=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission File No. 0-31157 INNOVATIVE SOLUTIONS AND SUPPORT, INC. -------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2507402 ------------ ---------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation) 420 LAPP ROAD, MALVERN, PENNSYLVANIA 19355 ------------------------------------ ----- (Address of principal executive offices) (Zip Code) (610) 889-9898 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of April 23, 2001, there were 12,705,815 shares of the Registrant's Common Stock, with par value of $.001, outstanding. ===============================================================================
INNOVATIVE SOLUTIONS AND SUPPORT, INC. FORM 10-Q MARCH 31, 2001 INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page No. -------- <S> <C> <C> Item 1. FINANCIAL STATEMENTS (unaudited) Consolidated Balance Sheets - September 30, 2000 and March 31, 2001 3 Consolidated Statements of Operations - Three and Six Months Ended March 31, 2000 and 2001 4 Consolidated Statements of Cash Flows - Six Months Ended March 31, 2000 and 2001 5 Notes to Financial Statements 6 Item 2. MANAGAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 PART II OTHER INFORMATION 13 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 13 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. 14 Signatures 15 </TABLE> 2
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements INNOVATIVE SOLUTIONS AND SUPPORT, INC. CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> September 30, March 31, 2000 2001 ---- ---- ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents....................................... $38,657,433 $39,347,745 Cash restricted for capital expenditures ....................... 4,141,689 4,067,738 Accounts receivable, net........................................ 8,394,304 7,837,798 Inventories, net................................................ 4,265,144 5,352,640 Deferred taxes.................................................. 464,346 464,346 Prepaid expenses................................................ 136,447 133,354 ----------- ----------- Total current assets......................................... 56,059,363 57,203,621 ----------- ----------- Property and Equipment: Computers and test equipment.................................... 2,027,987 2,719,699 Corporate airplane.............................................. 2,989,591 2,989,591 Furniture and office equipment.................................. 405,150 419,788 Leasehold improvements.......................................... 54,299 51,800 Construction in process......................................... 330,112 1,637,083 ----------- ----------- 5,807,139 7,817,961 Less--Accumulated depreciation.................................. (1,683,973) (1,962,872) ----------- ----------- Net property and equipment................................... 4,123,166 5,855,089 ----------- ----------- Deposits and Other Assets......................................... 359,986 772,131 ----------- ----------- Deferred Taxes.................................................... 204,012 204,012 ----------- ----------- $60,746,527 $64,034,853 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of note payable................................. $ 100,000 $ 100,000 Current portion of capitalized lease obligations................ 19,794 15,696 Accounts payable................................................ 1,856,048 1,626,315 Accrued expenses................................................ 2,964,947 2,078,695 Deferred revenue................................................ 173,975 70,471 ----------- ----------- Total current liabilities.................................... 5,114,764 3,891,177 ----------- ----------- Capitalized Lease Obligations .................................... 30,447 25,604 ----------- ----------- Deferred Revenue.................................................. 543,820 508,584 ----------- ----------- Long-Term Note Payable ........................................... 4,235,000 4,235,000 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Preferred stock, 10,000,000 shares authorized-- Class A Convertible stock, $.001 par value; 200,000 shares authorized, 0 shares issued and outstanding at September 30, 2000 and March 31, 2001 ..... -- -- Common stock, $.001 par value; 75,000,000 shares authorized, 12,593,503 and 12,694,809 shares issued and outstanding at September 30, 2000, and March 31, 2001, respectively.......... 12,594 12,695 Additional paid-in capital...................................... 43,881,392 44,173,192 Retained earnings............................................... 6,928,510 11,188,601 ----------- ----------- Total shareholders' equity................................... 50,822,496 55,374,488 ----------- ----------- $60,746,527 $64,034,853 =========== =========== </TABLE> The accompanying notes are an integral part of these statements. 3
INNOVATIVE SOLUTIONS AND SUPPORT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <TABLE> <CAPTION> Three months ended Six months ended March 31, March 31, 2000 2001 2000 2001 ------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues $ 7,221,345 $ 9,697,298 $ 13,558,786 $ 19,216,980 Cost of Sales 3,566,416 4,099,759 6,399,879 8,071,679 ------------------------------------------------------------- Gross Profit 3,654,929 $ 5,597,539 7,158,907 11,145,301 ------------------------------------------------------------- Research and development 689,024 998,587 1,357,302 2,436,341 Selling, general and administrative 1,233,514 1,630,738 2,047,816 3,156,993 ------------------------------------------------------------- Operating income 1,732,391 2,968,214 3,753,789 5,551,967 Interest income, net 72,681 547,944 133,267 1,210,082 Income tax expense 639,898 1,306,496 1,420,642 2,501,958 ------------------------------------------------------------- Net income $ 1,165,174 $ 2,209,662 $2,466,414 $ 4,260.091 ------------------------------------------------------------- Net Income per Common Share Basic $ 0.17 $ 0.17 $ 0.35 $ 0.34 Diluted $ 0.12 $ 0.17 $ 0.25 $ 0.32 Weighted Average Shares Outstanding Basic 7,053,029 12,663,592 7,100,319 12,622,983 Diluted 9,793,633 13,292,762 9,837,924 13,291,088 </TABLE> The accompanying notes are an integral part of these statements. 4
