 40,000 square feet. We
expect the cost of this new facility, including land acquisition, to be between
$5.0 million and $6.0 million.
Legal Proceedings
In the ordinary course of our business, we are at times subject to various
legal proceedings. We do not believe that any of the current legal proceedings
will have a material adverse effect on our operations or financial condition.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Geoffrey S. M. Hedrick.. 58 Chairman of the Board and Chief Executive Officer
Robert J. Ewy........... 54 President
James J. Reilly......... 59 Chief Financial Officer
Joseph C. Caesar........ 49 Vice President of Marketing and Business Development
Roger E. Mitchell....... 45 Vice President of Operations
Joel P. Adams........... 42 Director
Glen R. Bressner........ 39 Director
Winston J. Churchill.... 59 Director
Benjamin A. Cosgrove.... 73 Director
Ivan M. Marks........... 58 Director
Robert E. Mittelstaedt, 56 Director
Jr.....................
</TABLE>
Geoffrey S. M. Hedrick has been our Chief Executive Officer since he founded
IS&S in February 1988 and our Chairman of the Board since 1997. Prior to
founding us, Mr. Hedrick served as President and Chief Executive Officer of
Smiths Industries North American Aerospace Companies. He also founded Harowe
Systems, Inc. in 1971, which was subsequently acquired by Smiths Industries.
Mr. Hedrick has 35 years of experience in the avionics industry, and he holds a
number of patents in the electronics, optoelectric, electromagnetic, aerospace
and contamination-control fields. Mr. Hedrick holds a Bachelor of Science
degree in Engineering from Cornell University.
Robert J. Ewy has been our President since May 1999. Prior to joining us,
from 1971 to 1999, Mr. Ewy was employed by AlliedSignal, Inc., Electronics and
Avionics Systems, where he held various positions. From 1998 to 1999, Mr. Ewy
was General Manager of Business Aviation. From 1997 to 1998, he was Vice
President of Flight Information Systems, and from 1996 to 1997, he was Vice
President of Communications and Cabin Systems. Prior thereto, from 1993 to
1996, Mr. Ewy was Director of Strategic Business Enterprises. Mr. Ewy holds a
Bachelor of Science degree in Engineering from the University of Missouri.
James J. Reilly has been our Chief Financial Officer since February 2000.
From 1996 to 1999, Mr. Reilly was employed by B/E Aerospace, Inc., Seating
Products Group, where he served as Vice President and Chief Financial Officer.
From 1989 to 1996, Mr. Reilly was employed by E-Systems, Inc. as Vice President
and Principal Accounting Officer. Mr. Reilly holds a Bachelor of Science degree
and a Masters of Business Administration degree from the University of
Hartford.
Joseph C. Caesar has been our Vice President of Marketing and Business
Development since December 1999. Prior to joining us, from 1997 to 1999, Mr.
Caesar served as the Director of Marketing and Business Development for world-
wide aftermarket sales for Honeywell International Inc., formerly AlliedSignal.
From 1995 to 1997, Mr. Caesar served as Manager of Global General Aviation
Marketing for Honeywell, and from 1992 to 1995, he served as Director of
Regional Airline Programs for Honeywell. Mr. Caesar received a Bachelor of
Science degree from Christian Brothers University.
Roger E. Mitchell has been our Vice President of Operations since September
1999. From July 1998 until September 1999, Mr. Mitchell served as our Director
of Operations. Prior to joining us, Mr. Mitchell was employed by AlliedSignal,
where he held various positions, including Operations Manager from 1994 to
1998. Mr. Mitchell received a Bachelor of Arts degree from Lewis University.
Joel P. Adams has been a director since 1995. Mr. Adams has been the
President of Adams Capital Management, Inc., a venture capital management
company, since he founded it in 1994. Mr. Adams also serves
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on the board of directors of AirNet Communications Corporation and NetSolve
Inc. Mr. Adams holds a Masters of Science degree from Carnegie Mellon
University and a Bachelor of Science degree in Nuclear Engineering from the
State University of New York at Buffalo.
Glen R. Bressner has been a director since 1999. Mr. Bressner has been a
partner of Mid-Atlantic Venture Funds, a venture capital firm, since 1997. Mr.
Bressner is also a partner of NEPA Venture Fund, L.P., a venture capital firm,
a position he has held since 1985. From 1996 to 1997, Mr. Bressner served as
the Chairman of the Board of Directors of the Greater Philadelphia Venture
Group. Mr. Bressner holds a Bachelor of Science degree in Business
Administration from Boston University and a Masters of Business Administration
degree from Babson College.
Winston J. Churchill has been a director since 1990. Since 1996, Mr.
Churchill has been a managing general partner of SCP Private Equity Partners,
L.P., a private equity fund sponsored by Safeguard Scientifics, Inc. In
addition, since 1991, Mr. Churchill has been the Chairman of the Board of
Churchill Investment Partners, Inc. and CIP Capital, Inc., both of which are
venture capital firms. Mr. Churchill is also a director of Amkor Technology,
Inc., Freedom Securities Corp., Griffin Land and Nurseries, Inc. and CinemaStar
Luxury Theaters, Inc. Mr. Churchill is a member of the Executive Committee of
the Council of Institutional Investors. Mr. Churchill holds a Bachelor of
Science degree from Fordham University, a Masters of Business Administration
from Oxford University and a Juris Doctor from Yale Law School.
Benjamin A. Cosgrove has been a director since 1992. Mr. Cosgrove has been a
consultant to The Boeing Company since he retired from Boeing in 1993. Prior to
his retirement, Mr. Cosgrove was employed by Boeing for 44 years and held a
number of positions, including Senior Vice President for Technical and
Government Affairs. Mr. Cosgrove is currently a member of the NASA Advisory
Council's Task Force on the Shuttle-Mir Rendezvous and Docking Missions and the
Task Force on International Space Station Operational Readiness. Mr. Cosgrove
holds a Bachelor of Science degree in Aeronautical Engineering from Notre Dame
University.
Ivan M. Marks has been a director since 1996. Mr. Marks has been the Vice
President-Controller of Parker Aerospace Group, which is the aerospace segment
of Parker Hannifin Corporation, since 1979. Mr. Marks holds a Bachelor of
Science degree in Business Administration from Drake University and is a
Certified Public Accountant.
Robert E. Mittelstaedt, Jr. has been a director since 1989 and served as our
Chairman of the Board of Directors from 1989 to 1997. Since 1989, Mr.
Mittelstaedt has been Vice Dean of The Wharton School of the University of
Pennsylvania. Mr. Mittelstaedt also serves on the Board of Directors of
Laboratory Corporation of America Holdings, Inc. He holds a Bachelor of Science
degree from Tulane University and a Masters of Business Administration degree
from The Wharton School of the University of Pennsylvania.
Board Composition
As of the closing of this offering, our board will consist of seven
directors and will be classified into three classes with staggered three-year
terms, each class to contain as nearly as possible one-third of the number of
members of the board. One class of directors will be elected for a three-year
term at each annual meeting of shareholders commencing in 2001. The terms of
, and will expire at the 2001 annual meeting of shareholders; the
terms of and will expire at the 2002 annual meeting of shareholders;
and the terms of and will expire at the 2003 annual meeting of
shareholders. The classification of our board may have the effect of delaying
or preventing changes of control or management of IS&S. See "Description of
Capital Stock--Anti-Takeover Effects of Provisions of Our Articles of
Incorporation, Our Bylaws and Pennsylvania Law."
Parker Hannifin Corporation and the P/A Fund each have the right to
designate one director for our board of directors, and Messrs. Marks and Adams
are their respective designees. The rights to designate directors will expire
upon the closing of this offering.
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<PAGE>
Board Committees
Our board has established an audit committee and a compensation committee.
Our board does not have and does not currently intend to establish an executive
committee or a nominating committee.
Audit Committee. The audit committee makes recommendations to the board with
respect to various auditing and accounting matters, including the selection of
our auditors, the scope of our annual audits, fees to be paid to the auditors,
the performance of our auditors and our accounting practices. In addition, the
audit committee has responsibility for, among other things, the planning and
review of our annual and periodic reports and accounts and the involvement of
our auditors in that process. The audit committee currently consists of Messrs.
Adams, Bressner and Marks.
Compensation Committee. The compensation committee recommends, reviews and
oversees the salaries, benefits and stock option plans for our employees,
consultants, directors and other individuals compensated by us. The
compensation committee currently consists of Messrs. Churchill and
Mittelstaedt.
Director Compensation
In February 2000, our board adopted a Non-Employee Director Compensation
Plan under which each non-employee director who serves on the board at the
beginning of each fiscal year, commencing October 1, 2000 (fiscal year 2001),
will be entitled to receive shares of common stock with a fair market value of
$25,000, determined as of the first day of such fiscal year. The shares will
vest quarterly during the fiscal year, provided that the director is still
serving on the board on the date the shares are scheduled to vest.
Additionally, each non-employee director shall be entitled to receive $1,000
for each board meeting attended. All directors are reimbursed for reasonable
travel and lodging expenses associated with attendance at meetings.
Prior to the adoption of the plan described above, our board had a non-
employee director share bonus program under which each incumbent non-employee
director who had completed a year of service on the board was entitled to 5,000
shares of common stock issuable on April 11 of the following year; provided
that the first 15,000 shares attributable to a director's first three years' of
service on the board vested at the expiration of the third year. Pursuant to
this share bonus program, effective April 11, 1999, each of our non-employee
directors at such time was issued 5,000 shares of common stock for service on
the board during fiscal year 1998.
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<PAGE>
Executive Compensation
The following table sets forth information concerning compensation paid
during fiscal year 1999 to our chief executive officer and each of our two
other executive officers who earned more than $100,000 during fiscal year 1999.
We may refer to these officers as our named executive officers in other parts
of this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual ------------
Compensation Awards
-------------------- ------------
Securities All Other
Fiscal Underlying Compen-
Name and Principal Position Year Salary($) Bonus($) Options(#) sation($)
- --------------------------- ------ --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Geoffrey S. M. Hedrick..... 1999 167,307 -- -- --
Chief Executive Officer
Robert J. Ewy.............. 1999 94,712(1) -- 300,000 8,173(2)
President
Roger E. Mitchell.......... 1999 113,994 -- -- --
Vice President of
Operations
</TABLE>
- ---------------------
(1) Mr. Ewy joined us in May 1999 and, pursuant to his employment agreement,
was being compensated on the basis of an annual base salary of $225,000 at
the end of fiscal year 1999.
(2) This amount represents a relocation bonus.
Stock Option Information
The following table sets forth certain information with respect to stock
options granted during fiscal year 1999 to each of the named executive
officers:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term($)(1)
------------------------------------------------------- -----------------
Number of
Securities Percent of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal Year Per Share ($) Date 5% ($) 10% ($)
---- ---------- ---------------- -------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey S. M. Hedrick.. -- -- -- -- -- --
Robert J. Ewy........... 300,000(2) 92% 3.60 5/3/09 679,206 1,721,242
Roger E. Mitchell....... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the SEC and are based on the assumption that the exercise
price was the fair market value of the shares on the date of grant, as
determined under our 1998 Stock Option Plan by our board. These assumptions
are not intended to forecast future appreciation of our stock price. The
potential realizable value computation does not take into account federal
or state income tax consequences of option exercises or sales of
appreciated stock.
(2) The options were granted under the 1998 Stock Option Plan and vest in three
equal annual installments beginning on the first anniversary of the date of
grant.
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<PAGE>
The following table sets forth certain information regarding options held as
of September 30, 1999 by each of the named executive officers. None of the
named executives exercised any options during fiscal year 1999.
Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at September 30, Options at September 30,
1999(#) 1999($)(1)
-------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Geoffrey S. M. Hedrick.... -- -- -- --
Robert J. Ewy............. -- 300,000 --
Roger E. Mitchell......... 30,000(2) 20,000
</TABLE>
- ---------------------
(1) There was no public trading market for the common stock as of September 30,
1999. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $ per share, less the applicable
exercise price, multiplied by the number of shares underlying the options.
(2) Includes 25,000 options granted under our 1988 Incentive Stock Option Plan
and 5,000 options granted under our 1998 Stock Option Plan.
1998 Stock Option Plan
Our 1998 Stock Option Plan was adopted in November 1998 and provides for
grants of stock options to selected employees, officers, directors, consultants
and advisers. By encouraging stock ownership, we are seeking to attract, retain
and motivate such persons and to encourage them to devote their efforts to our
business. There are 790,812 shares of our common stock reserved for issuance
under our 1998 Stock Option Plan. As of March 31, 2000, there were outstanding
options to purchase 495,000 shares of common stock under the plan, having a
weighted average exercise price of $6.26 per share, and 295,812 shares remained
eligible for grant. As of March 31, 2000, options exercisable for 5,000 shares
were vested under the terms of the 1998 Stock Option Plan and the applicable
option agreements.
The 1998 Stock Option Plan provides for the grant of both options intended
to qualify as "incentive stock options" under Section 422(b) of the Internal
Revenue Code, as well as non-qualified stock options. The compensation
committee administers the 1998 Stock Option Plan, including the selection of
individuals eligible for grants of options, the terms of grants, possible
amendments to the terms of grants and the interpretation of the plan. The
maximum term of any stock option granted under the 1998 Stock Option Plan is
ten years, except that with respect to incentive stock options granted to a
person who owns stock possessing more than 10% of the voting power of our
stock, the term of an option shall be for no more than five years.
The exercise price of incentive stock options granted under the 1998 Stock
Option Plan must be at least equal to the fair market value of our common stock
on the date of the grant. However, for any optionee who owns stock possessing
more than 10% of the voting power of our stock, the exercise price for
incentive stock options must be at least 110% of the fair market value of our
common stock on the date of the grant. The exercise price of non-qualified
stock options is set by the committee and may be less than, equal to or greater
than the fair market value of our common stock on the date of the grant.
The aggregate fair market value on the date of grant of the common stock for
which incentive stock options are exercisable for the first time by an optionee
during any calendar year may not exceed $100,000.
Options granted under the plan may be exercised in whole or in part as
specifically set forth in the option agreement, and, except as provided by law,
no options may be transferred except by will or by the laws of descent and
distribution. In the event of a change of control, as defined in the plan, all
outstanding options shall become vested and exercisable in full, subject to
certain exceptions. Under such circumstances, the committee
40
<PAGE>
may, among other things, accelerate the date on which any option may be
exercised. The board may terminate the plan in whole or in part at any time and
may amend the plan from time to time without shareholder approval so long as
the amendment does not change the class of individuals eligible to receive
incentive stock options, increase the number of shares as to which options may
be granted or make any other changes which would require shareholder approval.
In addition, no amendment to the plan may adversely affect any outstanding
option in any material respect without the consent of the optionee. The plan
will terminate on November 14, 2008, unless terminated earlier by our board.
1988 Incentive Stock Option Plan
Prior to the adoption of our 1998 plan, we used our 1988 Incentive Stock
Option Plan, which was adopted in August 1988, to attract and retain employees
as well as provide incentives for such persons to exert their efforts for our
success. Options granted under the 1988 plan were intended to be "incentive
stock options" under Section 422(b) of the Internal Revenue Code. The maximum
number of shares of our common stock for which options were to be granted under
this plan was 450,000. No more options may be granted under the 1988 plan,
although unexercised options for 161,000 shares of common stock remain
outstanding.
The maximum term of any stock options granted under the 1988 plan was ten
years, except that with respect to options granted to employees who owned stock
possessing more than 10% of the voting power of our stock, the term of the
option was not more than five years from the date the option was granted. The
exercise price of the options granted under the 1988 plan was at least 100% of
the fair market value of our common stock on the date the option was granted.
Where the optionee owned stock possessing more than 10% of the voting power of
our stock, the option price was at least 110% of the fair market value of our
common stock on the date the option was granted.
The options granted under the 1988 plan may be exercised in whole or in part
as specifically set forth in the option agreement, and, except as provided by
law, no options may be transferred except by will or by the laws of descent and
distribution. In addition, no options may be exercised after the accelerated
expiration date set by our board in the event that IS&S is dissolved or
liquidated or sells all or substantially all of its assets; IS&S is party to a
transaction where it is not the surviving or acquiring entity; or IS&S becomes
an 80% or more owned subsidiary of another company.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
In May 1999, we entered into an employment agreement with Robert J. Ewy to
serve as our President at an annual salary of $225,000. The employment
agreement has a three-year term expiring in May 2002 that is automatically
renewable at the end of such term for an additional year and each year
thereafter unless either party gives notice of nonrenewal. In addition, we
granted Mr. Ewy an option to purchase 300,000 shares of our common stock at an
exercise price of $3.60 per share, which option vests annually in increments of
100,000 beginning in May 2000. In the event that a "termination without cause"
(as defined in the agreement) occurs, Mr. Ewy will continue to receive, subject
to offset, the remaining compensation and benefits payable under the agreement
until the expiration date of the agreement. In the event that a "voluntary
termination" or a "termination for cause" (as those terms are defined in the
agreement) occurs, Mr. Ewy will continue to receive his salary until the date
his employment is terminated and will forfeit all unexercised stock options. In
the event that a termination for death or disability occurs, Mr. Ewy will
continue to receive his salary until the date his employment is terminated and
will retain the right to exercise any options that have vested as of the date
his employment was terminated.
In July 1998, we entered into an employment letter agreement with Roger E.
Mitchell to serve as our Director of Operations at an annual salary of
$110,000. Under the agreement, we granted Mr. Mitchell options to purchase
50,000 shares of common stock at $3.60 per share. Of these options, 25,000 vest
in five equal annual installments beginning on the first anniversary of Mr.
Mitchell's employment with us. The remaining 25,000 options vested upon the
achievement by us of certain performance objectives.
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<PAGE>
401(k) Plan
We sponsor a 401(k) plan, a defined contribution plan that is intended to
qualify under Section 401(k) of the Internal Revenue Code. All employees who
are at least 21 years old and have been employed by us for three months are
eligible to participate in our 401(k) plan. An eligible employee may begin to
participate in the plan on the first day of the month following his or her
satisfying our plan's eligibility requirements. A participating employee may
make pre-tax contributions of a percentage (not less than 2% and not more than
15%) of his or her eligible compensation, subject to limitations under the
federal tax laws. Employee contributions and the investment earnings thereon
are fully vested at all times. We do not make contributions to the 401(k) plan.
CERTAIN TRANSACTIONS
We collaborate with Parker Hannifin Corporation in the sale of fuel quantity
instrumentation on DC-10 aircraft. Parker Hannifin holds approximately 16% of
our common stock and has the right to designate one of our directors, which
right will terminate upon the closing of this offering. Mr. Marks is the
designee of Parker Hannifin. In fiscal years 1999, 1998 and 1997, we paid
Parker Hannifin $617,000, $2.7 million and $1.5 million, respectively, in
connection with the purchase of component parts used in the manufacture of our
products. In addition, in fiscal years 1999, 1998 and 1997, Parker Hannifin
hired us to manufacture and assemble certain products on their behalf and paid
us $1.2 million, $3.0 million and $490,000, respectively, for such services.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 31, 2000 for:
. each person or group of affiliated persons known to us who owns
beneficially more than 5% of our common stock;
. each of our directors;
. each named executive officer; and
. all of our directors and executive officers as a group.
The percentage of ownership is based on 8,320,800 shares of common stock
outstanding as of March 31, 2000, assuming the conversion as of that date of
all of outstanding preferred stock, which will automatically be converted into
common stock upon the closing of this offering. The numbers shown in the table
below assume no exercise by the underwriters of their over-allotment option.
Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of common stock
held by them. Unless otherwise indicated, the principal address of each of the
5% shareholders is c/o Innovative Solutions and Support, Incorporated, 420 Lapp
Road, Malvern, Pennsylvania 19355.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned (1)
Shares ----------------------
Beneficially Before this After this
Name of Beneficial Owner Owned (1) Offering Offering
------------------------ ------------ ----------- ----------
<S> <C> <C> <C>
Geoffrey S.M. Hedrick (2)................. 3,036,000 35.9% %
Parker Hannifin Corporation (3)........... 1,320,090 15.9
The P/A Fund (4).......................... 1,526,620 18.3
NEPA Venture Fund, L.P. (5)............... 760,000 9.1
James M. Draper (6)....................... 680,000 8.1
Robert J. Ewy (7)......................... 100,000 1.2
Roger E. Mitchell (8)..................... 30,000 *
Joel P. Adams (9)......................... 1,526,620 18.3
Glen R. Bressner (10)..................... 760,000 9.1
Winston J. Churchill (11)................. 363,330 4.4
Benjamin A. Cosgrove (12)................. 40,000 *
Ivan M. Marks............................. -- --
Robert E. Mittelstaedt, Jr. .............. 148,560 1.8
All directors and executive officers as a
group (11 persons) (9)(10)(13)........... 6,004,510 69.8
</TABLE>
- ---------------------
* Less than 1%.
(1) With respect to each shareholder, includes any options or warrants held by
such shareholder that are exercisable within 60 days of March 31, 2000.
(2) Includes warrants to purchase 136,000 shares of common stock.
(3) The address of Parker Hannifin Corporation is 18321 Jamboree Boulevard,
Irvine, California 92612.
(4) The address of The P/A Fund is 518 Broad Street, Sewickley, Pennsylvania
15143.
(5) The address of NEPA Venture Fund, L.P. is 125 Goodman Drive, Bethlehem,
Pennsylvania 18015.
(6) Includes warrants to purchase 40,000 shares of common stock. Also includes
500,000 shares of common stock and warrants to purchase 20,000 shares of
common stock held by a trust for the benefit Stephanie Hedrick, the
daughter of Geoffrey Hedrick, our Chairman and Chief Executive Officer, for
which Mr. Draper serves as trustee. Mr. Draper disclaims beneficial
ownership of these shares.
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<PAGE>
(7) Consists of options to purchase 100,000 shares of common stock.
(8) Consists of options to purchase 30,000 shares of common stock.
(9) Consists of 1,526,620 shares owned by The P/A Fund. Mr. Adams is the
President of Adams Capital Management, Inc., a venture capital firm that
manages The P/A Fund. Mr. Adams disclaims beneficial ownership of these
shares.
(10) Consists of 760,000 shares beneficially owned by NEPA Venture Fund, L.P.
Mr. Bressner is a partner of Mid-Atlantic Venture Funds, a venture capital
firm that manages the NEPA Venture Fund, L.P. Mr. Bressner disclaims
beneficial ownership of these shares.
(11) Includes 203,330 shares owned by CIP Capital, Inc. Mr. Churchill is the
Chairman of the Board of Directors of CIP Capital, Inc. Mr. Churchill
disclaims beneficial ownership of these shares.
(12) Includes warrants to purchase 20,000 shares of common stock.
(13) Includes warrants to purchase 156,000 shares of common stock and options
to purchase 130,000 shares of common stock.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and other equity
securities, as well as certain provisions of our articles of incorporation and
bylaws in effect as of the closing of this offering. This description is only a
summary. You should also refer to our articles of incorporation and bylaws,
which have been filed with the SEC as exhibits to our registration statement of
which this prospectus forms a part.
General
Upon completion of this offering, our authorized capital stock will consist
of 75,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
preferred stock, $.001 par value. Immediately following the completion of this
offering, and assuming no exercise of the underwriters' over-allotment option,
shares of our common stock will be outstanding and no shares of preferred
stock will be outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders and do not have cumulative voting
rights. The holders of common stock are entitled to receive dividends, if any,
as our board may declare from time to time out of funds legally available for
dividends. In the event of our liquidation, dissolution or winding up, the
holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The holders of our common stock do
not have preemptive, redemption or conversion rights. All outstanding shares of
common stock are fully paid and nonassessable, and the shares of common stock
to be outstanding upon completion of this offering will be fully paid and
nonassessable.
Preferred Stock
Prior to this offering, we have had one class of preferred stock
outstanding. At the closing of this offering, all outstanding shares of our
preferred stock will be converted into shares of common stock.
After the offering, our board will be authorized, without further action by
the shareholders, to provide for the issuance of shares of preferred stock as a
class without series or in one or more series, to establish the number of
shares in each class or series and to fix the designations, powers, preferences
and rights of each class or series and the qualifications, limitations or
restrictions thereof. Because our board has the power to establish the
preferences and rights of each class or series of preferred stock, our board
may give the holders of any class or series of preferred stock preferences,
powers and rights, voting or otherwise, senior to the rights of holders of our
common stock. The issuance of preferred stock could have the effect of delaying
or preventing a change in control of IS&S. We have no plans, agreements or
understandings for the issuance of any shares of preferred stock.
Warrants
As of March 31, 2000, there were outstanding warrants to purchase an
aggregate of 342,402 shares of our common stock at an exercise price of $2.40
per share. The warrants may be exercised any time prior to their expiration in
June 2004. The exercise price and number of shares of stock issuable upon
exercise are subject to adjustment upon changes in capitalization.
Registration Rights
The holders of an aggregate of approximately 3,098,600 shares of our common
stock and warrants to purchase an aggregate of 342,402 shares of our common
stock are contractually entitled to certain rights with respect to the
registration of their shares under the Securities Act of 1933. Under the terms
of various registration rights agreements, if we propose registering any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
would be entitled to include their shares in the registration. The rights are
subject to certain conditions and
45
<PAGE>
limitations, including the right of the managing underwriter of an underwritten
offering to limit the number of shares included in such registration. The
holders of these shares and warrants have agreed to a 180-day "lock-up" with
respect to their shares and warrants, as described in "Shares Eligible for
Future Sale."
In addition to the piggyback registration rights described above, holders of
an aggregate of 2,666,670 shares of our common stock have various rights to
direct us to file registration statements under the Securities Act, subject to
specified minimum levels of shares being registered. Furthermore, certain
shareholders may require us, on not more than two occasions within one calendar
year, to file additional registration statements on Form S-3 with respect to
their shares, provided that the estimated market value of the shares being
registered is at least $1,000,000 and such shareholders hold at least 10% of
our stock at such time.
Anti-Takeover Effects of Provisions of Our Articles of Incorporation, Our
Bylaws and Pennsylvania Law
We are subject to the provisions of Section 2538 and Sections 2551-2556 of
the Pennsylvania Business Corporation Law of 1988, or the PBCL, which, in
certain cases, impose certain restrictions on and provide for supermajority
shareholder approval of business combinations involving us and any "interested
shareholder" (defined to include, in the case of Section 2538, shareholders who
are a party to the business combination or who are treated differently from
other shareholders, and, in the case of Sections 2551-2556, shareholders who
beneficially own 20% or more of the voting power of a "registered" corporation,
such as us). The term "business combination" includes a merger, asset sale or
other transaction involving an interested shareholder.
The PBCL also provides that the directors of a corporation making decisions
concerning takeovers or any other matters may consider, to the extent that they
deem appropriate, among other things, (1) the effects of any proposed
transaction upon any or all groups affected by such action, including, among
others, shareholders, employees, suppliers, customers and creditors, (2) the
short-term and long-term interests of the corporation and (3) the resources,
intent and conduct of the person seeking control.
Our bylaws provide that our board is to be composed of three classes, with
staggered three-year terms, each class to contain as nearly as possible one-
third of the number of members of the board. Accordingly, at each annual
meeting of shareholders, only approximately one-third of our directors will be
elected.
Certain other provisions of our articles of incorporation and bylaws could
also have the effect of preventing or delaying a change in control, including
(1) the advance notification procedures governing certain shareholder
nominations of candidates for the board of directors and for certain other
shareholder business to be conducted at an annual meeting, (2) the absence of
authority for shareholders to call special shareholders meetings, except in
certain limited circumstances mandated by the PBCL, and (3) the absence of
authority for shareholder action by written consent by less than all of our
shareholders. These provisions could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
seeking to acquire, control of us.
Limitation of Liability and Indemnification
As permitted by the PBCL, our bylaws provide that a director shall not be
personally liable in such capacity for monetary damages for any action taken,
or any failure to take any action, unless the director breaches or fails to
perform the duties of his or her office under the PBCL, and the breach or
failure to perform constitutes self-dealing, willful misconduct or
recklessness. These provisions of the bylaws, however, do not apply to the
responsibility or liability of a director pursuant to any criminal statute, or
to the liability of a director for the payment of the taxes of IS&S pursuant to
local, Pennsylvania or federal law. These provisions offer persons who serve on
our board protection against awards of monetary damages for negligence in the
performance of their duties.
Our bylaws also provide that every person who is or was a director or
officer of IS&S, or a director, officer, employee, agent, partner or fiduciary
of, or in any other capacity for any corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which he served as such at the
request or for the benefit of IS&S, shall be indemnified by us to the fullest
extent permitted by law against all expenses and liabilities
46
<PAGE>
reasonably incurred by or imposed upon him, in connection with any proceeding
to which he may be made, or threatened to be made, a party, or in which he may
become involved by reason of his being or having been a director or officer of
IS&S, or a director, officer, employee, agent, partner or fiduciary of, or in
any other capacity for such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, whether or not he still holds
such position at the time the expenses or liabilities are incurred.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. Future sales of substantial amounts of our common stock (including
shares issued upon exercise of outstanding options or warrants) in the public
market could adversely affect the market price of our stock from time to time
and could affect our ability to raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding. The shares sold in this offering will be freely tradable
without restriction, except that any shares purchased by "affiliates," as that
term is defined in Rule 144 under the Securities Act, may generally be sold
only pursuant to an effective registration statement under the Securities Act
or in compliance with the limitations of Rule 144 as described below.
The remaining 8,320,800 shares of common stock are "restricted securities,"
as that term is defined in Rule 144, and may not be sold unless they are
registered under the Securities Act, except where an exemption is available.
All of the restricted shares may be sold under Rule 144, including shares,
which may be sold subject to applicable volume and other restrictions. However,
the holders of all of these shares have agreed to a 180-day "lock-up" with
respect to their shares. This generally means that they may not sell their
shares during the 180 days following the date of this prospectus without the
approval of Friedman, Billings, Ramsey & Co., Inc. (FBR). After the 180-day
lock-up period expires, or sooner if earlier waived by FBR, these shares may be
sold in accordance with Rule 144. In addition, the holders of warrants to
purchase 342,402 shares of common stock can exercise these warrants at any
time, but these shares cannot be sold, absent registration, until one year
after their exercise, and then subject to Rule 144 limitations.
