UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
OR
 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[For the transition period from_____________________ to ___________________________
Commission File No. 0-31157
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
(Exact name of registrant as specified in its charter)
| PENNSYLVANIA | 23-2507402 | |||
| (State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) |
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| 720 Pennsylvania Drive, Exton, Pennsylvania | 19341 | |||
| (Address of principal executive offices) | (Zip Code) |
(610) 646-9800
(Registrant’s telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of August 11, 2004, there were 11,809,204 shares of the Registrant’s Common Stock, with par value of $.001, outstanding.
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
FORM 10-Q June 30, 2004
INDEX
2
PART I–FINANCIAL INFORMATION
Item 1–Financial Statements
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| As of September 30, 2003 |
As of June 30, 2004 |
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| ASSETS | |||||||||||||||||||
| Current Assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 48,789,744 | $ | 58,627,694 | |||||||||||||||
| Accounts receivable, less allowance for doubtful accounts of $100,000 at September 30, 2003 and June 30, 2004 | 6,955,207 | 4,991,335 | |||||||||||||||||
| Inventories | 2,840,648 | 4,697,647 | |||||||||||||||||
| Deferred income taxes | 673,134 | 673,134 | |||||||||||||||||
| Prepaid expenses | 660,430 | 615,241 | |||||||||||||||||
| Total current assets | 59,919,163 | 69,605,051 | |||||||||||||||||
| Property and Equipment: | |||||||||||||||||||
| Computers and test equipment | 3,309,852 | 3,728,577 | |||||||||||||||||
| Corporate airplane | 2,998,161 | 2,998,161 | |||||||||||||||||
| Furniture and office equipment | 520,973 | 599,013 | |||||||||||||||||
| Manufacturing facility | 5,368,690 | 5,414,986 | |||||||||||||||||
| Land | 1,021,245 | 1,021,245 | |||||||||||||||||
| Total property and equipment | 13,218,921 | 13,761,982 | |||||||||||||||||
| Less-accumulated depreciation and amortization | (3,670,430 | ) | (4,166,087 | ) | |||||||||||||||
| Net property and equipment | 9,548,491 | 9,595,895 | |||||||||||||||||
| Deposits and Other Assets | 408,971 | 140,113 | |||||||||||||||||
| Total Assets | $ | 69,876,625 | $ | 79,341,059 | |||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||
| Current Liabilities | |||||||||||||||||||
| Current portion of note payable | $ | 100,000 | $ | 100,000 | |||||||||||||||
| Current portion of capitalized lease obligations | — | 7,257 | |||||||||||||||||
| Accounts payable | 578,306 | 779,794 | |||||||||||||||||
| Accrued expenses | 3,146,409 | 3,270,660 | |||||||||||||||||
| Deferred revenue | 98,036 | 153,180 | |||||||||||||||||
| Total current liabilities | 3,922,751 | 4,310,891 | |||||||||||||||||
| Note Payable | 4,235,000 | 4,235,000 | |||||||||||||||||
| Capitalized Lease Obligations | — | 22,524 | |||||||||||||||||
| Deferred Revenue | 332,407 | 279,552 | |||||||||||||||||
| Deferred Income Taxes | 328,177 | 320,089 | |||||||||||||||||
| Commitments and Contingencies | — | — | |||||||||||||||||
| Shareholders’ Equity: | |||||||||||||||||||
| Preferred stock, 10,000,000 shares authorized–Class A Convertible stock, $.001 par value; 200,000 shares authorized, no shares issued and outstanding at September 30, 2003 and June 30, 2004 |
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| Common stock, $.001 par value; 75,000,000 shares authorized, 13,080,717 and 13,462,385 shares issued at September 30, 2003 and |
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| June 30, 2004, respectively | 13,081 | 13,462 | |||||||||||||||||
| Additional paid-in capital | 46,248,224 | 47,895,517 | |||||||||||||||||
| Retained earnings | 25,410,742 | 32,877,781 | |||||||||||||||||
| Treasury stock, at cost, 1,690,026 shares | (10,613,757 | ) | (10,613,757 | ) | |||||||||||||||
| Total shareholders’ equity | 61,058,290 | 70,173,003 | |||||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 69,876,625 | $ | 79,341,059 | |||||||||||||||
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, 2003 |
Three Months Ended June 30, 2004 |
Nine Months Ended June 30, 2003 |
Nine Months Ended June 30, 2004 |
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| Net Sales | $ | 6,519,628 | $ | 12,269,653 | $ | 18,064,848 | $ | 31,688,276 | |||||
