UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy
Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
| Filed by the Registrant ý | |||
|
|
Filed by a Party other than the Registrant o |
||
|
|
Check the appropriate box: |
||
|
|
o |
|
Preliminary Proxy Statement |
|
|
o |
|
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
|
|
ý |
|
Definitive Proxy Statement |
|
|
o |
|
Definitive Additional Materials |
|
|
o |
|
Soliciting Material Pursuant to §240.14a-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): | ||||
|
ý |
|
No fee required. |
||
|
o |
|
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:
|
|||
|
o |
|
Fee paid previously with preliminary materials. |
||
|
o |
|
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:
|
|||
|
|
|
|
|
Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. |
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 12, 2009
Time: 10:00 a.m., Eastern Standard Time
Place: 720 Pennsylvania Drive, Exton, Pennsylvania 19341
Purposes of the Meeting:
Record Date:
January 20, 2009 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:
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.
We consider your vote important and encourage you to vote as soon as possible.
Geoffrey
S.M. Hedrick
Chairman of the Board and Chief Executive Officer
January 28, 2009
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 Pennsylvania Drive
Exton, Pennsylvania 19341
610-646-9800
TABLE OF CONTENTS
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
720 Pennsylvania Drive
Exton, Pennsylvania 19341
610-646-9800
PROXY STATEMENT
for
Annual Meeting of Shareholders
March 12, 2009
Our Board of Directors is soliciting your proxy to vote your shares at our 2009 annual meeting of shareholders. The annual meeting will be held on March 12, 2009 at 10:00 a.m., local time, at our corporate offices at 720 Pennsylvania Drive, Exton, Pennsylvania. We intend to mail a Notice of Internet Availability of Proxy Materials (sometimes referred to as the "Notice"), and to make this Proxy Statement available to our shareholders of record entitled to vote at the Annual Meeting, on or about January 28, 2009.
Your vote is important.
In accordance with the rules and regulations adopted by the Securities and Exchange Commission ("SEC"), instead of mailing a printed copy of our proxy materials to each shareholder of record, we may now furnish proxy materials including this Proxy Statement, the proxy card, and the Company's Annual Report on Form 10-K for the year ended September 30, 2008 ("Annual Report") to our shareholders by providing access to such documents on the Internet. Shareholders will not receive printed copies of the proxy materials unless requested. Instead, the Notice will instruct shareholders as to how they may access and review all of the proxy materials. The Notice also instructs shareholders how to submit a proxy through the Internet. If you would like to receive a paper copy or e-mail copy of your proxy materials, you should follow the instructions for requesting such materials included in the Notice. We will pay the entire cost of preparing, assembling, printing, mailing and distributing these proxy materials and soliciting votes. If you choose to access the proxy materials and/or vote over the Internet, you are responsible for any Internet access charges you may incur.
You may revoke this proxy at any time before it is voted by written notice to the Chief Financial Officer of the Company, by submission of a proxy bearing a later date or by casting a ballot at the Annual Meeting. Properly executed and delivered proxies that are received before the Annual Meeting's adjournment will be voted in accordance with the directions provided or, if no directions are provided, your shares will be voted by one of the individuals named on your proxy card as recommended by the Board of Directors. If you wish to give a proxy to someone other than those named on the proxy card, you should cross out those names and insert the name(s) of the person(s), not more than three, to whom you wish to give your proxy.
If you want to vote in person at the Annual Meeting and you hold shares of Company common stock in street name, you must obtain a proxy card from your broker and bring that proxy card to the Annual Meeting, together with a copy of a brokerage statement reflecting your stock ownership as of the record date.
1
Who can vote?
You can vote if, as of the close of business on January 20, 2009, you were a shareholder of record of our common stock. On that date, 16,743,209 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. A list of shareholders eligible to vote will be available at the offices of Innovative Solutions and Support, Inc., 720 Pennsylvania Drive, Exton, Pennsylvania 19341 beginning January 26, 2009. Shareholders may examine this list during normal business hours for any purpose relating to the Annual Meeting.
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, or one notice of internet availability of proxy materials, as applicable, for each company in which you hold stock through that broker or bank. This practice is known as "house-holding." Unless you responded that you did not want to participate in "house-holding," 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, John C. Long, 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 shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purpose of consideration and action on the matter. 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 votes properly cast at the meeting with respect to such matter. 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 matters 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.
2
How do I vote by proxy?
Most shareholders have three ways to vote by proxy: by telephone, via the Internet or by returning the proxy card. To vote by telephone or via the Internet, follow the instructions set forth on the Notice you receive. To vote by mail, sign and date each proxy card you receive, mark the boxes indicating how you wish to vote and return the proxy card. Do not return the proxy card if you vote via the Internet or by telephone.
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 and Chief Financial Officer 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 vote by proxy 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 the notice of the Annual Meeting, proxy statement and proxy card, as well as handling and tabulating the proxies returned. In addition to the use of mail, proxies may be solicited by directors, officers and regular employees of the Company, without additional compensation, in person or by telephone or other electronic means. The Company will reimburse brokerage houses and other nominees for their expenses in forwarding proxy material to beneficial owners of the Company's common stock.
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, John C. Long, 720 Pennsylvania Drive, Exton, Pennsylvania 19341, telephone (610) 646-9800.
Annual Report
On written request, we will provide, without charge, a copy of our annual report on Form 10-K for the year ended September 30, 2008, as amended (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 January 20, 2009, the record date, or to any person who subsequently becomes such a 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 January 20, 2009, of each person who we knew to be the beneficial owner of more than 5% of our common stock. To the knowledge of the Company, each of the shareholders named below has sole voting and investment power with respect to such shares, unless otherwise indicated. The information
3
provided in the table is based on our records, information filed with the Securities and Exchange Commission and information provided to the Company.
|
|
Common Stock | ||||||
|---|---|---|---|---|---|---|---|
|
Name of Beneficial Owner
|
Number of
Shares |
Percent of
Class(1) |
|||||
|
Geoffrey S. M. Hedrick(2) |
3,650,875 | 21.8 | % | ||||
|
Federated Investors, Inc.(3) |
1,899,946 | 11.3 | % | ||||
|
Bank of America Corporation(4) |
1,702,000 | 10.2 | % | ||||
|
Putnam, LLC d/b/a Putnam Investments(5) |
892,065 | 5.3 | % | ||||
Security Ownership of Management
The following table sets forth certain information with respect to the beneficial ownership as of January 20, 2009, of (i) each director, (ii) our chief executive officer and each other executive officer, (iii) our former chief executive officer and former chief financial officer and (iv) 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, unless otherwise indicated. The information provided in the table is based on our records, information filed with the Securities and Exchange Commission and information provided to the Company.
|
Name of Beneficial Owner
|
Number of Shares | Percent of Class(1) | |||||
|---|---|---|---|---|---|---|---|
|
Geoffrey S. M. Hedrick |
3,650,875 | 21.8 | % | ||||
|
Roman G. Ptakowski |
180,000 | (2) | 1.1 | % | |||
|
Robert E. Mittelstaedt, Jr. |
129,728 | * | |||||
|
Winston J. Churchill |
66,224 | * | |||||
|
James J. Reilly |
56,549 | (3) | * | ||||
|
John C. Long |
50,000 | (4) | * | ||||
|
Robert H. Rau |
43,193 | * | |||||
|
Ivan M. Marks |
24,339 | * | |||||
|
Glen R. Bressner |
18,223 | * | |||||
|
Raymond J. Wilson |
1,386 | (5) | * | ||||
|
All executive officers and directors as a group
|
4,220,517 | (6) | 25.2 | % | |||
4
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 16,743,209 shares of common stock outstanding as of January 20, 2009.
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, 2008, including the 1998 Stock Option Plan.
|
Plan Category
|
Number of Securities
to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average
exercise price of outstanding options, warrants and rights |
Number of Securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in second column) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Equity compensation plans approved by security holders |
753,243 | $ | 9.79 | 1,570,982 | ||||||
|
Equity compensation plans not approved by security holders |
— | — | — | |||||||
|
Total |
753,243 | $ | 9.79 | 1,570,982 | (1) | |||||
The 2003 Restricted Stock Plan for non-employee directors was approved by shareholders at the Company's February 26, 2004 Annual Meeting of Shareholders. The Plan called for an annual award of restricted stock having a fair market value of $25,000 as of the close of business on October 1 of the current fiscal year for all eligible non-employee directors. The stock is awarded in four installments quarterly during the fiscal year provided the director is still serving on the board on the quarterly issue date. In fiscal year 2005 the annual award was increased to $40,000 effective the fourth quarter of the fiscal year.
In the fiscal years ended September 30, 2008, 2007 and 2006, awards to our non-employee directors under the Plan were 11,355, 15,056 and 15,396 shares respectively.
5
1998 Stock Option Plan
The Company's 1998 Stock Option Plan was adopted in order to recognize the contributions made by the Company's employees, directors, consultants and advisors, to provide such persons with additional incentives to devote their efforts to the Company's future success and to improve the Company's ability to attract, retain and motivate individuals through the receipt of Company stock options. The maximum number of shares of the Company's stock available under the 1998 Stock Option Plan was 3,389,025 (after giving effect to stock splits). The 1998 Stock Option Plan authorizes the grant of "incentive stock options" (within the meaning of Section 422 of the Code) and non-qualified stock options, such options to vest and become exercisable as specified in separate written agreements between the Company and the option recipient. Unless otherwise specified in such agreement, all outstanding options become fully vested and exercisable upon a change in control. The 1998 Stock Option Plan expired on November 13, 2008, therefore no further options can be awarded under the plan.
2003 Restricted Stock Plan
The Company's 2003 Restricted Stock Plan was adopted in order to provide non-employee directors with restricted stock grants that would encourage them to contribute to the growth of the Company and benefit the Company's shareholders. The maximum number of shares of the Company's stock available under the 2003 Restricted Stock Plan is 1,500,000 (after giving effect to stock splits). Each non-employee director is eligible to receive an award of restricted stock on an annual basis, with such award vesting over the course of the fiscal year in equal installments. Pursuant to the terms of the 2003 Restricted Stock Plan, upon a change in control all restrictions applicable to restricted stock awards that are then outstanding lapse in full. In fiscal years ended September 30, 2008, 2007 and 2006 awards to our non-employee directors under the 2003 Restricted stock Plan were 10,525, 15,246, and 15,083 shares respectively.
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, except as set forth below, during fiscal year 2008, all of the Section 16(a) filing requirements applicable to our officers, directors and 10% beneficial owners were complied with by such persons.
6
ELECTION OF DIRECTORS
(Item 1 on Proxy Card)
At the annual meeting, the shareholders will elect (two) Class III directors to hold office until the annual meeting of shareholders in 2012 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 III directors expires at the 2009 annual meeting of shareholders. Upon the recommendation of the Nominating/Corporate Governance Committee, the Board has nominated Messrs. Geoffrey S. M. Hedrick and Winston J. Churchill to serve as directors. Each individual is currently serving as a Class III 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. Hedrick and Churchill. The two 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 III directors .
The current members of the Board of Directors, including the nominees for Class III directors, together with certain information about them, are set forth below:
|
Name
|
Age | Director Since | Term Expires | Positions with the Company | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Class I Directors | |||||||||||
| Ivan M. Marks | 67 | 1996 | 2010 | Director | |||||||
| Robert H. Rau | 72 | 2001 | 2010 | Director | |||||||
|
Class II Directors |
|
|
|
|
|
|
|
|
|
|
|
| Glen R. Bressner | 48 | 1999 | 2011 | Director | |||||||
| Robert E. Mittelstaedt, Jr. | 65 | 1989 | 2011 | Director | |||||||
|
Class III Directors |
|
|
|
|
|
|
|
|
|
|
|
| Geoffrey S. M. Hedrick | 66 | 1988 | 2009 | Director, Chairman of the Board, Chief Executive Officer | |||||||
| Winston J. Churchill | 68 | 1990 | 2009 | 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, 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.
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
7
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. and is a member of the Board of Directors of W.P. Carey & Co. LLC. 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 founded the Company in February 1988 and has been our Chairman of the Board since 1997. Mr. Hedrick resigned from his position as Chief Executive Officer of the Company on November 30, 2007 but continued as Chairman of the Board of Directors. He reassumed his former duties as Chief Executive Officer on September 8, 2008. 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 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., Rodman & Renshaw Capital Group, 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.
The Board has determined in its business judgment that five (5) of the Company's six (6) directors are independent as defined in the applicable NASDAQ listing standards, including that each member is free of any relationships that would interfere with his individual exercise of independent judgment. The following directors were determined to be independent: Glen R Bressner, Winston J. Churchill, Ivan M. Marks, Robert E. Mittelstaedt, Jr. and Robert H. Rau.
Committees of the Board of Directors
The Board maintains four standing committees: Audit, Compensation, Investment, and Nominating/Corporate Governance.
8
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 independent registered public accounting firm, the scope of our annual audits, fees to be paid to the independent registered public accounting firm, the performance and independence of our independent registered public accounting firm and our accounting practices. The Audit Committee approves all services provided to the Company by the independent registered public accounting firm. 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 independent registered public accounting firm 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 applicable Nasdaq listing standards. In addition, the Board has determined in its business judgment that each member of the Audit Committee is financially literate and 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 Audit Committee has adopted a formal written Charter that has been approved by the Board. The Charter specifies the scope of the Audit 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. Please note that none of the information on the Company's website is incorporated by reference in this proxy statement.
Compensation Committee. The Compensation Committee of the Board of Directors is composed of two directors, Messrs. Churchill (Chairman), and Mittelstaedt, each of whom, in the judgment of the Board of Directors, was found to be "independent" as defined by the applicable NASDAQ listing standards. 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 of the Company's Chief Executive Officer and determines or recommends to the full Board the annual base salary, bonus and equity-based compensation for the Chief Executive Officer. The Compensation Committee relies on the recommendations of the Chief Executive Officer, following the Chief Executive Officer's annual performance reviews of other executive officers, in setting annual salaries, bonuses and equity-based compensation for other executive officers.
