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
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] 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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THREE-FIVE SYSTEMS, INC. LOGO
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 22, 1999
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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 22, 1999, 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 an amendment to the Company's 1998 Stock Option Plan to
increase the number of shares of Common Stock that may be issued pursuant to the
1998 Stock Option Plan from 300,000 shares to 550,000 shares.
3. To ratify the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999.
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 12, 1999
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,
/s/ Jeffrey D. Buchanan
Tempe, Arizona Jeffrey D. Buchanan
March 19, 1999 Secretary
<PAGE>
THREE-FIVE SYSTEMS, INC. LOGO
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 22, 1999 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
19, 1999 to all stockholders entitled to vote at the Meeting.
VOTING SECURITIES AND VOTING RIGHTS
Stockholders of record at the close of business on March 12, 1999 (the
"Record Date") are entitled to notice of and to vote at the Meeting. On the
Record Date, there were issued and outstanding 7,012,107 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) for the
approval of the amendment to the Company's 1998 Stock Option 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, 1999.
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" the approval of the amendment to the
Company's 1998 Stock Option 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, 1999.
<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 by delivering
to the Company 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 1998 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, 1998 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.
2
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The following table sets forth certain information regarding the
nominees for directors of the Company:
NAME AGE POSITION HELD
---- --- -------------
David C. Malmberg 56 Director
Kenneth M. Julien 44 Director
Gary R. Long 66 Director
Jeffrey D. Buchanan 43 Executive Vice President - Finance, Administration,
and Legal; Chief Financial Officer; Secretary;
Treasurer; and Director
Thomas H. Werner 38 Director
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 1980, Mr. Long served as Vice President of
Operations for Talos Systems, which designed and manufactured digitizers for the
computer graphics industry.
JEFFREY D. BUCHANAN has served as a director and Executive Vice
President - Finance, Administration, and Legal of the Company since July 1998;
as Chief Financial Officer and Treasurer of the Company since June 1996; and as
Secretary of the Company since May 1996. Mr. Buchanan served as Vice President -
Finance, Administration, and Legal of the Company from June 1996 until July 1998
and as Vice President - Legal and Administration of the Company from May 1996
until June 1996. Mr. Buchanan served as a Senior Partner of O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears from June 1986 until May 1996, where he
practiced as a business lawyer with an emphasis on mergers and acquisitions,
joint ventures, and taxation. Mr. Buchanan was associated with the international
law firm of Davis Wright Tremaine from 1984 to 1986, and he was a senior staff
person at Deloitte & Touche from 1982 to 1984. Mr. Buchanan is a member of the
Arizona and Washington state bars and passed the certified public accounting
examination in 1983. Mr. Buchanan is the son of David R. Buchanan, the current
Chairman of the Board, President, and Chief Executive Officer of the Company.
THOMAS H. WERNER has been a director of the Company since March 1999.
Mr. Werner has served as Vice President and General Manager for the LAN
Connectivity Division of 3Com Corporation since October 1998. Prior to that, Mr.
Werner was Vice President of the Manufacturing Personal Communication Division
of U.S. Robotics, which 3Com Corporation acquired in June 1997, from January
1996 until September 1998. Mr. Werner also served in various positions at Oak
Frequency Control, a manufacturer of telecommunications components, most
recently as President of the Networks Group from February 1994 until January
1996, and earlier as President of the McCoy International Unit from July 1993
until February 1994.
3
<PAGE>
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, Long, Malmberg, and Burton
E. McGillivray, who is not standing for re-election as a director at the
Meeting, 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,
Julien, Long, and McGillivray serve as the Compensation Committee of the Board
of Directors, with Mr. Malmberg serving as the Chair of the Compensation
Committee.
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 five meetings
during the fiscal year ended December 31, 1998. The Company's Audit Committee
met separately at two formal meetings during the fiscal year ended December 31,
1998. The Company's Compensation Committee held one formal meeting and met
informally several times during the fiscal year ended December 31, 1998. 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 of Directors 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. Employees of the Company that
also serve as directors receive no additional compensation for their 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.
