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)
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(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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[LOGO] THREE-FIVE SYSTEMS, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 23, 1998
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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 23, 1998, 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 the Company's 1998 Stock Option Plan.
3. To ratify the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998.
4. 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 13, 1998
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 17, 1998
<PAGE>
[LOGO] THREE-FIVE SYSTEMS, INC.
1600 North 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 23, 1998 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, 1998 to all stockholders entitled to vote at the Meeting.
Voting Securities and Voting Rights
Stockholders of record at the close of business on March 13, 1998 (the
"Record Date") are entitled to notice of and to vote at the Meeting. On the
Record Date, there were issued and outstanding 7,907,123 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
the Company's 1998 Stock Option Plan (the "1998 Plan"); and (iii) for the
ratification of the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the year ending December 31, 1998.
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 1998 Plan; and (iii)
"for" the ratification of the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the year ending December 31, 1998.
<PAGE>
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 Company's 1997 Annual Report to Stockholders, which was mailed to
stockholders with or preceding this Proxy Statement, contains financial and
other information about the Company but is not incorporated into this Proxy
Statement and is not to be considered a part of these proxy soliciting materials
or subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, 1997 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.
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.
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The following table sets forth certain information regarding the
nominees for directors of the Company:
Name Age Position
---- --- --------
David R. Buchanan 65 Chairman of the Board, President, and
Chief Executive Officer
Burton E. McGillivray 41 Director
David C. Malmberg 55 Director
Kenneth M. Julien 43 Director
Gary R. Long 65 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 been a partner of First Chicago
Equity Capital from January 1994 to the present. From January 1993 until
December 1993, 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, Duotang, Inc., Pacer Propane, Inc., 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 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
3
<PAGE>
1980, Mr. Long served as Vice President of Operations for Talos Systems, which
designed and manufactured 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, Long, 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. Malmberg,
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, Administration, 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, 1997. The Company's Audit Committee
met separately at two formal meetings during the fiscal year ended December 31,
1997. The Company's Compensation Committee held one formal meeting and met
informally several times during the fiscal year ended December 31, 1997. 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 non-employee director an annual retainer fee in
the amount of $15,000, plus $1,250 for each board meeting attended, and $500 for
each committee meeting held on a day other than the same day as a board meeting.
Beginning in 1998, each non-employee director is required to receive two-thirds
of his or her annual retainer fee in shares of the Company's Common Stock
pursuant to the Company's Directors' Stock Plan. See "Executive Compensation -
Stock Option Plans and Directors' Stock Plan." The Company also reimburses each
non-employee 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 Automatic Stock Option Plan for Non-Employee
Directors (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. See "Executive Compensation
- - Stock Option Plans and Directors' Stock Plan."
4
<PAGE>
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth the total compensation received by the
Company's Chief Executive Officer and its three other executive officers, each
of whose aggregate cash compensation exceeded $100,000 for services in all
capacities to the Company and its subsidiaries for the fiscal year ended
December 31, 1997 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary ($)(1) Bonus ($) Options(#)(2) Compensation($)(3)
--------------------------- ----------------------------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
David R. Buchanan, 1997 $398,846 $221,500 50,000 $7,658
Chairman, President, and 1996 257,448 --- --- 7,308
Chief Executive Officer 1995 254,169 --- --- 2,782
Vincent C. Hren, Vice 1997 $170,769 $97,350 35,000 $5,154
President - Operations(4) 1996 129,308 20,000 70,000(5) 63,445
Dan J. Schott, Vice 1997 $120,769 $41,000 --- $4,301
President - Research 1996 111,903 --- --- 3,911
and Development 1995 117,550 --- --- 606
Jeffrey D. Buchanan, 1997 $155,385 $89,650 --- $4,917
Vice President - Finance, 1996 90,541 30,000 60,000 123
Administration, and Legal; Chief
Financial Officer; Secretary; and
Treasurer(6)
</TABLE>
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(1) Messrs. David Buchanan, Hren, Schott, and Jeffrey Buchanan 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 1997 include (i) matching contributions to the
Company's 401(k) Plan earned in fiscal 1997 but not paid until fiscal
1998 in the amounts of $4,750, $4,750, $3,664, and $4,702 on behalf of
Messrs. David Buchanan, Hren, Schott, and Jeffrey Buchanan,
respectively; and (ii) term life insurance premiums of $2,908, $404,
$637, and $215 paid by the Company on behalf of Messrs. David Buchanan,
Hren, Schott, and Jeffrey Buchanan, respectively.
(4) Mr. Hren became an officer of the Company in January 1996.
