<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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 sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
Smartflex Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not 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:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] 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:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
SMARTFLEX SYSTEMS, INC.
14312 FRANKLIN AVENUE
P.O. BOX 2085
TUSTIN, CALIFORNIA 92781-2085
April 4, 1997
Dear Stockholders:
Our Annual Meeting of Stockholders will be held on May 14, 1997, at 9:30
a.m., Pacific Time, at the Marriott Hotel, 18000 Von Karman, Irvine, California.
I urge you to attend this meeting to give us an opportunity to meet you
personally, to allow us to introduce to you the key personnel responsible for
management of your Company and to answer any questions you may have.
The formal Notice of Meeting, the Proxy Statement, the proxy card, and the
Annual Report to Stockholders describing the Company's operations during the
fiscal year ended December 31, 1996 are enclosed.
I hope that you will be able to attend the meeting in person. Whether or
not you plan to attend the meeting, please sign and return the enclosed proxy
card promptly. A prepaid return envelope is provided for this purpose. Your
shares will be voted at the meeting in accordance with your proxy.
If you have shares in more than one name, or if your stock is registered in
more than one way, you may receive more than one copy of the proxy materials. If
so, please sign and return each of the proxy cards you receive so that all of
your shares may be voted. I look forward to seeing you at the May 14, 1997
Annual Meeting of Stockholders.
Very truly yours,
SMARTFLEX SYSTEMS, INC.
/s/ William L. Healey
William L. Healey
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 3
SMARTFLEX SYSTEMS, INC.
14312 FRANKLIN AVENUE
P.O. BOX 2085
TUSTIN, CALIFORNIA 92781-2085
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of
Smartflex Systems, Inc. (the "Company"), will be held at the Marriott Hotel,
18000 Von Karman, Irvine, California, on Wednesday, May 14, 1997, at 9:30 a.m.,
Pacific Time, for the following purposes, which are more fully described in the
accompanying Proxy Statement:
1. To elect five persons to the Board of Directors to serve until the
next annual meeting of stockholders or until their successors are
elected and qualified;
2. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
1997; and
3. To transact such other business as may properly come before the
Annual Meeting of Stockholders and any adjournments or postponements
thereof.
Notice is also hereby given of any and all adjournments and postponements
of the Annual Meeting.
The Board of Directors has fixed the close of business on March 24, 1997,
as the record date for determination of the stockholders entitled to notice of
and to vote at the 1997 Annual Meeting of Stockholders.
By Order of the Board of Directors,
/s/ Nick E. Yocca
Nick E. Yocca
Secretary
Tustin, California
April 4, 1997
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. THE PROXY IS
REVOCABLE AND WILL NOT AFFECT THE RIGHT OF EACH RECORD HOLDER TO VOTE IN PERSON
AT THE ANNUAL MEETING.
<PAGE> 4
SMARTFLEX SYSTEMS, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1997
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of Stockholders of Smartflex Systems,
Inc., a Delaware corporation (the "Company"), to be held at the Marriott Hotel,
18000 Von Karman, Irvine, California, at 9:30 a.m. Pacific Time, on Wednesday,
May 14, 1997, and at any and all adjournments or postponements thereof (the
"Meeting").
This Proxy Statement is first being mailed or given on or about April 4,
1997 to stockholders entitled to vote at the Meeting.
REVOCABILITY OF PROXIES
A form of proxy for voting your shares at the Meeting is enclosed. Any
stockholder who executes and delivers a proxy has the right to revoke it at any
time before it is exercised by (i) delivering an instrument revoking the proxy
to the Secretary of the Company, (ii) executing and returning a proxy bearing a
later date, if received by the stock registrar on or before the last business
day preceding the meeting, or (iii) appearing and voting in person at the
Meeting by written ballot. Subject to such revocation, shares represented by a
properly executed proxy received by the Company in time for the Meeting will be
voted in accordance with the instructions on the proxy. If no instruction is
specified on each proposal, the shares represented by the proxy will be voted
FOR the election as directors of the nominees listed on the proxy, and FOR
ratification of the appointment of Ernst & Young LLP as independent auditors of
the Company. If any other business is properly presented at the Meeting, the
proxy will be voted in accordance with the recommendations of the Board of
Directors.
PERSONS MAKING THE SOLICITATION
This solicitation of proxies is being made by the Board of Directors of the
Company. It is contemplated that proxies will be solicited through the mails,
but officers and regular employees of the Company may solicit proxies personally
or by telephone, telegram or facsimile without receiving special compensation
therefor. The Company will bear the entire cost of solicitation of proxies
including costs associated with the preparation, assembly, printing and mailing
of this Proxy Statement and any other materials used in the solicitation of
proxies or furnished to stockholders for the Meeting. Upon request, the Company
shall reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in mailing these proxy materials to
the beneficial owners of the shares held of record by such entities. In
addition, the Company may use the services of individuals or companies it does
not regularly employ in connection with the solicitation of proxies, if
management determines that it is advisable.