Malmberg, Julien, Long, and Werner 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
each person who served as the Company's Chief Executive Officer during fiscal
1998, as well as its other executive officers whose aggregate cash compensation
exceeded $100,000 for services in all capacities to the Company and its
subsidiaries for the fiscal year ended December 31, 1998 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) OPTIONS(#)(2) ($)(3)
- --------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
David R. Buchanan 1998 $346,037 -- -- $12,224
Chairman of the Board, President, 1997 398,846 221,500 50,000 7,658
and Chief Executive Officer(4) 1996 257,448 -- -- 7,308
Vincent C. Hren 1998 $188,609 -- 30,000 $ 5,503
President, Chief Executive 1997 170,769 97,350 35,000 5,154
Officer, and Director(5) 1996 129,308 20,000 70,000(6) 63,445
Dan J. Schott 1998 $126,604 $ 22,000 10,000 $ 5,761
Vice President - Research and 1997 120,769 41,000 -- 4,301
Development 1996 111,903 -- -- 3,911
Jeffrey D. Buchanan 1998 $162,864 $ 52,500 25,000 $ 5,245
Vice President - Finance, 1997 155,385 89,650 -- 4,917
Administration, and Legal; Chief 1996 90,541 30,000 60,000 123
Financial Officer; Secretary;
Treasurer; and Director(7)
</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 1998 include (i) matching contributions to the
Company's 401(k) Plan earned in fiscal 1998 but not paid until fiscal 1999
in the amount of $5,000, on behalf of each of Messrs. David Buchanan, Hren,
Schott, and Jeffrey Buchanan; and (ii) term life insurance premiums of
$3,024, $418, $761, and $245 paid by the Company on behalf of Messrs. David
Buchanan, Hren, Schott, and Jeffrey Buchanan, respectively.
(4) Mr. Buchanan served as the Company's President and Chief Executive Officer
from February 1990 until July 1998 and re-assumed those positions in
January 1999. Mr. Buchanan is not standing for re-election as a director at
the Meeting.
(5) Mr. Hren served as President and Chief Executive Officer of the Company
from July 1998 until January 1999. Mr. Hren served as a Vice President of
the Company from January 1996 until July 1998.
(6) The amount shown includes options to acquire 35,000 shares of Common Stock
that were cancelled during 1996.
(7) Mr. Buchanan became an officer of the Company in May 1996.
5
<PAGE>
OPTION GRANTS
The following table sets forth certain information with respect to
stock options granted to the Named Officers during the fiscal year ended
December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH)(1) DATE 5% 10%
- ---- ----------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David R. Buchanan...... -- -- -- -- -- --
Vincent C. Hren(3)..... 30,000 9.0% $17.88 7/1/08(3) $337,245 $854,644
Dan J. Schott.......... 10,000 3.0% $10.00 11/9/08(4) $ 62,889 $159,374
Jeffrey D. Buchanan.... 25,000 7.5% $17.88 7/1/08(4) $281,037 $712,204
</TABLE>
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(1) The options were granted at the fair value of the Company's Common Stock on
the date of grant and have a ten-year term.
(2) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future price
of the Company's Common Stock. Actual gains, if any, on stock option
exercises will depend upon the future market prices of the Company's Common
Stock.
(3) Mr. Hren resigned as an officer of the Company in January 1999. Such
options were not vested and were automatically canceled at that time.
(4) Such options vest and become exercisable at the rate of 20% on the first
anniversary of the date of grant, 30% on the second anniversary of the date
of grant, and 50% on the third anniversary of the date of grant.
OPTION EXERCISES AND OPTION HOLDINGS
The following table contains certain information with respect to
options held by the Named Officers as of December 31, 1998. None of the Named
Officers exercised options during fiscal 1998.
YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
- ---- ----------- ---------------- ----------- ----------------
David R. Buchanan.... 50,000 -- $46,875 --
Vincent C. Hren(3)... 7,000 93,000 $31,063 $124,250
Dan J. Schott........ 24,000 26,000 -- $ 36,875
Jeffrey D. Buchanan.. 22,500 62,500 $34,956 $ 34,956
- ----------
(1) Calculated based upon the December 31, 1998, New York Stock Exchange
closing price of $13.69 per share, multiplied by the applicable number of
shares in-the-money, less the aggregate exercise price for such shares. The
exercise price of certain options held by the Named Officers is greater
than $13.69 per share.
(2) Not vested as of December 31, 1998.
(3) Mr. Hren resigned as an officer of the Company in January 1999.
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 $10,000
for calendar 1998. 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 1998 in the amount of
$20,000.
STOCK OPTION PLANS AND DIRECTORS' STOCK PLAN
The Company currently has five 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"); the 1997 Stock Option Plan (the "1997 Plan"); and the 1998 Stock
Option Plan (the "1998 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. Eligible persons under the 1998 Plan include
employees of the Company (including officers and directors) and independent
contractors. 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 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 164,850 options issued but
unexercised under the 1990 Plan as of March 12, 1999. 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 12, 1999, an aggregate of 15,650
shares of Common Stock had been issued upon exercise of options granted under
the 1993 Plan, and there were outstanding options to acquire 293,900 shares of
the Company's Common Stock.
Under the 1994 Plan, 50,000 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 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 12,000 shares of the Company's Common Stock under the 1994
Plan as of March 12, 1999.
7
<PAGE>
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. There were
outstanding options to acquire 44,800 shares of the Company's Common Stock under
the 1997 Plan as of March 12, 1999.
The Board of Directors adopted the 1998 Plan on January 29, 1998, and
the Company's stockholders approved the 1998 Plan on April 23, 1998. A maximum
of 300,000 shares of Common Stock of the Company currently may be issued under
the 1998 Plan. The Board of Directors has amended the 1998 Plan to increase the
number of shares authorized for issuance from 300,000 to 550,000 shares. See
"Proposal to Amend the Company's 1998 Stock Option 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.
There were outstanding options to acquire 92,500 shares of Common Stock under
the 1998 Plan as of March 12, 1999.
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, 1997 Plan, 1998 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, 1998, the Company's
Compensation Committee consisted of Messrs. Malmberg, Julien, Long, and Burton
E. McGillivray, who is not standing for re-election at the Meeting. 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 in April or May 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 Gary R. Long,
Kenneth M. Julien, and Burton E. McGillivray, who is not standing for
re-election as a director at the Meeting, are the current Committee members.
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 obtains the comparative data used to assess
competitiveness from a variety of resources. 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.
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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 1998 were determined by the
Committee in April 1998. Base salaries were raised in 1998 for the executive
officers so that their respective compensation remained competitive with
companies similar in both size and industry.
ANNUAL INCENTIVE BONUSES
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.
For fiscal 1998, 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's assessment of the Company's
overall performance in 1998.
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. As of July 1998, the Chief Executive
Officer and Chief Financial Officer serve as the members of the Employee
Committee, which grants options to employees other than officers. In general,
stock options are granted to managers and key technical employees at the onset
of employment. If, in the opinion of the Plan Administrator, 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
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also have longer vesting schedules. In 1998, the Senior Committee and the
Employee Committee authorized the issuance of stock options to certain executive
officers and other key employees.
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 the
Company's Chief Executive Officer ("CEO"). The Committee's evaluation of the CEO
is subjective, with no particular weight assigned to any one factor. From
January to July, the Company's CEO was David R. Buchanan and his annual base
salary remained at $400,000, which was the same amount that it was for 1997. In
July 1998, David R. Buchanan resigned, and Vincent C. Hren was appointed CEO of
the Company. David Buchanan remained as Executive Chairman. Based on his
experience and comparable data, the Committee established Mr. Hren's annual base
salary at $220,000. In early January 1999, Mr. Hren resigned and Mr. Buchanan
resumed his former position as CEO until a replacement for Mr. Hren could be
found. The Committee determined that Mr. Hren's individual performance for
fiscal year 1998 merited the payment of no bonus in accordance with the terms of
the MICP and based upon the Board's assessment of the overall Company
performance. Mr. Buchanan declined to be considered for a bonus for 1998.
