SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
-----------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
5) Total fee paid:
----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________________
3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 Pennsylvania Drive
Exton, Pennsylvania 19341
610-646-9800
----------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------
Dear Shareholder:
You are invited to attend the Annual Meeting of Shareholders of Innovative
Solutions and Support, Inc.
Date: Thursday, March 31, 2005
Time: 10:00 a.m., Eastern Standard Time
Place: 720 Pennsylvania Drive, Exton, Pennsylvania 19341
Purposes of the Meeting:
o To elect two Class II directors to our Board of Directors for a term
of three (3) years and until their successors are duly elected and
qualified, and
o To increase the number of shares authorized for issuance under the
Company's 1998 Stock Option Plan from 1,259,350 to 2,259,350, and
o To transact any other business that may properly come before the
meeting.
Record Date:
February 15, 2005 is the record date for the meeting. This means that
holders of our common stock at the close of business on that date are entitled
to:
o receive notice of the meeting; and
o vote at the meeting and any adjournment or postponement of the
meeting.
In the event that the meeting is adjourned for one or more periods totaling
at least 15 days due to the fact that there is not a proper quorum, the
shareholders entitled to vote who attend the adjourned meeting, even if there is
not a proper quorum, shall constitute a quorum for the purpose of acting upon
any of the named matters above.
Proxy Solicitation:
The enclosed proxy is solicited by our Board of Directors.
Annual Report:
We have enclosed a copy of our 2004 annual report on Form 10-K, which is not
a part of the proxy soliciting materials.
Voting:
Your vote is important. Please sign, date and return your proxy card promptly
so your shares can be represented, even if you plan to attend the meeting.
Please see the proxy card for instructions on how to vote. You can revoke a
proxy at any time prior to its exercise at the meeting by following the
instructions in the proxy statement or by attending the meeting and voting in
person.
Geoffrey S.M. Hedrick
Chairman of the Board
and Chief Executive
Officer
February 28, 2005
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 Pennsylvania Drive
Exton, Pennsylvania 19341
610-646-9800
TABLE OF CONTENTS
About the Meeting ........................................................ 1
Security Ownership of Principal Shareholders ............................. 3
Security Ownership of Management ......................................... 3
Section 16(A) Beneficial Ownership Reporting Compliance .................. 4
Election of Directors .................................................... 5
Directors and Nominees .................................................. 5
Committees of the Board of Directors .................................... 6
Executive Officers ...................................................... 9
Executive Compensation ................................................... 11
Stock Performance Graph .................................................. 14
Report of the Compensation Committee ..................................... 15
Report of the Audit Committee ............................................ 16
Related Party Transactions ............................................... 17
Shareholder Proposals for 2005 Annual Meeting and Other Matters .......... 17
Independent Auditors ..................................................... 18
Exhibits ................................................................. A-1
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 Pennsylvania Drive
Exton, Pennsylvania 19341
(610) 646-9800
----------------
PROXY STATEMENT
for
Annual Meeting of Shareholders
March 31, 2005
----------------
We are sending you this proxy statement and the enclosed proxy card because
our Board of Directors is soliciting your proxy to vote your shares at our
2005 annual meeting of shareholders. The annual meeting will be held on March
31, 2005 at 10:00 a.m., local time, at our corporate offices at 720
Pennsylvania Drive, Exton, Pennsylvania. We began mailing this proxy statement
and the proxy card on or about February 28, 2005.
ABOUT THE MEETING
Who can vote?
You can vote if, as of the close of business on February 15, 2005, you were
a shareholder of record of our common stock. On that date, 11,852,095 shares
of our common stock were outstanding and entitled to vote. We do not have any
other classes of voting stock outstanding other than our common stock. Each
share of common stock is entitled to one vote, and there are no cumulative
voting rights when voting for directors.
If you and other residents at your mailing address own shares of common
stock in "street name," your broker or bank may have notified you that your
household will receive only one annual report and proxy statement for each
company in which you hold stock through that broker or bank. This practice is
known as "householding." Unless you responded that you did not want to
participate in "householding," you were deemed to have consented to the
process. Each shareholder will continue to receive a separate proxy card or
voting instruction card.
If you did not receive an individual copy of this year's proxy statement or
our annual report, we will send a copy to you if you address a written request
to our Chief Financial Officer, James J. Reilly, 720 Pennsylvania Drive,
Exton, Pennsylvania 19341, telephone (610) 646-9800.
If you would like to receive your own set of the Company's future annual
report and proxy statement, or if you share an address with another Company
shareholder and together both of you would like to receive only a single set
of the Company's annual disclosure documents, you should contact your broker
or bank or you may contact the Company at the above address and phone number.
What constitutes a quorum?
The presence at the annual meeting, in person or by proxy, of a majority of
the outstanding shares as of the record date must be present to hold the
annual meeting. Abstentions from voting and broker "non-votes" will be counted
toward a quorum. A broker "non-vote" occurs when the nominee holding a
shareholder's shares does not vote on a particular proposal because the
nominee does not have discretionary voting power on that item and has not
received instructions from the shareholder.
What vote is required and what is the method of calculation?
The nominees for director who receive a plurality of the shares of common
stock present or represented by proxy at the annual meeting will be elected.
Approval of each other matter to be voted on at the annual meeting requires
the affirmative vote of a majority of the shares of our common stock present
or represented and entitled to vote at the annual meeting. Abstentions or
broker "non-votes" will not be counted for or against matters to be acted on
at the annual meeting.
What matters will be voted on?
Our Board does not intend to bring any other matters before the annual
meeting except the matter listed in the notice, and the Board is not aware of
anyone else who will submit any other matters to be voted on. However, if any
other matters properly come before the annual meeting, the people named on the
proxy card, or their substitutes, will be authorized to vote on those matters
in their own judgment.
How do I vote by proxy?
When you return your properly signed and dated proxy card prior to the
annual meeting, your shares will be voted in accordance with your instructions
marked on the proxy card. If you sign your proxy card but do not specify how
you want your shares to be voted, they will be voted as recommended by the
Board of Directors. You may also vote electronically through the Internet by
following the instructions included with your proxy card.
Can I change my vote after I return my proxy card?
Yes. You can change or revoke your proxy at any time before the annual
meeting either by notifying our Secretary in writing or by sending another
executed proxy dated later than the first proxy card. Attendance at the annual
meeting will not cause your previously granted proxy to be revoked unless you
specifically so request. For shares held beneficially by you, you may
accomplish this by submitting new voting instructions to your broker or
nominee.
Can I vote in person at the annual meeting instead of voting by proxy?
Yes. However, we encourage you to complete and return the enclosed proxy
card to ensure that your shares are represented and voted. If you attend the
annual meeting in person, you may then vote in person even though you returned
your proxy card.
Who pays for this proxy solicitation?
We do. We will pay all costs in connection with the meeting, including the
cost of preparing, assembling and mailing proxy materials, handling and
tabulating the proxies returned, and charges of brokerage houses, nominees and
fiduciaries in forwarding proxy materials to our beneficial owners.
Who can help answer your questions?
If you have questions about the annual meeting or would like additional
copies of this proxy statement, you should contact our Chief Financial
Officer, James J. Reilly, 720 Pennsylvania Drive, Exton, Pennsylvania 19341,
telephone (610) 646-9800.
Annual Report
Our annual report to shareholders accompanies this proxy statement. On
written request, we will provide, without charge, a copy of our annual report
on Form 10-K for the year ended September 30, 2004 (including a list briefly
describing the exhibits thereto), filed with the Securities and Exchange
Commission (the SEC), to any record holder or beneficial owner of our common
stock on February 15, 2005, the record date, or to any person who subsequently
becomes such a
2
record holder or beneficial owner. Requests should be directed to the
attention of our Chief Financial Officer at the address set forth above.
Security Ownership of Principal Shareholders
The following table sets forth certain information with respect to the
beneficial ownership, as of February 15, 2005, of each person who we knew to
be the beneficial owner of more than 5% of our common stock. Each of the
shareholders named below has sole voting and investment power with respect to
such shares, unless otherwise indicated.
Common Stock
----------------------
Number of Percent of
Name of Beneficial Owner Shares Class (1)
------------------------ --------- ----------
Geoffrey S. M. Hedrick (2) ........................... 2,667,584 22.5%
---------------
(1) As used in this table, beneficial ownership means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose,
or direct the disposition, of a security). A person is deemed as of any
date to have beneficial ownership of any security that such person has
the right to acquire within 60 days after such date. Percentage ownership
is based upon 11,852,095 shares of common stock outstanding as of
February 15, 2005.
(2) Mr. Hedrick's address is c/o Innovative Solutions and Support, Inc., 720
Pennsylvania Drive, Exton, PA 19341. Includes options to purchase 800
shares, which were exercisable as of February 15, 2005, or within 60 days
from such date.
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership as of February 15, 2005 of (i) each director, (ii) our
chief executive officer and each other executive officer who earned more than
$100,000 during fiscal year 2004 (collectively, the "Named Executive
Officers") and (iii) all the directors and executive officers as a group. Each
of the shareholders named below has sole voting and investment power with
respect to such shares.
Name of Beneficial Owner Number of Shares Percent of Class (1)
------------------------ ---------------- --------------------
Geoffrey S. M. Hedrick .............. 2,667,584 22.5%
James J. Reilly ..................... 91,499(2) *
Robert E. Mittelstaedt, Jr. ......... 79,628 *
Roman G. Ptakowski .................. 60,000(3) *
Benjamin A. Cosgrove ................ 40,619 *
Winston J. Churchill ................ 37,293 *
Robert H. Rau ....................... 5,372 *
Glen R. Bressner .................... 11,934 *
Ivan M. Marks ....................... 5,125 *
All executive officers and directors
as a group (9 persons)............. 3,009,054(4) 25.1%
---------------
* Less than 1%.
