SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] 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, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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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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3) Filing Party:
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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 27, 2000
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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 27,
2000, 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 Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock, par
value $.01 per share, from 15,000,000 shares to 60,000,000 shares.
3. To approve the adoption of the Company's Amended and Restated 1998
Directors' Stock Plan, which requires non-employee directors to receive shares
of Common Stock in lieu of cash for an amount equal in value to two-thirds of a
director's annual retainer fee.
4. To ratify the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2000.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 17, 2000 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 29, 2000 Secretary
<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 27, 2000 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 29,
2000 to all stockholders entitled to vote at the Meeting.
VOTING SECURITIES AND VOTING RIGHTS
Stockholders of record at the close of business on March 17, 2000 (the
"Record Date") are entitled to notice of and to vote at the Meeting. On the
Record Date, there were issued and outstanding 12,643,551 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 Restated Certificate of Incorporation, (iii) for the
adoption of the Company's Amended and Restated 1998 Directors' Stock Plan, and
(iv) for the ratification of the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the year ending December 31, 2000.
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
Restated Certificate of Incorporation, (iii) "for" the adoption of the Company's
Amended and Restated 1998 Directors' Stock Plan, and (iv) "for" the ratification
of the appointment of Arthur Andersen LLP as the independent auditors of the
Company for the year ending December 31, 2000.
<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 1999 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, 1999 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 seven 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 Held
---- --- -------------
David C. Malmberg 57 Chairman of the Board
Jack L. Saltich 56 President, Chief Executive Officer, and Director
Kenneth M. Julien 45 Director
Gary R. Long 67 Director
Jeffrey D. Buchanan 44 Executive Vice President; Chief Financial Officer;
Secretary; Treasurer; and Director
Thomas H. Werner 39 Director
David P. Chavoustie 56 Director
DAVID C. MALMBERG has been a director of our company since April 1993 and
Chairman of the Board since April 1999. 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 Bancorporation and Fieldworks, Inc., and is a member of the board of
directors of PPT/Vision, Inc., all publicly held companies. He also serves on
the Board of Trustees for Minnesota State University, Mankato.
JACK L. SALTICH has served as a director and the President and Chief
Executive Officer of our company since July 1999. Mr. Saltich served as Vice
President of Advanced Micro Devices from May 1993 until July 1999; as Executive
Vice President of Applied Micro Circuits Corp. from January 1991 until March
1993; and as Vice President of VLSI from July 1988 until January 1991. Mr.
Saltich held a variety of executive positions for Motorola from July 1971 until
June 1988. These positions included serving as an Engineering Manager from May
1974 until January 1980, an Operation Manager from January 1980 until May 1982,
a Vice President and Director of the Bipolar Technology Center from May 1982
until June 1986, and a Vice President and Director of the Advanced Product
Research and Development Laboratory from June 1986 until June 1988.
KENNETH M. JULIEN has been a director of our 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 our Executive Vice President and Chief
Operating Officer from August 1992 to April 1993; as Vice President, Chief
Financial Officer, and Secretary of our company or one of our predecessors from
May 1988 to August 1992; and as a director of our company or one of its
predecessors from July 1987 to April 1993. Mr. Julien served as a Vice President
and Chief Financial Officer of Cerprobe Corporation, 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 and currently serves on the
board of Alanco Technologies, Inc., a public company.
GARY R. LONG has been a director of our company since October 1996. Mr.
Long served as President and Chief Executive Officer of CalComp Technology,
Inc., 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 our company since July 1998; as Chief
Financial Officer and Treasurer since June 1996; and as Secretary since May
1996. Mr. Buchanan served as our Vice President - Finance, Administration, and
Legal from June 1996 until July 1998 and as our Vice President - Legal and
Administration from May 1996 until June 1996. Mr. Buchanan served from June 1986
until May 1996 as a business lawyer with O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, where his practice emphasized 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.
3
<PAGE>
THOMAS H. WERNER has been a director of our company since March 1999. Mr.
Werner has served as Vice President and General Manager for the Business
Connectivity Group of 3Com Corporation since October 1998. From January 1996
until September 1998, Mr. Werner was Vice President of the Manufacturing
Personal Communication Division of U.S. Robotics, which 3Com Corporation
acquired in June 1997. 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.