The Compensation Committee is responsible for reviewing and overseeing the Company's benefit plans and stock option plans for our employees, consultants, directors and other individuals compensated by us, including our Chief Executive Officer. The Compensation Committee has adopted a formal written Charter that has been approved by the Board. The Charter specifies the scope of the Compensation 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 Compensation Committee has not retained an outside consultant to advise it regarding Company compensation practices. Instead, the Compensation Committee independently determines the appropriate levels of compensation for executive officers and directors taking into account, among other factors, the performance of such individuals (as determined in annual reviews conducted by the Compensation Committee or the Chief Executive Officer), the Company's financial performance, cost of living, prior compensation practices and recruitment and retention needs. The Compensation Committee relies on the recommendations of the Company's Chief Executive Officer in determining whether and how much of a discretionary bonus may be paid to the Company's employees (including executive officers) in the event the Company's financial performance exceeds the Board's expectations.
9
Compensation Committee Interlocks and Insider Participation. No member of the Compensation Committee is a former or current executive officer or employee 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.
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, including with respect to the implementation of our stock repurchase program. Messrs. Churchill (Chairman), Bressner and Rau are currently the 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 applicable Nasdaq listing standards.
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 and to monitor the Company's corporate governance structure.
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 III 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 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 shareholder nomination for director. These requirements are summarized in this Proxy Statement under the caption "Shareholder Proposals for 2010 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 2009 Annual
10
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. All seven of the Company's then-serving directors attended the Company's 2008 Annual Meeting of Shareholders.
In addition, you may communicate with the Board, or if applicable, to a specific individual director, by sending a written communication to the attention of the Board or such individual director at the following address: 720 Pennsylvania Drive, Exton, PA, 19341, (fax (610) 646-0150).
Copies of each written communication received at such address will be provided to the Board or to the specific individual director unless such communication is considered, in the reasonable judgment of the Corporate Secretary or other appropriate company officer, to be improper for submission to the intended recipient. 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.
During the fiscal year ended September 30, 2008, the full Board held seven meetings. From time to time during fiscal year 2008 the Board met in executive session without members of management present. The Audit Committee met twelve times, the Investment Committee met two times, the Compensation Committee met one time and the Nominating/Corporate Governance Committees met one time. All directors attended at least 75% of the meetings of the full Board and the meetings of the committees on which they served.
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
(Item 2 on Proxy Card)
The Audit Committee has retained Deloitte & Touche, LLP as the independent registered public accounting firm to audit the Company's consolidated financial statements for the fiscal year ending September 30, 2009. Although action by the shareholders on this matter is not required, the Audit Committee and the Board of Directors believe it is appropriate to seek shareholder ratification of this selection in light of the role played by the independent registered public accounting firm in reporting on the Company's consolidated financial statements. Ratification requires the affirmative vote of a majority of eligible shares present at the Annual Meeting, in person or by proxy, and voting thereon. If this appointment is not ratified by the shareholders, the Audit Committee may reconsider its selection.
One or more representatives of Deloitte & Touche, LLP are expected to attend the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.
Principal Accountant Fees and Services
Services provided by Deloitte & Touche, LLP in prior fiscal years have included an audit of the annual consolidated financial statements of the company, an audit of the effectiveness of internal controls over financial reporting as required by the Sarbanes-Oxley Act of 2002 and other services
11
related to filings made with the SEC. The aggregate fees billed by Deloitte & Touche, LLP in connection with services rendered during the fiscal years ended September 30, 2008 and 2007 were:
|
|
FY 2008 | FY 2007 | |||||
|---|---|---|---|---|---|---|---|
| Audit Fees | $ | 444,453 | $ | 420,908 | |||
| Audit Related Fees | $ | — | $ | 18,725 | |||
| Tax Fees | $ | 59,250 | $ | 58,795 | |||
| Total | $ | 503,703 | $ | 498,428 | |||
Audit Fees
Audit fees for fiscal years 2008 and 2007 were for professional services rendered for the audit of our annual consolidated financial statements, auditing the effectiveness of our internal controls over financial reporting, review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Deloitte & Touche, LLP in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit-related fees for fiscal year 2007 were for the audit of our 401(k) Plan.
Tax-Related Fees
Tax-related fees for fiscal years 2008 and 2007 were related to preparation of tax returns.
All Other Fees
No fees were incurred in connection with services provided by Deloitte & Touche during fiscal years 2008 and 2007 other than as described above.
Pre-Approved Policies and Procedures
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 registered public accounting firm. 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 2008 and 2007 fees paid to the independent registered public accounting firm.
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 registered public accounting firm.
The Board of Directors recommends a vote FOR ratification of the appointment of Deloitte & Touche LLP as the Company's independent registered public accounting firm.
12
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.
The Audit Committee assists our Board in its oversight of our financial reporting process. The Committee operates pursuant to a charter. 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 Company's independent registered public accounting firm is 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 and for reviewing the Company's unaudited interim financial statements. The Audit Committee reviews and reassesses the adequacy of the charter on an annual basis. It is not the Audit Committee's duty or responsibility to conduct auditing or accounting reviews or procedures. The Committee will however take the appropriate actions to set the overall corporate "tone" for quality financial reporting, sound business risk practices, and ethical behavior.
The Audit Committee makes recommendations to the Board with respect to the selection and compensation of our independent registered public accounting firm, the scope of our annual audits, and the fees to be paid to the independent registered public accounting firm. In addition, the Committee monitors the performance and independence of our independent registered public accounting firm and approves all services provided to the Company by the independent registered public accounting firm. The Committee consults with and reviews recommendations made by the independent registered public accounting firm with respect to financial statements, financial records and financial controls of the Company. The Audit Committee meets with management periodically to consider the adequacy of the Company's internal controls and discusses with management the Company's disclosure controls and procedures.
The Board, in its business judgment, has determined that each of the three directors on the Audit Committee is independent as required by Rule 4200(a)(15) of the listing standards of the Nasdaq Stock Market, LLC. In addition, the Board has determined that each member of the Audit Committee is financially literate and at least one of the Audit Committee members, Mr. Marks, is an audit committee financial expert as defined by SEC rules and regulations.
In the performance of its oversight function, the Audit Committee has reviewed and discussed the audited financial statements for the year ending September 30, 2008 with management of the Company and its independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, its judgment as to the quality, not just the acceptability, of the Company's accounting principles, as well as an opinion on the effective operation of the Company's internal control over financial reporting. The Audit Committee has also discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 114, "The Auditor's Communication with those charged with Governance," AU 380, as currently in effect. Finally, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm 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 registered public accounting firm is compatible with maintaining the independent registered public accounting firm's independence and has discussed with the the independent registered public accounting firm their independence.
13
The Audit Committee discussed with the Company's independent registered public accounting firm the overall scope and plans for its 2008 audit and met with them both with and without management present, to discuss the results of its examination, its evaluation of the Company's internal controls and the overall quality of the Company's financial reporting.
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, 2008 be included in the Company's Annual Report on Form 10-K for the year ended September 30, 2008 as filed with the Securities and Exchange Commission.
Submitted by the Audit Committee:
Robert
H. Rau (Chairman)
Glen R. Bressner
Ivan M. Marks
The Charter of the Audit Committee provides that it is the responsibility of the Audit Committee to review and approve any transaction between the Company and its officers, directors and 5% shareholders.
Settlement and Release Agreement
On March 4, 2008, the Company entered into a settlement and release agreement (the "Settlement Agreement") with State Teachers Retirement System of Ohio, an Ohio public retirement system that was at that time a significant shareholder of the Company ("STRS Ohio"), and Maureen A. Huppe, an individual shareholder ("Shareholder"), relating to an allegation that STRS Ohio engaged in short-swing trades subject to disgorgement to the Company under Section 16 of the Exchange Act. Pursuant to the Settlement Agreement, STRS Ohio agreed to pay $300,000 to the Company and $300,000 to Shareholder. The Company agreed to provide a release to STRS Ohio of any and all claims relating to STRS Ohio's transactions in the equity securities of the Company reported to the Securities and Exchange Commission at least five days prior to the date of the Settlement Agreement, and Shareholder agreed to provide the Company and STRS Ohio each a release of any and all claims by the Shareholder.
Compensation of Directors
The Company's compensation program for non-employee directors consists of two elements of compensation: meeting fees and restricted stock awards. Each non-employee director is entitled to a fee of $1,000 for each Board meeting attended and $1,000 for each in-person committee meeting that is not held on the same day as a Board meeting. Each non-employee director also receives an award of restricted stock pursuant to the Company's 2003 Restricted Stock Plan for non-employee directors, which was approved by shareholders at the Company's February 26, 2004 Annual Meeting of Shareholders.
Since fiscal year 2005, the Company has granted to each non-employee director an annual award of restricted stock with a value of $40,000 based on the closing price of the Company's stock on the first business day of the fiscal year. The Company's common stock closed at $19.00 per share on October 1, 2007 and accordingly, each non-employee director in the table below received a grant of 2,105 shares of restricted stock for fiscal year 2008. Each restricted stock award vests quarterly during
14
the fiscal year provided the director continues to serve on the Board through each applicable vesting date.
In addition, all directors are reimbursed for reasonable travel and lodging expenses actually incurred in connection with required attendance at Board meetings.
|
Name
|
Fees Earned
or Paid in Cash ($) |
Stock
Awards ($)(1) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings |
All Other
Compensation ($) |
Total
($) |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Glen R. Bressner | $ | 7,000 | $ | 40,000 | — | — | — | — | $ | 47,000 | ||||||||||||
| Winston J. Churchill | $ | 8,000 | (2) | $ | 40,000 | — | — | — | — | $ | 48,000 | |||||||||||
| Ivan M. Marks | $ | 7,000 | $ | 40,000 | — | — | — | — | $ | 47,000 | ||||||||||||
| Robert E. Mittelstaedt, Jr. | $ | 8,000 | (2) | $ | 40,000 | — | — | — | — | $ | 48,000 | |||||||||||
| Robert H. Rau | $ | 7,000 | $ | 40,000 | — | — | — | — | $ | 47,000 | ||||||||||||
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 current 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 |
60 | President | |||
|
John C. Long |
44 | Chief Financial Officer | |||
Roman G. Ptakowski. Mr. 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.
15
John C. Long. Mr. Long has been our Chief Financial Officer since January 2008. Prior to joining the Company, Mr. Long served in a variety of positions with Arrow International, Inc., including as Vice President from January, 2003 to January, 2008 as Treasurer from January, 2003 to October, 2007, as Secretary from April, 2004 to October, 2007 and as Assistant Treasurer from 1995 to January 2003. Prior to joining Arrow International, Mr. Long served as Controller for the Jaindl Companies, a group of privately held companies involved in agribusiness and real estate development, from 1989 to 1995. From 1986 to 1989, Mr. Long was employed in the Allentown, Pennsylvania office of the accounting firm, Concannon, Gallagher, Miller & Co. Mr. Long also serves as a director and Audit Committee Chairman of D&E Communications, Inc., an integrated communications provider. Mr. Long received a B.S. in Accounting from Wilkes University and a MBA from Columbia University and is a Certified Public Accountant.
2009 Stock-Based Incentive Compensation Plan
(Item 3 on the Proxy Card)
On January 20, 2009 the Board adopted the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan (the "2009 Plan"). The 2009 Plan shall be effective upon its approval by the Company's shareholders. A copy of the 2009 Plan is attached as Appendix A and the following description is qualified in its entirety by reference to the full 2009 Plan. Model grant agreements (nonqualified Options, incentive stock Options, and Restricted Stock) are attached as Appendix B. Capitalized terms not otherwise defined in this summary have the meanings given to them in the 2009 Plan.
General
The general purpose of the 2009 Plan is to attract and retain valued employees, consultants and directors by offering them a greater stake in the success of Innovative Solutions and Support, Inc. (the "Company"), and to encourage ownership of Company stock by those employees, consultants and directors.
Summary of the 2009 Plan
The 2009 Plan will authorize the grant of Stock Appreciation Rights ("SARs"), Restricted Stock, Options and other equity-based awards under the 2009 Plan (collectively referred to as "Awards"). Options granted under the 2009 Plan may be either "incentive stock options" as defined in section 422 of the Internal Revenue Code (the "Code"), or nonqualified stock options, as determined by the Compensation Committee of the Company's Board of Directors (the "Committee").
Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event, the maximum number of shares of Common Stock available for Awards under the 2009 Plan shall be 1,200,000, all of which may be issued pursuant to Awards of incentive stock options. In addition, the Plan provides that no more than 300,000 shares may be awarded to any employee as a performance-based Award under Section 162(m) of the Code.
If any Award is forfeited, or if any Option terminates, expires or lapses without being exercised, shares of Common Stock subject to such Award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an Option or the tax liability with respect to an Award (including, in any case, shares withheld from any such Award) will not be available for future grant under the 2009 Plan. If there is any change in the Company's corporate capitalization, the Committee shall proportionately and equitably adjust the number and kind of shares of Common Stock which may be issued in connection with future Awards, the number and kind of shares of Common
16
Stock covered by Awards then outstanding under the 2009 Plan, the number and kind of shares of Common Stock available under the 2009 Plan, the exercise or grant price of any Award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Committee. In addition, the Committee may make adjustments in the terms and conditions of any Awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations or accounting principles, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Committee.
Administration
The 2009 Plan is administered by the Committee or, with respect to non-employee directors, by the Board of Directors of the Company (the "Board"). Subject to the provisions of the 2009 Plan, the Committee (or the Board) has the authority to:
The Committee may also delegate all or a portion of its responsibility to one or more of its members, one or more of the officers of the Company, or to a secondary committee made up of one or more Board members, however, only the Committee may grant Awards to participants subject to Rule 16b-3 of the Exchange Act or Section 162(m) of the Code.
Eligibility
All employees, individual consultants and directors are eligible to participate in the 2009 Plan. However, only employees, consultants and directors who are selected by the Committee will receive Awards under the 2009 Plan.
Each Award granted under the 2009 Plan will be evidenced by a written Award agreement between the participant and the Company describing the Award and the terms and conditions to which the Award is subject. The principal terms and conditions of each type of Award are described below.
Types of Awards under the 2009 Plan
Options. An Option is a right to purchase shares of Common Stock for a specified period of time at a fixed price (the "exercise price"). An Option may be either an "incentive stock option," satisfying the requirements of Section 422 of the Code, or a nonqualified stock option, as determined by the Committee. Incentive stock options may not be granted to non-employee directors or consultants. Each option agreement will specify the number of shares which may be purchased pursuant to the Option,
17
the exercise price, the term of the Option, the date or dates on which the Option will become exercisable and the terms and conditions under which the Option may be exercised.