FBR may, in its sole discretion and at any time without notice, release all
or any portion of the securities subject to lock-up agreements. However, FBR
currently has no plans to release any portion of the securities subject to
lock-up agreements.
In general, under Rule 144 as currently in effect, an affiliate of IS&S or a
person (or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year, (including the holding period of any
prior owner other than a person who may be deemed an affiliate of IS&S) is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of 1% of the then-outstanding shares of
common stock (approximately shares after this offering) and the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the sale. Sales under Rule 144 are subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about IS&S. In addition, under Rule 144(k), a person
who is not an affiliate of IS&S and has not been an affiliate for 90 days
preceding a sale, and who has beneficially owned shares for at least two years,
would be entitled to sell his or her shares immediately following this offering
without regard to the volume limitations, manner of sale provisions or notice
or other requirements of Rule 144 of the Securities Act. Approximately of
the restricted shares will be eligible for sale under Rule 144(k), subject to
the lock-up agreements.
Certain holders of our common stock and warrants have rights to have their
shares registered as described under "Description of Capital Stock--
Registration Rights."
Upon completion of this offering, we intend to file a registration statement
on Form S-8 under the Securities Act covering all shares of common stock
reserved for issuance under our stock option plans. Shares covered by such
registration statement would be available for sale in the open market in the
future unless those shares are subject to vesting restrictions or the lock-up
described above.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below are acting through their representatives, Friedman,
Billings, Ramsey & Co., Inc., Stifel, Nicolaus & Company, Incorporated and
Janney Montgomery Scott LLC. The underwriters have agreed with us, subject to
the terms and conditions of the underwriting agreement, to purchase from us the
number of shares of our common stock shown opposite their names below. Other
than the shares covered by the over-allotment option, the underwriters are
obligated to purchase and accept delivery of all the shares of common stock if
any are purchased.
<TABLE>
<CAPTION>
Number
of
Underwriter shares
----------- ------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................................
Stifel, Nicolaus & Company, Incorporated.................................
Janney Montgomery Scott LLC .............................................
----
Total..................................................................
====
</TABLE>
The underwriters propose initially to offer our shares of common stock in
part directly to the public at the initial public offering price shown on the
cover page of this prospectus and in part to dealers, including the
underwriters, at this price less a discount not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow other dealers, a discount
not in excess of $ per share.
The following table summarizes the underwriting discounts we will pay in
connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Without Over- With Over-
allotment allotment
------------- ----------
<S> <C> <C>
Per Share.............................................. $ $
Total.................................................. $ $
</TABLE>
The total expenses of this offering, not including underwriting discounts,
are estimated at $ and are payable by us.
Over-allotment. The underwriters have an option, exercisable within 30 days
after the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise this option solely to
cover over-allotments, if any, made in this offering. If the underwriters
exercise this option, each underwriter will purchase shares in approximately
the same proportion as indicated in the table above.
Indemnity. We have agreed to indemnify the underwriters against some types
of liabilities, including liabilities under the Securities Act. We have also
agreed to contribute to payments that the underwriters may be required to make
with respect to any of those liabilities.
Future Sales. We and our executive officers, directors and our current
shareholders have agreed not to offer, pledge, sell, hedge or otherwise
transfer or dispose of, directly or indirectly, any shares of our common stock
or any securities convertible into or exercisable or exchangeable for common
stock for a period of 180 days from the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Friedman,
Billings, Ramsey & Co., Inc. Such consent may be given at any time without
public notice. During such 180-day period, we have agreed not to file any
registration statements with respect to any shares of our common stock, except
with respect to employee benefit plans.
Offers in Other Jurisdictions. Neither we nor the underwriters have taken
any action that would permit a public offering of the shares of common stock
being offered by this prospectus in any jurisdiction other than the United
States where action for that purpose is required. The shares of common stock
offered by this
49
<PAGE>
prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering materials or advertisements related to the
offer and sale of these shares of common stock be distributed or published in
any jurisdiction except under circumstances that will result in compliance with
the applicable rules and regulation of such jurisdiction. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock offered hereby in any jurisdiction in which such an offer or solicitation
is unlawful.
Discretionary Account Sales. Friedman, Billings, Ramsey & Co., Inc. has
advised us that the underwriters do not expect discretionary sales by the
underwriters to exceed percent of the shares offered by this prospectus.
Directed Share Program. At our request, the underwriters have reserved up
to shares of our common stock to be issued by us and offered for sale by this
prospectus, at the initial offering price, to directors, officers, employees,
business associates and related persons of IS&S. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these individuals purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered by this prospectus.
Stabilization. In connection with this offering, the underwriters may
engage in transactions on the Nasdaq National Market, the over-the-counter
market or otherwise that stabilize, maintain or otherwise affect the price of
the common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock. In addition, Friedman, Billings, Ramsey &
Co., Inc., on behalf of the underwriters, may reclaim selling concessions
allowed to an underwriter or dealer for distributing the common stock in the
offering if the syndicate repurchases previously distributed shares of common
stock to cover syndicate short positions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
common stock above independent market levels. The underwriters are not required
to engage in these activities and may discontinue any of these activities at
any time.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. As a result, the initial public offering price for
the common stock will be determined by negotiations between us and the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our product development;
. the market capitalizations of other companies that we and the
underwriters believe to be comparable to us; and
. estimates of our growth potential.
Affiliation. Friedman, Billings, Ramsey & Co., Inc, one of the managing
underwriters of this offering, is an affiliate of PNC Bank, the principal
lender on our line of credit. PNC Bank owns 4.97% of the common stock of
Friedman, Billings, Ramsey Group, Inc., the parent company of Friedman,
Billings, Ramsey & Co., Inc. PNC Bank and Friedman, Billings, Ramsey Group,
Inc. have formed a strategic alliance and have agreed to work together on an
arms-length basis to refer potential business to each other.
50
<PAGE>
LEGAL MATTERS
The validity of the common stock being offered will be passed upon for us by
Cozen and O'Connor, a professional corporation, Philadelphia, Pennsylvania.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Jenkens & Gilchrist, a Professional Corporation,
Washington, D.C.
EXPERTS
The financial statements as of September 30, 1998 and September 30, 1999 and
for each of the three years ended September 30, 1999 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with this offering. This prospectus does not
contain all of the information set forth in the registration statement. For
further information with respect to us and the shares of common stock we are
offering pursuant to this prospectus, you should refer to the registration
statement, including its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other document filed as an exhibit to the registration
statement. You may read and copy the registration statement and any other
documents filed by us with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a web site
at http://www.sec.gov that contains the registration statement, proxy
statements, information statements, reports and other information concerning us
and any registrants that file electronically with the SEC.
Upon completion of this offering, we will be required to file annual,
quarterly and current reports, proxy statements and other information with the
SEC. We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements and quarterly
reports containing unaudited interim financial information for the first three
quarters of each fiscal year.
51
<PAGE>
Innovative Solutions and Support, Incorporated
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................... F-2
BALANCE SHEETS............................................................. F-3
STATEMENTS OF OPERATIONS................................................... F-4
STATEMENTS OF SHAREHOLDERS' EQUITY......................................... F-5
STATEMENTS OF CASH FLOWS................................................... F-6
NOTES TO FINANCIAL STATEMENTS.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Solutions and Support, Incorporated:
We have audited the accompanying balance sheets of Innovative Solutions and
Support, Incorporated (a Pennsylvania corporation) as of September 30, 1998 and
1999, and the related statements of operations, shareholders' equity and cash
flows for the three years ended September 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Solutions and
Support, Incorporated as of September 30, 1998 and 1999, and the results of its
operations and its cash flows for the three years ended September 30, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
December 30, 1999
F-2
<PAGE>
Innovative Solutions and Support, Incorporated
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September December
1998 30, 1999 31, 1999
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 102,150 $ 4,638,607 $ 5,275,073
Accounts receivable.................... 3,575,333 3,413,771 4,727,533
Inventories............................ 2,808,085 3,496,773 3,796,229
Deferred taxes......................... 1,231,937 23,530 23,530
Prepaid expenses....................... 87,810 66,104 90,189
----------- ----------- -----------
Total current assets................. 7,805,315 11,638,785 13,912,554
----------- ----------- -----------
Property and Equipment:
Computers and test equipment........... 1,150,490 1,646,659 1,727,070
Furniture and office equipment......... 265,337 341,042 350,407
Leasehold improvements................. 29,890 50,205 50,205
----------- ----------- -----------
1,445,717 2,037,906 2,127,682
Less--Accumulated depreciation......... (1,027,931) (1,292,716) (1,369,123)
----------- ----------- -----------
Net property and equipment........... 417,786 745,190 758,559
----------- ----------- -----------
Deposits................................. 24,202 24,202 225,627
----------- ----------- -----------
Deferred Taxes........................... 781,865 204,012 204,012
----------- ----------- -----------
$ 9,029,168 $12,612,189 $15,100,752
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Credit Facility (Note 6)............... $ 550,000 $ -- $ --
Notes payable (Note 5)................. 250,000 -- --
Current portion of capitalized lease
obligations........................... 55,481 23,831 23,423
Accounts payable....................... 2,251,691 888,052 1,048,971
Accrued expenses....................... 431,007 1,385,143 1,679,315
Deferred revenue....................... 879,973 784,707 762,986
----------- ----------- -----------
Total current liabilities............ 4,418,152 3,081,733 3,514,695
----------- ----------- -----------
Capitalized Lease Obligations (Note 8)... 46,379 45,764 42,437
----------- ----------- -----------
Deferred Revenue......................... -- 549,420 596,674
----------- ----------- -----------
Commitments and Contingencies (Note 8)
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
December 31, 1999).................... 177 177 177
Common stock, $.001 par value;
10,000,000 shares authorized,
6,137,200, 6,172,200 and 6,429,880
shares issued and outstanding at
September 30, 1998 and 1999 and
December 31, 1999, respectively....... 6,137 6,172 6,430
Additional paid-in capital............... 8,560,005 8,749,970 9,460,144
Retained earnings (accumulated deficit).. (4,001,682) 178,953 1,480,195
----------- ----------- -----------
Total shareholders' equity........... 4,564,637 8,935,272 10,946,946
----------- ----------- -----------
$ 9,029,168 $12,612,189 $15,100,752
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Innovative Solutions and Support, Incorporated
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Year Ended September For the Three Months
30, Ended December 31,
------------------------------------- ----------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $10,594,204 $14,682,313 $22,487,882 $3,855,822 $6,337,442
Cost of Sales........... 7,007,523 8,480,549 10,570,009 2,183,798 2,833,460
----------- ----------- ----------- ---------- ----------
Gross profit.......... 3,586,681 6,201,764 11,917,873 1,672,024 3,503,982
----------- ----------- ----------- ---------- ----------
Operating Expenses:
Research and
development.......... 1,114,351 1,554,564 1,915,634 408,631 668,278
Selling, general and
administrative....... 1,567,896 2,492,509 3,333,977 628,948 816,565
----------- ----------- ----------- ---------- ----------
2,682,247 4,047,073 5,249,611 1,037,579 1,484,843
----------- ----------- ----------- ---------- ----------
Operating income.... 904,434 2,154,691 6,668,262 634,445 2,019,139
Interest Income......... (20,307) (14,092) (80,376) (8,632) (64,387)
Interest Expense........ 84,120 238,213 50,239 25,882 1,540
----------- ----------- ----------- ---------- ----------
Income before income
taxes................ 840,621 1,930,570 6,698,399 617,195 2,081,986
Income tax (expense)
benefit, net (Note
4)................... -- 2,013,802 (2,517,764) (231,988) (780,744)
----------- ----------- ----------- ---------- ----------
Net Income.............. $ 840,621 $ 3,944,372 $ 4,180,635 $ 385,207 $1,301,242
=========== =========== =========== ========== ==========
Net Income Per Common
Share:
Basic................. $ 0.14 $ 0.65 $ 0.68 $ 0.06 $ 0.20
Diluted............... $ 0.11 $ 0.50 $ 0.50 $ 0.05 $ 0.15
Weighted Average Shares
Outstanding:
Basic................. 6,032,200 6,084,556 6,154,652 6,137,200 6,377,763
Diluted............... 7,803,120 7,855,476 8,396,285 8,200,207 8,887,287
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Innovative Solutions and Support, Incorporated
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Earnings
Preferred Common Paid-in (Accumulated
Stock Stock Capital Deficit) Total
--------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1996.................... $177 $6,032 $8,183,110 $(8,786,675) $ (597,356)
Warrants issued with
subordinated notes.... -- -- 125,000 -- 125,000
Net income............. -- -- -- 840,621 840,621
---- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997.................... 177 6,032 8,308,110 (7,946,054) 368,265
Issuance of stock to
directors............. -- 105 251,895 -- 252,000
Net income............. -- -- -- 3,944,372 3,944,372
---- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1998.................... 177 6,137 8,560,005 (4,001,682) 4,564,637
Issuance of stock to
directors............. -- 35 104,965 -- 105,000
Compensation in
connection with
issuance of Common
stock options......... -- -- 85,000 -- 85,000
Net income............. -- -- -- 4,180,635 4,180,635
---- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1999.................... 177 6,172 8,749,970 178,953 8,935,272
Exercise of warrants to
purchase Common stock
(unaudited)........... -- 248 698,184 -- 698,432
Exercise of options to
purchase Common stock
(unaudited)........... -- 10 11,990 -- 12,000
Net income
(unaudited)........... -- -- -- 1,301,242 1,301,242
---- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1999 (unaudited)........ $177 $6,430 $9,460,144 $ 1,480,195 $10,946,946
==== ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Innovative Solutions and Support, Incorporated
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Year Ended For the Three Months
September 30, Ended December 31,
----------------------------------- -----------------------
1997 1998 1999 1998 1999
--------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income............. $ 840,621 $ 3,944,372 $ 4,180,635 $ 385,207 $ 1,301,242
Adjustment to reconcile
net income to net cash
provided by (used in)
operating activities--
Imputed interest..... 33,560 91,440 -- -- --
Depreciation and
amortization......... 150,054 126,877 264,785 45,787 76,407
Deferred taxes........ -- (2,013,802) 1,786,260 -- --
Stock issued to
directors............ -- 252,000 105,000 -- --
Compensation expense
for common stock
options.............. -- -- 85,000 -- --
(Increase) decrease
in--
Accounts receivable... (932,768) (1,079,782) 161,562 982,146 (1,313,762)
Inventories........... (121,696) (1,209,498) (688,688) (87,084) (299,456)
Prepaid expenses and
other................ (11,403) (82,607) 21,706 5,562 (225,510)
Increase (decrease)
in--
Accounts payable...... 529,385 237,048 (1,363,639) (1,325,593) 160,919
Accrued expenses...... (201,048) (17,058) 954,136 137,073 294,172
Deferred revenue...... (787,954) (287,502) 454,154 -- 25,533
--------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) in
operating
activities......... (501,249) (38,512) 5,960,911 143,098 19,545
--------- ----------- ----------- ---------- -----------
Cash Flows From
Investing activities:
Purchases of property
and equipment........ (35,452) (238,152) (592,189) (134,398) (89,776)
--------- ----------- ----------- ---------- -----------
Cash Flows From
Financing Activities:
Proceeds from issuance
of notes............. 795,455 -- -- -- --
Repayments on notes... -- (587,600) (250,000) (250,000) --
Borrowings on credit
facility............. -- 2,270,000 -- 300,000 --
Repayments on credit
facility............. -- (1,720,000) (550,000) -- --
Repayments of
capitalized lease
obligations.......... (102,924) (67,867) (32,265) (20,016) (3,735)
Proceeds from exercise
of stock options..... -- -- -- -- 12,000
Proceeds from exercise
of warrants.......... -- -- -- -- 698,432
--------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities......... 692,531 (105,467) (832,265) 29,984 706,697
--------- ----------- ----------- ---------- -----------
Net Increase (Decrease)
In Cash And Cash
Equivalents............ 155,830 (382,131) 4,536,457 38,684 636,466
Cash And Cash
Equivalents, Beginning
Of Year................ 328,451 484,281 102,150 102,150 4,638,607
--------- ----------- ----------- ---------- -----------
Cash And Cash
Equivalents, End Of
Year................... $ 484,281 $ 102,150 $ 4,638,607 $ 140,834 $ 5,275,073
========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
1. Background:
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 Company is in the process of preparing a registration statement for the
sale of shares of Common stock to the public in an initial public offering.
Upon the closing of the offering, the outstanding shares of Preferred stock
will be converted into 1,770,920 shares of Common stock.
Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cause actual results to
vary materially from expectations include, but are not limited to, dependence
on key personnel, dependence on technological developments, dependence on key
customers and product liability.
2. Summary Of Significant Accounting Policies:
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual future results could differ from those estimates.
Cash and Cash Equivalents
Highly liquid investments purchased with an original maturity of three
months or less are classified as cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
as follows:
<TABLE>
<CAPTION>
September 30,
---------------------- December 31,
1998 1999 1999
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Raw materials and finished
components.......................... $2,276,764 $2,368,432 $2,797,445
Work-in-process...................... 1,108,821 1,706,287 1,576,730
---------- ---------- ----------
Gross inventory...................... 3,385,585 4,074,719 4,374,175
Reserve for excess and obsolete...... (577,500) (577,946) (577,946)
---------- ---------- ----------
$2,808,085 $3,496,773 $3,796,229
========== ========== ==========
</TABLE>
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using an
accelerated method over the estimated useful lives of the assets (the lesser of
5 to 7 years or over the lease term). This method is not materially different
from straight-line. Major additions and improvements are capitalized, while
maintenance and repairs that do not improve or extend the size of assets are
charged to expense as incurred.
F-7
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
Revenue Recognition
Revenues are recognized upon shipment of product, and include $489,519,
$2,952,584 and $1,226,210 from a related-party in 1997, 1998 and 1999,
respectively, and $729,463 and $21,566 for the three months December 31, 1998
and 1999, respectively (see Note 9).
Deferred Revenue
The Company has a contract which provided for the customer to make advance
payments of 10% of anticipated deliverables. These amounts are recorded as
deferred revenue when received and recognized as revenue when the related
products are shipped. Additionally, in fiscal 1999, a customer purchased a 10
year warranty. This amount has been recorded as deferred revenue and is being
recognized ratably over the 10 year term of the warranty.
Warranty
Estimated cost to repair or replace products under warranty is provided when
revenues from product sales are recorded. In fiscal 1999, the Company began to
offer its customers extended warranties for additional fees. These warranty
sales are recorded as deferred revenue and recorded as revenues over the
warranty period.
Income Taxes
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note
4).
Research and Development
Research and development expenses are incurred for projects conducted under
customer-sponsored programs and for future product development. All research
and development costs incurred for projects conducted under customer-sponsored
programs are charged to cost of revenues and research and development costs
related to future product development are charged to expense as incurred.
Long-Lived Assets
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.121
requires that long-lived assets to be held and used by the Company be reviewed
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If changes in
circumstances indicate that the carrying amount of an asset that an entity
expects to hold and use may not be recoverable, future cash flows expected to
result from the use of the asset and its disposition must be estimated. If the
undiscounted value of the future cash flows is less than the carrying amount of
the asset, impairment is recognized. No material adjustments have been recorded
for the periods presented.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
debt instruments. The carrying values of these assets and liabilities are
considered to be representative of their respective fair values.
F-8
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
Major Customers and Products
The Company derived 38%, 49% and 76% of its revenue from two, three and
three customers for the years ended September 30, 1997, 1998 and 1999,
respectively, and 78% and 85% from five and four customers for the three months
ended December 31, 1998 and 1999, respectively. Accounts receivable related to
these customers total $1,952,220, $2,096,468 and $3,718,822 at September 30,
1998 and 1999 and December 31, 1999, respectively.
In addition, revenues from sales of air data and RVSM systems and components
were 81% of revenues for the year ended September 30, 1999 and 100% of revenues
for the three months ended December 31, 1999, respectively.
Major Suppliers
The Company currently buys several of its components from sole source
suppliers. Although there are a limited number of manufacturers of the
particular components, management believes that other suppliers could provide
similar components on comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and shipments, a possible loss of sales, and
could cause the Company to fail to fulfill certain performance obligations
under current customer contracts, which would adversely affect operating
results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash with large banks. The Company's customer base
principally consists of companies within the aviation industry. The Company
does not require collateral from its customers.
Supplemental Cash Flow Information
For the years ended September 30, 1997, 1998 and 1999, the Company paid
$14,691, $146,875 and $75,206, respectively, for interest, and $72,085, $10,028
and $155,278, respectively, for income taxes. For the three months ended
December 31, 1998 and 1999 the Company paid $49,637 and $1,148, respectively,
for interest, and $1,049 and $300,000, respectively, for income taxes.
3. Net Income Per Share:
Net income per share is calculated utilizing the principles of SFAS No. 128,
"Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive
securities and is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS is computed assuming the conversion or exercise of all
dilutive securities such as preferred stock, options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of
basic EPS. The following table summarizes the differences between basic
weighted average shares outstanding and diluted weighted average shares
outstanding used to compute diluted EPS.
F-9
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
For the Three
For the Year Ended Months
September 30, Ended December 31,
----------------------------- -------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic weighted average number
of shares outstanding....... 6,032,200 6,084,556 6,154,652 6,137,200 6,377,763
Incremental shares from
assumed exercise or
conversion of:
Stock options.............. -- -- 153,863 68,726 322,882
Warrants................... -- -- 316,850 223,361 415,722
Preferred stock............ 1,770,920 1,770,920 1,770,920 1,770,920 1,770,920
--------- --------- --------- --------- ---------
Diluted weighted average
number of shares
outstanding............... 7,803,120 7,855,476 8,396,285 8,200,207 8,887,287
========= ========= ========= ========= =========
</TABLE>
The number of incremental shares from the assumed exercise of stock options
and warrants is calculated applying the treasury stock method.
4. Income Taxes:
The Company incurred operating losses and generated a significant
accumulated deficit from inception through the fiscal year ended September 30,
1996. As of September 30, 1997, and 1998 the Company had federal net operating
loss carryforwards of approximately $7.6 million, and $5.8 million,
respectively. At September 30, 1996 and 1997, a valuation allowance was
recorded for 100% of the associated deferred tax asset as realization of the
tax benefit was not considered more likely than not. At September 30, 1998,
management determined, based upon historical and projected operating results,
that it was more likely than not that the tax benefit would be realized.
Therefore, as of September 30, 1998 the Company eliminated the valuation
reserve and recorded an income tax benefit and a corresponding deferred tax
asset of $2.0 million, relating to the remaining cumulative net operating loss
of $5.8 million. The Company utilized the entire remaining cumulative net
operating loss in fiscal 1999.
At September 30, 1998, the Company's current and long-term deferred tax
assets relate to the deferred revenue from the sale of long-term warranties.
Payments received for these warranties are recorded as taxable income in the
year received and, therefore, generate deferred tax assets.
The components of income taxes were as follows:
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------
1997 1998 1999
--------- ----------- ----------
<S> <C> <C> <C>
Current Provision:
Federal................................ $ 273,571 $ 656,394 $ 534,497
State.................................. 52,573 115,834 197,007
--------- ----------- ----------
326,144 772,228 731,504
--------- ----------- ----------
Deferred Provision (Benefit):
Federal................................ (273,571) (2,529,362) 1,780,359
State.................................. (52,573) (256,668) 5,901
--------- ----------- ----------
(326,144) (2,786,030) 1,786,260
--------- ----------- ----------
$ -- $(2,013,802) $2,517,764
========= =========== ==========
</TABLE>
F-10
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
The reconciliation of the statutory federal rate to the Company's effective
income tax expense (benefit) rate is as follows:
<TABLE>
<CAPTION>
For the Year
Ended For the Three Months
September 30, Ended December 31,
-------------------- ----------------------
1997 1998 1999 1998 1999
----- ------ ---- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate...... 34.0% 34.0% 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit................ 6.3 6.0 3.6 3.6 3.5
Benefit of net operating loss
carryforward................... (40.3) (40.0) -- -- --
Reversal of deferred tax asset
valuation reserve.............. -- (104.3) -- -- --
----- ------ ---- ---------- ----------
--% (104.3)% 37.6% 37.6% 37.5%
===== ====== ==== ========== ==========
</TABLE>
5. Notes Payable:
The Company had $837,600 of subordinated notes bearing annual interest at
10% collateralized by all of the Company's tangible and intangible assets. In
fiscal 1998, $587,600 of these notes was repaid and the remaining $250,000 was
repaid during fiscal 1999.
Warrants to purchase 670,082 shares of Common stock at $2.40 per share
expiring in June 2004 were issued to the noteholders in conjunction with
issuance of the notes. The subordinated notes were recorded net of $125,000 of
fair value assigned to the warrants. The notes were amortized to their face
value over one year, with $91,440 and $33,560 of amortization included in
interest expense for the years ended September 30, 1998 and 1997, respectively
(see Note 7).
6. Credit Facility:
The Company has a revolving credit and equipment line with a bank ("Credit
Facility") which allows the Company to borrow up to $1,000,000, increasing to
$2,000,000 under certain circumstances, with interest at the higher of the
prime rate plus 1.5% or the bank's cost of funds, as defined, plus 2.5%. All
borrowings under the Credit Facility were repaid in April 1999. The original
expiration date was July 1999, and was temporarily extended to May 2000. The
Credit Facility requires the Company to maintain certain financial covenants,
as defined, and is collateralized by substantially all of the Company's
tangible assets.
7. Shareholders' Equity:
Preferred Stock
Holders of Class A Convertible Preferred stock are entitled to certain
rights shared with Common stock holders, as defined, including equal voting
rights and an equal share of dividends, if any. In addition, Class A
Convertible Preferred stock carries a liquidation right of $24 per share in the
event of any liquidation, as defined. The Class A Convertible Preferred stock
is convertible into Common stock at the option of the holder, at the rate of
ten shares of Common stock for each share of Class A Convertible Preferred
stock, subject to adjustment as defined. In addition, the Preferred stock is
automatically convertible into Common stock upon the closing of a qualified
initial public offering, as defined.
F-11
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
Common Stock
The Company issued 105,000 and 35,000 shares of Common stock to non-employee
directors, with fair values of $252,000 and $105,000, for the years ended
September 30, 1998 and 1999, respectively. The fair value of the Common stock
was charged to selling, general and administrative expense on the accompanying
statements of operations on the date of issue.
Stock Options
The Company's 1988 Stock Incentive Plan provides for the grant of incentive
stock options to employees. The Company's 1998 Stock Option Plan provides for
the grant of incentive and nonqualified stock options to employees, officers,
directors and independent contractors and consultants. Incentive stock options
granted under the 1988 Stock Incentive Plan and the 1998 Stock Option Plan,
(the "Plans") must be at least 100% of the fair value of the Common stock on
the date of grant. Nonqualified stock options granted under the 1998 Plan may
be less than, equal to or greater than the fair value of the Common stock on
the date of grant. Required disclosure information regarding the Plans have
been combined due to the similarities in the Plans. The Company has reserved
1,240,812 shares of its Common stock for awards under the Plans.
The Company applies Accounting Principal Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for options issued under the Plans. Under APB No. 25, compensation
cost related to stock options granted to employees is computed based on the
intrinsic value of the stock option at the date of grant, which represents the
difference between the exercise price and the fair value of the Common stock.
During the year ended September 30, 1999, the Company granted performance based
stock options to an employee. The Company recorded $85,000 in compensation
expense related to these options as the applicable performance measures that
determined vesting had been achieved.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," compensation
cost related to stock options granted to employees is computed based on the
value of the stock option at the date of grant using an option valuation
methodology, typically the Black-Scholes pricing model. SFAS No. 123 can be
applied either by recording the fair value of the options or by continuing to
record the APB No. 25 value and disclosing the SFAS No. 123 impact on a pro-
forma basis. The Company has elected the disclosure method of SFAS No. 123. Had
the Company recognized compensation cost for its stock option plans consistent
with the provisions of SFAS 123, the Company's pro forma net income for fiscal
1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.............................. $840,621 $3,944,372 $4,180,635
Pro forma................................ 824,627 3,923,963 4,114,312
Basic EPS:
As reported.............................. $ 0.14 $ 0.65 $ 0.68
Pro forma................................ 0.14 0.64 0.67
Diluted EPS:
As reported.............................. $ 0.11 $ 0.50 $ 0.50
Pro forma................................ 0.11 0.50 0.49
</TABLE>
F-12
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
The weighted average fair value of the stock options granted during the
years ended September 30, 1997, 1998 and 1999 were $1.53, $1.40 and $2.42,
respectively. The fair value of each option grant is estimated on the grant
date using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend rate.................................. -- -- --
Expected volatility..................................... 70% 70% 70%
Weighted average risk-free interest rate................ 6.6% 5.7% 5.7%
Expected lives (years).................................. 5 5 5
</TABLE>
Information relative to the Plans is as follows:
<TABLE>
<CAPTION>
Range of Weighted
Exercise Average
Options Prices Exercise Price
-------- ----------- --------------
<S> <C> <C> <C>
Outstanding September 30, 1996........ 71,300 $1.00- 3.00 $ 1.93
Granted............................. 197,500 2.40 2.40
Terminated.......................... (11,300) 1.20 1.20
-------- ----------- ------
Outstanding September 30, 1997........ 257,500 1.00- 3.00 2.32
Granted............................. 123,500 2.40- 3.60 2.96
Terminated.......................... (100,000) 2.40- 3.00 2.46
-------- ----------- ------
Outstanding September 30, 1998........ 281,000 1.00- 3.60 2.55
Granted............................. 325,000 3.60- 7.00 3.86
Terminated.......................... (50,000) 2.40 2.40
-------- ----------- ------
Outstanding September 30, 1999........ 556,000 1.00- 7.00 3.60
Granted (unaudited)................. 65,000 11.00 11.00
Exercised (unaudited)............... (10,000) 1.20 1.20
Terminated (unaudited)................ (35,000) 1.00- 2.40 2.00
-------- ----------- ------
Outstanding December 31, 1999
(unaudited).......................... 576,000 $2.40-11.00 $ 4.32
======== =========== ======
</TABLE>
As of September 30, 1999, there were 67,700 options vested and exercisable
at an aggregate exercise price of $176,380. In addition, as of December 31,
1999, there were options to purchase an additional 375,812 shares of common
stock available for grant under the 1998 Stock Option Plan. Options may no
longer be granted under the 1988 Stock Incentive Plan.