DAVID P. CHAVOUSTIE has been a director of our company since January 2000.
From April 1998 to present, Mr. Chavoustie has served as Executive Vice
President of Sales and Marketing of ASML, a manufacturer of lithography
equipment used to manufacture semiconductors. From April 1992 until March 1998,
Mr. Chavoustie held several positions with Advanced Micro Devices, Inc., a
semiconductor company, including Vice President/General Manager Customer
Specific Products Division, Vice President/General Manager Embedded Processor
Division, and Vice President Worldwide Sales/Marketing - Vantis (a wholly-owned
subsidiary of AMD). From 1985 to 1992, Mr. Chavoustie held various positions
with VLSI Technology, Inc., an ASIC semiconductor company, including Sales
Director, Vice President Sales and Corporate Marketing, and Senior Vice
President/General Manager ASIC Products. From 1974 to 1984, Mr. Chavoustie held
various sales positions with Advanced Micro Devices, including area sales -
Southeast United States, regional sales manager, and district sales manager -
Upstate New York.
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. Malmberg, Julien, Long, and Werner,
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 Werner 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 created three standing committees: an Audit Committee, a
Compensation Committee, and an Employee 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
Employee Committee meets on matters relating to the Company's employees.
The Board of Directors of the Company held a total of five meetings during
the fiscal year ended December 31, 1999. The Company's Audit Committee met
separately at two formal meetings during the fiscal year ended December 31,
1999. The Company's Compensation Committee held two formal meetings and met
informally several times during the fiscal year ended December 31, 1999. The
Employee Committee did not meet formally during the year but met informally
several times during the fiscal year ended December 31, 1999. 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.
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<PAGE>
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 non-executive Chairman
receives an extra $15,000 per year over the standard outside director
compensation, with such $15,000 paid in cash immediately upon election each year
after the annual stockholder meeting. 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, Werner, and Chavoustie 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. In addition, each of
Messrs. Werner and Chavoustie were granted options to acquire 1,000 shares of
the Company's Common Stock when they were appointed to the Board of Directors.
See "Executive Compensation - Stock Option Plans and Directors' Stock Plan."
5
<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 1999,
as well as its other executive officers whose aggregate cash compensation
exceeded $100,000 for services in all capacities to the Company and its
subsidiaries for the fiscal year ended December 31, 1999 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------------
Annual Compensation(1) Securities All Other
--------------------------- Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options(#)(2) ($)(3)
- --------------------------- ---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Jack L. Saltich (4) ................. 1999 $141,538 $128,977 266,668 $ 262
President, Chief Executive Officer,
and Director
David R. Buchanan (4) ............... 1999 $326,154 -- -- $51,469
Former Chairman of the Board, 1998 346,037 -- -- 12,224
President, and Chief Executive 1997 398,846 221,500 66,667 7,658
Officer
Vincent C. Hren (5) ................. 1999 $ 40,971 -- -- --
Former President, Chief Executive 1998 188,609 -- 40,000 $ 5,503
Officer, and Director 1997 170,769 97,350 46,667 5,154
Jeffrey D. Buchanan ................. 1999 $190,000 $148,770 -- $ 4,957
Vice President - Finance, 1998 162,864 52,500 33,334 5,245
Administration, and Legal; Chief 1997 155,385 89,650 -- 4,917
Financial Officer; Secretary;
Treasurer; and Director
Dr. Carl E. Derrington(6) ........... 1999 $120,723 $ 79,617 53,334 $ 179
Vice President and
Chief Manufacturing Officer
Robert T. Berube (7) ................ 1999 $ 86,850 $ 38,691 5,334 $ 3,324
Principal Accounting Officer and
Corporate Controller
</TABLE>
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(1) Certain Named Officers also received certain perquisites, the value of
which did not exceed 10% of the 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. Securities
underlying options granted during fiscal years 1998 and 1997 have been
adjusted to reflect the Company's 4-for-3 split of its Common Stock during
fiscal 1999.