The exercise price will be determined by the Committee, but will not be less than the fair market value of a share of Common Stock on the date of grant (110% of the fair market value on the date of grant in the case of an incentive stock option granted to a ten percent shareholder). The term of the Option will be no more than 10 years (five years in the case of an incentive stock option granted to a ten percent shareholder). Payment for shares issued upon exercise of an Option must be made within three days of the date of exercise. The option agreement will specify whether the exercise price may be paid in cash; with shares of Common Stock; with any combination of cash and shares of Common Stock; or through a broker with the proceeds of the sale of shares purchased through the exercise of the Option (a "cashless exercise").
SARs. An SAR is a right to receive the excess of (i) the fair market value of one share of Common Stock on the date of exercise over (ii) the grant price of the SAR as determined by the Committee, but which can never be less than the fair market value of a share of Common Stock on the date of grant. Each SAR agreement shall specify the number of SARs granted, the grant price of the SARs, the date on which the SAR will become exercisable, the method of exercise, the method of settlement, the method by which Common Stock will be delivered or deemed to be delivered to the participant and any other terms and conditions of the SAR.
Restricted Stock. An Award of Restricted Stock is a grant to the participant of a specified number of shares of Common Stock, which are subject to forfeiture upon the happening of certain specified events and/or the failure to achieve specified performance goals during the restriction period. An Award of Restricted Stock will be evidenced by a Restricted Stock agreement that will specify the duration of the restriction period, any transfer restrictions, the performance, employment or other conditions under which the Restricted Stock may be forfeited and the amount, if any, the participant must pay to receive the Restricted Stock. Unless otherwise provided in the Award agreement, during the restriction period, the participant has the right to receive dividends from, and to vote, the shares of Restricted Stock. If not previously forfeited, at the end of the restriction period, the forfeiture conditions will lapse and the unrestricted shares will be delivered to the participant. A Restricted Stock agreement may, but is not required to, provide for a tax reimbursement cash payment to be made by the Company to any participant in connection with the tax consequences of an Award or payment by a participant of any taxes related to an Award.
Performance-Based Awards. Performance-based Awards are certain Awards which are based on the attainment of specified performance goals. A performance-based Award will vest and become payable to and/or exercisable by the participant upon achievement during a specified performance period of performance goals established by the Committee. Performance goals may be established on a Company-wide basis, or with respect to any subsidiary or business unit of the Company.
In the case of performance-based Awards which are intended to satisfy Section 162(m) of the Code and which are granted to participants who are "covered employees" under Section 162(m) of the Code, the applicable performance goals are limited to one or more of the following:
18
Performance goals may be expressed in absolute or relative terms and may be based on comparisons with a group of peer companies or by a financial market index. In addition, with respect to Awards that are not intended to qualify as "performance-based" under Section 162(m) of the Code, performance goals may include any other goal that the Committee determines to be appropriate.
Other Stock-Based Awards. The Committee may, subject to applicable law, grant to a participant any type of Award other than an Award of Options, SARs, or Restricted Stock that is payable in or valued by reference to shares of Common Stock, and that is deemed by the Committee to be consistent with the purposes of the 2009 Plan.
Change in Control
Unless otherwise provided in an Award agreement, upon a Change in Control (defined below), the Committee may take one or more of the following actions: (i) accelerate the vesting and exercisability of all Options or SARs and fully vest all Restricted Stock; (ii) cancel any outstanding vested Options or SARs in exchange for a cash payment in an amount equal to the excess of the fair market value of the Common Stock underlying the unexercised portion of the Option or SAR as of the date of the Change in Control over the exercise price of such portion; (iii) terminate any or all of a participant's outstanding Options or SARs immediately prior to the Change in Control, provided that the Company gives the participant an opportunity to exercise the Options or SARs within a specified period of time; (iv) where the Company is not the surviving corporation, cause the surviving corporation to assume all outstanding Awards or replace all outstanding Awards with comparable Awards; or take any other action that it deems appropriate. As explained below, the Company may not engage in any option repricing without the approval of the Company's shareholders.
19
A "Change in Control" is defined in the 2009 Plan as, unless otherwise provided in an Award agreement:
Effective Date, Amendments, and Termination
The 2009 Plan will be effective as of the date of approval by the Company's shareholders. The 2009 Plan will terminate on the tenth anniversary of the Plan's adoption by the Board, unless earlier terminated by the Board. Termination will not affect Awards outstanding at the time of termination. The Board may amend, alter, suspend, discontinue or terminate the 2009 Plan without shareholder approval, provided that shareholder approval is required for any amendment which (i) would increase the number of shares subject to the 2009 Plan; (ii) would decrease the price at which Awards may be granted, or (iii) would require shareholder approval by law, regulation, or the rules of any stock exchange or automated quotation system. Accordingly, the Committee is prohibited from engaging in any repricing of Options unless such repricing is approved by the Company's shareholders in a manner that satisfies applicable NASDAQ (or other applicable securities exchange) requirements.
The Committee may amend or terminate any outstanding Award and any Award agreement without a participant's consent, provided the amendment does not materially and adversely impact the participant (unless necessary to ensure a deduction under Section 162(m) of the Code). In addition, any performance condition specified in connection with an Award shall remain subject to adjustment by the Committee, except to the extent such adjustment will affect the status of an Award as "performance-based compensation" under Section 162(m) of the Code.
New Plan Benefits
There have been no grants made under the 2009 Plan. Employees, consultants and directors who will participate in the 2009 Plan in the future, and the amounts of their Awards, will be determined by the Committee subject to the restrictions outlined above. The amount of shares subject to these Awards has not yet been determined. As no additional determinations have yet been made, it is not possible to state the terms of any individual Awards which may be issued under the 2009 Plan or the names or positions of, or respective amounts payable or allocable to any participants in the 2009 Plan, other than as provided in this summary.
20
Certain Federal Income Tax Consequences
The following discussion is a summary of certain federal income tax considerations that may be relevant to participants under the 2009 Plan. The discussion is for general informational purposes only and does not purport to address specific federal income tax considerations that may apply to a participant based on his or her particular circumstances, nor does it address state or local income tax or other considerations that may be relevant to a participant.
Incentive Stock Options. In general, neither the grant nor the exercise of an incentive stock option results in taxable income to an option holder or a deduction to the Company. If the option holder holds the stock received upon exercise for at least two years from date of grant and one year after the date of exercise, then the gain realized on disposition of the stock is treated as a long-term capital gain, and the Company will not be entitled to a deduction. If, however, the shares are disposed of prior to the completion of this period (a "disqualifying disposition"), then the option holder will include as compensation income for the year of the disposition, an amount equal to the excess of the fair market value of the shares upon exercise over the exercise price of the option, or if less, the excess of the amount realized upon disposition over the exercise price. The Company will be entitled to a corresponding deduction at that time. 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 on whether the shares have been held for more than one year.
Under the 2009 Plan, incentive stock options may, if permitted by the Committee, be exercised in whole or in part with shares of Common Stock held by the option holder. Such an exercise will be treated as a tax-free exchange of the shares of Common Stock surrendered (assuming the surrender of the previously-owned shares does not constitute a disqualifying disposition of those shares) for an equivalent number of shares of Common Stock received, and the equivalent number of shares will have a tax basis equal to the tax basis of the surrendered shares. Shares of Common Stock received in excess of the number of shares surrendered will have a tax basis of zero.
Non-Qualified Stock Options. A non-qualified stock option results in no taxable income to the option holder or deduction to the Company at the time it is granted. An option holder will recognize compensation income at the time a non-qualified stock option is exercised in an amount equal to the excess of the fair market value of the underlying shares on the exercise date over the exercise price. The Company will generally be entitled to a deduction for federal income tax purposes in the same amount as the amount included in compensation income by the option holder. Gain or loss on a subsequent sale or other disposition of the shares acquired upon the exercise of a non-qualified stock option will be measured by the difference between the amount realized on the disposition and the tax basis of such shares, and will be short-term or long-term capital gain depending on whether the shares have been held for more than one year. The tax basis of the shares acquired upon the exercise of any non-qualified stock option will be equal to the sum of the exercise price and the amount included in income with respect to such option.
Under the 2009 Plan, non-qualified options may, if permitted by the Committee, be exercised in whole or in part with shares of Common Stock held by the option holder. Such an exercise will be treated as a tax-free exchange of the shares of Common Stock surrendered for an equivalent number of shares of Common Stock received, and the equivalent number of shares will have a tax basis equal to the tax basis of the surrendered shares. Shares of Common Stock received in excess of the number of shares surrendered will have a tax basis of zero.
Stock Appreciation Rights. A recipient realizes no taxable income when an SAR is granted. Upon exercising an SAR, a recipient will realize ordinary income in an amount equal to the cash or value of
21
the shares received. Generally, there will be no federal income tax deduction allowed to the Company upon the grant or termination of SARs. However, upon exercise of a SAR, the Company will be entitled to a deduction equal to the amount of ordinary income the recipient is required to recognize as a result of the exercise.
Restricted Stock. Restricted stock received pursuant to Awards, including performance-based Awards, will be considered subject to a substantial risk of forfeiture for federal income tax purposes. If a holder of restricted stock does not make the election described below, the holder realizes no taxable income upon the receipt of restricted stock and the Company is not entitled to a deduction at such time. When the forfeiture restrictions applicable to the restricted stock lapse, the holder will realize compensation income equal to the fair market value of the shares at that time, less any amount paid for the shares, and the Company will be entitled to a corresponding deduction. A holder's tax basis in restricted stock will be equal to the fair market value when the forfeiture restrictions lapse, and the holding period for such shares will begin at that time. Upon a subsequent sale of the shares, the holder will realize short-term or long-term gain or loss, depending on whether the shares have been held for more than one year at the time of sale. Such gain or loss will be equal to the difference between the amount realized upon the sale of the shares and the holder's tax basis in the shares.
Individuals receiving shares of restricted stock may make an election under Section 83(b) of the Code with respect to the shares. By making a Section 83(b) election, the restricted stock holder elects to realize compensation income with respect to the shares when the restricted stock is granted rather than at the time the forfeiture restrictions lapse. The amount of such compensation income will be equal to the fair market value of the shares when the holder receives them (valued without taking the restrictions into account), less any amount paid for the shares, and the Company will be entitled to a corresponding deduction at that time. By making a Section 83(b) election, the holder will realize no additional compensation income with respect to the shares when the forfeiture restrictions lapse, and will instead recognize gain or loss with respect to the shares when they are sold. The holder's tax basis in the shares with respect to which a Section 83(b) election is made will be equal to their fair market value when received by the holder, and the holding period for such shares begins at that time. If, however, the shares are subsequently forfeited, the holder will not be entitled to claim a loss with respect to the shares to the extent of the income realized by the holder upon the making of the Section 83(b) election. To make a Section 83(b) election, a holder must file an appropriate form of election with the Internal Revenue Service and with the Company, each within 30 days after shares of restricted stock are received, and the holder must also attach a copy of his or her election to his or her federal income tax return for the year in which the shares are received.
In general, during the restriction period, dividends and distributions paid with respect to restricted stock will be treated as compensation income (not dividend income) received by the holder. Dividend payments received with respect to shares of restricted stock for which a Section 83(b) election has been made generally will be treated as dividend income.
Withholding. The Company is entitled to deduct from the payment of any Award all applicable income and employment taxes required by federal state or local law to be withheld, or to take such other action as the Committee may deem advisable to enable the Company or any subsidiary and participants to satisfy tax obligations relating to any Award.
Section 162(m) Limitations. Section 162(m) of the Code limits the deductibility of compensation paid to certain executive officers, unless the compensation is "performance-based compensation" and meets certain other requirements outlined in Code Section 162(m) and related regulations. Under the 2009 Plan, the Committee may in its discretion grant Awards that are intended to qualify as performance-based compensation.
The Board unanimously recommends a vote FOR the adoption of the 2009 Plan.
22
Compensation Discussion and Analysis
Objective of Compensation Policy
The objective of the Company's compensation policy is to:
What Our Compensation Program is Designed to Reward
Overall, our compensation program is designed to reward the contributions of each individual executive officer to shareholder value and to provide sufficient incentives to executive officers to ensure their dedication to the Company. As discussed further below, the Company seeks to achieve these goals by providing sufficient base salaries to compensate executives for their day-to-day performance of their duties for the Company, awarding cash bonuses when the Company's financial performance is strong and for outstanding individual performance and granting equity-based awards, from time to time, when the Company believes such equity awards will align the interests of named executive officers with those of the Company's shareholders and provide an additional incentive to executive officers to contribute to the Company's financial and strategic performance.
General Compensation Policies
Process for Setting Total Compensation
Generally, upon hiring or promoting a named executive officer, the Compensation Committee sets base salary and other compensation on the basis of subjective factors, including experience, individual achievements, level of responsibility assumed at the Company and may also consider market compensation practices from time to time. Actual base salaries, cash bonuses, and equity-based awards for each named executive officer may be adjusted from year to year based upon each named executive officer's annual review and progress toward or attainment of personal and corporate goals and objectives, including Company financial performance, shareholder return and such other factors as the Compensation Committee deems appropriate and in the best interests of our shareholders. During fiscal year 2008, the Company experienced turnover in the positions of chief executive officer and chief financial officer requiring the entry into new compensatory arrangements with two named executive officers. In addition, due to the termination of each of their employment during the fiscal year, the Company entered into separation agreements with Mr. Wilson and Mr. Reilly.
The Compensation Committee seeks recommendations from the Chief Executive Officer regarding changes to or increases in elements of compensation for named executive officers. In addition, our Chief Executive Officer is principally responsible for reviewing each other named executive officer's performance and making recommendations for the Company's compensation package for such officers for the following fiscal year. The Compensation Committee independently reviews the performance of the Company's Chief Executive Officer. The Compensation Committee reviews the recommendations of the Chief Executive Officer carefully in light of his proximity to the other executives and knowledge of their contributions to and goals for continuing achievement with the Company.
