SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
Three-Five Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
---------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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<PAGE>
[LOGO] THREE-FIVE SYSTEMS, INC.
------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 24, 1997
------------------------------------------
The Annual Meeting of Stockholders of Three-Five Systems, Inc., a
Delaware corporation (the "Company"), will be held at 9:00 a.m. on Thursday,
April 24, 1997, at the Company's corporate headquarters at 1600 North Desert
Drive, Tempe, Arizona, for the following purposes:
1. To elect directors to serve until the next annual meeting of
stockholders and until their successors are elected and qualified.
2. To approve amendments to and the restatement of the Company's 1993
Stock Option Plan (the "1993 Plan") to (a) permit all non-employee directors to
receive grants of options and awards pursuant to the 1993 Plan, (b) limit the
number of options that may be granted to salaried employees in any one-year
period in order to comply with Section 162(m) of the Internal Revenue Code of
1986, as amended, and (c) make certain other revisions, which do not require
stockholder approval, in order to bring the 1993 Plan into compliance with
recent revisions to rules promulgated under Section 16 of the Securities
Exchange Act of 1934, as amended.
3. To approve amendments to and the restatement of the Company's 1994
Automatic Stock Option Plan (the "1994 Plan") to (a) clarify that the
restriction on receiving the initial automatic grant of options to acquire 1,000
shares of the Company's common stock (the "Initial Grant") applies only to
non-employee directors who have previously received an Initial Grant, (b) revise
the vesting period for the options granted pursuant to the Initial Grant, and
(c) make certain other technical revisions to the 1994 Plan, which do not
require stockholder approval.
4. To ratify the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1997.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 14, 1997
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
To assure your representation at the meeting, however, you are urged to mark,
sign, date, and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder of record
attending the meeting may vote in person even if he or she previously has
returned a proxy.
Sincerely,
Jeffrey D. Buchanan
Secretary
Tempe, Arizona
March 20, 1997
<PAGE>
[LOGO] THREE-FIVE SYSTEMS, INC.
1600 N. Desert Drive
Tempe, Arizona 85281
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PROXY STATEMENT
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VOTING AND OTHER MATTERS
General
The enclosed proxy is solicited on behalf of Three-Five Systems, Inc.,
a Delaware corporation (the "Company"), by the Company's board of directors (the
"Board of Directors") for use at the Annual Meeting of Stockholders to be held
Thursday, April 24, 1997 at 9:00 a.m. (the "Meeting"), or at any adjournment
thereof, for the purposes set forth in this Proxy Statement and in the
accompanying Notice of Annual Meeting of Stockholders. The Meeting will be held
at the Company's corporate headquarters, 1600 North Desert Drive, Tempe,
Arizona.
These proxy solicitation materials were first mailed on or about March
20, 1997 to all stockholders entitled to vote at the Meeting.
Voting Securities and Voting Rights
Stockholders of record at the close of business on March 14, 1997 (the
"Record Date") are entitled to notice of and to vote at the Meeting. On the
Record Date, there were issued and outstanding 7,759,629 shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock").
The presence, in person or by proxy, of the holders of a majority of
the total number of shares of Common Stock outstanding constitutes a quorum for
the transaction of business at the Meeting. Each stockholder voting at the
Meeting, either in person or by proxy, may cast one vote per share of Common
Stock held on all matters to be voted on at the Meeting. Assuming that a quorum
is present, the affirmative vote of a majority of the shares of Common Stock of
the Company present in person or represented by proxy at the Meeting and
entitled to vote is required (i) for the election of directors; (ii) to approve
amendments to and the restatement of the Company's 1993 Stock Option Plan (the
"1993 Plan") to (a) permit all non-employee directors to receive grants of
options and awards pursuant to the 1993 Plan, (b) limit the number of options
that may be granted to salaried employees in any one-year period in order to
comply with Section 162(m) of the Internal Revenue Code of 1986, as amended,
(the "Internal Revenue Code"), and (c) make certain other revisions, which do
not require stockholder approval, in order to bring the 1993 Plan into
compliance with recent revisions to rules (the "Rules") promulgated under
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); (iii) to approve amendments to and the restatement of the Company's 1994
Automatic Stock Option Plan (the "1994 Plan") to (1) clarify that the
restriction on receiving the initial automatic grant of options to acquire 1,000
shares of the Company's common stock (the "Initial Grant") applies only to
non-employee directors who have previously received an Initial Grant, (2) revise
the vesting period for the options granted pursuant to the Initial Grant, and
(3) make certain other technical revisions to the 1994 Plan, which do not
require stockholder approval; and (iv) for the ratification of the appointment
of Arthur Andersen LLP as the independent auditors of the Company for the year
ending December 31, 1997.
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Votes cast by proxy or in person at the Meeting will be tabulated by
the election inspectors appointed for the Meeting and will determine whether a
quorum is present. The election inspectors will treat abstentions as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum but as unvoted for purposes of determining the approval of any matter
submitted to the stockholders for a vote. If a broker indicates on the proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
Voting of Proxies
When a proxy is properly executed and returned, the shares it
represents will be voted at the Meeting as directed. If no specification is
indicated, the shares will be voted (i) "for" the election of the nominees set
forth in this Proxy Statement, (ii) "for" approval of the proposal to amend and
restate the 1993 Plan; (iii) "for" approval of the proposal to amend and restate
the 1994 Plan; and (iv) "for" the ratification of the appointment of Arthur
Andersen LLP as the independent auditors of the Company for the year ending
December 31, 1997.
Revocability of Proxies
Any person giving a proxy may revoke the proxy at any time before its
use by delivering to the Company written notice of revocation or a duly executed
proxy bearing a later date or by attending the Meeting and voting in person.
Solicitation
The cost of this solicitation will be borne by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for expenses incurred in forwarding
solicitation materials to such beneficial owners. Proxies also may be solicited
by certain of the Company's directors and officers, personally or by telephone
or telegram, without additional compensation.
Annual Report and Other Matters
The 1996 Annual Report to Stockholders, which was mailed to
stockholders with or preceding this Proxy Statement, contains financial and
other information about the activities of the Company, but is not incorporated
into this Proxy Statement and is not to be considered a part of these proxy
soliciting materials. The information contained in the "Compensation Committee
Report on Executive Compensation" below and "Performance Graph" below shall not
be deemed "filed" with the Securities and Exchange Commission (the "SEC") or
subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Exchange Act.
The Company will provide upon written request, without charge to each
stockholder of record as of the Record Date, a copy of the Company's annual
report on Form 10-K for the year ended December 31, 1996 as filed with the SEC.
Any exhibits listed in the Form 10-K report also will be furnished upon request
at the actual expense incurred by the Company in furnishing such exhibit. Any
such requests should be directed to the Company's Secretary at the Company's
executive offices set forth in this Proxy Statement.
ELECTION OF DIRECTORS
Nominees
The Company's bylaws provide that the number of directors shall be
fixed from time to time by resolution of the Board of Directors or stockholders.
All directors are elected at each annual meeting of the Company's stockholders
for a term of one year and hold office until their successors are elected and
qualified.
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A board of five directors is to be elected at the Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for each of the nominees named below. All of the nominees currently are
directors of the Company. In the event that any such nominee is unable or
declines to serve as a director at the time of the Meeting, the proxies will be
voted for any nominee designated by the current Board of Directors to fill the
vacancy. It is not expected that any nominee will be unable or will decline to
serve as a director. The term of office of each person elected as a director
will continue until the next annual meeting of stockholders or until a successor
has been elected and qualified.
The following table sets forth certain information regarding the
nominees for directors of the Company:
Name Age Position
---- --- --------
David R. Buchanan 64 Chairman of the Board, President, and
Chief Executive Officer
Burton E. McGillivray 40 Director
David C. Malmberg 54 Director
Kenneth M. Julien 42 Director
Gary R. Long 64 Director
David R. Buchanan has been Chairman of the Board, President, and Chief
Executive Officer of the Company since its formation in February 1990. Mr.
Buchanan served as Treasurer of the Company from May 1990 until January 1994 and
as Chairman of the Board and Chief Executive Officer, President, and a director
of one of the predecessors of the Company from October 1986, February 1987, and
November 1985, respectively, until the predecessor's merger into the Company in
May 1990.
Burton E. McGillivray has been a director of the Company since its
formation. Mr. McGillivray served as a director of one of the Company's
predecessors from September 1986 until March 1987 and from July 1987 until its
merger with the Company. Mr. McGillivray has served as First Vice President of
First Chicago Equity Capital ("FCEC") and served as Managing Director of FCEC
from January 1994 to February 1996. From December 1992 until January 1994, Mr.
McGillivray was a Chicago-based private investor. From September 1984 to
December 1992, Mr. McGillivray was employed by Continental Illinois Venture
Corporation ("CIVC") and Continental Equity Capital Corporation ("CECC"). He
served as Managing Director of both CIVC and CECC from 1989 to 1992. The primary
business of CIVC, CECC, and FCEC is making equity investments in high-growth
businesses. Mr. McGillivray is a member of the boards of directors for CFM
Technologies, Inc., a publicly held company, and Alpha Technologies and Seco
Products Corp., which are privately held companies.
David C. Malmberg has been a director of the Company since April 1993.
Mr. Malmberg is a private investor and management consultant. Before resigning
in May 1994, Mr. Malmberg spent 22 years at National Computer Systems, including
13 years as its President and Chief Operating Officer. Mr. Malmberg serves as
the Chairman of the Board of National City Bank of Minneapolis and is a member
of the boards of directors of National City Bancorporation, PPT/Vision, Inc.,
Fieldworks, Inc., Concerted Technology, Inc., and the Board of Trustees for
Mankato State University.
Kenneth M. Julien has been a director of the Company since October
1996. Mr. Julien has served as President and a director of Julien Aerospace
Systems, Inc., an aerospace parts supplier, since November 1996 and as Managing
Director of Julien Investments LLC, a real estate development and lending
company, since August 1994. Mr. Julien served as Executive Vice President and
Chief Operating Officer of the Company from August 1992 to April 1993; as Vice
President, Chief Financial Officer, and Secretary of the Company or one of its
predecessors from May 1988 to August 1992; and as a director of the Company or
one of its predecessors from July 1987 to May 1990. Mr. Julien served as a Vice
President and Chief Financial Officer of CerProbe Corporation ("CerProbe"), a
publicly held company engaged in the business of designing, manufacturing, and
marketing
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<PAGE>
semiconductor test equipment, from October 1983 to May 1988. Mr. Julien also
served as a director of CerProbe from February 1988 to June 1988.
Gary R. Long has been a director of the Company since October 1996. Mr.
Long served as President and Chief Executive Officer of CalComp Technology, Inc.
("CalComp"), a computer peripherals company, from January 1994 until his
retirement in February 1997. Mr. Long served as Senior Vice President and
General Manager of CalComp's Digitizer Products Division in Scottsdale, Arizona,
from 1980 to January 1994. Prior to 1980, Mr. Long served as Vice President of
Operations for Talos Systems, which designs and manufactures digitizers for the
computer graphics industry.
Directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
pleasure of the Board of Directors. Messrs. Julien, McGillivray, and Malmberg
serve as the members of the Audit Committee of the Board of Directors, with Mr.
Julien, serving as the Chair of the Audit Committee. Messrs. Malberg,
McGillivray, Julien, and Long serve as the Compensation Committee of the Board
of Directors, with Mr. Malmberg serving as the Chair of the Compensation
Committee. David R. Buchanan is the father of Jeffrey D. Buchanan, the Vice
President - Finance, Administion, and Legal, Chief Financial Officer, Secretary,
and Treasurer of the Company. There are no other family relationships among any
of the directors or officers of the Company.
Meetings and Committees of the Board of Directors
The Company's bylaws authorize the Board of Directors to appoint among
its members one or more committees composed of one or more directors. The Board
of Directors has appointed an Audit Committee and a Compensation Committee. The
Audit Committee reviews the annual financial statements, the significant
accounting issues, and the scope of the audit with the Company's independent
auditors and is available to discuss with the auditors any other audit related
matters that may arise during the year. The Compensation Committee reviews and
acts on matters relating to compensation levels and benefit plans for key
executives of the Company.
The Board of Directors of the Company held a total of four meetings
during the fiscal year ended December 31, 1996. The Company's Audit Committee
met separately at one formal meeting during the fiscal year ended December 31,
1996. The Company's Compensation Committee held two formal meetings during the
fiscal year ended December 31, 1996. No director attended fewer than 75% of the
aggregate of (i) the total number of meetings of the Board of Directors during
the period in which such person served as a director, and (ii) the total number
of meetings held by all Committees of the Board on which such director was a
member and during the period in which such person served on such committee.
Director Compensation and Other Information
The Company pays each independent director an annual fee in the amount
of $9,000, plus $500 for each board or committee meeting attended, other than
committee meetings held on the same day as a board meeting. The Company also
reimburses each independent director for travel and related expenses incurred in
connection with attendance at board and committee meetings. David R. Buchanan,
an executive officer of the Company, receives no additional compensation for his
services as a director. The terms of the 1994 Plan provide that each
non-employee director will receive an automatic grant of options to acquire
1,000 shares of the Company's Common Stock on the date of his or her first
appointment or election to the Board of Directors. The 1994 Plan also provides
for the automatic grant of options to purchase 500 shares of the Company's
Common Stock to non-employee directors at the time of the meeting of the Board
of Directors held immediately following each annual meeting of stockholders.
Pursuant to the 1994 Plan, each of Messrs. McGillivray, Malmberg, Julien, and
Long will receive an automatic grant of options to purchase 500 shares of Common
Stock at the time of the Board of Directors meeting immediately following the
Meeting. The original terms of the 1994 Plan provided that a non-employee
director of the Company who had previously served as a member of the Board of
Directors will not be eligible to
4
<PAGE>
receive the automatic grant of options if that person rejoined the Board of
Directors. As a result, when Kenneth M. Julien, who had previously served as a
director of the Company prior to the adoption of the 1994 Plan, became a
director again in October 1996, Mr. Julien was ineligible to receive an initial
automatic grant under the 1994 Plan. In October 1996, the Board of Directors
granted Mr. Julien options to acquire 1,000 shares of Common Stock pursuant to
the 1993 Plan, subject to stockholder approval of the amendments to and
restatement of the 1993 Plan. See "Proposal to Amend and Restate the Company's
1993 Stock Option Plan" and "Proposal to Amend and Restate the Company's 1994
Stock Option Plan."