(3) Amounts shown for fiscal 1999 include (i) matching contributions to the
Company's 401(k) Plan earned in fiscal 1999 but not paid until fiscal 2000
in the amount of $4,800 and $2,995, on behalf of each of Messrs. Jeffrey
Buchanan and Berube, respectively, (ii) term life insurance premiums of
$191, $1,469, $140, $154,
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<PAGE>
and $292 paid by the Company on behalf of Messrs. Saltich, David Buchanan,
Jeffrey Buchanan, Derrington, and Berube, respectively, and (iii) payments
to Mr. David Buchanan pursuant to a consulting agreement.
(4) Mr. David Buchanan served as the Company's President and Chief Executive
Officer from February 1990 until July 1998 and from January 1999 until July
1999, after which he retired. Mr. Saltich became the Company's President,
Chief Executive Officer, and Director in July 1999.
(5) Mr. Hren served as President and Chief Executive Officer of the Company
from July 1998 until January 1999. Mr. Hren served as a Vice President of
the Company from January 1996 until July 1998.
(6) Dr. Derrington became an executive officer during April 1999.
(7) Mr. Berube became an executive officer during July 1998.
OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted to the Named Officers during the fiscal year ended December 31,
1999. Securities underlying options granted and the respective exercise prices
have been adjusted to reflect the Company's 4-for-3 split of its Common Stock
during fiscal 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------------ Value At Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term(2)
Options Employees in Price Expiration ----------------------
Name Granted (#) Fiscal Year ($/Sh)(1) Date 5% 10%
- ---- ----------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Saltich .......... 266,668 39.41% $12.5156 7/12/09(3) $2,098,942 $5,319,131
David R. Buchanan(4)...... -- -- -- -- -- --
Vincent C. Hren(5) ....... -- -- -- -- -- --
Jeffrey D. Buchanan ...... -- -- -- -- -- --
Dr. Carl E. Derrington ... 53,334 7.88% $ 8.2969 5/3/09(6) 278,290 705,242
Robert T. Berube ......... 5,334 0.79% $10.2656 7/2/09(7) 34,436 87,268
</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) 31,958 of such options vest at the rate of 25% on the first anniversary of
the date of grant and 25% on each anniversary thereafter. The remainder of
such options vest at the rate of 18,678 on the first anniversary of the
date of grant, 45,344 on the second anniversary, 72,010 on the third
anniversary, and 98,678 on the fourth anniversary.
(4) Mr. David Buchanan retired from the Company in August 1999.
(5) Mr. Hren resigned as an officer of the Company in January 1999.
(6) 10,667 of such options are immediately exercisable. 16,000 of such options
vest on the second anniversary of the date of grant, and 26,667 vest on the
third anniversary of the date of grant.
(7) 1,066 of such option vest on the first anniversary of the date of grant,
1,601 vest on the second anniversary, and 2,667 vest on the third
anniversary.
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<PAGE>
OPTION EXERCISES AND OPTION HOLDINGS
The following table contains certain information with respect to options
exercised during fiscal 1999 and options held by the Named Officers as of
December 31, 1999. All share amounts have been adjusted to reflect the Company's
4-for-3 split of its Common Stock during fiscal 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the Money Options
Shares Options At Fiscal Year-end(#) At Fiscal Year-end($)(1)
Acquired On Value ----------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack L. Saltich ......... -- -- -- 266,668 -- $7,595,878
David R. Buchanan(2) .... -- -- 66,667 -- $2,095,844 --
Vincent C. Hren(3) ...... -- -- -- -- -- --
Jeffrey D. Buchanan ..... -- -- 61,666 51,669 $1,925,827 $1,521,112
Dr. Carl E. Derrington .. -- -- 10,667 42,667 $ 348,844 $1,395,343
Robert T. Berube ........ 2,750 $69,688 867 7,468 $ 28,669 $ 235,426
</TABLE>
- ----------
(1) Calculated based upon the December 31, 1999, New York Stock Exchange
closing price of $41.00 per share, multiplied by the number of shares held,
less the aggregate exercise price for such shares.
(2) Mr. David Buchanan retired from the Company in August 1999.
(3) Mr. Hren resigned as an officer of the Company in January 1999.
EMPLOYMENT AND OTHER 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.
David R. Buchanan entered into an agreement with the Company to provide
consulting services to the Company and to refrain from providing any such
services to any of the Company's competitors. The Company entered into the
agreement on September 1, 1999 and the agreement expires on August 31, 2004.