Warrants
In connection with the issuance of subordinated notes, the Company issued
warrants to purchase 670,082 shares of Common stock at an exercise price of
$2.40 per share (see Note 5). During the three months ended December 31, 1999,
warrants to purchase 207,680 shares of Common stock were exercised for an
aggregate purchase price of $498,432. The remaining warrants are fully vested
and exercisable through June 2004.
In addition, during the three months ended December 31, 1999, warrants to
purchase 40,000 shares of Common stock were exercised for an aggregate purchase
price of $200,000, or approximately $5.00 per share.
F-13
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
8. Commitments and Contingencies:
Capital Leases
The Company leases certain equipment under capital leases, with terms
ranging from three to five years. Implicit interest rates under these leases
range from 2% to 13%. The capitalized cost of $278,606, $94,291 and $94,291 and
the related accumulated amortization of $161,269, $36,771 and $41,485 has been
included in property and equipment at September 30, 1998 and 1999 and December
31, 1999, respectively.
Future minimum payments of capital leases at September 30, 1999 are as
follows:
<TABLE>
<S> <C>
Fiscal 2000..................................................... $ 22,762
Fiscal 2001..................................................... 19,614
Fiscal 2002..................................................... 19,328
Fiscal 2003..................................................... 16,906
--------
Total minimum lease payments.................................... 78,610
Less--amount representing interest.............................. (9,015)
--------
Present value of future minimum lease payments.................. 69,595
Less--Current portion........................................... (23,831)
--------
$ 45,764
========
</TABLE>
Operating Lease
The Company currently leases its facility under operating leases from
affiliates of a company whose principals are shareholders of the Company. Rent
expense under operating leases totaled $224,613, $226,014 and $427,410 for the
years ended September 30, 1997, 1998 and 1999, respectively, and $73,932 and
$85,065 for the three months ended December 31, 1998 and 1999, respectively.
Future minium payments related to all noncancelable leases are $319,463 in
fiscal 2000.
Product Liability
The Company currently has product liability insurance to $10,000,000, which
management believes is adequate to cover potential liabilities that may arise.
Land Purchase
During the three months ended December 31, 1999, the Company committed to
purchase a tract of land for $1.0 million. The Company intends to construct a
new manufacturing and office facility constructed on the land. Included in the
accompanying balance sheet as of December 31, 1999 is a deposit of $100,000
toward the purchase of the land. The Company expects to spend a total of $5.0
million to $6.0 million on the construction through fiscal 2001, a portion of
which will be funded with industrial development bonds.
Airplane Purchase
During the three months ended December 31, 1999, the Company committed to
purchase an aircraft for approximately $3.0 million. This aircraft will serve
as a test bed for the Company's new air data and flat panel products and also
as a sales/marketing tool for demonstrating its products to its aviation
customers. Included in the accompanying balance sheet as of December 31, 1999
is a deposit of $100,000 toward the purchase of the airplane.
F-14
<PAGE>
Innovative Solutions and Support, Incorporated
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended
December 31, 1998 and 1999 is unaudited)
Legal Proceedings
From time to time, the Company is subject to various legal proceedings in
the ordinary course of business. Management does not believe that any of the
current legal proceedings will have a material adverse effect on the Company's
operations or financial condition.
9. Related-party Transactions:
The Company incurred legal fees of $29,150, $82,231 and $76,924 with a law
firm which is a shareholder of the Company for the years ended September 30,
1997, 1998 and 1999, respectively, and $30,767 and $32,887 for the three months
ended December 31, 1998 and 1999, respectively. Management believes the fees
paid were on an arm's length basis and were consistent with the fees paid prior
to the law firm's investment in the Company.
The Company derived revenues of approximately $489,519, $2,952,584 and
$1,226,210 for the years ended September 30, 1997, 1998 and 1999, respectively,
and $729,463 and $21,566 for the three months ended December 31, 1998 and 1999,
respectively, from a company which is a minority shareholder and purchased
$1,516,263, $2,744,825, $616,751 and $502,704 of component parts used in the
manufacturing process from this related party for the years ended September 30,
1997, 1998 and 1999 and the three months ended December 31, 1998, respectively.
There were no purchases for the three months ended December 31, 1999.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Innovative Solutions and Support, Incorporated
Common Stock
---------------------
PROSPECTUS
---------------------
Friedman Billings Ramsey
Stifel, Nicolaus & Company, Incorporated
Janney Montgomery Scott LLC
, 2000
---------------------
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide any information different from that contained
in this prospectus. Neither the delivery of this prospectus nor the sale of
common stock means that the information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to sell or a
solicitation to buy any shares in any circumstances under which the offer or
solicitation is unlawful.
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts, in connection with the sale of the shares of common
stock being registered. IS&S will pay all of these costs. All amounts are
estimates except the fees payable to the SEC, the National Association of
Securities Dealers, Inc. (NASD), and the Nasdaq National Market.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $10,560
NASD Filing Fee..................................................... 4,500
Nasdaq National Market Listing Fee.................................. *
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Transfer Agent Fees................................................. *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- ---------------------
* To be completed by amendment
Item 14. Indemnification of Directors and Officers
Subchapter D (Sections 1741 through 1750) of Chapter 17 of the Pennsylvania
Business Corporation Law of 1988 (the "PBCL") contains provisions for mandatory
and discretionary indemnification of a corporation's directors, officers,
employees and agents (collectively "Representatives") and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors, officers and other Representatives under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with a threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party or threatened to be made a party by reason of his being
a Representative of the corporation or serving at the request of the
corporation as a Representative of another corporation, partnership, joint
venture, trust or other enterprise, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative and
corporate actions similar to that provided by Section 1741. However,
indemnification is not provided under Section 1742 in respect of any claim,
issue or matter as to which a Representative has been adjudged to be liable to
the corporation unless and only to the extent that the proper court determines
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, a Representative is fairly and reasonably
entitled to indemnity for the expenses that the court deems proper.
Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or otherwise
in defense of any such action or proceeding referred to in Section 1741 or
1742.
Section 1744 provides that unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation as authorized in
the specific case upon a determination that indemnification of a Representative
is proper because the Representative met the applicable standard of conduct,
and such determination will be made by the board of directors by a majority
vote of a quorum of directors not parties to
II-1
<PAGE>
the action or proceeding; if a quorum is not obtainable or if obtainable and a
majority of disinterested directors so directs, by independent legal counsel;
or by the shareholders.
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the PBCL may be paid by the corporation in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
Representative to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the PBCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding that office.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by him
in his capacity as a Representative, whether or not the corporation would have
the power to indemnify him against that liability under Subchapter D of Chapter
17 of the PBCL.
Sections 1748 and 1749 apply the indemnification and advancement of expenses
provisions contained in Subchapter D of Chapter 17 of the PBCL to successor
corporations resulting from consolidation, merger or division and to service as
a Representative of a corporation or an employee benefit plan.
Article VII of our bylaws provides indemnification to directors and officers
for all actions taken by them and for all failures to take action to the
fullest extent permitted by Pennsylvania law against all expense, liability and
loss reasonably incurred or suffered by them in connection with any threatened,
pending or completed action, suit or proceeding (including, without limitation,
an action, suit or proceeding by or in the right of IS&S), whether civil,
criminal, administrative, investigative or through arbitration. Article VII
also permits us, by action of our board of directors, to indemnify officers,
employees and other persons to the same extent as directors. Amendments,
repeals or modifications of Article VII can only be prospective, and such
changes require the affirmative vote of not less than all of the directors then
serving or the holders of a majority of the outstanding shares of stock
entitled to vote in elections of directors. Article VII further permits us to
maintain insurance, at our expense, for the benefit of any person on behalf of
whom insurance is permitted to be purchased by Pennsylvania law against any
such expenses, liability or loss, whether or not we would have the power to
indemnify such person against such expense, liability or loss under
Pennsylvania or other law.
Item 15. Recent Sales of Unregistered Securities
Since October 1, 1996, we have issued unregistered securities to a limited
number of persons as described below:
(a) From time to time since April 1997, we have issued stock options to
our employees under our stock option plans to purchase an aggregate of
672,500 shares of common stock at exercise prices ranging from $2.40 to
$13.00 per share.
(b) On June 24, 1997, we issued warrants to purchase an aggregate of
670,082 shares of common stock at an exercise price of $2.40 per share to
certain shareholders in connection with their agreement to make loans to us
totaling $837,600. From September 1999 to November 1999, we issued 207,680
shares of common stock upon the exercise of such warrants by three of these
shareholders.
(c) From April 1998 to April 1999, a total of 140,000 shares of common
stock were issued under our non-employee director share bonus program to
our non-employee directors for services rendered from April 1995 to April
1999. The shares otherwise issuable to Ivan M. Marks and Joel P. Adams,
II-2
<PAGE>
non-employee directors who serve by designation of Parker Hannifin
Corporation and The P/A Fund, respectively, were issued directly to Parker
Hannifin Corporation and The P/A Fund.
(d) In September 1999, we issued to one of our shareholders 40,000
shares of common stock upon the exercise of warrants at an exercise price
of $5.00 per share.
(e) From September 1999 to December 1999, we issued an aggregate of
10,000 shares of common stock to an employee of ours upon the exercise of
stock options granted to him at an exercise price of $1.20 per share.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients in such transactions
represented their intention to acquire the securities for investment purposes
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1* Form of Underwriting Agreement.
3.1* Articles of Incorporation of IS&S.
3.2* Bylaws of IS&S.
4* Form of the specimen common stock certificate of IS&S.
5* Opinion of Cozen and O'Connor.
10.1 IS&S 1988 Incentive Stock Option Plan.
10.2 IS&S 1998 Stock Option Plan.
10.3 Employment Agreement by and between Robert J. Ewy and IS&S dated May
3, 1999.
10.4 Employment Letter Agreement by and between Roger E. Mitchell and IS&S
dated July 7, 1998.
10.5 Stock Purchase Agreement by and between IS&S and Parker Hannifin
Corporation dated July 11, 1991.
10.6 Securities Purchase Agreement by and among IS&S, Geoffrey S. M.
Hedrick, The P/A Fund and Parker Hannifin Corporation dated May 8,
1995.
10.7* Form of Warrant Agreement.
21 Subsidiaries of IS&S.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Cozen and O'Connor (contained in its opinion filed as
Exhibit 5).
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment
II-3
<PAGE>
(b) Financial Statement Schedule
All financial schedules have been omitted because they are not required, not
applicable or the required information is shown in the financial statements or
related notes.
Item 17. Undertakings
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement certificates in such denominations and registered
in such name as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Malvern, Pennsylvania,
on this 8th day of May, 2000.
Innovative Solutions and Support,
Incorporated
/s/ Geoffrey S. M. Hedrick
By: _________________________________
Geoffrey S. M. Hedrick
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Geoffrey S. M. Hedrick and Robert J. Ewy, and each one
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign this registration statement (including all pre-
effective and post-effective amendments which incorporate this registration
statement by reference) and any and all new registration statements filed
pursuant to Rule 462 under the Securities Act of 1933 in connection with or
related to the offering contemplated by this Registration Statement, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that such attorneys-in-fact and agents, or his or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Geoffrey S. M. Hedrick Chairman and Chief May 8, 2000
______________________________________ Executive Officer
Geoffrey S. M. Hedrick (Principal Executive
Officer)
/s/ James J. Reilly Chief Financial Officer May 8, 2000
______________________________________ (Principal Financial and
James J. Reilly Accounting Officer)
/s/ Joel P. Adams Director May 8, 2000
______________________________________
Joel P. Adams
/s/ Glen R. Bressner Director May 8, 2000
______________________________________
Glen R. Bressner
/s/ Winston J. Churchill Director May 8, 2000
______________________________________
Winston J. Churchill
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Benjamin A. Cosgrove Director May 1, 2000
______________________________________
Benjamin A. Cosgrove
/s/ Ivan M. Marks Director May 8, 2000
______________________________________
Ivan M. Marks
/s/ Robert E. Mittelstaedt, Jr. Director May 8, 2000
______________________________________
Robert E. Mittelstaedt, Jr.
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1* Form of Underwriting Agreement.
3.1* Articles of Incorporation of IS&S.
3.2* Bylaws of IS&S.
4* Form of the specimen common stock certificate of IS&S.
5* Opinion of Cozen and O'Connor.
10.1 IS&S 1988 Incentive Stock Option Plan.
10.2 IS&S 1998 Stock Option Plan.
10.3 Employment Agreement by and between Robert J. Ewy and IS&S dated May
3, 1999.
10.4 Employment Letter Agreement by and between Roger E. Mitchell and IS&S
dated July 7, 1998.
10.5 Stock Purchase Agreement by and between IS&S and Parker Hannifin
Corporation dated July 11, 1991.
10.6 Securities Purchase Agreement by and among IS&S, Geoffrey S. M.
Hedrick, The P/A Fund and Parker Hannifin Corporation dated May 8,
1995.
10.7* Form of Warrant Agreement.
21 Subsidiaries of IS&S.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Cozen and O'Connor (contained in its opinion filed as
Exhibit 5).
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment
<PAGE>
Exhibit 10.1
INNOVATIVE SOLUTIONS AND SUPPORT, INCORPORATED
1988 INCENTIVE STOCK OPTION PLAN
1. PURPOSE. Innovative Solutions and Support, Incorporated, a
Pennsylvania corporation (the "Company"), hereby adopts the Innovative Solutions
and Support, Incorporated 1988 Incentive Stock Option Plan effective August 4,
1988 (the "Plan"). The Plan is intended as an additional incentive to
individuals to enter into or remain in the employ of the Company or any
Affiliate (as defined below) and to devote themselves to the Company's success
by providing them with an opportunity to acquire or increase their proprietary
interest in the Company through receipt of rights (the "Options") to acquire the
Company's Common Stock, par value $0.001 (the "Common Stock"). Each Option
granted under the Plan is intended to be an incentive stock option ("ISO")
within the meaning of Section 422A(b) of the Internal Revenue Code of 1986 (the
"Code") for federal income tax purposes. For purposes of the Plan, the term
"Affiliate" shall mean a corporation which is a parent corporation or a
subsidiary corporation with respect to the Company within the meaning of section
425(e) or (f) of the Code.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company; however, subject to compliance with any applicable
by-law or agreement binding upon the Company, the Board of Directors may
designate a committee composed of two or more of its members to operate and
administer the Plan in its stead. The committee or the Board of Directors
<PAGE>
in its administrative capacity with respect to the Plan is referred to as the
"Committee".
(a) MEETINGS. The Committee shall hold meetings at such times
and places as it may determine. Acts approved at a meeting by a majority of the
members of the Committee or acts approved in writing by the unanimous consent of
the members of the Committee shall be the valid acts of the Committee.
(b) GRANTS. The Committee shall from time to time at its
discretion direct the Company to grant Options pursuant to the terms of the
Plan. The Committee shall have plenary authority to determine the employees to
whom and the times at which Options shall be granted, the number of Option
Shares (as defined in Section 4) to be granted and the price and other terms and
conditions thereof, subject, however, to the express provisions of the Plan. In
making such determinations the Committee may take into account the nature of the
employee's services and responsibilities, the employee's present and potential
contribution to the Company's success and such other factors as it may deem
relevant. The interpretation and construction by the Committee of any provision
of the Plan or of any Option granted under it shall be final, binding and
conclusive.
(c) EXCULPATION. No member of the Board of Directors or of the
Committee shall be personally liable for monetary damages as such for any action
taken or any failure to take any action in connection with the administration of
the Plan
-2-
<PAGE>
or the granting of Options under it unless (i) the director or member of the
Committee has breached or failed to perform the duties of his office under
Section 8363 of the Pennsylvania Directors' Liability Act (relating to standard
of care and justifiable reliance), and (ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness; provided, however,
that the provisions of this subsection 2(c) shall not apply to the
responsibility or liability of a director or a member of the Committee pursuant
to any criminal statute or to the liability of a director or a member of the
Committee for the payment of taxes pursuant to local, state or federal law.
(d) INDEMNIFICATION. Each member of the Board of Directors or
of the Committee shall be entitled without further act on his part to indemnity
from the Company to the fullest extent provided by applicable law and the
Company's Articles of Incorporation and/or by-laws in connection with or arising
out of any action, suit or proceeding with respect to the administration of the
Plan or the granting of Options under it in which he may be involved by reason
of his being or having been a member of the Board of Directors or the Committee,
whether or not he continues to be such member of the Board or the Committee at
the time of the action, suit or proceeding.
3. ELIGIBILITY. All employees of the Company or its Affiliates (who may
also be directors of the Company or its Affiliates) shall be eligible to receive
Options hereunder. An employee who receives an Option is referred to as an
"Optionee."
-3-
<PAGE>
The Committee, in its sole discretion, shall determine whether an individual
qualifies as an employee. An employee may receive more than one Option, but only
on the terms and subject to the restrictions of the Plan.
4. OPTION SHARES. The aggregate maximum number of shares of the Common
Stock for which Options may be issued under the Plan is 45,000 shares, adjusted
as provided in Section 8 (the "Option Shares"). Option Shares shall be issued
from authorized and unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If any outstanding Option granted
under the Plan expires, lapses or is terminated for any reason, the Option
Shares allocable to the unexercised portion of such Option may again be the
subject of an Option granted pursuant to the Plan.
5. TERM OF PLAN. The Plan is effective as of August 4, 1988, the date
on which it was adopted by the Board of Directors. If the Plan is not approved
by vote of a majority of the outstanding voting stock of the Company on or
before August 4, 1989, no Option granted pursuant to the Plan shall be an ISO
and all Options granted under the Plan shall remain outstanding but shall not be
treated as ISOs. No Option may be granted under the Plan after August 4, 1998.
6. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to the
Plan shall be evidenced by written documents (the "Option Documents") in such
form as the Committee shall from time to time approve, which Option Documents
shall comply with and be
-4-
<PAGE>
subject to the following terms and conditions and such other terms and
conditions which the Committee shall from time to time require which are not
inconsistent with the terms of the Plan.
(a) NUMBER OF OPTION SHARES. Each Option Document shall state
the number of Option Shares to which it pertains.
(b) OPTION PRICE. Each Option Document shall state the price
at which Option Shares may be purchased (the "Option Price"), which shall be at
least 100% of the fair market value of the Common Stock on the date the Option
is granted as determined by the Committee; provided, however, that if an Option
is granted to an Optionee who then owns, directly or by attribution under
section 425(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
then the Option Price shall be at least 110% of the fair market value of the
Option Shares on the date the Option is granted. If the Common Stock is traded
in a public market, then the fair market value per share shall be the mean
between the closing "bid" and "asked" prices thereof or the mean between the
highest and lowest quoted selling prices thereof, as applicable and as the
Committee determines, on the day the Option is grated as reported in customary
financial reporting services.
(c) MEDIUM OF PAYMENT. An Optionee shall pay for Option Shares
(i) in cash, (ii) by certified check payable to the order of the Company, or
(iii) by such other mode of payment as the Committee may approve. Furthermore,
the Committee may
-5-
<PAGE>
provide in an Option Document that payment may be made all or in part in shares
of the Common Stock held by the Optionee for more than one year. If payment is
made in whole or in part in shares of the Common Stock, then the Optionee shall
deliver to the Company certificates registered in the name of such Optionee
representing shares of Common Stock owned by such Optionee, free of all liens,
claims and encumbrances of every kind and having an aggregate fair market value
on the date of delivery that is not greater than the Option Price of the Option
Shares with respect to which such Option is to be exercised, accompanied by
stock powers duly endorsed in blank by the Optionee. Notwithstanding the
foregoing, the Committee, in its sole discretion, may refuse to accept shares of
Common Stock in payment of the Option Price. In that event, any certificates
representing shares of Common Stock which were delivered to the Company shall be
returned to the Optionee with notice of the refusal of the Committee to accept
such shares in payment of the Option Price. The Committee may impose from time
to time such limitations and prohibitions on the use of shares of the Common
Stock to exercise an Option as it deems appropriate.
(d) TERMINATION OF OPTIONS. No Option shall be exercisable
after the first to occur of the following:
(i) Expiration of the Option term specified in the
Option Document, which shall not exceed (A) ten years from the date of grant, or
(B) five years from the date of grant if the Optionee on the date of grant owns,
directly or by
-6-
<PAGE>
attribution under section 425(d) of the Code, shares possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or of an Affiliate;
(ii) Expiration of three months from the date of
Optionee's employment with the Company or its Affiliates terminates for any
reason other than disability (within the meaning of section 22(e)(3) of the
Code), death or as specified in subsection 6(d)(iv) or (v), below;
(iii) Expiration of one year from the date the
Optionee's employment with the Company or its Affiliates terminates due to the
Optionee's disability (within the meaning of section 22(e)(3) of the Code) or
death;
(iv) The date set by the Committee to be an
accelerated expiration date in the event of the occurrence of a transaction or
series of related transactions in which (A) the Company is dissolved or
liquidated or sells substantially all of its operating assets, (B) the Company
is not the surviving or acquiring entity or (C) the Company becomes an 80% or
more owned subsidiary of another company, in which case the Committee may take
whatever other action with respect to the Option, including acceleration of any
exercise provisions, it deems necessary or desirable; or
(v) A finding by the Committee, after full
consideration of the facts presented on behalf of both the Company and the
Optionee, that the Optionee has breached his employment contract with the
Company or an Affiliate, or has been
-7-
<PAGE>
engaged in any sort of disloyalty to the Company or an Affiliate, including,
without limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his employment or service or has disclosed trade
secrets or confidential information of the Company or an Affiliate. In such
event, in addition to immediate termination of the Option, the Optionee, upon a
determination by the Committee, shall automatically forfeit all Option Shares
for which the Company has not yet delivered the share certificates upon refund
by the Company of the Option Price. Notwithstanding anything herein to the
contrary, the Company may withhold delivery of share certificates pending the
resolution of any inquiry that could lead to a finding resulting in a
forfeiture.
(e) TRANSFERS. No Option granted under the Plan may be
transferred, except by will or by the laws of descent and distribution. During
the lifetime of the person to whom an Option is granted, such Option may be
exercised only by him or his legal representative in the event of his
incompetence.
(f) OTHER PROVISIONS. The Option Documents shall contain such
other provisions including, without limitation, additional restrictions upon the
exercise of the Option, additional limitations upon the term of the Option,
restrictions on the transfer of Option Shares and conditions of forfeiture
applicable to Option Shares, as the Committee shall deem advisable.
-8-
<PAGE>
(g) ADDITIONAL BENEFITS. An Option Document may grant the
Optionee the right to receive additional compensation, in cash or other
property, from the Company at the time of exercise of the Option provided such
additional compensation is includible in income under the provisions of sections
61 and 83 of the Code. The additional compensation may be determined in any
manner specified by the Committee in the Option Document.
(h) AMENDMENT. The Committee shall have the right to amend
Option Documents issued to an Optionee subject to his consent, except that the
consent of the Optionee shall not be required for any amendment made under
subsection 6(d)(iv).
7. EXERCISE. No Option shall be deemed to have been exercised prior to
the receipt by the Company of written notice of such exercise and of payment in
full of the Option Price for the Option Shares to be purchased. Each such notice
shall specify the number of Option Shares to be purchased and shall (unless the
Option Shares are covered by a then current registration statement or a
Notification under Regulation A under the Securities Act of 1933, as amended
(the "Act")), contain the Optionee's acknowledgment in form and substance
satisfactory to the Company that (a) such Option Shares are being purchased for
investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Act), (b) the Optionee has
been advised and understands that (i) the Option Shares have not been
-9-
<PAGE>
registered under the Act and are "restricted securities" within the meaning of
Rule 144 under the Act and are subject to restrictions on transfer and (ii) the
Company is under no obligation to register the Option Shares under the Act or to
take any action which would make available to the Optionee any exemption from
such registration, (c) such Option Shares may not be transferred without
compliance with all applicable federal and state securities laws, and (d) an
appropriate legend referring to the foregoing restrictions on transfer and any
other restrictions imposed under the Option Documents may be endorsed on the
certificates. Notwithstanding the above, should the Company be advised by
counsel that issuance of shares should be delayed pending (A) registration under
federal or state securities laws or (B) the receipt of an opinion that an
appropriate exemption therefrom is available, the Company may defer exercise of
any Option granted hereunder until either such event in (A) or (B) has occurred.
8. ADJUSTMENTS ON CHANGES IN CAPITALIZATION. The aggregate number of
shares and class of shares as to which Options may be granted hereunder, the
number of shares covered by each outstanding Option and the Option Price thereof
shall be appropriately adjusted in the event of a stock dividend, stock split,
recapitalization or other change in the number or class of issued and
outstanding equity securities of the Company resulting from a subdivision or
consolidation of the Common Stock and/or other outstanding equity security or a
recapitalization or other
-10-
<PAGE>
capital adjustment (not including the issuance of Common Stock on the conversion
of other securities of the Company which are convertible into Common Stock)
affecting the Common Stock which is effected without receipt of consideration by
the Company. The Committee shall have authority to determine the adjustments to
be made under this Section and any such determination by the Committee shall be
final, binding and conclusive; provided, however, that no adjustment shall be
made which will cause an Option to lose its status as an ISO without the consent
of the Optionee.
9. AMENDMENT OF THE PLAN. The Board of Directors of the Company may
amend the Plan from time to time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not, without obtaining
approval by vote of a majority of the outstanding voting stock of the Company,
within twelve months before or after such action, change the class of
individuals eligible to receive an Option, extend the expiration date of the
Plan, decrease the minimum Option Price of an Option or increase the maximum
number of shares as to which Options may be granted, except as provided in
Section 8 hereof. No amendment to the Plan shall adversely affect any
outstanding Option, however, without the consent of the Optionee.
10. NO CONTINUED EMPLOYMENT. The grant of an Option pursuant to the
Plan shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company of any Affiliate to retain the
Optionee in
-11-
<PAGE>
the employ of the Company or an Affiliate or in any other capacity.
11. WITHHOLDING OF TAXES. Whenever the Company proposes or is required
to deliver or transfer Option Shares, property or cash in connection with the
exercise of an Option, the Company shall have the right to (a) require the
recipient to remit or otherwise make available to the Company an amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Option Shares, property or cash or (b) take whatever
action it deems necessary to protect its interests with respect to tax
liabilities, including, without limitation, withholding a portion of any Option
Shares, property or cash otherwise deliverable pursuant to the Plan. The
Company's obligation to make any delivery or transfer of Option Shares, property
or cash shall be conditioned on the Optionee's compliance with any withholding
requirement to the Company's satisfaction.
-12-
<PAGE>
Exhibit 10.2
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
1998 STOCK OPTION PLAN
Innovative Solutions and Support, Inc. (the "Company") hereby establishes
and adopts the Innovative Solutions and Support, Inc. 1998 Stock Option Plan, as
set forth in this document.
1. PURPOSE. The Plan is intended to recognize the contributions made to the
Company or an Affiliate by employees of the Company or any Affiliate (as
hereinafter defined), members of the Board of Directors of the Company or any
Affiliate, and certain consultants and advisors to the Company or any Affiliate,
to provide such persons with additional incentive to devote themselves to the
future success of the Company or any Affiliate, and to improve the ability of
the Company or an Affiliate to attract, retain, and motivate individuals upon
whom the Company's sustained growth and financial success depend, by providing
such persons with an opportunity to acquire or increase their proprietary
interest in the Company through receipt of rights to acquire the Company's
Common Stock, $.001 par value (the "Common Stock").
2. DEFINITIONS. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Affiliate" means a corporation which is a parent corporation or a
subsidiary corporation with respect to the Company within the meaning of Section
424(e) or (f) of the Code.
(c) "Board of Directors" means the Board of Directors of the Company.
(d) "Change of Control" shall have the meaning set forth in Section 9 of
the Plan.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the committee designated by the Board of Directors
in accordance with the provisions of Section 3 of the Plan.
(g) "Company" means Innovative Solutions and Support, Inc., a
Pennsylvania corporation.
(h) "Disability" shall mean, in the case of an Optionee who is covered
by a disability policy or plan paid for or provided by the Company, a condition
which entitles the Optionee to benefits under the policy or plan. If there is no
such policy or plan covering the Optionee, "Disability" shall mean a mental or
physical condition which renders the Optionee incapable of performing his duties
for the Company and which is expected to be permanent, as determined by the
Committee.
<PAGE>
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" shall have the meaning set forth in Section 8(b)
of the Plan.
(k) "ISO" means an Option granted under the Plan which is an "incentive
stock option" within the meaning of Section 422(b) of the Code.
(l) "Non-qualified Stock Option" means an Option granted under the Plan
which is not intended to qualify, or otherwise does not qualify, as an ISO.
(m) "Option" means either an ISO or a Non-qualified Stock Option granted
by the
Company under the Plan.
(n) "Optionee" means a person to whom an Option has been granted under
the Plan.
(o) "Option Document" means the written document described in Section 8
of the Plan evidencing the Option and setting forth the terms and conditions
upon which the Option is granted and upon which it may be exercised.
(p) "Option Price" means the price at which Shares may be purchased upon
exercise of an Option, as determined pursuant to Section 8(b) of the Plan.
(q) "Plan" means the Innovative Solutions and Support, Inc. 1998 Stock
Option Plan.
(r) "Shares" means the shares of Common Stock of the Company which are
the subject of Options, except as the same may be modified pursuant to the terns
of Section 10 of the Plan.