23
Elements of Compensation
Our compensation program for named executive officers consists of the following elements of compensation, each described in greater depth below:
For fiscal year 2008, the substantial majority of each named executive officer's compensation consisted of annual base salary. With the exception of Mr. Ptakowski, no bonuses were paid based on services provided by the named executive officers during fiscal year 2008. Both Messrs. Wilson and Long were granted options in connection with their entry into employment agreements with the Company, as described more fully below.
The Company has historically provided few personal benefits to named executive officers. However, in connection with Mr. Wilson's entry into an employment agreement with the Company, the Company negotiated additional benefits, including a moving allowance and use of a Company car in order to facilitate Mr. Wilson's relocation to the United States in connection with his new role as chief executive officer.
The Company has not historically provided significant severance or change in control benefits because the Company believes that each named executive officer's total compensation provides a sufficient basis for our executives' long range planning and retirement savings. However, in negotiating employment agreements with Mr. Wilson and Mr. Long in fiscal year 2008, the Company concluded that a potential severance benefit would provide such named executive officers with a measure of income security when beginning a new position and ensure their commitment to the Company. In addition, the Company's equity awards typically vest in full or become fully exercisable upon a change in control. Finally, named executive officers participate in the Company's 401(k) savings plan and health and benefit plans and are entitled to vacation and paid time off based on the Company's general vacation policies.
Base Salary
The Company pays base salaries to named executive officers because the Company believes salaries are essential to recruiting and retaining qualified executives. In addition, because base salaries are subject to increase based on each named executive officer's performance for the Company, base salaries also create an incentive for named executive officers to make meaningful contributions to the Company's success. Base salaries are initially set by the Compensation Committee upon hiring or promoting a named executive officer, and may be incorporated into employment contracts entered into with our named executive officers. Base salary levels are initially set based on the named executive officer's previous experience and employment, as well as the named executive officer's expected duties and obligations to the Company. Thereafter, the Compensation Committee may increase a named executive officer's base salary each year based on the results of each named executive officer's annual review (conducted by the Chief Executive Officer for each of the other named executive officers and by the Compensation Committee for the Chief Executive Officer) and based on the Compensation Committee's subjective assessment of our overall performance over the preceding year.
24
Each named executive officer's annual review is a subjective process whereby the Chief Executive Officer or Compensation Committee evaluates each named executive officer's contributions toward the development and execution of strategic plans, leadership skills and motivation and involvement in industry groups. The weight given such factors by the Compensation Committee may vary from one named executive officer to another.
For fiscal year 2008, the Company did not increase the base salary of any of the named executive officers who were employed by the Company in fiscal year 2007 from the levels in effect for such year. The Company did not believe that a base salary increase would be appropriate given the Company's financial performance for fiscal year 2007. Upon Mr. Reilly's retirement, however, and in order to ensure a smooth transition of the Chief Financial Officer's office to Mr. Long, the Company entered into a consulting relationship with Mr. Reilly providing for Mr. Reilly's continued services to the Company, as needed, for a period of 12 months following his retirement, with consulting fees of $50,000 to be paid for such services.
In fiscal year 2008, the Company entered into new employment agreements with Mr. Wilson and Mr. Long. The Compensation Committee determined that for fiscal year 2008, Mr. Wilson would be entitled to an initial annual base salary of $400,000 per year. The Compensation Committee determined that a base salary of $400,000 per year was appropriate for Mr. Wilson based on his experience and expertise and because it represented the same base salary paid to the Company's Chief Executive Officer for fiscal year 2007. The Compensation Committee determined that, Mr. Long would initially be entitled to a base salary of $250,000 per year. The Compensation Committee determined that a base salary of $250,000 per year was appropriate for Mr. Long considering his experience and expertise and represents an adequate increase over annual base salary paid to the Company's former chief financial officer, whose base salary had not been significantly increased over the preceding two fiscal years.
Following Mr. Wilson's separation from employment with the Company, Mr. Hedrick resumed his prior role of Chief Executive Officer. The Company determined that Mr. Hedrick's base salary should continue to be $400,000 per year, the same rate as was in effect prior to Mr. Hedrick reassuming the Chief Executive Officer role.
Annual Bonus Compensation
The Company may, from time to time, award annual bonuses, in its discretion, to the named executive officers and may agree, in hiring or promoting a named executive officer, to a target bonus opportunity, expressed as a percentage of base salary, to be paid if the Company determines that the Company's financial performance goals or other objectives are attained. Only Mr. Wilson was, during fiscal year 2008, eligible to earn an annual bonus under the terms of his employment agreement with the Company. The Company determined that an incentive to contribute to the Company's financial performance was appropriate and necessary to motivate Mr. Wilson to achieve meaningful results for the Company's shareholders. Accordingly, for fiscal year 2008, Mr. Wilson was eligible to earn an annual bonus if the Company achieved more than 90% of its annual budget, with a target bonus payout of $300,000 if the Company achieved 100% of designated corporate performance objectives and a maximum bonus payout of $600,000 if the Company achieved 120% of designated corporate performance objectives. The Company's designated corporate performance objectives for fiscal year 2008 consisted of a sales target of $55.5 million and a net income target of $4.6 million. Mr. Wilson's potential bonus is reported in the "Grants of Plan-Based Awards Table below" as a non-equity incentive plan award.
Except as required under the terms of a contract with a named executive officer (none were in effect for fiscal year 2007), the Company has historically only awarded discretionary bonuses when the Company's financial performance has met or exceeded the Board's expectations. Because the
25
Company's financial performance for fiscal year 2008 did not meet the Board's expectations, named executive officers, with the exception of Mr. Ptakowski, did not receive discretionary bonuses for services performed in fiscal year 2008. The Company awarded a one-time $75,000 bonus to Mr. Ptakowski for his efforts in fiscal year 2008 in successfully resolving the Company's litigation against Kollsman, Inc. The Compensation Committee relies on the Chief Executive Officer's recommendations regarding whether discretionary bonuses should be paid to the other named executive officers (and other Company employees) and independently determines whether any discretionary bonus should be paid to the Chief Executive Officer.
Because the Chief Executive Officer has historically determined whether and how much cash bonus to pay each named executive officer based on a discretionary review of Company financial performance, named executive officers' bonuses for prior fiscal years were not considered to be "performance based" under Section 162(m) of the Internal Revenue Code. Accordingly, the Company would not have been entitled to deduct, on its corporate tax return, all of a named executive officer's base salary and bonus if the total amount of such base salary and bonus (and other compensation considered under Section 162(m) of the Code) exceeded $1,000,000 in that fiscal year. However, the Company has not paid any annual discretionary bonuses that have resulted in the Company's loss of deduction, nor does the Company anticipate paying such high bonuses to its named executive officers.
Equity Compensation
The Company awards equity-based compensation to named executive officers in order to provide a link between the long-term results achieved for our shareholders and the rewards provided to named executive officers, thereby ensuring that such officers have a continuing stake in our long-term success. Equity-based compensation has historically been paid to named executive officers in the form of stock options. Such awards are made at the discretion of the Compensation Committee and are not timed or coordinated with the release of material, non-public information.
In connection with his entry into an employment agreement with the Company, the Company awarded Mr. Wilson an option to purchase 200,000 shares of the Company's common stock to vest semi-annually (on each June 30 and December 31 of 2008 and 2009). The Compensation Committee believed that for Mr. Wilson to be properly motivated to contribute to the Company's success, he should be afforded a meaningful opportunity to obtain a valuable ownership stake in the Company over a relatively short period of time. In connection with his entry into an employment agreement with the Company, the Company awarded Mr. Long an option to purchase 120,000 shares of the Company's common stock to vest in three equal annual installments beginning on January 28, 2009. The Compensation Committee believed that Mr. Long should similarly be motivated to contribute to the Company's success and afforded an opportunity to obtain a valuable ownership interest in the Company, but that his vesting schedule should not be as rapid as Mr. Wilson's. In addition, in recognition of his service to the Company, Mr. Reilly was awarded full vesting of his unexercised stock options upon his retirement in February 2008 and the Company extended the exercise period for Mr. Reilly's outstanding options until the earlier of February 28, 2010 or the expiration date set forth in the applicable option agreement. The compensation expense recognized by the Company in connection with Mr. Wilson's, Mr. Long's and Mr. Reilly's stock options that vested in fiscal year 2007 is reported in the "Option Awards" column of the Summary Compensation Table below.
Severance, Termination and Change in Control Benefits
Although the Company has not historically provided for separate severance, termination or change in control benefits for named executive officers, the Company, in recognition of the need to attract talented executive leadership, determined that it was necessary to provide for severance benefits in the event of involuntary termination or termination in connection with a change in control for newly hired executives. Accordingly, in negotiating Mr. Wilson's and Mr. Long's employment agreements, the
26
Company agreed to a potential severance benefits for each executive. In fiscal year 2008, none of the other named executive officers had any contractual right to severance or other benefits (except as provided by the Company's retirement plans) from the Company upon termination of employment.
The Company negotiated in Mr. Wilson's employment agreement that he would receive continued payment of his base salary for a period of 6 months in the event of his death or disability and for the remainder of the term (expiring in December 2009) if he is terminated by the Company without cause or if he voluntarily terminates for Good Reason. Upon Mr. Wilson's separation from employment with the Company in September 2008, the Company entered into a separation and release agreement providing for severance consistent with the terms of his employment agreement. The amount paid to Mr. Wilson as severance in fiscal year 2008 is reported in the Summary Compensation Table below and Mr. Wilson's severance is described more fully below under the heading "Potential Payments upon Termination or Change in Control."
The Company negotiated in Mr. Long's employment agreement that he would receive continued payment of his base salary for the remainder of the term (expiring in January 2010), but no less than six months, if he is terminated by the Company without cause. However, following a change of control, if Mr. Long's employment is terminated by the Company without cause or by Mr. Long because of a change in his position, powers, duties or responsibilities, Mr. Long is entitled to a lump sum payment equal to his then-current annual salary.
Upon Mr. Reilly's retirement in February 2008, the Company entered into a separation agreement to provide for a lump sum severance payment of $50,000 in recognition of his service to the Company, $100,000 for a release of any and all claims by Mr. Reilly against the Company, and attorneys fees in connection with such claims and the negotiation of his separation agreement, totaling $95,000. In addition, the Company agreed to continue paying the Company's portion of the premiums for Mr. Reilly's continued health benefits under the Company's plan for 18 months following Mr. Reilly's retirement. Finally, in order to properly transition Mr. Reilly's position to his successor, Mr. Long, the Company retained Mr. Reilly as a consultant to the Company for a period of 12 months following his retirement at the rate of $50,000 per year. The amounts paid in fiscal year pursuant to Mr. Reilly's separation agreement (to Mr. Reilly and his attorney on his behalf) are reported as severance, other compensation and base salary, respectively, in the Summary Compensation Table, below, and are described more fully in the section entitled "Potential Payments upon Termination or Change in Control," below.
Grants of Company stock options to named executive officers typically vest or become fully exercisable upon a change in control of the Company. The Company believes that such accelerated vesting is essential to maintaining the commitment and dedication of its key employees throughout a potential change in control scenario. Accordingly, as described under the heading "Potential Payments Upon Termination or Change in Control," below, the outstanding options granted to Mr. Long would vest in full upon a change in control of the Company. Options granted to Mr. Wilson that remained outstanding following his separation from employment expired on December 8, 2008, pursuant to the terms of the agreement under which they were granted. The Company amended Mr. Reilly's outstanding options to provide for full vesting upon his retirement in February 2008 and to permit such options to be exercised at any time until the earlier of February 28, 2010 or their original expiration date.
Perquisites
In fiscal year 2008, we provided certain personal benefits to our Chief Executive Officer, as summarized below. The aggregate incremental cost to the Company of the perquisites received by Mr. Wilson are included in the Summary Compensation Table, below.
27
Automobile. A company car was available to Mr. Wilson for business and personal purposes for fiscal year 2008, and following his separation from employment, until the earlier of December 31, 2008 or his return to the United Kingdom. The Company covers the costs of car insurance, upkeep and maintenance for the company car.
Aircraft. The Company has, in prior fiscal years, permitted the Company's Chief Executive Officer to use the Company's corporate aircraft for personal travel. The Company believes that use of the Company's aircraft represents a valuable perquisite for the Chief Executive Officer which is appropriate considering his value to the Company and that such benefit can be provided by the Company for relatively minimal cost. However, the Company's Chief Executive Officer in fiscal year 2008 did not use the Company's aircraft for personal reasons, and accordingly, did not receive any personal benefit with respect thereto during the 2008 fiscal year.
Moving Expenses. In connection with his entry into an employment agreement, the Company agreed to reimburse Mr. Wilson for his relocation expenses, up to a maximum of $75,000. The Company viewed Mr. Wilson's right to reimbursement as appropriate and necessary to ensure that he be able to dedicate his time and attention to the performance of his duties to the Company immediately upon entry into his employment agreement. Upon Mr. Wilson's separation from employment, Mr. Wilson was entitled to use the remaining balance of relocation reimbursement to assist in his return to the United Kingdom.
General Benefits
The following are standard benefits offered to all eligible Company employees, including named executive officers.
Retirement Benefits. The Company maintains a tax-qualified 401(k) savings plan for all of our eligible employees, including the named executive officers, known as the IS&S 401K Plan (the "Savings Plan"). The Savings Plan is a voluntary contributory plan under which employees may elect to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986.
The Company has not historically made contributions (other than participant salary deferrals) to the Savings Plan on behalf of participants. In fiscal year 2008, however, the Company approved contributions in the amount of 1% of base salary (subject to limitations imposed by the IRS) for each eligible employee. The contributions on behalf of each named executive officer under the Savings Plan are reported in the "All Other Compensation" column of the Summary Compensation Table, below.
Medical, Dental, Life Insurance and Disability Coverage. Active employee benefits such as medical, dental, life insurance and disability coverage are available to all eligible employees. The value of these benefits is not required to be included in the Summary Compensation Table since they are made available on a Company-wide basis to all eligible employees.
Other Paid Time-Off Benefits. We also provide vacation and other paid holidays to all employees, including the named executive officers.
Fiscal Year 2009 Compensation
Adoption of 2009 Stock Option Plan.