(5) The amount shown includes options to acquire 35,000 shares of Common
Stock that were cancelled during 1996.
(6) Mr. Buchanan became an officer of the Company in May 1996.
5
<PAGE>
Option Grants
The following table sets forth certain information with respect to
stock options granted to the Named Officers during the fiscal year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------------- Value at Assumed
Percentage Annual Rates
Number of of Total of Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(2)
Options Employees in Price Expiration --------------
Name Granted (#) Fiscal Year ($/Sh)(1) Date 5% 10%
---------------------------- ------------ ----------- ------------------------- -- ---
<S> <C> <C> <C> <C> <C> <C>
David R. Buchanan.......... 50,000(3) 25.2% $12.75 04/24/07(3) $400,920 $1,016,011
Vincent C. Hren............ 35,000(4) 17.6% $14.63 02/18/07(4) $321,915 $815,797
Dan J. Schott.............. -- -- -- -- -- --
Jeffrey D. Buchanan........ -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Except as otherwise indicated, the options were granted at the fair
value of the Company's Common Stock on the date of grant and have a
ten-year term.
(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that
could be achieved for the respective options if exercised at the end of
the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Company's Common
Stock. Actual gains, if any, on stock option exercises will depend upon
the future market prices of the Company's Common Stock.
(3) All of such options vest and become exercisable on the first
anniversary of the date of grant.
(4) Such options vest and become exercisable at the rate of 10% on the
third anniversary of the date of grant, 10% on the fourth anniversary
of the date of grant, and 80% on the fifth anniversary of the date of
grant.
Option Holdings
The following table contains certain information respecting the options
held by the Named Officers as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at Fiscal Money Options at Fiscal
Year-End (#) Year-End ($)(1)
Shares Acquired Value ------------------------------ -------------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable(2) Exercisable Unexercisable(2)
- ---- -------------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
David R. Buchanan......... 106,856 $1,073,229 0 50,000 $ 0 $187,500
Vincent C. Hren........... 0 --- 0 70,000 $ 0 $319,375
Dan J. Schott............. 0 --- 16,000 24,000 $ 0 $ 0
Jeffrey D. Buchanan....... 0 --- 8,750 51,250 $ 42,088 $195,013
</TABLE>
- ---------------
(1) Calculated based upon the December 31, 1997 New York Stock Exchange
closing price of $16.50 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, 1997.
6
<PAGE>
Employment Agreements
The Company has no written employment contracts with its executive
officers or directors. The Company does have employment agreements or signed
terms-and-conditions agreements with certain 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 incentive bonuses and are eligible to receive stock options under the
Company's stock option plans.
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 of
1986, as amended (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 1997. 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 matching contributions
pursuant to the 401(k) Plan to the Named Officers for 1997 in the amount of
$17,866.
Stock Option Plans and Directors' Stock Plan
On January 29, 1998, the Board of Directors approved the Company's 1998
Stock Option Plan, subject to stockholder approval at the Meeting. See "Proposal
to Approve the Company's 1998 Stock Option Plan."
The Company currently has four stock options plans: the 1990 Incentive
Stock Option Plan (the "1990 Plan"), the 1993 Stock Option Plan (the "1993
Plan"), the 1994 Automatic Stock Option Plan for Non-Employee Directors (the
"1994 Plan"), and the 1997 Stock Option Plan (the "1997 Plan"). The eligible
persons under the 1990 Plan are key employees of the Company. Eligible persons
under the 1993 Plan include key personnel (including directors and executive
officers), consultants, and independent contractors who perform valuable
services for the Company or its subsidiaries. Persons who are employees of or
consultants to the Company or its subsidiaries, other than directors, executive
officers, and persons who own 10 percent or more of the Company's Common Stock,
are eligible to receive options granted under the 1997 Plan. Directors who are
not employees receive automatic grants of stock options under the 1994 Plan, are
eligible to receive options under the 1993 Plan, and will be eligible to receive
options under the 1998 Plan, but are not eligible under the 1990 Plan or the
1997 Plan.
In conjunction with stockholder approval of the 1993 Plan, the Board
terminated the 1990 Plan with respect to 85,454 options that were unissued as of
the date that the 1993 Plan was adopted. There were 208,720 options issued but
unexercised under the 1990 Plan as of March 13, 1998. If any option 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.
Under the 1993 Plan, an aggregate of 385,454 shares of Common Stock of
the Company may be issued pursuant to the granting of options to acquire Common
Stock of the Company, the direct granting of Common Stock, or the granting of
stock appreciation rights. If any option terminates or expires without having
been exercised in full, stock not issued under such option will become available
for reissuance under the 1993 Plan. As of March 13, 1998, an aggregate of 6,950
shares of Common Stock had been issued upon exercise of options granted under
the 1993 Plan, and there were outstanding options to acquire 334,650 shares of
the Company's Common Stock.
