<PAGE>
As filed with the Securities and Exchange Commission on July 13, 2000
Registration No. 333-36584
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
Innovative Solutions and Support, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 7371 23-2507402
(Primary Standard (I.R.S. Employer
(State or other Industrial Classification Identification Number)
jurisdiction of Code Number)
incorporation or
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)
--------------------
Geoffrey S. M. Hedrick
Chief Executive Officer
Innovative Solutions and Support, Inc.
420 Lapp Road
Malvern, Pennsylvania 19355
(610) 889-9898
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
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.
--------------------
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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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class of Maximum Maximum
Securities to be Amount to Offering Price Aggregate Amount of
Registered be Registered(1) Per Share(2) Offering Price(2) Registration Fee(3)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share......... 3,450,000 shares $12.00 $41,400,000 $10,930
</TABLE>
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--------------------------------------------------------------------------------
(1) Includes 450,000 shares which the underwriters have the right to purchase
from the Registrant to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(3) $10,560 was paid with the initial filing, and an additional $370 is being
paid with this Amendment.
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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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JULY 13, 2000
PROSPECTUS
3,000,000 shares
Innovative Solutions and Support, Inc.
[LOGO OF INNOVATIVE SOLUTIONS]
Common Stock
--------------
This is the initial public offering of common stock of Innovative Solutions
and Support, Inc. We are offering 3,000,000 shares of our common stock. We
anticipate that the initial public offering price will be between $10.00 and
$12.00 per share. We have applied to list our common stock on the Nasdaq
National Market under the symbol "ISSC."
--------------
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.
<TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
Per share Total
--------------------------------------------------------------------------------
<S> <C> <C>
Public offering price.......................................... $ $
--------------------------------------------------------------------------------
Underwriting discount.......................................... $ $
--------------------------------------------------------------------------------
Proceeds, before expenses, to us............................... $ $
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
The underwriters may purchase up to an additional 450,000 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.
--------------
Friedman Billings Ramsey
Stifel, Nicolaus & Company, Incorporated
Janney Montgomery Scott LLC
--------------
The date of this prospectus is , 2000.
<PAGE>
INSIDE FRONT COVER
Photograph of cockpit of Pilatus PC12 aircraft with IS&S flat panel display.
Text:
Instrument panel in a Platus PC12 with conventional Electronic Flight
Instrumentation System (EFIS) on the left side and the IS&S Cockpit
Information Panel (Cockpit/IP) on the right side.
Illustration of RVSM air data system for US Air Force KC 135
Text:
IS&S RVSM air data system for the US Air Force KC 135
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
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.
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. 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) reflects a 1.09624-
for-1 split of our common stock to occur prior to this offering; (2) assumes no
exercise of the underwriters' over-allotment option; and (3) 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, Inc.
Our Business
We design, manufacture and sell flight avionics products, which are
electronic instruments used in the operation of aircraft, to the military and
government, commercial air transport and corporate aviation markets primarily
to upgrade, or retrofit, aircraft currently in use. Our products include flight
information computers, electronic displays and advanced monitoring systems that
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. We believe that this strategy, combined with our experience
in the aviation industry, 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 $13.6 million for the six months ended March 31, 2000. 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 $3.9
million for the six months ended March 31, 2000.
Our air data product line includes our reduced vertical separation minimum
(RVSM) products, which allow aircraft to comply with regulatory standards
necessary to fly 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, a liquid crystal
display that can replicate the display of one or a suite of analog and digital
displays on one screen. We believe that our flat panel display system, which we
call our Cockpit Information Portal (CIP), at 15 inches diagonal (12p by 9p),
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, which projects important flight information onto an aircraft's
cockpit windshield for easy reference by pilots.
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, Inc., 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
<PAGE>
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 and other information that cannot currently
be displayed in cockpits, either because of space or technological limitations.
Strategy
Our objective is to become a leading supplier and integrator of cockpit
information. We believe that our industry experience and reputation, our
technology and products, and our business strategy provide a basis to achieve
this objective. 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
<PAGE>
. 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.
--------------------
The Offering
<TABLE>
<C> <S>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding after the
offering................................... 12,121,593 shares
Use of proceeds............................. For product development of our
flat panel display and related
products, to finance our
purchase of an airplane, to
finance a portion of our new
facility, to expand our sales
and marketing efforts, for
possible acquisitions and for
general corporate purposes and
working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...... ISSC
</TABLE>
--------------------
Our common stock to be outstanding after this offering excludes:
. 757,501 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average exercise price of
$5.26 per share;
. warrants to purchase 375,354 shares of common stock at an exercise price
of $2.19 per share; and
. 285,912 shares of common stock reserved for future grants under our 1998
Stock Option Plan as of June 30, 2000.
3
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended
----------------------------------------------------------------- -----------------------
March 31, March 31,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(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 $8,913,950 $13,558,787
Cost of sales........... 1,847,207 5,322,424 7,007,523 8,480,549 10,570,009 4,694,879 6,399,879
----------- ----------- ----------- ----------- ----------- ---------- -----------
Gross profit........... 325,226 1,363,258 3,586,681 6,201,764 11,917,873 4,219,071 7,158,908
Research and
development............ 969,403 963,921 1,114,351 1,554,564 1,915,634 877,920 1,357,302
Selling, general and
administrative......... 851,512 1,634,199 1,567,896 2,492,509 3,333,977 1,202,825 2,051,643
----------- ----------- ----------- ----------- ----------- ---------- -----------
Total operating
expenses.............. 1,820,915 2,598,120 2,682,247 4,047,073 5,249,611 2,080,745 3,408,945
Operating income
(loss)................ (1,495,689) (1,234,862) 904,434 2,154,691 6,668,262 2,138,326 3,749,963
Interest (income)
expense, net........... -- (27,287) 63,813 224,121 (30,137) 31,105 (137,093)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before
income taxes.......... (1,495,689) (1,207,575) 840,621 1,930,570 6,698,399 2,107,221 3,887,056
Income tax (expense)
benefit, net........... -- -- -- 2,013,802 (2,517,764) (792,051) (1,420,642)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net income (loss)....... $(1,495,689) $(1,207,575) $ 840,621 $ 3,944,372 $ 4,180,635 $1,315,170 $ 2,466,414
=========== =========== =========== =========== =========== ========== ===========
Net income (loss) per
common share:
Basic.................. $ (0.23) $ (0.18) $ 0.13 $ 0.59 $ 0.62 $ 0.20 $ 0.35
Diluted................ (0.23) (0.18) 0.10 0.46 0.45 0.15 0.25
Weighted average shares
outstanding:
Basic.................. 6,570,649 6,612,739 6,612,739 6,670,134 6,746,976 6,727,844 7,100,319
Diluted................ 6,570,649 6,612,739 8,554,092 8,611,487 9,204,344 8,983,348 9,837,924
Operating Data:
Gross profit margin.... 15.0% 20.4% 33.9% 42.2% 53.0% 47.3% 52.8%
Operating income (loss)
margin................ (68.8%) (18.5%) 8.5% 14.7% 29.7% 24.0% 27.7%
Revenues per employee
(1)................... $ 51,820 $ 114,210 $ 156,150 $ 192,798 $ 258,253 $ 107,396 $ 124,393
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
---------------------------
Actual As Adjusted (2)
----------- ---------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $ 6,456,285 $36,408,910
Working capital................................... 11,665,639 41,618,264
Total assets...................................... 15,328,305 45,248,305
Debt and capital lease obligations, less current
portion.......................................... 38,889 38,889
Total shareholders' equity........................ 12,400,118 42,320,118
</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.