Pursuant to the agreement, Mr. Buchanan is entitled to retain various
business-related equipment previously provided by the Company and is entitled to
receive $12,500 per month during the first year of the agreement, with such
amount increasing by 5% annually during each subsequent year of the agreement.
In addition, the agreement entitles Mr. Buchanan to certain health, disability,
and other benefits afforded to other executive officers through August 31, 2004.
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 1999. 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 1999 in the amount of $7,795.
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
8
<PAGE>
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 113,939 options that were unissued as
of the date that the 1993 Plan was adopted. There were 116,368 options issued
but unexercised under the 1990 Plan as of March 17, 2000. 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. The 1990 Plan expires May 1, 2000.
Under the 1993 Plan, an aggregate of 513,939 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. There were outstanding options to acquire
410,683 shares of the Company's Common Stock under the 1993 Plan as of March 17,
2000.
Under the 1994 Plan, 66,667 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 12,672 shares of the Company's Common Stock under the 1994
Plan as of March 17, 2000.
An aggregate of 233,334 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 145,279 shares of the Company's Common Stock
under the 1997 Plan as of March 17, 2000.
The Board of Directors adopted the 1998 Stock Option Plan on January 29,
1998, and the Company's stockholders approved the 1998 Stock Option Plan on
April 23, 1998. The Board of Directors adopted the Amended and Restated 1998
Stock Option Plan on January 28, 1999, and the Company's stockholders approved
the Amended and Restated 1998 Stock Option Plan on April 22, 1999. An aggregate
of 733,334 shares of Common Stock may be issued upon exercise of options granted
pursuant to the 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 Stock Option Plan. There were
outstanding options to acquire 386,013 shares of Common Stock under the 1998
Stock Option Plan as of March 17, 2000.
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 initially required because treasury shares were used to
fund the Directors' Plan. 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 are issued
to the non-employee directors on the date of the Company's annual meeting of
stockholders to be held in each year. 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. As of March 17, 2000, 393
treasury shares of the stock were available for issuance 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
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otherwise, adjustments will be made as to the maximum number of shares subject
to the 1990 Plan, 1993 Plan, 1994 Plan, 1997 Plan, and 1998 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, 1999, the Company's Compensation
Committee consisted of Messrs. Malmberg, Julien, Long, and Werner. 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. (the "Company") 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 the beginning 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 Kenneth M. Julien,
Gary R. Long, and Thomas H. Werner are the 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. 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. The Committee determined base salaries for fiscal 1999 in April 1999. No
executive officer's base salary was raised in 1999; each officer's base salary
remained flat over 1998.
ANNUAL INCENTIVE BONUSES
Annual 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.
10
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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 1999, 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 1999.
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. Employee Board members 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 also have longer vesting schedules. In 1999, 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. Vincent C.
Hren served as CEO until early January 1999 at an annual base salary of
$220,000. In early January 1999, Mr. Hren resigned and David R. Buchanan resumed
his former position as CEO until a replacement for Mr. Hren could be found. From
January to July, David R. Buchanan's annualized base salary remained at
$400,000, which was the same amount that it was for 1997 and 1998. Jack L.
Saltich was appointed President and CEO in July 1999, after which Mr. Buchanan
retired from the Company. Based on his experience and comparable data, the
Committee established Mr. Saltich's annual base salary at $320,000 and granted
him options to purchase 266,666 shares of common stock of the Company. The
Committee determined that Mr. Saltich's individual performance for fiscal year
1999 merited the payment of a pro rata bonus equal to $129,000 in accordance
with the terms of the MICP and based upon the Board's assessment of the overall
Company performance.
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
11
<PAGE>
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 Compensation Committee to the
Company's Board of Directors.
David C. Malmberg, Chairman
Gary R. Long
Kenneth M. Julien
Thomas H. Werner
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, 1999, 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 Thomas H. Werner filed a late report on Form 3 with
respect to his ownership of the Company's securities as of the date he became a
director of the Company.