Under the 1994 Plan, 100,000 shares of Common Stock of the Company may
be issued upon exercise of stock options automatically granted to non-employee
directors of the Company pursuant to the terms described in
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<PAGE>
the section above entitled "Elections of Directors - Director Compensation and
Other Information." Persons other than non-employee directors of the Company are
not eligible to receive options granted pursuant to the 1994 Plan. There were
outstanding options to acquire 9,000 shares of the Company's Common Stock under
the 1994 Plan as of March 13, 1998.
On May 12, 1997, the Company's Board of Directors adopted the 1997
Plan. Stockholder approval of the 1997 Plan was not required. An aggregate of
100,000 shares of Common Stock may be issued upon exercise of options granted
pursuant to the 1997 Plan. If any option terminates or expires without having
been exercised in full, stock not issued under such option will become available
for reissuance under the 1997 Plan. As of March 13, 1998, there were outstanding
options to acquire 26,000 shares of the Company's Common Stock.
On January 29, 1998, the Company's Board of Directors adopted the
Directors' Stock Plan (the "Directors' Plan"). Stockholder approval of the
Directors' Plan was not required. Under the Directors' Plan, the Company will
issue to the non-employee members of the Board of Directors shares of Common
Stock equal in value to two-thirds of the annual retainer fee paid to the
non-employee directors in lieu of an equivalent amount of cash. The value of the
shares of Common Stock issued under the Directors' Plan will be based on the
closing price of the Company's Common Stock on the New York Stock Exchange on
the last trading day prior to the Company's annual meeting of stockholders. The
shares will be issued to the non-employee directors on the date of the Company's
annual meeting of stockholders to be held in each year, beginning in 1998.
Participation in the Directors Plan by non-employee directors is mandatory. An
aggregate of 20,000 treasury shares of Common Stock may be issued under the
Directors' 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, 1993 Plan, 1994 Plan, the 1997 Plan, and the Directors' Plan,
and the number of shares and exercise price per share of stock subject to
outstanding options.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1997, the Company's
Compensation Committee consisted of Messrs. McGillivray, Malmberg, Julien, and
Long. 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.
8
<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 incentive bonuses, and stock option grants.
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 1997 were determined by the
Committee in April 1997. Base salaries were raised in 1997 for all four
executive officers so that their respective compensation remained competitive
with companies similar in both size and industry.
Annual Incentive Bonuses
The annual incentive bonuses are intended to provide incentive
compensation to key officers and employees who contribute substantially to the
success of the Company. The bonuses are calculated and paid out of the
Management Incentive Compensation Plan ("MICP"), which was approved by the Board
of Directors in April 1997. The MICP is intended to enhance and reinforce the
Company's goals of profitable growth and a sound overall financial condition by
making incentive compensation awards available to senior level management and
key employees.
The granting of such awards is based upon the achievement of Company
performance objectives and predefined individual performance objectives.
Individual performance objectives are developed for every senior level manager
and key employee early in each fiscal year. Upon the close of each fiscal year,
executive management and the Committee conduct an assessment of individual
performance achieved versus individual performance objectives. This assessment
may include but not be limited to individual responsibility, performance, and
compensation level. Simultaneously, the Board conducts an assessment of the
Company's overall performance to date, which may include but not be limited to
the achievement of sales, net income, and other performance criteria. The
combination of these factors determines any incentive bonuses to be paid.
Incentive bonuses are 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. For
fiscal 1997, the Committee awarded bonuses to certain officers and employees
with the amount of the award based upon the achievement of their individual
performance objectives and the Board of Directors' assessment of the Company's
overall performance in 1997.
9
<PAGE>
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 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. The vesting period on
grants is generally four years for new employees and three years for employees
who have been employed for two years or longer. The vesting schedule is
generally 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 may also have longer vesting schedules. In 1997, the Senior
Committee and the Employee Committee authorized the issuance of stock options to
certain executive officers and other key employees (see "Executive Compensation
- - Option Grants").
Benefits
The Company provides various employee benefit programs to its executive
officers, including medical, dental, 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 noted that Mr. Buchanan's salary had not been
adjusted since 1995 and that his compensation was no longer competitive with
that paid to chief executive officers of comparable companies. In addition, the
Committee considered Mr. Buchanan's contribution to developing the
infrastructure of the Company and establishing the direction of the Company's
future with respect to technology. The Committee therefore established Mr.