(2) Gives effect to the public offering of 3,000,000 shares of common stock at
an assumed initial public offering price of $11.00 per share, net of
underwriting discount and $770,000 of other estimated issuance costs.
4
<PAGE>
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
Most of our sales are of air data systems products, and we cannot be certain
that the market will continue to accept these or our other products.
During fiscal year 1999 and the six months ended March 31, 2000, we derived
81% and 100% 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 revenues will decrease if such products do not continue to receive market
acceptance or 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.
We currently have a limited number of customers that use our products,
primarily for government-related contracts, making us reliant on these
customers and government needs.
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 75% and 90% of
our revenues during fiscal year 1999 and the six months ended March 31, 2000.
Accordingly, our revenues could decline as a result of 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, The Boeing Company, Rockwell International Corporation
and Northwest Airlines Corporation, and 57% of our revenues during the six
months ended March 31, 2000 from DME, Inc., Raytheon Company and Rockwell
International Corporation. 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 revenues and results of operations.
Our business currently derives a large portion of its revenues from one
military retrofit program, the loss of which could reduce our revenues.
During fiscal year 1999 and the six months ended March 31, 2000, 63% and 62%
of our revenues resulted from sales in connection with the United States Air
Force KC-135 retrofit program in which we are a supplier of certain avionics
products. Governmental spending cuts with respect to this program or our loss
of business under this program would reduce our revenues and harm our financial
condition.
The growth of our customer base could be limited by delays or difficulties in
completing the development and introduction of our planned products or product
enhancements.
Recent advances in technology have led to increased demands for new avionics
products. 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 and our
customers decide to purchase competing products, our business may be harmed as
a result of decreased sales and lost market share.
5
<PAGE>
If we fail to enhance existing products or to develop and achieve market
acceptance for flat panel displays and other new products that meet customer
requirements, our business may not grow.
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 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 the components of our air data systems
products, and any interruption in the supply of these components could hinder
our ability to deliver our products.
Our manufacturing process consists primarily of assembling components from
third party manufacturers. For fiscal year 1999, our principal suppliers were
Weston, UK, DDC, Inc. and API Harrowe, Inc. 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 goverment
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 a 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.
We depend on our key personnel to manage our business effectively, and if we
are unable to retain our key employees, our ability to compete could be harmed.
Our success depends on the efforts, abilities and expertise of our senior
management and 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 hurt our ability to
execute our business strategy. 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.
If we do not manage our rapid growth, improve existing processes and implement
new systems, procedures and controls, we may use resources, including your
investment, inefficiently and our ability to serve our customers and capitalize
on market opportunities may suffer.
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 June 30, 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
<PAGE>
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 revenue and operating results may vary significantly from quarter to
quarter, which may cause our stock price to decline.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:
. 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.
Our competition includes other manufacturers of air data systems and flight
information displays against whom we may not be able 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.
We may not be able to identify or complete acquisitions or we may consummate an
acquisition that adversely affects our operating results.
One of our strategies is to acquire businesses or technologies that will
complement our existing operations. We have limited experience in acquiring
businesses or technologies. 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. 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.
7
<PAGE>
Our success depends on our ability to protect our proprietary rights, and there
is a risk of infringement. If we are unable to protect and enforce our
intellectual property rights, we may be unable to compete effectively.
Our success and ability to compete will depend in part on our ability to
obtain and maintain patent or other protection for our technology and products,
both in the United States and abroad. In addition, we must operate without
infringing the proprietary rights of others.
We currently hold three U.S. patents and have one U.S. patent application
pending. In addition, we have five international patent 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 our patents. If we are not successful in protecting our
intellectual property, competitors could begin to offer products which
incorporate our technology. Patent protection involves complex legal and
factual questions and, therefore, is highly uncertain, and 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, we might not be able to make
some of our products.
Risks Related to Our Industry
If we are unable to respond to rapid technological change, our products could
become obsolete and our reputation could suffer.
Future generations of air data systems, engine and fuel displays and flat
panel displays embodying new technologies or new industry standards could
render our products obsolete. The market for aviation products is subject to
rapid technological change, new product introductions, changes in customer
preferences and evolving industry standards. Our future success will depend on
our ability to:
. 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.
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 result in lost sales or delays in sales. Furthermore, the adoption of
additional regulations or product standards, as well as changes to the existing
product standards, could require us to change our products and underlying
technology. Some products from which we expect to generate significant future
revenues, including our CIP, have not received regulatory approval. We cannot
assure you that we will receive regulatory approval on a timely basis or at
all. For a more detailed description, see "Business--Government Regulation."
8
<PAGE>
Because our products utilize sophisticated technology and are deployed in
complex aircraft cockpit environments, problems with these products may arise
that could seriously harm our reputation for quality assurance and our
business.
Our products use complex system designs and components that may contain
errors, omissions or defects, particularly when we incorporate new technologies
into our products or we release new versions or enhancements of our products.
Despite our quality assurance process, errors, omissions or defects could occur
in our current products, in new products or in new versions or enhancements of
existing products after commercial shipment has begun. We may be required to
redesign or recall those products or pay damages. Such an event could result in
the following:
. 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.
We face risks associated with international operations that could cause our
financial results to suffer or make it difficult to market our products outside
of the United States.
We expect to derive an increasing amount of our revenues from sales outside
the United States, particularly in Europe. We have limited experience in
marketing and distributing our products internationally. In addition, there are
certain risks inherent in doing business on an international basis, such as:
. 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 results of operations.
Risks Related to Our Offering
We may not be able to obtain additional financing necessary to grow our
business.
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
9
<PAGE>
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;
. 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 will need to raise additional funds. If we issue additional
stock, 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.
Management has substantial discretion in the use of the proceeds of this
offering and may use the proceeds in ways that do not increase our profits or
market value.
We expect to use a substantial portion of the net proceeds of this offering
primarily for working capital and other general corporate purposes. We may also
use some of the proceeds to acquire other businesses, products or technologies
that 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 a substantial portion of the funds provided by
this offering and you may not approve of how we utilize the net proceeds.
There has been no prior public market for our common stock. The price of our
common stock may be volatile, which could result in substantial losses for
investors purchasing shares in this offering.
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 continue to have substantial control over our
future direction after this offering and could limit your ability to influence
the outcome of key transactions to the detriment of shareholder value,
including potential changes of control.
Our executive officers and directors will, in the aggregate, beneficially
own approximately 53% of our outstanding common stock following the completion
of this offering. These shareholders, if acting together,
10
<PAGE>
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."
There may be an adverse effect on the price of our stock as a result of shares
being available for sale in the future.