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth the total compensation received by the
Company's Chief Executive Officer, its four other most highly compensated
executive officers, and one former executive officer, each of whose aggregate
cash compensation exceeded $100,000 for services in all capacities to the
Company and its subsidiaries for the fiscal year ended December 31, 1996 (the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary ($)(1) Bonus ($) Options(#)(2) Compensation($)(3)
--------------------------- ---------------------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
David R. Buchanan, 1996 $257,448 $ --- -- $ 7,308
Chairman, President, and 1995 254,169 --- -- 2,782
Chief Executive Officer 1994 226,848 268,110 -- 6,948
Vincent C. Hren, Vice 1996 $129,308 $ 20,000 70,000(5) $63,445
President - Operations(4)
James F. Bowser, Vice 1996 $110,862 $ 5,000 $ --- $ 499
President - New Product 1995 121,208 --- --- 388
Development 1994 109,319 78,910 10,000 4,580
Dan J. Schott, Vice 1996 $111,903 $ --- --- $ 3,911
President - Research 1995 117,550 --- --- 606
and Development 1994 107,565 88,910 40,000 2,201
Jeffrey D. Buchanan, 1996 $ 90,541 $ 30,000 60,000 $ 123
Vice President - Finance,
Administration, and
Legal; Chief Financial
Officer; Secretary; and
Treasurer(6)
David M. Rzasa, 1996 $120,742 $ --- --- $47,307
Executive Vice President 1995 41,369 $ --- 70,000(8) 42,760
and Chief Operating
Officer(7)
</TABLE>
5
<PAGE>
- ----------------------
(1) Messrs. David Buchanan, Hren, Bowser, Schott, Jeffrey Buchanan, and
Rzasa also received certain perquisites, the value of which did not
exceed 10% of their annual salary and bonus.
(2) The exercise price of all stock options granted were equal to the fair
market value of the Company's Common Stock on the date of grant.
(3) Amounts shown for fiscal 1996 include (i) matching contributions to the
Company's 401(k) Plan earned in fiscal 1996 but not paid until fiscal
1997 in the amounts of $4,500, $2,109, and $3,367 on behalf of Messrs.
David Buchanan, Hren, and Schott, respectively; (ii) term life
insurance premiums of $2,808, $279, $499, $544, $123, and $383 paid by
the Company on behalf of Messrs. David Buchanan, Hren, Bowser, Schott,
Jeffrey Buchanan, and Rzasa, respectively; (iii) relocation expenses
paid by the Company in the amounts of $61,057 and $18,209 to Messrs.
Hren and Rzasa, respectively; and (iv) severance payments in the amount
of $28,715 to Mr. Rzasa.
(4) Mr. Hren became an officer of the Company in January 1996.
(5) Of the amount shown, options to acquire 35,000 shares of Common Stock
were cancelled and reissued in August 1996. See "Executive Compensation
- Option Repricings."
(6) Mr. Buchanan became an officer of the Company in May 1996.
(7) Mr. Rzasa served as the Company's Executive Vice President and Chief
Operating Officer from October 1995 to August 1996, at which time his
employment with the Company was terminated.
(8) Such options were automatically cancelled upon the termination of Mr.
Rzasa's employment with the Company.
Option Grants
The following table sets forth certain information with respect to
stock options granted to the Named Officers during the fiscal year ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
Potential Realizable
Value at Assumed
Percentage Annual Rates
Number of of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise Option Term(2)
Options Employees in Price Expiration --------------
Name Granted (#) Fiscal Year ($/Sh)(1) Date 5% 10%
---- ----------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
David R. Buchanan.......... -- -- -- -- -- --
Vincent C. Hren............ 35,000(3) 14.2% $16.88 08/09/96(3) -- --
35,000(4) 14.2% $ 9.25 08/09/06 $203,700 $515,900
James F. Bowser............ -- -- -- -- -- --
Dan J. Schott.............. -- -- -- -- -- --
Jeffrey D. Buchanan........ 25,000(5) 10.1% $13.75 05/06/06 $216,250 $547,750
35,000(6) 14.2% $11.69(6) 06/17/01 $113,050 $249,900
David M. Rzasa(7).......... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Except as otherwise indicated, the options were granted at the fair
value of the Company's Common Stock on the date of grant and have a
ten-year term.
(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that
could be achieved for the respective options if exercised at the end of
the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with
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<PAGE>
the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future price of
the Company's Common Stock. Actual gains, if any, on stock option
exercises will depend upon the future market prices of the Company's
Common Stock.
(3) Such options were cancelled and reissued in August 1996. See "Executive
Compensation - Option Repricings."
(4) Such options vest and become exercisable at the rate of 20% on the
second anniversary of the date of grant, 30% on the third anniversary
of the date of grant, and 50% on the fourth anniversary of the date of
grant.
(5) Such options vest and become exercisable in five equal annual
installments beginning on the second anniversary of the date of grant.
(6) Such options have an exercise price equal to 110% of the fair value of
the Company's Common Stock on the date of grant, vest and become
exercisable in four equal annual installments beginning on the first
anniversary of the date of grant, and have a five-year term.
(7) Mr. Rzasa served as the Company's Executive Vice President and Chief
Operating Officer from October 1995 to August 1996, at which time his
employment with the Company was terminated.
Option Holdings
The following table contains certain information respecting the options
held by the Named Officers as of December 31, 1996.
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at Fiscal Money Options at Fiscal
Year-End (#) Year-End ($)(1)
------------------------------- -------------------------------
Name Exercisable Unexercisable(2) Exercisable Unexercisable(2)
- ---- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
David R. Buchanan 106,856 0 $ 1,206,800 --
Vincent C. Hren 0 35,000 -- $ 126,875
James F. Bowser 15,000 5,000 $ 123,750 $ 0
Dan J. Schott 16,000 24,000 $ 0 $ 0
Jeffrey D. Buchanan 0 60,000 -- $ 41,475
David M. Rzasa(3) 0 0 -- --
</TABLE>
(1) Calculated based upon the December 31, 1996 New York Stock Exchange
closing price of $12.875 per share, multiplied by the applicable number
of shares in-the-money, less the aggregate exercise price for such
shares.
(2) Not vested as of December 31, 1996.
(3) Mr. Rzasa served as the Company's Executive Vice President and Chief
Operating Officer from October 1995 to August 1996, at which time his
employment with the Company was terminated. Options to acquire an
aggregate of 70,000 shares of Common Stock were automatically cancelled
upon the termination of Mr. Rzasa's employment with the Company.
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<PAGE>
Option Repricings
The following table sets forth certain information with respect to the
cancellation of outstanding stock options held by and the grant of replacement
options to (i) any of the Company's Named Executive Officers during fiscal 1996,
and (ii) any of the Company's other executive officers since May 1, 1990, the
date on which the Company's Common Stock became registered under Section 12 of
the Exchange Act as a result of the Company's merger with its predecessors. See
"Compensation Committee Report on Executive Compensation - Compensation Program
- - Stock Option Grants."
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
Number of
Securities Market Price Exercise Length of
Underlying of Stock at Price at Time Original Option
Options Time of of Repricing Term Remaining
Repriced or Repricing or or New at Date of
Name and Principal Amended Amendment Amendment Exercise Repricing or
Position Date (#) ($) ($) Price ($) Amendment
- -------------------- -------- ----------- ------------ ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Hren, 08/09/96 35,000 $9.25 $16.875 $9.25 9 years and 6
Vice President - months
Operations
Daniel P. Clarke, 03/10/95 30,000 $21.125 $35.125 $21.125 9 years and 10
Vice President - months
Sales and
Marketing(1)
Randall L. Buness, 03/10/95 15,000 $21.125 $30.00 $21.125 9 years and 8
Vice President - months
Finance and
Administration, 10/28/94 10,000 $30.00 $44.375 $30.00 10 years
Chief Financial
Officer, Secretary,
and Treasurer(2)
</TABLE>
- -----------------------
(1) Mr. Clarke served as Vice President - Sales and Marketing of the
Company from January 1995 to March 1996. The repriced options indicated
in the table were not vested and were automatically cancelled on the
date that Mr. Clarke's employment with the Company ceased.
(2) Mr. Buness served as Vice President - Finance and Administration, Chief
Financial Officer, Secretary, and Treasurer of the Company from
September 1994 to June 1996. The repriced options indicated in the
table were not vested and were automatically cancelled on the date that
Mr. Buness' employment with the Company ceased.
Employment Agreements
The Company has no written employment contracts with its officers,
directors, or other employees. The Company offers its employees medical, dental,
life, and disability insurance benefits. The executive officers and other key
personnel of the Company are eligible to receive profit sharing distributions
and discretionary bonuses, and are eligible to receive stock options under the
Company's stock option plans.
8
<PAGE>
401(k) Profit Sharing Plan
On September 1, 1990, the Company adopted a profit sharing plan
pursuant to Section 401(k) (the "401(k) Plan") of the Internal Revenue Code.
Pursuant to the 401(k) Plan, all eligible employees may contribute through
payroll deductions up to the maximum allowable under Section 402(g) of the
Internal Revenue Code, which was $9,500 for calendar year 1996. In addition, the
401(k) Plan provides that the Company may make matching and discretionary
contributions in such amount as may be determined by the Board of Directors. The
Company made discretionary contributions pursuant to the 401(k) Plan to the
Named Officers for 1996 in the amount of $9,976.
Stock Option Plans
The Company currently has three stock options plans: the 1990 Incentive
Stock Option Plan (the "1990 Plan"), the 1993 Plan, and the 1994 Plan. The
eligible persons under the 1990 Plan include key personnel, consultants, and
independent contractors who perform valuable services for the Company. In
conjunction with stockholder approval of the 1993 Plan, the Board terminated the
1990 Plan with respect to 85,454 options which were unissued as of the date that
the 1993 Plan was adopted. Under the 1990 Plan, there were 334,976 options
issued but unexercised as of March 14, 1997. If any option granted under the
1990 Plan terminates or expires without having been exercised in full, stock not
issued under such stock option will become available for reissuance under the
1990 Plan. If any change in the Common Stock of the Company occurs through
merger, consolidation, reorganization, capitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure, or
otherwise, adjustments will be made as to the maximum number of shares subject
to the 1990 Plan and the number of shares and exercise price per share of stock
subject to outstanding options.
See "Proposal to Amend and Restate the Company's 1993 Stock Option
Plan" and "Proposal to Amend and Restate the Company's 1994 Automatic Stock
Option Plans" for descriptions of the 1993 Plan and 1994 Plan, respectively.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, the Company's
Compensation Committee consisted of Messrs. McGillivray and Malmberg and Jeffrey
A. Wilson. On January 9, 1997, the Board of Directors added Messrs. Julien and
Long to the Compensation Committee and Mr. Wilson ceased to serve as a member of
the Compensation Committee. None of such individuals had any contractual or
other relationships with the Company during such fiscal year except as
directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Introduction
The Compensation Committee of the Board of Directors (the "Committee")
of Three-Five Systems, Inc. consists exclusively of independent, non-employee
directors. The Committee is responsible for reviewing and recommending for
approval by the Board of Directors the Company's compensation practices,
executive salary levels, and variable compensation programs, both cash-based and
equity-based. The Committee generally reviews base salary levels for executive
officers of the Company at or about the start of each fiscal year and approves
actual bonuses at the end of each fiscal year based upon Company and individual
performance.
David C. Malmberg is the Chairman of the Committee, and Burton E.
McGillivray, Gary Long, and Kenneth M. Julien are the current Committee members.
9
<PAGE>
Philosophy
The executive compensation program seeks to provide a level of
compensation that is competitive with companies similar in both size and
industry. The Committee obtained the comparative data used to assess
competitiveness from the American Electronics Association Executive Compensation
Survey, the ECS Industry Report on Top Management Compensation (Watson Wyatt),
and the Crystal Report. Actual total compensation levels may differ from
competitive levels in surveyed companies as a result of annual and long-term
Company performance, as well as individual performance. The Committee uses its
discretion to set executive compensation when, in its judgment, external,
internal, or an individual's circumstances warrant.
Compensation Program
The primary components of executive compensation consist of base
salary, annual discretionary bonuses, and stock option grants. In previous
years, the Board considered profit sharing distributions which could be paid
into the 401(k) retirement plan of the Company. In 1996, an automatic matching
program was instituted with respect to the 401(k).
Base Salary
The Committee reviews salaries recommended by the Chief Executive
Officer for executive officers other than the Chief Executive Officer. In
formulating these recommendations, the Chief Executive Officer considers the
overall performance of the Company and conducts an informal evaluation of
individual officer performance. Final decisions on any adjustments to the base
salary for executives, other than the Chief Executive Officer, are made by the
Committee in conjunction with the Chief Executive Officer. The Committee's
evaluation of the recommendations by the Chief Executive Officer considers the
same factors outlined above and is subjective with no particular weight assigned
to any one factor. Base salaries for fiscal 1996 were determined by the
Committee in April 1996. Base salaries were not adjusted for 1996 except for two
executive officers whose salaries were reduced because of decreased
responsibilities. Three new executive officers were added in 1996 and each of
their salaries were raised during the year because of increased
responsibilities.
Annual Discretionary Bonuses
The annual discretionary bonuses are designed to provide incentive
compensation to key officers and employees who contribute substantially to the
success of the Company. The bonuses can be Incentive Bonuses or Work Bonuses.
The Incentive Bonuses are intended to maintain a strong link between overall
Company performance and enhanced stockholder value by rewarding results that
exceed industry averages. Incentive Bonuses may be awarded to selected officers
and employees from a pool based on a subjective percentage of the Company's net
income for the fiscal year. Projected Incentive Bonuses are accrued monthly and
paid annually based on the overall performance of the Company to date, taking
into consideration achievement of sales, net income, and other performance
criteria, as well as individual responsibility, performance, and compensation
level. The Committee's evaluation of these factors is subjective, with no
particular weight being assigned to any one factor. The Committee determined
that the Company's performance did not warrant the payment of any discretionary
Incentive Bonuses for fiscal 1996. Work Bonuses are intended to encourage a
culture that rewards a strong work ethic as measured by efficiency of effort,
strength of leadership, or level of achievement. The Committee awarded Work
Bonuses to those officers and employees identified as meeting the criteria.