| Cost of Sales | 2,744,729 | 4,056,372 | 7,752,467 | 11,200,624 | |||||||||
| Gross Profit | 3,774,899 | 8,213,281 | 10,312,381 | 20,487,652 | |||||||||
| Operating expense: | |||||||||||||
| Research and development | 658,259 | 1,363,143 | 2,424,147 | 3,861,311 | |||||||||
| Selling, general and administrative | 1,598,011 | 2,090,357 | 4,330,342 | 5,600,461 | |||||||||
| Operating Income | 1,518,629 | 4,759,781 | 3,557,892 | 11,025,880 | |||||||||
| Interest Income | 134,142 | 116,110 | 463,383 | 345,985 | |||||||||
| Interest Expense | 33,090 | 31,197 | 101,680 | 94,201 | |||||||||
| Income Before Income Taxes | 1,619,681 | 4,844,694 | 3,919,595 | 11,277,664 | |||||||||
| Income Tax Expense | 388,723 | 1,559,086 | 1,193,694 | 3,810,625 | |||||||||
| Net Income | $ | 1,230,958 | $ | 3,285,608 | $ | 2,725,901 | $ | 7,467,039 | |||||
| Net Income per Common Share | |||||||||||||
| Basic | $ | 0.10 | $ | 0.28 | $ | 0.22 | $ | 0.65 | |||||
| Diluted | $ | 0.10 | $ | 0.27 | $ | 0.22 | $ | 0.63 | |||||
| Weighted Average Shares Outstanding | |||||||||||||
| Basic | 11,982,569 | 11,666,639 | 12,437,036 | 11,530,994 | |||||||||
| Diluted | 12,204,971 | 11,960,746 | 12,660,902 | 11,867,818 |
The accompanying notes are an integral part of these statements.
4
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Nine Months Ended June 30, 2003 |
For the Nine Months Ended June 30, 2004 |
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| Cash Flows From Operating Activities: | ||||||
| Net income | $ | 2,725,901 | $ | 7,467,039 | ||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||
| Depreciation and amortization | 499,693 | 520,665 | ||||
| Write-off of software deposit | 101,738 | — | ||||
| Loss on disposal of fixed assets | __ | 1,037 | ||||
| Excess and obsolete inventory expense | — | 62,998 | ||||
| Compensation expense for stock issued to directors | 99,302 | 182,766 | ||||
| Tax benefit from exercise of stock options | — | 175,982 | ||||
| (Increase)/decrease in– | ||||||
| Accounts receivable | 984,132 | 1,963,871 | ||||
| Inventories | (383,196 | ) | (1,919,997 | ) | ||
| Prepaid expenses and other | (356,441 | ) | 305,045 | |||
| Increase/(decrease) in– | ||||||
| Accounts payable | 195,581 | 201,486 | ||||
| Accrued expenses | (232,161 | ) | 116,164 | |||
| Deferred revenue | (8,024 | ) | 2,290 | |||
| Net cash provided by operating activities | 3,626,525 | 9,079,346 | ||||
| Cash Flows From Investing Activities: | ||||||
| Purchases of property and equipment | (35,990 | ) | (560,105 | ) | ||
| Net cash used in investing activities | (35,990 | ) | (560,105 | ) | ||
| Cash Flows From Financing Activities: | ||||||
| Proceeds from exercise of stock options | — | 674,330 | ||||
| Proceeds from exercise of warrants | — | 614,598 | ||||
| Purchase of treasury stock | (5,244,862 | ) | — | |||
| Capital lease obligations | — | 39,119 | ||||
| Repayments of capitalized lease obligations | (14,570 | ) | (9,338 | ) | ||
| Net cash provided by (used in) financing activities | (5,259,432 | ) | 1,318,709 | |||
| Net Increase (Decrease) in Cash and Cash Equivalents | (1,668,897 | ) | 9,837,950 | |||
| Cash and Cash Equivalents, Beginning of Year | 52,245,754 | 48,789,744 | ||||
| Cash and Cash Equivalents, End of Period | $ | 50,576,857 | $ | 58,627,694 | ||
The accompanying notes are an integral part of these statements.
5
Innovative Solutions & Support Inc.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation:
Innovative Solutions and Support, Inc. (the “Company”) was incorporated in Pennsylvania on February 12, 1988. The Company’s primary business is the design, manufacture and sale of flight information computers, flat panel displays and advanced monitoring systems for the military, government, commercial air transport and corporate aviation markets.
The balance sheet as of June 30, 2004, the statement of operations for the three months and nine months ended June 30, 2003 and 2004 and the statements of cash flows for the nine months ended June 30, 2003 and 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at June 30, 2004 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10K for the year ended September 30, 2003 as filed with the Securities and Exchange Commission. The results of operations for the three months and nine months ended June 30, 2004 are not necessarily indicative of the operating results for the full year.
2. Net income per Share
Net income per share (“EPS”) is calculated using the principles of SFAS No. 128.