In order to continue to be able to make option awards to named executive officers, other employees and non-employee directors of the Company following the fiscal year 2008 expiration of the Company's 1998 Stock Option Plan, the Board has adopted and is recommending that the shareholders vote in favor of the adoption of the 2009 Stock Option Plan (the "2009 Plan"), described more fully in Proposal 2 above.
28
Mr. Ptakowski
The Company awarded Mr. Ptakowski a one-time bonus of $75,000 and increased his base salary by $75,000 per year, effective October 1, 2008 in recognition of Mr. Ptakowski's time spent in achieving a successful outcome in the Company's litigation against Kollsman, Inc. Because Mr. Ptakowski's bonus was awarded in respect of his services to the Company in fiscal year 2008, such amount is reported in the Bonus column of the Summary Compensation Table, below.
Deductibility of Compensation
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, 2008, 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 $1,000,000.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section of the Company's proxy with management, and based on the Compensation Committee's review and discussion with management, the Compensation Committee recommended to the Company's Board of Directors that the Compensation Discussion and Analysis section be included in the Company's proxy statement for fiscal year 2008.
Submitted by the Compensation Committee:
Winston J. Churchill (Chairman)
Robert E. Mittelstaedt, Jr.
29
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
||||||||||||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary
($) |
Bonus
($) |
Stock
Awards ($) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($)(1) |
All other
Compensation ($)(2) |
Total
($) |
||||||||||||||||||
|
|
||||||||||||||||||||||||||
| Geoffrey S. M. Hedrick, | 2008 | $ | 400,000 | $ | 1,538 | $ | 401,538 | |||||||||||||||||||
| Chief Executive Officer | 2007 | $ | 400,000 | $ | 400,000 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||
| Raymond J. Wilson, | 2008 | $ | 386,154 | $ | 253,990 | (3) | — | $ | 90,000 | (4) | $ | 730,144 | ||||||||||||||
| Chief Executive Officer | 2007 | $ | 124,077 | $ | 20,000 | $ | 32,644 | $ | 176,721 | |||||||||||||||||
|
|
||||||||||||||||||||||||||
| Roman G. Ptakowski, | 2008 | $ | 250,000 | $ | 75,000 | (5) | $ | 3,462 | $ | 328,462 | ||||||||||||||||
| President | 2007 | $ | 250,000 | $ | 250,000 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||
| James J. Reilly, | 2008 | $ | 140,822 | $ | 70,332 | (6) | $ | 224,754 | (7) | $ | 435,908 | |||||||||||||||
| Chief Financial Officer | 2007 | $ | 200,000 | $ | 36,975 | $ | 236,975 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||
| John C. Long, | 2008 | $ | 163,462 | $ | 143,248 | (8) | $ | 1,154 | $ | 307,864 | ||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
30
Additional Information Regarding Summary Compensation Table.
As described in the Compensation Discussion and Analysis section, above, the Company entered into employment agreements with Messrs. Wilson and Long during fiscal year 2008. During fiscal year 2008, Mr. Wilson's base salary was set at $400,000 per year and he was eligible to earn a bonus, based on whether the Company achieved its budgeted goals. During fiscal year 2008, Mr. Long's base salary was set at $250,000 per year. As described in the section below, entitled "Potential Payments upon Termination or Change in Control," both Mr. Wilson's and Mr. Long's employment agreements provide for severance benefits upon certain terminations of employment.
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|||||||||||||||||||||||||
|
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)
|
|
|
|
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Name
|
Grant Date
|
Threshold ($)
|
Target ($)
|
Maximum ($)
|
All other
Stock Awards: Number Of Shares Of Stock Or Units (#) |
All other
Option Awards: Number Of Securities Underlying Options (#) |
Exercise or
Base Price of Option Awards ($/Sh) |
Grant Date
Fair Value of Stock and Option Awards |
|||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Geoffrey S. M. Hedrick |
— | — | — | — | — | — | — | — | |||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Raymond J. Wilson |
1/15/2008 | — | 300,000 | 600,000 | — | 200,000 | (2) | 10.22 | $ | 1,015,960 | |||||||||||||||
|
|
|||||||||||||||||||||||||
|
Roman G. Ptakowski |
— | — | — | — | — | — | — | — | |||||||||||||||||
|
|
|||||||||||||||||||||||||
|
James J. Reilly |
— | — | — | — | — | — | — | — | |||||||||||||||||
|
|
|||||||||||||||||||||||||
|
John C. Long |
1/28/2008 | — | — | — | — | 120,000 | (3) | 11.32 | $ | 675,192 | |||||||||||||||
|
|
|||||||||||||||||||||||||
31
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
|
|
|
|
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
||||||||||||||||
|
|
Option Awards(1)
|
|||||||||||||||
|
|
||||||||||||||||
|
Name
|
Number of Securities
Underlying Unexercised Options (#) Exercisable |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Equity
Incentive Plan Awards Number of Securities Underlying Unexercised Unearned Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
|||||||||||
|
|
||||||||||||||||
|
Geoffrey S.M. Hedrick |
— | — | — | — | — | |||||||||||
|
|
||||||||||||||||
|
Raymond J. Wilson(1) |
50,000 | — | — | 10.22 | 12/8/2008 | |||||||||||
|
|
||||||||||||||||
|
Roman G. Ptakowski |
180,000 | 0 | — | 4.21 | 5/8/2013 | |||||||||||
|
|
||||||||||||||||
|
James J. Reilly(2) |
41,549 | 0 | — | 7.91 | 2/9/2010 | |||||||||||
|
|
1,500 | 0 | — | 7.33 | 2/28/2010 | |||||||||||
|
|
15,000 | 0 | — | 16.67 | 2/28/2010 | |||||||||||
|
|
||||||||||||||||
|
John C. Long |
0 | 120,000 | — | 11.32 | 1/28/2018 | |||||||||||
|
|
||||||||||||||||
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Outstanding Options.
As described in the Compensation Discussion and Analysis section above, Mr. Wilson and Mr. Long were granted options in fiscal year 2008. Upon his separation from employment, Mr. Wilson forfeited his unvested stock options and retained vested options to purchase 50,000 shares of the Company's common stock. Mr. Long was granted options to acquire 120,000 shares of the Company's common stock, none of which were vested as of September 30, 2008. Pursuant to the terms of the Company's 1998 Stock Option Plan, Mr. Long's unvested stock options would vest in full upon a "Change in Control" of the Company. A "Change in Control" is deemed to occur pursuant to the 1998 Stock Option Plan when: the Company's shareholders approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated; the Company's shareholders approve a definitive agreement to sell or otherwise dispose of substantially all of the assets of the Company; or the Company's shareholders and the shareholders of the other constituent corporation (or its board of directors if shareholder action is not required) approve a definitive agreement to merge or consolidate the Company. Accordingly, if a Change in Control occurred on the last day of the Company's 2008 fiscal year, Mr. Long's options would vest with respect to the 120,000 shares that were unvested as of September 30, 2008, and he would be entitled to the appreciation in value of the 120,000 shares since the date of grant. Because Mr. Long's options were granted with an exercise price of $11.32 per share
32
and the closing market price of the Company's common stock on September 30, 2008 was $5.45 per share, Mr. Long would not be entitled to receive any value if he exercised his unvested options upon a change in control.
Employment Agreements.
Pursuant to Mr. Wilson's employment agreement, upon his termination of employment without cause, he was entitled to receive his base salary through December 31, 2009, in installments pursuant to the Company's normal payroll practices, plus reimbursement for his relocation expenses and a pro rated bonus for the year of his termination. Accordingly, Mr. Wilson received a lump sum payment of $90,000 representing his accrued but unpaid base salary at the time of his termination and to reimburse him for his relocation expenses to the United Kingdom. In connection with his release agreement, Mr. Wilson will receive $521,538, payable to him in the first payroll following March 8, 2009. In addition, in exchange for Mr. Wilson's waiver and release of all claims against the Company, the Company agreed to reimburse Mr. Wilson for continued health coverage under the Company's group health plan for him and his family through December 31, 2008; the value of the continued health coverage Mr. Wilson received was $1,732.
Pursuant to Mr. Long's employment agreement, if his employment were terminated by the Company without "cause" ("cause" includes conviction of a felony or crime of moral turpitude, unethical conduct expected to harm the Company, intentionally attempting to cause harm to the Company, stealing or misappropriating Company proprietary information or trade secrets, a material breach of his employment agreement or gross negligence or malfeasance in his performance of services for the Company), Mr. Long would be entitled to receive his base salary through January 4, 2010 and all of Mr. Long's outstanding options would become vested at the time of such termination. Accordingly, if Mr. Long were terminated without cause on September 30, 2008, he would be entitled to receive $125,000 in continued base salary payments, but he would not be entitled to receive any value with respect to his options, the exercise price of which exceeded the closing market price of the Company's common stock on such date. If Mr. Long's employment were terminated in connection with a Change in Control (including a transaction resulting in the sale of 30% or more of the Company's common stock, a sale or disposition of all or substantially all of the Company's assets, or a change in the majority of the Company's board members), Mr. Long would be entitled to a lump sum payment equal to his annual base salary. Accordingly, if such Change in Control occurred on September 30, 2008 and Mr. Long's employment were terminated in connection therewith, he would be entitled to a lump sum payment of $250,000.
Reilly Separation Agreement
Mr. Reilly retired from the Company in February 2008. Mr. Reilly did not have an employment agreement or any other contractual right to severance or retirement benefits other than the benefits provided under the Company's 401(k) plan upon his retirement. However, upon Mr. Reilly's retirement in February 2008, the Company entered into a separation agreement to provide for a lump sum severance payment of $50,000 in recognition of his service to the Company, $100,000 for a release of any and all claims by Mr. Reilly against the Company, and attorneys fees in connection with such claims and the negotiation of his separation agreement, totaling $95,000. The Company agreed to continue paying the Company's portion of the premiums for Mr. Reilly's continued health benefits under the Company's plan for 18 months following Mr. Reilly's retirement.
The amount of the health care premiums paid by the Company in fiscal year 2008 was $8,764. Finally, in order to assist the Company in transitioning the Chief Financial Officer's role to Mr. Long, the Company retained Mr. Reilly as a consultant to the Company for a period of 12 months following his retirement at the rate of $50,000 per year. In fiscal year 2008, Mr. Reilly received $29,169 in consulting fees from the Company.
33
SHAREHOLDER PROPOSALS FOR 2010 ANNUAL MEETING
AND OTHER MATTERS
Shareholders wishing to submit proposals for inclusion in the proxy statement for the 2010 Annual Meeting of Shareholders must submit such proposals to us at 720 Pennsylvania Drive, Exton, PA 19341, Attention: John C. Long, on or before September 30, 2009. 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 2010 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 14, 2009, 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 mailed and 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 date that the Corporation's proxy statement was released to shareholders in connection with the previous year's annual meeting of shareholders 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 arise at the annual meeting, shares represented by proxies will be voted at the discretion of the proxy holders.
By Order of the Board of Directors
|
Geoffrey S.M. Hedrick
Chairman of the Board and Chief Executive Officer |
January 28, 2009
34
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
2009 STOCK-BASED INCENTIVE COMPENSATION PLAN
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
2009 STOCK-BASED INCENTIVE COMPENSATION PLAN
Section 1. Purpose of the Plan. The purpose of the Innovative Solutions and Support, Inc. Stock-Based Incentive Compensation Plan is to assist the Company and its Subsidiaries in attracting and retaining valued Employees, Consultants and Non-Employee Directors by offering them a greater stake in the Company's success and a closer identity with it, and to encourage ownership of the Company's stock by such Employees, Consultants and Non-Employee Directors.
Section 2. Definitions. As used herein, the following definitions shall apply:
2.1. " Award " means an award of Restricted Stock, Options, SARs, or other stock-based award under the Plan.
2.2. " Award Agreement " means the written agreement, instrument or document evidencing an Award.
2.3. " Board " means the Board of Directors of the Company.
2.4. " Cause " means,
(a) if the applicable Participant is party to an effective employment, consulting, severance or similar agreement with the Company or a Subsidiary, and such term is defined therein, "Cause" shall have the meaning provided in such agreement;
(b) if the applicable Participant is not a party to an effective employment, consulting, severance or similar agreement or if no definition of "Cause" is set forth in the applicable employment, consulting, severance or similar agreement, "Cause" shall have the meaning provided in the applicable Award Agreement;
(c) if neither (a) nor (b) applies, then "Cause" shall mean, as determined by the Committee in its sole discretion, (i) the Participant's willful misconduct or gross negligence in connection with the performance of the Participant's duties for the Company or its Subsidiaries; (ii) the Participant's conviction of, or a plea of nolo contendere to, a felony or a crime involving fraud or moral turpitude; (iii) the Participant's engaging in any business that directly or indirectly competes with the Company or its Subsidiaries; (iv) disclosure of trade secrets, customer lists or confidential information of the Company, its Subsidiaries or Affiliates to a competitor or unauthorized person.
2.5. " Change in Control " means, unless otherwise determined by the Committee or provided in an Award Agreement:
(a) the acquisition in one or more transactions during any 12-month period by any "Person" (as such term is used for purposes of Section 13(d) or Section 14(d) of the Exchange Act) but excluding, for this purpose, the Company or its Subsidiaries or any employee benefit plan of the Company or its Subsidiaries, of "Beneficial Ownership" (within the meaning of Rule 13d-3 under the Exchange Act) of thirty percent (30%) or more of the combined voting power of the Company's then outstanding voting securities (the " Voting Securities ");
(b) a change in the composition of the Board such that the individuals who as of any date constitute the Board (the " Incumbent Board ") cease to constitute a majority of the Board at any time during the 12-month period immediately following such date; provided, however, that if the election, or nomination for election by the Company's shareholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board, and provided further that any reductions in the size of the Board that are instituted voluntarily by the Incumbent Board
A-1
shall not constitute a Change in Control, and after any such reduction the "Incumbent Board" shall mean the Board as so reduced;
(c) the consummation of a merger or consolidation involving the Company if the shareholders of the Company, immediately before such merger or consolidation, do not own, directly or indirectly, immediately following such merger or consolidation, more than seventy percent (70%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation; or
(d) a complete liquidation or dissolution of the Company or a sale or other disposition of all or substantially all of the assets of the Company.
2.6. " Code " means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code.
2.7. " Common Stock " means the common stock of the Company, par value $.001 per share.