Buchanan's base salary at $400,000 throughout 1997. The Committee believes that
this base salary is competitive with that paid to chief executive officers of
comparable companies. The Committee determined that individual performance for
fiscal year 1997 merited the payment of a bonus to Mr. Buchanan in accordance
with the terms of the MICP and based upon the Board of Directors' assessment of
the overall Company performance.
The Senior Committee noted that stock options issued to Mr. Buchanan in
1994 were due to expire in 1997. The Senior Committee therefore authorized the
issuance of new stock options to Mr. Buchanan during 1997 in the amount of
50,000 shares (see "Executive Compensation - Option Grants").
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).
10
<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.
Except as noted below, based solely upon the Company's review of the
copies of such forms received by it during the fiscal year ended December 31,
1997, 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. David R. Buchanan timely filed a Form 5 reporting two
transactions that were required to have been filed originally on a Form 4.
11
<PAGE>
COMPANY PERFORMANCE GRAPH
The following line graph compares cumulative total stockholder returns
for the five years ended December 31, 1997 for (i) the Company's Common Stock;
(ii) the Standard and Poor's SmallCap 600 Index (the "SmallCap 600"); and (iii)
the Standard and Poor's Electrical Equipment Index (the "Electrical Equipment
Index"). The graph assumes an investment of $100 on December 31, 1992. The
calculations of cumulative stockholder return on the SmallCap 600 and the
Electrical Equipment Index include reinvestment of dividends, but 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.
TOTAL SHAREHOLDER RETURNS
-------------------------
(Dividends Reinvested)
INDEXED RETURNS
Years Ending
Base
Period
Company Name/Index Dec92 Dec93 Dec94 Dec95 Dec96 Dec97
- --------------------------------------------------------------------------------
Three-Five Systems, Inc. 100 $972.68 $2007.45 $931.29 $710.54 $910.60
S&P SmallCap 600 Index 100 $118.79 $113.12 $147.01 $178.35 $223.98
Electrical Equipment Index 100 $158.22 $195.43 $281.13 $355.88 $450.35
12
<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 13, 1998 (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................................................ 884,118 (3) 11.1%
Vincent C. Hren.................................................. 2,000 *
Dan J. Schott.................................................... 28,000 (4) *
Jeffrey D. Buchanan.............................................. 40,840 (5) *
Burton E. McGillivray............................................ 69,500 (6) *
David C. Malmberg................................................ 26,000 (7) *
Kenneth M. Julien................................................ 1,033 (8) *
Gary R. Long..................................................... 2,833 (9) *
All directors and executive officers as a group (eight persons).1,054,321 13.2%
Non-management 5% Stockholder:
LGT Asset Management, Inc.(10)................................... 696,200 8.8%
</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 13, 1999 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 13, 1998.
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 50,000 shares of Common Stock issuable upon exercise of stock
options that will vest within 60 days of March 13, 1998.
(4) Includes 24,000 shares of Common Stock issuable upon exercise of vested
stock options.
(5) Includes 13,750 shares of Common Stock issuable upon exercise of vested
stock options.
(6) Includes 3,500 shares of Common Stock issuable upon exercise of vested
stock options.
(7) Includes 3,500 shares of Common Stock issuable upon exercise of vested
stock options.
(8) Represents 200 shares of Common Stock held by Mr. Julien as custodian
for his minor children and 833 shares of Common Stock issuable upon
exercise of vested stock options.
(9) Includes 833 shares of Common Stock issuable upon exercise of vested
stock options.
(10) 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
<PAGE>
PROPOSAL TO APPROVE THE
COMPANY'S 1998 STOCK OPTION PLAN
The Board of Directors has approved the Company's 1998 Stock Option
Plan, subject to approval by the Company's stockholders at the Meeting. The full
text of the 1998 Plan 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
adopt the 1998 Plan. Accordingly, the Board of Directors recommends a vote "FOR"
the proposal to approve the 1998 Plan.
General
The purpose of the 1998 Plan is to attract, retain, and motivate
employees, independent contractors, and non-employee members of the Board of
Directors by providing them with the opportunity to acquire a proprietary
interest in the Company and to link their interests and efforts to the long-term
interests of the Company's stockholders. The 1998 Plan provides for the grant of
options to acquire Common Stock of the Company ("Options"). The 1998 Plan is not
intended to be the exclusive means by which the Company may issue options or
warrants to acquire its Common Stock. To the extent permitted by applicable law
and the rules and regulations of the New York Stock Exchange, the Company may
issue any other options, warrants, or awards other than pursuant to the 1998
Plan without stockholder approval.