(1) As used in this table, beneficial ownership means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose,
or direct the disposition, of a security). A person is deemed as of any
date to have beneficial ownership of any security that such person has
the right to acquire within 60 days after such date. Percentage ownership
is based upon 11,852,095 shares of common stock outstanding as of
February 15, 2005.
3
(2) Includes options to purchase 88,499 shares, which were exercisable as of
February 15, 2005, or within 60 days from such date.
(3) Represents the total number of outstanding options to purchase shares,
which were exercisable as of February 15, 2005, or within 60 days from
such date.
(4) Includes options to purchase 149,299 shares, which were exercisable as of
February 15, 2005, or within 60 days from such date.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers (as defined under Section 16(a) of the Securities Exchange Act),
directors and persons who own greater than 10% of a registered class of our
equity securities to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Based solely on a review of the forms
we have received and on written representations from certain reporting persons
that no such forms were required for them, we believe that during fiscal year
2004, all of the Section 16(a) filing requirements applicable to our officers,
directors and 10% beneficial owners were complied with by such persons.
4
ELECTION OF DIRECTORS
(Item 1 on Proxy Card)
At the annual meeting, the shareholders will elect (three) Class II
directors to hold office until the annual meeting of shareholders in 2008 and
until their respective successors have been duly elected and qualified. The
Board is divided into three classes serving staggered three-year terms, the
term of one class of directors to expire each year. The term of the Class II
directors expires at the 2005 annual meeting of shareholders. Upon the
recommendation of the Nominating/Corporate Governance Committee, the Board has
nominated Messrs. Glen R. Bressner, Robert E. Mittelstaedt, Jr. and William C.
Bowes to serve as directors. Each individual is currently serving as a Class
II director and has indicated a willingness to continue serving as a director.
Unless contrary instructions are given, the shares represented by a properly
executed proxy will be voted "FOR" the election of Messrs. Bressner,
Mittelstaedt and Bowes. The three nominees receiving a plurality of the votes
cast for director will be elected. Should any of the nominees become
unavailable to accept election as a director, the persons named in the
enclosed proxy will vote the shares that they represent for the election of
such other person as the Board may recommend. The Board of Directors
recommends voting "FOR" the nominees for Class II directors.
Directors and Nominees
The current members of the Board of Directors, including the nominees for
Class II directors, together with certain information about them, are set
forth below:
Director Term
Name Age Since Expires Positions with the Company
---- --- -------- ------- ---------------------------------
Class I Directors
Ivan M. Marks .................................................... 63 1996 2007 Director
Robert H. Rau .................................................... 68 2001 2007 Director
Class II Directors
Glen R. Bressner ................................................. 44 1999 2005 Director
Robert E. Mittelstaedt, Jr ....................................... 61 1989 2005 Director
Class III Directors
Geoffrey S. M. Hedrick ........................................... 62 1988 2006 Director, Chairman of the
Board and Chief Executive Officer
Winston J. Churchill ............................................. 64 1990 2006 Director
Benjamin A. Cosgrove ............................................. 78 1992 2006 Director
Ivan M. Marks. Mr. Marks retired January 31, 2005 as Vice President-
Controller of Parker Aerospace Group, which is the aerospace segment of Parker
Hannifin Corporation, a position he held since 1979. Mr. Marks holds a
Bachelor of Science degree in Business Administration from Drake University
and is a Certified Public Accountant.
Robert H. Rau. Mr. Rau retired December 31, 1998 as President of the
Aerostructures Group of The Goodrich Company. Prior to its merger with
Goodrich, Mr. Rau was President and Chief Executive Officer of Rohr, Inc. from
1993 to 1997. Before joining Rohr, he was an Executive Vice President of
Parker Hannifin Corporation and President of its Aerospace Sector. In
addition, Mr. Rau is a past member of the Board of Governors of the Aerospace
Industries Association, a past Chairman of the General Aviation Manufacturers
Association, a member of the Board of Trustees of Whittier College and a
member of the Board of Directors of Goodrich Aerospace Europe and HCC
Industries, Inc. and Chairman of the International Advisory Panel of Singapore
Aerospace. Mr. Rau received a Bachelor of Arts degree in Business
Administration from Whittier College in 1962.
5
Glen R. Bressner. 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.
Robert E. Mittelstaedt, Jr. Mr. Mittelstaedt served as our Non-Executive
Chairman of the Board of Directors from 1989 to 1997. Since July 1, 2004 Mr.
Mittelstaedt has been Dean of the W.P. Carey School of Business at Arizona
State University. Prior to that, Mr. Mittelstaedt was Vice Dean of The Wharton
School of the University of Pennsylvania since 1989. Mr. Mittelstaedt also
serves on the Board of Directors of Laboratory Corporation of America
Holdings, Inc. Mr. Mittelstaedt holds a Bachelor of Science degree in
Mechanical Engineering from Tulane University and a Masters of Business
Administration degree from The Wharton School of the University of
Pennsylvania.
Geoffrey S. M. Hedrick. Mr. Hedrick has been our Chief Executive Officer
since he founded the company in February 1988 and our Chairman of the Board
since 1997. Prior to founding the company, 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 over 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.
Winston J. Churchill. Mr. Churchill has been managing general partner of
SCP Private Equity Partners since he founded it in 1996, and has over twenty-
five years experience in private equity investing. Previously, he had formed
Churchill Investment Partners, Inc. in 1989 and CIP Capital, L.P., another
venture capital fund, in 1990. Prior to that, he was a managing partner of a
private investment firm that specialized in leveraged buyouts on behalf of
Bessemer Securities Corporation. From 1967 to 1983, he practiced law at the
Philadelphia firm of Saul, Ewing, Remick and Saul and served as Chairman of
its Banking and Financial Institutions Department, Chairman of the Finance
Committee and a member of its Executive Committee. He is a Director of Amkor
Technology, Inc. and Griffin Land and Nurseries, Inc., as well as a number of
private companies. From 1989 to 1993, he served as Chairman of the Finance
Committee of the Pennsylvania Public School Employees' Retirement System. He
is currently a trustee of Fordham University, Georgetown University,
Immaculata University, American Friends of New College Oxford, England, The
Gesu School and Young Scholars Charter School. He was awarded a BS in Physics,
summa cum laude, from Fordham University followed by a M.A. in Economics from
Oxford University where he studied as a Rhodes Scholar, and a J.D. degree from
Yale Law School.
Benjamin A. Cosgrove. Prior to his retirement, Mr. Cosgrove was employed by
Boeing for 44 years and held a number of positions, including Senior Vice
President for Engineering in the Commercial Division. 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 and an honorary Doctorate degree in engineering
from Notre Dame University.
Committees of the Board of Directors
The Board maintains four standing committees: Audit, Compensation,
Investment, and Nominating/Corporate Governance.
Audit Committee. The Audit Committee makes recommendations to the Board
with respect to various auditing and accounting matters, including the
selection and compensation of our auditors, the scope of our annual audits,
fees to be paid to the auditors, the performance and independence of our
auditors and our accounting practices. The Audit Committee approves all
services provided to
6
the company by the independent public accountants. The Audit Committee has
established procedures for the receipt, retention and treatment, on a
confidential basis, of complaints received by the company, regarding
accounting, internal accounting controls or auditing matters, and the
confidential, anonymous submissions by employees of concerns regarding
questionable accounting or auditing matters. 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. Messrs. Rau (Chairman), Bressner and Marks are currently
members of the Audit Committee. The Audit Committee is comprised solely of
independent members, as independence for audit committee members is defined in
the listing standards of the Nasdaq National Market. In addition, the Board
has determined that at least one of the Audit Committee members, Mr. Marks, is
an audit committee financial expert, as defined by SEC rules and regulations.
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. Messrs.
Cosgrove (Chairman), Churchill and Mittelstaedt are currently the members of
the Compensation Committee.
Investment Committee. The Investment Committee assists the Board of
Directors in fulfilling its oversight responsibilities with respect to
recommendations pertaining to the investment of excess capital. Messrs.
Churchill (Chairman), Bressner and Rau are currently members of the Investment
Committee.
Nominating/Corporate Governance Committee. We have a Nominating/Corporate
Governance Committee, consisting of three non-employee directors. The
Committee has adopted a formal written Charter that has been approved by the
Board. The Charter specifies the scope of the Committee's responsibilities and
procedures for carrying out such responsibilities. A copy of the Charter is
available on our website, www.innovative-ss.com under the heading Investor
Relations. The Committee members are Messrs. Mittelstaedt (Chairman),
Churchill and Bressner, each of whom is independent, as that term is defined
in the listing standards of the NASDAQ National Market.
The Nominating/Corporate Governance Committee functions include
establishing the criteria for selecting candidates for nomination to the
Board; actively seeking candidates who meet those criteria; and making
recommendations to the Board of nominees to fill vacancies on, or as additions
to, the Board.
The Committee seeks director candidates based upon a number of
qualifications/criteria, including their independence, knowledge, judgment,
character, leadership skills, education, experience, financial literacy,
standing in the community and ability to foster a diversity of backgrounds and
views and to complement the Board's existing strengths relative to the
Company's business. In the case of potential independent director candidates,
such eligibility criteria shall be in accordance with SEC and NASDAQ rules.
The Committee conducts an annual assessment of the size and composition of
the Board and Committees and reviews with the Board the appropriate skills and
characteristics required of Board members. The Committee has not yet relied
upon third-party search firms to identify board candidates, but reserves the
right to do so as required. To date the Committee has relied upon
recommendations from a wide variety of its business contacts, including
current executive officers, directors, community leaders, and shareholders as
a source for potential board candidates.
Neither the Nominating/Corporate Governance Committee nor the Company has
engaged, or paid any fees to, a search firm in connection with the nomination
of any of the Class II directors for election at the Annual Meeting covered by
this Proxy Statement.