The Senior Committee authorized an additional 30,000 options for Mr.
Hren upon his appointment as CEO in July 1998, but those options were canceled
upon his resignation in January.
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).
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, 1998, 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, except that (i) Robert T. Berube filed a late report on
Form 3 with respect to his ownership of the Company's securities as of the date
he became an executive officer of the Company, and (ii) Gary R. Long filed one
late Form 5 covering one transaction.
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COMPANY PERFORMANCE GRAPH
The following line graph compares cumulative total stockholder returns
for the five years ended December 31, 1998 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, 1993. 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.
CUMULATIVE TOTAL RETURN
--------------------------------------------------
12/93 12/94 12/95 12/96 12/97 12/98
----- ----- ----- ----- ----- -----
Three-Five Systems, Inc. 100 206 96 73 94 78
S & P Smallcap 600 100 95 124 150 189 194
S & P Electrical Equipment 100 101 142 192 271 363
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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 12, 1999 by (i) each
director and each executive officer of the Company, and (ii) all directors and
officers of the Company as a group. The Company is not aware of any other person
that owns more than five percent of the Company's Common Stock.
SHARES BENEFICIALLY
OWNED
-----------------------
NAME OF BENEFICIAL OWNER NUMBER(1) PERCENT(2)
- ------------------------ --------- ----------
DIRECTORS AND EXECUTIVE OFFICERS:
David R. Buchanan(3).................................. 877,198 12.4%
Dan J. Schott(4)...................................... 36,000 *
Lawrence E. Kagemann, Jr.(5).......................... 3,000 *
Jeffrey D. Buchanan(6)................................ 55,590 *
Radu G. Andrei(7) .................................... -- --
Robert T. Berube (8).................................. 3,750 *
Burton E. McGillivray(9).............................. 70,501 1%
David C. Malmberg(10)................................. 27,001 *
Kenneth M. Julien(11)................................. 3,867 *
Gary R. Long(12)...................................... 6,167 *
Thomas H. Werner...................................... -- --
All directors and executive officers as a group
(eleven persons).................................... 1,083,074 15.2%
- ----------
* 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 12, 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 12, 1999. 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 12, 1998 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 vested
stock options. Mr. Buchanan is not standing for re-election as a director
at the Meeting.
(4) Includes 32,000 shares of Common Stock issuable upon exercise of vested
stock options.
(5) Mr. Kagemann serves as the Company's Vice President - Operations.
(6) Includes 27,500 shares of Common Stock issuable upon exercise of vested
stock options.
(7) Mr. Andrei serves as the Company's Vice President - Sales and Marketing.
(8) Includes 1,750 shares of Common Stock issuable upon exercise of vested
stock options. Mr. Berube serves as the Company's Principal Accounting
Officer and Corporate Controller.
(9) Includes 4,000 shares of Common Stock issuable upon exercise of vested
stock options. Mr. McGillivray is not standing for re-election as a
director at the Meeting.
(10) Includes 4,000 shares of Common Stock issuable upon exercise of vested
stock options.
(11) Includes 1,666 shares of Common Stock issuable upon exercise of vested
stock options.
(12) Represents 700 shares of Common Stock held by Mr. Julien as custodian for
his minor children and 1,666 shares of Common Stock issuable upon exercise
of vested stock options.
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PROPOSAL TO AMEND THE COMPANY'S
1998 STOCK OPTION PLAN
On January 28, 1999, the Board of Directors approved a proposal to
amend the Company's 1998 Stock Option Plan (the "1998 Plan"), subject to
approval by the Company's stockholders, to increase the number of shares of
Common Stock that may be issued pursuant to the 1998 Plan from 300,000 shares to
550,000 shares. The full text of the 1998 Stock Option Plan as proposed to be
amended is included as "Appendix A" to this Proxy Statement. The Board of
Directors recommends a vote "for" the proposed amendment to the 1998 Plan.