3. ADMINISTRATION OF THE PLAN.
(a) Committee. The Plan shall be administered by a committee appointed
by the Board of Directors composed of two or more "outside directors" within the
meaning of Section 162(m) of the Code. No person shall be eligible or continue
to serve as a member of the Committee unless such person is an "outside
director" as aforesaid. Members of the Committee shall serve at the pleasure of
the Board of Directors which shall also fill any vacancies in the membership of
the Committee.
(b) Meetings. The Committee shall hold meetings at such times and places
as it may determine and shall keep minutes of its meetings. A majority of the
Committee shall constitute a quorum thereof, and acts approved at a meeting or
acts approved in writing by a majority of the members of the Committee shall be
the valid acts of the Committee.
(c) Grants. The Committee shall from time to time, in its discretion,
direct the Company to grant Options pursuant to the terms of the Plan. The
Committee shall have plenary authority to (i) determine the Optionees to whom,
the times at which, and the price at which
-2-
<PAGE>
Options shall be granted, (ii) determine the type of Option to be granted and
the number of Shares subject thereto, and (iii) approve the form and terms and
conditions of the Option Documents; all subject, however, to the express
provisions of the Plan. In making such determinations, the Committee shall take
into account the nature of the Optionee's services and responsibilities, the
Optionee's present and potential contribution to the Company's success and such
other factors as the Committee may deem relevant. The interpretation and
construction by the Committee of any provisions of the Plan or of any Option
granted under the Plan, and of any Option Document, shall be final, binding and
conclusive.
(d) Exculpation. No member of the Committee or of the Board of Directors
shall be personally liable for monetary damages for any action taken or any
failure to take any action in connection with the administration of the Plan or
the granting of Options under the Plan, provided that this Section 3(d) shall
not apply to (i) any breach of such member's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) acts or omissions
that would result in liability under Section 1553 of the Pennsylvania Business
Corporation Law, as amended, or (iv) any transaction from which the member
derived an improper personal benefit.
(e) Indemnification. Service on the Committee shall constitute service
as a member of the Board of Directors. Each member of the Committee shall be
entitled without further act on his part to indemnity from the Company to the
fullest extent provided by applicable law and the Company's Articles of
Incorporation and/or By-laws in connection with or arising out of any action,
suit or proceeding with respect to the administration of the Plan or the
granting of Options thereunder in which he or she may be involved by reason of
his or her being or having been a member of the Committee, whether or not he or
she continues to be a member of the Committee at the time of the action, suit or
proceeding.
4. GRANTS UNDER THE PLAN. Grants under the Plan may be in the form of a
Non-qualified Stock Option, an ISO or a combination thereof, at the discretion
of the Committee. More than one Option may be granted to any individual, and
each such grant may include Options which are intended to be ISOs and Options
which are not intended to be ISOs, but only on the terms and subject to the
conditions and restrictions of the Plan.
5. ELIGIBILITY. All employees and members of the Board of Directors of,
and consultants and advisors to, the Company or an Affiliate shall be eligible
to receive Options hereunder.
6. SHARES SUBJECT TO PLAN. The aggregate maximum number of Shares for
which Options may be granted pursuant to the Plan is 790,812, subject to
adjustment as provided in Section 10 of the Plan. The Shares shall be issued
from either authorized and unissued Common Stock or Common Stock held in or
hereafter acquired for the treasury of the Company. If an Option terminates or
expires without having been fully exercised for any reason, the Shares for which
the Option was not exercised may again be the subject of further Option grants
under the Plan.
7. TERM OF THE PLAN. No Option may be granted under the Plan after
November 13, 2008 or the earlier termination of the Plan.
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8. OPTION DOCUMENTS AND TERMS. Each Option granted under the Plan shall
be a Non-qualified Stock Option unless the Option shall specifically be
designated an ISO at the time of grant. If any Option designated as an ISO is
determined for any reason not to qualify as an incentive stock option within the
meaning of Section 422 of the Code, such Option shall be treated as a
Non-qualified Stock Option for all purposes under the provisions of the Plan.
The grant of each Option under the Plan shall be evidenced by one or more Option
Documents in such form as the Committee shall from time to time approve, which
Option Documents shall be executed by the Company as promptly as possible
following such grant. Each Option Document shall comply with and be subject to
the following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan, and the Option Document shall expressly state the provisions
of the Plan or incorporate them by reference.
(a) Number of Option Shares. Each Option Document shall state the number
of Shares to which it pertains.
(b) Option Price. Each Option Document shall, subject to adjustment as
provided in Section 10 of the Plan, state the Option Price which, for a Non-
qualified Stock Option, may be less than, equal to, or greater than the Fair
Market Value of the Shares on the date the Option is granted and, for an ISO,
shall be at least 100% of the Fair Market Value of the Shares on the date the
Option is granted as determined by the Committee in accordance with this Section
8(b); provided, however, that if an ISO is granted to an Optionee who then owns,
directly or by attribution under Section 424(d) of the Code, stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Company or an Affiliate, then the Option Price shall be at least 110% of
the Fair Market Value of the Shares on the date the Option is granted. If the
Common Stock is traded in a public market, the Fair Market Value per share shall
be, if the Common Stock is listed on a national securities exchange or included
in the Nasdaq National Market, the last reported sale price thereof on the
relevant date, or, if the Common Stock is not so listed or included, the mean
between the last reported "bid" and "asked" prices thereof on the relevant date,
as reported on Nasdaq or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Common Stock is
not traded in a public market on the relevant date, the Fair Market Value shall
be as determined in good faith by the Committee.
(c) Exercise. An Option granted under the Plan may be exercised in whole
or in part to the extent then exercisable under the terms of the Option Document
and this Plan, provided that no Option shall be deemed to have been exercised
prior to the receipt by the Company of written notice of such exercise (on such
form or forms as the Committee may prescribe for this purpose) and of payment in
full (except as otherwise provided in Section 8(d) of the Plan) of the Option
Price for the Shares to be purchased. Moreover, except as an Option Document may
otherwise provide, no Option may be exercised within six months of the date of
grant. Each such notice of exercise shall specify the number of Shares to be
purchased and shall (unless the Shares are covered by a then current and
effective registration statement or qualified Offering Statement under
Regulation A under the Securities Act) contain the Optionee's acknowledgment in
form and substance satisfactory to the Company that (i) such Shares are being
purchased for investment and not for distribution or
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resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (ii) the Optionee has been advised and understands that
(A) the Shares have not been registered under the Act, are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer and (B) the Company is under no obligation to register
the Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (iii) such Shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (iv) an appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option Documents may be
endorsed on the certificates. Notwithstanding the foregoing, if the Company in
its sole discretion determines that issuance of Shares should be delayed pending
(I) registration under federal or state securities laws, (II) the receipt of an
opinion of counsel satisfactory to the Company that an appropriate exemption
from such registration is available, (III) the listing, registration,
qualification or inclusion of the Shares on any securities exchange or an
automated quotation system or under any state or federal law or (IV) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary or desirable in connection with the issuance of such Shares, the
Company may defer exercise of any Option granted hereunder until any of the
events described in this sentence has occurred.
(d) Medium of Payment. Upon exercise of an Option, the aggregate Option
Price for the Shares as to which the Option is being exercised shall, in the
discretion of the Committee, be (i) paid in U.S. funds by cash (including a
check, draft or wire transfer made payable to the order of the Company), or
delivery of stock certificates for Shares of the Company's Common Stock, free of
all liens, claims and encumbrances of every kind, and endorsed in blank or
accompanied by executed stock powers with signatures guaranteed by a national
bank or trust company or a member of a national securities exchange evidencing
Shares which have been held for more than six months (in which case the value of
such Shares shall be deemed to be their Fair Market Value on the date of
exercise of the Option), (ii) paid on a deferred basis upon such terms and
conditions as the Committee in its discretion shall provide, (iii) deemed to be
paid provided the notice of exercise of the Option is accompanied to the
Committee's satisfaction by a copy of irrevocable instructions to a broker to
promptly deliver to the Company an amount of sales or loan proceeds sufficient
to pay the Option Price in full, or (iv) a combination of the foregoing. If any
part of the Option Price is to be paid on a deferred basis, the Shares with
respect to which payment is deferred shall be registered in the name of the
Optionee, but the certificate representing such Shares shall serve as security
to the Company for the payment of the Option Price and shall not be delivered to
the Optionee until the Option Price for said Shares has been paid in full.
(e) Termination of Options.
(i) No Option or any unexercised installment thereof shall be
exercisable after the first to occur of the following:
(A) Expiration of the Option term specified in the Option
Document which, subject to earlier termination as hereinafter provided, shall
not exceed (1) ten years from the date of grant, or (2) five years from the date
of grant of an ISO if the Optionee on the date of grant owns, directly and/or by
attribution under Section 424(d) of the Code, stock
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possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of an Affiliate;
(B) Expiration of three months from the date the Optionee's
employment or service with the Company or its Affiliates terminates for any
reason other than Disability or death or as otherwise specified in Subsection
8(e)(i)(D) or 8(e)(i)(E) below; provided, however, that such Option was
exercisable on the date of termination of employment or service under the
provisions of the Option Document or the Committee specifically waives the
restrictions relating to exercisability, if any, contained in the Option
Document.
(C) Expiration of one year from the date such employment or
service with the Company or its Affiliates terminates due to the Optionee's
Disability or death, whether or not the Option was exercisable on the date of
such termination under the provisions of the Option Document relating thereto.
The determination of whether the termination of the Optionee's employment or
service with the Company is due to Disability shall be made by the Committee,
and such determination shall be final and binding on the Company and the
Optionee;
(D) A finding by the Committee, after full consideration of the
facts presented on behalf of both the Company and the Optionee, that the
Optionee has breached his employment or service contract with the Company or an
Affiliate, or has been engaged in disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of his or her employment or service,
or has committed an intentional or grossly negligent act detrimental to the
interests of the Company or an Affiliate. In such event, in addition to
immediate termination of the Option, the Optionee shall automatically forfeit
all Shares for which the Company has not yet delivered the share certificates
upon refund by the Company of the Option Price of such Shares. Notwithstanding
anything herein to the contrary, the Company may withhold delivery of share
certificates pending the resolution of any inquiry that could lead to a finding
resulting in a forfeiture; or
(E) The date, if any, set by the Board of Directors as an
accelerated expiration date in the event of a Change of Control.
(ii) Notwithstanding the Option termination provisions of
Section 8(e)(i), the Committee, in it sole discretion, may extend the period
during which all or any portion of an Option may be exercised to a date no later
than the Option term specified in the Option Document pursuant to Section
8(e)(i)(A), provided that any change pursuant to this Section 8(e)(ii) which
would cause an ISO to become a Non-qualified Stock Option may be made only with
the consent of the Optionee.
(f) Transfers. Except as otherwise provided by law, no Option granted
under the Plan may be transferred, except by will or by the laws of descent and
distribution. During the lifetime of the person to whom an Option is granted,
such Option may be exercised only by him or his guardian or legal
representative. Notwithstanding the foregoing, the Committee in its sole
discretion may permit the transfer of an Option, without payment of
consideration, to immediate family members of the Optionee or to trusts or
partnerships for such family members.
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(g) Limitation on ISO Grants. In no event shall the aggregate fair
market value of the Shares of Common Stock (determined at the time an ISO is
granted) with respect to which incentive stock options under all incentive stock
option plans of the Company or its Affiliates are exercisable for the first time
by the Optionee during any calendar year exceed $100,000 or such greater sum as
may here after be permitted under Section 422 of the Code.
(h) Conversion of ISO to Non-Qualified Stock Option. An Optionee shall
have the right, at the Optionee's election and upon notice to the Company, to
convert or to otherwise cause the conversion of ISO's granted to the Optionee
hereunder into Non-qualified Stock Options; provided, that Optionee shall
indemnify and hold harmless the Company from and against any loss or damage
resulting from such conversion, including, but not limited to, any loss incurred
by reason of the nonavailability of any deduction to the Company under federal
income tax law.
(i) Other Provisions. Subject to the provisions of the Plan, each Option
Document shall contain such other provisions including, without limitation,
provisions authorizing the Committee to accelerate the exercisability of all or
any portion of an Option granted pursuant to the Plan, additional restrictions
upon the exercise of the Option or additional limitations upon the term of the
Option, as the Committee shall deem advisable.
(j) Amendment. The Committee shall have the right to amend any Option
Document issued to an Optionee to the extent the terms to be amended are within
the Committee's discretion as provided in the Plan but subject to the Optionee's
consent if such amendment is not favorable to the Optionee, except that the
consent of the Optionee shall not be required for any amendment made pursuant to
Section 8(e)(i)(E) or Section 9 of the Plan, as applicable.
9. CHANGE OF CONTROL. In the event of a Change of Control, all Options
then outstanding under the Plan immediately shall become vested and exercisable
in full; provided that any acceleration of exercisability of options under this
Section 9 which would cause an ISO to become a Non-Qualified Stock Option may be
made only with the consent of the Optionee. In addition, in the event of a
Change of Control, the Committee may take whatever other action with respect to
Options outstanding as it deems necessary or desirable, including without
limitation, accelerating the expiration date of any Options. Any amendment to
this Section 9 which diminishes the rights of Optionees shall not be effective
with respect to Options outstanding at the time of adoption of such amendment,
whether or not such outstanding Options are then exercisable.
A "Change of Control" shall be deemed to have occurred upon the earliest to
occur of the following events: (a) the date the shareholders of the Company (or
the Board of Directors, if shareholder action is not required) approve a plan or
other arrangement pursuant to which the Company will be dissolved or liquidated,
(b) the date the shareholders of the Company (or the Board of Directors, if
shareholder action is not required) approve a definitive agreement to sell or
otherwise dispose of substantially all of the assets of the Company, (c) the
date the shareholders of the Company (or the Board of Directors, if shareholder
action is not required) and the shareholders of the other constituent
corporation (or its board of directors if shareholder action is not required)
have approved a definitive agreement to merge or consolidate the Company with or
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into such other corporation other than, in either case, a merger or
consolidation of the Company in which holders of Shares of Common Stock
immediately prior to the merger or consolidation will have at least a majority
of the voting power of the surviving corporation's voting securities immediately
after the merger or consolidation, which voting securities are to be held in the
same proportion as such holders' ownership of Common Stock immediately before
the merger or consolidation, (d) the date any entity, person or group, within
the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act (other
than (i) the Company or any of its Affiliates or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its Affiliates,
or (ii) any other person who, as of January 1, 1995, shall have been the
beneficial owner (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 30% of outstanding shares of Common Stock), shall
have become the beneficial owner of, or shall have obtained voting control over,
more than 30% of the outstanding shares of Common Stock, or (e) the first day
after the date this Plan is effective when directors are elected such that a
majority of the Board of Directors shall have been members of the Board of
Directors for less than two years, unless the nomination for election of each
new director who was not a director at the beginning of such two-year period was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period.
10. ADJUSTMENTS. In the event that a dividend shall be declared upon the
Common Stock payable in Shares of Common Stock or if a stock split is declared
with respect to the Common Stock, the number of Shares of Common Stock then
subject to any Option outstanding under the Plan and the number of Shares
reserved for the grant of Options pursuant to the Plan but not yet subject to an
Option shall be adjusted by adding to each such Share the number of shares which
would be distributable in respect thereof if such Shares had been outstanding on
the date fixed for determining the shareholders of the Company entitled to
receive such stock dividend or stock split. In the event that the outstanding
shares of Common Stock shall be changed into or exchanged for a different number
or kind of shares of stock or other securities of the Company or of another
corporation, whether through reorganization, recapitalization, stock split
combination of shares, merger, consolidation or otherwise, there shall be
substituted for each Share of Common Stock subject to any such Option and for
each Share of Common Stock reserved for the grant of Options pursuant to the
Plan but not yet subject to an Option, the number and kind of shares of stock or
other securities into which each outstanding share of Common Stock shall have
been so changed or for which each such share shall have been exchanged. In the
event there shall be any change, other than as specified above in this Section
10, in the number or kind of outstanding shares of Common Stock or of any stock
or other securities into which such Common Stock shall have been changed or for
which it shall have been exchanged, then if the Board of Directors shall in its
sole discretion determine that such change equitably requires an adjustment in
the number or kind of Shares theretofore reserved for the grant of Options
pursuant to the Plan but not yet subject to an Option and of the Shares then
subject to Options, such adjustment shall be made by the Board of Directors and
shall be effective and binding for all purposes of the Plan and of each Option
outstanding thereunder. In the case of any such substitution or adjustment as
provided for in this Section 10, the Option Price for each Share of stock or
other security which shall have been substituted for each Share of Common Stock
covered by an outstanding Option shall be adjusted appropriately to reflect such
substitution or adjustment. No adjustment or substitution provided for in this
Section 10 shall require the Company to sell a fractional share of Common Stock,
and the total substitution or adjustment with respect to each outstanding Option
shall be limited accordingly. Upon any adjustment
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made pursuant to this Section 10, the Company will, upon request, deliver to the
Optionee a certificate of its Secretary setting forth the Option Price
thereafter in effect and the number and kind of shares or other securities
thereafter purchasable on the exercise of such Option.
11. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors may
terminate the Plan in whole or in part at any time or amend the Plan from time
to time in such manner as it may deem advisable. Nevertheless, the Board of
Directors of the Company shall not (a) change the class of individuals eligible
to receive an ISO, (b) increase the maximum number of Shares as to which Options
may be granted or (c) make any other change or amendment to which shareholder
approval is required in order to satisfy the conditions set forth in Rule 16b-3
promulgated under the Exchange Act, in each case without obtaining approval,
within twelve months before or after such action, by vote of a majority of the
votes cast at a duly called meeting of the shareholders at which a quorum
representing a majority of all outstanding voting stock of the Company is,
either in person or by proxy, present and voting on the matter. No amendment to
the Plan, however, shall adversely affect any outstanding Option in any material
respect without the consent of the Optionee.
12. NO COMMITMENT TO RETAIN. The grant of an Option pursuant to the Plan
shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company or any Affiliate to retain the
Optionee in the employ or service of the Company or an Affiliate and/or as a
member of the Company's Board of Directors or in any other capacity, and nothing
in the Plan shall interfere with or limit in any way the right of the Company or
an Affiliate to terminate the employment or service of an Optionee.
13. WITHHOLDING OF TAXES. The Company shall deduct or withhold an amount
sufficient to satisfy all Federal, state and local taxes required by law to be
withheld with respect to any grant or exercise of an Option or other transaction
under the Plan which gives rise to a withholding obligation and, in so doing,
the Company shall by agreement with the Optionee or unilaterally take such
action as it deems necessary or prudent to protect the Company's interest with
respect to such withholding obligations. In the sole discretion of the
Committee, and subject to such conditions or limitations as the Committee shall
prescribe, an Optionee may satisfy the withholding obligation, in whole or in
part, by electing to have the number of Shares to be issued upon exercise of an
Option reduced by a number of Shares having a Fair Market Value equal to the
desired withholding amount or by surrendering to the Company Shares which the
Optionee has held for more than six months having an equivalent Fair Market
Value. If the method of payment for the Shares is from a loan or sale by a
broker of the Shares acquired on exercise of the Option, the withholding
obligation shall be satisfied from the proceeds of such loan or sale.
14. INTERPRETATION. It is the intent of the Company that transactions under
the Plan with respect to directors and officers (within the meaning of Section
16(a) of the Exchange Act) satisfy the conditions of Rule 16b-3 promulgated
under the Exchange Act. To the extent that any provision of the Plan or action
by the Committee would result in a conflict with or fail to comply with any such
condition, such provision or action shall be deemed null and void as applied to
such transactions to the extent permitted by applicable law and deemed advisable
by the Company. This Section 14 shall not be applicable if no class of the
Company's equity securities is then registered pursuant to Section 12 of the
Exchange Act. In addition, with respect to
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employees subject to Section 162(m) of the Code, transactions under the Plan are
intended to avoid the loss of a deduction under that Code section. Accordingly,
to the extent any provision of the Plan or action by the Committee fails to
comply with Section 162(m) of the Code to avoid the loss of a deduction, it
shall be deemed null and void to the extent permitted by law and deemed
advisable by the Company.
15. GOVERNING LAW. The granting of Options and the issuance of Shares under
the Plan shall be subject to all applicable laws and regulations and to such
approvals by any governmental agency or national securities exchanges as may be
required. To the extent not pre-empted by Federal law, the Plan and all Option
Documents hereunder shall be construed in accordance with and governed by the
laws of Pennsylvania.
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Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 3rd day of May, 1999 (the "Effective Date") between INNOVATIVE SOLUTIONS AND
SUPPORT, INCORPORATED, a Pennsylvania corporation (the "Company"), and ROBERT J.
EWY a resident of the State of Kansas ("Employee").
RECITALS
A. Employee has served in various executive capacities with other companies
over the past several years and has extensive managerial and administrative
experience and possesses skills vital to the Company's continued growth and
prosperity.
B. Company desires Employee to serve as an employee of the Company in order to
ensure the continued growth and success of the business of the Company.
C. The parties wish to set forth herein the terms and conditions on which
Employee will serve as an employee of the Company.
The parties agree as follows:
1. Agreement: Position. Subject to the terms and conditions of this
Agreement, during the term of this Agreement the Company agrees to employ
Employee, and Employee agrees to be employed by the Company and to serve the
Company as the President of the Company. Employee's title may not be changed
during the term of this Agreement without his prior written consent.
2. Duties of Employee
2.1 General Duties. As President of the Company, Employee will have
day-to-day responsibility for management of the Company as its chief operating
officer and will be responsible to the Company's CEO and Board of Directors (the
"Board"). Employee will report to the CEO. Employee agrees that Employee's
duties may be changed by the Board and that Employee will cooperate with the
Board and will serve the Company in such other capacities and with such other
duties and responsibilities as are typically accorded to the position of
President subject to the Company's Bylaws. The duties and services to be
performed by Employee under this Agreement are collectively referred to herein
as the "Services".
2.2 Other Duties and Obligations. In addition to performing the duties
and the Services described in Section 2.1, Employee further agrees with the
Company that, during the term of this Agreement:
(a) Employee will perform the Services and his duties hereunder, and
will manage and operate the business of the Company, subject to, and in
accordance with, the directions of the CEO.
<PAGE>
(b) Employee will comply with and be bound by the operating
policies, procedures, standards, regulations and practices of the Company that
are in effect from time to time during Employee's employment with the Company.
(c) Employee will be generally available and readily accessible to
Company personnel by telephone, e-mail and facsimile at all reasonable times.
(d) Employee will not: (i) engage in any unethical, dishonest,
fraudulent or felonious criminal behavior; (ii) intentionally or deliberately
cause or attempt to cause an injury to the Company; or (iii) steal, convert,
misappropriate or wrongfully and willfully use or disclose any proprietary
information, technology or trade secret of the Company.
2.3 Working Facilities. Employee shall have a private office,
stenographic help, a personal computer and other facilities and services that
are suitable for his position and appropriate for the performance of his duties.
2.4 Representations of Employee. Employee represents and warrants to
the Company that he is free to enter into and fully perform this Agreement and
the agreements referred to herein without breach of any agreement or contract to
which Employee is a party or by which Employee is bound.
3. Exclusive Service. Employee will devote his full working time, energy,
skill and efforts exclusively to the performance of the Services for the Company
and will apply all his skill and experience to the performance of the Services
and advancing the Company's interests and will do nothing inconsistent with the
performance of the Services hereunder.
4. Compensation and Benefits
4.1 Salary and Bonus. During the term of the Agreement, the Company will
pay Employee a gross base salary at the rate of Two Hundred Twenty Five Thousand
Dollars ($225,000) per year payable bi-weekly.
4.2 Additional Benefits. Employee will be eligible to participate in the
Company's employee benefit plans of general application, including without
limitation any pension plans and any life, health, and dental insurance plans in
accordance with the rules established for individual participation in any such
plan and applicable law, including health and dental for spouse. In addition,
Employee will be entitled to three weeks vacation.
4.3 Moving Expenses. To assist Employee with relocation, Company shall
reimburse Employee for approved, reasonable moving expenses associated with
Employee's relocation to Pennsylvania. Reasonable expenses include closing
costs, moving expenses, and temporary living costs. Employee agrees that
relocation expenses are fully repayable to the Company if the Employee resigns
or is terminated for cause during the term of this Agreement.
4.4 Stock Options. Employee shall be granted stock options for 300,000
shares of the Company's common stock at an option price of $3.60 per share under
the 1998 Incentive Stock Option Plan. These options shall vest at the rate of
100,000 at the end of each 12 months
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throughout the term of this agreement. Employee expressly acknowledges and
agrees that, to the extent of any inconsistency between the terms of this
Agreement and the 1998 Incentive Stock Option Plan, the terms of the 1998
Incentive Stock Option Plan shall govern and control; provided, however, that to
the extent that the terms of the stock option agreement issued to Employee on
account of the foregoing options contains terms and conditions which, by the
terms of the 1998 Incentive Stock Option Plan, may be included therein, the
terms set forth in such stock option agreement shall govern and control.
4.5 Expenses. All reasonable and necessary expenses incurred by Employee
in connection with Employee's performance of the Services shall be reimbursed
provided that such expenses are; (a) in accordance with the Company's policies,
as determined from time to time by the Board; and (b) properly documented and
accounted for.
5. Term and Termination.
5.1 Term of Agreement. Unless this Agreement is earlier terminated in
accordance with the provision of this Section 5, the term of this Agreement will
commence on the Effective Date, and will continue until the date that is three
(3) years after the Effective Date (the "Initial Term".) Thereafter, this
Agreement shall be renewed yearly for one-year periods(each, a "Renewal Term")
unless either party provides the other party with written notice of termination
of this Agreement not later than ninety (90) days from the end of the then
current term of the Agreement. The expiration of this Agreement at the end of
the Initial Term or the then current Renewal term is hereinafter called the
"Expiration Date".
5.2 Events of Termination. Employee's employment with the Company will
terminate immediately upon any one of the following occurrences:
(a) the giving of a written notice by the Company to Employee other
than pursuant to Section 5.1 stating that Employee's employment with the Company
is being terminated without Cause, which notice may be given by the Company at
any time at the sole discretion of the Company ("Termination Without Cause");
(b) the Company's termination of Employee's employment hereunder due
to Employee's death or Employee's becoming "Disabled" as defined in Section 5.4
below ("Termination for Death or Disability");
(c) any resignation by Employee of his employment with the Company
or any other voluntary termination or abandonment by Employee of his employment
with the Company other than as provided in Section 5.1 ("Voluntary
Termination"); or
(d) the Company's termination of Employee's employment hereunder for
"Cause" as defined in Section 5.3 below ("Termination for Cause").
5.3 "Cause" Defined. For purposes of this Agreement, the term
"Cause" means (i) the conviction of Employee of any misdemeanor (other than
traffic or similar offenses) or felony, (ii) any material breach by Employee of
this Agreement, or (iii) gross negligence or malfeasance by Employee in the
performance of his duties hereunder.
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5.4 "Disabled" Defined. For purposes of this Agreement, Employee
will be deemed to be "Disabled" if Employee is unable to perform the Services
hereunder for more than 90 days during any consecutive 120 day period because of
Employee's illness or physical or mental disability, or incapacity, as
determined by the Board, in consultation with a licensed physician mutually
agreeable to the Board and Employee.
5.5 Date of Termination. the effective date of Employee's
termination pursuance to Section 5.2 (a), (b), (c) or (d), is referred to herein
as the "Termination Date."
6. Effect of Termination.
6.1 Termination Without Cause. In the event of the termination of
Employee's employment pursuant to Section 5.2(a) prior to the end of the then
current term of this Agreement , Company will pay Employee the compensation and
benefits otherwise payable to Employee under Section 4 until the Expiration
Date. To the extent Employee receives compensation from any source for services
rendered during the period following the Termination Date during which Company
is obligated to continue payments to Employee hereunder, whether for full-time
or part-time employment or for consulting or similar services, such compensation
shall be offset against payments otherwise due Employee under this Section 6.1.
6.2 Termination for Death or Disability. In the event of any termination
of Employee's employment pursuant to Sections 5.2(b), the Company will pay
Employee the compensation and benefits otherwise payable to Employee under
Section 4 through the Termination Date. Employee's rights under the Company's
benefit plans for general application in which Employee then participates, will
be determined under the provision of such plans. All options vested as of the
Termination Date shall be exercisable to the extent set forth in the option
agreement. Employee will be entitled to no other payment or compensation upon
any such termination.
6.3 Voluntary Termination. In the event of the termination of Employee's
employment pursuant to Section 5.2(c), company will pay Employee no additional
compensation or benefits and Employee shall forfeit all unexercised stock
options.
6.4 Termination for Cause. In the event of termination of Employee's
employment pursuance to Section 5.2(d), the Company will pay the Employee
compensation and benefits otherwise payable to Employee through the date of
termination and Employee shall forfeit all unexercised stock options.
7. Noncompetition, Trade Secrets, Etc. Employee hereby acknowledges that
during his employment by the Company, Employee will have access to confidential
information and business and professional contacts. In consideration of
Employee's employment and the special and unique opportunities afforded by
Company to Employee as a result of Employee's employment, the Employee hereby
agrees as follows:
7.1 Non-Competition. For so long as Employee remains an employee of the
Company and for the Restricted Period (as defined in subsection 7.3 below) after
the termination of employment with Company, as such period may be extended as
hereinafter set forth,
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Employee shall not directly or indirectly engage in (as a principal,
shareholder, partner, director, officer, agent, employee, consultant or
otherwise) or be financially interested in any business which is involved in
business activities which are the same as or in direct competition with business
activities carried on by Company, or being definitively planned by Company at
the time of the termination of Employee's employment.) Nothing contained in this
Subsection 7.1 shall prevent Employee from holding for investment up to three
percent (3%) of any class of equity securities of a company whose securities are
publicly traded on a national securities exchange or in a national market
system.
7.2 Non-Solicitation. For so long as Employee remains an employee of the
Company and for a period of twelve months after the termination of employment
with Company for any reason, Employee shall not directly or indirectly (as a
principal, shareholder, partner, director, officer, agent, employee, consultant
or otherwise) induce or attempt to influence any employee, customer, independent
contractor or supplier of Company to terminate employment or any other
relationship with Company.