After this offering, we will have outstanding 12,121,593 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
9,121,593 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 3,396,809
shares of our common stock and holders of warrants to purchase 375,354 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 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 $11.00 per share, as of March 31, 2000, the dilution,
on a pro forma, as adjusted basis giving effect to this offering, would have
been equal to $7.51 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."
Provisions of our charter documents and Pennsylvania law may have anti-takeover
effects that could prevent a change in control even if the change in control
would be beneficial to our shareholders.
Our articles of incorporation and bylaws, as well as the corporate laws
under which we are governed, contain provisions that may have the effect of
discouraging certain transactions involving an actual or threatened change of
control. Such provisions could limit the price that certain investors might be
willing to pay in the future for our stock. In addition, our board may issue
shares of preferred stock 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.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be
approximately $29.9 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 $34.5 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 $11.00 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 as follows: approximately
$4 million for additional research and development on our flat panel display
and related products; approximately $3 million to fund the purchase a Pilatus
PC12 aircraft; approximately $2 million to finance a portion of our new
facility; approximately $2 million to expand our sales and marketing efforts
over the next several years; and the balance 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.
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
capitalization as of March 31, 2000. Our pro forma, as adjusted capitalization
gives effect to:
. the conversion of all outstanding shares of preferred stock into
1,941,353 shares of common stock upon the closing of this offering;
. the issuance and sale of the 3,000,000 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 $11.00 per
share and after deducting the underwriting discount and estimated
offering expenses payable by us.
You should read this table in conjunction with the financial statements and
the related notes and the other financial information included in this
prospectus.
<TABLE>
<CAPTION>
At March 31, 2000
-----------------------
Pro Forma,
Actual As Adjusted
----------- -----------
<S> <C> <C>
Capitalized lease obligations, net of current
portion.......................................... $ 38,889 $ 38,889
----------- -----------
Shareholders' equity:
Preferred stock.................................. 177 --
Common stock..................................... 7,180 12,121
Additional paid-in-capital....................... 9,747,394 39,662,630
Retained earnings................................ 2,645,367 2,645,367
----------- -----------
Total shareholders' equity...................... 12,400,118 42,320,118
----------- -----------
Total capitalization.......................... $12,439,007 $42,359,007
=========== ===========
</TABLE>
This table excludes an aggregate of 1,105,449 shares of common stock
issuable upon exercise of stock options and warrants outstanding as of March
31, 2000, plus an additional 313,318 shares reserved for issuance in connection
with future grants under our stock option plans as of such date.
14
<PAGE>
DILUTION
Purchasers of common stock in this offering will experience immediate and
substantial dilution. Our pro forma net tangible book value at March 31, 2000
was $12.4 million, or $1.36 per share. Pro forma 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 3,000,000
shares of common stock offered by us at an assumed initial public offering
price of $11.00 per share, and after deducting the underwriting discount and
estimated offering expenses, pro forma, as adjusted net tangible book value at
March 31, 2000 would have been $42.3 million, or $3.49 per share. This
represents an immediate increase in pro forma net tangible book value of $2.13
per share to existing shareholders and an immediate dilution of $7.51 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............... $11.00
Pro forma net tangible book value per share as of March 31,
2000....................................................... $1.36
Increase per share attributable to new investors............ 2.13
-----
Pro forma, as adjusted net tangible book value per share after
the offering................................................. 3.49
------
Dilution per share to new investors........................... $ 7.51
======
</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 $11.00 per share (before deducting the
underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 9,121,593 75.3% $ 9,544,751 22.4% $ 1.05
New investors.......... 3,000,000 24.7 33,000,000 77.6 11.00
---------- ----- ----------- -----
Totals............... 12,121,593 100.0% $42,544,751 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares of common and
preferred stock outstanding as of March 31, 2000 and exclude:
. 730,095 shares of common stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $5.01 per share;
. warrants to purchase 375,354 shares of common stock at an exercise price
of $2.19 per share; and
. 313,318 shares of common stock reserved for future grants 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 for the six months
ended March 31, 1999 and 2000 and the balance sheet data as of September 30,
1995 and March 31, 2000 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, Six Months Ended
----------------------------------------------------------------- -----------------------
March 31, March 31,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(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 $8,913,950 $13,558,787
Cost of sales........... 1,847,207 5,322,424 7,007,523 8,480,549 10,570,009 4,694,879 6,399,879
----------- ----------- ----------- ----------- ----------- ---------- -----------
Gross profit........... 325,226 1,363,258 3,586,681 6,201,764 11,917,873 4,219,071 7,158,908
Research and
development............ 969,403 963,921 1,114,351 1,554,564 1,915,634 877,920 1,357,302
Selling, general and
administrative......... 851,512 1,634,199 1,567,896 2,492,509 3,333,977 1,202,825 2,051,643
----------- ----------- ----------- ----------- ----------- ---------- -----------
Total operating
expenses.............. 1,820,915 2,598,120 2,682,247 4,047,073 5,249,611 2,080,745 3,408,945
Operating income
(loss)................. (1,495,689) (1,234,862) 904,434 2,154,691 6,668,262 2,138,326 3,749,963
Interest (income)
expense, net........... -- (27,287) 63,813 224,121 (30,137) 31,105 (137,093)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before
income taxes........... (1,495,689) (1,207,575) 840,621 1,930,570 6,698,399 2,107,221 3,887,056
Income tax (expense)
benefit, net........... -- -- -- 2,013,802 (2,517,764) (792,051) (1,420,642)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net income (loss)....... $(1,495,689) $(1,207,575) $ 840,621 $ 3,944,372 $ 4,180,635 $1,315,170 $ 2,466,414
=========== =========== =========== =========== =========== ========== ===========
Net income (loss) per
common share:
Basic.................. $ (0.23) $ (0.18) $ 0.13 $ 0.59 $ 0.62 $ 0.20 $ 0.35
Diluted................ (0.23) (0.18) 0.10 0.46 0.45 0.15 0.25
Weighted average shares
outstanding:
Basic.................. 6,570,649 6,612,739 6,612,739 6,670,134 6,746,976 6,727,844 7,100,319
Diluted................ 6,570,649 6,612,739 8,554,092 8,611,487 9,204,344 8,983,348 9,837,924
Operating Data:
Gross profit margin.... 15.0% 20.4% 33.9% 42.2% 53.0% 47.3% 52.8%
Operating income (loss)
margin................ (68.8%) (18.5%) 8.5% 14.7% 29.7% 24.0% 27.7%
Revenues per employee
(1)................... $ 51,820 $ 114,210 $ 156,150 $ 192,798 $ 258,253 $ 107,396 $ 124,393
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
----------- ---------- ---------- ---------- ----------- -----------
(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 $ 6,456,285
Working capital
(deficit).............. 439,396 (846,370) 140,212 3,387,163 8,557,052 11,665,639
Total assets............ 4,308,123 3,732,425 4,839,520 9,029,168 12,612,189 15,328,305
Debt and capital lease
obligations, less
current portion........ 42,396 115,286 27,845 46,379 45,764 38,889
Total shareholders'
equity (deficit)....... 610,219 (597,356) 368,265 4,564,637 8,935,272 12,400,118
</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 our financial
statements and related 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 for the retrofit program, which covers the approximately 600 KC-135
aircraft currently in use. As of March 31, 2000, we had delivered 177 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 to
receive revenues from our flat panel display during fiscal year 2001.