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COMPANY PERFORMANCE GRAPH
The following line graph compares cumulative total stockholder returns for
the five years ended December 31, 1999 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, 1994. 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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG THREE-FIVE SYSTEMS, INC., THE S & P SMALLCAP 600 INDEX
AND THE S & P ELECTRICAL EQUIPMENT INDEX
12/94 12/95 12/96 12/97 12/98 12/99
----- ----- ----- ----- ----- -----
THREE-FIVE SYSTEMS, INC. 100 46 35 45 38 150
S & P SMALLCAP 600 100 130 158 198 203 229
S & P ELECTRICAL EQUIPMENT 100 140 190 268 359 538
* $100 INVESTED ON 12/31/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
13
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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 17, 2000, except as indicated,
by (1) each director and each executive officer of the Company, (2) all
directors and officers of the Company as a group, and (3) each person known by
the Company to own 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:
Jack L. Saltich ........................................ 2,666 *
Jeffrey D. Buchanan(3) ................................. 99,119 *
Robert L. Melcher ...................................... -- --
Dr. Carl E. Derrington(4) .............................. 58,667 *
Robert T. Berube(5) .................................... 1,097 *
David C. Malmberg(6) ................................... 38,011 *
Kenneth M. Julien(7) ................................... 7,611 *
Gary R. Long(8) ........................................ 10,611 *
Thomas H. Werner(9) .................................... 2,232 *
David P. Chavoustie .................................... -- --
All directors and executive
officers as a group (ten persons) .................... 220,014 1.73%
5% STOCKHOLDERS:
David R. Buchanan(10) .................................. 692,407 5.45%
- ----------
* 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 17, 2000
by the exercise of vested stock options. All amounts have been adjusted to
reflect the Company's 4-for-3 split of its Common Stock during fiscal 1999.
(2) The percentages shown include the shares of Common Stock which the person
will have the right to acquire within 60 days of March 17, 2000. 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 17, 2000 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 61,666 shares of Common Stock issuable upon exercise of vested
stock options.
(4) Includes 10,667 shares of Common Stock issuable upon exercise of vested
stock options.
(5) Includes 867 shares of Common Stock issuable upon exercise of vested stock
options.
(6) Includes 6,002 shares of Common Stock issuable upon exercise of vested
stock options.
(7) Includes 700 shares of Common Stock held by Mr. Julien as custodian for his
minor children and 3,335 shares of Common Stock issuable upon exercise of
vested stock options.
(8) Includes 3,335 shares of Common Stock issuable upon exercise of vested
stock options.
(9) Includes 444 shares of Common Stock issuable upon exercise of vested stock
options.
(10) As reported on Schedule 13G as filed February 23, 2000. Includes 66,667
shares of Common Stock issuable upon exercise of vested stock options.
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PROPOSAL TO AMEND THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has approved a proposal to amend the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 15,000,000 to 60,000,000. The Board of Directors
recommends a vote "for" the proposed amendment of the Company's Restated
Certificate of Incorporation. The full text of Article Fourth of the Restated
Certificate of Incorporation as proposed to be amended is included as Appendix A
to this Proxy Statement. If approved by the stockholders, the proposed amendment
will become effective upon filing with the Secretary of State of Delaware, which
will occur as soon as reasonably practicable.
The Board of Directors believes that it is in the Company's best interests
to increase the number of authorized shares of Common Stock in order to have
additional authorized but unissued shares available for issuance to meet
business needs as they arise. The Board of Directors believes that the
availability of such additional shares will provide the Company with the
flexibility to issue Common Stock for possible future stock splits, stock
dividends or distributions, financings, acquisitions, stock option plans, or
other proper corporate purposes which may be identified in the future by the
Board of Directors, without the possible expense and delay of a special
stockholders' meeting. The issuance of additional shares of Common Stock may
have a dilutive effect on earnings per share and, for persons who do not
purchase additional shares to maintain their pro rata interest in the Company,
on such stockholders' percentage voting power.
The authorized shares of Common Stock in excess of those issued will be
available for issuance at such times and for such corporate purposes as the
Board of Directors may deem advisable, without further action by the Company's
stockholders, except as may be required by applicable law or by the rules of the
New York Stock Exchange or any other stock exchange or national securities
association trading system on which the securities may be listed or traded. Upon
issuance, such shares will have the same rights as the outstanding shares of
Common Stock. Holders of Common Stock have no preemptive rights.