The Committee will consider nominees for election to the Board that are
timely recommended by shareholders provided that a complete description of the
nominees' qualifications, experience and background, together with a statement
signed by each nominee in which he or she consents to act
7
as such, accompany the recommendations. Such recommendations should be
submitted in writing to the attention of Chairman, Nominating/Corporate
Governance Committee, at our address at 720 Pennsylvania Drive, Exton, PA,
19341, and should not include self-nominations. Section 3.10 of the Company's
by-laws contains provisions setting forth the requirements applicable to a
stockholder nomination for director. These requirements are summarized in this
Proxy Statement under the caption "Shareholder Proposals For 2005 Annual
Meeting And Other Matters".
Each of the current nominees for director listed under the caption
"ELECTION OF DIRECTORS" is an existing director standing for re-election. In
connection with the 2005 Annual Meeting, the Nominating/Corporate Governance
Committee did not receive any recommendation for a candidate from any
shareholder or group of shareholders owning more than 5% of our common stock.
Our Annual Meeting of Shareholders provides an opportunity each year for
shareholders to ask questions of or otherwise communicate directly with
members of our Board of Directors on matters relevant to the Company. Each of
our directors is requested to attend in person the Annual Meeting. Seven out
of eight Company directors attended the Company's 2004 Annual Meeting of
Shareholders. In addition, shareholders may, at any time, communicate in
writing with the Chairman of the Nominating/Corporate Governance Committee by
sending such written communication to the attention of Chairman, Nominating/
Corporate Governance Committee, at our address at 720 Pennsylvania Drive,
Exton, PA, 19341, (fax (610) 646-0150).
Copies of written communications received at such address will be provided
to the Chairman of the Nominating/Corporate Governance Committee or the non-
management directors as a group unless such communications are considered, in
the reasonable judgment of the Corporate Secretary, to be improper for
submission to the intended recipient(s). Examples of shareholder
communications that would be considered improper for submission include,
without limitation, customer complaints, solicitations, communications that do
not relate directly or indirectly to the Company or the Company's business or
communications that relate to improper or irrelevant topics.
Meetings and Attendance
During the fiscal year ended September 30, 2004, the full Board held six
meetings. The Audit Committee met eight times, the Investment and Compensation
Committees each met three times and the Nominating/Corporate Governance
Committee met once. All directors attended at least 75% of the meetings of the
full Board and the meetings of the committees on which they served.
If you would like to communicate with the Company's directors, please send
a letter to the following address: 720 Pennsylvania Drive, Exton, Pennsylvania
19341(fax (610) 646-0150). The appropriate officer at the Company will review
each such communication and forward a copy to each member of the Board of
Directors.
Compensation of Directors
Each non-employee director who served on the Board at the beginning of our
fiscal year (October 1, 2003), received shares of common stock with a fair
market value of $25,000, determined as of such date. The shares vested
quarterly during the fiscal year, provided that the director was still serving
on the board on the date the shares are scheduled to vest. Additionally, each
non-employee director receives $1,000 for each board meeting attended. All
directors are reimbursed for reasonable travel and lodging expenses associated
with attendance at meetings.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee currently serves as an officer of
the company. There are no compensation committee interlocks between us and any
other entity involving us or such entity's executive officers or board
members.
8
Code of Ethics
We adopted a Code of Ethics (the "Code of Ethics") applicable to our
Directors, our principal executive officer and principal financial and
accounting officer and persons performing similar functions. In addition, the
Code of Ethics applies to our employees, officers, agents and representatives.
The Code of Ethics is posted on the Company's website, www.innovative-ss.com,
under the heading Investor Relations.
Executive Officers
Set forth below is a table identifying our executive officers who are not
identified in the tables above. Biographical information for Mr. Hedrick is
set forth above.
Name Age Position with the Company
---- --- -------------------------
Roman G. Ptakowski .......................... 56 President
James J. Reilly ............................. 64 Chief Financial Officer
Roman G. Ptakowski has been our President since March 2003. Prior to that,
Mr. Ptakowski served as a Group Vice President and General Manager at B/E
Aerospace, Inc. Previously, Mr. Ptakowski was General Manager, Protective
Relay Division of the ASEA Brown Bovari Power T&D Company, Inc. Mr. Ptakowski
received a B.S. in Electrical Engineering from New York University and a MBA
from Duke University.
James J. Reilly. Mr. 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 both
BS and MBA degrees from the University of Hartford.
9
INCREASE IN SHARES AVAILABLE UNDER THE
COMPANY'S 1998 STOCK OPTION PLAN
(Item 2 on Proxy Card)
In November 1998, our Board adopted the Innovative Solutions and Support,
Inc. 1998 Stock Option Plan (the "Option Plan"). The purpose of the Option
Plan is to offer certain of our employees, consultants and directors options
to acquire equity interests in us, thereby increasing their personal interest
in our growth and success and providing them with an opportunity to share in
the potential capital appreciation of our common stock.
A summary description of the Option Plan is attached to this proxy
statement as Exhibit A. This summary is qualified in its entirety by the full
text of the Option Plan, a copy of which is attached to this proxy statement
as Exhibit B. The Closing Price of a share of Common Stock on February 15,
2005 was $30.75. The Option Plan originally reserved 790,812 shares of our
common stock, which was increased to 866,920 shares when upon our initial
public offering in 2000 shares were split on a 1 to 1.09624 ratio. In November
2000, our Board adopted an amendment to the Option Plan that increased the
total number of shares of common stock authorized for issuance under the
Option Plan by 392,430 shares from 866,920 to 1,259,350 shares. At our annual
meeting on October 31, 2001, our shareholders approved this increase to
1,259,350 shares.
As of December 31, 2004, 194,012 shares (15.4% of the total pool) remain
available for grant under the Option Plan. Subject to shareholder approval,
the Compensation Committee of the Board has approved an increase in the number
of shares available under the Option Plan from 1,259,350 to 2,259,350, which
is an increase of 1,000,000 shares. A copy of the amendment which will be
adopted if the increase in shares is approved by shareholders is attached to
this Proxy Statement as Exhibit C.
In unanimously recommending the approval of this increase to the full
Board, the Compensation Committee of the Board reviewed the projected impact
on the Company and our shareholders. Among other things, the Compensation
Committee considered that additional option shares would be needed for the
retention of present employees and the future recruitment of suitable
management and technical talent needed to enhance our growth. We believe that
our growth and long-term success depends in large part upon attracting,
retaining and motivating key personnel, and that such retention and motivation
can be achieved in part through the grant of stock options. We also believe
that stock options will play an important role in our success by encouraging
and enabling our directors, officers, consultants and other employees-upon
whose judgment, initiative and efforts we depend-to acquire a proprietary
interest in our long-term performance. We anticipate that providing these
persons with a direct stake in us will ensure a closer identification of the
interests of the participants in the plan with those of us, thereby
stimulating the efforts of these participants to promote our future success
and strengthen their desire to remain with our company.
We believe that the proposed increase in the number of shares available for
issue under the Option Plan will help us accomplish these goals and will keep
our equity incentive compensation in line with that of other companies
comparable to us.
The Board of Directors recommends a vote FOR an increase in the number of
shares authorized for issuance under the Option Plan.
10
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash compensation as well as certain
other compensation paid or accrued during fiscal years 2004, 2003 and 2002 to
the Named Executive Officers for services rendered in such years:
Long-Term
Compensation
Awards
Annual Compensation Securities
------------------------ Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ---- -------- ----- ------------ ------------
Geoffrey S. M. Hedrick.................................................. 2004 $350,000 -- -- $ 5,936(1)
Chief Executive Officer 2003 $328,846 -- -- --
2002 $300,000 -- -- --
Roman G. Ptakowski (2).................................................. 2004 $250,000 $ 57,903(3)
President 2003 $115,383 180,000 $ 17,091(3)
James J. Reilly......................................................... 2004 $180,000 -- -- --
Chief Financial Officer 2003 $160,349 -- -- --
2002 $150,000 -- -- --
Roger E. Mitchell....................................................... 2004 $160,000 -- -- $342,478(4)
Vice President Operations 2003 $160,000 -- -- --
2002 $146,154 -- -- --
---------------
(1) Automobile allowance.
(2) Mr. Ptakowski joined the Company in March 2003.
(3) This amount represents a relocation bonus.
(4) Exercise of stock options.
Stock Option Grants
There were no stock option grants in fiscal year 2004 to any of the Named
Executive Officers.
Stock Option Exercises and Holdings
The following table sets forth the value of options held by each of the
Named Executive Officers at September 30, 2004.
11
Aggregated Option Exercises in 2004 and Option Values at September 30, 2004
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-The-Money Options at
Acquired September 30, 2004 September 30, 2004 (1)
On Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Geoffrey S. M. Hedrick ............... -- -- 800 200 $ 10,824 $ 2,706
Roman G. Ptakowski ................... -- -- 60,000 120,000 $1,093,200 $2,186,400
James J. Reilly ...................... -- -- 70,959 17,740 $ 899,738 $ 224,937
Roger E. Mitchell .................... -- -- 16,428 200 $ 342,919 $ 2,706
---------------
(1) The value of unexercised in-the-money options is based on the difference
between the last sale price of a share of our common stock as reported on
the Nasdaq National Market on September 30, 2004 ($24.53) and the
exercise price of the options, multiplied by the number of options.
Equity Compensation Plan Information
The following table gives information about our common stock that may be
issued upon the exercise of options and rights under all of our existing
equity compensation plans and arrangements as of September 30, 2004, including
the 1998 Stock Option Plan and the 2003 Restricted Stock Plan.
Number of Securities
remaining available for
Number of Securities Weighted-average future issuance under
to be issued upon exercise price of equity compensation
exercise of outstanding outstanding options, plans (excluding securities
Plan Category options, warrants and rights warrants and rights reflected in second column)
------------- ---------------------------- -------------------- ---------------------------
Equity compensation plans approved by
security holders........................... 560,458 $10.19 215,769(1)
Equity compensation plans not approved by
security holders........................... 0 $ 0 0
------- ------ -------
Total........................................ 560,458 $10.19 215,769(1)
======= ====== =======
---------------
(1) Includes 194,012 stock options from the 1998 Stock Option Plan and 21,757
shares from the 2003 Restricted Stock Plan.