Shares Subject to the Plan
A maximum of 300,000 shares of Common Stock of the Company may be
issued under the 1998 Plan. If any Option terminates or expires without having
been exercised in full, stock not issued under such Option will again be
available for the purposes of the 1998 Plan. If any change is made in the stock
subject to the 1998 Plan or subject to any Option granted under the 1998 Plan
(through merger, consolidation, reorganization, recapitalization, stock
dividend, split-up, combination of shares, exchange of shares, change in
corporate structure, or otherwise), the 1998 Plan provides that appropriate
adjustments will be made as to the maximum number of shares subject to the 1998
Plan and the number of shares and exercise price per share of stock subject to
outstanding Options. As of March 13, 1998, there were no Options outstanding
under the 1998 Plan.
Eligibility and Administration
Options may be granted pursuant to the 1998 Plan only to persons
("Eligible Persons") who at the time of grant are either (i) employees
(including officers and directors) of the Company or its subsidiaries, (ii)
independent contractors, or (iii) non-employee members of the Board of
Directors. Options granted pursuant to the 1998 Plan may be incentive stock
options or non-qualified stock options. Options that are incentive stock options
may be granted only to 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 Board of Directors administers the 1998 Plan, except that the Board
of Directors may delegate its authority and duties under the 1998 Plan (other
than the power to amend the Plan) to one or more committees appointed by the
Board of Directors. The Board of Directors and any committee that has been
delegated authority to administer the 1998 Plan are each referred to as a "Plan
Administrator." The power to administer the 1998 Plan with respect to the
Company's directors, executive officers, and persons who own 10 percent or more
of the Company's issued and outstanding stock ("Affiliates") is vested
exclusively with the Board of Directors or a committee comprised of two or more
non-employee directors. The power to administer the 1998 Plan with respect to
the remaining Eligible Persons is vested with the Board of Directors 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; (ii) the type of options granted; (iii) the amount and
timing of the grant of such
14
<PAGE>
Options; (iv) vesting conditions, provided that no vesting period may be less
than one year; and (v) such other terms and conditions as may be imposed by the
Plan Administrator consistent with the 1998 Plan.
Terms and Conditions of Options; Exercise Prices; 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. No Eligible Person may receive options for more than 150,000
shares of Common Stock pursuant to the 1998 Plan in any one-year period. No
Option may be granted for a term in excess of 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, except
that Options granted under the 1998 Plan may not have a vesting period of less
than one year after the date of grant. All outstanding Options under the 1998
Plan will automatically terminate upon completion of a merger or consolidation
in which the Company is not the surviving corporation.
Although each Plan Administrator will determine the exercise prices of
Options at the time of grant, the exercise price of all Options granted under
the 1998 Plan may not be less than 100 percent of the fair market value of the
Common Stock at the time of the grant. On March 13, 1998, the closing price of
the Company's Common Stock on the New York Stock Exchange was $20.88 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.
Transferability of Options; Termination of Employment or Services
Except as otherwise allowed by the Plan Administrator, Options granted
under the 1998 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. The Plan Administrator will
determine the terms and conditions under which Options may be exercised
following the termination of the holder's relationship with the Company.
Incentive Options, however, will not be exercisable for more than (a) up to
three months after termination of the holder's employment for reasons other than
death or disability, or (b) up to one year after termination due to death or
disability.
No Affiliate Repricings Without Stockholder Approval
The Company may not cancel any Options granted to Affiliates under the
1998 Plan and issue, in place of the cancelled Options, new Options with a lower
exercise price (a "repricing") unless the repricing is approved by the Company's
stockholders within 12 months of the date of repricing.
Duration and Modification
The 1998 Plan will remain in effect until January 28, 2008. The Board
of Directors of the Company may at any time suspend, amend, or terminate the
1998 Plan, except that without the approval of the Company's stockholders, the
Board of Directors may not (i) make any amendments for which stockholder
approval is required to comply with Section 162(m) or Section 422 of the
Internal Revenue Code, the rules and regulations of the New York Stock Exchange,
or state and federal securities law rules and regulations; (ii) increase the
maximum number of shares of Common Stock subject to the 1998 Plan (except in the
case of certain organic changes to the Company); (iii) reduce the exercise price
for which any outstanding Options may be exercised below the fair market value
on the date of grant; or (iv) allow repricings of Options.