The Company has no arrangements, agreements, understandings or plans at the
present time for the issuance or use of the additional shares of Common Stock
proposed to be authorized. The Board of Directors does not intend to issue any
Common Stock except on terms which the Board of Directors deems to be in the
best interests of the Company and its then existing stockholders. Any future
issuance of Common Stock will be subject to the rights of holders of outstanding
shares of any preferred stock which the Company may issue in the future.
Although the company has no present intention to issue shares of Common
Stock in the future in order to make acquisition of control of the Company more
difficult, future issuances of Common Stock could have that effect. For example,
the acquisition of shares of the Company's Common Stock by an entity in order to
acquire control of the Company might be discouraged through the public or
private issuance of additional shares of Common Stock, since such issuance would
dilute the stock ownership of the acquiring entity. Common Stock could also be
issued to existing stockholders as a dividend or privately placed with
purchasers who might side with the Board of Directors in opposing a takeover
bid, thus discouraging such a bid.
15
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PROPOSAL TO APPROVE THE COMPANY'S
AMENDED AND RESTATED 1998 DIRECTORS' STOCK PLAN
On January 27, 2000, the Board of Directors approved the Company's Amended
and Restated 1998 Directors' Stock Plan (the "1998 Directors' Plan"), subject to
approval by the Company's stockholders. The full text of the 1998 Directors'
Plan as proposed is included as "Appendix B" to this Proxy Statement. The Board
of Directors recommends a vote "for" the approval of the 1998 Directors' Plan.
The purpose of the 1998 Directors' Plan is to further strengthen the
alignment of interests between members of the Board of Directors and the
Company's stockholders through the increased ownership by non-employee members
of the Board of Directors of shares of the Company's Common Stock. This will be
accomplished by requiring non-employee members of the Board of Directors to
receive a portion of their fees for services as a Director in shares of Common
Stock. By January 27, 2000, the Company had granted all but 393 of the shares of
Common Stock then available for issuance under the Directors' Plan. At that
time, the Board of Directors considered that the Company will be required to
grant additional shares in order to continue this program. Accordingly, the
Board of Directors approved a proposal to amend the Directors' Plan to make
available unissued shares and treasury shares in order to continue this program.
The Board of Directors also reserved 20,000 shares of common stock for issuance
under the 1998 Directors' Plan.
DESCRIPTION OF THE AMENDED AND RESTATED 1998 DIRECTORS' STOCK PLAN
SHARES SUBJECT TO THE PLAN
A maximum of 393 shares of Common Stock of the Company currently are
available for issuance under the original Directors' Plan. A maximum of 20,000
shares of Common Stock of the Company will be available for issuance under the
1998 Directors' Plan.
ELIGIBILITY AND ADMINISTRATION
Shares will be issued pursuant to the 1998 Directors' Plan only to
non-employee members of the Board of Directors. On the date of the annual
stockholders meeting of the Company, each non-employee member of the Board of
Directors is required to receive shares of Common Stock equal in value to
two-thirds of that Director's annual retainer fees. The Common Stock received
pursuant to the 1998 Directors' Plan shall be received in lieu of the equivalent
of annual retainer fees paid in cash. The Board of Directors administers the
1998 Directors' Plan.
ADDITIONAL PROVISIONS
Common Stock issued under the 1998 Directors' Plan shall be subject to such
other conditions and restrictions, if any, as the Board of Directors may
determine. The Board of Directors may, at any time, amend, alter, or discontinue
the 1998 Directors' Plan.
RATIFICATION BY STOCKHOLDERS OF THE 1998 DIRECTORS' PLAN
Upon approval of the 1998 Directors' Plan by the stockholders of the
Company, the effective date of the amendment will be January 27, 2000. In the
event that the 1998 Directors' Plan is not approved by the stockholders, the
1998 Plan will remain in effect as previously adopted. Any grants under the 1998
Directors' Plan prior to the amendment will remain valid and unchanged.
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, 2000 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
2001, 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 2001, 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 29, 2000
17
<PAGE>
APPENDIX A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
THREE-FIVE SYSTEMS, INC.
Three-Five Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That the Board of Directors of the Corporation, by the unanimous
written consent of its members, adopted a resolution proposing and declaring
advisable a proposed amendment to the Restated Certificate of Incorporation of
the Corporation, amending Article Fourth thereof in its entirety to read as set
forth on Exhibit A hereto.