Our cost of sales are comprised of material components purchased through our
supplier base and direct in-house assembly labor and overhead costs. Because
our manufacturing activities consist primarily of assembling and testing
components and subassemblies and integrating them into a finished system, we
believe that we can achieve flexible manufacturing capacity while controlling
overhead expenses. In addition, many of the components we use in assembling our
products are standard, although certain parts are manufactured to meet our
specifications. The overhead portion of cost of sales is primarily comprised of
salaries and benefits, building occupancy, supplies, business travel, and
outside services costs related to our production, purchasing, material control
and quality departments as well as warranty costs.
We intend to continue to invest in the development of new products 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, and 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>
Six Months
Fiscal Year Ended Ended
September 30, March 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<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 52.7 47.2
----- ----- ----- ----- -----
Gross profit............................ 33.9 42.2 53.0 47.3 52.8
Research and development.................. 10.6 10.5 8.5 9.8 10.0
Selling, general and administrative....... 14.8 17.0 14.8 13.5 15.1
----- ----- ----- ----- -----
Operating income........................ 8.5 14.7 29.7 24.0 27.7
Interest (income) expense, net............ 0.6 1.6 (0.1) .4 (1.0)
----- ----- ----- ----- -----
Income before income taxes................ 7.9 13.1 29.8 23.6 28.7
Income tax benefit (expense), net......... -- 13.8 (11.2) 8.8 10.5
----- ----- ----- ----- -----
Net income.............................. 7.9% 26.9% 18.6% 14.8% 18.2%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended March 31, 2000 Compared to the Six Months Ended March 31, 1999
Revenues. Revenues increased $4.7 million, or 52.1%, to $13.6 million for
the six months ended March 31, 2000 from $8.9 million for the six months ended
March 31, 1999. The increase was primarily attributable to RVSM product
shipments for the KC-135 program. We recognized revenues related to this
program of $4.7 million for the six months ended March 31, 1999 and $8.0
million for the six months ended March 31, 2000.
Cost of Sales. Cost of sales increased $1.7 million, or 36.3%, to $6.4
million, or 47.2% of revenues, for the six months ended March 31, 2000 from
$4.7 million, or 52.7% of revenues, for the six months ended March 31, 1999.
The increase in dollar amount was related to the increase in revenues, and the
decrease as a percentage of revenues was primarily related to cost containment
resulting from our Six Sigma program, a process evaluation program designed to
increase efficiency.
Research and development. Research and development expenses increased
$479,000, or 54.6%, to $1.4 million, or 10.0% of revenues, for the six months
ended March 31, 2000 from $878,000, or 9.8% of revenues, for the six months
ended March 31, 1999. This increase in dollar amount was primarily due to
engineering efforts related to the introduction of new products, including our
flat panel display, an engine pressure ratio transmitter, a low-cost altimeter
and ongoing enhancements and improvements to existing products. The increase in
research and development spending reflects our continued commitment to product
development and new product introductions.
Selling, general and administrative. Selling, general and administrative
expenses increased $849,000, or 70.6%, to $2.1 million, or 15.1% of revenues,
for the six months ended March 31, 2000 from $1.2 million, or 13.5% of
revenues, for the six months ended March 31, 1999. The increase in dollar
amount and as a percentage of revenues reflects our investment in personnel and
infrastructure to support our continued growth.
Interest (income) expense, net. Net interest income was $137,000 for the six
months ended March 31, 2000 as compared to net interest expense of $31,000 for
the six months ended March 31, 1999. Net interest income for the six months
ended March 31, 2000 was due to higher cash balances during the period. Net
interest expense for the six months ended March 31, 1999 was due to outstanding
borrowings under our credit facility and lower cash balances.
18
<PAGE>
Income tax (expense) benefit, net. Income tax expense was $1.4 million for
the six months ended March 31, 2000 compared to an income tax expense of
$792,000 for the six months ended March 31, 1999. The increased amount was the
direct result of higher income before tax. Effective tax rates decreased to
36.5% for the six months ended March 31, 2000 from 37.6% for the six months
ended March 31, 1999 due to a difference in the effective state tax rates.
Net income. As a result of the factors described above, our net income
increased $1.2 million, or 87.5%, to $2.5 million, or 18.2% of revenues, for
the six months ended March 31, 2000 from $1.3 million, or 14.8% of revenues,
for the six months ended March 31, 1999.
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 our increase in
revenues, and the decrease as a percentage of revenues was primarily related to
cost containment resulting from our Six Sigma program.
Research and development. Research and development expense increased
$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 and lower cash balances.
Income tax (expense) benefit, net. We recognized an income tax expense of
$2.5 million for 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.
19
<PAGE>
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 our increase in
revenues, and the decrease as a percentage of revenues was primarily related to
cost containment resulting from our Six Sigma program.
Research and development. Research and development expense increased
$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 in dollar amount 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 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 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 and
the remainder of the cost with a portion of the proceeds from this offer.
In June 2000, we purchased a PC12 aircraft from Pilatus Business Aircraft,
Ltd. for approximately $3.0 million. We intend to use a portion of the net
proceeds of this offering to pay for the aircraft. The aircraft will serve as a
test bed for our new air data and flat panel products, as a sales/marketing
tool for demonstrating our products to our aviation customers and will be
utilized for business travel.
20
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of
operations data for the six quarters ended March 31, 2000. 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 related notes 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, March 31,
1998 1999 1999 1999 1999 2000
------------ --------- -------- ------------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $3,856 $5,058 $6,849 $6,725 $6,337 $7,222
Gross profit............ $1,672 $2,547 $3,683 $4,016 $3,504 $3,655
Operating income........ $ 638 $1,500 $2,348 $2,182 $2,019 $1,731
Net income.............. $ 385 $ 930 $1,477 $1,389 $1,301 $1,165
Gross profit margin..... 43.4% 50.4% 53.8% 59.7% 55.3% 50.6%
Operating income mar-
gin.................... 16.5% 29.7% 34.3% 32.4% 31.9% 24.0%
Net income as a percent
of revenues............ 10.0% 18.4% 21.6% 20.6% 20.5% 16.1%
</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 $1.1 million for the
six months ended March 31, 2000 as compared to $1.0 million for the six months
ended March 31, 1999. The increase is a result of higher net income that was
partially offset by accrued expenses and deferred revenue.
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 $293,000 for the six months ended
March 31, 2000 as compared to $292,000 for the six months ended March 31, 1999,
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 for the purchase of our
Pilatus PC 12 aircraft. We intend to finance a portion of our new facility with
industrial development bonds and we will finance the remainder of our new
facility and the purchase of the aircraft with a portion of the net proceeds of
this offering.
Cash flow provided by financing activities was $990,000 for the six months
ended March 31, 2000 as compared to cash used of $341,000 for the six months
ended March 31, 1999. This increase was primarily due
21
<PAGE>
to the exercise of warrants during the six months ended March 31, 2000. In
contrast, the use of funds in the period ended March 31, 1999 was attributable
to repayment of loans and capital lease obligations.