In October 2003, under the 2003 Restricted Stock Plan, each non-employee
director who served on the Board at the beginning of the fiscal year was
entitled to receive shares of common stock with a fair market value of
$25,000, determined as of the first day of the fiscal year. The shares vested
quarterly during the fiscal year, provided that the director was still serving
on the board on the date the shares were scheduled to vest. Six non-employee
directors received a grant of 3,125 shares of restricted stock as of October
1, 2003 and one non-employee director received a prorated grant of 2,500
shares of restricted stock as of October 1, 2003. As of October 1, 2004 seven
non-employee directors each received 999 shares subject to quarterly vesting
discussed above.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
In March 2003, we entered into an agreement with Roman G. Ptakowski to
serve as President at an annual salary of $250,000 and an annual performance
incentive bonus of up to 30% of base salary based on performance of the
business. The initial term of the agreement is for two years with yearly one-
year renewal periods unless either party provides the other party with written
notice of termination of the agreement not later than ninety-days (90) prior
to the end of the then current term of the agreement. In the event that Mr.
Ptakowski is involuntarily terminated without cause,
12
Mr. Ptakowski would be entitled to continue to receive compensation and
benefits at the rate in effect at the time of termination until the end of the
then current term of the agreement, provided however, that such amount shall
not be less than six months of current salary and benefits. Amounts payable
following such a termination shall be reduced by any compensation received for
services rendered by Mr. Ptakowski to a subsequent employer. In addition, Mr.
Ptakowski was granted options to purchase 180,000 shares of common stock at
$6.31 per share. One-third of these options vest each year on the anniversary
of the initial grant date.
In the event that Mr. Ptakowski is involuntarily terminated without cause
or resigns as a result of a material change in duties or a reduction in
compensation or benefits following certain changes of control of Innovative
Solutions and Support, Mr. Ptakowski would be entitled to receive a one time
payment equal to Mr. Ptakowski's annual salary as then in effect within thirty
(30) days of the date of such termination in addition to continued
compensation and benefits at the rate in effect at the time of termination
until the end of the then current term of the agreement.
On December 27, 2004 both parties concurred that the current agreement will
be allowed to expire and will be replaced with one that continues with the
same terms and conditions, provided that employment may be terminated by
either party at any time on ninety-days prior notice.
13
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
return on our common stock during the period from the commencement of public
trading of our common stock on the NASDAQ National Market on August 4, 2000
until September 30, 2004, against the cumulative total return on the NASDAQ
Composite Index and the Russell 2000 index during such period. The comparison
assumes that $100 was invested at the beginning of such period in our common
stock and in each of the foregoing indices and assumes the reinvestment of any
dividends.
COMPARISON OF 4-YEAR CUMULATIVE TOTAL RETURN*
AMONG INNOVATIVE SOLUTIONS AND SUPPORT, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RDG TECHNOLOGY COMPOSITE INDEX
[GRAPHIC OMITTED]
*$100 invested on 8/4/00 in stock or on 7/3/99 in index-
including reinvestment of dividends.
Fiscal year ending September 30.
Cumulative Total Return
---------------------------------------------------
8/00 9/00 9/01 9/02 9/03 9/04
------ ------ ----- ----- ------ ------
Innovative Solutions and Support, Inc. ..................................... 100.00 140.51 59.65 63.09 66.95 201.26
NASDAQ Stock Market (U.S.) ................................................. 100.00 101.93 35.24 30.58 36.30 39.12
Russell 2000 ............................................................... 100.00 104.47 82.31 74.66 101.90 121.03
14
The following report of the Compensation Committee and the performance
graph on the previous page will not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that we specifically
incorporate this information by reference. The following report shall not
otherwise be deemed filed under such Acts.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is composed of three
non-employee directors. The Compensation Committee is responsible for setting
and administering the policies that govern annual executive salaries, bonuses
and stock ownership programs. The Compensation Committee annually evaluates
the performance, and determines or recommends to the full Board the
compensation, of the Chief Executive Officer and other executive officers.
An executive officer's annual salary, including the Chief Executive
Officer's salary, is established initially on the basis of subjective factors,
including experience, individual achievements and the level of responsibility
assumed at the Company. The Compensation Committee reviews an executive
officer's annual salary, including the Chief Executive Officer's salary,
periodically and makes adjustments based on each executive officer's past
performance, expected future contributions, and the scope and nature of the
responsibilities of the executive officer, including changes in
responsibilities and market compensation practices.
The Compensation Committee determined that for fiscal year 2004 (the twelve
months ended September 30, 2004) the annual salary of the Chief Executive
Officer would be increased to $400,000 from $350,000. There were no other
annual salary increases or cash incentive compensation payments in fiscal year
2004. Certain bonus amounts for executive officers were accrued for in fiscal
2004 and paid out in fiscal 2005 as follows: Messrs Hedrick, Reilly and
Mitchell each received $4,225.00 and Mr. Ptakowski received $30,000.00.
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
denies a federal income tax deduction for certain compensation exceeding
$1,000,000 paid to the Chief Executive Officer or any of the other named
executive officers, excluding, among other things, certain performance-based
compensation. Through September 30, 2004, this provision has not affected our
tax deductions, and the Compensation Committee believes that, at the present
time, it is unlikely that the compensation paid to any of our employees in a
taxable year will exceed $1,000,000. The Compensation Committee intends to
continue to evaluate the effects of the statute and any applicable regulations
and to comply with Internal Revenue Code Section 162(m) in the future to the
extent consistent with our best interests.
Submitted by the Compensation Committee:
Benjamin A. Cosgrove (Chairman)
Winston J. Churchill
Robert E. Mittelstaedt, Jr.
15
The following report of the Audit Committee will not be deemed incorporated
by reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or
under the Securities Exchange Act of 1934, as amended, except to the extent
that we specifically incorporate this information by reference. The following
report shall not otherwise be deemed filed under such Acts.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is composed of three non-
employee directors. The role of the Audit Committee is to assist our Board in
its oversight of our financial reporting process. The Board, in its business
judgment, has determined that each director is independent as required by Rule
4200(a)(15) of the listing standards of the Nasdaq National Market. In
addition, the Board has determined that at least one of the Audit Committee
members, Mr. Marks, is an audit committee financial expert as defined by SEC
rules and regulations. The Committee operates pursuant to a charter, a copy of
which was attached to the 2003 Proxy Statement filed with the SEC on January
21, 2003. As set forth in the charter, management of the company is
responsible for the preparation, presentation and integrity of our financial
statements, our accounting and financial reporting principles and internal
controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. The independent auditors are
responsible for auditing our financial statements and expressing an opinion as
to their conformity with generally accepted accounting principles in the
United States of America. The Audit Committee reviews and reassesses the
adequacy of the charter on an annual basis.
In the performance of its oversight function, the Audit Committee has
reviewed and discussed the audited financial statements for the year ending
September 30, 2004 with management of the company and its independent
auditors. The Audit Committee has also discussed with the independent auditors
the matters required to be discussed by Statement on Auditing Standards No. 61,
Codification of Statements on Auditing Standards, AU 1380, as currently in
effect. Finally, the Audit Committee has received the written disclosures and
the letter from the independent auditors required by Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees, as
currently in effect, and has considered whether the provision of non-audit
services by the independent auditors is compatible with maintaining the
auditor's independence and has discussed with the auditors the auditors'
independence.
Based upon the review, reports and discussions described in this report,
and subject to the limitations on the role and responsibilities of the Audit
Committee referred to above and in the charter, the Audit Committee
recommended to the Board of Directors that the audited financial statements
for the year ending September 30, 2004 be included in the company's Annual
Report on Form 10-K for the year ended September 30, 2004 as filed with the
Securities and Exchange Commission.
Submitted by the Audit Committee:
Robert H. Rau (Chairman)
Glen R. Bressner
Ivan M. Marks
16
Related Party Transactions
The Company incurred legal fees of $169,000, $128,000 and $116,000 with a
law firm which is a shareholder of the Company for the years ended September
30, 2002, 2003 and 2004, respectively. The fees paid were comparable with the
fees paid prior to the law firm's investment in the Company.
The Company derived net sales of $0, $68,000 and $125,000 for the years
ended September 30, 2002, 2003 and 2004, respectively, from an entity which is
a shareholder, and purchased $0, $6,000 and $0 of component parts used in the
manufacturing process from this related party during these years.
For the years ended September 30, 2002, 2003 and 2004, respectively, the
Company incurred service fees of $29,000, $19,000 and $125,000 with a
commercial graphics firm controlled by an individual who is married to a
shareholder and the daughter of the Company's Chairman and Chief Executive
Officer.
SHAREHOLDER PROPOSALS FOR 2005 ANNUAL MEETING
AND OTHER MATTERS
Shareholders wishing to submit proposals for inclusion in the proxy
statement for the 2006 Annual Meeting of Shareholders must submit such
proposals to us at 720 Pennsylvania Drive, Exton, PA 19341, Attention: James
J. Reilly, on or before September 15, 2005. In order for the proposal to be
included in the proxy statement, the shareholder submitting the proposal must
meet certain eligibility standards and comply with the procedures established
by the SEC as set forth in Rule 14a-8 of the Securities Exchange Act of 1934.
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, issued under the Securities Exchange Act of 1934. The
amendment to Rule 14a-4(c)(1) governs a company's use of discretionary proxy
voting authority for a shareholder proposal which the shareholder has not
sought to include in our proxy statement. The amendment provides that if a
proponent of a proposal fails to notify a company at least 45 days prior to
the month and day of mailing of the prior year's proxy statement (or any date
specified in an advance notice provision), then the management proxies will be
allowed to use their discretionary voting authority when the proposal is
raised at the meeting, without any discussion of the matter in the proxy
statement. With respect to our 2006 Annual Meeting of Shareholders, if we are
not provided notice of a shareholder proposal, which the shareholder has not
previously sought to include in our proxy statement, by December 8, 2005, the
management proxies will be allowed to use their discretionary authority.