A reconciliation of weighted average shares outstanding appears below:
| Three Months Ended June 30, 2003 |
Three Months Ended June 30, 2004 |
Nine Months
Ended June 30, 2003 |
Nine Months Ended June 30, 2004 |
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| Weighted average shares outstanding: | |||||||||||||
Basic |
11,982,569 | 11,666,639 | 12,437,036 | 11,530,994 | |||||||||
| Effect of dilutive securities: | |||||||||||||
Employee
stock options |
43,351 | 294,107 | 38,922 | 239,015 | |||||||||
Warrants |
179,051 | 0 | 184,944 | 97,809 | |||||||||
| Weighted average shares outstanding: | |||||||||||||
Diluted |
12,204,971 | 11,960,746 | 12,660,902 | 11,867,818 |
For the nine-month period ended June 30, 2004, there were 7,153 options outstanding that were excluded from the computation of diluted earnings per share as the effect would be antidilutive.
3. Concentrations
For the three months ended June 30, 2004, three customers accounted for 17%, 11%, and 10% of net sales or 38% on a combined basis. For the three months ended June 30, 2003, two customers accounted for 17% each of revenues or 34% on a combined basis. For the nine months ended June 30, 2004, four customers accounted for 13%, 13%, 10% and 10% of net sales or 46% on a combined basis. For the nine months ended June 30, 2003, three customers accounted for 18%, 11% and 11% of net sales or 40% on a combined basis.
6
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
| September 30, 2003 |
June 30, 2004 |
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| Raw materials | $ | 1,412,242 | $ | 1,982,555 | ||
| Work-in-process | 785,771 | 1,999,337 | ||||
| Finished goods | 642,635 | 715,755 | ||||
| $ | 2,840,648 | $ | 4,697,647 |
5. Warranty
The Company provides for the estimated cost of product warranties at the time revenue is recognized. Warranty cost is recorded as cost of sales in the financial statements. While the Company engages in extensive product quality programs and processes, the Company’s warranty obligation is affected by product failure rates and the related material, labor and delivery costs incurred in correcting a product failure. During the period ended March 31, 2004, the Company changed its warranty accrual based upon favorable historical experience. Should actual product failure rates, material or labor costs differ from the Company’s estimates, further revisions to the estimated warranty liability would be required.
Warranty cost and accrual information for the three months ended June 30, 2004 is highlighted below:
| Warranty accrual at March 31, 2004 | $ | 742,665 | |
| Accrued expense for the quarter ended June 30, 2004 | 45,993 | ||
| Warranty costs for the quarter ended June 30, 2004 | (38,702 | ) | |
| Warranty accrual at June 30, 2004 | $ | 749,956 | |
| Warranty cost and accrual information for the nine months ended June 30, 2004 is highlighted below: | |||
| Warranty accrual at September 30, 2003 | $ | 842,541 | |
| Accrued expense for the nine months ended June 30, 2004 | 175,410 | ||
| Warranty costs for the nine months ended June 30, 2004 | (101,595 | ) | |
| Change in estimate of warranty liability | (166,400 | ) | |
| Warranty accrual at June 30, 2004 | $ | 749,956 |
6. Stock Options
The Company’s 1988 Stock Incentive Plan terminated in 1998 consistent with its ten year life. The Company’s 1998 Stock Option Plan provides for the granting of incentive and nonqualified stock options to employees, officers, directors and independent contractors and consultants.
Incentive stock options granted under the terminated 1988 Stock Incentive Plan and the 1998 Stock Option Plan (the “Plans”) must be at least equal to 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 has been combined due to the similarities in the Plans. The Company has reserved 1,259,350 shares of Common stock for awards under the 1998 plan.
Stock-based employee compensation is recognized using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” For disclosure purposes, pro forma net income and net income per share data are provided in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as if the fair value method had been applied. Under SFAS No. 123, compensation cost related to stock options granted to employees is computed based on the fair value of the stock option at the date of grant using the Black-Scholes option pricing model. 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 the three-month and nine-month periods ended June 30, 2003 and 2004 would have been as follows:
7
| Three Months Ended June 30, 2003 |
Three Months Ended June 30, 2004 |
Nine Months Ended June 30, 2003 |
Nine Months Ended June 30, 2004 |
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| Net income: | ||||||||||||
| As reported | $ | 1,230,958 | $ | 3,285,608 | $ | 2,725,901 | $ | 7,467,039 | ||||
| Deduct: Total stock based employee compensation expense | ||||||||||||
| determined under the fair value based method for all awards, | ||||||||||||
| net of related tax effects | $ | 177,580 | $ | 194,088 | $ | 490,680 | $ | 568,524 | ||||
| Pro forma | $ | 1,053,378 | $ | 3,091,520 | $ | 2,235,221 | $ | 6,898,515 | ||||