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%. As of March
31, 2000, we had no amounts outstanding under the credit facility. The credit
facility expires in August 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.
22
<PAGE>
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.
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 one of 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 we
intend to develop 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 or from third-party data and information products, such as a
predictive weather information system. 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 June 2000, we entered into an agreement with Pilatus Business Aircraft,
Ltd. pursuant to which Pilatus will offer our CIP as an option on the Pilatus
PC 12, initially for use on the co-pilot side of the cockpit. Pilatus will
offer our CIP as an option 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 during the first quarter of calendar year 2001.
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.
23
<PAGE>
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 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.
Based on industry data, we estimate that worldwide sales of avionics
products in the markets related to our current and expected products was
approximately $6 billion during 1999, and we estimate that these markets will
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.
24
<PAGE>
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. In addition, aircraft traveling at fuel-efficient altitudes
are able to 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 liquid crystal display (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
25
<PAGE>
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. We believe that our industry experience and reputation, our
technology and products and our business strategy provide a basis to achieve
this objective. 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
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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 $13.6
million, or 100% of our total revenues, for the six months ended March 31,
2000.
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 significant 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 by the end of calendar year 2000 and approval
for essential use during the first quarter of calendar year 2001. 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 June 2000, we entered into an agreement with Pilatus Business Aircraft,
Ltd. pursuant to which Pilatus will offer our CIP as an option on the Pilatus
PC 12, initially for use on the co-pilot side of the cockpit. Pilatus will
offer the CIP as an option 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 first
half of fiscal year 2000, 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, Inc., 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 an 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 six months
ended March 31, 2000, we sold approximately 75% and 90% 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 75% of total revenues, for fiscal year 1999 and $12.2 million, or
90% of total revenues, for the six months ended March 31, 2000.
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 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
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these customers a range of products from fuel quantity indicators to RVSM air
data systems. During fiscal year 1999 and the six months ended March 31, 2000,
we sold approximately 13% and 4% 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
$609,000, or 4% of total revenues, for the six months ended March 31, 2000.
Aircraft Modification Centers. Based on industry data, we believe there are
approximately 12,800 private and corporate aircraft in service in North
America. 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 2001.
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 $2.7 million, or 12% of
total revenues, for fiscal year 1999 and $783,000, or 6% of total revenues, for
the six months ended March 31, 2000.
Backlog
As of March 31, 2000, our backlog was $21.6 million, $11.7 million of which
we expect will be sold during the last two quarters of fiscal year 2000 and
$9.9 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 retrofit
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. We intend to increase our sales efforts with
respect to the commercial and corporate aviation markets in the future. To
date, we have made substantial use of third-party sales representatives for our
sales efforts. We compensate these third-party sales representatives through
commissions.
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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 then 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.
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
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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, as well as software and overall system
testing.
The FAA requires that all avionics products receive TC or STC certification
upon their installation in aircraft. Without such certification, avionics
products may not be installed in an 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 a certain type of
aircraft, the FAA conducts an inspection and systems tests on a test aircraft
containing 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 type of aircraft tested 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 helped 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 substantially all 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 we serve
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 the know-how of our personnel in
applying the technology reflected in our 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 June 30, 2000, we had 115 employees, 74 of whom were in our
manufacturing and assembly operations, 16 in product development, five 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......... 60 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........... 43 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.
Robert J. Ewy has been our President since May 1999. From 1971 until joining
us, 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. From 1997 until joining us, 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
36
<PAGE>
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
Messrs. Adams and Marks will expire at the 2001 annual meeting of shareholders;
the terms of Messrs. Bressner and Mittelstaedt will expire at the 2002 annual
meeting of shareholders; and the terms of Messrs. Hederick, Churchill and
Cosgrove 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.
37
<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 5,481
shares of common stock issuable on April 11 of the following year; provided
that the first 16,443 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 5,481 shares of common stock for service on
the board during fiscal year 1998.
38
<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) -- 328,872 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 $225,000 at
the end of fiscal year 1999.
(2) This amount represents a relocation bonus.
Stock Option Information
The following table sets forth certain information with respect to stock
options granted during fiscal year 1999 to each of the named executive
officers. The options were granted under our 1998 Stock Option Plan and vest in
three equal annual installments beginning on the first anniversary of the date
of grant.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
for Option
Individual Grants Term($)(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........... 328,872 92% 3.28 5/3/09 4,813,976 8,304,402
Roger E. Mitchell....... -- -- -- -- -- --
</TABLE>
---------------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the SEC. The options were issued at what our board believed
was the fair market value of our stock at the time of grant. For purposes
of this table, the potential realizable value is calculated at the SEC-
required assumed rates of appreciation using $11.00, the assumed initial
public offering price as the base. 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.
39
<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. 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 $11.00 per share, less the applicable exercise
price, multiplied by the number of shares underlying the options.
Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at September 30, Options at September 30,
1999(#) 1999($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Geoffrey S. M. Hedrick..... -- -- -- --
Robert J. Ewy.............. -- 328,872 -- 2,538,892
Roger E. Mitchell.......... 32,817 21,924 253,888 169,254
</TABLE>
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 866,920 shares of our common stock reserved for issuance
under our 1998 Stock Option Plan. As of June 30, 2000, there were outstanding
options to purchase 581,007 shares of common stock under the plan, having a
weighted average exercise price of $5.83 per share, and 285,912 shares remained
eligible for grant. As of June 30, 2000, options exercisable for 5,481 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 may, among other
things, accelerate the date on which any option may be exercised. The board may
terminate
40
<PAGE>
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 493,308. No more options may be granted under the 1988 plan,
although unexercised options for 176,494 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 328,872 shares of our common stock at an
exercise price of $3.28 per share, which option vests in three equal annual
installments 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
54,812 shares of common stock at $3.28 per share. Of these options, 27,406 vest
in five equal annual installments beginning on the first anniversary of Mr.
Mitchell's employment with us. The remaining 27,406 options vested in July 1999
upon the achievement by us of certain performance objectives.
41
<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. We
believe that the terms of these transactions are no less favorable to us than
the terms we could have obtained from unrelated third parties.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 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 9,121,593 shares of common stock
outstanding as of June 30, 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, Inc., 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)................. 3,328,184 35.9% 27.5%
Parker Hannifin Corporation (3)........... 1,447,135 15.9 11.9
The P/A Fund (4).......................... 1,673,541 18.3 13.8
NEPA Venture Fund, L.P. (5)............... 833,142 9.1 6.9
James M. Draper (6)....................... 745,441 8.1 6.1
Robert J. Ewy (7)......................... 109,624 1.2 *
Roger E. Mitchell (8)..................... 32,887 * *
Joel P. Adams (9)......................... 1,673,541 18.3 13.8
Glen R. Bressner (10)..................... 833,142 9.1 6.9
Winston J. Churchill (11)................. 398,296 4.4 3.3
Benjamin A. Cosgrove (12)................. 43,848 * *
Ivan M. Marks............................. -- -- --
Robert E. Mittelstaedt, Jr. .............. 162,857 1.8 1.3
All directors and executive officers as a
group (11 persons) (9)(10)(13)........... 6,582,379 69.8 52.9
</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 June 30, 2000.