Our by-laws provide that a shareholder proposal (including a shareholder
nomination of a director) must meet certain predetermined requirements in
order to be considered at the Annual Meeting. In order to be considered, a
shareholder's proposal must be made in writing and delivered to or received at
our principal executive offices not less than one hundred twenty (120) days
nor more than one hundred fifty (150) days prior to the meeting in the case of
an annual meeting that is called for a date that is within 30 days before or
after the anniversary date of the immediately preceding annual meeting of
shareholders. However, in the case of an annual meeting that is called for a
date that is not within 30 days before or after the anniversary date of the
immediately preceding annual meeting, proposals must be received not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date
of the meeting was made, whichever occurs first. The notice to the Secretary
must set forth certain information as specified in our by-laws.
As of the date of this proxy statement, the Board knows of no other
business which may properly be and is likely to be brought before the annual
meeting. If a shareholder proposal that was excluded from this proxy statement
in accordance with Rule 14a-8 of the Securities Act or our by-laws is properly
brought before the annual meeting, it is intended that the proxy holders will
use their discretionary authority to vote the proxies against said proposal.
If any other matters should
17
arise at the annual meeting, shares represented by proxies will be voted at
the discretion of the proxy holders.
Independent Auditors
The audit committee retained Deloitte & Touche, LLP to provide audit
services for the fiscal years ended September 30, 2004 and 2005. A
representative of Deloitte & Touche, LLP will be present at the meeting and
will have an opportunity to make a statement and, also, respond to appropriate
questions from shareholders.
Services provided by Deloitte & Touche, LLP included an audit of the
consolidated financial statements of the company and services related to
filings made with the SEC. The aggregate fees billed by Deloitte & Touche, LLP
in connection with services rendered during fiscal year ended September 30,
2003 and 2004 were:
FY 2003 FY 2004
-------- --------
Audit Fees.................................... $170,000 $191,000
Audit Related Fees............................ $ 13,000 $ 6,300
Tax Fees...................................... $ 56,411 $ 48,549
All Other Fees................................ -- --
-------- --------
Total......................................... $239,411 $245,849
======== ========
The Audit Committee's policy is to pre-approve the engagement of
accountants to render all audit and tax-related services for the Company, as
well as any changes to the terms of the engagement. The Audit Committee will
also pre-approve all proposed non-audit related services to be provided by the
Company's independent auditors. The Audit Committee reviews the terms of the
engagement, a description of the engagement, and a budget for the engagement.
The request for services must be specific as to the particular services to be
provided. Requests are aggregated and submitted to the Audit Committee in one
of the following ways: requesting approval of services at a meeting of the
Audit Committee, through a written consent or by a designated member of the
Audit Committee. The Audit Committee approved all 2004 fees paid to the
independent accountants.
Pursuant to the adoption of the revised Audit Committee Charter, the Board
of Directors has adopted a policy which prohibits the Company from entering
into non-audit related consulting agreements for financial information systems
design and implementation, for certain other services considered to have an
impact on independence, and for all other services prohibited by the Sarbanes-
Oxley Act of 2002 and new Securities and Exchange Commission regulations. The
policy also contains procedures requiring Audit Committee pre-approval of all
audit and permitted non-audit services provided by the Company's independent
auditors.
By Order of the Board of Directors
Geoffrey S.M. Hedrick
Chairman of the Board and Chief Executive Officer
February 15, 2005
18
EXHIBIT A
Summary of 1998 Stock Option Plan
The key provisions of the 1998 Stock Option Plan, as proposed to be
amended, are as follows:
Purpose. The Option Plan is intended to recognize the contributions made by
our employees, directors, consultants and advisors to us, to provide optionees
with additional incentive to devote themselves to our future success, and to
improve our ability to attract, retain, and motivate individuals upon whom our
sustained growth and financial success depend, by providing eligible
individuals with an opportunity to acquire or increase their proprietary
interest in the Company through receipt of rights to acquire the Company's
common stock.
Number of Shares. The aggregate maximum number of shares that may be issued
under the Option Plan, if the increase in shares proposed in this proxy is
approved by shareholders will be 2,259,350, subject to the adjustments
described below. If any shares subject to any option are forfeited, or an
option is terminated without issuance of shares, the shares subject to such
option will again be available for grant under the Option Plan.
Administration. The Option Plan is administered by the Compensation
Committee appointed by our Board of Directors.
Eligibility. All of our employees, officers, directors, consultants and
advisors are eligible to receive options under the Option Plan. To be eligible
to receive grants, consultants and advisors must have rendered bona fide
services, and such services must not be in connection with a capital raising
transaction.
Term of Stock Option Plan. No options may be granted under the Option Plan
after November 13, 2008, or an earlier date established by our Board.
Options. Options granted under the Option Plan may be either incentive
stock options (ISOs) or non-qualified stock options. ISOs are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code. Unless an option is specifically designated at the time
of grant as an ISO, the option will be non-qualified. Options to purchase more
than 300,000 shares may not be issued to any participant in any fiscal year.
Exercise Price. The exercise price of an ISO must be at least equal to the
fair market value of a share of our common stock on the date the option is
granted, or at least 110% of the fair market value of a share of common stock
on the date an ISO is granted if the recipient owns shares possessing more
than 10% of the total voting power of our stock. The exercise price of non-
qualified stock options may be less than, equal to or greater than the fair
market value of our common stock on the date of grant. The aggregate fair
market value on the date of grant of the common stock for which an ISO is
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000.
Termination of Options. All options terminate on the earliest of: (a) the
expiration of the term specified in the option, which may not exceed ten years
from the date of grant or five years from the date of grant of an ISO if the
optionee on the date of grant owns, directly or by attribution, shares
possessing more than 10% of the total combined voting power of all of our
stock; (b) the expiration of three months from the date an optionee's
employment or service with us or our affiliates terminates for any reason
other than disability, death or as set forth in clauses (d) and (e) below; (c)
the expiration of one year from the date an optionee's employment or service
with us or our affiliates terminates by reason of disability or death; (d) the
date on which a determination is made by the Committee that the optionee has
breached his or her employment or service contract with us or an affiliate,
has been engaged in disloyalty or has disclosed trade secrets or confidential
information; or (e) the date set by the Committee as an accelerated expiration
date in the event of a change of control. The Committee, in its discretion,
may provide for additional limitations on the terms of any option.
A-1
Transfers. No option granted under the Option Plan may be transferred,
except by will or the laws of descent and distribution or, at the discretion
of the Committee, an option may be transferred to the optionee's spouse,
children or grandchildren or to a trust or partnership created solely for the
benefit of the optionee and the foregoing persons.
Payment. An optionee may pay for shares covered by an option (a) in cash,
certified check or by such other mode of payment as the Committee may approve,
including payment in whole or in part in shares of common stock held by the
optionee for at least six months, (b) on a deferred basis as determined by the
Committee, (c) pursuant to a broker promptly paying an amount of sales or loan
proceeds sufficient to pay the option price, or (d) any combination of the
above.
Provisions Relating to a Change of Control. Upon the occurrence of a change
of control, all options become immediately vested and exercisable in full,
provided that any acceleration of exercisability which would cause an ISO to
become a non-qualified option may be made only with the consent of the
optionee. In addition, the Committee may take whatever action with respect to
options outstanding as it deems necessary or desirable, including acceleration
of the expiration or termination date of the options.
Adjustments. In the event that a dividend or a stock split is declared with
respect to the shares of common stock, the number of shares subject to any
option outstanding and the number of shares reserved for the grant of options
but not yet subject to an option will be adjusted by adding the number of
shares which would have been distributable with respect to the shares of
common stock if they had been outstanding. In the event that outstanding
shares are changed into or exchanged for a different number or kind of our
shares of stock or other securities or of another corporation, we will
substitute for each share of common stock the number and kind of shares of
stock or other securities into which each outstanding share was changed or for
which each share was exchanged. In the case of any substitution or adjustment,
the option price for each share of common stock or other security which was
substituted for each share covered by an outstanding option will be adjusted
appropriately to reflect the substitution or adjustment.
Amendments. Our Board may amend the Option Plan from time to time in such
manner as it may deem advisable. Nevertheless, our Board may not, without
obtaining shareholder approval, change the class of individuals eligible to
receive an ISO or increase the maximum number of shares for which options may
be granted or make any other change or amendment as to which shareholder
approval is required in order to satisfy the conditions set forth in the rules
promulgated under the Securities Exchange Act of 1934.
Federal Income Tax Consequences. The following summary of the federal
income tax consequences applicable to options awarded under the Option Plan
does not purport to be complete. This general summary of Federal income tax
consequences does not address other taxes or state, local, or foreign taxes.
Participants in the Option Plan are advised to consult their own tax advisors
regarding the tax effects of their participation in the Option Plan.
Incentive Stock Options. In general, neither the grant nor the exercise of
an incentive stock option will result in federal taxable income to an option
holder or a deduction to us. Only employees may receive incentive stock
options. To receive special tax treatment as an incentive stock option under
the Code as to shares acquired upon exercise of an incentive stock option, an
option holder must neither dispose of such shares within two years after the
incentive stock option is granted nor within one year after the exercise of
the option. In addition, the option holder must be an employee at all times
between the date of grant and the date three months, or one year in the case
of disability, before the exercise of the option. Special rules apply in the
case of the death of the option holder. Incentive stock option treatment under
the Code generally allows the sale of common stock received upon the exercise
of an incentive stock option to result in any gain being treated as short-term
or long-term capital gain to the option holder depending upon the period the
stock underlying the incentive stock option has been held, but we will not be
entitled to a tax deduction. However, the exercise of an incentive stock
option, if the holding period rules described above are satisfied, will give
rise to income includable by the option holder in his or her alternative
A-2
minimum tax in an amount equal to the excess of the fair market value of the
stock acquired on the date of the exercise of the option over the exercise
price.