15
<PAGE>
Federal Income Tax Consequences
Certain Options granted under the 1998 Plan will be intended to qualify
as incentive stock options under Section 422 of the Internal Revenue 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, however, 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 1998 Plan may be non-qualified
options. The income tax consequences of non-qualified options will be governed
by Section 83 of the Internal Revenue Code. Under Section 83, the excess of the
fair market value of the shares of the Company's Common Stock acquired pursuant
to the exercise of any non-qualified 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 recognize income. 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
more than 12 months from the date the substantial risk of forfeiture lapsed or,
if a Section 83(b) election is made, more than 12 months from the date the
shares were acquired. The maximum federal capital gains tax rate currently is
28% for property held more than 12 months but not more than 18 months. The
maximum federal capital gains tax rate currently is 20% for property held more
than 18 months.
Ratification by Stockholders of the 1998 Plan
Approval of the 1998 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 1998 Plan by
the Company's stockholders, any Options granted pursuant to the 1998 Plan prior
to stockholder approval will remain valid and unchanged. In the event that the
proposal to approve the 1998 Plan is not approved by the stockholders of the
Company at the Meeting, any Options granted pursuant to the 1998 Plan will
automatically terminate and be forfeited to the same extent and with the same
effect as though the 1998 Plan had never been adopted, and the Company will not
make any further grants of Options under the 1998 Plan.
16
<PAGE>
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, 1998 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
In order to be included in the proxy statement and form of proxy
relating to the annual meeting of stockholders of the Company to be held during
calendar 1999, stockholder proposals that are intended to be presented by
stockholders must be received at the principal executive offices of the
Corporation (i) not less than 60 days in advance of such meeting if such meeting
is to be held on a day which is within 30 days preceding the anniversary of the
previous year's annual meeting, or 90 days in advance of such meeting if such
meeting is to be held on or after the anniversary of the previous year's annual
meeting, and (ii) with respect to any other annual meeting of stockholders, on
or before the close of the business on the fifteenth day following the date (or
the first date, if there be more than one) of public disclosure of the date of
such meeting 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 17, 1998
17
<PAGE>
APPENDIX A
----------
THREE-FIVE SYSTEMS, INC.
1998 STOCK OPTION PLAN
1. Purpose. The purpose of this 1998 Stock Option Plan (the "Plan") is
to attract, retain and motivate employees, independent contractors and
non-employee board members by providing them with the opportunity to acquire a
proprietary interest in THREE-FIVE SYSTEMS, INC. (the "Company") and to link
their interests and efforts to the long-term interests of the Company's
shareholders.
Plan Administration
2.1 In General. The Plan shall be administered by the
Company's Board of Directors (the "Board"). Except for the power to amend the
Plan as provided in Section 11, the Board, in its sole discretion, may delegate
its authority and duties under the Plan to one or more committees appointed by
the Board, under such conditions and limitations as the Board may from time to
time establish. The Board and/or any committee that has been delegated the
authority to administer the Plan shall be referred to as the "Plan
Administrator". Except as otherwise explicitly set forth in the Plan, the Plan
Administrator shall have the authority, in its discretion, to determine all
matters relating to options granted under the Plan, including selection of the
individuals to be granted options, the type of options granted, the number of
shares of the Company's Common Stock ("Common Stock") subject to an option,
vesting conditions, and any and all other terms, conditions, restrictions and
limitations, if any, of an option. Notwithstanding the foregoing, no options
granted under the Plan shall have a vesting period of less than one year from
the date of grant. All decisions made by the Plan Administrator pursuant to the
Plan and related orders and resolutions shall be final and conclusive.
2.2 Rule 16b-3 and Code Section 162(m). Notwithstanding any
provision of this Plan to the contrary, only the Board or a committee composed
of two or more or Non-Employee Directors may make determinations regarding
grants of options to officers, directors and 10% shareholders of the Company
("Affiliates"). (The term "Non-Employee Directors shall satisfy the meaning set
forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended). The Plan Administrator shall have the authority and discretion to
determine the extent to which option grants will conform to the requirements of
Section 162(m) Internal Revenue Code of 1986, as amended (the "Code"), and to
take such action, establish such procedures, and impose such restrictions as the
Plan Administrator determines to be necessary or appropriate to conform to such
requirements.
3. Eligibility. Any employee of the Company (the term "employee" shall
include a person who has signed an agreement to become an employee) shall be
eligible to receive Incentive Stock Options and/or Nonqualified Stock Options
(as such terms are defined in Section 5.1). An independent contractor or
non-employee board member shall be eligible to receive only Nonqualified Stock
Options. For purposes of this Section 3, "Company" includes any parent or
subsidiary of the Company as defined in Section 424 of the Code.