Stock Option Grants
The Company grants stock options periodically to executive officers and
other key employees to provide additional incentive to work to maximize
long-term total return to stockholders. Although the Board is the Plan
Administrator of the stock option plans, it has delegated its authority to a
Senior Committee and an Employee
10
<PAGE>
Committee. The members of the Compensation Committee serve as members of the
Senior Committee, which is the Committee that grants options to officers of the
Company. The Chairman of the Board serves as the sole member of the Employee
Committee, which grants options to employees other than officers. In general,
stock options are granted to senior level and key employees at the onset of
employment. If in the opinion of the Plan Administrators the outstanding service
of an existing employee merits an increase in the number of options held,
however, the Plan Administrator may elect to issue additional stock options to
that employee. In 1996, the policy on vesting was changed so that the vesting
period on future grants will generally be four years for new employees and three
years for employees who have been employed for two years or longer. The vesting
schedule will generally be backloaded (with 50% vesting in the last year) in
order to encourage optionholders to continue in the employ of the Company. The
Plan Administrators retain the right to accelerate the vesting of options
granted by the Company. Certain officers also have longer vesting schedules.
During 1996, the Board of Directors authorized a reduction of the
exercise price of certain stock options granted to key employees, including an
executive officer. The new exercise price for those options was fixed at the
market price of the Company's Common Stock at the time of the various
repricings. Stock options granted to employees under the Company's stock option
plans are intended to provide incentives to the employees to work to achieve
long-term success for the Company. The decline in the market price of the
Company's Common Stock since the date the options were granted frustrated the
purpose of the options, and the Compensation Committee deemed it in the best
interest of the Company to reduce the exercise price to the market price at the
time of the repricing. With respect to the repriced options, the vesting period
of those options was revised at the time of repricing. See the table included
under "Executive Compensation - Option Repricings" for further information on
the option repricing.
Benefits
The Company provides various employee benefit programs to its executive
officers, including medical and life insurance benefits, an employee 401(k)
retirement savings plan, and short- and long-term disability insurance. These
programs are generally available to all employees of the Company.
Chief Executive Officer Compensation
The Committee considers the same factors outlined above for other
executive officers in evaluating the base salary and other compensation of David
R. Buchanan, the Company's Chief Executive Officer. The Committee's evaluation
of Mr. Buchanan's base salary is subjective, with no particular weight assigned
to any one factor. The Committee established Mr. Buchanan's base salary at
$250,000 throughout 1996. The Committee believes that this base salary perhaps
may not be competitive with that paid to chief executive officers of comparable
companies and is currently looking into that issue. Mr. Buchanan requested that
he not be considered for a discretionary bonus for 1996.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation in excess of $1 million paid to
each of any publicly held corporation's chief executive officer and four other
most highly compensated executive officers. Qualifying performance-based
compensation is not subject to the deduction limit if certain requirements are
met. The Company currently intends to structure the performance-based portion of
the compensation of its executive officers in a manner that complies with
Section 162(m).
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<PAGE>
This report has been furnished by the members of the Compensation
Committee to the Board of Directors of the Company.
David C. Malmberg, Chairman
Burton E. McGillivray
Gary R. Long
Kenneth M. Julien
SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
officers, and persons who own more than 10 percent of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10 percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely upon the Company's review of the copies of such forms
received by it during the fiscal year ended December 31, 1996, and written
representations that no other reports were required, the Company believes that
each person who, at any time during such fiscal year, was a director, officer,
or beneficial owner of more than 10 percent of the Company's Common Stock
complied with all Section 16(a) filing requirements during such fiscal year.
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<PAGE>
COMPANY PERFORMANCE GRAPH
The following line graph compares cumulative total stockholder returns,
assuming reinvestment of dividends, for the five years ended December 31, 1996
for (i) the Company's Common Stock; (ii) the Standard and Poor's SmallCap 600
Index; and (iii) the Electrical Components & Other Equipment Industry Index of
Standard and Poor's Mid Cap Index. The graph assumes an investment of $100 on
December 31, 1991. The calculation of cumulative stockholder return on the
Company's Common Stock does not include reinvestment of dividends because the
Company did not pay dividends during the measurement period. The performance
shown is not necessarily indicative of future performance.
[GRAPH]
<TABLE>
<CAPTION>
31-Dec-91 31-Dec-92 31-Dec-93 31-Dec-94 31-Dec-95 31-Dec-96
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three-Five Systems, Inc. $100 $181.20 $1762.50 $3,637.50 $1,687.50 $1,287.50
S&P SmallCap 600 Index $100 $121.04 $143.78 $136.92 $177.94 $215.88
Electrical Components and Other
Equipment Industry Index $100 $113.25 $179.18 $221.33 $318.36 $403.00
</TABLE>
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<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock on March 14, 1997 (except as
otherwise noted) by (i) each director and each executive officer of the Company,
(ii) all directors and officers of the Company as a group, and (iii) each person
known by the Company to own more than five percent of the Company's Common
Stock.
<TABLE>
<CAPTION>
Shares Beneficially
Name of Beneficial Owner Owned
------------------------ --------------------------
Number(l) Percent(2)
--------- ----------
<S> <C> <C>
Directors and Executive Officers:
David R. Buchanan..................................................................... 848,118 (3) 10.8%
Vincent C. Hren(4).................................................................... 2,000 *
Dan J. Schott......................................................................... 20,000 (5) *
James F. Bowser....................................................................... 97,000 (6) 1.2%
Bruce E. Sedlak(7).................................................................... 0 *
Jeffrey D. Buchanan(8)................................................................ 25,090 *
Elizabeth A. Sharp.................................................................... 14,443 (9) *
Burton E. McGillivray................................................................. 69,000 (10) *
David C. Malmberg..................................................................... 25,500 (11) *
Kenneth M. Julien..................................................................... 0 *
Gary R. Long.......................................................................... 700 *
All directors and executive officers as a group (eleven persons)......................1,101,851 13.9%
Non-management 5% Stockholders:
LGT Asset Management, Inc.(12)......................................................... 793,500 10.2%
Eugene M. Lang......................................................................... 471,877 (13) 6.1%
</TABLE>
- --------------------
*Less than 1% of the outstanding shares of Common Stock.
(1) Includes, when applicable, shares owned of record by such person's
minor children and spouse and by other related individuals and entities
over whose shares of Common Stock such person has custody, voting
control, or power of disposition. Also includes shares of Common Stock
that the identified person had the right to acquire within 60 days of
March 14, 1997 by the exercise of vested stock options.
(2) The percentages shown include the shares of Common Stock which the
person will have the right to acquire within 60 days of March 14, 1997.
In calculating the percentage of ownership, all shares of Common Stock
which the identified person will have the right to acquire within 60
days of March 14, 1997 upon the exercise of vested stock options are
deemed to be outstanding for the purpose of computing the percentage of
shares of Common Stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares
of Common Stock owned by any other person.
(3) Includes 106,856 shares of Common Stock issuable upon exercise of
vested stock options.
(4) Mr. Hren is the Company's Vice President - Operations.
(5) Includes 16,000 shares of Common Stock issuable upon exercised of
vested stock options. Mr. Schott is the Company's Vice President -
Research and Development.
(6) Includes 15,000 shares of Common Stock issuable upon exercise of vested
stock options. Mr. Bowser is the Company's Vice President - New
Business Development.
(7) Mr. Sedlak is the Company's Vice President - Sales.
(8) Mr. Buchanan is the Company's Vice President - Finance, Administration,
and Legal; Chief Financial Officer; Secretary; and Treasurer.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of vested
stock options. Ms. Sharp is the Company's Vice President - Corporate
Relations.
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<PAGE>
(10) Includes 3,000 shares of Common Stock issuable upon exercise of vested
stock options.
(11) Includes 3,000 shares of Common Stock issuable upon exercise of vested
stock options.
(12) LGT Asset Management, Inc. is the holding company for Chancellor LGT
Asset Management, Inc. and its wholly owned subsidiary Chancellor LGT
Trust Company, each of which serves as investment advisor for various
fiduciary accounts and each of which has sole voting and dispositive
power over the shares indicated. The address of LGT Asset Management,
Inc. is 50 California Street, 27th Floor, San Francisco, California
94111.
(13) Represents 193,670 shares of Common Stock held by Mr. Lang and 166,903
and 111,304 shares of Common Stock owned by REFAC International, Ltd.
("RIL"), and REFAC Financial Corporation ("RFC"), respectively. Mr.
Lang and REFAC Technology Development Corporation ("REFAC") may be
deemed to beneficially own, and to have shared voting and investment
power with respect to, the shares held of record by RIL and RFC. RIL
may be deemed to have shared voting and investment power with respect
to the shares held of record by RFC. REFAC, RFC, and RIL disclaim
beneficial ownership of Common Stock except for shares of Common Stock
owned of record, if any, by such entity. Mr. Lang disclaims beneficial
ownership of the shares held by RIL and RFC. The address of Mr. Lang is
122 East 42nd Street, Suite 4000, New York, New York 10168.
PROPOSAL TO AMEND AND RESTATE THE
COMPANY'S 1993 STOCK OPTION PLAN
The Board of Directors has approved a proposal to amend and restate the
Company's 1993 Stock Option Plan, subject to approval by the Company's
stockholders at the Meeting, to (a) permit all non-employee directors to receive
grants of options and awards pursuant to the 1993 Plan; (b) limit the number of
options that may be granted to salaried employees in any one-year period in
order to comply with Section 162(m) of the Internal Revenue Code ("Section
162(m)); and (c) make certain other revisions, which do not require stockholder
approval, so that the 1993 Plan complies with recent revisions to the Rules
promulgated under Section 16 of the Exchange Act. The full text of the 1993 Plan
as proposed to be amended and restated is included as "Appendix A" to this Proxy
Statement. The Board of Directors believes that it is in the best interests of
the Company to continue to grant options and/or issue shares of Common Stock
under the 1993 Plan and in the Company's best interests to adopt the proposed
amendments to and restatement of the 1993 Plan. Accordingly, the Board of
Directors recommends a vote "FOR" the proposed amendments to and restatement of
the 1993 Plan.
Reasons for and Effect of the Proposed Amendments and Restatement
The Board of Directors believes that the approval of the proposed
amendments to and restatement of the 1993 Plan is necessary to achieve the
purposes of the 1993 Plan and to promote the welfare of the Company and its
stockholders generally. The Board of Directors believes that the proposed
amendments to the 1993 Plan will aid the Company in attracting and retaining
directors, officers, and key employees and motivating such persons to exert
their best efforts on behalf of the Company. In addition, the Company expects
that the proposed amendments will further strengthen the identity of interests
of the directors, officers, and key employees with those of the stockholders.
Amendments Intended to Comply with the Revised Rules
In May 1996, the SEC amended the Rules promulgated pursuant to Section
16 of the Exchange Act. The amended Rules became effective on November 1, 1996.
In general, the Rules require the Company's officers, directors, and holders of
more than 10 percent of the Company's Common Stock to file reports of ownership
and changes in ownership of Common Stock with the SEC. The Rules also exempt
certain transactions in the Company's Common Stock by the Company's officers,
directors, and 10 percent stockholders from liability for "short-swing profits"
under Section 16 of the Exchange Act. Because the 1993 Plan is intended to
comply with the
15
<PAGE>
Rules with respect to Options and Awards granted pursuant to the 1993 Plan and
issuances of Common Stock pursuant to the 1993 Plan, the Board of Directors
adopted amendments to the 1993 Plan that are intended to bring the 1993 Plan
into compliance with the revised Rules. These amendments generally do not
require stockholder approval, except for the amendment that permits all
non-employee directors, including non-employee directors who are members of the
Senior Committee (as defined below), to receive grants of Options and Awards
pursuant to the 1993 Plan in addition to options granted to them pursuant to the
1994 Plan. This provision, which was previously prohibited under the Rules, is
permitted under the revised Rules. The Board of Directors believes that this
amendment is necessary to attract, retain, and motivate non-employee directors
and to encourage non-employee directors to serve as members of the Senior
Committee.
Amendment Intended to Comply with Internal Revenue Code Section 162(m)
The Board of Directors has adopted an amendment to the 1993 Plan that
limits the number of options that may be granted to salaried employees in any
one-year period to a maximum of 150,000 options per salaried employee. This
amendment is being submitted to stockholders in order to satisfy the stockholder
approval requirements of Section 162(m) of the Internal Revenue Code. Section
162(m) generally allows a tax deduction to the Company for compensation in
excess of $1.0 million paid in any year to its Chief Executive Officer and four
other most highly compensated executive officers (the "Highly Compensated
Officers") only if such compensation qualifies as "performance-based
compensation." Under Section 162(m), options granted under the 1993 Plan prior
to the date of the Meeting generally qualify as "performance-based
compensation." Upon stockholder approval of the amendments to and restatement of
the 1993 Plan, non-qualified options granted following the date of the Meeting
generally will qualify as "performance-based compensation" and will entitle the
Company to take a tax deduction for compensation paid as a result of option
exercises by the Company's Highly Compensated Officers.
As required by Section 162(m), the Board of Directors has adopted a
resolution providing that, if the stockholders do not approve the amendment, the
Company will not make any further grants of options under the 1993 Plan. In
essence, stockholders will be reapproving the entire 1993 Plan, although no
additional shares are being authorized for issuance under the 1993 Plan. The
Board of Directors believes that it is in the best interests of the Company to
continue to grant options and/or issue shares of Common Stock under the 1993
Plan and in the Company's best interests to adopt the proposed amendments to and
restatement of the 1993 Plan. Accordingly, the Board of Directors recommends a
vote "FOR" approval of the amendments to and restatement of the 1993 Plan.
Restatement of the 1993 Plan
The restatement of the 1993 Plan is intended to reflect other minor
technical revisions and to provide one integrated document to avoid confusion.
Description of the 1993 Stock Option Plan
General
The 1993 Plan is intended to promote the interests of the Company by
providing key employees, consultants, and other independent contractors who
provide valuable services to the Company with the opportunity to acquire, or
otherwise increase, their proprietary interest in the Company as an incentive to
remain in service to the Company. The 1993 Plan provides for the grant of
options to acquire Common Stock of the Company ("Options"), the direct grant of
Common Stock ("Stock Awards"), the grant of stock appreciation rights ("SARs"),
and the grant of other cash awards ("Cash Awards") (Stock Awards, SARs, and Cash
Awards are collectively referred to herein as "Awards"). The 1993 Plan states
that it is not intended to be the exclusive means by which the Company may issue
options or warrants to acquire its Common Stock, stock awards, or any other type
of award. To the extent permitted by applicable law, the Company may issue any
other options, warrants, or awards other than pursuant to the 1993 Plan without
stockholder approval.