If an incentive stock option recipient disposes of the shares received upon
exercise before complying with the requisite holding periods, the recipient
will recognize ordinary income equal to the lesser of: (1) the sales price or
(2) the fair market value of the shares on the date of exercise; over the
exercise price of the option, and we will be entitled to a corresponding
deduction. Any proceeds in excess of the fair market value of the shares on
the date of exercise will be treated as short-term or long-term capital gain,
depending upon whether the shares have been held for more than one year. If
the sales price is less than the exercise price of the option, this amount
will be treated as a short-term or long-term capital loss, depending upon
whether the shares have been held for more than one year. We will not be
entitled to any deduction for amounts that the recipient treat as capital gain
or loss
Nonqualified Stock Options. No income will be recognized by an option
holder at the time a nonqualified stock option is granted. Generally, an
option holder will recognize ordinary income at the time a vested nonqualified
stock option is exercised in an amount equal to the excess of the fair market
value of the underlying common stock on the exercise date over the exercise
price. We will generally be entitled to a deduction for federal income tax
purposes in the same amount as the amount included in ordinary income by the
option holder with respect to his or her nonqualified stock option. Gain or
loss on a subsequent sale or other disposition of the shares acquired upon the
exercise of a vested nonqualified stock option will be measured by the
difference between the amount realized on the disposition and the tax basis of
such shares, and will generally be long-term capital gain depending on the
holding period involved. The tax basis of the shares acquired upon the
exercise of any nonqualified stock option will be equal to the sum of the
exercise price of such nonqualified stock option and the amount included in
income with respect to such option. Notwithstanding the foregoing, in the
event that exercise of the option is permitted other than by cash payment of
the exercise price, various special tax rules may apply.
Generally, when the shares underlying a nonqualified stock option are
received, the holder will recognize ordinary income, and we will be entitled
to a deduction, equal to the difference between the fair market value of the
stock at such time and the exercise price paid by the holder for the stock.
Subsequently realized changes in the value of the stock generally would be
treated as long-term or short-term capital gain or loss, depending on the
length of time the shares were held prior to disposition of such shares.
Additional special rules may apply to certain option holders who are
subject to the rules set forth in Section 16 of the Exchange Act.
A-3
EXHIBIT B
INNOVATIVE SOLUTIONS AND SUPPORT, INC.1998 STOCK OPTION PLAN
Innovative Solutions and Support, Inc. (the Company) hereby establishes and
adopts the Innovative Solutions and Support, Inc. 1998 Stock Option Plan, as
set forth in this document.
1. Purpose. The Plan is intended to recognize the contributions made to the
Company or an Affiliate by employees of the Company or any Affiliate (as
hereinafter defined), members of the Board of Directors of the Company or any
Affiliate, and certain consultants and advisors to the Company or any
Affiliate, to provide such persons with additional incentive to devote
themselves to the future success of the Company or any Affiliate, and to
improve the ability of the Company or an Affiliate to attract, retain, and
motivate individuals upon whom the Company's sustained growth and financial
success depend, by providing such persons with an opportunity to acquire or
increase their proprietary interest in the Company through receipt of rights
to acquire the Company's Common Stock, $.001 par value (the "Common Stock").
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
a "Act" means the Securities Act of 1933, as amended.
b "Affiliate" means a corporation which is a parent corporation or a
subsidiary corporation with respect to the Company within the
meaning of Section 424(e) or (f) of the Code.
c "Board of Directors" means the Board of Directors of the Company.
d "Change of Control" shall have the meaning set forth in Section 9
of the Plan.
e "Code" means the Internal Revenue Code of 1986, as amended.
f "Committee" means the committee designated by the Board of
Directors in accordance with the provisions of Section 3 of the
Plan.
g "Company" means Innovative Solutions and Support, Inc., a
Pennsylvania corporation.
h "Disability" shall mean, in the case of an Optionee who is covered
by a disability policy or plan paid for or provided by the Company,
a condition which entitles the Optionee to benefits under the
policy or plan. If there is no such policy or plan covering the
Optionee, Disability shall mean a mental or physical condition
which renders the Optionee incapable of performing his duties for
the Company and which is expected to be permanent, as determined by
the Committee.
i "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
j "Fair Market Value" shall have the meaning set forth in Section
8(b) of the Plan.
k "ISO" means an Option granted under the Plan which is an incentive
stock option within the meaning of Section 422(b) of the Code.
l "Non-qualified Stock Option" means an Option granted under the Plan
which is not intended to qualify, or otherwise does not qualify, as
an ISO.
m "Option" means either an ISO or a Non-qualified Stock Option
granted by the Company under the Plan.
n "Optionee" means a person to whom an Option has been granted under
the Plan.
o "Option Document" means the written document described in Section 8
of the Plan evidencing the Option and setting forth the terms and
conditions upon which the Option is granted and upon which it may
be exercised.
B-1
p "Option Price" means the price at which Shares may be purchased
upon exercise of an Option, as determined pursuant to Section 8(b)
of the Plan.
q "Plan" means the Innovative Solutions and Support, Inc. 1998 Stock
Option Plan.
r "Shares" means the shares of Common Stock of the Company which are
the subject of Options, except as the same may be modified pursuant
to the terns of Section 10 of the Plan.
3. Administration of the Plan.
a Committee. The Plan shall be administered by a committee appointed
by the Board of Directors composed of two or more outside directors
within the meaning of Section 162(m) of the Code. No person shall
be eligible or continue to serve as a member of the Committee
unless such person is an "outside director" as aforesaid. Members
of the Committee shall serve at the pleasure of the Board of
Directors which shall also fill any vacancies in the membership of
the Committee.
b Meetings. The Committee shall hold meetings at such times and
places as it may determine and shall keep minutes of its meetings.
A majority of the Committee shall constitute a quorum thereof, and
acts approved at a meeting or acts approved in writing by a
majority of the members of the Committee shall be the valid acts of
the Committee.
c Grants. The Committee shall from time to time, in its discretion,
direct the Company to grant Options pursuant to the terms of the
Plan. The Committee shall have plenary authority to (i) determine
the Optionees to whom, the times at which, and the price at which
Options shall be granted, (ii) determine the type of Option to be
granted and the number of Shares subject thereto, and (iii) approve
the form and terms and conditions of the Option Documents; all
subject, however, to the express provisions of the Plan. In making
such determinations, the Committee shall take into account the
nature of the Optionee's services and responsibilities, the
Optionee's present and potential contribution to the Company's
success and such other factors as the Committee may deem relevant.
The interpretation and construction by the Committee of any
provisions of the Plan or of any Option granted under the Plan, and
of any Option Document, shall be final, binding and conclusive.
d Exculpation. No member of the Committee or of the Board of
Directors shall be personally liable for monetary damages for any
action taken or any failure to take any action in connection with
the administration of the Plan or the granting of Options under the
Plan, provided that this Section 3( d) shall not apply to (i) any
breach of such member's duty of loyalty to the Company or its
shareholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) acts or
omissions that would result in liability under Section 1553 of the
Pennsylvania Business Corporation Law, as amended, or (iv) any
transaction from which the member derived an improper personal
benefit.
e Indemnification. Service on the Committee shall constitute service
as a member of the Board of Directors. Each member of the Committee
shall be entitled without further act on his part to indemnity from
the Company to the fullest extent provided by applicable law and
the Company's Articles of Incorporation and/or By-laws in
connection with or arising out of any action, suit or proceeding
with respect to the administration of the Plan or the granting of
Options there under in which he or she may be involved by reason of
his or her being or having been a member of the Committee, whether
or not he or she continues to be a member of the Committee at the
time of the action, suit or proceeding.
4. Grants under the Plan. Grants under the Plan may be in the form of a
Non-qualified Stock Option. an ISO or a combination thereof, at the discretion
of the Committee. More than one Option may be granted to any individual, and
each such grant may include Options which are
B-2
intended to be ISOs and Options which are not intended to be ISOs, but only on
the terms and subject to the conditions and restrictions of the Plan.
5. Eligibility. All employees and members of the Board of Directors of, and
consultants and advisors to, the Company or an Affiliate shall be eligible to
receive Options hereunder.
6. Shares Subject to Plan. The aggregate maximum number of Shares for which
Options may be granted pursuant to the Plan is 790,812, subject to adjustment
as provided in Section 10 of the Plan. The Shares shall be issued from either
authorized and unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If an Option terminates or expires
without having been fully exercised for any reason, the Shares for which the
Option was not exercised may again be the subject of further Option grants
under the Plan.
7. Term of the Plan. No Option may be granted under the Plan after November
13, 2008 or the earlier termination of the Plan.