7.3 Restricted Period Defined; Extension of Restricted Period. For
purposes of this Agreement, the term "Restricted Period" shall mean: (A) the
period during which the Company continues to pay Employee upon termination of
employment pursuant to Section 5.2(a); (B) three (3) months following
termination of Employee's employment pursuant to Section 5.2(b); or (C) six (6)
months following termination of Employee's employment pursuant to Section 5.2(c)
or Section 5.2(d). In addition to the foregoing, Company shall have the option,
by delivering written notice to Employee within sixty (60) days from the
Termination Date, to extend the Restricted Period to a total of twelve (12)
months under clauses (A), (B) and (C) above, or to extend the Restricted Period
to a total of six (6) months following the Expiration Date upon termination of
this Agreement at the end of the then current Initial Term or Renewal Term
pursuant to Section 5.1 of this Agreement, in each case by paying Employee an
amount equal to the monthly portion of Employee's annual salary as of the
Termination Date or Expiration Date, as the case may be, for the additional
months by which the Restricted Period is extended, which payments shall be made
bi-weekly during the extended period.
7.4 Non-Disclosure. Employee shall not use for Employee's personal
benefit, or disclose, communicate or divulge to, or use for the direct or
indirect benefit of any person, firm, association or company other than company,
any "Confidential Information," which term shall mean any information regarding
the business methods, business policies, policies, procedures, techniques,
research or development projects or results, historical or projected financial
information, budgets, trade secrets, or other knowledge or processes of, or
developed by, Company or any other confidential information relating to or
dealing with the business operations or activities of Company, made known to
Employee or learned or acquired by Employee while in the employ of Company, but
Confidential Information shall not include information otherwise lawfully known
generally by or readily accessible to the trade or the general public. The
foregoing provisions of this Subsection (b) shall apply during and after the
period when Employee is an employee of the Company and shall be in addition to
(and not a limitation of) any legally applicable protections of Company's
interest in confidential information, trade secrets, and the like. At
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<PAGE>
the termination of Employee's employment with Company, Employee shall return to
the Company all copies of Confidential Information in any medium, including
computer tapes and other forms of data storage.
7.5 Remedies.
(a) Employee acknowledges that the restrictions contained in the
foregoing Subsections 7.1 through 7.4, are reasonable and necessary to protect
the legitimate interests of the Company, that their enforcement will not impose
a hardship on Employee or significantly impair Employee's ability to earn a
livelihood, and that any violation thereof would result in irreparable injuries
to Company. Employee therefore acknowledges that, in the event of Employee's
violation of any of these restrictions, Company shall be entitled to obtain from
any court of competent jurisdiction preliminary and permanent injunctive relief,
as well as damages and an equitable accounting of all earnings, profits and
other benefits arising from such violation, which rights shall be cumulative and
in addition to any other rights or remedies to which Company may be entitled.
(b) If any of the restrictions specified in Subsections 7.1 or 7.2
above should be adjudged unreasonable in any proceeding, then such restrictions
shall be modified so that they may be enforced for such time and in such area as
is adjudged to be reasonable.
(c) If Employee violates any of the restrictions contained in
Subsection 7.1, the Restricted Period shall be extended by a period equal to the
length of time from the commencement of any such violation until such time as
such violation shall be cured by Employee to the satisfaction of Company.
8. Miscellaneous.
8.1 Arbitration. Employee and the Company will submit to mandatory
binding arbitration any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof as well as all claims under any federal,
state or local anti-discrimination laws, provided, however, that each party will
retain its right to, and will not be prohibited, limited or in any other way
restricted form, seeking or obtaining equitable relief (such as injunctive
relief) from a court having jurisdiction over the parties. Such arbitration will
be conducted in accordance with the commercial arbitration rules of the American
Arbitration Association in effect at that time, and judgment upon the
determination or award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
8.2 Severability. If any provision of this Agreement is found by any
arbitrator or court of competent jurisdiction to be invalid or unenforceable,
then the parties hereby waive such provision t the extent that it is found to be
invalid or unenforceable. Such provision will, to the extent allowable by law
and the preceding sentence, not be voided or canceled but will instead be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, will be enforced as any other provision hereof, all the other
provision continuing in full force and effect.
8.3 No Waiver. The failure by either party at any time to require
performance or compliance by the other of any of its obligation or agreements
will in no way affect the right to require such performance or compliance at any
time thereafter. the waiver of either party of a
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breach of any provision hereof will not be taken or held to be a waiver of any
preceding or succeeding breach of such provision or as a waiver of the provision
itself. No waiver of any kind will be effective or binding, unless it is in
writing and is signed by the party against whom such waiver is sought to be
enforced.
8.4 Assignment. This Agreement and all rights hereunder are personal to
Employee and may not be transferred or assigned by Employee at any time.
8.5 Entire Agreement. This Agreement constitutes the entire and only
agreement between the parties relating to employment of Employee with the
Company, and this Agreement supersedes and cancels any and all previous
contracts, arrangements or understandings with respect thereto.
8.6 Amendment; Waiver. No provision of this Agreement may be modified,
waived, terminated or amended except by a written instrument executed by the
parties hereto. No waiver of a breach of any provision of this Agreement shall
constitute a waiver of any subsequent breach of the same or other provisions
hereof.
8.7 Notices. All notices and other communications required or permitted
under this Agreement will be in writing and hand delivered, sent by telecopier,
sent by certified first class mail, postage prepaid, or sent by nationally
recognized express courier service. Such notices and other communications will
be effective upon receipt of hand delivered five (5) days after mailing--if sent
by mail, or by express courier, to the following addresses, or such other
addresses as any party may notify the other parties in accordance with this
Section:
Employee: Company:
Robert J. Ewy Chairman
12917 Richards Innovative Solutions
Overland Park, KS 66213 and Support, Inc.
420 Lapp Road
Malvern, PA 19355
8.8 Successors and Assigns. This Agreement will be binding upon, and
inure to the benefit of, the successors and personal representatives of the
respective parties hereto.
8.9 Headings. The headings contained in this Agreement are for reference
purposes only and will in no way affect the meaning or interpretation of this
Agreement. In this Agreement, the singular includes the plural, the plural
includes the singular, the masculine gender includes both male and female
referents, and the word "or" is used in the inclusive sense.
8.10 Counterparts. This Agreement may be executed in counterparts, each
of which will be deemed an original but all of which, taken together, constitute
one and the same agreement.
8.11 Survival. The provision of Sections 4, 5 and 6 will survive the
termination or expiration of this Agreement as a continuing agreement of the
Company and Employee.
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8.12 Governing Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
IN WITNESS WHEREOF, the undersigned parties have executed this Agreement
as of the date first above written.
ROBERT J. EWY INNOVATIVE SOLUTIONS AND
SUPPORT, INC.
/s/ Robert J. Ewy /s/ Geoffrey S. M. Hedrick
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Exhibit 10.4
ISS INNOVATIVE
SOLUTIONS & SUPPORT, INC.
July 7, 1998
Roger E. Mitchell
5 Oakwood Road
New Freedom, PA 17349
Dear Roger:
I am pleased to offer you a job as our Director of Operations with an initial
annual salary of $110,000 per year. In addition, we will provide you 25,000
share options at an exercised price of $3.60. These stock options will become
vested in increments of 5,000 vested at the end of each year of your employment.
We are providing you an additional 25,000 share stock option opportunity
consistent with the enclosed formulas. The intention is that you will maintain
reasonable material and direct labor overheads, and the 5% direct labor content
reasonably represents normal production flow of our product. I have attempted to
outline, as accurately as practical, the terms and definitions under which this
bonus plan would be awarded. I believe this is consistent with your goals and I
have provided a 12-month period in which this can be earned. The other terms, I
hope, are self-explanatory. I very much look forward to you making a significant
contribution to the growth of IS&S.
o TITLE: Director of Operations
o REPORTS: to President or COO
o RESPONSIBILITIES:
o Manufacturing operations including: Production Planning/Control;
Purchasing; Inventory Control; Shipping/Receiving; Production;
Manufacturing Engineering and Facilities management.
o Development of annual budget and execution of the approved budget
o SALARY: 110K/year
o STOCK: Share options awarded at $3.60 option price. Twenty-five thousand
(25,000) shares in increments of 5,000/year awarded at the end of each year
of service.
<PAGE>
ISS
o ONE TIME BONUS: Additional maximum of 25,000 share options will be awarded
within the first 12 months of employment in accordance with the following
formula:
o With the following maximum operating burdens including space allocation,
taxes and benefits:
o MATERIAL OVERHEAD (Purchasing + Shipping + Inventory Control + 50% of
Manufacturing Management:): 18% of material cost.
o DIRECT LABOR OVERHEAD (Production Supervision + Production Test and
rework + 50% Production Control/Planning + Manufacturing Engineering
+ 50% of Manufacturing Management:): 150% of direct labor cost.
o Direct Labor: 5% of sales
o 5,000 SHARE OPTIONS AWARDED AT $3.60 OPTION PRICE: When inventory (raw
material cost in stock and WIP), on a three month running average, is
reduced to 2.5 months of the sum of present and forward production
demand.
o 20,000 SHARE OPTIONS AT $3.60 OPTION PRICE IN ACCORDANCE WITH THE
FOLLOWING FORMULA: When existing standard material costs of 9 month
forward production is reduced:
o 2,500 shares for each 5% cost reduction for the first 20%
o One thousand shares for each 1% cost reduction for reductions over 20%
to a maximum of 10,000 shares.
o RELOCATION. Relocation expenses up to $15,000 maximum of approved relocation
expenses when incurred. The total reimbursed expenses are fully repayable to
the company if the employee resigns or is terminated for cause within the
first 12 months of employment. Individual caps are as follows:
o $15K total upon relocation into the area. Expenses must be approved.
o VACATION: 2 weeks
o INSURANCE:
o Life: $150,000
o Health: Company standard policy for salaried employees (presently Blue
Cross Personal Choice and dental)
o LTD
o START DATE: on or before July 21, 1998 or other mutually agreed upon date.
<PAGE>
ISS
I am enthusiastically looking forward to the opportunity of working with you. I
believe your enthusiasm and experience will be a key to our future success.
Warm regards,
/s/ GEOFFREY S. M. HEDRICK
- -----------------------------------
Geoffrey S. M. Hedrick
Chairman & CEO
Please confirm your acceptance and return.
Accepted By: /s/ ROGER E. MITCHELL
----------------------------
Roger E. Mitchell
<PAGE>
Exhibit 10.5
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into as of the 11th day of
July, 1991, by and between Parker-Hannifin Corporation, an Ohio Corporation
having an address at 17325 Euclid Avenue, Cleveland, Ohio 44112 ("PARKER"), and
Innovative Solutions & Support, Inc., a Pennsylvania Corporation having an
address at 420 Lapp Road, Malvern, Pennsylvania 19355 ("IS&S").
PARKER wishes to purchase and IS&S wishes to sell an ownership
interest in IS&S under the terms of this Agreement. PARKER and IS&S also wish to
enter into two (2) other Agreements executed of even date herewith pertaining to
aircraft instrumentation products ("Instrumentation Agreements").
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF PREFERRED SHARES
1.01. THE PREFERRED SHARES. IS&S has authorized the issuance and sale
to PARKER of IS&S Class B Convertible Preferred Stock, par value $.001 per share
("Class B Shares") to be authorized and unissued prior to Closing (as defined
below). The description, rights, preferences and other terms and conditions
relating to the Class B Shares of IS&S shall be as set forth in Exhibit 1.01
hereto. The shares of Class A and Class B Convertible Preferred Stock, and any
unrealized shares of Convertible Preferred Stock, are referred to collectively
herein as "Preferred Shares."
1.02. THE CONVERSION SHARES. Prior to Closing IS&S shall have
authorized and reserved, and IS&S covenants thereafter to continue to reserve,
free of preemptive rights and other preferential rights, a sufficient number of
previously authorized but unissued shares of its Common Stock to satisfy the
rights of conversion of all holders (including Parker) of the Preferred Shares.
Any shares of IS&S Common Stock issuable upon conversion of the Preferred
Shares, and such shares when issued, are referred to as the "Conversion Shares."
The description, rights, preferences and other terms and conditions relating to
the Conversion Shares shall be as set forth in Exhibit 1.02 hereto.
<PAGE>
1.03. SALE AND PURCHASE OF CLASS B SHARES. Subject to the conditions,
terms, representations and warranties of this Agreement, IS&S will issue and
sell, and PARKER will purchase at the Closing (as defined below), one hundred
thousand (100,000) Class B Shares, representing 16.7% of the issued outstanding
capital stock of IS&S, for an aggregate purchase price of three million dollars
($3,000,000) (the "Purchase Price").
1.04. CLOSING. The sale and purchase of the Class B Shares (the
"Closing") shall take place on July 12, 1991 (the "Closing Date"), or at such
other place and date as may be agreed to by IS&S and PARKER.
1.05. PAYMENT AT CLOSING. At the Closing, PARKER will pay the Purchase
Price by:
(a) TRANSFER FUNDS. Wire transfer of the sum of two million five
hundred thousand dollars ($2,500,000) to an account designated by IS&S, as
payment for 83,333-1/3 Class B Shares; and
(b) CONTRIBUTE NOTE. Contribute a January 24, 1991 note
receivable in the amount of $500,000 ("Note Receivable") to the capital of IS&S,
by signing the Capital Contribution Agreement attached as Exhibit 1.05(b), as
payment for 16,666-2/3 Class B Shares.
1.06. USE OF FUNDS. The funds received by IS&S from PARKER, under
Article 1.05 above will be used by IS&S only to repay a certain loan to IS&S
from Geoffrey S.M. Hedrick (Article 4.10 below), to repay certain expenses of
Douglas Gemmell (Article 4.10 below), and to fund operating expenses in the
ordinary course of business and capital equipment purchases consistent with
current and proposed operations.
1.07. CLASS B SHARES AT CLOSING. At the Closing, IS&S will deliver to
PARKER certificates for the one hundred thousand (100,000) Class B Shares to be
issued and sold to PARKER, duly registered in PARKER's name.
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1.08. CERTIFIED FINANCIAL INFORMATION AT CLOSING. At the Closing, IS&S
will deliver to PARKER Arthur Anderson certified financial results (including
footnotes) for IS&S fiscal year 1990, identical in substance and form to the
unsigned financial results for IS&S fiscal year 1990 attached hereto as Exhibit
4.09.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PARKER
PARKER represents and warrants to IS&S as follows:
2.01. SECURITIES LAWS COMPLIANCE. It is Parker's present intention to
acquire the Class B Shares and Conversion Shares for its own account, and the
Class B Shares and Conversion Shares will be acquired by it for the purpose of
investment and not with a view to distribution or resale thereof. PARKER
acknowledges and agrees that the Class B Shares and Conversion Shares have not
been registered under the Securities Act of 1933, as amended ("Securities Act")
or the securities laws of certain states and that the certificates representing
the Class B Shares and Conversion Shares will be subject to the restriction
that, unless a registration statement under the Securities Act is in effect in
respect to PARKER's Class B Shares and Conversion Shares, PARKER may not sell or
otherwise transfer or dispose of its Class B Shares or Conversion Shares or any
interest therein unless it shall first furnish to IS&S an opinion of counsel
reasonably satisfactory to IS&S to the effect that registration thereof under
the Securities Act and applicable state securities laws is not required. PARKER
understands and agrees that unless registered under the Securities Act, the
certificates representing the Class B Shares and the Conversion Shares, whether
upon initial issuance or upon any transfer thereof, may bear a legend reading
substantially as follows:
"The Shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
shares have been acquired for investment and not with a view
to distribution or resale, and may not be sold, mortgaged,
pledged, hypothecated or otherwise transferred without an
effective registration statement for such shares under said
Act, or an opinion of counsel for the Owner that registration
is not required thereunder."
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<PAGE>
2.02. CORPORATE STATUS AND AUTHORITY. PARKER is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio, and has the corporate power and authority to acquire the Class B Shares
and Conversion Shares hereunder. The execution, delivery and performance by
PARKER of this Agreement and the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of PARKER, and this
Agreement constitutes the valid and binding obligation of PARKER, enforceable
against it in accordance with its terms.
2.03. AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and the fulfillment by PARKER of the terms hereof, will not result in a
breach of any of the terms and provisions of, or constitute a default under, or
conflict with or cause any acceleration of any material obligation of PARKER
under any agreement, indenture or other instrument to which PARKER or its assets
is bound, PARKER's Articles of Incorporation or By-laws, any judgment, decree or
order, or any applicable law, rule or regulation.
ARTICLE 3
CONDITIONS TO PARKER'S OBLIGATIONS
3.01. CONDITIONS TO PARKER'S OBLIGATIONS AT THE CLOSING. The
obligations of PARKER on the Closing Date to purchase and pay for the Class B
Shares shall be subject to the satisfaction of each of the following conditions
precedent, each of which IS&S agrees to use its best efforts to cause to be
fulfilled and any one or more of which may be waived by PARKER:
(a) REPRESENTATIONS, WARRANTIES AND PERFORMANCE. Each of the
representations and warranties of IS&S set forth in Article 4 shall be true and
correct on the Closing Date, and IS&S shall have performed all of its
obligations under this Agreement to be performed prior to or at the Closing;
(b) AIRCRAFT INSTRUMENTATION AGREEMENTS. IS&S and PARKER shall
have entered into the Aircraft Instrumentation Agreements;
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(c) EMPLOYMENT AND NONCOMPETE AGREEMENTS. Geoffrey S.M. Hedrick
and Douglas Gemmell shall have each entered into employment and noncompete
agreements with IS&S in the form attached as Exhibit 3.01(c);
(d) SHAREHOLDER AGREEMENT. Geoffrey S.M. Hedrick shall have
entered into the Shareholder Agreement attached as Exhibit 3.01(d), which
required Mr. Hedrick to vote his shares of IS&S Common Stock to elect a person
designated by PARKER to the Board of Directors of IS&S;
(e) CORPORATE DOCUMENTS. IS&S shall have furnished PARKER true
and correct copies of all charter documents of IS&S; the resolutions of the
Board of Directors and, if required by law, the stockholders, of IS&S evidencing
approval of this Agreement, the issuance of the Class B Shares, and other
matters contemplated hereby; the By-Laws of IS&S; and all documents evidencing
other necessary corporate or other action and approvals, if any, with respect to
this Agreement, the Class B Shares and the Conversion Shares; and
(f) OPINION OF COUNSEL. IS&S shall have delivered to PARKER a
favorable opinion of Wolf, Block, Schorr and Solis-Cohen, counsel for IS&S, in
the form set forth in Exhibit 3.01(f).
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Except as set forth in the Disclosure Schedule attached hereto as
Exhibit 4.00, IS&S represents and warrants to PARKER as follows:
4.01. ORGANIZATION AND STANDING OF IS&S. IS&S is a duly organized and
validly existing corporation in good standing under the laws of the Commonwealth
of Pennsylvania and has all requisite corporate power and authority for the
ownership and operation of its properties and for the carrying on of its
business as now conducted and as now proposed to be conducted. IS&S is duly
licensed or qualified and in good standing as a foreign corporation authorized
to do business in all jurisdictions wherein the character
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<PAGE>
of the property owned or leased, or the nature of the activities conducted by
it, makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a material adverse
impact on IS&S. IS&S has no Subsidiaries.
4.02. CORPORATE ACTION. All of the provisions of this Agreement, the
Preferred Shares, the Conversion Shares and any other agreements and instruments
executed in connection with this Agreement are the valid and binding obligations
of IS&S. The issuance and delivery of the Class B Shares and the execution,
delivery and performance of this Agreement and any other agreement and
instruments executed in connection with this Agreement have been duly authorized
by all necessary corporate or other action of IS&S. Sufficient shares of
authorized but unissued Class B Shares to be issued to PARKER hereunder and
sufficient shares of authorized but unissued Common Stock of IS&S to be issued
in connection with the prospective conversion of the Preferred Shares will have
been reserved by appropriate corporate action prior to Closing. Neither the
issuance of the Class B Shares nor the issuance of the Conversion Shares will
require any further corporate action other than as contemplated herein or by the
Articles of Incorporation, and will not be subject to preemptive or other
preferential rights or similar statutory or contractual rights either arising
pursuant to any agreement or instrument to which IS&S is a party or which are
otherwise binding upon IS&S.
4.03. GOVERNMENTAL APPROVALS. No authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, under any applicable laws, rules or regulations presently in effect, is
or will be necessary for, or in connection with, the offer, issuance, sale,
execution or delivery by IS&S of the Class B Shares or the Conversion Shares or
for the performance by it of its obligations under this Agreement, the Preferred
Shares or the Conversion Shares.
4.04. LITIGATION. There is no litigation or governmental proceeding or
investigation pending or, to the best knowledge of IS&S, threatened against IS&S
affecting any of its properties or assets. To the best knowledge of IS&S, there
is no litigation or governmental
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<PAGE>
proceeding or investigation pending or threatened against any officer of IS&S or
against Douglas Gemmell. Neither IS&S, nor to the best knowledge of IS&S, or any
officer of IS&S or Douglas Gemmell, is in default with respect to any order,
writ, injunction, decree, ruling or decision of any court, commission, board or
other government agency. The foregoing sentences include, without limiting their
generality, actions pending, or to the best knowledge of IS&S threatened,
involving the prior employment of any IS&S officer or employee or their use in
connection with IS&S business of any information or techniques allegedly
proprietary to any of their former employers.
4.05. REGISTRATION RIGHTS. Except as set forth in Article 7 hereof, no
person has demand or other rights to cause IS&S to file any registration
statement under the Securities Act relating to any securities of IS&S or any
right to participate in any such registration statement.
4.06. CERTAIN AGREEMENTS OF OFFICERS AND EMPLOYEES.
(a) To the best knowledge of IS&S, no employee of IS&S is in
violation of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, or any other contract or agreement or any restrictive
covenant relating to the right of any such officer or employee to be employed by
IS&S, or relating to the use of trade secrets or proprietary information of
others; and
(b) Each present or former officer and employee of IS&S who is or
was authorized to have access to proprietary information of IS&S has executed
IS&S's nondisclosure and inventions agreement attached as Exhibit 4.06(b). To
the best knowledge of IS&S, no officer or employee or former officer or employee
of IS&S is in violation of the terms of the aforesaid agreement or of any other
obligation relating to the use of confidential or proprietary information of
IS&S.
4.07. COMPLIANCE WITH OTHER INSTRUMENTS. IS&S is in compliance in all
respects with the terms and provisions of this Agreement and of its Articles of
Incorporation and By-Laws and in all material respects with the terms and
provisions of the mortgages,
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<PAGE>
indentures, leases, agreements and other instruments to which IS&S is a party
and of all judgments, decrees, governmental orders, statutes, rules or
regulations by which it is bound or to which it or any of its properties or
assets are subject. There is no term or provision in any of the foregoing
documents and instruments which materially adversely affects the business,
assets or financial condition of IS&S. Neither the execution and delivery of
this Agreement, the Preferred Shares or the Conversion Shares, nor the
consummation of any transaction contemplated by this Agreement, has constituted
or resulted in or will constitute or result in a material default or violation
of any term or provision in any of the foregoing documents, instruments,
judgments, decrees, orders, statutes, rules and regulations.
4.08. TITLE TO ASSETS, PATENTS.
(a) IS&S has title to all of its assets now carried on its books
as owned by it including those reflected in the most recent balance sheet of
IS&S (Article 4.09 below) or acquired since the date of such balance sheet free
of any mortgages, pledges, charges, liens, security interests or other
encumbrances; and
(b) IS&S owns, or to the best knowledge of IS&S, it has a valid
right to use, the patents, patent rights, licenses, permits, trade secrets,
trademarks, trade names, copyrights, inventions and intellectual property rights
being used to conduct its business as now operated and as now proposed to be
operated; and IS&S has not received any notice and does not have any reason to
believe that the conduct of its business as now operated and as now proposed to
be operated does or will conflict with valid patents, patent rights, licenses,
permits, trade secrets, trademarks, trade names, copyrights, inventions and
intellectual property rights of others. IS&S has no obligation to compensate any
person for the use of any such rights.
4.09. FINANCIAL INFORMATION. The balance sheets and income statements
of IS&S attached hereto as Exhibit 4.09, (i) include the Arthur Anderson
unsigned financial results (including footnotes) for IS&S fiscal year 1990, and
(ii) present fairly the interim financial position of IS&S as of April 30, 1991.
IS&S has no liability, contingent or otherwise, not
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<PAGE>
adequately reflected in or reserved against in the aforesaid balance sheets that
could, together with all such other liabilities, materially affect the financial
condition of IS&S, nor does IS&S have any reasonable grounds to know of any such
liability. Since the date of the aforesaid interim balance sheet, (i) there has
been no material adverse change in the business, assets, financial condition,
operations or prospects of IS&S; (ii) the business, financial condition,
operations or prospects of IS&S or any of its properties or assets has not been
materially and adversely affected as the result of any legislative or regulatory
change, any revocation or change in any franchise, license or right to do
business, or any other event or occurrence, whether or not insured against; and
(iii) IS&S has not entered into any transaction or agreement outside the
ordinary course of business, and has not made any distribution of its capital
stock.
4.10. LOANS AND GUARANTEES. IS&S has not made any loan or advance to
any person which is outstanding on the date of this Agreement, nor is IS&S
obligated or committed to make any such loan or advance, nor does IS&S own any
capital stock, assets comprising the business of, obligations of, or any
interest in, any person, except as set forth in Exhibit 4.10. IS&S has not
assured or guaranteed the indebtedness of any other person, except as set forth
in Exhibit 4.10. All contracts of IS&S which require the expenditure of or
anticipate the receipt of $50,000 or more by IS&S are as set forth in Exhibit
4.10.
4.11. SECURITIES ACT. IS&S has complied and will comply with all
applicable federal or state securities laws. Neither IS&S, nor to the best
knowledge of IS&S anyone acting on its behalf, has offered to sell any capital
stock of IS&S (including without limitation Common Stock, the Preferred Shares
or Conversion Shares or similar securities), or solicited offers with respect
thereto from, or entered into any preliminary conversations or negotiations
relating thereto with, any person, so as to bring the issuance and sale of such
capital stock under the registration provisions of the Securities Act.
4.12. DISCLOSURE. Neither this Agreement, the financial statements
incorporated herein as Exhibit 4.09, nor any other agreement, document,
certificate or written statement furnished to PARKER by IS&S or its authorized
representatives in connection with the transactions contemplated hereby contains
any untrue statement of a material fact or fails
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<PAGE>
to state a material fact necessary to make the statements contained herein or
therein, taken as a whole, not misleading. There is no fact within the special
knowledge of IS&S or any officer of IS&S or Douglas Gemmell which has not been
disclosed herein or in writing by them to PARKER which materially adversely
affects the business, properties, assets, financial condition, operations or
prospects of IS&S. Financial projections furnished by IS&S were prepared by IS&S
in good faith, based upon assumptions which, when made, were reasonable.
4.13. CAPITALIZATION; STATUS OF CAPTIAL STOCK. IS&S has a total
authorized capitalization consisting of (a) 2,000,000 shares of Common Stock, of
which 350,000 shares are issued and outstanding, and (b) 500,000 shares of
Preferred Stock, consisting of 250,000 shares of Class A Convertible Preferred
Stock, of which 100,000 shares are issued and outstanding, 200,000 shares of
Class B Convertible Preferred Stock, of which 47,500 are issued and outstanding
immediately prior to the sale of Class B Shares to PARKER under this Agreement,
and 50,000 shares of undesignated Preferred Stock, of which none are issued and
outstanding. A complete list of the shares of Common Stock and Convertible
Preferred Stock presently issued and outstanding, and the names in which such
shares are registered, is set forth in Exhibit 4.13 hereto. IS&S has granted
options to purchase a cumulative total of 41,720 shares of Common Stock, and the
names of the persons who have received such options, the number of shares
subject to the option, the option price, and the exercise date are also set
forth in Exhibit 4.13. All the outstanding shares of capital stock of IS&S have
been duly authorized, are validly issued and are fully paid and nonassessable.
The Class B Shares when issued and delivered in accordance with the terms
hereof, and the Conversion Shares, when issued and delivered upon conversion of
the Preferred Shares in accordance with the Articles of Incorporation, when so
issued, will be authorized, validly issued and fully paid and nonassessable.
Other than as provided in this Agreement or as set forth on Exhibit 4.13, there
are no options, warrants or rights to purchase shares of capital stock or other
securities of IS&S which are authorized, issued or outstanding, nor is IS&S
obligated in any other manner to issue shares of its capital stock or other
securities. Except as otherwise contemplated by this Agreement, there are no
restrictions on the transfer of shares of capital stock of IS&S other than those
imposed
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<PAGE>
by relevant state and federal securities laws and the Shareholders Agreement to
which IS&S and certain of its shareholders are parties. The offer and sale of
all shares of capital stock or other securities of IS&S issues before the
Closing complied with or were exempt from all federal and state securities laws.
4.14. BOOKS AND RECORDS. The books of account, ledgers, order books,
records and documents of IS&S accurately and completely reflect all material
information relating to the business of IS&S, the assets of IS&S, and the nature
of all transactions giving rise to the obligations or accounts receivable of
IS&S.