INNOVATIVE SOLUTIONS AND SUPPORT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> For the Six Months For the Six Months Ended Ended March 31, March 31, 2000 2001 ---- ---- <S> <C> <C> Cash Flows From Operating Activities: Net income $ 2,466,414 $ 4,260,091 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 152,403 278,899 (Increase)decrease in: Accounts receivable (389,496) 556,506 Inventories (99,580) (1,087,496) Prepaid expenses (62,967) 3,093 Deferred taxes - - Deposits (205,332) 58,689 Other assets - (470,834) Increase (decrease) in: Accounts payable 385,794 (229,733) Accrued expenses (443,009) (886,252) Deferred revenue (712,559) (103,504) Long-term unearned warranty revenue 29,636 (35,236) --------------- -------------- Net cash provided by operating activities 1,121,304 2,344,223 --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (293,466) (2,010,822) --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Stock issued 998,432 291,901 Repayment of capital lease obligations (8,592) (8,941) --------------- -------------- Net cash provided by financing activities 989,840 282,960 --------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,817,678 616,361 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,638,607 42,799,122 --------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,456,285 $ 43,415,483 =============== ============== </TABLE> The accompanying notes are an integral part of these statements. 5
1. Basis of Presentation: Innovative Solutions and Support, Inc., (the "Company"), was incorporated in Pennsylvania on February 12, 1988. The Company's primary business is the design, manufacture and sale of flight information computers, electronic displays and advanced monitoring systems to the military and governmental, commercial air transport and corporate aviation markets. The balance sheet as of March 31, 2001, the statements of operations for the three months and six months ended March 31, 2000 and 2001 and the statements of cash flows for the six months ended March 31, 2000 and 2001 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 March 31, 2001 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10K as filed with the Securities and Exchange Commission. The results of operations for the three months and six months ended March 31, 2001 are not necessarily indicative of the operating results for the full year. 2. Initial Public Offering In August 2000, the Company completed its initial public offering of 3,450,000 shares of Common Stock at a price of $11.00 per share. The Company received net proceeds of approximately $34 million from the offering. Upon the closing of the offering, the outstanding shares of Preferred stock were converted into 1,941,353 shares of Common stock. 3. Net income per Share Net income per share ("EPS") is calculated using the principles of SFAS No. 128. On July 7, 2000, the Company's Board of Directors approved a split of the Company's common shares on a 1.09624-to-1 basis. All references in the financial statements to the number of common shares and to per share amounts have been retroactively stated to reflect the common share split. A reconciliation of weighted average shares outstanding -- basic to the weighted average shares outstanding -- diluted appears below: <TABLE> <CAPTION> Three months ended Six months ended March 31, March 31, 2000 2001 2000 2001 --------- ---------- --------- ----------- <S> <C> <C> <C> <C> Weighted average shares outstanding: Basic.......................................... 7,053,029 12,663,592 7,100,319 12,622,983 Potentially dilutive securities: Employee Stock Options......................... 395,067 343,631 369,410 382,566 Preferred Stock................................ 1,941,353 -- 1,941,353 -- Warrants....................................... 404,184 285,539 426,842 285,539 --------- ---------- --------- ----------- Weighted average shares outstanding: Diluted........................................ 9,793,633 13,292,762 9,837,924 13,291,088 ========= ========== ========= =========== </TABLE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We design, manufacture and sell flight information computers, electronic displays and advanced monitoring systems to the military and government, commercial air transport and corporate aviation markets. Our revenues are derived from the sale of our products to the retrofit market and, to a lesser extent, original equipment manufacturers (OEMs). Our customers include government and military entities and their commercial contractors, aircraft operators, aircraft modification centers and various OEMs. Although we occasionally sell our products directly to government entities, we primarily have sold our products to commercial customers for end use in government and military programs. These sales to commercial contractors are on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. We record revenues when our products are shipped. Since fiscal year 1998, the majority of our revenues have come from the sale of Reduced Vertical Separation Minimum (RVSM) -compliant air data systems, including sales 6