SECOND: That the aforesaid amendment was approved by a majority of
Stockholders of the Corporation at a meeting of the Stockholders held on
_______, 2000.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, Three-Five Systems, Inc. has caused this Certificate of
Amendment to be signed by __________________, its __________, as of the __ day
of _____, 2000.
Three-Five Systems, Inc.
By:
------------------------------------
Name:
Its:
A-1
<PAGE>
EXHIBIT A
FOURTH: A. The total number of shares that the Corporation has authority
to issue is Sixty-One Million (61,000,000), which will be divided into the
following classes and series:
Sixty Million (60,000,000) shares of common stock, par value $.01
per share (the "Common Stock"); and
One Million (1,000,000) shares of serial preferred stock, par
value $.01 per share (the "Serial Preferred Stock").
B. The Serial Preferred Stock may be issued from time to time in
one or more series with such distinctive serial designations and: (i) may have
such voting power, full or limited, or may be without such voting powers; (ii)
may be subject to redemption at such time or times and at such prices; (iii) may
be entitled to receive dividends (which may be cumulative or noncumulative) at
such rate or rates, on such conditions, and at such times, and payable in
preference to or in such relation to, the dividends payable on any other class
or classes or series of stock; (iv) may have such rights upon the dissolution
of, or upon any distribution of the assets of, the Corporation; (v) may be made
convertible into, or exchangeable for, shares of any other class or classes of
stock of the Corporation, at such price or prices or at such rates of exchange,
and with such adjustments; and (vi) shall have each other relative,
participating, optional or special rights, and qualifications, limitations or
restrictions thereof, all as shall hereafter be stated and expressed in a
resolution or resolutions providing for the issue of such Serial Preferred Stock
from time to time adopted by the board of directors of the Corporation pursuant
to authority so to do which is hereby vested in the board of directors.
A-2
<PAGE>
APPENDIX B
THREE FIVE SYSTEMS, INC.
AMENDED AND RESTATED DIRECTORS' STOCK PLAN
(AMENDED AS OF JANUARY 27, 2000)
SECTION 1. ADOPTION AND PURPOSE
(a) Adoption. On January 29, 1998, the Board of Directors (the "Board") of
Three-Five Systems, Inc., a Delaware corporation (the Company"), adopted the
Director's Stock Plan (the "Original Plan"). The Original Plan did not require
stockholder approval because it used the Company's available treasury shares of
Common Stock. On January 27, 2000, the Board adopted certain amendments to the
Original Plan because the Company's treasury shares were issued in the equity
offering in September 1999 and, consequently, no shares remained in the Original
Plan. The amended and restated Plan must be approved by the stockholders of the
Company within one year of the date of its adoption by the Board. The amended
and restated Plan shall be known as the Three-Five Systems, Inc. Amended and
Restated Directors' Stock Plan (the "Plan").
(b) PURPOSE. The purpose of the Three Five Systems, Inc. Directors' Stock
Plan is to further strengthen the alignment of interests between members of the
Board of Three Five Systems, Inc. and the Company's stockholders through the
increased ownership by non-employee members of the Board ("Participants") of
shares of the Company's common stock ("Common Stock"). This will be accomplished
by requiring Participants to receive a portion of their fees for services as a
Director in shares of Common Stock.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Board. Subject to the provisions of
the Plan, the Board shall have sole and complete authority to construe and
interpret the Plan; to establish, amend and rescind appropriate rules and
regulations relating to the Plan; to administer the Plan; and to take all such
steps and make all such determinations in connection with the Plan as it may
deem necessary or advisable to carry out the provisions and intent of the Plan.
All determinations of the Board shall be by a majority of its members, and its
determinations shall be final and conclusive for all purposes and upon all
persons, including, but without limitation, the Company, the Participants and
their respective successors in interest.
SECTION 3. ELIGIBILITY AND PARTICIPATION
Participation in the Plan shall be limited to Participants. On the date
specified in Section 5, each Participant shall receive shares of Common Stock
equal in value (the "Specified Stock Value") to two-thirds of that Participant's
annual retainer fees. The Common Stock received pursuant to this Plan shall be
received in lieu of the equivalent value of annual retainer fees paid in cash.