(2) Includes warrants to purchase 149,088 shares of common stock.
(3) The address of Parker Hannifin Corporation is 18321 Jamboree Boulevard,
Irvine, California 92612. The board of directors of Parker Hannifin
Corporation has dispositive and voting power over the shares held by Parker
Hannifin Corporation. The board members of Parker Hannifin Corporation are
Patrick S. Parker, John G. Breen, Duane E. Collins, Paul C. Ely, Jr., Peter
W. Likins, Giulio Mazzalupi, Klaus-Peter Muller, Hector R. Ortino, Allan L.
Rayfield, Wolfgang R. Schmitt, Debra L. Starnes and Dennis W. Sullivan.
(4) The address of The P/A Fund is 518 Broad Street, Sewickley, Pennsylvania
15143. Through various entities, Joel P. Adams has sole voting and
investment power over the shares held by The P/A Fund.
43
<PAGE>
(5) The address of NEPA Venture Fund, L.P. is 125 Goodman Drive, Bethlehem,
Pennsylvania 18015. Through various entities, Glen R. Bressner, Frederick
Beste and Marc Benson share voting and investment power over the shares
held by NEPA Venture Fund, L.P.
(6) Includes warrants to purchase 43,149 shares of common stock. Also includes
548,120 shares of common stock and warrants to purchase 21,924 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.
(7) Consists of options to purchase 109,624 shares of common stock.
(8) Consists of options to purchase 32,887 shares of common stock.
(9) Consists of 1,673,541 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 833,142 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 222,898 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 21,924 shares of common stock.
(13) Includes warrants to purchase 171,012 shares of common stock and options
to purchase 142,511 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,
12,121,593 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 June 30, 2000, there were outstanding warrants to purchase an
aggregate of 375,354 shares of our common stock at an exercise price of $2.19
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 3,396,809 shares of our common
stock and warrants to purchase an aggregate of 375,354 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 2,923,310 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 IS&S). 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 IS&S.
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 American Stock
Transfer & Trust Company.
47
<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 12,121,593 shares of common
stock outstanding. The 3,000,000 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 9,121,593 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.
Following termination of the lock-up described below, all of the restricted
shares may be sold under Rule 144, including 7,748,882 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 375,354 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 121,215 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
1,372,711 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............................................................... 3,000,000
=========
</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 discount 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 the underwriting
discount, are estimated at $770,000 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 450,000
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, subject to certain exceptions, 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 intend to confirm sales of the common
stock offered by this prospectus to any accounts over which they exercise
discretionary authority.
Directed Share Program. At our request, the underwriters have reserved up
to 150,000 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
our 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 this
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
our 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 and schedules as of September 30, 1998 and
September 30, 1999 and for each of the three years ended September 30, 1999
included in this prospectus and elsewhere in the registration statement 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 is
materially complete. However, it 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 summaries 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, Inc.
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>
After the stock split discussed in Note 1 to the financial statements is
effected, we will be in a position to render the following report.
/s/ Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Innovative Solutions and Support,
Inc.:
We have audited the accompanying balance sheets of Innovative Solutions and
Support, Inc. (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 and
the schedule referred to below 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, Inc. 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Philadelphia, Pa.,
December 30, 1999
F-2
<PAGE>
Innovative Solutions and Support, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September March 31,
1998 30, 1999 2000
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 102,150 $ 4,638,607 $ 6,456,285
Accounts receivable.................... 3,575,333 3,413,771 3,803,267
Inventories............................ 2,808,085 3,496,773 3,596,353
Deferred taxes......................... 1,231,937 23,530 23,530
Prepaid expenses....................... 87,810 66,104 96,446
----------- ----------- -----------
Total current assets................. 7,805,315 11,638,785 13,975,881
----------- ----------- -----------
Property and Equipment:
Computers and test equipment........... 1,150,490 1,646,659 1,880,555
Furniture and office equipment......... 265,337 341,042 400,612
Leasehold improvements................. 29,890 50,205 50,205
----------- ----------- -----------
1,445,717 2,037,906 2,331,372
Less--Accumulated depreciation......... (1,027,931) (1,292,716) (1,445,119)
----------- ----------- -----------
Net property and equipment........... 417,786 745,190 886,253
----------- ----------- -----------
Deposits and Other Assets................ 24,202 24,202 262,159
----------- ----------- -----------
Deferred Taxes........................... 781,865 204,012 204,012
----------- ----------- -----------
$ 9,029,168 $12,612,189 $15,328,305
=========== =========== ===========
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 22,114
Accounts payable....................... 2,251,691 888,052 1,273,846
Accrued expenses....................... 431,007 1,385,143 942,134
Deferred revenue....................... 879,973 784,707 72,148
----------- ----------- -----------
Total current liabilities............ 4,418,152 3,081,733 2,310,242
----------- ----------- -----------
Capitalized Lease Obligations (Note 8)... 46,379 45,764 38,889
----------- ----------- -----------
Deferred Revenue......................... -- 549,420 579,056
----------- ----------- -----------
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
March 31, 2000)....................... 177 177 177
Common stock, $.001 par value;
10,000,000 shares authorized,
6,727,844, 6,766,213 and 7,180,240
shares issued and outstanding at
September 30, 1998 and 1999 and March
31, 2000, respectively................ 6,728 6,766 7,180
Additional paid-in capital............. 8,559,414 8,749,376 9,747,394
Retained earnings (accumulated
deficit).............................. (4,001,682) 178,953 2,645,367
----------- ----------- -----------
Total shareholders' equity........... 4,564,637 8,935,272 12,400,118
----------- ----------- -----------
$ 9,029,168 $12,612,189 $15,328,305
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Innovative Solutions and Support, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Year Ended September For the Six Months
30, Ended March 31,
------------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues (includes
related party amounts
of $489,519,
$2,952,584, $1,226,210,
$178,905 and $32,765,
respectively).......... $10,594,204 $14,682,313 $22,487,882 $8,913,950 $13,558,787
Cost of Sales (includes
related party amounts
of $1,516,263,
$2,744,825, $616,751,
$89,984 and $0,
respectively).......... 7,007,523 8,480,549 10,570,009 4,694,879 6,399,879
----------- ----------- ----------- ---------- -----------
Gross profit.......... 3,586,681 6,201,764 11,917,873 4,219,071 7,158,908
----------- ----------- ----------- ---------- -----------
Operating Expenses:
Research and
development.......... 1,114,351 1,554,564 1,915,634 877,920 1,357,302
Selling, general and
administrative....... 1,567,896 2,492,509 3,333,977 1,202,825 2,051,643
----------- ----------- ----------- ---------- -----------
2,682,247 4,047,073 5,249,611 2,080,745 3,408,945
----------- ----------- ----------- ---------- -----------
Operating income.... 904,434 2,154,691 6,668,262 2,138,326 3,749,963
Interest Income......... (20,307) (14,092) (80,376) (12,343) (139,815)
Interest Expense........ 84,120 238,213 50,239 43,448 2,722
----------- ----------- ----------- ---------- -----------
Income before income
taxes................ 840,621 1,930,570 6,698,399 2,107,221 3,887,056
Income tax (expense)
benefit, net (Note
4)................... -- 2,013,802 (2,517,764) (792,051) (1,420,642)
----------- ----------- ----------- ---------- -----------
Net Income.............. $ 840,621 $ 3,944,372 $ 4,180,635 $1,315,170 $ 2,466,414
=========== =========== =========== ========== ===========
Net Income Per Common
Share:
Basic................. $ 0.13 $ 0.59 $ 0.62 $ 0.20 $ 0.35
Diluted............... $ 0.10 $ 0.46 $ 0.45 $ 0.15 $ 0.25
Weighted Average Shares
Outstanding:
Basic................. 6,612,739 6,670,134 6,746,976 6,727,844 7,100,319
Diluted............... 8,544,092 8,611,487 9,204,344 8,983,348 9,837,924
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Innovative Solutions and Support, Inc.