to commercial contractors in connection with the United States Air Force KC-135 retrofit program. We are the sole supplier of these systems and components under subcontracts with various commercial contractors for the retrofit program, which covers the approximately 600 KC-135 aircraft currently in use. This program continues through fiscal year 2002. Our cost of sales are comprised of material components purchased through our supplier base and direct in-house assembly labor and overhead costs. Because our manufacturing activities consist primarily of assembling and testing components and subassemblies and integrating them into a finished system, we believe that we can achieve flexible manufacturing capacity while controlling overhead expenses. In addition, many of the components we use in assembling our products are standard, although certain parts are manufactured to meet our specifications. The overhead portion of cost of sales is primarily comprised of salaries and benefits, building occupancy, supplies, business travel, and outside services costs related to our production, purchasing, material control and quality departments as well as warranty costs. We intend to continue to invest in the development of new products and the enhancement of our existing product line. We expense research and development costs related to future product development as they are incurred. Our selling, general and administrative expenses consist of marketing and business development expenses, professional expenses, salaries and benefits for executive and administrative personnel, facility costs, and recruiting, legal, accounting and other general corporate expenses. 7
Six Months Ended March 31, 2001 Compared to the Six Months Ended March 31, 2000 Revenues. Revenues increased $5.7 million, or 41.7%, to $19.2 million for the six months ended March 31, 2001 from $13.6 million for the six months ended March 31, 2000. The increase was primarily attributable to RVSM product shipments for the KC-135 program. We recognized revenues related to this program of $11.6 million for the six months ended March 31, 2001 and $5.0 million for the six months ended March 31, 2000. Cost of Sales. Cost of sales increased $1.7 million, or 26.1%, to $8.1 million, or 42% of revenues, for the six months ended March 31, 2001 from $6.4 million, or 47.2% of revenues, for the six months ended March 31, 2000. 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 $1.1 million, or 79.5%, to $2.4 million, or 12.7% of revenues, for the six months ended March 31, 2001 from $1.4 million, or 10% of revenues, for the six months ended March 31, 2000. This increase in dollar amount was primarily due to engineering efforts related to the introduction of new products, including our flat panel display 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, and administrative expenses increased $1.1 million, or 54.2%, to $3.2 million, or 16.4% of revenues, for the six months ended March 31, 2001 from 2.0 million, or 15.1% of revenues, for the six months ended March 31, 2000. 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 $1.2 million for the six months ended March 31, 2001 as compared to net interest income of $133,000 for the six months ended March 31, 2000. Net interest income for the six months ended March 31, 2001 was due to higher cash balances during the period. Income tax (expense) benefit, net. Income tax expense was $2.5 million for the six months ended March 31, 2001 compared to an income tax expense of $1.4 million for the six months ended March 31, 2000. The increased amount was the direct result of higher income before tax. Net income. As a result of the factors described above, our net income increased $1.8 million, or 72.7% to $4.3 million, or 22.2% of revenues, for the six months ended March 31, 2001 from $2.5 million, or 18.2% of revenues, for the six months ended March 31, 2000. 8
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31, 2000 Revenues. Revenues increased $2.5 million, or 34.3%, to $9.7 million for the three months ended March 31, 2001 from $7.2 million in the three months ended March 31, 2000. The increase was principally due to shipments of RVSM air data systems for the KC-135 aircraft. Cost of Sales. Cost of sales increased $ .5 million, or 15%, to $4.1 million, or 42.3% of revenues, in the three months ended March 31, 2001 from $3.6 million, or 49.4% of revenues, in the three months ended March 31, 2000. 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 $310,000, or 45%, to $1,000,000, or 10.3% of revenues, in the three months ended March 31, 2001 from $689,000, or 9.5% of revenues, in the three months ended March 31, 2000. The dollar increase in research and development expense was primarily due to engineering efforts related to the introduction of new products, including our flat panel display and ongoing enhancements and improvements to existing products. The overall level of research and development expense reflects our continued commitment to product development and new product introductions. Selling, general and administrative. Selling, general and administrative expenses increased $397,000, or 32.2%, to $1.6 million, or 16.8% of revenues, in the three months ended March 31, 2001 from $1.2 million, or 17% of revenues, in the three months ended March 31, 2000. The increase in dollar amount and as a percentage of revenues reflects our investment in personnel and infrastructure to support our continued growth. Interest income, net. Net interest income was $548,000 in the three months ended March 31, 2001 as compared to net interest income of $73,000 in the three months ended March 31, 2000. The increased interest income in the three months ended March 31, 2001 was the result of higher average cash balances in the period. Income tax expense. We recognized an income tax expense of $1.3 million for an effective rate of 32.2% for the three months ended March 31, 2001. In the three months ended March 31, 2000 we recorded a tax expense $640,000 for an effective rate of 35.5%. The decrease is due to a difference in the effective state tax rates. Net income. As a result of the factors described above, our net income increased $1,044,000, or 89.6%, to $2.2 million, or 22.8% of revenues. Liquidity and Capital Resources Our main sources of liquidity have been cash flows from operations and borrowings. We require cash principally to finance inventory, accounts receivable and payroll. Net cash flow provided from operating activities was 2.3 million for the six months ended March 31, 2001 as compared to $1.1 million for the six months ended March 31, 2000. The increase is a result of higher net income combined 9