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. By January 28, 1999, the Company had
granted options to purchase an aggregate of 122,500 of the 300,000 shares of
Common Stock then reserved for issuance under the 1998 Plan. At that time, the
Board of Directors considered the likelihood that the Company will be required
to grant a significant number of stock options in the near future in order to
attract additional senior management personnel, particularly a Chief Technical
Officer and a permanent Chief Executive Officer. Accordingly, the Board of
Directors approved a proposal to increase the number of shares that may be
issued pursuant to the 1998 Plan to 550,000 in order to enable the Company to
make grants to new executive officers as well as to continue to grant options
and/or issue shares of Common Stock under the 1998 Plan to other employees,
independent contractors, and non-employee directors.
DESCRIPTION OF THE 1998 STOCK OPTION PLAN
SHARES SUBJECT TO THE PLAN
A maximum of 300,000 shares of Common Stock of the Company currently
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 12, 1999, no shares of the Company's Common
Stock had been issued upon exercise of options granted pursuant to the 1998
Plan, and there were outstanding options to acquire 92,500 shares of the
Company's Common Stock.
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." 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 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.
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TERMS AND CONDITIONS OF OPTIONS; EXERCISE PRICES; EXERCISE OF OPTIONS
Each Plan Administrator determines the expiration date, maximum number
of shares purchasable, and the other provisions of the options at the time of
grant. The 1998 Plan currently provides that 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 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 automatically terminate upon completion
of a merger or consolidation in which the Company is not the surviving
corporation.
Although each Plan Administrator determines the exercise prices of
options at the time of grant, the exercise price all of 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 12, 1999, the closing price of
the Company's Common Stock on the New York Stock Exchange was $11.19 per share.
To exercise an option, the optionholder is 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.
NO AFFILIATE REPRICINGS WITHOUT STOCKHOLDER APPROVAL
The Company may not cancel any options granted to officers, directors,
or 10% shareholders 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.
REASONS FOR AND EFFECT OF THE PROPOSED AMENDMENT
It is proposed to increase the number of shares reserved for issuance
under the 1998 Plan from 300,000 to 550,000 shares. The proposed amendment to
the 1998 Plan also would increase the aggregate number of shares of Common Stock
that may be subject to options granted to any one individual in any one year
from 150,000 shares to 275,000 shares. The Company currently is seeking new
executive officers, particularly a new Chief Technical Officer and a permanent
Chief Executive Officer. The Company believes that it will be necessary to grant
a significant number of stock options to attract and retain these officers. In
addition, the Company believes that the proposed amendment to the 1998 Plan will
provide a sufficient reserve of additional shares available for grant under the
1998 Plan to enable the Company to attract and retain other directors, officers,
and key employees from time to time in the future and to motivate such persons
to exert their best efforts on behalf of the Company.
In addition to approving the proposed amendment to the 1998 Plan, on
January 28, 1999 the Board of Directors also reduced the number of shares
authorized for issuance under the 1994 Automatic Stock Option Plan from 100,000
to 50,000 shares. This action by the Board of Directors did not require
stockholder approval. The Board of Directors recognized that, because of the low
number of options granted under the 1994 Plan each year, the number of shares of
Common Stock authorized for issuance under the 1994 Plan was unnecessarily high.
Accordingly, and in light of the proposed increase in the number of shares
authorized under the 1998 Plan, the Board of Directors reduced the number of
shares authorized for issuance under the 1994 Plan with the intent to minimize
the total number of shares authorized under all of the Company's stock-based
plans. In the event that the stockholders of the Company approve the proposed
amendment to the 1998 Plan, the combined effect of the actions of the Board of
Directors will be a net increase of 200,000 shares authorized under all of the
Company's stock-based plans.
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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
20% for property held more than 12 months.