SECTION 4. COMMON STOCK SUBJECT TO THE PLAN
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 Board may from time to time determine. The total number
of shares of Common Stock initially reserved and available for distribution
under the Plan shall be 20,000, subject to adjustment as herein provided ("Total
Available Shares").
In the event of any merger, reorganization, consolidation,
recapitalization, Common Stock dividend, Common Stock split or other change in
corporate structure affecting the Common Stock, the Board, in its sole
discretion, shall make such modifications, substitutions or adjustments as it
deems necessary to reflect such change so as to prevent the dilution or
enlargement of rights, including, but not limited to, modifications,
substitutions or adjustments in the aggregate number of shares reserved for
issuance under the Plan.
B-1
<PAGE>
SECTION 5. ISSUANCE OF SHARES
Shares of Common Stock shall be issued annually under the Plan on the date
of the annual meeting of the shareholders of the Company. The number of shares
of Common Stock to be received by a Participant under the Plan shall be equal to
the Specified Stock Value divided by the closing price of the Common Stock as
reported in the Wall Street Journal (or in such other source as the Board deems
reliable) for the last market trading day prior to the annual meeting of the
shareholders of the Company.
All shares issued under the Plan, including fractional shares, shall be
held in a book-entry account with the Company's transfer agent unless the Board
designates another person to act in that capacity. Participants may in the
alternative elect to receive a stock certificate representing the number of
whole shares acquired by notifying the Corporate Secretary of the Company in
writing. The Company will make a cash payment to the Participants for any
fractional share in lieu of issuing a stock certificate.
Common Stock acquired under this Plan shall be subject to such other
conditions and restrictions, if any, as the Board may determine.
SECTION 6. ADDITIONAL PROVISIONS
The Board may, at any time, amend, alter or discontinue the Plan, but no
amendment, alteration or discontinuance shall be made which would impair the
rights of a Participant with respect to shares of Common Stock previously,
distributed to such Participant under the Plan, without the Participant consent,
or which, would cause the Plan not to comply with Rule 16b-3.
With respect to persons subject to Section 16 of the Act, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 regardless of whether such conditions are set forth in the Plan. To the
extent any provision of the Plan or action by the Board fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Board.
Every recipient of shares pursuant to this Plan shall be bound by the terms
and provisions of this Plan, and the acceptance of any transfer of shares
pursuant to this Plan shall constitute a binding agreement between the recipient
and the Company.
SECTION 7. DURATION OF THE PLAN
The Original Plan was approved unanimously by the Board on January 29,
1998. The Amended and Restated Plan was approved unanimously by the Board on
January 27, 2000.
THREE-FIVE SYSTEMS, INC.
----------------------------------------
Jeffrey D. Buchanan
Secretary
B-2
<PAGE>
[FRONT OF CARD]
THREE-FIVE SYSTEMS, INC.
2000 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 29,
2000, and hereby appoints Jack L. Saltich and Jeffrey D. Buchanan, 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
2000 Annual Meeting of Stockholders of the Company, to be held on Thursday,
April 27, 2000, 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 RESTATED CERTIFICATE OF INCORPORATION; FOR
ADOPTION OF THE COMPANY'S AMENDED AND RESTATED 1998 DIRECTORS' STOCK 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
<PAGE>
[REVERSE OF CARD]
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS: FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS [ ]
listed below. for all nominees listed below.
</TABLE>
Nominees: Jack L. Saltich, Jeffrey D. Buchanan, David C. Malmberg, Kenneth M.
Julien, Gary R. Long, Thomas H. Werner, and David P. Chavoustie.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided below.)
*Exceptions_____________________________________________________________________
2. Proposal to amend the Company's Restated Certificate of Incorporation to
increase the authorized shares of Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to adopt the Company's Amended and Restated 1998 Directors' Stock
Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
and upon such matters which may properly come before the meeting or any
adjournment or adjournments thereof.
Change of Address and/or Comments Mark Here [ ]
(This Proxy should be dated, signed by the
stockholder(s) exactly as his or her name
appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If
shares are held by joint tenants or as
community property, both stockholders should
sign.)
Dated:_____________________, 2000
_______________________________________________
Signature
_______________________________________________
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.