8. Option Documents and Terms. Each Option granted under the Plan shall be
a Non-qualified Stock Option unless the Option shall specifically be
designated an ISO at the time of grant. If any Option designated as an ISO is
determined for any reason not to qualify as an incentive stock option within
the meaning of Section 422 of the Code, such Option shall be treated as a Non-
qualified Stock Option for all purposes under the provisions of the Plan. The
grant of each Option under the Plan shall be evidenced by one or more Option
Documents in such form as the Committee shall from time to time approve, which
Option Documents shall be executed by the Company as promptly as possible
following such grant. Each Option Document shall comply with and be subject to
the following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan, and the Option Document shall expressly state the
provisions of the Plan or incorporate them by reference.
a Number of Option Shares. Each Option Document shall state the
number of Shares to which it pertains.
b Option Price. Each Option Document shall, subject to adjustment as
provided in Section 10 of the Plan, state the Option Price which,
for a Non-qualified Stock Option, may be less than, equal to, or
greater than the Fair Market Value of the Shares on the date the
Option is granted and, for an ISO, shall be at least 100% of the
Fair Market Value of the Shares on the date the Option is granted
as determined by the Committee in accordance with this Section
8(b); provided, however, that if an ISO is granted to an Optionee
who then owns, directly or by attribution under Section 424(d) of
the Code, stock possessing more than ten percent of the total
combined voting power of an classes of stock of the Company or an
Affiliate, then the Option Price shall be at least 110% of the Fair
Market Value of the Shares on the date the Option is granted. If
the Common Stock is traded in a public market, the Fair Market
Value per share shall be, if the Common Stock is listed on a
national securities exchange or included in the NASDAQ National
Market, the last reported sale price thereof on the relevant date,
or, if the Common Stock is not so listed or included, the mean
between the last reported "bid" and "asked" prices thereof on the
relevant date, as reported on NASDAQ or, if not so reported, as
reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable
and as the Committee determines. If the Common Stock is not traded
in a public market on the relevant date, the Fair Market Value
shall be as determined in good faith by the Committee.
c Exercise. An Option granted under the Plan may be exercised in
whole or in part to the extent then exercisable under the terms of
the Option Document and this Plan, provided that no Option shall be
deemed to have been exercised prior to the receipt by the Company
of written notice of such exercise on such form or forms as the
Committee may prescribe for this purpose) and of payment in fun
(except as otherwise provided in
B-3
Section 8( d) of the Plan) of the Option Price for the Shares to be
purchased. Moreover, except as an Option Document may otherwise
provide, no Option may be exercised within six months of the date
of grant. Each such notice of exercise shall specify the number of
Shares to be purchased and shall (unless the Shares are covered by
a then current and effective registration statement or qualified
Offering Statement under Regulation A under the Securities Act)
contain the Optionee's acknowledgment in full and substance
satisfactory to the Company that (i) such Shares are being
purchased for investment and not for distribution or resale (other
than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the
registration provisions of the Act), (ii) the Optionee has been
advised and understands that (A) the Shares have not been
registered under the Act, are "restricted securities" within the
meaning of Rule 144 under the Act and are subject to restrictions
on transfer and (B) the Company is under no obligation to register
the Shares under the Act or to take any action which would make
available to the Optionee any exemption from such registration,
(iii) such Shares may not be transferred without compliance with
all applicable federal and state securities laws, and (iv) an
appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option
Documents may be endorsed on the certificates. Notwithstanding the
foregoing, if the Company in its sole discretion determines that
issuance of Shares should be delayed pending (I) registration under
federal or state securities laws, (II) the receipt of an opinion of
counsel satisfactory to the Company that an appropriate exemption
from such registration is available, (III) the listing,
registration, qualification or inclusion of the Shares on any
securities exchange or an automated quotation system or under any
state or federal law or (IV) the consent or approval of any
governmental regulatory body whose consent or approval is necessary
or desirable in connection with the issuance of such Shares, the
Company may defer exercise of any Option granted hereunder until
any of the events described in this sentence has occurred.
d Medium of Payment. Upon exercise of an Option, the aggregate Option
Price for the Shares as to which the Option is being exercised
shall, in the discretion of the Committee, be (i) paid in U.S.
funds by cash (including a check, draft or wire transfer made
payable to the order of the Company), or delivery of stock
certificates for Shares of the Company's Common Stock, free of all
liens, claims and encumbrances of every kind, and endorsed in blank
or accompanied by executed stock powers with signatures guaranteed
by a national bank or trust company or a member of a national
securities exchange evidencing Shares which have been held for more
than six months (in which case the value of such Shares shall be
deemed to be their Fair Market Value on the date of exercise of the
Option), (ii) paid on a deferred basis upon such terms and
conditions as the Committee in its discretion shall provide, (iii)
deemed to be paid provided the notice of exercise of the Option is
accompanied to the Committee's satisfaction by a copy of
irrevocable instructions to a broker to promptly deliver to the
Company an amount of sales or loan proceeds sufficient to pay the
Option Price in full, or (iv) a combination of the foregoing. If
any part of the Option Price is to be paid on a deferred basis, the
Shares with respect to which payment is deferred shall be
registered in the name of the Optionee, but the certificate
representing such Shares shall serve as security to the Company for
the payment of the Option Price and shall not be delivered to the
Optionee until the Option Price for said Shares has been paid in
full.
e Termination of Options.
No Option or any unexercised installment thereof shall be
exercisable after the first to occur of the following:
A Expiration of the Option term specified in the Option Document
which, subject to earlier termination as hereinafter provided,
shall not exceed (1) ten years from the date of grant, or (2)
five years from the date of grant of an ISO if the Optionee on
B-4
the date of grant owns, directly and/or by attribution under
Section 424(d) of the Code, stock possessing more than ten
percent of the total combined voting power of all classes of
stock of the Company or of an Affiliate;
B Expiration of three months from the date the Optionee's
employment or service with the Company or its Affiliates
terminates for any reason other than Disability or death or as
otherwise specified in Subsection 8(e)(i)(D) or 8(e)(i)(E)
below; provided, however, that such Option was exercisable on
the date of termination of employment or service under the
provisions of the Option Document or the Committee
specifically waives the restrictions relating to
exercisability, if any, contained in the Option Document.
C Expiration of one year from the date such employment or
service with the Company or its Affiliates terminates due to
the Optionee's Disability or death, whether or not the Option
was exercisable on the date of such termination under the
provisions of the Option Document relating thereto. The
determination of whether the termination of the Optionee's
employment or service with the Company is due to Disability
shall be made by the Committee, and such determination shall
be final and binding on the Company and the Optionee;
D A finding by the Committee, after full consideration of the
facts presented on behalf of both the Company and the
Optionee, that the Optionee has breached his employment or
service contract with the Company or an Affiliate, or has been
engaged in disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft,
commission of a felony or proven dishonesty in the course of
his or her employment or service, or has committed an
intentional or grossly negligent act detrimental to the
interests of the Company or an Affiliate. In such event, in
addition to immediate termination of the Option, the Optionee
shall automatically forfeit all Shares for which the Company
has not yet delivered the share certificates upon refund by
the Company of the Option Price of such Shares.
Notwithstanding anything herein to the contrary, the Company
may withhold delivery of share certificates pending the
resolution of any inquiry that could lead to a finding
resulting in a forfeiture; or
E The date, if any, set by the Board of Directors as an
accelerated expiration date in the event of a Change of
Control.
f Notwithstanding the Option termination provisions of Section
8(e)(i), the Committee, in it sole discretion, may extend the
period during which all or any portion of an Option may be
exercised to a date no later than the Option term specified in the
Option Document pursuant to Section 8(e)(i)(A), provided that any
change pursuant to this Section 8(e)(ii) which would cause an ISO
to become a Non-qualified Stock Option may be made only with the
consent of the Optionee.
g Transfers. Except as otherwise provided by law, no Option granted
under the Plan may be transferred, except by will or by the laws of
descent and distribution. During the lifetime of the person to whom
an Option is granted, such Option may be exercised only by him or
his guardian or legal representative. Notwithstanding the
foregoing, the Committee in its sole discretion may permit the
transfer of an Option, without payment of consideration, to
immediate family members of the Optionee or to trusts or
partnerships for such family members.
h Limitation on ISO Grants. In no event shall the aggregate fair
market value of the Shares of Common Stock (determined at the time
an ISO is granted) with respect to which incentive stock options
under all incentive stock option plans of the Company or its
Affiliates are exercisable for the first time by the Optionee
during any calendar year
B-5
exceed $100,000 or such greater sum as may here after be permitted
under Section 422 of the Code.
i Conversion of ISO to Non-Qualified Stock Option. An Optionee shall
have the right, at the Optionee's election and upon notice to the
Company, to convert or to otherwise cause the conversion of ISO's
granted to the Optionee hereunder into Non-qualified Stock
Options--provided, that Optionee shall indemnify and hold harmless
the Company from and against any loss or damage resulting from such
conversion, including, but not limited to, any loss incurred by
reason of the nonavailability of any deduction to the Company under
federal income tax law.
j Other Provisions. Subject to the provisions of the Plan, each
Option Document shall contain such other provisions including,
without limitation, provisions authorizing the Committee to
accelerate the exercisability of all or any portion of an Option
granted pursuant to the Plan, additional restrictions upon the
exercise of the Option or additional limitations upon the term of
the Option, as the Committee shall deem advisable.
k Amendment. The Committee shall have the right to amend any Option
Document issued to an Optionee to the extent the terms to be
amended are within the Committee's discretion as provided in the
Plan but subject to the Optionee's consent if such amendment is not
favorable to the Optionee, except that the consent of the Optionee
shall not be required for any amendment made pursuant to Section
8(e)(i)(E) or Section 9 of the Plan, as applicable.
9. Change of Control. In the event of a Change of Control, all Options then
outstanding under the Plan immediately shall become vested and exercisable in
full--provided that any acceleration of exercisability of options under this
Section 9 which would cause an ISO to become a Non-Qualified Stock Option may
be made only with the consent of the Optionee. In addition, in the event of a
Change of Control, the Committee may take whatever other action with respect
to Options outstanding as it deems necessary or desirable, including without
limitation, accelerating the expiration date of any Options. Any amendment to
this Section 9 which diminishes the rights of Optionees shall not be effective
with respect to Options outstanding at the time of adoption of such amendment,
whether or not such outstanding Options are then exercisable.
A "Change of Control"shall be deemed to have occurred upon the earliest to
occur of the following events: (a) the date the shareholders of the Company
(or the Board of Directors, if shareholder action is not required) approve a
plan or other arrangement pursuant to which the Company will be dissolved or
liquidated, (b) the date the shareholders of the Company (or the Board of
Directors, if shareholder action is not required) approve a definitive
agreement to sell or otherwise dispose of substantially all of the assets of
the Company, (c) the date the shareholders of the Company (or the Board of
Directors, if shareholder action is not required) and the shareholders of the
other constituent corporation (or its board of directors if shareholder action
is not required) have approved a definitive agreement to merge or consolidate
the Company with or made pursuant to this Section 10, the Company will, upon
request, deliver to the Optionee a certificate of its Secretary setting forth
the Option Price thereafter in effect and the number and kind of shares or
other securities thereafter purchasable on the exercise of such Option.