ARTICLE 5
COVENANTS OF IS&S
5.01. AFFIRMATIVE COVENANTS OF IS&S. The affirmative covenants of this
Article 5.01 will not apply after the earlier of (i) the consummation of the
first underwritten public offering by IS&S pursuant to a registration statement
filed with the Securities and Exchange Commission in which the aggregate net
proceeds to IS&S exceed $5,000,000 ("Qualified Public Offering"), or (ii) the
date PARKER owns less than ten percent (10%) of the then issued and outstanding
capital stock of IS&S. During the period prior to an event set forth above, IS&S
will:
(a) ACCESS TO BOOKS AND RECORDS. At such times as are reasonably
acceptable to IS&S, permit PARKER to examine and make copies of and extracts
from the records and books of account of, and, at all times accompanied by a
duly authorized representative of IS&S, visit and inspect the properties of IS&S
and discuss the affairs, finances and accounts of IS&S with any of its officers,
employees, directors and independent accountants. PARKER agrees that, to the
extent set forth in Article 6.02 below, it shall keep confidential and not
disclose to third parties (except for professional advisers who shall be advised
of the confidential nature of such information and shall agree to maintain its
confidentiality, or as may be required by law) any confidential or proprietary
information received by it pursuant to this Article 5, so long as such
information is not generally available to the public;
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<PAGE>
(b) QUARTERLY STATEMENTS. As soon as available and in any event
within forty five (45) days after the end of each fiscal quarter of IS&S,
furnish to the IS&S Board of Directors consolidated and consolidating balance
sheets of IS&S as of the end of such quarter and consolidated and consolidating
statements of income setting forth in each case in comparative form the
corresponding figures for the corresponding period of the preceding fiscal year,
all in reasonable detail and duly certified (subject to year-end audit
adjustments) by the chief financial officer of IS&S or in his or her absence by
a person designated as the acting chief financial officer, as having been
prepared in accordance with generally accepted accounting principals
consistently applied, subject to the exception that footnotes and related
schedules required by generally accepted accounting principles need not be
included;
(c) YEAR END STATEMENTS. As soon as available and in any event
within one hundred twenty (120) days after the end of each fiscal year of IS&S,
furnish to the IS&S Board of Directors consolidated and consolidating balance
sheets of IS&S as of the end of such fiscal year and consolidated and
consolidating statements of income and retained earnings and of changes in
financial position of IS&S and reconciliations of sources and uses of working
capital for such fiscal year, setting forth in each case in comparative form the
corresponding figures for the preceding fiscal year, together with an opinion
thereon of independent public accountants approved by the IS&S Board of
Directors;
(d) SIGNIFICANT TRANSACTIONS. Promptly, fully and in detail,
inform the IS&S Board of Directors of any discussions, offers or contracts
relating to significant capital restructuring (including issuance or purchase of
equity or debt securities), mergers, acquisitions or divestitures of any nature
involving IS&S, of which IS&S has knowledge, whether initiated by IS&S or by any
other person;
(e) BOARD REPRESENTATION. Within thirty (30) days after the
Closing Date, take all steps necessary or appropriate to appoint a person
designated by PARKER to be a member of the IS&S Board of Directors, and
thereafter to nominate or appoint such person in accordance with PARKER's
written request to IS&S. Such designee shall be subject to
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<PAGE>
the approval of the IS&S Board of Directors, which approval will not be
unreasonably withheld. Such designee shall serve as a director until the
occurrence of an event eliminating the covenants in this Article 5 or until such
individual's earlier resignation, incapacity, death or the withdrawal of such
individual's designation by PARKER, subject to the right of the shareholders of
IS&S to remove such designee in accordance with the IS&S By-Laws and applicable
law. The parties acknowledge that Robert H. Rau shall initially serve on the
Board as PARKER's designee;
(f) CONVERSION AND VOTING TRUST. Within thirty (30) days after
the Closing Date, convert all Preferred Shares to Conversion Shares; and
terminate all Voting Trust Agreements or other agreements that transfer or
require the transfer of any voting rights of such Conversion Shares from the
owner of the Conversion Shares to any officer or employee or director or other
shareholder of IS&S or to any person under the control of any of the aforesaid,
except that this termination provision will not apply to the transfer of voting
rights with respect to 50,000 shares of IS&S capital stock beneficially owned by
Stephanie H. Hedrick;
(g) AGREEMENTS. Retain in effect and fulfill its obligations
under its employment and noncompete agreements with Geoffrey S.M. Hedrick and
Douglas Gemmell (see Article 3.01(c) above), and use its best efforts and take
all reasonably necessary actions to enforce substantially all of its rights
under each such Agreement; and
(h) CHANGE OF CONTROL. Deliver to PARKER a good faith irrevocable
offer in the form attached as Exhibit 5.01(h) to repurchase the Series B Shares
or Conversion Shares transferred to PARKER under this Agreement and perform all
of its obligations under such offer if control of IS&S passes to a competitor of
PARKER in the aircraft fuel management business.
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<PAGE>
5.02. FURTHER RIGHTS OF PARKER.
(a) Upon the occurrence of an event set forth in the first
sentence of Article 5.01 above and until PARKER owns less than five percent (5%)
of the then issued and outstanding capital stock of IS&S:
(i) As soon as available and in any event within forty five
(45) days after the end of each fiscal quarter of IS&S, IS&S shall furnish
to PARKER consolidated and consolidating balance sheets of IS&S as of the
end of such quarter, together with consolidated and consolidating
statements of income, all in reasonable detail and prepared in accordance
with generally accepted accounting principles consistently applied, subject
to the exception that footnotes and related schedules required by generally
accepted accounting principles need not be included; and
(ii) As soon as available and in any event within one hundred
twenty (120) days after the end of each fiscal year of IS&S, IS&S shall
furnish to PARKER consolidated and consolidating balance sheets of IS&S as
of the end of such fiscal year, together with consolidated and
consolidating statements of income and retained earnings and of changes in
financial position and reconciliations of sources and uses of working
capital, reviewed by the Company's independent public accountants and
prepared in accordance with generally accepted accounting principles
consistently applied, subject to the exception that footnotes and related
schedules required by generally accepted accounting principles need not be
included.
(b) In the event Articles 5.01 and 5.02(a) are not in effect and
until PARKER no longer owns any shares of capital stock of IS&S, IS&S shall
furnish to PARKER within forty five (45) days from the end of each fiscal
quarter and within one hundred twenty (120) days from the end of each fiscal
year, condensed consolidated and consolidating balance sheets and statements of
income for the end of each fiscal quarter and fiscal year, respectively, in each
case prepared in accordance with generally accepted accounting principles
consistently applied.
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<PAGE>
(c) In each case, the financial information provided to PARKER
pursuant to Article 5.02 shall be subject to the obligation of PARKER to
maintain the confidentiality of such information to the extent required by
Article 6.02. Notwithstanding anything in this Article 5.02 to the contrary,
IS&S shall not be obligated to comply with this Article 5.02 in the event IS&S
is required to file, and does file, reports with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended or any similar statute.
5.03. PARKER EMPLOYEES. So long as PARKER is a shareholder of IS&S,
neither IS&S nor any officer or director or affiliate of IS&S will directly or
indirectly induce or attempt to influence any employee of PARKER to terminate
his or her employment with PARKER. This Article 5.03 will not prevent IS&S from
soliciting or employing any person who is a former employee of PARKER.
ARTICLE 6
COVENANTS OF PARKER
6.01. IS&S EMPLOYEES. So long as PARKER is a shareholder of IS&S,
neither PARKER nor any officer or director or affiliate of PARKER will directly
or indirectly induce or attempt to influence any employee of IS&S to terminate
his or her employment with IS&S. This Article 6.01 will not prevent PARKER from
soliciting or employing any person who is a former employee of IS&S.
6.02. CONFIDENTIALITY. So long as either of the Instrumentation
Agreements is in effect, the confidentiality obligations of PARKER with respect
to information received by PARKER from IS&S will be according to the terms of
the Instrumentation Agreements. Effective upon termination of the
Instrumentation Agreements, (a) with respect to all information received by
PARKER from IS&S after such termination, PARKER will take at least the same
precautions to maintain such information in confidence as PARKER takes to
maintain in confidence its own confidential information, and (b) with respect to
all information received by PARKER from IS&S after such termination other than
condensed balance sheets and condensed statements of income, PARKER will not use
such information
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<PAGE>
to compete with IS&S with respect to any customer or with respect to any
product. PARKER may at any time refuse to receive information from IS&S or
designate a particular officer or employee of PARKER to be the recipient of all
information from IS&S. In no event will PARKER have any obligation with respect
to any information received from IS&S after termination of the Instrumentation
Agreements which (a) is already known to PARKER at the time it receives the
information from IS&S or is developed at any time by PARKER without use of
information from IS&S which is otherwise confidential under this Agreement, or
(b) is or becomes publicly known through no wrongful act of PARKER, or is or
becomes known to other persons or entities without written obligation of
confidentiality to IS&S, or (c) is rightfully received by PARKER from a third
party who did not receive it from IS&S, or (d) is approved for release by
written authorization of IS&S.
ARTICLE 7
PREEMPTIVE AND REGISTRATION RIGHTS
7.01. PREEMPTIVE RIGHTS. The rights of PARKER and obligations of IS&S
with respect to preemptive rights concerning the Preferred Shares and the
Conversion Shares are set forth in attached Exhibit 7.01.
7.02. REGISTRATION RIGHTS. The rights of PARKER and obligations of IS&S
with respect to registration of the Preferred Shares and the Conversion Shares
are set forth in attached Exhibit 7.02.
ARTICLE 8
MISCELLANEOUS
8.01. MODIFICATION AND WAIVER. No cancellation, modification,
amendment, deletion, addition or change in this Agreement or any provision
hereof or the waiver of any right or remedy herein provided shall be effective
for any purpose unless specifically set forth in writing and signed by an
officer of the party or by the individual to be bound thereby. No waiver of any
right or remedy in respect of any occurrence or event on one occasion shall be
deemed a waiver of such right or remedy in respect of such occurrence or event
on any other occasion.
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<PAGE>
8.02. ENTIRE AGREEMENT. This Agreement includes the attached Exhibits
which are incorporated by reference and comprises the entire Agreement between
IS&S and PARKER with respect to the purchase and sale of IS&S stock.
8.03. ASSIGNMENT AND RIGHT OF FIRST REFUSAL.
(a) ASSIGNMENT. The disposition of PARKER's Class B Shares and
Conversion Shares shall at all times be within the control of PARKER. None of
PARKER's rights under this Agreement may be assigned by PARKER in connection
with such disposition by PARKER of its Class B Shares or Conversion Shares,
except that the transferee of at least 20,000 of such shares will at all times
prior to a Qualified Public Offering be entitled to (i) the same rights as
PARKER would have had under Article 7 of this Agreement if PARKER would have
retained ownership of such shares, and (ii) information of the type described in
Article 5.02(b) above, information provided to other shareholders of IS&S who do
not have a representative on the IS&S Board of Directors, and information
available to such transferee under applicable state law, provided such
transferee agrees in writing to the same confidentiality and nonuse obligations
as apply to PARKER under Article 6.02 of this Agreement.
(b) RIGHT OF FIRST REFUSAL. Notwithstanding the foregoing, in the
event PARKER desires to transfer its Class B Shares or Conversion Shares other
than to an affiliate, it shall first obtain a bona fide offer in writing for
such shares which PARKER is willing to accept and then provide IS&S with a right
of first refusal to purchase such of the Class B Shares or Conversion Shares
subject to transfer on the same terms and conditions as being offered by the
potential transferee. Such right of first refusal shall be exercised by IS&S by
delivery of written notice thereof to PARKER within twenty (20) days of receipt
of the notice from PARKER of the bona fide offer. The consummation of such
purchase shall occur within twenty (20) days of IS&S's exercise of such right of
first refusal, using the closing procedure set forth in Exhibit 5.01(h) of this
Agreement.
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<PAGE>
8.04. CONTROLLING LAW. This Agreement will be construed and performed
and governed by the laws of the Commonwealth of Pennsylvania.
8.05. NOTICES. Any notice provided for herein shall be in writing and
shall be deemed to have been sufficiently given on the date of receipt by
recipient (as evidenced by the carrier's return receipt card) if sent by
registered mail or overnight carrier (such as Federal Express), postage prepaid,
and addressed to the other party at its address as set forth below, or
personally delivered thereto:
If to IS&S: INNOVATIVE SOLUTIONS & SUPPORT, INC.
420 Lapp Road
Malvern, Pennsylvania 19355
Attention: Mr. Geoffrey S.M. Hedrick
If to PARKER: PARKER-HANNIFIN CORPORATION
17325 Euclid Avenue
Cleveland, Ohio 44112
Attention: Secretary
8.06. AGENTS OR BROKERS. IS&S represents and warrants that it has
incurred no liabilities for any brokerage commission, finders' fees or the like
in connection with the transaction described in this Agreement. PARKER
represents and warrants that it has taken no action which would give rise to any
claim by any person for brokerage commissions, finders' fees or the like
relating to this Agreement or the transaction described in this Agreement.
8.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Agreement are given as of the Closing Date and shall
survive the execution and delivery hereof for a period of three (3) years from
the Closing Date.
8.08. SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision.
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<PAGE>
8.09. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
8.10. FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of either party, the other party will execute and deliver such
instruments, documents and other writing as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement on the date indicated below.
INNOVATIVE SOLUTIONS & SUPPORT, INC.
Signature: /s/ GEOFFREY S. M. HEDRICK
---------------------------------------
Name: Geoffrey S.M. Hedrick
--------------------------------------------
Title: Chief Executive Officer
--------------------------------------------
Date:
--------------------------------------------
PARKER-HANNIFIN CORPORATION
Signature: /s/ ROBERT H. RAU
---------------------------------------
Name: Robert H. Rau
--------------------------------------------
Title: PRESIDENT-PARKER BERTEA AEROSPACE GROUP
--------------------------------------------
Date: JULY 11, 1991
--------------------------------------------
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<PAGE>
LIST OF EXHIBITS
EXHIBIT NO. DESCRIPTION
1.01 Terms and Conditions of Series B Shares
1.02 Terms and Conditions of Conversion Shares
1.05(b) Capital Contribution Agreement
3.01(c) Hedrick/Gemmell Employment/Noncompete Agreement
3.01(d) Hedrick Shareholder Agreement
3.01(f) Opinion of IS&S Counsel
4.00 Disclosure Schedule for Exceptions
4.06(b) IS&S Nondisclosure and Inventions Agreement
4.09 IS&S Balance Sheet and Income Statement
4.10 List of IS&S Loans, Guarantees and Material Contracts
4.13 List of IS&S Shareholders and Stock Options
5.01(h) Repurchase Offer
7.01 Preemptive Rights
7.02 Registration Rights
<PAGE>
EXHIBIT 7.02
REGISTRATION RIGHTS
-------------------
A. "Piggy Back" Registration. If at any time or times IS&S shall determine
--------------------------
to register under the Securities Act (including pursuant to a demand of any
shareholder of IS&S exercising registration rights) any of its Preferred Stock
or its Common Stock of the type which has been or may be issued upon the
conversion of the Preferred Shares, other than on Form S-8 or Form S-4 or their
then equivalents, it shall send to PARKER written notice of such determination.
If within thirty (30) days after receipt of such notice, PARKER shall so request
in writing, IS&S shall use its best efforts to include in such registration
statement all of the shares PARKER requests to be registered. If, in connection
with any offering involving an underwriting of stock to be issued by IS&S, the
managing underwriter shall impose a reduction in the number of shares of such
stock which may be included in any such registration statement because, in its
judgment, such reduction is desirable to effect an orderly public distribution,
such reduction shall be imposed on PARKER on a pro rata basis in the proportion
that the total number of shares of PARKER to be included in the offering bears
to the total number of shares to be included in the offering, other than shares
included in the offering to be issued by IS&S for its own account. No incidental
right under this Section A shall be construed to limit any registration required
under Section B unless the registration of shares under this Section A is made
due to the demand of a shareholder who is an affiliate of PARKER.
Notwithstanding anything in this Section A to the contrary, IS&S shall only
be required to include shares in a registration statement and send notices of
determination to register under the Securities Act, as described above, with
respect to the first Qualified Public Offering of IS&S, and each registration
occurring prior to such Qualified Public Offering.
B. Required Registration. If one or more holders of at least 25% of the
----------------------
IS&S shares then outstanding shall notify IS&S in writing that it or they intend
to offer or cause to be offered for public sale at least ten percent (10%) of
the outstanding IS&S shares, IS&S will so notify all holders of IS&S shares,
including all holders who have a right to
<PAGE>
acquire shares. Upon written request of any holder given within thirty (30) days
after the receipt by such holder from IS&S of such notification, IS&S will use
its best efforts to cause a registration statement covering such of the shares
as may be requested by any holder thereof (including the holder or holders
giving the initial notice of intent to offer) to be filed with the Securities
and Exchange Commission as expeditiously as possible and to cause such
registration statement to become and remain effective. If IS&S determines to
include shares to be sold by it in any registration request pursuant to this
Section B, such registration shall be deemed to have been a registration under
Section A of this Exhibit 7.02. Notwithstanding the foregoing, IS&S shall not be
obligated to file a registration statement with the Securities and Exchange
Commission pursuant to this Section B, (1) prior to the consummation by IS&S of
its initial underwritten public offering, (2) within ninety (90) days following
the effective date of any registration of securities by IS&S in an underwritten
public offering, (3) on any more than one occasion unless a registration
statement covering all requested shares owned by PARKER is for whatever reason
not declared effective, in which case PARKER shall be entitled to exercise its
right to request registration hereunder until a registration statement with
respect to such requested shares is declared effective, or (4) if the number of
shares included in such registration shall have a fair market value (based upon
the probable offering price, as estimated in good faith by the Board of
Directors of IS&S or by the proposed underwriters) of less than $5,000,000.
C. Registration on Form S-3. In addition to the rights provided the holder
-------------------------
of Shares in Sections A and B above, if the registration of shares under the
Securities Act can, at any time or from time to time, be effected on Form S-3
(or any similar form promulgated by the Securities and Exchange Commission),
IS&S will promptly so notify each holder of shares, including each holder who
has a right to acquire shares, and then will at the request of holders of at
least 10% of the IS&S shares then outstanding at any time, and from time to time
thereafter, as expeditiously as possible, use its best efforts to effect
registration under the Securities Act on said Form S-3, of all or such portion
of the shares as such holder or holders of shares shall specify; provided,
however, that IS&S shall not be required to effect more than two such
registrations in any calendar year and further provided that the estimated
market value of the shares to be included in any such registration shall be at
least $1,000,000.
<PAGE>
D. Effectiveness. IS&S will use its best efforts to maintain the
--------------
effectiveness for up to six (6) months of any registration statement pursuant to
which any of the shares are being offered, and from time to time will amend or
supplement such registration statement and the prospectus contained therein if
and to the extent necessary to comply with the Securities Act and any applicable
state securities statute or regulation.
E. Exchange Act Registration. If IS&S at any time shall list any of its
--------------------------
shares on any national securities exchange and shall register such shares under
the Exchange Act, IS&S will, at its expense, simultaneously list on such
exchange and maintain such listing of, all of the IS&S shares. If IS&S becomes
subject to the reporting requirements of either Section 13 or Section 15(d) of
the Exchange Act, IS&S will use its best efforts to timely file with the
Securities and Exchange Commission such information as the Commission may
require under either of said Sections; and in such event, IS&S shall use its
best efforts to take all action as may be required as a condition to the
availability of Rule 144 under the Securities Act (or any successor exemptive
rule hereinafter in effect) with respect to such shares. IS&S shall furnish to
any holder of shares forthwith upon request (i) a written statement by IS&S as
to its compliance with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of IS&S as filed with the Securities
and Exchange Commission, and (iii) such other reports and documents as a holder
may reasonably request in availing itself of any rule or regulation of the
Securities and Exchange Commission allowing a holder to sell any such shares
without registration.
F. Further Obligations of IS&S. Whenever under the preceding sections of
----------------------------
Exhibit 7.02, IS&S is required hereunder to register shares, it agrees that it
shall also do the following:
(1) Furnish to PARKER such copies of each preliminary and final
prospectus and such other documents as PARKER may reasonably request to
facilitate the public offering of its shares;
(2) Use its best efforts to register or qualify the shares covered by
said registration statement under the applicable securities or "blue sky" laws
of such
<PAGE>
jurisdictions as PARKER may reasonably request; provided, however, that IS&S
shall not be obligated to: (i) qualify to do business in any jurisdiction where
it is nor then so qualified; (ii) take any action which would subject it to the
service of process in suits other than those arising out of the offer or sale of
the securities covered by the registration statement in any jurisdiction where
it is not then so subject; (iii) subject itself to taxation in such
jurisdiction; (iv) register in a state requiring, as a condition to such
registration, escrow or surrender of any securities of a security holder; or (v)
incur expenses in excess of $10,000 in connection with registration in all
states so requested unless PARKER agrees to reimburse IS&S for expenses so
incurred in excess of such amount;
(3) Furnish to PARKER a signed counterpart of
(a) an opinion of counsel for IS&S dated included as an exhibit to
the registration statement pursuant to the requirements of the Securities Act,
and
(b) "comfort" letters signed by IS&S independent public accountants
who have examined and reported on IS&S financial statements included in the
registration statement, to the extent permitted by the standards of the American
Institute of Certified Public Accountants,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants' "comfort" letters) with respect to events subsequent to the date of
the financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities, to the extent that IS&S is required
to deliver or cause the delivery of such opinion or "comfort" letters to the
underwriters in an underwritten public offering of securities;
(4) Permit PARKER or its counsel or other representatives to inspect and
copy such corporate documents and records as may reasonably be requested by
them;
(5) Furnish to PARKER a copy of all documents filed and all correspondence
<PAGE>
dispatched from or to the Securiries and Exchange Commission in connection with
any such offers; and
(6) Use its best efforts to insure the obtaining of all necessary
approval from the National Association of Securities Dealers, Inc.
G. Obligations of PARKER. Whenever under the preceding sections of this
----------------------
Exhibit 7.02, IS&S is required hereunder to register Shares) PARKER agrees to do
the following:
(1) To furnish IS&S with appropriate information as may be included in
the registration statement; and
(2) To become a signatory to the underwriting agreement and such other
agreements as required by the underwriters, but only with respect to the shares
being offered by PARKER.
H. Expenses. In the case of a registration under Sections A or B, IS&S
---------
shall bear all costs and expenses of each such registration, including, but not
limited to, printing, legal and accounting expenses, Securities and Exchange
Commission filing fees and "blue sky" fees and expenses; provided, however, (1)
that with respect to Section A, in the case of a registration in which IS&S is
not registering any shares for its own account, PARKER shall bear all such costs
and expenses (on a pro rata basis based on the number of shares being sold by
such holder or holders), and (2) that with respect to Section B, PARKER shall
bear all such costs and expenses (on a pro rata basis based on the number of
shares being sold by such holder or holders), exclusive, in each case, of the
cost of any year end audit of IS&S financial statements and exclusive of any
compensation of directors, officers or employees of IS&S, all of which shall be
borne entirely by IS&S. Notwithstanding the foregoing, whether or not IS&S is
registering shares for its own account in connection with a registration under
Sections A or B, IS&S shall have no obligation to pay or otherwise bear any
portion of the registration fees, transfer taxes or underwriters' commissions or
discounts attributable to the shares being offered and sold by PARKER or the
cost of fees
<PAGE>
for counsel not engaged by IS&S. PARKER shall bear all costs and expenses in
the case of registrations under Section C.
I. Exception. IS&S shall nor be required to effect a registration under
----------
this Exhibit 7.02 if, in the written opinion of counsel for IS&S, which counsel
shall be reasonably acceptable to PARKER, PARKER may sell, without registration
under the Securities Act, all shares for which it had requested registration
under the provisions of the Securities Act in the manner and in the quantity in
which the shares were proposed to be sold.
J. Transfer of Registration Rights. The registration rights of PARKER
--------------------------------
herein granted may be transferred to any transferee of PARKER's shares of IS&S
(1) who is an affiliated person, as that term is defined in the Investment
Company Act of 1940, of PARKER (including a partner of PARKER) or (2) who
acquires at least 50,000 Preferred Shares or an equivalent amount of Conversion
Shares issued upon conversion thereof (as adjusted for stock splits, stock
dividends, reclassifications, recapitalizations or other similar events).
K. Granting of Registration Rights. IS&S shall not, without PARKER's
--------------------------------
consent, grant any rights to any Person to register any shares of capital stock
or other securities of IS&S if such rights could reasonably be expected to
conflict with the rights of PARKER granted pursuant to this Agreement.
L. Sales Following Initial Public Offering. PARKER agrees that for a period
----------------------------------------
equal to the greater of: (i) ninety (90) days after IS&S initial public offering
of securities or (ii) such longer period as may be imposed by the underwriters
in the initial public offering of securities but in no event longer than
eighteen (18) months, it will not, without the consent of IS&S (or the
underwriters, as they may require), sell in the open market any IS&S shares held
by it, whether or not any IS&S shares held by it are included in such offering.
<PAGE>
Exhibit 10.6
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT ("Agreement") dated as of the 8th day
of May, 1995, is entered into by and among Innovative Solutions & Support, Inc.,
a Pennsylvania corporation (the "Company"), Geoffrey S. M. Hedrick, an
individual ("Hedrick"), and the purchasers listed on SCHEDULE I hereto
(hereinafter referred to collectively as the "Purchasers" and individually as a
"Purchaser").
WITNESSETH:
WHEREAS, the Company is in need of equity capital in order to carry on and
expand its business and the Purchasers are willing to provide such equity
capital by purchasing securities of the Company on the terms contained or
referred to herein.
NOW THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
I. PURCHASES AND SALES; CLOSING
1.1 PURCHASE AND SALES. Subject to the terms and conditions set forth
in this Agreement, each Purchaser listed on SCHEDULE I hereto shall purchase
from the Company and the Company shall issue and sell to each Purchaser, on the
Closing Date (as hereinafter defined), the number of shares of Series A
Convertible Preferred Stock, par value $.001 per share ("Preferred Stock") set
forth opposite each Purchaser's name on SCHEDULE I hereto under the caption
"Preferred Stock", for a purchase price of $24.00 per share.
1.2 CLOSING.
(a) The consummation of the transactions referred to in Section
1.1 shall constitute the closing (the "Closing"). The date on which the Closing
takes place is referred to herein as the "Closing Date". At the Closing (i) the
Company shall deliver to each Purchaser a certificate evidencing the number of
shares of Preferred Stock set forth opposite each Purchaser's name on SCHEDULE I
hereto under the caption "Preferred Stock", with such certificates registered in
the name of such Purchaser and legended as provided herein, and (ii) each
Purchaser shall deliver to the Company the amount set forth opposite such
Purchaser's name on SCHEDULE I hereto under the caption "Purchase Price", by
check or wire transfer. The Closing shall take place at the offices of Klett
Lieber Rooney & Schorling, 40th Floor, One Oxford Centre,
<PAGE>
Pittsburgh, Pennsylvania at 11:00 a.m. on May 8, 1995, or on such other date and
time as the parties hereto may agree.
(b) Notwithstanding any provision to the contrary contained
herein, at the Closing, payment of the purchase price set forth on SCHEDULE I
hereto opposite the Purchaser "The P/A Fund" shall be made by delivery by The
P/A Fund to the Company of (i) the Company's Demand Note dated April 28, 1995 in
the principal amount of $250,000.00 (the "Demand Note") and the Security
Agreement dated April 28, 1995 between the Company and The P/A Fund (the
"Security Agreement"), and termination statements for such UCC filings as have
been made by The P/A Fund, and (ii) the balance of the purchase price in the
amount of $3,080,000.00 by wire transfer, in exchange for 138,750 shares of
Preferred Stock. Upon receipt of the Demand Note, the Company shall mark the
Demand Note "paid in full" and the Demand Note and the Security Agreement shall
be cancelled and shall have no further force or effect whatsoever.
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Subject to and except as disclosed by the Company on SCHEDULE II
hereto, the Company hereby represents and warrants to each of the Purchasers as
follows:
2.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority and holds all licenses, permits and other required authorizations from
governmental authorities necessary to own its properties and assets and to
conduct its businesses as presently conducted except where the failure to obtain
such licenses, permits and authorizations would not have a material adverse
effect on the operations or financial condition of the Company. The Company will
obtain as soon as reasonably practicable all required authorizations of
governmental authorities necessitated by the operations of the Company in the
future. The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on the operations or financial condition of
the Company. True and complete copies of the Company's Articles of
Incorporation, as amended, and its bylaws, as presently in effect, have been
delivered to special counsel for the Purchasers.
2.2 CAPITALIZATION.
(a) At the date hereof, the Company's authorized capital stock
consists of 2,000,000 shares common stock, par value $.001 per share ("Common
Stock"), of which 602,504 shares are issued and outstanding, and 500,000 shares
of preferred stock, par value $.001 per share, of which no shares are issued and
2.
<PAGE>
outstanding. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable and were
issued in compliance with all applicable state and federal laws concerning the
issuance of securities.
(b) Prior to the Closing, the Company will file the Amendment to
the Articles of Incorporation (the "Amendment"), in substantially the form
attached hereto as EXHIBIT A, with the Secretary of State of the Commonwealth of
Pennsylvania. Upon the effectiveness of the Amendment, the authorized capital of
the Company shall consist of 500,000 shares of preferred stock, of which 200,000
shares have been designated as Series A Convertible Preferred Stock, par value
$.001 per share, and 2,000,000 shares of Common Stock, par value $.001 per
share. The voting rights, preferences, privileges and qualifications of the
Preferred Stock and the Common Stock shall be as set forth in the Amendment.
(c) The shares of Preferred Stock which are being issued and
sold hereunder have been duly and validly authorized and, when issued, sold and
delivered in accordance with the terms hereof for the consideration provided for
herein, will be validly issued, fully paid and nonassessable and will be subject
to no lien, encumbrance or restriction except as contemplated by this Agreement.
The shares of Common Stock issuable upon conversion of the Preferred Stock have
been duly and validly authorized and, upon conversion of the Preferred Stock,
will be validly issued, fully paid and nonassessable and will be subject to no
lien, encumbrance or restriction except as contemplated by this Agreement. All
necessary approval or authorization of the shareholders and the directors of the
Company shall be obtained prior to Closing for (i) the issuance and sale of the
Preferred Stock as contemplated herein, and (ii) the issuance of shares of
Common Stock upon conversion of the Preferred Stock. The Company shall, at all
times, reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
Preferred Stock, such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all shares of Preferred Stock.