4. Shares Subject to the Plan
4.1 Number and Source. The stock offered under the Plan shall
be shares of Common Stock and may be unissued shares or shares now held or
subsequently acquired by the Company as treasury shares, as the Plan
Administrator may from time to time determine. Any shares subject to an option
granted under the Plan that is forfeited, terminated or canceled shall again be
available for the granting of options under the Plan. Subject to adjustment as
provided in Section 4.2, the aggregate number of shares of Common Stock that may
be issued under the Plan shall not exceed 300,000. The aggregate number of
shares of Common Stock that may be covered by options granted to any one
individual in any year shall not exceed 150,000.
A-1
<PAGE>
4.2 Capital Adjustments. The aggregate numbers and type of
shares available for options under the Plan, the maximum number and type of
shares that may be subject to options to any individual under the Plan, the
number and kind of shares covered by each outstanding option, and the exercise
price per share (but not the total price) for stock options outstanding under
the Plan shall all be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from any split-up,
combination or exchange of shares, consolidation, spin-off or recapitalization
of shares or any like capital adjustment or the payment of any stock dividend.
4.3 Mergers, Etc. If the Company is the surviving corporation
in any merger or consolidation, any option granted under the Plan shall pertain
to and apply to the securities to which a holder of the number of shares of
Common Stock subject to the option would have been entitled prior to the merger
or consolidation. A dissolution or liquidation of the Company shall cause every
option outstanding under this Plan to terminate. A merger or consolidation in
which the Company is not the surviving corporation shall also cause every option
outstanding under this Plan to terminate, but each optionholder shall have the
right, immediately prior to such merger or consolidation in which the Company is
not a surviving corporation, to exercise vested options in whole or in part,
subject to the other provisions of this Plan and the applicable option
agreement.
5. Stock Options
5.1 Grant. The Plan Administrator may grant stock options,
designated as either "Incentive Stock Options" which comply with the provisions
of Section 422 of the Code or any successor statutory provision, or
"Nonqualified Stock Options" The price at which shares may be purchased upon
exercise of a particular option shall be determined by the Plan Administrator;
however, the exercise price of any stock option shall not be less than 100% of
the Fair Market Value of such shares on the date such option is granted (110% 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% of the total combined voting power of all classes of
stock of the Company). For purposes of the Plan, "Fair Market Value" as to a
particular day equals the closing price for the Common Stock on the New York
Stock Exchange as reported in the Wall Street Journal or in such other source as
the Plan Administrator deems reliable. If there is no reported sale of Common
Stock on the New York Stock Exchange on the date in question, then Fair Market
Value shall be the closing selling price on the New York Stock Exhange on the
last preceding date for which an actual reported sale exists. The Plan
Administrator shall set the term of each stock option, but no stock option shall
be exercisable more than 10 years after the date such option is granted and, to
the extent the aggregate Fair Market Value (determined as of the date the option
is granted) of Common Stock with respect to which Incentive Stock Options
granted to a particular individual become exercisable for the first time during
any calendar year (under the Plan and all other stock option Plans of the
Company) exceeds $100,000 (or such corresponding amount as may be set by the
Code) such options shall be treated as Nonqualified Stock Options. An
optionholder and the Plan Administrator can agree at any time to convert an
Incentive Stock Option to a Nonqualified Stock Option.
5.2 No Repricing Without Shareholder Approval. No Stock
Options granted to Affiliates may be repriced without the approval of the
stockholders of the Company ("Repricing") within 12 months of such repricing.
Stockholder approval shall be evidenced by the affirmative vote of the holders
of the majority of the shares of the Company's Common Stock present and person
by proxy and voting at the meeting. For purposes of this Agreement, "Repricing"
shall mean that situation in which new options are issued to an optionholder in
place of cancelled options and which would be reportable in the repricing table
of the annual proxy.
5.3 Individual Stock Option Agreements. Options granted under
the Plan shall be evidenced by option agreements in such form and content as the
Plan Administrator from time to time approves, which agreements shall
substantially comply with and be subject to the terms of the Plan. The option
agreements may contain other provisions or conditions as the Plan Administrator
deems necessary or appropriate to effectuate the sense and purpose of the Plan
and may be amended from time to time in accordance with the terms thereof.
A-2
<PAGE>
6. Option Exercise
6.1 Precondition to Stock Issuance. No shares shall be
delivered pursuant to the exercise of any stock option, in whole or in part,
until qualified for delivery under such securities laws and regulations as may
be deemed by the Plan Administrator to be applicable thereto and until, in the
case of the exercise of an option, payment in full of the option price thereof
(in cash or stock as provided in Section 6.2) is received by the Company. No
holder of an option, or any legal representative, legatee or distributee shall
be or be deemed to be a holder of any shares subject to such option or right
unless and until such shares are issued. No option may at any time be exercised
with respect to a fractional share.