10. Adjustments. In the event that a dividend shall be declared upon the
Common Stock payable in Shares of Common Stock or if a stock split is declared
with respect to the Common Stock, the number of Shares of Common Stock then
subject to any Option outstanding under the Plan and the number of Shares
reserved for the grant of Options pursuant to the Plan but not yet subject to
an Option shall be adjusted by adding to each such Share the number of shares
which would be distributable in respect thereof if such Shares had been
outstanding on the date fixed for determining the shareholders of the Company
entitled to receive such stock dividend or stock split. In the event that the
outstanding shares of Common Stock shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company
or of another corporation, whether through reorganization, recapitalization,
stock split combination of shares,
B-6
merger, consolidation or otherwise, there shall be substituted for each Share
of Common Stock subject to any such Option and for each Share of Common Stock
reserved for the grant of Options pursuant to the Plan but not yet subject to
an Option, the number and kind of shares of stock or other securities into
which each outstanding share of Common Stock shall have been so changed or for
which each such share shall have been exchanged. In the event there shall be
any change, other than as specified above in this Section 10, in the number or
kind of outstanding shares of Common Stock or of any stock or other securities
into which such Common Stock shall have been changed or for which it shall
have been exchanged, then if the Board of Directors shall in its sole
discretion determine that such change equitably requires an adjustment in the
number or kind of Shares theretofore reserved for the grant of Options
pursuant to the Plan but not yet subject to an Option and of the Shares then
subject to Options, such adjustment shall be made by the Board of Directors
and shall be effective and binding for all purposes of the Plan and of each
Option outstanding there under. In the case of any such substitution or
adjustment as provided for in this Section 10, the Option Price for each Share
of stock or other security which shall have been substituted for each Share of
Common Stock covered by an outstanding Option shall be adjusted appropriately
to reflect such substitution or adjustment. No adjustment or substitution
provided for in this Section 10 shall require the Company to sell a fractional
share of Common Stock, and the total substitution or adjustment with respect
to each outstanding Option shall be limited accordingly. Upon any adjustment
employees subject to Section 162(m) of the Code, transactions under the Plan
are intended to avoid the loss of a deduction under that Code section.
Accordingly, to the extent any provision of the Plan or action by the
Committee fails to comply with Section 162(m) of the Code to avoid the loss of
a deduction, it shall be deemed null and void to the extent permitted by law
and deemed advisable by the Company.
11. Amendment or Termination of the Plan. The Board of Directors may
terminate the Plan in whole or in part at any time or amend the Plan from time
to time in such manner as it may deem advisable. Nevertheless, the Board of
Directors of the Company shall not (a) change the class of individuals
eligible to receive an ISO, (b) increase the maximum number of Shares as to
which Options may be granted or (c) make any other change or amendment to
which shareholder approval is required in order to satisfy the conditions set
forth in Rule 16b-3 promulgated under the Exchange Act, in each case without
obtaining approval, within twelve months before or after such action, by vote
of a majority of the votes cast at a duly called meeting of the shareholders
at which a quorum representing a majority of all outstanding voting stock of
the Company is, either in person or by proxy, present and voting on the
matter. No amendment to the Plan, however, shall adversely affect any
outstanding Option in any material respect without the consent of the
Optionee.
12. No Commitment to Retain. The grant of an Option pursuant to the Plan
shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company or any Affiliate to retain the
Optionee in the employ or service of the Company or an Affiliate and/or as a
member of the Company's Board of Directors or in any other capacity, and
nothing in the Plan shall interfere with or limit in any way the right of the
Company or an Affiliate to terminate the employment or service of an Optionee.
13. Withholding of Taxes. The Company shall deduct or withhold an amount
sufficient to satisfy all Federal, state and local taxes required by law to be
withheld with respect to any grant or exercise of an Option or other
transaction under the Plan which gives rise to a withholding obligation and,
in so doing, the Company shall by agreement with the Optionee or unilaterally
take such action as it deems necessary or prudent to protect the Company's
interest with respect to such withholding obligations. In the sole discretion
of the Committee, and subject to such conditions or limitations as the
Committee shall prescribe, an Optionee may satisfy the withholding obligation,
in whole or in part, by electing to have the number of Shares to be issued
upon exercise of an Option reduced by a number of Shares having a Fair Market
Value equal to the desired withholding amount or by surrendering to the
Company Shares which the Optionee has held for more than six months having an
equivalent Fair Market Value. If the method of payment for the Shares is from
B-7
a loan or sale by a broker of the Shares acquired on exercise of the Option,
the withholding obligation shall be satisfied from the proceeds of such loan or
sale.
14. Interpretation. It is the intent of the Company that transactions under
the Plan with respect to directors and officers (within the meaning of Section
16(a) of the Exchange Act) satisfy the conditions of Rule 16b-3 promulgated
under the Exchange Act. To the extent that any provision of the Plan or action
by the Committee would result in a conflict with or fail to comply with any
such condition, such provision or action shall be deemed advisable by the
Company. This Section 14 shall not be applicable if no class of the Company's
equity securities is then registered pursuant to Section 12 of the Exchange
Act. In addition, with respect to into such other corporation other than, in
either case, a merger or consolidation of the Company in which holders of
Shares of Common Stock immediately prior to the merger or consolidation will
have at least a majority of the voting power of the surviving corporation's
voting securities immediately after the merger or consolidation, which voting
securities are to be held in the same proportion as such holders' ownership of
Common Stock immediately before the merger or consolidation, (d) the date any
entity, person or group, within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Exchange Act (other than (i) the Company or any of its
Affiliates or any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its Affiliates, or (ii) any other person
who, as of January 1, 1995, shall have been the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 30% of
outstanding shares of Common Stock), shall have become the beneficial owner
of, or shall have obtained voting control over, more than 30% of the
outstanding shares of Common Stock, or (e) the first day after the date this
Plan is effective when directors are elected such that a majority of the Board
of Directors shall have been members of the Board of Directors for less than
two years, unless the nomination for election of each new director who was not
a director at the beginning of such two-year period was approved by a vote of
at least two-thirds of the directors then still in office who were directors
at the beginning of such period.
15. Governing Law. The granting of Options and the issuance of Shares under
the Plan shall be subject to all applicable laws and regulations and to such
approvals by any governmental agency or national securities exchanges as may
be required. To the extent not pre-empted by Federal law, the Plan and all
Option Documents hereunder shall be construed in accordance with and governed
by the laws of Pennsylvania.
B-8
EXHIBIT C
AMENDMENT TO THE
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
1998 STOCK OPTION PLAN
Pursuant to the authority reserved to it under Paragraph 11 of the Innovative
Solutions and Support, Inc. 1998 Stock Option Plan (the "Plan"), and approval
by the Company's shareholders at its annual shareholders' meeting on March 31,
2005, the Board of Directors of the Company hereby amends the Plan, effective
as of April 1, 2005, as follows:
The first sentence of Section 6 of the Plan is hereby amended in its entirety
to read as follows:
"The aggregate maximum number of Shares for which Options may be granted
pursuant to the Plan is 2,259,350, subject to adjustment as provided in
Section 10 of the Plan."
************************
To record the adoption of this Amendment to the Plan, the Company has
caused its authorized officer to affix its corporate name hereto effective as
of the day and year first written above.
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
By: ________________________________________
Name: ________________________________________
Title: ________________________________________
C-1
PROXY
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 PENNSYLVANIA DRIVE, EXTON, PENNSYLVANIA 19341
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR THE MARCH 31, 2005 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Mr. Geoffrey S. M. Hedrick and Mr. James J.
Reilly and either of them as proxies, each with power of substitution, and
hereby authorizes them to represent the undersigned and to vote, as designated
below, all the shares of Common Stock held of record by the undersigned on
February 15, 2005 at the Annual Meeting of Shareholders of Innovative Solutions
and Support, Inc., to be held on March 31, 2005, at the Company's corporate
offices, 720 Pennsylvania Drive, Exton, Pennsylvania beginning at 10:00 a.m.
local time, or at any adjournment or postponement thereof, upon the matters set
forth in the Notice of Annual Meeting of Shareholders and Proxy Statement,
receipt of which is hereby acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE AS TO ANY
PARTICULAR ITEM, THIS PROXY WILL BE VOTED "FOR" THE NOMINEES LISTED ON THIS
PROXY AND "FOR" THE ADDITIONAL STOCK OPTION SHARES.
|X| Please mark your votes as in this example.
1. Election of Class II Directors for a term of three years:
_ _
Glen R. Bressner |_| FOR NOMINEE |_| WITHHOLD AUTHORITY
_ _
Robert E. Mittelstaedt, Jr. |_| FOR NOMINEE |_| WITHHOLD AUTHORITY
2. Increase the number of shares authorized for issuance under the Company's
1998 Stock Option Plan from 1,259,350 to 2,259,350
_ _ _
|_| For |_| Against |_| Abstain
PLEASE SIGN, DATE AND RETURN THIS PROXY IMMEDIATELY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
(Continued and to be signed on reverse side.)
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting or any adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 1 AND 2. THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ABOVE. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF PROPOSALS NO. 1 AND 2.
Attendance of the undersigned at the meeting, or at any adjournment or
postponement thereof, will not be deemed to revoke this proxy unless the
undersigned shall affirmatively indicate at such meeting or session the
intention of the undersigned to vote said share(s) in person. If the undersigned
hold(s) any of the shares of the Company in a fiduciary, custodial or joint
capacity or capacities, this proxy is signed by the undersigned in every such
capacity, as well as individually.
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
Date:
SIGNATURE
Date:
SIGNATURE (if jointly owned)
Note: Please sign name(s) exactly as
appearing hereon. When signing as
attorney, executor, administrator or
other fiduciary, please give your full
title as such. Joint owners should
each sign personally. When signing as
a corporation or a partnership, please
sign in the name of the entity by an
authorized person.
|_| Please check this box if you plan to attend the meeting.