16
<PAGE>
Shares Subject to the Plan
A maximum of 385,454 shares of Common Stock of the Company may be
issued under the 1993 Plan. If any Option or SAR terminates or expires without
having been exercised in full, stock not issued under such Option or SAR will
again be available for the purposes of the 1993 Plan. If any change is made in
the stock subject to the 1993 Plan or subject to any Option or SAR granted under
the 1993 Plan (through merger, consolidation, reorganization, recapitalization,
stock dividend, split-up, combination of shares, exchange of shares, change in
corporate structure, or otherwise), the 1993 Plan provides that appropriate
adjustments will be made as to the maximum number of shares subject to the 1993
Plan and the number of shares and exercise price per share of stock subject to
outstanding Options or Awards. As of March 14, 1997, an aggregate of 6,100
shares of the Company's Common Stock has been issued upon exercise of Options
granted pursuant to the 1993 Plan, and there were outstanding Options to acquire
247,250 shares of the Company's Common Stock under the 1993 Plan.
Eligibility and Administration
Options and Awards may be granted pursuant to the 1993 Plan only to
persons ("Eligible Persons") who at the time of grant are either (i) key
personnel (including officers and directors) of the Company, or (ii) consultants
and independent contractors who provide valuable services to the Company.
Options granted pursuant to the 1993 Plan may be incentive stock options or
non-qualified stock options. Options that are incentive stock options may be
granted only to key personnel of the Company who are also employees of the
Company. To the extent that granted Options are incentive stock options, the
terms and conditions of those Options must be consistent with the qualification
requirements set forth in the Internal Revenue Code.
The Eligible Persons under the 1993 Plan are divided into two groups,
and there is a separate administrator (each a "Plan Administrator") for each
group. One group consists of the executive officers and directors of the Company
and persons who own 10 percent or more of the Company's issued and outstanding
stock. The power to administer the 1993 Plan with respect to those persons is
vested exclusively with the Board of Directors or a committee (the "Senior
Committee") comprised of two or more non-employee directors who are appointed by
the Board of Directors. The power to administer the 1993 Plan with respect to
the remaining Eligible Persons is vested with the Board of Directors of the
Company or with a committee of one or more directors appointed by the Board of
Directors. Each Plan Administrator determines (i) which of the Eligible Persons
in its group will be granted Options and Awards; (ii) the amount and timing of
the grant of such Options and Awards; and (iii) such other terms and conditions
as may be imposed by the Plan Administrator consistent with the 1993 Plan. Upon
stockholder approval of the amendments to and restatement of the 1993 Plan, no
salaried employee (including officers) may receive options for more than 150,000
shares of Common Stock pursuant to the 1993 Plan in any one-year period. See
"Proposal to Amend and Restate the Company's 1993 Stock Option Plan - Reasons
for and Effect of the Proposed Amendments and Restatement."
Terms and Conditions of Options; Exercise of Options
Each Plan Administrator will determine the expiration date, maximum
number of shares purchasable, and the other provisions of the Options at the
time of grant. Options may be granted for terms of up to 10 years. Options will
vest and become exercisable in whole or in one or more installments at such time
as may be determined by the Plan Administrator upon the grant of the Options.
However, a Plan Administrator has the discretion to provide for the automatic
acceleration of the vesting of any Options or Awards granted under the 1993 Plan
in the event of a "Change in Control," as defined in the 1993 Plan.
Each Plan Administrator also will determine the exercise prices of
Options at the time of grant. However, the exercise price of any Option intended
to be an incentive stock option may not be less than 100 percent of the fair
market value of the Common Stock at the time of the grant (110 percent if the
Option is granted to a person who at the time the Option is granted owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company). On March 13, 1997, the closing price of the
Company's Common
17
<PAGE>
Stock on the New York Stock Exchange was $13.875 per share. To exercise an
Option, the optionholder will be required to deliver to the Company full payment
of the exercise price for the shares as to which the Option is being exercised.
Generally, Options can be exercised by delivery of cash, check, or shares of
Common Stock of the Company.
Termination of Employment or Services
Except as otherwise allowed by the Plan Administrator, Options and
Awards granted under the 1993 Plan are nontransferable other than by will or by
the laws of descent and distribution upon the death of the holder and, during
the lifetime of the holder, are exercisable only by such holder. In the event of
the termination of an employee holder's services with the Company, other than
for death or disability, the holder may exercise any Options or SARs granted in
conjunction with Options that are vested but unexercised on the date his or her
service is terminated until the earlier of (i) one month after the date of
termination of service, or (ii) the expiration date of the Options or SARs.
However, Options or SARs held by the terminated employee will immediately become
void and terminate (i) if the holder's service is terminated by the Company in
its good faith judgment for (a) commission of a crime by the holder or for
reasons involving moral turpitude, (b) an act by the holder that tends to bring
the Company into disrepute, or (c) negligent, fraudulent, or willful misconduct
by the holder, or (ii) if the holder commits acts detrimental to the Company's
interests after his or her service is terminated. If termination is by reason of
disability, however, the holder may exercise his or her Options or SARs until
the earlier of (i) 12 months after the termination of service, or (ii) the
expiration of the term of the Option or SAR. If the holder dies while in service
to the Company, the holder's estate or successor by bequest or inheritance may
exercise any Options or SARs that the holder was entitled to exercise on the
date of his or her death at any time until the earlier of (i) the period ending
three months after the holder's death, or (ii) the expiration of the term of the
Option or SAR. Options and SARs held by consultants, independent contractors,
and other non-employees of the Company and that are exercisable at the time the
holder ceases to be in service to the Company will remain exercisable for the
period of time determined by the Plan Administrator at the time of grant and set
forth in the documents evidencing such Options or SARs. In the absence of such
provisions, such Options and SARs will remain exercisable for one year after
termination as a result of death or disability and for one month after
termination for any reason other than termination by the Company for the reasons
stated above or if the holder commits acts detrimental to the Company's
interests, in which case the Options and SARs will immediately become void and
terminate.
Awards
SARs will entitle the recipient to receive a payment equal to the
appreciation in market value of a stated number of shares of Common Stock from
the price on the date the SAR was granted or became effective to the market
value of the Common Stock on the date the SARs are exercised or surrendered.
Stock Awards will entitle the recipient to receive shares of the Company's
Common Stock directly. Cash Awards will entitle the recipient to receive direct
payments of cash depending on the market value or the appreciation of the Common
Stock or other securities of the Company. The Plan Administrators may determine
such other terms, conditions, or limitations, if any, on any Awards granted
pursuant to the 1993 Plan.
Duration and Modification
The 1993 Plan will remain in effect until February 25, 2003. The Board
of Directors of the Company may at any time suspend, amend, or terminate the
1993 Plan, except that without approval of the stockholders of the Company, the
Board of Directors may not (i) increase the maximum number of shares of Common
Stock subject to the 1993 Plan (except in the case of certain organic changes to
the Company), (ii) reduce the exercise price at which Options may be granted or
the exercise price for which any outstanding Options may be exercised, (iii)
extend the term of the 1993 Plan, (iv) change the class of persons eligible to
receive Options or Awards under the 1993 Plan, or (v) materially increase the
benefits accruing to participants under the 1993 Plan. In addition, the Board
may not, without the consent of the optionholder, take any action that
disqualifies any Option previously granted under the Plan for treatment as an
incentive stock option or which adversely affects or impairs the rights of the
18
<PAGE>
optionholder of any outstanding Option. Notwithstanding the foregoing, the Board
of Directors may amend the 1993 Plan from time to time as it deems necessary in
order to meet the requirements of any amendments to Rule 16b-3 under the
Exchange Act without the consent of the stockholders of the Company.
Federal Income Tax Consequences
Certain Options granted under the 1993 Plan will be intended to qualify
as incentive stock options under Section 422 of the Code. Accordingly, there
will be no taxable income to an employee when an incentive stock option is
granted to him or her or when that option is exercised. The amount by which the
fair market value of the shares at the time of exercise exceeds the exercise
price generally will be treated as an item of preference in computing the
alternate minimum taxable income of the optionholder. If an optionholder
exercises an incentive stock option and does not dispose of the shares within
either two years after the date of the grant of the Option or one year of the
date the shares were transferred to the optionholder, any gain realized upon
disposition will be taxable to the optionholder as a capital gain. If the
optionholder does not satisfy the applicable holding periods, however, the
difference between the exercise price and the fair market value of the shares on
the date of exercise of the Option will be taxed as ordinary income, and the
balance of the gain, if any, will be taxed as capital gain. If the shares are
disposed of before the expiration of the one-year and two-year periods and the
amount realized is less than the fair market value of the shares at the date of
exercise, the employee's ordinary income is limited to the amount realized less
the exercise price paid. The Company will be entitled to a tax deduction only to
the extent the optionholder has ordinary income upon the sale or other
disposition of the shares received when the Option was exercised.
Certain other Options issued under the 1993 Plan, as well as options
issued to non-employee members of the Board of Directors pursuant to the 1994
Plan as described below, also may be non-qualified options. The income tax
consequences of non-qualified options and Stock Awards will be governed by
Section 83 of the Code. Under Section 83, the excess of the fair market value of
the shares of the Company's Common Stock acquired pursuant to the grant of a
Stock Award or the exercise of any Option over the amount paid for such stock
(hereinafter referred to as "Excess Value") must be included in the gross income
of the holder in the first taxable year in which the Common Stock acquired by
the holder is not subject to a substantial risk of forfeiture. In calculating
Excess Value, fair market value will be determined on the date that the
substantial risk of forfeiture expires, unless a Section 83(b) election is made
to include the Excess Value in income immediately after the acquisition, in
which case fair market value will be determined on the date of the acquisition.
Generally, the Company will be entitled to a federal income tax deduction in the
same taxable year that holders, including Highly Compensated Officers, recognize
income. See "Proposal to Amend and Restate the Company's 1993 Stock Option Plan
- - Reasons For and Effect of the Proposed Amendments and Restatement." The
Company will be required to withhold income taxes with respect to income
reportable pursuant to Section 83 by a holder. The basis of the shares acquired
by an optionholder will be equal to the exercise price of those shares plus any
income recognized pursuant to Section 83. Subsequent sales of the acquired
shares will produce capital gain or loss. Such capital gain or loss will be long
term if the stock has been held for one year from the date the substantial risk
of forfeiture lapsed or, if a Section 83(b) election is made, one year from the
date the shares were acquired.
Generally, all Cash Awards granted to employees will be treated as
compensation income to the employees when the cash payment is made pursuant to
the award. Such cash payment will also result in a federal income tax deduction
for the Company.
Ratification by Stockholders of the Proposed Amendments to and Restatement of
the 1993 Plan
Approval of the proposal to amend and restate the 1993 Plan will
require the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock of the Company present in person or by proxy at the
Meeting. Upon approval of the proposal to amend and restate the 1993 Plan by the
Company's stockholders, any
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Options or Awards granted pursuant to the 1993 Plan prior to stockholder
approval will remain valid and unchanged. In the event that the proposal to
amend and restate the 1993 Plan is not approved by the stockholders of the
Company at the Meeting, (i) the 1993 Plan in effect prior to October 24, 1996
will remain in effect and all Options and Awards granted pursuant to the 1993
Plan subsequent to October 24, 1996 will remain in effect only the extent that
they could have been granted prior to October 24, 1996, and (ii) the Company
will not make any further grants of Options or Awards under the 1993 Plan.
PROPOSAL TO AMEND AND RESTATE THE COMPANY'S
1994 STOCK OPTION PLAN
The Board of Directors has approved a proposal to amend and restate the
Company's 1994 Automatic Stock Option Plan, subject to approval by the Company's
stockholders at the Meeting, to (a) clarify that the restriction on receiving
the Initial Grant applies only to non-employee directors who have previously
received an Initial Grant; (b) revise the vesting period for the options granted
pursuant to the Initial Grant; and (c) make certain other revisions, which do
not require stockholder approval, such that the 1994 Plan complies with recent
revisions to the Rules promulgated under Section 16 of the Exchange Act. The
full text of the 1994 Automatic Stock Option Plan as proposed to be amended and
restated is included as "Appendix B" to this Proxy Statement. The Board of
Directors recommends a vote "FOR" the proposed amendments to and restatement of
the 1994 Plan.
Reasons for and Effect of the Proposed Amendments and Restatement
The Board of Directors believes that the approval of the proposed
amendments to and restatement of the 1994 Plan is necessary to achieve the
purposes of the 1994 Plan and to promote the welfare of the Company and its
stockholders generally. The Board of Directors believes that the proposed
amendments to the 1994 Plan will aid the Company in attracting and retaining
qualified non-employee directors and motivating such persons to exert their best
efforts on behalf of the Company. In addition, the Company expects that the
proposed amendments will further strengthen the identity of interests of the
Company's non-employee directors with those of the stockholders.
Proposal to Clarify the Restriction on Receiving Initial Grants
The 1994 Plan provides for the automatic grant of options ("Automatic
Options") to non-employee directors of the Company. As originally adopted, the
1994 Plan provided that a non-employee director who had previously served as a
member of the Board of Directors would not be eligible to receive an Initial
Grant of Automatic Options if that person rejoined the Board of Directors,
whether or not the non-employee director had previously received an Initial
Grant. In October 1996, the Board of Directors determined that, at the time that
the 1994 Plan was adopted, the intention of the Board of Directors was to
prevent the receipt of more than one Initial Grant by any non-employee director,
and not to prevent a former director who had never received an Initial Grant
from receiving an Initial Grant at the time that he or she rejoined the Board of
Directors. Accordingly, the Board of Directors revised the 1994 Plan to provide
that every new non-employee member of the Board of Directors who has not
previously received an Initial Grant shall receive an Initial Grant under the
1994 Plan, as long as there are shares of the Company's Common Stock available
for grant under the 1994 Plan.
Proposal to Revise the Vesting Period for Automatic Options Included in the
Initial Grant
As originally adopted, the 1994 Plan provided that the Automatic
Options included in the Initial Grant would vest in a series of three equal and
successive yearly installments, with the first installment to become exercisable
13 months after the date of the Initial Grant, and each successive installment
to become exercisable every 12 months thereafter. If a non-employee director
ceases to serve as a member of the Board of Directors prior to the date on which
any of his or her options become vested, any unvested options immediately
terminate and cease to be outstanding. Accordingly, a non-employee director
would be required to be elected to the Board of Directors
20
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at four successive annual meetings before the Automatic Options included in the
Initial Grant would be fully vested. In October 1996, the Board of Directors
amended the 1994 Plan to provide that the Automatic Options included in the
Initial Grant will vest in three equal and successive yearly installments, with
the first such installment to vest and become exercisable immediately after the
non-employee director's second successive election by stockholders to the Board
of Directors (the "First Vesting Date"), the second installment to become vested
and exercisable 10 months after the First Vesting Date, and the third
installment to vest and become exercisable 22 months after the First Vesting
Date, provided that the non-employee director has not ceased serving as a member
of the Board of Directors prior to each such vesting date. The Board of
Directors also provided that these revisions to the vesting periods for
Automatic Options included in the Initial Grants will be retroactive and
therefore apply to Initial Grants of Automatic Options previously granted,
subject to stockholder approval of the amendments to and restatement of the 1994
Plan.