RATIFICATION BY STOCKHOLDERS OF THE AMENDMENT TO THE 1998 PLAN
Upon approval of the amendment to the Company's 1998 Plan by the
stockholders of the Company, the effective date of the amendment will be January
29, 1999. In the event that the amendment to the Company's 1998 Plan is not
approved by the stockholders, the 1998 Plan will remain in effect as previously
adopted. Any options outstanding under the 1998 Plan prior to the amendment will
remain valid and unchanged, except that if the stockholders do not approve the
proposed amendment, any options granted in excess of the 300,000 shares
originally authorized for issuance under the 1998 Plan will automatically be
terminated and of no further force and effect, as though they had never been
granted.
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, 1999 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.
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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 2000, 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.
Pursuant to Rule 14a-4 under the Exchange Act, the Company intends to
retain discretionary authority to vote proxies with respect to shareholder
proposals for which the proponent does not seek to have the Company include the
proposed matter in the proxy statement for the annual meeting to be held during
calendar 2000, except in circumstances where (i) the Company receives notice of
the proposed matter within the time periods described in the paragraph above and
(ii) the proponent complies with the other requirements set forth in Rule 14a-4.
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 19, 1999
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APPENDIX A
AMENDED AND RESTATED
THREE-FIVE SYSTEMS, INC. 1998 STOCK OPTION PLAN
(AMENDED AS OF JANUARY 28, 1999)
1. ADOPTION. On January 29, 1997, the Board of Directors (the "Board")
of Three-Five Systems, Inc., a Delaware corporation (the Company"), adopted the
1998 Stock Option Plan (the "Original Plan"). The stockholders of the Company
approved the Original Plan on April 23, 1998. On January 28, 1999, the Board
amended the Original Plan in order to increase the number of available shares
for issuance under the Plan by 250,000 shares. This amended and restated plan,
fully incorporating the revisions made on January 28, 1999, 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. 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 1998 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 13 hereof.
2. 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 the Company and to link their interests and efforts to
the long-term interests of the Company's stockholders.
3. PLAN ADMINISTRATION
3.1 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 12, 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.
3.2 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% stockholders 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.
4. 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
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Nonqualified Stock Options (as such terms are defined in SECTION 6.1). An
independent contractor or non-employee board member shall be eligible to receive
only Nonqualified Stock Options. For purposes of this SECTION 4, "Company"
includes any parent or subsidiary of the Company as defined in Section 424 of
the Code.
5. SHARES SUBJECT TO THE PLAN
5.1 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 5.2, the aggregate number of shares of Common Stock that may
be issued under the Plan shall not exceed 550,000. 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 275,000.
5.2 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.
5.3 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.
6. STOCK OPTIONS
6.1 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 Exchange 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.
6.2 NO REPRICING WITHOUT STOCKHOLDER 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
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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.
6.3 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.
7. OPTION EXERCISE
7.1 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 7.2) 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.
7.2 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.
8. 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.
9. 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.
10. 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.
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11. 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.
12. 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
stockholder approval. The Original Plan was unanimously adopted by the Board on
January 29, 1997. The Amended and Restated 1998 Stock Option Plan was
unanimously adopted by the Board on January 28, 1999.
13. 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
---------------------------
Name: Jeffrey D. Buchanan
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Its: Secretary
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THREE-FIVE SYSTEMS, INC.
1999 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 19,
1999, and hereby appoints Jeffrey D. 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 1999 Annual Meeting of Stockholders of the Company, to be held on Thursday,
April 22, 1999, 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
that 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
PROPOSED AMENDMENT TO 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 OTHER SIDE.)
THREE-FIVE SYSTEMS, INC.
P.O. BOX 11227
NEW YORK, NY 10203-0227
1. ELECTION OF DIRECTORS:
FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS [ ]
listed below. for all nominees listed below.
Nominees: Jeffrey D. Buchanan, David C. Malmberg, Kenneth M. Julien,
Gary R. Long, Thomas H. Werner
(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
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2. Proposal to amend 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
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: , 1999
-------------------------------------
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Signature
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Signature if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
Votes must be indicated (x) in Black or Blue ink.