2.8. " Company " means Innovative Solutions and Support, Inc., a Pennsylvania corporation, or any successor corporation.
2.9. " Committee " means the Compensation Committee of the Board, each member of which shall be a "non-employee director" as defined in Rule 16b-3 under the Exchange Act and an "outside director" as defined in Section 162(m) of the Code and the regulations issued thereunder.
2.10. " Consultant " means a natural person who provides bona fide services to the Company other than in connection with the offer or sale of securities in a capital-raising transaction and is not engaged in activities that directly or indirectly promote or maintain a market for the Company's securities.
2.11. " Disability " shall mean, unless otherwise provided in an Award Agreement, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
2.12. " Effective Date" means the date that the Plan is approved by the shareholders of the Company in accordance with applicable laws, resolutions or rules governing the applicable securities exchange.
2.13. " Employee " means an officer or other employee of the Company or a Subsidiary, including a director who is such an employee.
2.14. " Exchange Act " means the Securities Exchange Act of 1934, as amended. A reference to any provision of the Exchange Act or rule promulgated under the Exchange Act shall include reference to any successor provision or rule.
2.15. " Fair Market Value " means, on any given date (i) if the shares of Common Stock are then listed on a national securities exchange, including the Nasdaq Global Select Market ("NASDAQ"), the closing sales price per share of Common Stock on the exchange for such date, or if no sale was made on such date on the exchange, on the last preceding day on which a sale occurred; (ii) if shares of Common Stock are not then listed on a national securities exchange but are then quoted on another stock quotation system, the closing price for the shares of Common Stock as quoted on such quotation system on such date, or if no sale was made on such date on such quotation system, on the last preceding day on which a sale was made; or (iii) if (i) and (ii) do not apply, such value as the Committee in its discretion may in good faith determine in accordance with Section 409A of the Code (and, with respect to Incentive Stock Options, Section 422 of the Code) and the applicable guidance thereunder.
A-2
2.16. " Incentive Stock Option " means an Option or portion thereof intended to meet the requirements of an incentive stock option as defined in Section 422 of the Code and designated as an Incentive Stock Option.
2.17. " Non-Employee Director " means a member of the Board who is not an Employee.
2.18. " Non-Qualified Option " means an Option or portion thereof not intended to be an Incentive Stock Option, and designated as a Non-Qualified Option.
2.19. " Option " means a right granted under Section 6.1 of the Plan to purchase a specified number of shares of Common Stock at a specified price. An Option may be an Incentive Option or a Non-Qualified Option.
2.20. " Optionee " means a person to whom an Option has been granted under the Plan.
2.21. " Participant " means any Employee, Non-Employee Director or Consultant who receives an Award.
2.22. " Performance Cycle " means the period selected by the Committee during which the performance of the Company, any Subsidiary, or any department thereof, or any individual is measured for the purpose of determining the extent to which a Performance Goal has been achieved.
2.23. " Performance Goals " means any goals established by the Committee in its sole discretion the attainment of which is substantially uncertain at the time such goals are established. Performance Goals may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant or the Subsidiary, division, department or function within the Company or Subsidiary in which the Participant is employed. Performance Goals may be measured on an absolute or relative basis. Relative performance may be measured by a group of peer companies or by a financial market index. Performance Goals may be based upon: specified levels of or increases in the Company's, a division's or a Subsidiary's return on capital, equity or assets; earnings measures/ratios (on a gross, net, pre-tax or post-tax basis), including diluted earnings per share, total earnings, operating earnings, earnings growth, earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA); net economic profit (which is operating earnings minus a charge to capital); net income; operating income; sales; sales growth; gross margin; direct margin; share price (including but not limited to growth measures and total shareholder return), operating profit; per period or cumulative cash flow (including but not limited to operating cash flow and free cash flow) or cash flow return on investment (which equals net cash flow divided by total capital); inventory turns; financial return ratios; market share; balance sheet measurements such as receivable turnover; improvement in or attainment of expense levels; improvement in or attainment of working capital levels; debt reduction; strategic innovation, including but not limited to entering into, substantially completing, or receiving payments under, relating to, or deriving from a joint development agreement, licensing agreement, or similar agreement; customer or employee satisfaction; individual objectives; any other financial or other measurement deemed appropriate by the Committee as it relates to the results of operations or other measurable progress of the Company and Subsidiaries (or any business unit thereof); and any combination of any of the foregoing criteria. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Goals unsuitable, the Committee may modify such Performance Goals or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable.
2.24. " Plan " means the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan herein set forth, as amended from time to time.
A-3
2.25. " Qualified Performance-Based Award " means an Award or portion of an Award that is intended to satisfy the requirements for "qualified performance-based compensation" under Section 162(m) of the Code and the regulations issued thereunder.
2.26. " Restricted Stock " means Common Stock awarded by the Committee under Section 6.3 of the Plan.
2.27. " Restriction Period " means the period during which Restricted Stock awarded under Section 6.3 of the Plan is subject to forfeiture.
2.28. " SAR " means a stock appreciation right awarded by the Committee under Section 6.2 of the Plan.
2.29. " Securities Act " means the Securities Act of 1933, as amended. A reference to any provision of the Securities Act or rule promulgated under the Securities Act shall include reference to any successor provision or rule.
2.30. " Subsidiary " means any corporation, partnership, joint venture or other business entity of which 50% or more of the outstanding voting power is beneficially owned, directly or indirectly, by the Company.
2.31. " Ten Percent Shareholder " means a person who on any given date owns, either directly or indirectly (taking into account the attribution rules contained in Section 424(d) of the Code), stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or a Subsidiary.
Section 3. Eligibility. Any Employee, Non-Employee Director or Consultant shall be eligible to receive an Award; provided, however, that only persons who are employees of the Company or any subsidiary corporation (within the meaning of Section 424(f) of the Code) may be granted Options which are intended to qualify as Incentive Stock Options.
Section 4. Administration and Implementation of Plan.
4.1. The Plan shall be administered by the Committee; provided, however, that the Board shall administer and otherwise exercise all powers of the Committee under the Plan with respect to Awards granted to Non-Employee Directors. Notwithstanding the foregoing, the Committee may make recommendations to the full Board regarding Awards to Non-Employee Directors. Any action of the Committee in administering the Plan shall be final, conclusive and binding on all persons, including the Company, its Subsidiaries, their employees, Participants, persons claiming rights from or through Participants and shareholders of the Company.
4.2. Notwithstanding Section 4.1, the Board shall serve as a " Secondary Committee " with the full authority to grant Awards to eligible individuals who are not subject to the requirements of Rule 16b-3 of the Exchange Act or Section 162(m) of the Code and administer the Plan with respect to such Awards. In all cases requiring an interpretation of the Plan related to an Award made by the Secondary Committee, the use of the term "Committee" herein shall refer to the Secondary Committee. Notwithstanding the foregoing, the Board may delegate to one or more officers or Board members the authority to act as a Secondary Committee with the same authority with respect to selecting the individuals to whom Awards are granted and establishing the terms and conditions of such Awards as the Secondary Committee has under the terms of the Plan.
4.3. Subject to the provisions of the Plan, the Committee (or, as applicable, the Board) shall have full and final authority in its discretion to (i) select the Employees, Non-Employee Directors and Consultants who will receive Awards pursuant to the Plan; (ii) determine the type or types of Awards to be granted to each Participant; (iii) determine the number of shares of Common Stock to which an Award will relate, the terms and conditions of any Award granted under the Plan
A-4
(including, but not limited to, restrictions as to vesting, transferability or forfeiture, exercisability or settlement of an Award and waivers or accelerations thereof, and waivers of or modifications to Performance Goals relating to an Award, based in each case on such considerations as the Committee shall determine) and all other matters to be determined in connection with an Award; (iv) determine whether, to what extent, and under what circumstances an Award may be cancelled, forfeited, or surrendered; (v) determine whether, and to certify that, Performance Goals to which the settlement of an Award is subject are satisfied; (vi) correct any defect or supply any omission or reconcile any inconsistency in the Plan, and adopt, amend and rescind such rules, regulations, guidelines, forms of agreements and instruments relating to the Plan as it may deem necessary or advisable; (vii) construe and interpret the Plan; and (viii) make all other determinations as it may deem necessary or advisable for the administration of the Plan; provided, however, that the Committee shall be prohibited from effecting a repricing of any outstanding Award without shareholder approval as required by Section 9.4 hereof.
Section 5. Shares of Common Stock Subject to the Plan.
5.1. Subject to adjustment as provided in Section 8, the total number of shares of Common Stock available for Awards under the Plan shall be 1,200,000. Any shares tendered, with the Committee's approval, by a Participant in payment of an exercise price for an Award or the tax liability with respect to an Award, including shares withheld from any such Award, shall not be available for future Awards hereunder.
5.2. All shares of Common Stock available for Awards under the Plan may be issued pursuant to Incentive Stock Options, and no more than 300,000 shares may be awarded to any Employee as a Qualified Performance-Based Award in any one calendar year. Common Stock awarded under the Plan may be reserved or made available from the Company's authorized and unissued Common Stock or from Common Stock reacquired and held in the Company's treasury.
5.3. Any shares of Common Stock issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares of Common Stock available for Awards under the Plan.
5.4. If any shares subject to an Award under this Plan are forfeited or such Award otherwise terminates or is settled for any reason whatsoever without an actual distribution of shares to the Participant, any shares counted against the number of shares available for issuance pursuant to the Plan with respect to such Award shall, to the extent of any such forfeiture, settlement, or termination, again be available for Awards under the Plan; provided, however, that the Committee may adopt procedures for the counting of shares relating to any Award to ensure appropriate counting, avoid double counting, provide for adjustments in any case in which the number of shares actually distributed differs from the number of shares previously counted in connection with such Award, and if necessary, to comply with applicable law or regulations.
Section 6. Awards. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including without limitation terms requiring forfeiture of Awards in the event of the termination of employment or other relationship with the Company or any Subsidiary by the Participant; provided, however, that the Committee shall retain full power to accelerate or waive any such additional term or condition as it may have previously imposed. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such Performance Goals as may be determined by the Committee. Each Award, and the terms and conditions applicable thereto, shall be evidenced by an Award Agreement.
A-5
6.1. Options. Options give a Participant the right to purchase a specified number of shares of Common Stock from the Company for a specified time period at a fixed exercise price, as provided in the applicable Award Agreement. Options may be either Incentive Stock Options or Non-Qualified Stock Options; provided that Incentive Stock Options may not be granted to Non-Employee Directors or Consultants. The grant of Options shall be subject to the following terms and conditions:
(a) Exercise Price . The price per share at which Common Stock may be purchased upon exercise of an Option shall be determined by the Committee and specified in the Award Agreement, but shall be not less than the Fair Market Value of a share of Common Stock on the date of grant (110% of Fair Market Value in the case of an Incentive Stock Option granted to a Ten Percent Shareholder).
(b) Term of Options. The term of an Option shall be specified in the Award Agreement, but shall in no event be greater than ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent Shareholder).
(c) Exercise of Option. Each Option grant shall specify the time or times at which an Option may be exercised in whole or in part and the terms and conditions applicable thereto, including (i) a vesting schedule which may be based upon the passage of time, attainment of Performance Goals or a combination thereof, (ii) whether the exercise price for an Option shall be paid in cash, with shares of Common Stock, with any combination of cash and shares of Common Stock, or with other legal consideration that the Committee may deem appropriate, (iii) the methods of payment, which may include payment through cashless and net exercise arrangements, to the extent permitted by applicable law, and (iv) the methods by which, or the time or times at which, Common Stock will be delivered or deemed to be delivered to Participants upon the exercise of such Option. Payment of the exercise price shall in all events be made within three days after the date of exercise of an Option. Unless otherwise determined by the Committee, each Option shall be exercisable for a period of 90 days following termination of employment by the Company (or a Subsidiary) without Cause and one year following the Participant's death or Disability, to the extent the Option was otherwise exercisable at the time of such termination, death or Disability. Unless otherwise determined by the Committee, for any other termination of employment, the Option shall not be exercisable following termination of employment with the Company and its Subsidiaries.
(d) Incentive Stock Options. Each Participant awarded an Incentive Stock Option under the Plan shall notify the Company in writing immediately after the date he or she makes a disqualifying disposition (as defined in Section 421(b) of the Code) of any shares of Common Stock acquired pursuant to the exercise of such Incentive Stock Option. The Company may, if determined by the Committee and in accordance with procedures established by it, retain possession of any shares acquired pursuant to the exercise of an Incentive Stock Option as agent for the applicable Participant until the end of the period described in the preceding sentence, subject to complying with any instructions from such Participant as to the sale of such shares.
6.2. Stock Appreciation Rights . An SAR shall confer on the Participant a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one share of Common Stock on the date of exercise over (ii) the grant price of the SAR as determined by the Committee, but which may never be less than the Fair Market Value of a share of Common Stock on the date of grant. The grant of SARs shall be subject to the following terms and conditions:
(a) Each SAR grant shall specify the number of SARs granted, the grant price of the SAR, the time or times at which an SAR may be exercised in whole or in part (including vesting upon the passage of time, the attainment of Performance Goals, or a combination
A-6
thereof), the method of exercise, method of settlement (in cash, Common Stock or a combination thereof), form of consideration payable in settlement, method by which Common Stock will be delivered or deemed to be delivered to Participants, and any other terms and conditions of any SAR. Unless otherwise determined by the Committee, each SAR shall be exercisable for a period of 90 days following termination of employment by the Company (or a Subsidiary) without Cause and one year following the Participant's death or Disability, to the extent the SAR was otherwise exercisable at the time of such termination, death or Disability. Unless otherwise determined by the Committee, for any other termination of employment, the SAR shall not be exercisable following termination of employment with the Company and its Subsidiaries.
(b) An SAR granted under the Plan may be granted alone or in tandem with all or a portion of a related Option. An SAR granted in tandem with an Option shall be exercisable only to the extent the related Option is exercisable.
(c) The term of an SAR shall be specified in the Award Agreement, but shall in no event be greater than ten years.