Amendments Intended to Comply with the Revised Rules
Because the 1994 Plan is intended to comply with the Rules promulgated
pursuant to Section 16 of the Exchange Act with respect to Automatic Options
granted pursuant to the 1994 Plan and issuances of Common Stock pursuant to the
1994 Plan, the Board of Directors adopted amendments to the 1994 Plan that are
intended to bring the 1994 Plan into compliance with the revised Rules. See
"Proposal to Amend and Restate the Company's 1993 Stock Option Plan - Reason for
and Effect of the Proposed Amendments and Restatement." These amendments do not
require stockholder approval.
Restatement of the 1994 Plan
The restatement of the 1994 Plan is intended to reflect other minor
technical revisions and to provide one integrated document to avoid confusion.
Description of the 1994 Automatic Stock Option Plan
General
The 1994 Plan is intended to promote the interests of the Company by
providing non-employee members of the Board of Directors with the opportunity to
acquire, or otherwise increase, their proprietary interest in the Company and an
increased personal interest in the Company's continued success and progress. The
1994 Plan states that it is not intended to be the exclusive means by which the
Company may issue options or warrants to acquire its Common Stock, stock awards,
or any other type of award. To the extent permitted by applicable law, the
Company may issue any other options, warrants, or awards other than pursuant to
the 1994 Plan without stockholder approval.
Shares Subject to the Plan
A maximum of 100,000 shares of Common Stock of the Company currently
may be issued under the 1994 Plan. If any Automatic Option (as defined below)
terminates or expires without having been exercised in full, stock not issued
under such Automatic Option will again be available for the purposes of the 1994
Plan. If any change is made in the stock subject to the 1994 Plan or subject to
any Automatic Option granted under the 1994 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure, or otherwise), the
1994 Plan provides that appropriate adjustments will be made as to the maximum
number of shares subject to the 1994 Plan and the number of shares and exercise
price per share of stock subject to outstanding Automatic Options. As of March
14, 1997, there were outstanding Automatic Options to acquire 9,000 shares of
the Company's Common Stock under the 1994 Plan.
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Automatic Options
Each non-employee director serving on the Board of Directors on the
date the Company's stockholders approved the 1994 Plan received an Initial Grant
of Automatic Options to acquire 2,000 shares of Common Stock (as adjusted for
the subsequent two-for-one stock split), and each subsequent newly elected
non-employee member of the Board of Directors receives an Initial Grant of
Automatic Options to acquire 1,000 shares of Common Stock on the date of his or
her first appointment or election to the Board of Directors. In addition,
Automatic Options to acquire 500 shares of Common Stock will be granted to each
non-employee director at the meeting of the Board of Directors held immediately
after each annual meeting of the Company's stockholders (the "Annual Grant"). A
non-employee member of the Board of Directors is not eligible to receive the 500
share Annual Grant if that grant date is within 30 days of such non-employee
director receiving the 1,000-share Initial Grant. Automatic Options included in
each Annual Grant vest and become exercisable in a series of 12 equal and
successive monthly installments, beginning one month after the date of the
Annual Grant. For a discussion of the vesting of Automatic Options included in
the Initial Grant, see "Proposal to Amend and Restate the 1994 Automatic Stock
Option Plan - Reasons for and Effect of the Proposed Amendments and
Restatement."
The exercise price per share of Automatic Options will be equal to 100%
of the fair market value of the Company's Common Stock (as defined in the 1994
Plan) on the date such Automatic Options are granted. Each Automatic Option
expires on the tenth anniversary of the date on which an Automatic Option grant
was made. In the event the non-employee director ceases to serve as a member of
the Board of Directors or dies while serving as a director or within six months
after cessation of Board service, the optionholder or the optionholder's estate
or successor by bequest or inheritance may exercise any Automatic Options vested
at the time of cessation of service until the earlier of (i) six months (one
year in the case of death) after the cessation of service, or (ii) the
expiration of the term of the Automatic Option. Upon stockholder approval of the
amendments to and restatement of the 1993 Plan, non-employee members of the
Company's Board of Directors also will be eligible to receive Options or Awards
under the 1993 Plan. See "Proposal to Amend and Restate the Company's 1993 Stock
Option Plan."
Exercise of Automatic Options; Duration and Modification
To exercise an Option, the optionholder will be required to deliver to
the Company full payment of the exercise price for the shares as to which the
Option is being exercised. Generally, Options can be exercised by delivery of
cash, check, or shares of Common Stock of the Company.
The 1994 Plan will remain in effect until the earlier of April 12, 2004
or the date on which all shares of Common Stock available for issuance under the
1994 Plan have been issued. The Board of Directors of the Company at any time
may suspend, amend, or terminate the 1994 Plan, except that without approval of
the stockholders of the Company, the Board of Directors may not (i) increase the
maximum number of shares of Common Stock subject to the 1994 Plan (except in the
case of certain organic changes to the Company), (ii) extend the term of the
1994 Plan, (iii) materially modify the eligibility requirements for
participation in the 1994 Plan, or (iv) materially increase the benefits
accruing to participants under the 1994 Plan. In addition, the Board may not,
without the consent of the optionholder, take any action that adversely affects
or impairs the rights of the optionholder of any outstanding Automatic Option.
Notwithstanding the foregoing, the Board of Directors may amend the 1994 Plan
from time to time as it deems necessary in order to meet the requirements of any
amendments to Rule 16b-3 under the Exchange Act without the consent of the
stockholders of the Company.
Federal Income Tax Consequences
Automatic Options granted under the 1994 Plan are non-qualified options
and will be subject to the income tax consequences for such options described
above under "Proposal to Amend and Restate the Company's 1993 Stock Option Plan
- - Federal Income Tax Consequences."
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<PAGE>
Ratification by Stockholders of the Proposed Amendments to and Restatement of
the 1994 Plan
Approval of the proposal to amend and restate the 1994 Plan will
require the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock of the Company present in person or by proxy at the
Meeting. In the event that the proposal to amend and restate the 1994 Plan is
not approved by the stockholders of the Company at the Meeting, the 1994 Plan as
in effect prior to the October 24, 1996 amendments and restatement will remain
in effect.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Arthur Andersen LLP, independent
public accountants, to audit the consolidated financial statements of the
Company for the fiscal year ending December 31, 1997 and recommends that
stockholders vote in favor of the ratification of such appointment. In the event
of a negative vote on such ratification, the Board of Directors will reconsider
its selection. The Board of Directors anticipates that representatives of Arthur
Andersen LLP will be present at the Meeting, will have the opportunity to make a
statement if they desire, and will be available to respond to appropriate
questions.
DEADLINE FOR RECEIPT OF STOCKHOLDERS PROPOSALS
Stockholder proposals that are intended to be presented by such
stockholders at the annual meeting of stockholders of the Company to be held
during calendar 1998 must be received by the Company no later than December 26,
1997 in order to be included in the proxy statement and form of proxy relating
to such meeting.
OTHER MATTERS
The Company knows of no other matters to be submitted to the Meeting.
If any other matters properly come before the Meeting, it is the intention of
the persons named in the enclosed proxy card to vote the shares they represent
as the Board of Directors may recommend.
Dated: March 20, 1997
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APPENDIX A
----------
THREE-FIVE SYSTEMS, INC.
AMENDED AND RESTATED
1993 STOCK OPTION PLAN
(As Amended and Restated through February 1997)
Section 1. Purpose of Plan; Term
(a) Adoption. On February 25, 1993, the Board of Directors
(the "Board") of Three-Five Systems, Inc., a Delaware corporation (the
Company"), adopted the 1993 Stock Option Plan (the "Original Plan"). The
stockholders of the Company approved the Original Plan on April 29, 1993. On
June 21, 1994 and April 26, 1995, the Board adopted certain technical amendments
to the Original Plan. Those amendments did not require stockholder approval. On
October 24, 1996, the Board adopted a newly amended and restated 1993 Stock
Option Plan as a result of recent revisions to Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "1934 Act") and to make certain
other technical changes. On January 30, 1997, the Board further revised the 1993
Stock Option Plan to comply with certain requirements of Treasury Regulations
promulgated under the Internal Revenue Code. On February 27, 1997, the Board
further revised the 1993 Stock Option Plan to comply with certain requirements
of the Treasury Regulations such that the entire Plan be submitted for
re-approval. The amended and restated plan fully incorporating the revisions
made on October 24, 1996, January 30, 1997, and February 27, 1997 is referred to
herein as the "Revised Plan." The Revised Plan must be approved by the
stockholders of the Company within one year of the date of its adoption by the
Board. If the Revised Plan is not timely approved by the Company's stockholders,
the Original Plan, as previously amended and except as otherwise specifically
provided herein, shall continue in effect and any Options or Awards issued after
the date of the adoption of the Revised Plan shall remain valid and unchanged to
the extent that such Options or Awards contain terms such that they could have
been issued under the Original Plan, as previously amended; provided, however,
that no further Options or Awards shall be issued under the Plan after the date
of the stockholder meeting at which the Revised Plan was not approved. Any
Options or Awards outstanding prior to the adoption by the Board of the Revised
Plan shall remain valid and unchanged. The Revised Plan shall be known as the
Three-Five Systems, Inc. Amended and Restated 1993 Stock Option Plan (the
"Plan"). When applicable, the term "Plan" shall include the Original Plan, as
previously amended, and/or the Revised Plan. Capitalized terms used in this Plan
are defined in Section 12 hereof.
(b) General Purpose. The purpose of the Plan is to further the
interests of Three-Five Systems, Inc., a Delaware corporation (the "Company"),
and its stockholders by encouraging key persons associated with the Company (or
parent or subsidiary corporations of the Company) to acquire shares of the
Company's common stock, thereby acquiring a proprietary interest in its business
and an increased personal interest in its continued success and progress. Such
purpose shall be accomplished by providing for the granting of options to
acquire the Company's common stock ("Options"), the direct granting of the
Company's common stock ("Stock Awards"), the granting of stock appreciation
rights ("SARs"), or the granting of other cash awards ("Cash Awards") (Stock
Awards, SARs and Cash Awards shall be collectively referred to herein as
"Awards"). A "parent corporation" for purposes of this Plan is any corporation
in the unbroken chain of corporations ending with the employer corporation,
where, at each link of the chain, the corporation and the link above owns at
least 50 percent of the combined total voting power of all classes of the stock
in the corporation in the link below. A "subsidiary corporation" for purposes of
this Plan is any corporation in the unbroken chain of corporations starting with
the employer corporation, where, at each link of the chain, the corporation and
the link above owns at least 50 percent of the combined voting power of all
classes of stock in the corporation below.
(c) Options. Options granted under this Plan to employees of
the Company (or parent or subsidiary corporations of the Company) which are
intended to qualify as an "incentive stock option" as defined in section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") will be specified in
the applicable stock option agreement. All other Options granted under this Plan
will be nonqualified options.
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(d) Rule 16b-3 Plan. With respect to persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
this Plan is intended to comply with all applicable conditions of Rule 16b-3
(and all subsequent revisions thereof) promulgated under the 1934 Act. To the
extent any provision of the Plan or action by the Plan Administrators fail to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Plan Administrators. In addition, the Board may amend
the Plan from time to time as it deems necessary in order to meet the
requirements of any amendments to Rule 16b-3 without the consent of the
stockholders of the Company.
(e) Duration of Plan. The term of the Plan is 10 years
commencing on the date of adoption of the Original Plan by the Board. No Option
or Award shall be granted under the Plan unless granted within 10 years of the
adoption of the Original Plan by the Board, but Options or Awards outstanding on
that date shall not be terminated or otherwise affected by virtue of the Plan's
expiration.
Section 2. Stock and Maximum Number of Shares Subject to Plan
(a) Description of Stock and Maximum Shares Allocated. The
stock subject to the provisions of the Plan and issuable upon the grant of Stock
Awards or upon the exercise of SARs or Options granted under the Plan is shares
of the Company's common stock, $.01 par value per share (the "Stock"), which may
be either unissued or treasury shares, as the Board may from time to time
determine. Subject to adjustment as provided in Section 7 hereof, the aggregate
number of shares of Stock covered by the Plan and issuable thereunder shall be
385,454 shares of Stock (as adjusted to reflect the Company's May 4, 1994, stock
split). No salaried employee of the Company shall receive options for more than
150,000 shares in any one-year period.
(b) Calculation of Available Shares. For purposes of
calculating the maximum number of shares of Stock which may be issued under the
Plan: (i) the shares issued (including the shares, if any, withheld for tax
withholding requirements) upon exercise of an Option shall be counted and (ii)
the shares issued (including the shares, if any, withheld for tax withholding
requirements) as a result of a grant of a Stock Award or an exercise of an SAR
shall be counted.
(c) Restoration of Unpurchased Shares. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
Section 3. Administration; Approval; Amendments
(a) General Administration. The Eligible Persons under the
Plan shall be divided into two groups and there shall be a separate
administrator for each group. One group will be comprised of Eligible Persons
that are Affiliates. For purposes of this Plan, the term "Affiliates" shall mean
all "executive officers" (as that term is defined in Rule 16a-1(f) promulgated
under the 1934 Act) and directors of the Company and all persons who own ten
percent or more of the Company's issued and outstanding Stock. The power to
administer the Plan with respect to Eligible Persons that are Affiliates shall
be vested exclusively with the Board. At any time, however, the Board may vest
the power to administer the Plan with respect to persons that are Affiliates
with a committee (the "Senior Committee") comprised of two or more Non-Employee
Directors who are appointed by the Board. The Senior Committee, in its sole
discretion, may require approval of the Board for specific grants of Options or
Awards under the Plan. The second group shall be composed of all Eligible
Persons that are not Affiliates ("Non-Affiliates"), and the power to administer
the Plan with respect to Non-Affiliates shall be vested exclusively with the
Board. The Board, however, may at any time appoint a committee (the "Employee
Committee") of one or more persons who are members of the Board and delegate to
such Employee Committee the power to administer the Plan with respect to the
Non-Affiliates. Members of the Senior Committee and of the Employee Committee
shall serve for such period of time as the Board may determine and shall be
subject to removal by the Board at any time. The Board may at any time terminate
the functions of the Senior Committee or the Employee Committee and reassume all
powers and authority previously delegated to that committee.