with a decrease in accounts receivable. Net cash used in investing activities was $2 million for the six months ended March 31, 2001 as compared to $300,000 for the six months ended March 31, 2000, most of which related to purchases of property and equipment. The increase in the six months ended March 31, 2001 was primarily due to the Company's purchase of land for its new manufacturing facility. Net cash flow provided by financing activities was $300,000 for the six months ended March 31, 2001 as compared to $990,000 for the six months ended March 31, 2000. This decrease was primarily due to the exercise of fewer warrants during the six months ended March 31, 2001. In August 2000, the Company completed its initial public offering of 3,450,000 shares of Common Stock at a price of $11.00 per share. The Company received net proceeds of approximately $34 million from the offering. Our future capital requirements depend on numerous factors, including market acceptance of our products, the timing and rate of expansion of our business and other factors. We have experienced increases in our expenditures since our inception consistent with growth in our operations, personnel and product line, and we anticipate that our expenditures will continue to increase in the foreseeable future. We believe that our cash and cash equivalents, together with the net proceeds from our initial public offering and any new credit facility we may enter into, will provide sufficient capital to fund our operations for at least the next twelve months. However, we may need to raise additional funds through public or private financings or other arrangements in order to support more rapid expansion of our business than we anticipate, develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies or respond to unanticipated requirements or developments. If additional funds are raised through the issuance of equity securities, dilution to existing shareholders may result. If insufficient funds are available, we may not be able to introduce new products or compete effectively in any of our markets, which could hurt our business. RISK FACTORS This report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as anticipates, believes, expects, future, and intends, and similar expressions to identify forward-looking statements. There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including: - -most of our sales are of air data systems products, and we cannot be certain that the market will continue to accept these or our other products. - -we currently have a limited number of customers that use our products, primarily for government-related contracts, making us reliant on these customers and government needs. - -our business currently derives a large portion of its revenues from one military retrofit program, the loss of which could reduce our revenues. - -the growth of our customer base could be limited by delays or difficulties in completing the development and introduction of our planned products or product enhancements. - -we rely on third party suppliers for the components of our air data systems products, and any interruption in the supply of these components could hinder our ability to deliver our products. 10
- -our government retrofit projects allow the government agency or government contractor to terminate or modify their contracts with us. - -we depend on our key personnel to manage our business effectively, and if we are unable to retain our key employees, our ability to compete could be harmed. - -if we do not manage our rapid growth, improve existing processes and implement new systems, procedures and controls, we may use resources, including your investment, inefficiently and our ability to serve our customers and capitalize on market opportunities may suffer. - -our revenue and operating results may vary significantly from quarter to quarter, which may cause our stock price to decline. - -our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including: o variations in demand for our products; o the timing of the introduction of RVSM requirements on various flight routes; o the capital expenditure budgets of aircraft owners and operators and the appropriation cycles of the U.S. government; o changes in the use of our products, including non-RVSM air data systems, RVSM systems and flat panel displays; o delays in introducing or obtaining government approval for new products; o new product introductions by competitors; o changes in our pricing policies or the pricing policies of our competitors; and o costs related to possible acquisitions of technologies or businesses. - -our competition includes other manufacturers of air data systems and flight information displays against whom we may not be able to compete successfully. - -we may not be able to identify or complete acquisitions or we may consummate an acquisition that adversely affects our operating results. - -our success depends on our ability to protect our proprietary rights, and there is a risk of infringement. If we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively. Risks Related to Our Industry If we are unable to respond to rapid technological change, our products could become obsolete and our reputation could suffer. Future generations of air data systems, engine and fuel displays and flat panel displays embodying new technologies or new industry standards could render our products obsolete. The market for aviation products is subject to rapid technological change, new product introductions, changes in customer preferences and evolving industry standards. Our future success will depend on our ability to: o adapt to rapidly changing technologies; 11