6.3. Restricted Stock. An Award of Restricted Stock is a grant by the Company of a specified number of shares of Common Stock to the Participant, which shares are subject to forfeiture upon the happening of specified events during the Restriction Period. Such an Award shall be subject to the following terms and conditions:
(a) Each Restricted Stock grant shall specify the duration of the Restriction Period and/or each installment thereof, the conditions under which the Restricted Stock may be forfeited to the Company, and the amount, if any, the Participant must pay to receive the Restricted Stock. Such restrictions may include a vesting schedule based upon the passage of time, the attainment of Performance Goals or a combination thereof.
(b) During the Restriction Period, the transferability of Restricted Stock shall be prohibited or restricted in the manner and to the extent prescribed in the applicable Award Agreement. Such restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee.
(c) Upon determination of the number of shares of Restricted Stock to be granted to the Participant, the Committee shall direct that a certificate or certificates representing the number of shares of Common Stock be issued to the Participant with the Participant designated as the registered owner. The certificate(s) representing such shares shall be legended as to sale, transfer, assignment, pledge or other encumbrances during the Restriction Period and deposited by the Participant, together with a stock power endorsed in blank, with the Company, to be held in escrow during the Restriction Period. At the end of the Restriction Period the restrictions imposed hereunder shall lapse with respect to the number of shares of Restricted Stock as provided in the Award Agreement, and the legend shall be removed and such number of shares delivered to the Participant (or, where appropriate, the Participant's legal representative).
(d) Unless otherwise provided in the applicable Award Agreement, during the Restriction Period the Participant shall have all the rights of a shareholder with respect to Restricted Stock, including, without limitation, the right to receive dividends thereon (whether in cash or shares of Common Stock) and to vote such shares of Restricted Stock. Dividends shall be subject to the same restrictions as the underlying Restricted Stock unless otherwise provided by the Committee.
A-7
(e) In the sole discretion of the Committee, an Award Agreement regarding Restricted Stock may provide for a tax reimbursement cash payment to be made by the Company to any Participant in connection with the tax consequences resulting from an Award of Restricted Stock, the lapse of restrictions on any Restricted Stock or the payment by a Participant of any taxes related thereto, subject to such conditions as the Committee may specify.
6.4. Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants any type of Award other than an Award provided in Section 6.1, 6.2, or 6.3 hereof that is payable in, or valued in whole or in part by reference to, shares of Common Stock, and that is deemed by the Committee to be consistent with the purposes of the Plan.
6.5. Rules Applicable to Qualified Performance-Based Awards . To the extent the Committee determines, in its sole discretion, necessary or advisable in order to comply with the deductibility limitations of Section 162(m) of the Code applicable to Qualified Performance-Based Awards, the following rules shall apply:
(a) Only an Employee who is a " covered employee " within the meaning of Section 162(m) of the Code shall be eligible to receive Qualified Performance-Based Awards. The Committee shall designate in its sole discretion which covered employees will be Participants for a Performance Cycle within the earlier of (i) the first 90 days of a Performance Cycle and (ii) the lapse of 25% of the Performance Cycle.
(b) The Committee shall establish in writing within the earlier of (i) the first 90 days of a Performance Cycle and (ii) the lapse of 25% of the Performance Cycle, and in any event, while the outcome is substantially uncertain, (A) Performance Goals for the Performance Cycle, and (B) in respect of such Performance Goals, a minimum acceptable level of achievement below which no payment will be made or no Award shall vest or become exercisable, and an objective formula or other method for determining the amount of any payment to be made or the extent to which an Award hereunder shall vest or become exercisable if performance is at or above such minimum acceptable level but falls short of the maximum achievement of the specified Performance Goals.
(c) Following the completion of a Performance Cycle, the Committee shall review and certify in writing whether, and to what extent, the Performance Goals for the Performance Cycle have been achieved and, if so, to also calculate and certify in writing the amount of the Qualified Performance-Based Awards earned for the period based upon the Performance Goals and the related formulas or methods as determined pursuant to Section 6.5(b). The Committee shall then determine the actual amount payable or the extent to which an Award is vested or exercisable as a result of attainment of such Performance Goals under each Participant's Award for the Performance Cycle, and, in doing so, may reduce or eliminate, except as otherwise provided in the Award Agreement, the amount of the Award. In no event shall the Committee have the authority to increase Award amounts to any Covered Employee.
(d) An Award granted, vesting or becoming exercisable with respect to a Performance Cycle shall be paid (unless such Award is subject to the Participant's exercise, which exercise such Participant has not effectuated) as soon as practicable following completion of the certification described in Section 6.5(c) but in no event later than December 31 of the year following the end of the Performance Cycle.
6.6. Additional Provisions Applicable to Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, any other Award granted under the Plan. In addition, the Committee may grant awards in substitution for
A-8
awards granted under any other plan of any business entity acquired by the Company or any Subsidiary.
Section 7. Change in Control. Notwithstanding any provision in this Plan to the contrary and unless otherwise provided in the applicable Participant's Award Agreement, upon the occurrence of a Change in Control, the following provisions shall apply:
7.1. Options and SARs. Upon a Change in Control, unless otherwise provided by the Committee or in an Award Agreement, the Committee, in its discretion, may take one or more of the following actions with respect to all Options and/or SARs that are outstanding and unexercised as of such Change in Control: (i) accelerate the vesting and exercisability of all such Options or SARs to the extent unvested and unexercisable, such that all outstanding Options or SARs are fully vested and exercisable, (ii) cancel all outstanding vested Options or SARs in exchange for a cash payment in an amount equal to the excess, if any, of the Fair Market Value of the Common Stock underlying the unexercised portion of the Option or SAR as of the date of the Change in Control over the exercise price of such portion, (iii) terminate all Options or SARs immediately prior to the Change in Control, provided that the Company provide the Optionee an opportunity to exercise the Option within a specified period following the Optionee's receipt of a written notice of such Change in Control and of the Company's intention to terminate the Option prior to such Change in Control, or (iv) require the successor corporation, following a Change in Control if the Company does not survive such Change in Control, to assume all outstanding Options or SARs and to substitute such Options or SARs with awards involving the common stock of such successor corporation on terms and conditions necessary to preserve the rights of Optionees or SAR Grantees with respect to such Options or SARs.
7.2. Other Awards. Upon a Change in Control, all Awards of Restricted Stock, or other awards granted under Section 6.4, that are outstanding may, at the discretion of the Committee, become immediately and fully vested. In addition, upon a Change in Control, the Committee may take such other actions as it deems appropriate with respect to the Awards described in the preceding sentence, including the immediate distribution of amounts that would not otherwise be payable as of the date of the Change in Control.
7.3. Committee Authority. The judgment of the Committee with respect to any matter referred to in this Section 7 shall be conclusive and binding upon each Participant without the need for any amendment to the Plan.
Section 8. Adjustments upon Changes in Capitalization.
8.1. In the event that the Committee shall determine that any stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event, affects the Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Participants under the Plan, then the Committee shall proportionately and equitably adjust any or all of (i) the number and kind of shares of Common Stock which may thereafter be issued in connection with Awards, (ii) the number and kind of shares of Common Stock issuable in respect of outstanding Awards, (iii) the aggregate number and kind of shares of Common Stock available under the Plan, (iv) the limits described in Section 5 of the Plan, and (v) the exercise or grant price relating to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award; provided, however, in each case, that no adjustment shall be made that would adversely affect the status of any Award that is intended to be a Qualified Performance-Based Award, unless the Committee expressly determines otherwise.
A-9
8.2. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards, including any Performance Goals, in recognition of unusual or nonrecurring events (including, without limitation, events described in Section 14.1) affecting the Company or any Subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. Notwithstanding the foregoing, no adjustment shall be made in any outstanding Awards to the extent that such adjustment would adversely affect the status of an Award intended to be a Qualified Performance-Based Award.
Section 9. Termination and Amendment.
9.1. Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of the Company's shareholders or Participants, except that any such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company's shareholders if (i) such action would increase the number of shares subject to the Plan, (ii) decrease the price at which Awards may be granted, or (iii) such shareholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to the Plan to the Company's shareholders for approval; provided, however, that without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation, or termination of the Plan may materially and adversely affect the rights of such Participant under any outstanding Award unless such modification is necessary to ensure a deduction under Section 162(m) of the Code or to avoid the additional tax described in Section 409A(a)(1)(B) of the Code.
9.2. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Award theretofore granted and any Award Agreement relating thereto; provided, however, that without the consent of an affected Participant, no such amendment, alteration, suspension, discontinuation, or termination of any Award may materially and adversely affect the rights of such Participant under such Award.
9.3. Notwithstanding anything in this Section 9 to the contrary, any Performance Goal applicable to an Award shall not be deemed a fixed contractual term, but shall remain subject to adjustment by the Committee, in its discretion at any time in view of the Committee's assessment of the Company's strategy, performance of comparable companies, and other circumstances, except to the extent that any such adjustment to a performance condition would adversely affect the status of an Award intended to be a Qualified Performance-Based Award.
9.4. Notwithstanding anything in the Plan or an Award Agreement to the contrary, no Award may be repriced, replaced, regranted through cancellation, or modified, directly or indirectly, without the approval of the shareholders of the Company, provided that nothing herein shall prevent the Committee from taking any action provided for in Section 8.1.
Section 10. No Right to Award, Employment or Service. No Participant shall have any claim to be granted any award under the Plan, and there is no obligation that the terms of Awards be uniform or consistent among Participants. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ or service of the Company or any Subsidiary. For purposes of this Plan, transfer of employment between the Company and its Subsidiaries and affiliates shall not be deemed a termination of employment.
Section 11. Taxes. Each Participant must make appropriate arrangement for the payment of any taxes relating to an Award granted hereunder. The Company or any Subsidiary is authorized to withhold from any payment relating to an Award under the Plan, including from a distribution of Common Stock or any payroll or other payment to a Participant amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the
A-10
Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include the ability to withhold or receive Common Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. Withholding of taxes in the form of shares of Common Stock from the profit attributable to the Award shall not occur at a rate that exceeds the minimum required statutory federal and state withholding rates.
Section 12. Limits on Transferability; Beneficiaries. No Award or other right or interest of a Participant under the Plan shall be pledged, encumbered, or hypothecated to, or in favor of, or subject to any lien, obligation, or liability of such Participant to, any party, other than the Company, any Subsidiary or affiliate, or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution, and such Awards and rights shall be exercisable during the lifetime of the Participant only by the Participant or his or her guardian or legal representative. Notwithstanding the foregoing, the Committee may, in its discretion, provide that Awards (other than Incentive Stock Options) or other rights or interests of a Participant granted pursuant to the Plan be transferable, without consideration, to immediate family members (i.e., children, grandchildren or spouse), to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. The Committee may attach to such transferability feature such terms and conditions as it deems advisable. In addition, a Participant may, in the manner established by the Committee, designate a beneficiary (which may be a person or a trust) to exercise the rights of the Participant, and to receive any distribution, with respect to any Award upon the death of the Participant. A beneficiary, guardian, legal representative or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award Agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional restrictions deemed necessary or appropriate by the Committee.
Section 13. Foreign Nationals. Without amending the Plan, Awards may be granted to Employees or Consultants who are foreign nationals or render services outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purpose of the Plan.
Section 14. Securities Law Requirements.
14.1. No shares of Common Stock may be issued hereunder if the Company shall at any time determine that to do so would (i) violate the listing requirements of an applicable securities exchange, or adversely affect the registration or qualification of the Company's Common Stock under any state or federal law, or (ii) require the consent or approval of any regulatory body or the satisfaction of withholding tax or other withholding liabilities. In any of the events referred to in clause (i) or clause (ii) above, the issuance of such shares shall be suspended and shall not be effective unless and until such withholding, listing, registration, qualifications or approval shall have been effected or obtained free of any conditions not acceptable to the Company in its sole discretion, notwithstanding any termination of any Award or any portion of any Award during the period when issuance has been suspended.
14.2. The Committee may require, as a condition to the issuance of shares hereunder, representations, warranties and agreements to the effect that such shares are being purchased or acquired by the Participant for investment only and without any present intention to sell or otherwise distribute such shares and that the Participant will not dispose of such shares in transactions which, in the opinion of counsel to the Company, would violate the registration provisions of the Securities Act, and the rules and regulations thereunder. The certificates issued to evidence such shares shall bear appropriate legends summarizing such restrictions on the disposition thereof.
A-11
Section 15. Termination. Unless earlier terminated, the Plan shall terminate on the earlier of the 10-year anniversary of the Effective Date or the 10-year anniversary of the date the Plan was approved by the Board, and no Awards under the Plan shall thereafter be granted.
Section 16. Fractional Shares. The Company will not be required to issue any fractional shares of Common Stock pursuant to the Plan. The Committee may provide for the elimination of fractions and settlement of such fractional shares of Common Stock in cash.
Section 17. Discretion. In exercising, or declining to exercise, any grant of authority or discretion hereunder, the Committee may consider or ignore such factors or circumstances and may accord such weight to such factors and circumstances as the Committee alone and in its sole judgment deems appropriate and without regard to the effect such exercise, or declining to exercise such grant of authority or discretion, would have upon the affected Participant, any other Participant, any employee, the Company, any Subsidiary, any affiliate, any shareholder or any other person.
Section 18. Governing Law. The validity and construction of the Plan and any Award Agreements entered into thereunder shall be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, but without giving effect to the conflict of laws principles thereof.
Section 19. Effective Date. The Plan shall become effective upon the Effective Date, and no Award shall become exercisable, realizable or vested prior to the Effective Date.
A-12
[Innovative Solutions and Support, Inc. letterhead]
[Date]
[Name]
[Address]
Dear [Name]:
We are pleased to inform you that on [Date] (the " Grant Date "), pursuant to the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan (the " Plan "), the Committee granted you a Non-Qualified Stock Option (referred to herein as either the " Option " or " Award ") to purchase shares of Common Stock of Innovative Solutions and Support, Inc. (the " Company "). The exercise price of the Option is [ ] per share.
This letter (the " Award Agreement ") sets forth the terms and conditions of your Award not otherwise provided in the Plan. Your Award is subject to the applicable terms and conditions of the Plan, which are incorporated herein by reference, and in the event of any contradiction, distinction or difference between this Award Agreement and the terms of the Plan, the terms of the Plan will control. All capitalized terms not otherwise defined herein have the meanings set forth in the Plan.