A-2
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(b) Plan Administrators. The Board, the Senior Committee,
and/or the Employee Committee, whichever is applicable, shall each be referred
to herein as a "Plan Administrator." Each Plan Administrator shall have the
authority and discretion, with respect to its administered group, to select
which Eligible Persons shall participate in the Plan, to grant Options or Awards
under the Plan, to establish such rules and regulations as they may deem
appropriate with the proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding Option or Award as they may deem necessary or advisable. Decisions
of the Plan Administrators shall be final and binding on all parties who have an
interest in the Plan or any outstanding Option or Award.
(c) Approval by Stockholders. The Revised Plan shall be
submitted to the stockholders of the Company for their approval at a regular or
special meeting to be held within 12 months after the adoption of the Revised
Plan by the Board. Stockholder approval shall be evidenced by the affirmative
vote of the holders of a majority of the shares of the Company's Common Stock
present in person or by proxy and voting at the meeting. If the stockholders
decline to approve the Plan at such meeting or if the Plan is not otherwise
approved by the stockholders within 12 months after its adoption by the Board,
the Original Plan, as previously amended, shall continue in effect and any
Options or Awards issued after the date of the adoption of the Revised Plan
shall remain valid and unchanged only to the extent that such Options or Awards
contain terms such that they could have been issued under the Original Plan, as
previously amended. To the extent that any Options or Awards could not have been
issued under the Original Plan, such Options and Awards will automatically
terminate and be forfeited to the same extent and with the same effect as though
the Revised Plan had never been adopted. Any Options or Awards outstanding prior
the adoption by the Board of the Revised Plan shall remain valid and unchanged.
(d) Amendments to Plan. The Board may, without action on the
part of the Company's stockholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the Optionholder, take any action which disqualifies
any Option previously granted under the Plan for treatment as an incentive stock
option or which adversely affects or impairs the rights of the Optionholder of
any Option outstanding under the Plan, and further provided that, except as
provided in Sections 1(d) and 7 hereof, the Board may not, without the approval
of the Company's stockholders, (i) increase the aggregate number of shares of
Stock subject to the Plan, (ii) reduce the exercise price at which Options may
be granted or the exercise price at which any outstanding Option may be
exercised, (iii) extend the term of the Plan, (iv) change the class of persons
eligible to receive Options or Awards under the Plan, or (v) materially increase
the benefits accruing to participants under the Plan. Notwithstanding the
foregoing, Options or Awards may be granted under this Plan to purchase shares
of Stock in excess of the number of shares then available for issuance under the
Plan if (A) an amendment to increase the maximum number of shares issuable under
the Plan is adopted by the Board prior to the initial grant of any such Option
or Award and within one year thereafter such amendment is approved by the
Company's stockholders and (B) each such Option or Award granted is not to
become exercisable or vested, in whole or in part, at any time prior to the
obtaining of such stockholder approval.
Section 4. Participants
(a) Eligibility and Participation. Options and Awards may be
granted only to persons ("Eligible Persons") who at the time of grant are (i)
key personnel (including officers and directors) of the Company or parent or
subsidiaries of the Company, or (ii) consultants or independent contractors who
provide valuable services to the Company or parent or subsidiaries of the
Company. Notwithstanding the foregoing, incentive stock options may only be
granted to key personnel of the Company (and its parent or subsidiary) who are
also employees of the Company (or its parent or subsidiary). The Plan
Administrators shall have full authority to determine which Eligible Persons in
its administered group are to receive Option grants under the Plan, the number
of shares to be covered by each such grant, whether the granted Option is to be
an incentive stock option which satisfies the requirements of section 422 of the
Code or a nonstatutory option not intended to meet such requirements, the time
or times at which each such Option is to become exercisable, and the maximum
term for which the Option is to be outstanding. The Plan Administrators shall
also have full authority to determine which Eligible Persons in such group are
to receive Awards under the Plan and the conditions relating to such Award.
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(b) Guidelines for Participation. In designating and selecting
Eligible Persons for participation in the Plan, the Plan Administrators shall
consult with and give consideration to the recommendations and criticisms
submitted by appropriate managerial and executive officers of the Company. The
Plan Administrators also shall take into account the duties and responsibilities
of the Eligible Persons, their past, present and potential contributions to the
success of the Company and such other factors as the Plan Administrators shall
deem relevant in connection with accomplishing the purpose of the Plan.
Section 5. Terms and Conditions of Options
(a) Allotment of Shares. The Plan Administrators shall
determine the number of shares of Stock to be optioned from time to time and the
number of shares to be optioned to any Eligible Person (the "Optioned Shares").
The grant of an Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Stock Awards under this Plan or any other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Option, the Plan
Administrators shall specify the option price per share. In no event may the
option price per share specified by a Plan Administrator be less than 100
percent of the fair market value per share of the Stock on the date the Option
is granted (110 percent if Options are intended to be incentive stock options
and are granted to a stockholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or of any parent or any
subsidiary corporation of the Company).
(c) Calculation of Fair Market Value of Stock. The fair market
value of a share of Stock on any relevant date shall be determined in accordance
with the following provisions:
(i) If the Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-the-counter
market, the fair market value shall be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) per share of Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through The NASDAQ Stock Market, Inc. system or any successor system. If
there are no reported bid and asked prices (or closing selling price) for the
Stock on the date in question, then the mean between the highest bid price and
lowest asked price (or the closing selling price) on the last preceding date for
which such quotations exist shall be determinative of fair market value.
(ii) If the Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Stock on the date in question on the stock
exchange determined by the Board to be the primary market for the Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.
(iii) If the Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including one or
more independent professional appraisals.
(d) Individual Stock Option Agreements. Options granted under
the Plan shall be evidenced by option agreements in such form and content as a
Plan Administrator from time to time approves, which agreements shall
substantially comply with and be subject to the terms of the Plan, including the
terms and conditions of this Section 5. As determined by a Plan Administrator,
each option agreement shall state (i) the total number of shares to which it
pertains, (ii) the exercise price for the shares covered by the Option, (iii)
the time at which the Options vest and become exercisable and (iv) the Option's
scheduled expiration date. The option agreements may contain such other
provisions or conditions as a Plan Administrator deems necessary or appropriate
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to effectuate the sense and purpose of the Plan, including covenants by the
Optionholder not-to-compete and remedies to the Company in the event of the
breach of any such covenant.
(e) Option Period. No Option granted under the Plan that is
intended to be an incentive stock option shall be exercisable for a period in
excess of 10 years from the date of its grant (5 years if the Option is granted
to a stockholder who at the time the Option is granted owns or is deemed to own
stock possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary corporation),
subject to earlier termination in the event of termination of employment,
retirement or death of the Optionholder. An Option may be exercised in full or
in part at any time or from time to time during the term of the Option or
provide for its exercise in stated installments at stated times during the
Option's term.
(f) Vesting; Limitations. The time at which the Optioned
Shares vest with respect to a participant shall be in the discretion of that
participant's Plan Administrator. Notwithstanding the foregoing, to the extent
an Option is intended to qualify as an incentive stock option under the Code,
the aggregate fair market value (determined as of the respective date or dates
of grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Code during any one calendar year shall not exceed the sum of
$100,000 (referred to herein as the "$100,000 Limitation"). To the extent that
any person holds two or more Options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability as an
incentive stock option shall be applied on the basis of the order in which such
Options are granted.
(g) No Fractional Shares. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Option granted under the Plan.
(h) Method of Exercising Options; Full Payment. Options shall
be exercised by written notice to the Company, addressed to the Company at its
principal place of business. Such notice shall state the election to exercise
the Option and the number of shares with respect to which it is being exercised,
and shall be signed by the person exercising the Option. Such notice shall be
accompanied by payment in full of the exercise price for the number of shares
being purchased. Payment may be made in cash or by check as prescribed by the
applicable Plan Administrator or by tendering duly endorsed certificates
representing shares of Stock then owned by the Optionholder and held for the
requisite period necessary to avoid a charge to the Company's earnings and
valued at fair market value on the date of exercise (as determined in accordance
with Section 5(c) hereof). Upon the exercise of any Option, the Company shall
deliver, or cause to be delivered, to the Optionholder a certificate or
certificates representing the shares of Stock purchased upon such exercise as
soon as practicable after payment for those shares has been received by the
Company. If an Option is exercised pursuant to Section 6(c) hereof by any person
other than the Optionholder, such notice shall be accompanied by appropriate
proof of the right of such person to exercise the Option. All shares that are
purchased and paid for in full upon the exercise of an Option shall be fully
paid and non-assessable.
(i) Rights of a Stockholder. An Optionholder shall have no
rights as a stockholder with respect to shares covered by his Option until such
Optionholder shall have exercised the Option and paid the full exercise price
for the Optioned Shares. No adjustment will be made for dividends or other
rights with respect to any Optioned Shares for which the record date is prior to
the date on which the Optionholder exercises the Option for such shares.
(j) Exercise of Options After Cessation of Service.
(i) Termination of Employment. If any Optionholder
who is an employee of the Company ceases to be in Service to the Company for a
reason other than death, such Optionholder may, within one month after the date
of termination of such Service, but in no event after the Option's stated
expiration date, exercise some or all of the Options that the Optionholder was
entitled to exercise on the date the Optionholder's Service terminated;
provided, that (i) if the Optionholder's Service is terminated by the Company in
its good faith
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judgment, for (A) commission of a crime by the Optionholder or for reasons
involving moral turpitude; (B) an act by the Optionholder which tends to bring
the Company into disrepute; or (C) negligent, fraudulent or willful misconduct
by the Optionholder, or (ii) if after the Service of the Optionholder is
terminated, the Optionholder commits acts detrimental to the Company's
interests, then the Option shall thereafter be void for all purposes.
Notwithstanding the foregoing, if any Optionholder who is an employee of the
Company ceases to be in Service to the Company by reason of permanent disability
within the meaning of Section 22(e)(3) of the Code (as determined by the
applicable Plan Administrator), the Optionholder shall have 12 months after the
date of termination of Service, but in no event after Optionholder's Option's
stated expiration date, to exercise Options that the Optionholder was entitled
to exercise on the date the Optionholder's Service terminated as a result of
disability.
(ii) Termination of Options Held by Consultants,
Independent Contractors, and Other Non-Employees. Any Options which are held by
Eligible Persons other than employees of the Company and which are outstanding
at the time the Optionholder ceases to be in Service to the Company shall remain
exercisable for such period of time thereafter as determined by the Plan
Administrator at the time of grant and set forth in the documents evidencing
such Options. In the absence of any provision in the documents evidencing such
Option, the Option shall remain exercisable (i) for a period of one month after
the termination of the Optionholder's Service to the Company; and (ii) for a
period of 12 months if the Optionholder ceases to be in Service to the Company
by reason of permanent disability within the meaning of Section 22(e)(3) of the
Code; provided, that no Option shall be exercisable after the Option's stated
expiration date, and provided further, that (a) if the Optionholder's Service is
terminated by the Company in its good faith judgment for the reasons stated in
Section 5(j)(i) above, or (b) if after the Service of the Optionholder is
terminated, the Optionholder commits acts detrimental to the Company's
interests, then the Option will thereafter be void for all purposes.
(k) Death of Optionholder. If an Optionholder dies while in
the Company's Service, the Optionholder's vested Options on the date of death
shall be exercisable within three months of such death or until the stated
expiration date of the Optionholder's Option, whichever occurs first, by the
person or persons ("successors") to whom the Optionholder's rights pass under a
will or by the laws of descent and distribution. An Option may be exercised and
payment of the option price made in full by the successors only after written
notice to the Company specifying the number of shares to be purchased. Such
notice shall state that the Option price is being paid in full in the manner
specified in Section 5(h) hereof. As soon as practicable after receipt by the
Company of such notice and of payment in full of the Option price, a certificate
or certificates representing such shares shall be registered in the name or
names specified by the successors in the written notice of exercise and shall be
delivered to the successors.
(l) Other Plan Provisions Still Applicable. If an Option is
exercised upon the termination of Service or death of an Optionholder under this
Section 5, the other provisions of the Plan shall still be applicable to such
exercise.
(m) Definition of "Service." For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders services on a periodic basis to the Company (or to any parent
or subsidiary corporation) in the capacity of an employee or a consultant or
independent contractor. The Optionholder shall be considered to be an employee
for so long as such individual remains in the employ of the Company or one or
more of its parent or subsidiary corporations.
(n) Nonassignability. Except as specifically allowed by the
Plan Administrator at the time of grant and as set forth in the documents
evidencing an Option, no Option granted under the Plan or any of the rights and
privileges conferred thereby shall be assignable or transferable by an
Optionholder other than by will or the laws of descent and distribution, and
such Option shall be exercisable during the Optionholder's lifetime only by the
Optionholder.
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Section 6. Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. The grant of a Stock Award to a Person shall
neither entitle such person to, nor disqualify such person from participation
in, any other grant of options or awards by the Company, whether under this Plan
or under any other stock option or award plan of the Company.
(b) Award for Services Rendered. Stock Awards shall be granted
in recognition of an Eligible Person's past services to the Company. The grantee
of any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
applicable employment taxes and income tax withholding requirements.
(c) Conditions to Award. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) Award Agreements. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
Section 7. Terms and Conditions of SARs
(a) Eligibility. All Eligible persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of a SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or subsequent to the
grant of any Option to purchase one or more shares of Stock, a Plan
Administrator may award to the Optionholder, with respect to each share of Stock
underlying the Option, a related SAR permitting the Optionholder to be paid the
appreciation on the Stock underlying the Option in lieu of exercising the
Option. In addition, a Plan Administrator may award to any Eligible Person a SAR
permitting the Eligible Person to be paid the appreciation on a designated
number of shares of the Stock, whether or not such shares are actually issued.
(c) Conditions to SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions of transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator may require as a
condition to the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Plan Administrator from time to time
approves.
(e) Exercise. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified by the Plan
Administrator in the SAR agreement.
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(f) Amount of Payment. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Option related to the SAR was granted or became
effective, or, if the SAR is not related to any Option, on the date the SAR was
granted or became effective.
(g) Form of Payment. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 6(f) by the fair market value of a share
of Stock on the exercise date of such SAR. As soon as practical after exercise,
the Company shall deliver to the SAR grantee a certificate or certificates for
such shares of Stock.