(d) Except for (i) the Preferred Stock to be issued pursuant to
this Agreement, (ii) 200,000 shares of Common Stock reserved for issuance upon
conversion of the Preferred Stock, and (iii) except as disclosed on SCHEDULE II
hereto, or as otherwise provided in this Agreement, (A) no subscription,
warrant, option, convertible security or other right (contingent or otherwise)
to purchase or acquire any securities of the Company is authorized or
outstanding, (B) there is not any commitment of the Company to issue any
subscription, warrant, option, convertible security or other such right or to
issue or distribute to the holders of any securities of the Company any
evidences of indebtedness or any
3.
<PAGE>
assets of the Company, (C) the Company has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its securities or to
pay any dividend or make any other distribution in respect thereof, (D) no
person or entity is entitled to any preemptive or similar right with respect to
the issuance of any securities of the Company, and (E) no person or entity has
any rights to require the registration of any securities of the Company under
the Securities Act of 1933 (the "Securities Act").
(e) The Company has no subsidiaries and does not own or control,
directly or indirectly, any other corporation, association or business entity.
2.3 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The Company has full
corporate power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. All action, corporate or otherwise, on the
part of the Company and its officers, directors and shareholders, necessary for
the authorization, execution and delivery of this Agreement and the performance
of all obligations of the Company hereunder has been taken or will be taken
prior to the Closing Date and this Agreement, when executed, will constitute a
legal, valid and binding obligation of the Company, enforceable in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws and subject
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). The execution and delivery of
this Agreement, including EXHIBIT A hereto, the issuance of the Preferred Stock
and the issuance of the shares of Common Stock upon conversion of the Preferred
Stock, will not (i) violate the Company's Articles of Incorporation, as amended
or its bylaws, or (ii) violate any provision of law, or (iii) conflict with, or
result in a breach of any of the terms of, or constitute a default under any
agreement, instrument or other restriction to which the Company is a party or by
which the Company or any of its properties or assets is bound.
2.4 GOVERNMENT CONSENTS, ETC. No consent, approval or authorization
of, or declaration, registration or filing with, any person, entity or
governmental authority on the part of the Company is required for the valid
execution, delivery and performance of this Agreement, including EXHIBIT A
hereto, or the valid consummation of the transactions contemplated hereby,
except for filings pursuant to federal and state securities laws, if any, and
filings under the Pennsylvania Business Corporation Law of 1988, as amended,
which filings have been or will be made in a timely manner.
2.5 SECURITIES LAWS. Subject to the accuracy of the Purchasers'
representations and warranties set forth in Article III
4.
<PAGE>
hereof, the offer, sale and issuance of the Preferred Stock as provided in this
Agreement, are and are intended to be: (i) exempt from the registration
requirements of the Securities Act pursuant to one or more of Sections 3(b) and
4(2) thereof and Regulation D promulgated thereunder, and (ii) exempt from the
registration or qualification requirements of applicable state securities laws.
Neither the Company nor, to the Company's knowledge, anyone authorized by the
Company to act on its behalf has directly or indirectly offered the Preferred
Stock or any part thereof for sale to, or solicited any offer to buy the
Preferred Stock or any part thereof from, any person other than the Purchasers,
or other persons reasonably believed by the Company to meet the qualifications
set forth in Section 3.3 below, and neither the Company nor, to the Company's
knowledge, anyone authorized to act on its behalf, has taken or hereafter will
take any action that would cause the loss of such exemptions.
2.6 FINANCIAL STATEMENTS. The Company's unaudited financial
statements for the fiscal years ended September 30, 1993 and September 30, 1994,
and the unaudited financial statements for the five month period ended February
28, 1995 (collectively, the "Financial Statements"), copies of which have been
provided to the Purchasers, present fairly and accurately the financial position
of the Company at the dates indicated and the results of operations for the
periods specified and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods involved.
Since the date of the unaudited financial statements for the five month period
ended February 28, 1995 (the "Unaudited Financial Statements") and except as
disclosed on SCHEDULE II hereto, (i) there has been no change in the assets,
liabilities or financial condition of the Company from that reflected in the
Unaudited Financial Statements except for changes in the ordinary course of
business which have not been materially adverse, and (ii) none of the business,
prospects, financial condition, operations or property of the Company has been
materially adversely affected by any occurrence or development, individually or
in the aggregate, whether or not insured against. Except as disclosed in the
Financial Statements or on SCHEDULE II hereto, the Company has no liabilities of
any type which individually exceed $10,000, or in the aggregate exceeded
$100,000, whether matured or unmatured, absolute or contingent, or otherwise.
2.7 NO DEFAULTS IN AGREEMENTS. Except as disclosed on SCHEDULE II
hereto, (i) the Company is not in violation of its Articles of Incorporation, as
amended, or its bylaws, and (b) the Company is not in default in the performance
or observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, loan agreement, lease, note, or other
instrument to which it is a party or by which it may be bound
5.
<PAGE>
which would have a material adverse effect on the operations or financial
condition of the Company.
2.8 MATERIAL TRANSACTIONS. Except as disclosed in the Financial
Statement or on SCHEDULE II hereto, the Company has not (i) borrowed any funds
or incurred or become subject to any obligations or liabilities (absolute or
contingent), except as incurred in the ordinary course of business, (ii)
discharged or satisfied any lien or encumbrance or paid any obligation or
liability (absolute or contingent) other than current liabilities in the
ordinary course of business and obligations incurred in the ordinary course of
business referred to in clause (i) above, (iii) declared or paid any dividends
or distributions to its shareholders of any assets of any kind whatsoever, (iv)
entered into any agreements or arrangements granting any preferential rights to
purchase any of the assets, properties or rights of the Company (including
management and control thereof), or requiring the consent of any party to a
transfer or assignment of such assets, properties or rights (or change in the
management or control thereof), or providing for the merger or consolidation of
the Company into or with another corporation, (v) suffered any material losses,
waived any material rights of value or cancelled any debts or claims other than
in the ordinary course of business, (vi) except in the ordinary course of
business, made or permitted any amendment or termination of any contract,
agreement or license to which it is a party, (vii) changed any accounting method
or practice, including without limitation, any change in depreciation or
amortization policies or rates, (viii) made any loan to any person or entity,
including but not limited to any officer, director or employee of the Company,
or increased the compensation or benefits payable, or to become payable, to any
of the officers, directors or employees of the Company, including but not
limited to any bonus payment or deferred compensation, other than increases in
compensation and benefits due to cost of living adjustments or as required by
written employment contracts, (ix) entered into any transaction other than in
the ordinary course of business, or (x) entered into an agreement to do any of
the things described in clauses (i) through (ix) above.
2.9 MATERIAL AGREEMENTS. Except as disclosed on SCHEDULE II hereto,
the Company is not a party to any written or oral (i) contract for employment
which may not be terminated by the Company on not more than 30 days' notice
without liability to the Company, (ii) pension or profit sharing plan,
retirement plan, bonus plan, stock purchase or stock option plan or any similar
plan, formal or informal, whether covering one or more employees for former
employees, (iii) contract or commitment with any labor union with respect to any
of its employees, or (iv) contract involving the payment by or to the Company of
more than $25,000, and/or the performance of which may extend more than 90 days
from the date
6.
<PAGE>
hereof, or (v) other material contract, agreement or understanding, whether
formal or informal.
2.10 LITIGATION. Except as disclosed on SCHEDULE II hereto, there is
no action or proceeding at law or in equity pending or, to the best knowledge of
the Company, threatened against the Company or any of its properties before any
court or governmental commission, foreign or domestic; and there is no such
proceeding pending or, to the best knowledge of the Company, threatened, in
arbitration or before any administrative agency; and to the best knowledge of
the Company, there are no facts, events or occurrences by reason of which any
such action or proceeding may be brought. There is no judgment, consent, decree,
injunction, rule or other judicial or administrative order outstanding against
the Company.
2.11 TAXES. The Company has timely filed all tax returns and reports
as required by law. These returns and reports are true and correct in all
material respects. The Company has paid all taxes and other assessments due,
except those contested by it in good faith which are disclosed on SCHEDULE II
hereto. The provision for taxes of the Company as shown in the Financial
Statements is adequate for taxes due or accrued as of the date thereof. The
Company has not made any elections pursuant to the Internal Revenue Code of
1986, as amended (other than elections which relate solely to methods of
accounting, depreciation or amortization) which would have an adverse effect on
the Company, its financial condition, its business as presently conducted or any
of its material assets.
2.12 CERTAIN TRANSACTIONS. Except as disclosed on SCHEDULE II hereto,
the Company is not indebted, directly or indirectly, to any of its officers or
directors or to their respective spouses or children, in any amount whatsoever;
none of said officers or directors or any members of their immediate families
are indebted to the Company or to the Company's knowledge, have any direct or
indirect ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship or any firm or
corporation which competes with the Company (other than officers or directors of
the Company who own no more than 1% of the outstanding stock in publicly traded
companies which compete with the Company). Except for employment contracts with
the Company or stock options, and except as set forth on SCHEDULE II, no officer
or director or any member of their immediate families, is, directly or
indirectly, interested in any contract with the Company. The Company is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
2.13 PROPERTY AND ASSETS. Except as disclosed on SCHEDULE II hereto,
the Company has title to all of its real and
7.
<PAGE>
personal property, free and clear of any and all claims, liens, encumbrances,
equities and restrictions of every kind and nature whatsoever. The Company does
not own any real property except as disclosed herein or in the Financial
Statements.
2.14 COMPLIANCE. The Company has complied in all material respects
with all laws, regulations and orders, foreign or domestic, applicable to its
business as now conducted, and the present uses by the Company of its
properties, and the conduct by the Company does not in any material respect
violate any laws, regulations or orders.
2.15 INSURANCE. The Company maintains valid policies of workers'
compensation insurance and of insurance with respect to its properties and
business of the kinds and in the amounts not less than is customarily obtained
by corporations engaged in the same or similar business and similarly situated,
including without limitation, insurance against loss, damage, fire, theft,
public liability and other risks.
2.16 INTELLECTUAL PROPERTIES. Set forth on SCHEDULE II hereto is a
true and complete list of all patents, trademarks, service marks, trade names,
copyrights, licenses and proprietary rights owned, licensed or used by the
Company. The Company owns or possesses, or can obtain by payment of royalties in
amounts which, in the aggregate, do not materially adversely affect the
operations or financial condition of the Company, all of the patents,
trademarks, service marks, trade names, copyrights, proprietary rights, trade
secrets, and licenses or rights to the foregoing, necessary for the conduct of
the business of the Company as now conducted. To the knowledge of the Company,
the business of the Company as now conducted does not cause the Company to
infringe or violate any of the patents, trademarks, service marks, trade names,
copyrights, licenses or proprietary rights of any person or entity. The Company
is not aware that any employee is obligated under any contract (including any
license, covenant or commitment of any nature), or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interests of the Company
or would conflict with the business of the Company as now conducted or as
proposed to be conducted.
2.17 NON-DISCLOSURE AND INVENTIONS AGREEMENTS. Each employee of the
Company has executed and delivered to the Company a Non-Disclosure and
Inventions Agreement, a representative copy of which has been delivered to
special counsel for the Purchasers.
2.18 SENSITIVE PAYMENTS. Neither the Company nor, to the Company's
knowledge, any of its officers or directors nor anyone authorized by the Company
to act on behalf of any of them, has made or received any "sensitive" payments,
and to the Company's
8.
<PAGE>
knowledge, no such person has or will maintain any unrecorded cash or noncash
assets out of which any "sensitive" payments might be made. "Sensitive" payments
means, whether or not illegal, (i) payments to or from government officials or
employees, (ii) commercial bribes or kick-backs, (iii) amounts paid with an
understanding that rebates or refunds will be made in contravention of the laws
of any jurisdiction, either directly or through a third party, (iv) political
contributions, and (v) payments or commitments (whether made in the form of
commissions, payments of fees for goods or services received or otherwise) made
with the understanding or under circumstances which would indicate that all or
part thereof is to be paid by the recipient to government officials or employees
or as a commercial bribe, influence payment or kick-back; provided, however,
that "sensitive" payments shall not include contributions to political campaigns
or organizations which are permissible under federal and state election laws.
2.19 BOOKS AND RECORDS. The books and records of the Company are
complete and correct in all material respects and have been maintained in
accordance with good business practices and contain a true and complete record
of all meetings or proceedings of the Board of Directors and the shareholders.
The stock ledger of the Company is complete and reflects all issuances,
transfers, repurchases and cancellations of shares of capital stock of the
Company.
2.20 EMPLOYMENT MATTERS. There is no material labor dispute involving
the Company and its employees, nor is the Company aware of any labor
organization activity involving its employees. The Company is not aware that any
officer or key employee intends to terminate his employment with the Company,
nor does the Company have any present intention to terminate the employment of
any officer or key employee.
2.21 DISCLOSURE. No representation or warranty by the Company
contained in this Agreement or any Schedule or Exhibit hereto, or any
certificate or other instrument required by this Agreement to be furnished to
the Purchasers or their special counsel by the Company with respect to the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact which is
necessary in order to make the statements contained herein or therein, not
misleading. There is no fact known to the Company relating to the business,
operations, condition or prospects of the Company which materially adversely
affects the same and which has not been disclosed to the Purchasers by the
Company.
2.22 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Company contained herein shall survive the execution and
delivery of this Agreement and the purchase and issuance of the Preferred Stock,
but shall terminate
9.
<PAGE>
upon the earlier of (i) the closing of the Company's Public Offering, as defined
in Section 4.2 hereof, or (ii) December 31, 2000.
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby severally represents and warrants to the
Company as follows:
3.1 ORGANIZATION; GOOD STANDING. Each Purchaser, if a corporation or
a partnership, is duly organized, validly existing and in good standing under
the laws of its state of incorporation or organization, as the case may be, and
has all requisite power and authority to carry on its business as now conducted.
3.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. Each Purchaser, if a
corporation or a partnership, has full corporate or partnership, as the case may
be, power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. All action, corporate or otherwise, on the
part of each Purchaser, and its officers, directors, and shareholders or
partners, as the case may be, necessary for the authorization, execution and
delivery of this Agreement and the performance of all obligations of each
Purchaser hereunder has been taken or will be taken prior to the Closing Date of
this Agreement, when executed, will constitute a legal, valid and binding
obligation of each Purchaser, enforceable in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law). The execution and delivery of this Agreement, will not (i)
violate such Purchaser's charter, bylaws or other organizational document, or
(ii) violate any provision of law, of (iii) conflict with, or result in a breach
of any of the terms of, or constitute a default under any agreement, instrument
or other restriction to which such Purchaser is a party or by which such
Purchaser or any of its properties or assets is bound.
3.3 ACCREDITED INVESTOR. Each Purchaser is an
"Accredited Investor" within the definition set forth in Rule 501(a)
of Regulation D promulgated under the Securities Act.
3.4 PURCHASE FOR INVESTMENT. Each Purchaser represents that it is
purchasing and acquiring the securities for its own account for investment and
not with a view to the resale or distribution, in whole or in part, in violation
of the Securities Act or applicable state securities law. If a Purchaser
requests the Company to register the Preferred Stock in the name of either the
Purchaser's nominee, the Purchaser's immediate family members,
10.
<PAGE>
or an "affiliate" of the Purchaser provided that the Purchaser "controls" or is
"controlled" by or is under "common control" with, such "affiliate," as such
terms are defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or in regulations promulgated thereunder, the Company will not
withhold its consent unreasonably if such request is accompanied by an opinion
of counsel of the Purchaser that such registration shall not violate the
Securities Act or applicable state securities laws or invalidate the exemption
upon which the Company is relying in connection with the offer and sale of
Preferred Stock pursuant to this Agreement.
3.5 ACCESS TO INFORMATION. Each Purchaser has had access during the
course of this transaction and prior to the acquisition of the securities, to
such information relating to the Company as it has desired, and has been given
the opportunity to ask questions of, and receive answers from, the Company and
its representatives concerning the Company and the terms and conditions of the
issuance and sale of the securities, and to obtain any additional information
which the Company possesses or can reasonably obtain which is necessary to
verify the accuracy of the information furnished to the Purchaser.
3.6 RESTRICTIONS ON TRANSFER. Each Purchaser understands that (i) the
Preferred Stock and the Common Stock issuable upon conversion of the Preferred
Stock have not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Sections 3(b) or 4(2) thereof or Regulation D
promulgated under the Securities Act, (ii) the Preferred Stock and the Common
Stock issuable upon conversion of the Preferred Stock must be held indefinitely
unless a subsequent disposition thereof is registered under the Securities Act
or is exempt from such registration, (iii) the Preferred Stock and the Common
Stock issuable upon conversion of the Preferred Stock will bear a legend to such
effect and to the effect that such securities are subject to this Agreement, and
(iv) the Company will make a notation on its transfer books to such effect.
3.7 GOVERNMENT CONSENTS, ETC. No consent, approval or authorization
of, or declaration, registration or filing with, any person, entity or
government authority is required on the part of a Purchaser for the valid
execution, delivery and performance of this Agreement or the valid consummation
of the transactions contemplated hereby.
3.8 LITIGATION. Each Purchaser represents that there is no litigation
pending, or to the knowledge of such Purchaser, threatened, which could
adversely affect the transactions contemplated by this Agreement.
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3.9 SURVIVAL. The representations, warranties and covenants of the
Purchasers contained herein shall survive the execution and delivery of this
Agreement and the acquisition of the Preferred Stock, but shall terminate upon
the earlier of (i) the closing of the Company's Public Offering, as defined in
Section 4.2 hereof, or (ii) December 31, 2000.
IV. COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchasers as follows:
4.1 QUARTERLY AND ANNUAL FINANCIAL STATEMENTS. The Company shall
furnish to each Purchaser;
(a) As soon as available, but in any event, within 45 days after
the end of each fiscal quarter of the Company, an unaudited balance sheet of the
Company as at the end of such quarter and unaudited statements of income and of
changes in financial condition of the Company for such fiscal quarter and for
the current fiscal year to the end of such fiscal quarter setting forth in
comparative form the Company's financial statements for the corresponding
periods for the prior fiscal year, all in reasonable detail and certified by an
authorized financial officer of the Company stating that such statements have
been prepared in accordance with generally accepted accounting principles
consistently applied (except as noted) and fairly present the financial
condition of the Company at the date thereof and for the periods covered
thereby, subject to changes resulting from year-end adjustments and accruals;
and
(b) As soon as available, but in any event, within 90 days after
the end of each fiscal year of the Company, an audited balance sheet of the
Company as at the end of such year and audited statements of income and of
changes in financial condition of the Company for such year, including
comparisons to the corresponding periods in prior years, prepared in accordance
with generally accepted accounting principles consistently applied and certified
by independent certified public accountants.
4.2 AVAILABILITY OF RULE 144 AND RULE 144A. At such time as the Company
becomes subject to the reporting requirements of Section 13 of the Exchange Act,
whether as a result of the Company's Public Offering (as hereinafter defined) or
any other public offering of the Company's capital stock, or because the Company
meets the criteria of Section 12(g) of the Exchange Act, it shall file with the
Securities and Exchange Commission (the "Commission") all reports required to be
filed by it pursuant to Section 13 or Section 15(d) of the Exchange Act and
applicable rules and regulations thereunder, and shall maintain full
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compliance with the current public information requirements of Rule 144 and Rule
144A promulgated under the Securities Act or any similar successor to such rule.
"Public Offering" means a firm commitment underwritten offering to the public of
the Company's Common Stock pursuant to a registration statement under the
Securities Act where the aggregate sales price of such securities (before
deduction of underwriting discounts, commissions and expenses of sale) is not
less than $10,000,000, and the accreted value per share of Preferred Stock then
outstanding, giving effect to the public offering, is at least $100.00 per
share, subject to adjustment to reflect stock splits, reverse stock splits or
combinations.
4.3 OTHER INFORMATION. The Company will promptly notify the Board of
Directors of all material developments, including without limitation, all
discussions, offers, contracts, mergers, acquisitions, divestitures and any
changes in the business, properties, assets or condition, financial or
otherwise, of the Company. In addition, prior to the start of each fiscal year,
the Company shall submit to the Board of Directors for its approval, an annual
operating plan, which plan shall include, without limitation, a budget and
projected monthly financial statement for such year.
4.4 KEY MANAGER LIFE INSURANCE. When obtained by the Company, the
Company shall maintain key manager life insurance upon the life of Hedrick in
the amount of $2,000,000, with the proceeds payable to the Company.
4.5 INSPECTION. The Company shall permit any Purchaser, or any
authorized representative thereof, to visit and inspect the properties of the
Company, including its corporate and financial records, to examine its records
and make copies thereof (at the cost of the Purchaser) and to discuss its
affairs and finances with its officers, at all such reasonable times during
regular business hours and upon reasonable advance notice as often as may be
reasonably requested. The rights set forth in this Section 4.5 shall be
exercised solely in furtherance of the proper interests of such Purchaser as an
investor in the Company, and any Purchaser exercising its rights of inspection
hereunder, and its officers, directors, shareholders, employees, agents and
representatives, shall maintain the confidentiality of all financial and other
confidential information of the Company acquired by them in exercising such
rights. If requested by the Company, each Purchaser exercising its rights
hereunder shall execute a confidentiality agreement with the Company. With
respect to Parker-Hannifin Corporation, the confidentiality obligations shall be
governed by the provisions set forth in the Stock Purchase Agreement dated as of
July 11, 1991 between the Company and Parker-Hannifin Corporation.
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4.6 NON-DISCLOSURE AND INVENTIONS AGREEMENTS. The Company shall require
all employees now or hereafter employed by the Company, to enter into a
Non-Disclosure and Inventions Agreement in substantially the form delivered
pursuant to Section 2.17 of this Agreement.
4.7 BOARD OF DIRECTORS.
(a) The Board of Directors of the Company shall consist of 8
members. The Company hereby agrees to nominate and Hedrick and the Purchasers
hereby agree to vote for the election, among others, of the following candidates
to the Board of Directors.
(i) As long as The P/A Fund or its affiliates, as the case
may be, holds at least 10% of the securities acquired by it pursuant to
this Agreement (in any combination which may include shares of Preferred
Stock of shares of Common Stock issuable upon conversion of the Preferred
Stock, on an as-converted basis, and dividends or other distributions
thereon), one director designated by The P/A Fund or its affiliates, as the
case may be, which shall initially be Joel P. Adams (provided, however,
that a designee which the Board of Directors reasonably determines would
cause competitive harm to the Company shall not be nominated); and
(ii) One outside director designated by a majority of the
Purchasers and approved by the Board of Directors, such approval not to be
unreasonably withheld; and
(iii) So long as Hedrick shall beneficially own at least 20%
of the issued and outstanding capital stock of the Company, Hedrick shall
be so nominated and voted for by the Purchasers (in addition to the
designees nominated and voted for under clauses (i) and (ii) above).
(b) If any of the directors designated pursuant to Section
4.7(a) hereof is removed or vacates such position for any reason whatsoever,
such vacancy shall not be filled by the remaining members of the Board of
Directors, but the Company, Hedrick and the Purchasers shall consent in writing,
or vote or cause to be voted, all voting securities in favor of the election of
a new designee in compliance with Section 4.7(a), to replace such former
designee as promptly as practicable after the occurrence of such removal or
vacancy.
(c) The Company shall reimburse each of the directors for all
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors and meetings of committees of the Board of Directors.
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(d) The right to designate a director granted to The P/A Fund or
its affiliates, as the case may be, pursuant to Section 4.7(a)(i) hereof, may
not be transferred by The P/A Fund or its affiliates, as the case may be, to a
transferee of the securities acquired pursuant to this Agreement by The P/A Fund
or its affiliates, as the case may be.
4.8 PREEMPTIVE RIGHTS.
(a) The Company shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange:
(i) any shares of Common Stock, (ii) any other equity security of the Company,
including without limitation, shares of preferred stock, (iii) any debt security
which by its terms is convertible into or exchangeable for any equity security
of the Company, (iv) any security of the Company that is a combination of debt
and equity, or (v) any option, warrant or other right to subscribe for, purchase
or otherwise acquire any equity security or any such debt security of the
Company, unless in each case the Company shall have first offered to sell such
securities (the "Offered Securities") to each Purchaser as follows: the Company
shall offer to sell to each Purchaser that portion of the Offered Securities as
the number of shares of Preferred Stock and other shares of Common Stock then
held by or issuable to such Purchaser bears to the total number of shares of
Common Stock outstanding (assuming for such purpose the issuance of all shares
of Common Stock issuable upon conversion of all outstanding shares of Preferred
Stock (the "Basic Amount") at a price and on such other terms as shall have been
specified by the Company in writing delivered to each Purchaser (the "Offer"),
which Offer by its terms shall remain open and irrevocable for a period of 15
days.
(b) Notice of a Purchaser's intention to accept, in whole or in
part, an Offer made pursuant to Section 4.8(a) shall be evidenced by a writing
signed by such Purchaser and delivered to the Company prior to the end of the 15
day period of such Offer, setting forth such of such Purchaser's Basic Amount as
such Purchaser elects to purchase (the "Notice of Acceptance").
(c) (i) In the event that Notices of Acceptance are not given by
the Purchasers in respect of all of each Purchaser's Basic Amount within such 15
day period, the Company shall have 60 days from the expiration of the period set
forth in Section 4.8(a) to sell all or any part of such Basic Amount as to which
a Notice of Acceptance has not been given by a Purchaser, together with all or
any part of the Offered Securities which are not part of the Basic Amount (the
"Available Securities") to the person or persons specified in the Offer, in all
respects upon terms and conditions, including without limitation, unit price and
interest rates, which are no more favorable, in the aggregate, to such other
person or
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persons or less favorable to the Company than those set forth in the Offer.
(ii) In the event the Company shall propose to sell less than
all of the Available Securities (any such sale to be in the manner and on
the terms specified in Section 4.8(c) (i) above), then each Purchaser may,
at its sole option and in its sole discretion, reduce the number of, or
other units of, the Basic Amount specified in its respective Notice of
Acceptance to an amount which shall be not less than the amount of the
Basic Amount which such purchaser elected to purchase pursuant to Section
4.8(b) multiplied by a fraction (x) the numerator of which shall be the
amount of Offered Securities which the Company actually proposes to sell,
and (y) the denominator of which shall be the amount of all Offered
Securities. In the event that a Purchaser elects to reduce the number or
amount of the Basic Amount specified in its Notice of Acceptance, the
Company may not sell or otherwise dispose of more than the reduced amount
of the Offered Securities until such securities have again been offered to
the Purchasers in accordance with Section 4.8(a).
(iii) Upon the closing, which shall include full payment to
the Company, of the sale to such other person or persons of all or less
than all of the Available Securities, then each Purchaser who has exercised
its option hereunder shall purchase from the Company, and the Company shall
sell to each such Purchaser, the number of the Basic Amount specified in
the Notices of Acceptance, as reduced pursuant to Section 4.8(c)(ii), upon
the terms and conditions specified in the Offer.
(d) in each case, any Basic Amount not purchased by a Purchaser
or other person in accordance with Section 4.8(c), may not be sold or otherwise
disposed of until it is again offered to the Purchasers under the procedures set
forth in Sections 4.8(a), 4.8(b) and 4.8(c).
(e) (i) The rights of the Purchasers under this Section 4.8
shall not apply to:
(1) Common Stock issued as a stock dividend to holders
of Common Stock or upon any subdivision or combination of shares of Common
Stock; or
(2) The issuance of any share of Common Stock upon
conversion of the Preferred Stock.
(ii) The rights of the Purchasers under this Section 4.8
shall not apply to the following, except to the extent that the aggregate
market value of the shares involved in the following exceed $1,000,000:
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(1) The issuance to officers, directors, employees or
consultants of the Company of any shares of capital stock issued by exercise of
rights under the terms of a stock option; or
(2) The issuance to employees of the Company of any
shares of capital stock as a bonus without the receipt by the Company of any
monetary consideration therefor.
(f) Any transferee or assignee of any shares of Preferred Stock
or Common Stock owned by a Purchaser and transferred or assigned pursuant to
this Agreement shall be entitled to the benefits of this Section 4.8 with
respect to such shares and shall not require the consent of the Company thereto.
(g) For purposes of this Section 4.8, the term "Purchaser" shall
include the partners, shareholders or other affiliates of a Purchaser, and a
Purchaser may apportion its Basic Amount among itself and such partners,
shareholders and other affiliates in such proportion as it deems appropriate;
provided, however, if the rights granted herein to any Purchaser are exercised
by its partners, shareholders or other affiliates, a condition to such exercise
shall be delivery of an opinion of counsel reasonably acceptable to the Company
that such exercise shall not invalidate the exemption upon which the Company
intends to rely, if any, in the offer and sale of the securities.
4.9 ISSUANCE OF ADDITIONAL PREFERRED STOCK. The Company agrees that
it shall not issue or sell any additional shares of Series A Convertible
Preferred Stock after the Closing without the prior consent of the Purchasers.
4.10 SURVIVAL OF COVENANTS OF THE COMPANY. The obligations of the
Company set forth in Sections 4.1, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8 and 4.9 above
are continuing covenants of the Company and shall survive until terminated upon
the closing of the Company's Public Offering as defined in Section 4.2 hereof.
The obligations of the Company set forth in Section 4.2 above are continuing
covenants and shall survive the closing of the Company's Public Offering as
defined in Section 4.2 hereof.
V. REGISTRATION RIGHTS
5.1 CERTAIN DEFINITIONS. As used in this Article V,
the following terms shall have the following respective meanings:
(i) Act means the Securities Act or any successor federal
statute, and the rules and regulations of the Commission issued under the
Act, as they each may, from time to time, be in effect.
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(ii) Commission means the Securities and Exchange Commission, or
any other federal agency at the time administering the Act.
(iii) Exchange Act means the Exchange Act or any successor
federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
(iv) Holder means any person who holds Registrable Shares
including any person to whom the rights granted under this Article V are
transferred pursuant to Section 5.2 hereof, and Holders means all of them.