Subject to your continued service with the Company or any of its Subsidiaries, your Award will vest and become exercisable as follows:
[VESTING SCHEDULE]
Subject to the terms of the Plan and your continued service with the Company or any of its Subsidiaries, your Award will remain exercisable until the tenth anniversary of the Grant Date (the " Expiration Date "). Upon the date of your termination of service with the Company and its Subsidiaries (a " Termination Date "), your Award shall remain exercisable (the " Exercise Period ") only in accordance with the following provisions:
Any vested and exercisable portion of your Award that is not so exercised within the applicable Exercise Period shall be forfeited with no further compensation due to you. Additionally, unless otherwise provided by the Committee, any portion of your Award that is not vested or exercisable as of your Termination Date shall be immediately forfeited on such date with no further compensation due to you.
All or part of the exercisable portion of your Option may be exercised by you upon (a) your written notice to the Company of exercise, (b) your payment of the applicable exercise price in cash, with the proceeds received from a broker-dealer whom you have authorized to sell all or a portion of the Common Stock subject to your Option, or as otherwise may be permitted by the Committee and (c) your having made appropriate arrangements with the Company for the withholding of any taxes
B-1
which may be due with respect to your exercise of the Option. Payment of the exercise price of the Option shall in all events be made within three days of the date of exercise.
The Company may impose any additional conditions or restrictions on the Award or the exercise of the Option as it deems necessary or advisable to ensure that all rights granted under the Plan satisfy the requirements of applicable securities and other laws. The Company shall not be obligated to issue or deliver any shares if such action violates any provision of any law or regulation of any governmental authority or national securities exchange.
The Committee may amend the terms of this Award to the extent it deems appropriate to carry out the terms of the Plan. The construction and interpretation of any provision of this Award or the Plan shall be final and conclusive when made by the Committee.
Nothing in this letter shall confer on you the right to continue in the service of the Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries to terminate your service at any time.
Please sign and return a copy of this agreement to [ ], designating your acceptance of this Award. This acknowledgement must be returned within thirty (30) days; otherwise, the Award shall lapse and become null and void. Your signature also shall acknowledge that you have received and reviewed the Plan and that you agree to be bound by the applicable terms of such document.
Very truly yours,
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
|
By: |
|
|
|
ACKNOWLEDGED AND ACCEPTED |
||
|
|
||
|
Dated: |
|
|
Enclosure (Copy of Plan)
B-2
[Innovative Solutions and Support, Inc. letterhead]
[Date]
[Name]
[Address]
Dear [Name]:
We are pleased to inform you that on [Date] (the " Grant Date "), pursuant to the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan (the " Plan "), the Committee granted you an Incentive Stock Option (referred to herein as either the " Option " or " Award ") to purchase shares of Common Stock of Innovative Solutions and Support, Inc. (the " Company "). The exercise price of the Option is [ ] per share.
This Option is designated as an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended (the " Code "). If and to the extent that the Option fails to qualify as an Incentive Stock Option under the Code, the Option shall remain outstanding according to its terms as a nonqualified stock option.
This letter (the " Award Agreement ") sets forth the terms and conditions of your Award not otherwise provided in the Plan. Your Award is subject to the applicable terms and conditions of the Plan, which are incorporated herein by reference, and in the event of any contradiction, distinction or difference between this Award Agreement and the terms of the Plan, the terms of the Plan will control. All capitalized terms not otherwise defined herein have the meanings set forth in the Plan.
Subject to your continued employment with the Company or any of its Subsidiaries, your Award will vest and become exercisable as follows:
[VESTING SCHEDULE]
Subject to the terms of the Plan and your continued employment with the Company or any of its Subsidiaries, your Award will remain exercisable until the tenth anniversary (fifth anniversary, in the case of a Ten Percent Shareholder) of the Grant Date (the " Expiration Date "). Upon the date of termination of your employment with the Company and its Subsidiaries (a " Termination Date "), your Award shall remain exercisable (the " Exercise Period ") only in accordance with the following provisions:
Any vested and exercisable portion of your Award that is not so exercised within the applicable Exercise Period shall be forfeited with no further compensation due to you. Additionally, unless otherwise provided by the Committee, any portion of your Award that is not vested or exercisable as of your Termination Date shall be immediately forfeited on such date with no further compensation due to you.
B-3
All or part of the exercisable portion of your Option may be exercised by you upon (a) your written notice to the Company of exercise, (b) your payment of the applicable exercise price in cash, with the proceeds received from a broker-dealer whom you have authorized to sell all or a portion of the Common Stock subject to your Option, or as otherwise may be permitted by the Committee and (c) your having made appropriate arrangements with the Company for the withholding of any taxes which may be due with respect to your exercise of the Option. Payment of the exercise price of the Option shall in all events be made within three days of the date of exercise.
If you dispose of any shares of Common Stock acquired upon the exercise of this Option within two years from the Grant Date or one year after such shares were acquired pursuant to the exercise of this Option (any such disposition, a " Disqualifying Disposition "), you acknowledge and agree that you shall notify the Company in writing of such disposition. Any notice of a Disqualifying Disposition must be given within 30 days of such disposition.
The Company may impose any additional conditions or restrictions on the Award or the exercise of the Option as it deems necessary or advisable to ensure that all rights granted under the Plan satisfy the requirements of applicable securities and other laws. The Company shall not be obligated to issue or deliver any shares if such action violates any provision of any law or regulation of any governmental authority or national securities exchange.
The Committee may amend the terms of this Award to the extent it deems appropriate to carry out the terms of the Plan. The construction and interpretation of any provision of this Award or the Plan shall be final and conclusive when made by the Committee.
Nothing in this letter shall confer on you the right to continued employment with Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries to terminate your employment at any time.
Please sign and return a copy of this agreement to [ ], designating your acceptance of this Award. This acknowledgement must be returned within thirty (30) days; otherwise, the Award shall lapse and become null and void. Your signature also shall acknowledge that you have received and reviewed the Plan and that you agree to be bound by the applicable terms of such document.
Very truly yours,
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
|
By: |
|
|
|
ACKNOWLEDGED AND ACCEPTED |
||
|
|
||
| Dated: |
|
Enclosure (Copy of Plan)
B-4
[Innovative Solutions and Support, Inc. letterhead]
[Date]
[Name]
[Address]
Dear [Name]:
We are pleased to inform you that on [Date] (the " Grant Date "), pursuant to the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan (the " Plan "), the Committee granted you [ ] shares of Common Stock (referred to herein as either the " Restricted Stock " or " Award ") of Innovative Solutions and Support, Inc. (the " Company "), subject to the restrictions set forth below.
This Award is subject to the applicable terms and conditions of the Plan, which are incorporated herein by reference, and in the event of any contradiction, distinction or difference between this letter and the terms of the Plan, the terms of the Plan will control. Unless otherwise stated, all capitalized terms used herein have the meanings set forth in the Plan. By accepting this Award you (i) acknowledge that you have received and read a copy of the Plan and understand its terms and (ii) acknowledge that with respect to this Award and the Restricted Stock, you are bound by the terms of the Plan.
Subject to your continued service with the Company or any of its Subsidiaries the restrictions applicable to your Restricted Stock will lapse, and your Award will be vested, as follows: [ ].
Should your service with the Company and its Subsidiaries terminate for any reason before any portion of your Award vests, then that portion of your Award shall be forfeited with no further compensation due to you. Finally, if you are terminated by the Company or any of its Subsidiaries for Cause, your entire Award, regardless of whether any or all of the shares of Restricted Stock that relate to such Award are vested, shall be forfeited with no further compensation due to you.
If certificates are generally issued for other shares of stock of the Company, you may receive certificate(s) for the Restricted Stock designating you as the registered owner. Upon such receipt, you agree to deliver the certificate(s) together with a signed and undated stock power, in the form of Annex A hereto, to the Company or the Company's designee authorizing the Committee to transfer title to the certificate(s) representing any shares of Restricted Stock that are forfeited under the terms of the Plan and this Award to the Company in the event that your service with the Company and its Subsidiaries should terminate for any reason prior to the lapse of the restrictions.
You must make appropriate arrangements with the Company to provide for the withholding of the taxes that will be due with respect to this Award.
If certificates are generally issued for other shares of stock of the Company, then as promptly after each vesting date as possible, the Company will issue to you, or if such certificates were previously issued, the Company will deliver to you, certificates for your vested shares of Restricted Stock.
The construction and interpretation of any provision of this Award or the Plan shall be final and conclusive when made by the Committee.
Nothing in this letter shall confer on you the right to continue in the service of the Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries to terminate your service at any time.
You should sign and return a copy of this agreement to [ ] indicating your agreement to the terms of this letter and the Award granted hereby. This acknowledgement must be returned
B-5
within thirty (30) days; otherwise, the Award shall lapse and become null and void. Your signature will also acknowledge that this letter reflects our final agreement regarding the Award granted hereunder and supersedes any prior written or oral agreement, understanding or communication otherwise regarding your Award, and that you have received and reviewed the Plan and that you agree to abide by the applicable terms of these documents as provided herein.
Signature Page Follows
B-6
Very truly yours,
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
|
By: |
|
|
|
ACKNOWLEDGED AND ACCEPTED |
||
|
|
||
| Dated: |
|
Enclosures
B-7
For Value Received, [Name] hereby sells, assigns and transfers unto Innovative Solutions and Support, Inc. Shares of Restricted Stock of Innovative Solutions and Support, Inc. standing in his name on the books of said corporation [represented by Certificate No. ] herewith and does hereby irrevocably constitute and appoint attorney to transfer the said stock on the books of the within named corporation with full power of substitution in the premises.
| By: |
|
| Dated: |
|
| In presence of |
|
B-8
[Innovative Solutions and Support, Inc. letterhead]
[Date]
[Name]
[Address]
Dear [Name]:
We are pleased to inform you that on [Date] (the " Grant Date "), pursuant to the Innovative Solutions and Support, Inc. 2009 Stock-Based Incentive Compensation Plan (the " Plan "), the Committee granted you a stock appreciation right (hereinafter referred to as the " SARs " or the " Award ") to receive the appreciation in value of [ ] shares of Common Stock of Innovative Solutions and Support, Inc. (the " Company "). The base price of the Award is [ ] per share. This Award [is/is not] being granted in connection with a grant of an Option under the Plan.
This letter (the " Award Agreement ") sets forth the terms and conditions of your Award not otherwise provided in the Plan. Your Award is subject to the applicable terms and conditions of the Plan, which are incorporated herein by reference, and in the event of any contradiction, distinction or difference between this Award Agreement and the terms of the Plan, the terms of the Plan will control. All capitalized terms not otherwise defined herein have the meanings set forth in the Plan.
Subject to your continued service with the Company or any of its Subsidiaries, your Award will vest and become exercisable as follows:
[VESTING SCHEDULE]
Subject to the terms of the Plan and your continued service with the Company or any of its Subsidiaries, your Award will remain exercisable until the tenth anniversary of the Grant Date (the " Expiration Date "). Upon the date of your termination of service with the Company and its Subsidiaries (a " Termination Date "), your Award shall remain exercisable (the " Exercise Period ") only in accordance with the following provisions:
Any vested and exercisable portion of your Award that is not so exercised within the applicable Exercise Period shall be forfeited with no further compensation due to you. Additionally, unless otherwise provided by the Committee, any portion of your Award that is not vested or exercisable as of your Termination Date shall be immediately forfeited on such date with no further compensation due to you.
All or part of the exercisable portion of your Award may be exercised by you upon your written notice to the Company of exercise. Upon your notification of the Company of exercise, you will receive a payment (in Common Stock or cash, as determined by the Committee, in its discretion) equal to the difference between the base price of the Award and the fair market value of the Common Stock covered by the Award on the date of exercise, less any applicable withholding.
B-9
The Company may impose any additional conditions or restrictions on the Award or the exercise of the Award as it deems necessary or advisable to ensure that all rights granted under the Plan satisfy the requirements of applicable securities and other laws.
The Committee may amend the terms of this Award to the extent it deems appropriate to carry out the terms of the Plan. The construction and interpretation of any provision of this Award or the Plan shall be final and conclusive when made by the Committee.
Nothing in this letter shall confer on you the right to continue in the service of the Company or its Subsidiaries or interfere in any way with the right of the Company or its Subsidiaries to terminate your service at any time.
Please sign and return a copy of this agreement to [ ], designating your acceptance of this Award. This acknowledgement must be returned within thirty (30) days; otherwise, the Award shall lapse and become null and void. Your signature also shall acknowledge that you have received and reviewed the Plan and that you agree to be bound by the applicable terms of such document.
Very truly yours,
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
|
By: |
|
|
|
ACKNOWLEDGED AND ACCEPTED |
||
|
|
||
|
Dated: |
|
|
Enclosure (Copy of Plan)
B-10
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
The undersigned hereby appoints Mr. Geoffrey S. M. Hedrick and Mr. John C. Long 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 January 20, 2009 at the Annual Meeting of Shareholders of Innovative Solutions and Support, Inc., to be held on March 12, 2009, 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 IN PROPOSAL NO. 1 AND "FOR" PROPOSALS NO. 2 AND NO. 3.
| ý | Please mark your votes as in this example. | |||||
|
1. |
|
Election of Class III Directors for a term of three years: |
||||
|
|
|
Geoffrey S. M. Hedrick |
|
o FOR NOMINEE |
|
o WITHHOLD AUTHORITY |
|
|
|
Winston J. Churchill |
|
o FOR NOMINEE |
|
o WITHHOLD AUTHORITY |
|
2. |
|
Approval of the Company's 2009 Stock-Based Incentive Compensation Plan: |
||||
|
|
|
• FOR o |
|
• AGAINST o |
|
• ABSTAIN o |
|
3. |
|
Ratification of the appointment of Deloitte & Touche, LLP as the Company's independent registered public accounting firm for the fiscal year ended September 30, 2009: |
||||
|
|
|
• FOR o |
|
• AGAINST o |
|
• ABSTAIN o |
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" THE NOMINEES LISTED IN PROPOSAL NO. 1 AND "FOR" PROPOSALS NO. 2 AND NO. 3. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF THE NOMINEES LISTED IN PROPOSAL NO. 1 AND IN FAVOR OF PROPOSALS NO. 2 AND NO. 3.
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.
o Please check this box if you plan to attend the meeting.