(h) Termination of Employment; Death. Sections 5(j) and (k),
applicable to Options, shall apply equally to SARs.
Section 8. Nonassignability
Except as specifically allowed by the Plan Administrator at
the time of grant and as set forth in the documents evidencing a SAR, no SAR
granted under the Plan or any of the rights and privileges conferred thereby
shall be assignable or transferable by a grantee other than by will or the laws
of decent and distribution, and such SAR shall be exercisable during the
grantee's lifetime only by the grantee.
Section 9. Other Cash Awards
(a) In General. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) Conditions to Award. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
Section 10. Certain Adjustments.
(a) Capital Adjustments. The aggregate number of shares of
Stock subject to the Plan (and the number of shares covered by outstanding
Options and Awards and the price per share stated in such Options and Awards)
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
(b) Mergers, Etc. If the Company is the surviving corporation
in any merger or consolidation, any Option or Award granted under the Plan shall
pertain to and apply to the securities to which a holder of the number of shares
of Stock subject to the Option or Award would have been entitled prior to the
merger or consolidation. A dissolution or liquidation of the Company shall cause
every Option or Award outstanding hereunder to terminate. A merger or
consolidation in which the Company is not the surviving corporation shall also
cause every Option or Award outstanding hereunder to terminate, but each
Optionholder or grantee of an Award shall have the right, immediately prior to
such merger or consolidation in which the Company is not a surviving
corporation, to exercise his vested Options or Awards in whole or in part,
subject to the other provisions of this Plan.
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(c) Change in Control. With respect to any Change in Control,
a Plan Administrator shall have the discretion and authority, exercisable at any
time, whether before or after the Change in Control, to provide for the
automatic acceleration of one or more outstanding Options or Awards granted by
it under the Plan upon the occurrence of such Change in Control. A Plan
Administrator may also impose limitations upon the automatic acceleration of
such Options or Awards to the extent it deems appropriate. Any Options or Awards
accelerated upon a Change in Control will remain fully exercisable until the
expiration or sooner termination of the Option term.
(d) Incentive Stock Option Limits. The exercisability of any
Options which are intended to qualify as incentive stock options and which are
accelerated under the Plan in connection with a Change in Control shall remain
subject to the $100,000 Limitation and shall vest as quickly as possible without
violating the $100,000 Limitation.
Section 11. Miscellaneous
(a) Use of Proceeds. The proceeds received by the Company from
the sale of Stock pursuant to the exercise of Options or Awards hereunder, if
any, shall be used for general corporate purposes.
(b) Cancellation of Options. Each Plan Administrator shall
have the authority to effect, at any time and from time to time, with the
consent of the affected Optionholders, the cancellation of any or all
outstanding Options granted under the Plan by that Plan Administrator and to
grant in substitution therefore new Options under the Plan covering the same or
different numbers of shares of Stock as long as such new Options have an
exercise price per share of Stock no less than the minimum exercise price as set
forth in Section 5(b) hereof on the new grant date.
(c) Regulatory Approvals. The implementation of the Plan, the
granting of any Option or Award hereunder, and the issuance of Stock upon the
exercise of any such Option or Award shall be subject to the procurement by the
Company of all approvals and permits required by regulatory authorities having
jurisdiction over the Plan, the Options or Awards granted under it and the Stock
issued pursuant to it.
(d) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Plan Administrators shall
be indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
(e) Plan Not Exclusive. This Plan is not intended to be the
exclusive means by which the Company may issue options or warrants to acquire
its Stock, stock awards or any other type of award. To the extent permitted by
applicable law, any such other option, warrants or awards may be issued by the
Company other than pursuant to this Plan without stockholder approval.
(f) Governing Law. The Plan shall be governed by, and all
questions arising hereunder shall be determined in accordance with, the laws of
the State of Arizona.
(g) Withholding Taxes. Whenever the Company issues Stock under
the Plan pursuant to an Option or Award, the Company shall have the right to
require the grantee to remit to the Company an amount sufficient to satisfy any
federal, state and/or local withholding or employment tax requirements prior to
the delivery of any certificate or certificates for such shares. Alternatively,
the Company may issue or transfer such shares of Stock net of the number of
shares sufficient to satisfy the withholding or employment tax requirements. For
such purposes, the shares of Stock shall be valued on the date the withholding
or employment tax obligation is incurred.
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Section 12. Securities Restrictions
(a) Legend on Certificates. All certificates representing
shares of Stock issued upon exercise of Options or Awards granted under the Plan
shall be endorsed with a legend reading as follows:
The shares of Common Stock evidenced by this certificate have
been issued to the registered owner in reliance upon written
representations that these shares have been purchased solely
for investment. These shares may not be sold, transferred or
assigned unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be in
violation of the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) Private Offering for Investment Only. The Options and
Awards are and shall be made available only to a limited number of present and
future key personnel of the Company, and their permitted transferees, who have
knowledge of the Company's financial condition, management and its affairs. The
Plan is not intended to provide additional capital for the Company, but to
encourage ownership of Stock among the Company's key personnel. By the act of
accepting an Option or Award, each grantee or such permitted transferee agrees
(i) that, any shares of Stock acquired will be solely for investment and not
with any intention to resell or redistribute those shares and (ii) such
intention will be confirmed by an appropriate certificate at the time the Stock
is acquired if requested by the Company. The neglect or failure to execute such
a certificate, however, shall not limit or negate the foregoing agreement.
(c) Registration Statement. If a Registration Statement
covering the shares of Stock issuable upon exercise of options granted under the
Plan is filed under the Securities Exchange Act of 1933, as amended, and is
declared effective by the Securities Exchange Commission, the provisions of
Sections 10(a) and (b) shall terminate during the period of time that such
Registration Statement, as periodically amended, remains effective.
Section 13. Definitions
The following capitalized terms used in this Plan shall have
the meaning described below:
Affiliates" shall mean all "executive officers" (as that term
is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the
Company and all persons who own ten percent or more of the Company's issued and
outstanding Stock.
"Award" shall mean a Stock Award, SAR or Cash Award.
"Board" shall mean the Board of Directors of the Company.
"Cash Award" shall mean an award to be paid in cash and
granted under Section 8 hereunder.
"Change in Control" shall mean (i) a person or related group
of persons, other than the Company or a person that directly or indirectly
controls, is controlled by, or under common control with the Company, acquires
ownership of 40 percent or more of the Company's outstanding common stock
pursuant to a tender or exchange offer which the Board of Directors recommends
that the Company's stockholders not accept, or (ii) the change in the
composition of the Board occurs such that those individuals who were elected to
the Board at the last stockholders' meeting at which there was not a contested
election for Board membership subsequently ceased to comprise a majority of the
Board by reason of a contested election.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company" shall mean Three-Five Systems, Inc., a Delaware
corporation.
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"Eligible Persons" shall mean those persons who, at the time
that the Option or Award is granted, are (i) key personnel (including officers
and directors) of the Company or parent or subsidiaries of the Company, or (ii)
consultants or independent contractors who provide valuable services to the
Company or parent or subsidiaries of the Company.
"Employee Committee" shall mean that committee appointed by
the Board to administer the Plan with respect to the Non-Affiliates and
comprised of one or more persons who are members of the Board of the Company.
"Non-Affiliates" shall mean all Eligible Persons who are not
Affiliates.
"Non-Employee Directors" shall mean those directors of the
Company who satisfy the definition of "Non-Employee Director" under Rule
16b-3(b)(3)(i) promulgated under the 1934 Act.
"$100,000 Limitation" shall mean the limitation pursuant to
which the aggregate fair market value (determined as of the respective date or
dates of grant) of the Stock for which one or more Options granted to any person
under this Plan (or any other option plan of the Company or its parent or
subsidiary corporations) may for the first time be exercisable as incentive
stock options under the Code during any one calendar year shall not exceed the
sum of $100,000.
"Optionholder" shall mean an Eligible Person to whom Options
have been granted.
"Optioned Shares" shall be those shares of Stock to be
optioned from time to time to any Eligible Person.
"Options" shall mean options to acquire Stock granted under
the Plan.
"Plan" shall mean this stock option plan for Three-Five
Systems, Inc.
"Plan Administrator" shall mean (a) either the Board or the
Senior Committee, with respect to the administration of the Plan as it relates
to Affiliates and (b) either the Board or the Employee Committee, with respect
to the administration of the Plan as it relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to
Section 7 hereunder.
"Senior Committee" shall mean that committee appointed by the
Board to administer the Plan with respect to the Affiliates and comprised of two
or more Non-Employee Directors.
"Service" shall have the meaning set forth in Section 5(m)
hereof.
"Stock" shall mean shares of the Company's common stock, $.01
par value per share, which may be unissued or treasury shares, as the Board may
from time to time determine.
"Stock Awards" shall mean Stock directed granted under the
Plan.
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The Plan was originally adopted on February 25, 1993. This
Amended and Restated Plan is hereby executed this 28th day of February, 1997.
THREE-FIVE SYSTEMS, INC.
By: /s/ David R. Buchanan
-------------------------------
Name: David R. Buchanan
Its: President and Chairman
ATTESTED BY:
/s/ Jeffrey D. Buchanan
- -------------------------------
Secretary
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APPENDIX B
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THREE-FIVE SYSTEMS, INC.
AMENDED AND RESTATED
1994 AUTOMATIC STOCK OPTION PLAN
ARTICLE I
General
1.1 Purpose of the Plan
(a) Adoption. On March 1, 1994, the Board of Directors (the
"Board") of Three-Five Systems, Inc., a Delaware corporation (the "Corporation")
adopted the 1994 Automatic Stock Option Plan (the "Original Plan"). The
stockholders of the Company approved the Original Plan on April 12, 1994. On
October 19, 1995, the Board adopted a technical amendment to the Original Plan,
which did not require stockholder approval. On October 24, 1996, the Board
amended and restated the Original Plan as a result of recent revisions to Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act") and to make certain other technical changes, including changes to
the vesting schedule. Although some of the amendments and restatements require
stockholder approval, all amendments shall become effective immediately subject
to stockholder approval at the next annual meeting. The new vesting schedule
shall be applied to all outstanding options as well as all new options. The
amended and restated plan shall be known as the Three-Five Systems, Inc. Amended
and Restated 1994 Automatic Stock Option Plan (the "Plan").
(b) Purpose. The Plan is intended to promote the interests of
the Corporation by providing non-employee members of the Corporation's Board of
Directors (the "Board") the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation and an
increased personal interest in continued success and progress. Such purpose
shall be accomplished by providing for the automatic grant of options to acquire
the Corporation's Stock ("Options").
(c) Effective Date. The Plan became effective on April 12,
1994, the date the Plan was approved by the stockholders of the Corporation (the
"Effective Date").
(d) Termination of Plan. The Plan shall terminate upon the
earlier of (i) the tenth anniversary of the Effective Date or (ii) the date on
which all shares available for issuance under the Plan shall have been issued
pursuant to the exercise of Options granted under the Plan. If the date of
termination is determined under clause (i) above, then all Option grants
outstanding on such date shall thereafter continue to have force and effect in
accordance with the provisions of the instruments evidencing such grants or
issuances.
1.2 Eligible Persons under the Plan. The persons eligible to
participate in the Plan shall be limited to non-employee Board members, whether
or not such persons are "Non-Employee Directors" as defined in Rule
16b-3(b)(3)(i) promulgated under the 1934 Act ("Eligible Persons"). Persons who
are eligible under the Plan may also be eligible to receive option grants or
direct stock issuances under other plans of the Corporation.
1.3 Stock Subject to the Plan.
(a) Available Shares. The stock subject to the provisions of
the Plan and issuable upon the grant of Options are shares of the Corporation's
common stock, par value $.01 per share (the "Stock") and shall be drawn from
either the Corporation's authorized but unissued shares of Stock or from
reacquired shares of Stock, including shares repurchased by the Corporation on
the open market. The maximum number of shares of Stock which may be issued over
the term of the Plan shall not exceed 100,000 shares (as adjusted to reflect the
Corporation's May 4, 1994 stock split), subject to adjustment from time to time
in accordance with the provisions of this Section 1.3.
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(b) Adjustments for Issuances. Should one or more outstanding
Options under this Plan expire or terminate for any reason prior to exercise in
full, then the shares subject to the portion of each Option not so exercised
shall be available for subsequent option grant under the Plan. Should shares of
Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an outstanding Option under the Plan, then the number of shares of Stock
available for issuance under the Plan shall be reduced by the gross number of
shares for which the Option is exercised, and not by the net number of shares of
Stock actually issued to the Optionholder.
(c) Adjustments for Organic Changes. Should any change be made
to the Stock issuable under the Plan by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Stock as a class without the Corporation's
receipt of consideration, then appropriate adjustments shall be made to (i) the
maximum number and/or class of securities issuable under the Plan, and (ii) the
number and/or class of securities and price per share in effect under each
Option outstanding. Such adjustments to the outstanding Options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such Options. The adjustments determined by the Board shall
be final, binding and conclusive. The amount of Options granted automatically
shall not be adjusted regardless of any organic changes made to the Stock
issuable under the Plan.
ARTICLE II
Automatic Option Grants
2.1 Terms and Conditions of Automatic Option Grants.
(a) Amount and Date of Grant. During the term of this Plan,
Automatic Option Grants shall be made to each Eligible Person ("Optionholder")
as follows:
(i) Annual Grants. Each year on the Annual Grant Date
an Option to acquire 500 shares of Stock shall be granted to each Eligible
Person for so long as there are shares of Stock available under Section 1.3
hereof. The "Annual Grant Date" shall be the date of the Corporation's annual
stockholders meeting. Notwithstanding the foregoing, (1) any Eligible Person
whose term ended on the Annual Grant Date shall not be eligible to receive any
automatic option grants on that Annual Grant Date and (2) any Eligible Person
who has received an Automatic Option Grant pursuant to Section 2.1(a)(ii) on the
same date as the Annual Grant Date or within 30 days prior thereto, shall not be
eligible to receive an Automatic Option Grant on that Annual Grant Date.
(ii) Initial New Director Grants. On the Initial
Grant Date, every new member of the Board who is an Eligible Person and has not
previously received a grant under Sections 2.1(a)(ii) or (iii) shall be granted
an Option to acquire 1,000 shares of Stock ("Optioned Shares") as long as there
are shares of Stock available under Section 1.3 hereof. The "Initial Grant Date"
shall be the date that an Eligible Person is first appointed or elected to the
Board.