(v) Registration Statement means a registration statement filed
by the Company with the Commission for a public offering and sale of
securities of the Company (other than a registration statement on Form S-8
or Form S-4, or their successors, or any other form for a limited purpose,
or any registration statement covering only securities proposed to be
issued in exchange for securities or assets of another corporation).
(vi) Registration Expenses means the expenses
described in Section 5.6.
(vii) Registrable Shares means the shares of Common Stock issued
or issuable upon conversion of the Company's Preferred Stock and any other
shares of Common Stock of the Company issued in respect of such shares
(because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events), or any other shares of Common Stock
held by a Purchaser; provided, however, that shares of Common Stock which
are Registrable Shares shall cease to be Registrable Shares upon any sale
pursuant to a Registration Statement or any sale in any manner to a person
or entity which, by virtue of Section 5.2 of this Agreement, is not
entitled to the rights provided by Article V. Wherever reference is made
in this Article V to a request or consent of Holders of a certain
percentage of Registrable Shares, the determination of such percentage
shall include shares of Common Stock issued or issuable upon conversion of
the Preferred Stock even if such conversion has not yet been effected.
5.2 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Shares pursuant to this Article V may be
assigned (but only with all related obligations) by a Holder to a transferee of
such securities, provided the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee and
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the securities with respect to which such registration rights are being
assigned; and provided, further, that such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee is restricted under the Act.
5.3 REQUIRED REGISTRATION.
(a) At any time after 6 months following the effective date of
the Company's initial public offering, the Holders holding in the aggregate at
least 65% of the Registrable Shares may request, in writing, that the Company
effect the registration of Registrable Shares owned by such Holders aggregating
at least 50% of the Registrable Shares held by all of the Holders. If the
Holders initiating the registration intend to distribute the Registrable Shares
by means of an underwriting, they shall so advise the Company in their request.
In the event such registration is underwritten, the right of other Holders to
participate shall be conditioned upon such other Holders' agreement to
participate in such underwriting. Upon receipt of any such request, the Company
shall promptly give written notice of such proposed registration to all Holders.
Such Holders shall have the right, by giving written notice to the Company
within 20 days after the Company provides its notice, to elect to have included
in such registration such of their Registrable Shares as such Holders may
request in such notice of election, subject to the approval of the underwriting
managing the offering. Thereupon, the Company shall, as soon as reasonably
practicable, use its best efforts to effect the registration of all Registrable
Shares which the Company has been requested to so register. If the number of
Registrable Shares to be included in the underwriting in accordance with the
foregoing is less than the total number of shares which the Holders of
Registrable Shares have requested to be included, then the Holders of
Registrable Shares who have requested registration and other Holders of
Registrable Shares entitled to be included in such registration shall
participate in the underwriting pro rata based upon their total ownership of
Registrable Shares. The Company shall be entitled to include in such
registration, for its own account or for the account of others at the Company's
request, such amount of its stock as may be agreed upon by the Holders
initiating the registration and the underwriter managing the offering, if any;
provided, however, that a registration shall not be deemed to have been made
pursuant to this Section 5.3 if 51% or more of the stock included in such
registration is registered for the account of the Company or for the account of
others at the Company's request.
(b) The Company shall not be required to effect more than 2
registrations pursuant to Section 5.3(a). In addition, the Company shall not be
required to effect any registration within 6 months after the effective date of
any other Registration Statement of the Company. During the period commencing 6
months
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after the effective date of the Company's initial public offering and
terminating 12 months after the effective date of the Company's initial public
offering (the "First Required Registration Period"), the Holders may exercise
only one right to require registration pursuant to Section 5.3(a). The second
right to require registration pursuant to Section 5.3(a) (and the first right,
if not exercised during the First Required Registration Period), shall be
exercisable during the period commencing on the first annual anniversary of the
effective date of the Company's initial public offering and terminating on the
third annual anniversary of the effective date of the Company's initial public
offering (the "Second Required Registration Period"); provided, however, that no
registration shall be required if the sale of the Registrable Shares for which
registration is requested may be effected upon reliance on Rule 144 under the
Securities Act. Notwithstanding the foregoing, in the event that the Registrable
Shares are not freely transferable without registration at the end of the Second
Required Registration Period, then the Second Required Registration Period shall
be extended for such period of time as is necessary in order for the Registrable
Shares to be freely transferable without registration of such shares.
(c) If at any time of any request to register Registrable Shares
pursuant to this Section 5.3, the Company is engaged or has fixed plans to
engage within 90 days of the time of the request, in a registered public
offering as to which the Holders may include Registrable Shares pursuant to
Section 5.4, or is engaged in any other activity which, in the good faith
determination of the Company's Board of Directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may at its option direct that such request be delayed for a period not
in excess of 90 days from the effective date of such offering or the date of
commencement of such other material activity, as the case may be, such right to
delay a request to be exercised by the Company not more than once in any 2-year
period.
(d) The Company shall select the lead underwriter for the public
offering, with the approval of the Holders of a majority of the Registrable
Shares to be included in any registration pursuant to this Section 5.3, which
approval shall not be unreasonably withheld.
5.4 INCIDENTAL REGISTRATION.
(a) Whenever the Company proposes to file a Registration
Statement (other than pursuant to Section 5.3) at any time and from time to
time, it will, prior to such filing, give written notice to all Holders of its
intention to do so and, upon the written request of a Holder of Holders given
within 20 days after the Company provides such notice, the Company shall use its
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best efforts to cause all Registrable Shares which the Company has been
requested by such Holder or Holders to register to be registered under the Act
to the extent necessary to permit their sale or other disposition in accordance
with the intended methods of distribution specified in the request of such
Holder or Holders; provided that the Company shall have the right to postpone or
withdraw any registration effected pursuant to this Section 5.4 without
obligation to any Holder.
(b) In connection with any offering under this Section 5.4
involving an underwriting, the Company shall not be required to include any
Registrable Shares in such underwriting unless the Holders thereof accept the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwriters, jeopardize the success of the offering by the
Company. If in the opinion of the managing underwriter the registration of all,
or part of, the Registrable Shares which the Holders have requested to be
included would materially and adversely affect such public offering, then the
Company shall be required to include in the underwriting only that number of
Registrable Shares, if any, which the managing underwriter believes may be sold
without causing such adverse effect. If the number of Registrable Shares to be
included in the underwriting in accordance with the forgoing is less than the
total number of shares which the Holders of Registrable Shares have requested to
be included, then the Holders of Registrable Shares who have requested
registration and other holders of shares of Common Stock entitled to include
shares of Common Stock in such registration shall participate in the
underwriting pro rata based upon their total ownership of shares of Common Stock
of the Company (including shares of Common Stock issuable upon conversion of the
Preferred Stock, on an as-converted basis). If any Holder would thus be entitled
to include more shares than such Holder requested to be registered, the excess
shall be allocated among other requesting Holders pro rata based upon their
total ownership of Registrable Shares.
(c) All Holders of Registrable Shares proposing to distribute
their securities in an offering under this Section 5.4 involving an underwriting
shall (together with the Company and other shareholders of securities
distributing their shares through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
underwriting.
5.5 Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Shares under the Act, the Company shall:
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(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become and remain effective;
(b) as soon as reasonably practicable prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective until the earlier of (i) the period of time
required by the Commission, or (ii) 120 days from the effective date;
(c) as soon as reasonably practicable furnish to each selling
Holder such reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Act, and such
other documents as the selling Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the selling Holder;
(d) as soon as reasonably practicable use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the selling Holders
shall reasonably request; provided, however, that the Company shall not be
required in connection with this Section 5.5(d) to (i) qualify as a foreign
corporation, (ii) execute a general consent to service of process in any
jurisdiction, (iii) subject itself to taxation in such jurisdiction, or (iv)
register in any state requiring, as a condition to registration, escrow or
surrender of any Company securities held by the security holder other than a
Purchaser; and
(e) if an underwritten public offering, obtain a comfort letter
from the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by comfort letters and an opinion
from the Company's counsel in customary form and covering such matters of the
type customarily covered in public issuances of securities, in each case
addressed to the selling Holders.
If the Company has delivered a preliminary or final prospectus
to the selling Holders and after having done so the prospectus is amended to
comply with the requirements of the Act, the Company shall promptly notify the
selling Holders and, if requested, the selling Holders shall immediately cease
making offers of Registrable Shares and return all prospectuses to the Company.
The Company shall promptly provide the selling Holders with revised prospectuses
and, following receipt of the revised prospectuses, the selling Holders shall be
free to resume making offers of the Registrable Shares.
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5.6 ALLOCATION OF EXPENSES. The Company will pay all Registration
Expenses of all registrations under this Agreement; provided, however, that is a
registration is withdrawn at the request of the Holders requesting such
registration (other than as a result of information concerning a material
adverse change to the business of financial condition of the Company which is
made known to the Holders after the date on which such registration was
requested) and if the requesting Holders elect not to have such registration
counted as a registration requested under Section 5.3(a), the requesting Holders
shall pay the Registration Expenses of such registration pro rata in accordance
with the number of their Registrable Shares included in such registration in
relation to the number of shares of the Company and of others which were
included in the registration. For purposes of this Article V, the term
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with this Article V, including without limitation, all registration
and filing fees, exchange listing fees, printing expenses, the fees and
disbursements of counsel for the Company and the fees and disbursements of one
counsel selected by the selling Holders, the fees and disbursements of the
Company's accountants, state Blue Sky fees and expenses, and the expense of any
special audits incident to or required by any such registration, but excluding
underwriting discounts, selling commissions and the fees and expenses of the
selling Holders' own counsel (other than the counsel selected to represent all
of the selling Holders).
5.7 INDEMNIFICATION.
(a) In the event of any registration of any of the Registrable
Shares under the Act pursuant to this Agreement, the Company will indemnify and
hold harmless the seller of such Registrable Shares, each of its directors,
officers or partners and each other person, if any, who controls such seller
within the meaning of the Act or the Exchange Act against any losses, claims,
damages or liabilities, joint or several, to which such seller or controlling
person may become subject under the Act, the Exchange Act, Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
and the Company will reimburse such seller and each such controlling person for
any legal or any other expenses reasonably incurred by such seller or
controlling person in connection with
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investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made in such Registration Statement,
preliminary prospectus or prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of such seller or controlling person specifically for
use in the preparation thereof; and provided further, however, that any
indemnification contained in this paragraph with respect to any preliminary
prospectus shall not inure to the benefit of any person who otherwise is
entitled to indemnification hereunder on account of any loss, liability, claim,
damage or expense if a copy of an amended or supplemental preliminary
prospectus, or the final prospectus, shall have been delivered or sent to such
person within the time required by the Act, and the untrue statement or omission
of a material fact was corrected in such amended or supplemental preliminary
prospectus or final prospectus and provided that such person did not deliver
such amended or supplemental preliminary prospectus or final prospectus on a
timely basis.
(b) In the event of any registration of any of the Registrable
Shares under the Act pursuant to this Agreement, each seller of Registrable
Shares, severally and not jointly, will indemnify and hold harmless the Company,
each of its directors and officers and each person, if any, who controls the
Company within the meaning of the Act or the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers or controlling persons may become subject under the Act,
Exchange Act, Blue Sky laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement under which such Registrable Shares were
registered under the Act, any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or supplement to the
Registration Statement, or arise out of or are based upon any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, if the statement or omission was made in
reliance upon and in conformity with the information furnished in writing to the
Company by or on behalf of such seller, specifically for use in connection with
the preparation of such Registration Statement, prospectus, amendment or
supplement; provided, however, that the obligations of each Holder hereunder
shall be limited to an amount equal to the proceeds to each Holder of
Registrable Shares sold as contemplated herein.
24.
<PAGE>
(c) Each party entitled to indemnification under this Section
5.7 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 5.7 unless the failure to provide such notice
materially prejudices the defense by the Indemnifying Party against such claim.
The Indemnified Party may participate in such defense at such party's expense
(provided that the counsel of the Indemnifying Party shall control the defense
of such claim or proceeding); provided, however, that the Indemnifying Party
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would, in the opinion of counsel of
the Indemnified Party, be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding, it being understood, however, that in such event,
the Indemnifying Party shall be liable for the reasonable fees and expenses of
only one counsel for the Indemnified Parties. No Indemnifying Party, in the
defense of any such claim or litigation shall as to an Indemnified Party, except
with the consent of such Indemnified Party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect of such claim or litigation, and no
Indemnified Party shall consent to entry of any judgment or settle such claim or
litigation without the prior written consent of the Indemnifying Party.
5.8 INDEMNIFICATION WITH RESPECT TO UNDERWRITTEN OFFERING. In the
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Section 5.3(a), the Company agrees to enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including without limitation customary provisions with
respect to indemnification by the Company of the underwriters of such offering,
provided that the Holders of Registrable Shares being included in such
underwritten registration similarly agree to execute the underwriting agreement
containing customary provisions with respect to indemnification by such Holders.
25.
<PAGE>
5.9 INFORMATION BY HOLDER. Each Holder of Registrable Shares included
in any registration shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may request
in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Article V. Any failure by such
Holder to make available such information shall constitute a waiver by such
Holder of its rights to include such Holder's Registrable Shares in the
registration.
5.10 "STAND-OFF" AGREEMENT. Each Holder, if requested by the Company
and an underwriter of Common Stock or other securities of the Company, shall
agree not to sell or otherwise transfer or dispose of any Registrable Shares or
other securities of the Company held by such Holder for a specified period of
time (not to exceed 180 days) following the effective date of a Registration
Statement. Such agreement shall be in writing in a form satisfactory to the
Company and such underwriter. The Company may impose stop transfer instructions
with respect to the Registrable Shares or other securities subject to the
foregoing restriction until the end of the stand-off period.
5.11 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. The Company shall
not, without the prior written consent of the Holders holding at least 51% of
the Registrable Shares enter into any agreement (other than this Agreement) with
any holder or prospective holder of any securities of the Company which would
allow such holder or prospective holder to (i) receive registration rights which
could conflict with the rights granted to the Purchasers hereunder, or (ii) make
a demand registration which could result in such registration statement being
declared effective prior to the Company's initial public offering.
VI. CONDITIONS TO THE PURCHASERS' OBLIGATIONS AT CLOSING
The obligations of each of the Purchasers under Article I of this
Agreement are subject to the fulfillment, or the waiver by such Purchaser, of
the following conditions on or before the Closing Date:
6.1. REPRESENTATIONS AND WARRANTIES; CONDITIONS. The representations
and warranties set forth in Article II hereof shall be true and correct on and
as of the date hereof and as of the Closing Date, and the Company shall have
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied prior to the Closing Date.
6.2. NO ADVERSE CHANGE. Since the date of the Unaudited Financial
Statements and except as expressly set forth in this Agreement or in any
Schedule, Exhibit or other instrument required
26.
<PAGE>
to be furnished to the Purchasers hereunder, there shall have been no material
adverse change in the business or financial condition or results of operations
of the Company and no material litigation or other proceeding shall have been
commenced by any person, including, without limitation, any governmental agency
relating to any of the proposed transactions, or against the Company or any of
its properties which is, if adversely determined against the Company would have
a material adverse effect on the operations or financial condition of the
Company.
6.3 COMPLIANCE CERTIFICATE. The Company shall have delivered a
certificate executed by the President, dated the Closing Date, certifying that
the conditions specified in Section 6.1 have been satisfied.
6.4 LEGAL OPINION. The Purchasers shall have received an opinion from
Cozen and O'Connor, counsel to the Company, dated the Closing Date, addressed to
the Purchasers, and reasonably satisfactory in form and substance to the
Purchasers and their special counsel, substantially to the effect that:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania, and is qualified to do business in every jurisdiction in which the
business presently conducted by it makes such qualification necessary, except
where such failure to qualify will not have an adverse effect on the Company.
(b) Except for changes specified by this Agreement, the
authorized capital stock of the Company is as described in Section 2.2 of this
Agreement.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby or thereby will result in a
violation of, or be in conflict with, the Articles of Incorporation, as amended,
or bylaws of the Company, and will not, to the knowledge of such counsel, after
due inquiry, (i) constitute a default under any material agreement, lease,
mortgage, note, bond, indenture, license or other document or agreement known to
such counsel and to which the Company is a party or by which the Company is
bound or by which the Company or any of its properties or assets, may be
adversely affected, or (ii) violate any order, rule, regulation, writ,
injunction or decree of any court, administrative agency or governmental body to
which the Company is subject or by which the Company is bound which default or
violation would have a material adverse effect on the financial condition or
operations of the Company.
(d) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable against
27.
<PAGE>
the Company in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws and subject to general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
(e) The offer, sale and issuance of the Preferred Stock and the
issuance of the Common Stock upon conversion of the Preferred Stock, under the
circumstances contemplated by Agreement, constitute exempt transactions under
the Securities Act or regulations promulgated thereunder as now in effect and do
not require registration under the Securities Act.
(f) The offer, sale and issuance of the Preferred Stock and the
issuance of the Common Stock upon conversion of the Preferred Stock, under the
circumstances contemplated by the Agreement, do not require registration,
qualification or any other action under the securities laws of any state, or
such registration, qualification or other action as is required to be taken by
the Company has been duly effected or taken; or will be affected or taken in a
timely manner so as to comply with such state securities laws.
(g) Except with regard to the matter of federal and state
securities law compliance, which matter is addressed in subsections (e) and (f)
above, and the filing of the Amendment with the Secretary of State of the
Commonwealth of Pennsylvania pursuant to the Pennsylvania Business Corporation
Law of 1988, as amended, no consent, approval, authority or other order of any
governmental agency or, to such counsel's knowledge, any other person or
organization is legally required for the issuance and sale of the Preferred
Stock pursuant to this Agreement.
(h) Such counsel has not been retained by the Company in
connection with any action, suit or proceeding, or governmental inquiry or
investigation, pending or threatened against the Company.
In rendering such opinion, such counsel may rely as to factual
matters on certificates of executive officers of the Company, governmental
officials and information furnished by the Purchasers, may make assumptions
(which assumptions shall be specifically set forth) as to matters not reasonably
independently verifiable by such counsel and may rely upon opinions of other
counsel to the extent it reasonably deems appropriate, provided that reliance
upon all such documents, certificates and opinions shall be specified in such
opinion.
6.5 PHYSICAL EXAMINATION; KEY MAN INSURANCE. Hedrick shall have had a
complete physical examination with results that are satisfactory to the
Purchasers, in their sole discretion. The
28.
<PAGE>
Company shall have purchased, or commenced its best efforts to purchase, key
manager life insurance upon the life of Hedrick, in the amount of $2,000,000,
with the proceeds payable to the Company.
6.6 CERTIFICATES AND DOCUMENTS. The Company shall have delivered to
special counsel to the Purchasers:
(a) The Amendment in substantially in the form attached hereto
as EXHIBIT A, which shall have been filed with the Secretary of State of the
Commonwealth of Pennsylvania and be in effect prior to the Closing Date;
(b) Certificates, as of the most recent practicable dates as to
the corporate good standing of the Company issued by the Secretary of State of
the Commonwealth of Pennsylvania, and nay other state in which the Company is
required to be qualified to do business, confirming such good standing on or
immediately prior to the Closing Date.
(c) Bylaws of the Company in effect on the Closing Date,
certified by the Secretary or Assistant Secretary of the Company as of the
Closing Date; and
(d) Resolutions of the Board of Directors of the Company,
authorizing and approving all matters in connection with this Agreement and the
transactions contemplated hereby, certified by the Secretary or Assistant
Secretary of the Company as of the Closing Date.
6.7 OTHER MATTERS. All corporate and other proceedings in connection
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be reasonably satisfactory in
substance and form to the Purchasers and their special counsel.
VII. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING
The obligations of the Company under Article I of this Agreement are
subject to fulfillment, or the waiver by the Company, on or before the Closing
Date, of each of the following:
7.1 REPRESENTATIONS AND WARRANTIES; CONDITIONS. The representations
and warranties of the Purchasers set forth in Article III hereof shall be true
and correct on and as of the date hereof and as of the Closing Date, and the
Purchasers shall have performed and complied with all agreements and conditions
on their part to be performed or complied with prior to the Closing.
29.
<PAGE>
7.2 PURCHASE PRICE. Each Purchaser shall have tendered to the Company
at the Closing the purchase price for the Preferred Stock purchased by such
Purchaser pursuant to Article I hereof.
7.3 OPINION OF COUNSEL. The Purchasers shall have delivered the
opinion of counsel if required by Section 3.4 hereof.
7.4 NO LITIGATION. No material litigation or other proceeding shall
have commenced by any person, including without limitation, any governmental
agency, relating to any of the transactions proposed by this agreement.
VIII. CO-SALE AGREEMENT
8.1. CO-SALE
(a) Hedrick hereby agrees not to enter into any transaction that
would result in the sale by him of 51% or more of the capital stock of the
Company held by Hedrick unless prior to such sale Hedrick gives each of the
Purchasers written notice of his intention to effect such sale. Such notice
shall set forth (i) the number, class and series of the share to be sold by
Hedrick, (ii) the principal terms of the sale, including the price at which the
shares are intended to be sold, and (iii) the percentage that such number of
shares constitutes to the aggregate number of Common Stock Equivalents (as
hereinafter defined) then held by Hedrick.
(b) Each Purchaser shall have the right, exercisable upon
written notice to Hedrick within 20 days after receipt of the notice from
Hedrick, to participate in Hedrick's sale by selling that number of shares of
Common Stock equal to the product obtained by multiplying (x) the aggregate
number of shares of Common Stock Equivalents proposed to be sold by Hedrick, by
(y) a fraction, the numerator of which is the number of shares of Common Stock
Equivalents then owned by the Purchaser, and the denominator of which is the
combined number of shares of Common Stock Equivalents then owned by Hedrick and
all of the Purchasers.
(c) To the extent that any Purchaser elects not to sell the full
number of shares it is entitled to sell pursuant to Section 8.1(b) above, the
other Purchasers' rights to participate in the sale shall be increased pro-rata
based upon the number of shares of Common Stock Equivalents then owned by a
corresponding number of shares.
(d) Each Purchaser may effect its participation in the sale by
delivering to Hedrick for transfer to the purchaser one or more certificates,
properly endorsed for transfer, which represent:
30.
<PAGE>
(i) the number of shares of Common Stock which the Purchaser
elects to sell pursuant to this Section 8.1; or
(ii) that number of shares of Preferred Stock which is at
such time convertible into the number of shares of Common Stock the
Purchaser elects to sell pursuant to this Section 8.1; provided, that, if
the purchaser objects to the delivery of Preferred Stock in lieu of Common
Stock, the participating Purchaser shall convert the Preferred Stock and
deliver Common Stock to Hedrick as a condition to such participation.
(e) Each participating Purchaser shall be obligated to execute
and deliver such agreements and other instruments, including a Purchase or Stock
Agreement, which Hedrick is required to execute and deliver in connection with
the sale by Hedrick of the Common Stock Equivalents, and to make such reasonable
representations and warranties as to such participating Purchaser's shares as
are customary in such agreements.
(f) The certificates which each participating Purchaser delivers
to Hedrick shall be tendered by Hedrick to the purchaser in consummation of the
sale, and Hedrick shall promptly thereafter remit to each participating
Purchaser that portion of the sale proceeds to which such participating
Purchaser is entitled by reason of its participation in such sale.
(g) For purposes of this Section 8.1, the term "Common Stock
Equivalents" means shares of Common Stock, shares of Common Stock issuable upon
conversion of Preferred Stock, on an as-converted basis and shares of Common
Stock issuable upon exercise of options and warrants, on an as-exercised basis.
(h) The provisions of this Section 8.1 shall terminate upon the
closing of the Company's Public Offering as defined in Section 4.2 hereof.
IX. MISCELLANEOUS
9.1 EXPENSES. Each party hereto shall bear its own costs and expenses
that it incurs with respect to the negotiation, execution, delivery and
performance of this Agreement and any transactions contemplated hereby, except
that the Company shall pay the fees and disbursements of Klett Lieber Rooney &
Schorling, special counsel to the Purchasers, not in excess of $20,000;
provided, however, if the transactions contemplated by this Agreement are not
consummated, the Company shall pay one-half of the fees and disbursements of
Klett Lieber Rooney & Schorling, not in excess of $10,000. Such fees and
disbursement of Klett Lieber Rooney & Schorling shall be paid at the Closing, or
in the event
31.
<PAGE>
that the transactions contemplated hereby are not consummated, within 5 days
after a statement for such fees and disbursements has been sent to the Company.
9.2 FINDER'S FEES.
(a) The Company (i) represents and warrants that it has retained
no finder, agent or broker in connection with the transactions contemplated by
this Agreement, and (ii) hereby agrees to indemnify and hold harmless the
Purchasers of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its employees or representatives is responsible.
(b) Each Purchaser severally (i) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement, and (ii) hereby agrees to indemnify and to hold
harmless the Company and the other Purchasers of and from any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which such Purchaser, or any of such
Purchaser's employees or representatives, is responsible.
9.3 NOTICES. All notices, requests, consents and other communications
hereunder (except as stated in the last sentence of this section 9.3) shall be
in writing and shall be personally delivered or delivered by overnight courier
or mailed by first-class registered or certified mail, postage prepaid, return
receipt requested.
(a) If to a Purchaser, at its address as set forth on SCHEDULE I
hereto, or at such other address as may have been furnished to the Company by it
in writing, with a copy to:
Jane E. Hepner, Esq.
Klett Lieber Rooney & Schorling
A Professional Corporation
40th Floor, One Oxford Centre
Pittsburgh, PA 15219-6498
(b) If to the Company, at:
Geoffrey S. M. Hedrick
Innovative Solutions & Support, Inc.
420 Lapp Road
Malvern, PA 19455
32.
<PAGE>
with a copy to:
Steven N. Hass, Esq.
Cozen and O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
The financial statements required by section 4.1 may be mailed by first-class
regular mail.
9.4 INTEGRATION; AMENDMENTS AND WAIVER. This Agreement, together with
all Schedules and Exhibits hereto, embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Purchasers
purchasing at least 51% of the Preferred Stock issued and sold pursuant to this
Agreement and, as to Article VIII and the obligations of Hedrick arising under
Section 4.7, the written consent of Hedrick. No waivers of or exceptions to any
term, condition or provision of this Agreement, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, condition or provision.
9.5 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement.
9.6 GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the Commonwealth of Pennsylvania.
9.7 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall be binding upon, and inure to the
benefit of, the respective representatives, successors and assigns of the
parties hereto.
9.8 EXHIBITS, SCHEDULES, AND HEADINGS. Each Exhibit and Schedule to
this Agreement is made a part of this Agreement as though set forth in full
herein. The headings in this Agreement are for convenience of reference only,
and shall not limit or otherwise affect the meaning hereof.
9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
33.
<PAGE>
9.10 CONSENT BY PARKER. By execution if this Agreement,
Parker-Hannifin Corporation acknowledges and agrees that the terms set forth
therein shall apply only to the Preferred Stock and the Common Stock into which
the Preferred Stock may be converted, being offered and sold hereby, and to no
other securities of the company now or hereafter owned by it.
9.11 ACKNOWLEDGMENTS AND AGREEMENTS BY THE PURCHASERS AND THE
COMPANY. It is acknowledged and agreed by the Purchasers and the Company that
concurrently with (or immediately after) the Closing, the following transactions
shall occur:
(a) C.I.P. Capital, L.P. shall deliver to the Company stock
certificate number C21 evidencing 4,000 shares of Common Stock in exchange for a
certificate evidencing 4,000 shares of Common Stock and a certificate evidencing
4,333 shares of Preferred Stock; and
(b) Parker-Hannifin Corporation shall deliver to the Company
stock certificate number C22 evidencing 1,004 shares of Common Stock in exchange
for a certificate evidencing 1,004 shares of Common Stock and a certificate
evidencing 1,088 shares of Preferred Stock.
The Purchasers and the Company consent to the foregoing
transactions.
34.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year written above.
INNOVATIVE SOLUTIONS &
SUPPORT, INC.
By: /s/ GEOFFREY S. M. HEDRICK
---------------------------
Title: President
------------------------
------------------------------
Geoffrey S. M. Hedrick
THE P/A FUND
By Fostin Capital Partners II
By: /s/ Joel P. Adams
---------------------------
Title: GP
------------------------
PARKER-HANNIFIN CORPORATION
By: /s/ Stephen Hayes
---------------------------
Title: Vice President
------------------------
35.
<PAGE>
SCHEDULE I
PURCHASER PREFERRED STOCK PURCHASE PRICE
The P/A Fund 138,750 $ 3,330,000.00*
Adams Capital Management
518 Broad Street
Sewickley, PA 15143
Parker-Hannifin Corporation 27,917 $ 670,008.00
17325 Euclid Avenue
Cleveland, Ohio 44112
* Of which $3,080,000.00 shall be delivered in cash by wire transfer and
$250,000.000 shall be by delivery of the Demand Note, Security
Agreement and UCC termination statements as set fourth in Section
1.2(b) hereof.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
------------------------------
Innovative Solutions and Support, LLC, a Pennsylvania limited liability
company
IS&S Delaware, Inc., a Delaware corporation
IS&S Holdings, Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Inovative Solutions and Support, Incorporated:
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa,
May 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 4,638,607
<SECURITIES> 0
<RECEIVABLES> 3,413,771
<ALLOWANCES> 0
<INVENTORY> 3,496,773
<CURRENT-ASSETS> 11,638,785
<PP&E> 2,037,906
<DEPRECIATION> (1,292,716)
<TOTAL-ASSETS> 12,612,189
<CURRENT-LIABILITIES> 3,081,733
<BONDS> 0
0
177
<COMMON> 6,172
<OTHER-SE> 8,928,923
<TOTAL-LIABILITY-AND-EQUITY> 12,612,189
<SALES> 22,487,882
<TOTAL-REVENUES> 22,487,882
<CGS> 10,570,009
<TOTAL-COSTS> 5,249,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30,137)
<INCOME-PRETAX> 6,698,399
<INCOME-TAX> 2,517,764
<INCOME-CONTINUING> 4,180,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,180,635
<EPS-BASIC> .68
<EPS-DILUTED> .50
</TABLE>