6.2 Form of Payment An optionholder may exercise a stock
option using as the form of payment (a) cash or cash equivalent, (b)
stock-for-stock payment (as described below) (c) any combination of the above,
or (d) such other means as the Plan Administrator may approve. Any optionholder
who owns Common Stock may use such shares, the value of which shall be as the
Fair Market Value on the date the stock option is exercised, as a form of
payment to exercise stock options under the Plan. The Plan Administrator, in its
discretion, may restrict or rescind the right to use stock-for-stock payment. A
stock option may be exercised in such manner only by tendering (actually or by
attestation) to the Company whole shares of Common Stock having a Fair Market
Value equal to or less than the aggregate exercise price. The Plan Administrator
may permit an optionholder to elect to pay the exercise price of a stock option
by authorizing a third party to sell shares of Common Stock (or a sufficient
portion of the shares) acquired upon exercise of the stock option and remit to
the Company a sufficient portion of the sale proceeds to pay the entire exercise
price plus any tax withholding resulting from such exercise. If an option is
exercised by surrender of stock having a Fair Market Value less than the
aggregate exercise price, the optionholder must pay the difference in cash.
7. Transferability. Any Incentive Stock Option granted under the Plan
shall, during the recipient's lifetime, be exercisable only by such recipient
and shall not be assignable or transferable by such recipient other than by will
or the laws of descent and distribution. Except as specifically allowed by the
Plan Administrator, a Nonqualified Stock Option granted under the Plan or any of
the rights and privileges conferred thereby shall not be assignable or
transferable by the 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.
8. Withholding Taxes; Other Deductions. The Company shall have the
right to deduct from any settlement of an option granted under the Plan,
including the delivery or vesting of shares, (a) an amount sufficient to cover
withholding as required by law for any federal, state or local taxes, and (b)
any amounts due from the recipient of such option to the Company or to any
subsidiary of the Company or to take such other action as may be necessary to
satisfy any such withholding or other obligations, including withholding from
any other cash amounts due or to become due from the Company to such recipient
an amount equal to such taxes or obligations.
9. Termination of Services. The terms and conditions under which an
option may be exercised following termination of an optionholder's employment or
independent contractor relationship with the company shall be determined by the
Plan Administrator; provided, however, that Incentive Stock Options shall not be
exercisable at any time after the earliest of the date that is (a) three months
after termination of employment, unless due to death or Disability (as defined
in Section 22(e)(3) of the Code); (b) one year after termination of employment
due to death or Disability.
10. Term of the Plan. The Plan shall become effective as of January 29,
1998, and shall remain in full force and effect through January 28, 2008, unless
sooner terminated by the Board. After the Plan is terminated, no future options
may be granted, but options previously granted shall remain outstanding in
accordance with their applicable terms and conditions and the Plan's terms and
conditions.
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<PAGE>
11. Plan Amendment. The Board may amend, suspend or terminate the Plan
at any time; provided that no such amendment shall be made without the approval
of the Company's stockholders if such approval is: (a) required to comply with
Section 422 of the Code with respect to Incentive Stock options; (b) required
for purposes of Section 162(m) of the Code; (c) required to comply with New York
Stock Exchange rules and regulations; (d) required to comply with SEC or state
rules and regulations; (e) to increase the number of shares available for
issuance under the Plan; (f) to reduce the minimum exercise price of an option
below Fair Market Value on the date of grant; or (g) to allow Repricings without
shareholder approval. This Plan was unanimously adapted by the Board of
Directors on January 29, 1997.
12. Approval by stockholders. The Plan shall be submitted to the
stockholders of the Company for their approval at a regular meeting to be held
within 12 months after the adoption of the Plan by the Board. Stockholder
approval shall be evidenced by the affirmative vote of the holder of a majority
of the shares of the Company's Common Stock present in person or by proxy and
voting in the meeting.
THREE-FIVE SYSTEMS, INC.
By:/s/ Jeffrey D. Buchanan
-----------------------
Its: Secretary
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<PAGE>
THREE-FIVE SYSTEMS, INC.
1998 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 17,
1998, 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
1998 Annual Meeting of Stockholders of the Company, to be held on Thursday,
April 23, 1998, 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
Company's 1998 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.
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 approve the Company's 1998 Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [}
3. Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors of the Company.
FOR [ ] AGAINST [ ] ABSTAIN [}
</TABLE>
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: , 1998
--------------------------------
---------------------------------------------
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]