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 $6,613 $8,182,529 $(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 6,613 8,307,529 (7,946,054) 368,265
Issuance of stock to
directors............. -- 115 251,885 -- 252,000
Net income............. -- -- -- 3,944,372 3,944,372
---- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1998.................... 177 6,728 8,559,414 (4,001,682) 4,564,637
Issuance of stock to
directors............. -- 38 104,962 -- 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 6,766 8,749,376 178,953 8,935,272
Exercise of warrants to
purchase Common stock
(unaudited)........... -- 403 986,029 -- 986,432
Exercise of options to
purchase Common stock
(unaudited)........... -- 11 11,989 -- 12,000
Net income
(unaudited)........... -- -- -- 2,466,414 2,466,414
---- ------ ---------- ----------- -----------
BALANCE, MARCH 31, 2000
(unaudited)............. $177 $7,180 $9,747,394 $ 2,645,367 $12,400,118
==== ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Innovative Solutions and Support, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Year Ended For the Six Months
September 30, Ended March 31,
----------------------------------- ------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income............. $ 840,621 $ 3,944,372 $ 4,180,635 $ 1,315,171 $ 2,466,414
Adjustment to reconcile
net income to net cash
provided by (used in)
operating activities--
Imputed interest..... 33,560 91,440 -- -- --
Depreciation and
amortization......... 150,054 126,877 264,785 101,237 152,403
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) 161,562 217,570 (389,496)
Inventories........... (121,696) (1,209,498) (688,688) (397,026) (99,580)
Prepaid expenses and
other................ (11,403) (82,607) 21,706 (12,751) (268,299)
Increase (decrease)
in--
Accounts payable...... 529,385 237,048 (1,363,639) (1,071,068) 385,794
Accrued expenses...... (201,048) (17,058) 954,136 776,550 (443,009)
Deferred revenue...... (787,954) (287,502) 454,154 59,980 (682,923)
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) in
operating
activities......... (501,249) (38,512) 5,960,911 989,663 1,121,304
--------- ----------- ----------- ----------- -----------
Cash Flows From
Investing Activities:
Purchases of property
and equipment........ (35,452) (238,152) (592,189) (292,232) (293,466)
--------- ----------- ----------- ----------- -----------
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 -- 950,000 --
Repayments on credit
facility............. -- (1,720,000) (550,000) (1,000,000) --
Repayments of
capitalized lease
obligations.......... (102,924) (67,867) (32,265) (40,629) (8,592)
Proceeds from exercise
of stock options..... -- -- -- -- 12,000
Proceeds from exercise
of warrants.......... -- -- -- -- 986,432
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... 692,531 (105,467) (832,265) (340,629) 989,840
--------- ----------- ----------- ----------- -----------
Net Increase (Decrease)
In Cash And Cash
Equivalents............ 155,830 (382,131) 4,536,457 356,802 1,817,678
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 $ 458,952 $ 6,456,285
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
1. Background:
Innovative Solutions and Support, Inc., formerly Innovative Solutions and
Support, Incorporated (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. In
connection with the offering, on July 7, 2000, the Company's Board of Directors
approved a split of the Company's common shares on a 1.09624-to-1 basis. All
references in the financial statements to the number of common shares and to
per share amounts have been retroactively stated to reflect the common share
split. Upon the closing of the offering, the outstanding shares of Preferred
stock will be converted into 1,941,353 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.
Interim Financial Statements
The financial statements as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 are unaudited and, in the opinion of management,
include all adjustments necessary for a fair presentation of results for those
interim periods. The results of operations for the six months ended March 31,
1999 and 2000 are not necessarily indicative of the results to be expected for
the entire year.
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,
---------------------- March 31,
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials and finished
components........................... $2,276,764 $2,368,432 $3,257,162
Work-in-process....................... 1,108,821 1,706,287 1,085,558
---------- ---------- ----------
Gross inventory....................... 3,385,585 4,074,719 4,342,720
Reserve for excess and obsolete....... (577,500) (577,946) (746,367)
---------- ---------- ----------
$2,808,085 $3,496,773 $3,596,353
========== ========== ==========
</TABLE>
F-7
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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.
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 $178,905 and $32,765 for the six months March 31, 1999 and
2000, 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.
F-8
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
Comprehensive Income
Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company
would be required to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. There were
no items of other comprehensive income for any of 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.
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 82% and 69% from three customers for the six months ended
March 31, 1999 and 2000, respectively. Accounts receivable related to these
customers total $1,952,220, $2,096,468 and $2,454,961 at September 30, 1998 and
1999 and March 31, 2000, 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 six months ended March 31, 2000, 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 six months ended March
31, 1999 and 2000 the Company paid $60,964 and $1,491, respectively, for
interest, and $154,134 and $1,560,000, 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 by the
F-9
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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.
<TABLE>
<CAPTION>
For the Year Ended For the Six Months
September 30, Ended March 31,
----------------------------- -------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic weighted average number
of shares outstanding....... 6,612,739 6,670,134 6,746,976 6,727,844 7,100,319
Incremental shares from
assumed exercise or
conversion of:
Stock options.............. -- -- 168,671 69,294 369,410
Warrants................... -- -- 347,344 244,857 426,841
Preferred stock............ 1,941,353 1,941,353 1,941,353 1,941,353 1,941,353
--------- --------- --------- --------- ---------
Diluted weighted average
number of shares
outstanding............... 8,554,092 8,611,487 9,204,344 8,983,348 9,837,924
========= ========= ========= ========= =========
</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.
The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets consists of the following components:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Deferred tax assets--
Deferred Revenue............................... $ -- $227,542
Net operating loss carryforwards............... 1,988,379 --
---------- --------
Deferred tax asset............................... $1,988,379 $227,542
========== ========
</TABLE>
Payments received for warranties are recorded as taxable income in the year
received and, therefore, generate deferred tax assets.
F-10
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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>
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 September For the Six Months
30, Ended March 31,
-------------------- --------------------
1997 1998 1999 1999 2000
----- ------ ---- --------- ---------
(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 2.5
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% 36.5%
===== ====== ==== ========= =========
</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 734,570 shares of Common stock at $2.19 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 warrants were valued using the Black-
Scholes pricing model with the following assumptions: risk-free interest rate
of 6.50%; an expected life of seven years; dividend yield of zero; and a
volatility of 30%. 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 August 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.
F-11
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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
10.9624 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.