o adapt our products to evolving industry standards; and o develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. Our future success will also depend on our developing high quality, cost-effective products and enhancements to our products that satisfy the needs of our customers and on our introducing these new technologies to the marketplace in a timely manner. If we fail to modify or improve our products in response to evolving industry standards, our products could rapidly become obsolete. Our products must obtain government approval before we can sell them. Our products are currently subject to direct regulation by the U.S. Federal Aviation Administration (FAA), its European counterpart, the Joint Aviation Authorities (JAA), and other comparable organizations. Our products and many of their components must be approved by the FAA, the JAA or other comparable organizations before they can be used in an aircraft. To be certified, we must demonstrate that our products are accurate and able to maintain certain levels of repeatability over time. Although the certification requirements of the FAA and the JAA are substantially similar, there is no formal reciprocity between the two systems. Accordingly, even though some of our products are FAA-approved, we may need to obtain approval from the JAA or other appropriate organizations to have them certified for installation outside the United States. Significant delay in receiving certification for newly developed products or enhancements to our products or losing certification for our existing products could result in lost sales or delays in sales. Furthermore, the adoption of additional regulations or product standards, as well as changes to the existing product standards, could require us to change our products and underlying technology. Some products, from which we expect to generate significant future revenues, including our CIP, have not received regulatory approval. We cannot assure you that we will receive regulatory approval on a timely basis or at all. Because our products utilize sophisticated technology and are deployed in complex aircraft cockpit environments, problems with these products may arise that could seriously harm our reputation for quality assurance and our business. Our products use complex system designs and components that may contain errors, omissions or defects, particularly when we incorporate new technologies into our products or we release new versions or enhancements of our products. Despite our quality assurance process, errors, omissions or defects could occur in our current products, in new products or in new versions or enhancements of existing products after commercial shipment has begun. We may be required to redesign or recall those products or pay damages. Such an event could result in the following: o the delay or loss of revenues; o the cancellation of customer contracts; o the diversion of development resources; o damage to our reputation; o increased service and warranty costs; or o litigation costs. Although we currently carry product liability insurance, this insurance may not be adequate to cover our losses in the event of a product liability claim. Moreover, we may not be able to maintain such insurance in the future. 12
We face risks associated with international operations that could cause our financial results to suffer or make it difficult to market our products outside of the United States. We expect to derive an increasing amount of our revenues from sales outside the United States, particularly in Europe. We have limited experience in marketing and distributing our products internationally. In addition, there are certain risks inherent in doing business on an international basis, such as: o differing regulatory requirements for products being installed in aircraft; o legal uncertainty regarding liability; o tariffs, trade barriers and other regulatory barriers; o political and economic instability; o changes in diplomatic and trade relationships; o potentially adverse tax consequences; o the impact of recessions in economies outside the United States; and o variance and unexpected changes in local laws and regulations. Currently, all of our international sales are denominated in U.S. dollars. An increase in the value of the dollar compared to other currencies could make our products less competitive in foreign markets. In the future, we may conduct sales in local currencies, exposing us to changes in exchange rates that could adversely affect our results of operations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Most of our cash equivalents and capital lease obligations are at fixed interest rates and therefore the fair market value of these instruments is affected by changes in market interest rates. As of March 31, 2001, all of our cash equivalents matured within 1 day and we had the ability to immediately liquidate our investments. Therefore, we believe that we are exposed to immaterial levels of market risk. PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. None. 13
Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (b) Reports on Form 8-K. None. 14
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOVATIVE SOLUTIONS & SUPPORT, INC. Date: April 27, 2001 By: /s/ James J. Reilly - -------------------- -------------------------- James J. Reilly Chief Financial Officer (Principal Financial Officer) 15