(iii) Initial Grants. On the Effective Date, each
Eligible Person was granted an Option to acquire 1,000 shares of Stock.
(b) Exercise Price. The exercise price per share of Stock
subject to each Automatic Option Grant shall be equal to 100% of the fair market
value per share of the Stock on the date the Option was granted as determined in
accordance with the valuation provisions of Section 2.2 hereof (the "Option
Price").
(c) Vesting. Each Automatic Option Grant made pursuant to
Section 2.1(a)(i) shall become exercisable and vest in a series of 12 equal and
successive monthly installments, with the first such installment to become
exercisable one month after the Annual Grant Date. Each Automatic Option Grant
made pursuant to Sections 2.1(a)(ii) and (iii) shall become exercisable and vest
in a series of three equal and successive yearly installments, with the first
such installment to become exercisable immediately after a director's second
successive election by stockholders to the Board (the "First Vesting Date"), the
second installment to become exercisable 10
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months after the First Vesting Date, and the third installment to become
exercisable 22 months after the First Vesting Date. Each installment of an
Option shall only vest and become exercisable if the Optionholder has not ceased
serving as a Board member as of such installment date.
(d) Method of Exercise. In order to exercise an Option with
respect to any vested Optioned Shares, an Optionholder (or in the case of an
exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Secretary of the
Corporation a written notice of exercise signed in writing by the person
exercising the Option specifying the number of shares of Stock with respect to
which the Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.1(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Option (if other than the Optionholder) has the
right to exercise such Option.
As soon as practicable after the Exercise Date, the Corporation shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising this Option in accordance herewith) a certificate or certificates
representing the Stock for which the Option has been exercised in accordance
with the provisions of this Plan. In no event may any Option be exercised for
any fractional shares.
(e) Payment of Option Price. The aggregate Option Price shall
be payable in one of the alternative forms specific below:
(i) full payment in cash or check made payable to the
Corporation's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Corporation's reported
earnings and valued at fair market value on the Exercise Date (as determined in
accordance with Section 2.2 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Corporation to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(f) Term of Option. Each Option shall expire on the tenth
anniversary of the date on which an Automatic Option Grant was made ("Expiration
Date"). Except as provided in Section 2.4 hereof, should an Optionholder's
service as a Board member cease prior to the Expiration Date for any reason
while an Option remains outstanding and unexercised, then the Option term shall
immediately terminate and the Option shall cease to be outstanding in accordance
with the following provisions:
(i) The Option shall immediately terminate and cease
to be outstanding for any Optioned Shares of Stock which were not vested at the
time of Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have a six-month period measured from the date of such cessation of Board
service in which to exercise the Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Option be exercised
after the Expiration Date of such Option.
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(iii) Should an Optionholder die while serving as a
Board member or within six months after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Option is transferred pursuant to the Optionholder's will or in
accordance with the laws of descent and distribution) shall have a one-year
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Option be exercised
after the Expiration Date of such Option.
(g) Limited Transferability. Each Option shall be exercisable
only by Optionholder during Optionholder's lifetime and shall be neither
transferable nor assignable, other than by will or by the laws of descent and
distribution following Optionholder's death.
2.2 Fair Market Value. The fair market value per share of Stock shall
be determined in accordance with the following provisions:
(a) If the Stock is at the time listed or admitted to trading
on any national stock exchange, then the fair market value shall be the closing
selling price per share on the date in question on the exchange determined by
the Board to be the primary market for the Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there is no
reported sale of Stock on such exchange on the date in question, then the fair
market value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(b) If the Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded on the Nasdaq National
Market, the fair market value shall be the closing selling price per share on
the date in question, as such price is reported by the National Association of
Securities Dealers through the Nasdaq National Market or any successor system.
If there is no reported closing selling price for the Stock on the date in
question, then the closing selling price on the last preceding date for which
such quotation exists shall be determinative of fair market value.
2.3 Corporate Transaction. In the event of stockholder approval of a
Corporate Transaction, all unvested Options shall automatically accelerate and
immediately vest so that each outstanding Option shall, one week prior to the
specified effective date for the Corporate Transaction, become fully exercisable
for all of the Optioned Shares. Upon the consummation of the Corporate
Transaction, all Options shall, to the extent not previously exercised,
terminate and cease to be outstanding.
2.4 Change in Control. In the event of a Change in Control, all
unvested Options shall automatically accelerate and immediately vest so that
each outstanding Option shall, immediately prior to the effective date of such
Change in Control, become fully exercisable for all of the Optioned Shares.
Thereafter, each Option shall remain exercisable until the Expiration Date of
such Option.
ARTICLE III
Miscellaneous
3.1 Amendment of the Plan and Awards.
(a) Board Authority. The Board has complete and exclusive
power and authority to amend or modify the Plan (or any component thereof) in
any or all respects whatsoever. However, no such amendment or modification shall
adversely affect rights and obligations with respect to the Optionholder at the
time outstanding under the Plan, unless the Optionholder consents to such
amendment. In addition, the Board may not, without the approval of the
Corporation's stockholders, amend the Plan to (i) materially increase the
maximum number of shares issuable under the Plan, except for permissible
adjustments under Section 3.1, (ii) extend the term of the Plan, (iii)
materially modify the eligibility requirements for Plan participation, or (iv)
materially increase the benefits accruing to Plan participants.
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(b) Options Issued Prior to Stockholder Approval. Options
which incorporate Plan amendments may be granted prior to any required
stockholder approval of such amendments as long as any shares of Stock actually
issued under the Plan are held in escrow until the requisite stockholder
approval is obtained. If such stockholder approval is not obtained within 12
months of the meeting of the Board approving the amendments, then (i) any
Options incorporating Plan amendments which were not approved shall terminate
and cease to be exercisable and (ii) the Corporation shall promptly refund the
purchase price paid for any Optioned Shares actually issued under the Plan and
held in escrow, together with interest for the period the shares were held in
escrow.
(c) Rule 16b-3 Plan. With respect to persons subject to
Section 16 of the 1934 Act, the Plan is intended to comply with all applicable
conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated
under the 1934 Act. The Board may amend the Plan from time to time as it deems
necessary in order to meet the requirements of any amendments to Rule 16b-3
without the consent of the stockholders of the Corporation.
3.2 Tax Withholding.
(a) General. The Corporation's obligation to deliver Stock
upon the exercise of Options under the Plan shall be subject to the satisfaction
of all applicable federal, state and local income tax withholding requirements.
(b) Shares to Pay for Withholding. The Board may, in its
discretion and in accordance with the provisions of this Section 3.2(b) and such
supplemental rules as it may from time to time adopt, provide any or all
Optionholders with the right to use shares of Stock in satisfaction of all or
part of the federal, state and local income tax liabilities incurred by such
Optionholders in connection with the exercise of their Options ("Taxes"). Such
right may be provided to any such Optionholder in either or both of the
following formats:
(i) Stock Withholding. The Optionholder of an Option
may be provided with the election to have the Corporation withhold, from the
Stock otherwise issuable upon the exercise of such Option, a portion of those
shares of Stock with an aggregate fair market value equal to the percentage (not
to exceed 100 percent) of the applicable Taxes designated by the Optionholder.
(ii) Stock Delivery. The Board may, in its
discretion, provide the Optionholder with the election to deliver to the
Corporation, at the time the Option is exercised, one or more shares of Stock
previously acquired by such individual (other than pursuant to the transaction
triggering the Taxes) with an aggregate fair market value equal to the
percentage (not to exceed 100 percent) of the Taxes incurred in connection with
such Option exercise designated by the Optionholder.
3.3 Use of Proceeds. Any cash proceeds received by the Corporation from
the sale of Stock pursuant to Options granted under the Plan shall be used for
general corporate purposes.
3.4 Regulatory Approvals. The implementation of the Plan, the granting
of any Option and the issuance of Stock upon the exercise or surrender of the
Options made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options granted under it, and the Stock issued pursuant to
it.
3.5 Securities Registration. No shares of Stock or other assets shall
be issued or delivered under this Plan unless and until there shall have been
compliance with all applicable requirements of federal and state securities
laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Stock issuable under the Plan, and all applicable
listing requirements of any securities exchange on which stock of the same class
is then listed.
3.6 Corporation Rights. The grants of Options shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
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3.7 Privilege of Stock Ownership. An Optionholder shall not have any of
the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares.
3.8 Assignment. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. The provisions of the Plan
shall inure to the benefit of, and be binding upon, the Corporation and its
successors or assigns, and the Optionholders, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.
3.9 Choice of Law. The provisions of the Plan relating to the exercise
of Options and the vesting of shares shall be governed by the laws of the State
of Arizona, as such laws are applied to contracts entered into and performed in
such State.
3.10 Plan Not Exclusive. This Plan is not intended to be the exclusive
means by which the Corporation may issue options or warrants to acquire its
shares of Stock. To the extent permitted by applicable law, any such other
options, warrants, or stock awards may be issued by the Corporation, other than
pursuant to this Plan, without stockholder approval.
ARTICLE IV
Definitions
The following capitalized terms used in this Plan shall have the
meaning described below:
"Annual Grant Date" shall mean the date of the Corporation's annual
stockholder meeting.
"Automatic Option Grant" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the Effective Date.
"Board" shall mean the Board of Directors of the Corporation.
"Change in Control" shall mean (a) a person or related group of
persons, other than the Corporation or a person that directly or indirectly
controls, is controlled by, or under common control with the Corporation,
acquires ownership of 40 percent of the Corporation's outstanding common stock
pursuant to a tender or exchange offer which the Board recommends that the
Corporation's stockholders not accept or (b) a change in the composition of the
Board of Directors such that those individuals who were elected to the Board at
the last stockholders' meeting at which there was not a contested election for
Board membership subsequently ceased to comprise a majority of the Board by
reason of a contested election.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Corporation" shall mean Three-Five Systems, Inc., a Delaware
corporation.
"Corporate Transaction" shall mean (a) a merger or consolidation in
which the Corporation is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Corporation is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Corporation and complete liquidation or
dissolution of the Corporation, or (c) any reverse merger in which the
Corporation is the surviving entity but in which the securities possessing more
than 50 percent of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from
those who held such securities immediately prior to such merger.
"Effective Date" shall mean April 12, 1994.
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"Eligible Persons" shall mean non-employee Board members as limited by
Section 1.2 hereof.
"Exercise Date" shall be the date on which written notice of the
exercise of an Option is delivered to the Corporation in accordance with Section
2.1(d) hereof.
"Expiration Date" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"Initial Grant Date" shall mean the date that the Optionholder was
first appointed or elected to the Board.
"Optionholder" shall mean an Eligible Person to whom Options have been
granted.
"Optioned Shares" shall be those shares of Stock which can be acquired
by an Eligible Person.
"Option Price" shall mean 100 percent of the fair market value per
share of the Stock on the date any Option was granted, as determined in
accordance with the valuation provisions of Section 2.2 hereof.
"Option" shall mean options to acquire Stock granted under the Plan.
"Plan" shall mean this stock option plan for the Corporation.
"Stock" shall mean shares of the Corporation's common stock, par value
$.01 per share, which may be unissued or treasury shares as the Board from time
to time determines.
EXECUTED this 24th day of October, 1996.
THREE-FIVE SYSTEMS, INC., a Delaware
corporation
By: /s/ David R. Buchanan
-------------------------------
Name: David R. Buchanan
-------------------------------
Its: President and Chairman
-------------------------------
Attested by:
/s/ Jeffrey D. Buchanan
- -------------------------------
Secretary
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THREE-FIVE SYSTEMS, INC.
1997 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of THREE-FIVE SYSTEMS, INC., a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement of the Company, each dated March 20,
1997, and hereby appoints David R. Buchanan and Elizabeth A. Sharp, and each of
them, proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
1997 Annual Meeting of Stockholders of the Company, to be held on Thursday,
April 24, 1997, at 9:00 a.m., local time, at the Company's corporate
headquarters at 1600 North Desert Drive, Tempe, Arizona, and at any adjournment
or adjournments thereof, and to vote all shares of the Company's Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no contrary direction is
indicated, will be voted FOR the election of directors; FOR approval of the
proposal to amend, restate, and reapprove the Company's 1993 Stock Option Plan;
FOR approval of the proposal to amend and restate the Company's 1994 Automatic
Stock Option Plan; FOR the ratification of the appointment of Arthur Andersen
LLP as the independent auditors of the Company; and as said proxies deem
advisable on such other matters as may come before the meeting.
A majority of such proxies or substitutes as shall be present and shall act
at said meeting or any adjournment or adjournments thereof (or if only one shall
be present and act, then that one) shall have and may exercise all of the powers
of said proxies hereunder.
(Continued, and to be signed and dated, on the reverse side.)
THREE-FIVE SYSTEMS, INC.
P.O. BOX 11227
NEW YORK, N.Y. 10203-0227
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS: FOR all nominees[ ] WITHHOLD AUTHORITY to vote[ ] *EXCEPTIONS[ ]
listed below. for all nominees listed below.
</TABLE>
Nominees: David R. Buchanan, Burton E. McGillivray, David C. Malmberg, Kenneth
M. Julien, Gary R. Long
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided below.)
*Exceptions_____________________________________________________________________
2. Proposal to amend, restate, and reapprove in its entirety the Company's
1993 Stock Option Plan, including changes made (i) to conform the Plan to
recent amendments to rules adopted under Section 16 of the Securities
Exchange Act of 1934, as amended, including changes that permit all
non-employee directors to receive grants of options and awards and (ii) to
comply with Internal Revenue Code Section 162(m).
FOR[ ] AGAINST[ ] ABSTAIN[ ]
3. Proposal to amend and restate the Company's 1994 Automatic Stock Option
Plan (i) to clarify the restriction on receiving the initial automatic
grant of options and (ii) to revise the vesting period for the initial
options granted.
FOR[ ] AGAINST[ ] ABSTAIN[ ]
4. Proposal to ratify the appointment of Arthur Andersen LLP as
the independent auditors of the Company.
FOR[ ] AGAINST[ ] ABSTAIN[ ]
And upon such matters which may properly come before the meeting or any
adjournment or adjournments thereof.
Change of Address and [ ]
or Comments Mark Here
(This Proxy should be dated, signed by
the stockholder(s) exactly as his or her
name appears hereon, and returned
promptly in the enclosed envelope.
Persons signing a fiduciary capacity
should so indicate. If shares are held
by joint tenants or as community
property, both stockholders should
sign.)
Dated:____________________________, 1997
----------------------------------------
Signature
----------------------------------------
Signature
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
Votes must be indicated (x) in Black or Blue ink. |X|