Common Stock
The Company issued 115,105 and 38,368 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
1,360,228 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.
F-12
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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.............................. $ 0.13 $ 0.59 $ 0.62
Pro forma................................ 0.12 0.59 0.61
Diluted EPS:
As reported.............................. $ 0.10 $ 0.46 $ 0.45
Pro forma................................ 0.10 0.46 0.45
</TABLE>
The weighted average fair value of the stock options granted during the
years ended September 30, 1997, 1998 and 1999 were $1.39, $1.28 and $2.21,
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>
F-13
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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........ 78,162 $0.91- 2.74 $ 1.76
Granted............................. 216,507 2.19 2.19
Terminated.......................... (12,388) 1.09 1.09
-------- ----------- ------
Outstanding September 30, 1997........ 282,281 0.91- 2.74 2.12
Granted............................. 135,386 2.19- 3.28 2.70
Terminated.......................... (109,624) 2.19- 2.74 2.24
-------- ----------- ------
Outstanding September 30, 1998........ 308,043 0.91- 3.28 2.33
Granted............................. 356,278 3.28- 6.39 3.52
Terminated.......................... (54,812) 2.19 2.19
-------- ----------- ------
Outstanding September 30, 1999........ 609,509 0.91- 6.39 3.28
Granted (unaudited)................. 169,916 10.03 10.03
Exercised (unaudited)............... (10,962) 1.09 1.09
Terminated (unaudited).............. (38,368) 0.91- 2.19 1.82
-------- ----------- ------
Outstanding March 31, 2000
(unaudited).......................... 730,095 $2.19-10.03 $ 5.34
======== =========== ======
</TABLE>
As of September 30, 1999, there were 74,215 options vested and exercisable
at an aggregate exercise price of $176,380. In addition, as of March 31, 2000,
there were options to purchase an additional 313,318 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 734,570 shares of Common stock at an exercise price of
$2.19 per share (see Note 5). During the six months ended March 31, 2000,
warrants to purchase 359,216 shares of Common stock were exercised for an
aggregate purchase price of $786,432. The remaining warrants are fully vested
and exercisable through June 2004.
In addition, during the six months ended March 31, 2000, warrants to
purchase 43,850 shares of Common stock were exercised for an aggregate purchase
price of $200,000, or approximately $4.56 per share.
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 $46,200 has been
included in property and equipment at September 30, 1998 and 1999 and March 31,
2000, respectively.
F-14
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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 $158,121 and
$168,030 for the six months ended March 31, 1999, and 2000, 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 six months ended March 31, 2000, 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 March 31, 2000, 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 six months ended March 31, 2000, 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 March 31, 2000 is a
deposit of $100,000 toward the purchase of the airplane.
Employment Agreement
In May 1999, the Company entered into an employment agreement with an
employee for an annual salary of $225,000 expiring in May 2002.
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.
F-15
<PAGE>
Innovative Solutions and Support, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and for the six months ended
March 31, 1999 and 2000 is unaudited)
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 2000, respectively, and $10,203 and $70,924 for the six months
ended March 31, 1999 and 2000, 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 $178,905 and $32,765 for the six months ended March 31, 1999 and 2000,
respectively, from a company which is a minority shareholder and purchased
$1,516,263, $2,744,825, $616,751 and $89,984 of component parts used in the
manufacturing process from this related party for the years ended September 30,
1997, 1998 and 1999 and the six months ended March 31, 1999, respectively.
There were no purchases for the six months ended March 31, 2000.
F-16
<PAGE>
INSIDE BACK COVER
Photograph of IS&S Cockpit Information Portal
Text:
IS&S Cockpit Information Portal (Cockpit/IP)-actual viewing area 12" x 9"
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,000,000 Shares
Innovative Solutions and Support, Inc.
[LOGO OF IS&S]
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 the
underwriting discount, 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............................................... $ 10,930
NASD Filing Fee.................................................... 4,640
Nasdaq National Market Listing Fee................................. 87,000
Printing and Engraving Expenses.................................... 160,000
Legal Fees and Expenses............................................ 250,000
Accounting Fees and Expenses....................................... 250,000
Transfer Agent Fees................................................ 3,000
Miscellaneous...................................................... 4,430
--------
Total............................................................ $770,000
========
</TABLE>
---------------------
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 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.
II-1
<PAGE>
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
768,463 shares of common stock at exercise prices ranging from $2.19 to
$11.86 per share.
(b) On June 24, 1997, we issued warrants to purchase an aggregate of
734,570 shares of common stock at an exercise price of $2.19 per share to
certain shareholders in connection with their agreement to make loans to us
totaling $837,600. From October 1999 to June 2000, we issued 359,216 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 153,473 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,
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.
II-2
<PAGE>
(d) In September 1999, we issued to one of our shareholders 43,849
shares of common stock upon the exercise of warrants at an exercise price
of $4.56 per share.
(e) From September 1999 to December 1999, we issued an aggregate of
10,962 shares of common stock to an employee of ours upon the exercise of
stock options granted to him at an exercise price of $1.09 per share.
None of the foregoing transactions involved any underwriters, underwriting
discount 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.
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).
27.1 Restated Financial Data Schedule--September 30, 1999.
27.2 Financial Data Schedule--March 31, 2000.
</TABLE>
---------------------
*Previously filed
II-3
<PAGE>
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other 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 amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on this 12th
day of July, 2000.
Innovative Solutions and Support,
Inc.
/s/ Geoffrey S. M. Hedrick
By: _________________________________
Geoffrey S. M. Hedrick
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
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 July 12, 2000
______________________________________ Executive Officer
Geoffrey S. M. Hedrick (Principal Executive
Officer)
/s/ James J. Reilly Chief Financial Officer July 12, 2000
______________________________________ (Principal Financial and
James J. Reilly Accounting Officer)
* Director July 12, 2000
______________________________________
Joel P. Adams
* Director July 12, 2000
______________________________________
Glen R. Bressner
* Director July 12, 2000
______________________________________
Winston J. Churchill
* Director July 12, 2000
______________________________________
Benjamin A. Cosgrove
* Director July 12, 2000
______________________________________
Ivan M. Marks
* Director July 12, 2000
______________________________________
Robert E. Mittelstaedt, Jr.
</TABLE>
*By: /s/ Geoffery S. M. Hedrick
--------------------------
As Attorney-in-Fact
II-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Cost and Write- Balance at
of Period Expenses offs End of Period
---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Allowance doubtful accounts
(Fiscal 97)................... $ 42,000 $ -- $ (25,070) $ 16,930
Allowance doubtful accounts
(Fiscal 98)................... 16,930 -- (16,930) --
Allowance doubtful accounts
(Fiscal 99)................... -- -- -- --
Warranty allowance (Fiscal
97)........................... 242,510 105,942 (247,911) 100,541
Warranty allowance (Fiscal
98)........................... 100,541 146,823 (140,229) 107,135
Warranty allowance (Fiscal
99)........................... 107,135 324,879 (68,446) 363,568
</TABLE>
S-1
<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.
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).
27.1 Restated Financial Data Schedule--September 30, 1999.
27.2 Financial Data Schedule--March 31, 2000.
</TABLE>
---------------------
* Previously filed