VOTING AT THE MEETING
The shares of common stock of the Company, $.0025 par value (the "Common
Stock"), constitute the only outstanding class of voting securities of the
Company. A total of 6,315,958 shares of the Company's Common Stock were
outstanding at the close of business on March 24, 1997, which has been fixed as
the record date (the "Record Date") for the purpose of determining the
stockholders entitled to notice of and to vote at the Meeting. Each stockholder
will be entitled to one vote, in person or by proxy, for each share of Common
Stock held of record on the Record Date. Abstentions and broker non-votes are
each included in the determination of the number of shares present or
represented at the meeting for the purpose of determining whether a quorum is
present, and each is tabulated separately. In determining whether a proposal has
been approved, abstentions are counted as votes against a proposal and broker
non-votes are not counted as votes for or against a proposal or as votes present
and entitled to vote on a proposal.
<PAGE> 5
PROPOSAL ONE
ELECTION OF DIRECTORS
Directors are elected at each annual stockholders' meeting to serve until
the next annual meeting or until their successors are elected and qualified. The
Board of Directors proposes the election of five directors at the Meeting.
Unless authority to vote for directors has been withheld in the proxy, the
persons named in the enclosed proxy intend to vote at the Meeting for the
election of the nominees presented below. The five nominees are incumbent
directors, and the term of office for each person elected as a director will
continue until the next annual meeting of stockholders or until a successor has
been elected and qualified. Each of the nominees has consented to serve as a
director for the ensuing year. If any nominee becomes unavailable for any reason
before the election, then the enclosed proxy will be voted for the election of
such substitute nominees, if any, as shall be designated by the Board of
Directors. The Board of Directors has no reason to believe that any of the
nominees will become unavailable to serve. Election as a director will require
the affirmative vote of the holders of a plurality of the outstanding shares of
the Company's Common Stock present or represented at the Meeting and entitled to
vote thereat.
The names and certain information concerning the persons to be nominated
for election as directors are set forth below. YOUR BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH OF THE NOMINEES NAMED BELOW.
NOMINEES
The following table and paragraphs set forth the names of and certain
information regarding the nominees for election as directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------ ---- ----------------------------------
<S> <C> <C>
William L. Healey....... 52 President, Chief Executive Officer
and Chairman of the Board of
Directors
William E. Bendush...... 48 Director
Alan V. King............ 62 Director
William A. Klein........ 56 Director
Gary E. Liebl........... 55 Director
</TABLE>
William L. Healey has served as President and Chief Executive Officer of
the Company since July 1989, and as a director since its incorporation in
September 1993. In January 1996, Mr. Healey was elected Chairman of the Board.
Prior to joining Smartflex, Mr. Healey worked at Silicon Systems, Inc. ("Silicon
Systems"), a supplier of mixed signal integrated circuits. While employed by
Silicon Systems, Mr. Healey was responsible for all manufacturing operations in
California and Singapore, and held several senior executive positions, including
Senior Vice President of Operations, Vice President of Manufacturing and
Director of Wafer Fabrication Operations. Mr. Healey also sits on the Board of
privately held Bell Technologies, Inc., a leading provider of electronics
products and services to the high technology segment of the electronics
industry, and publicly held Praegitzer Industries, a leading provider of printed
circuit boards.
William E. Bendush has served on the Company's Board of Directors since
January 17, 1996. From May 1987 to the present time, Mr. Bendush has served as
Senior Vice President and Chief Financial Officer of Silicon Systems.
Alan V. King has served on the Company's Board of Directors since October
1993. Mr. King also serves as Chairman of the Board of Directors of Arithmos,
Inc., a developer of mixed signal application specific integrated circuits for
flat panel displays, as Chairman of the Board of Directors of Beckmen Displays
Inc., a developer of display technology, and as Chairman of the Board of
Directors of Berkeley Integrated Technologies, Inc., a developer of battery
management integrated circuits. From 1991 to November 1994, Mr. King was the
President and Chief Executive Officer of Silicon Systems. As indicated above,
Silicon Systems was a principal shareholder and is a supplier to the Company.
From 1986 to 1991, Mr. King served as the President and Chief Executive Officer
of Precision Monolithics, Inc., a semiconductor company.
2
<PAGE> 6
William A. Klein has served on the Company's Board of Directors since
January 1994. Mr. Klein has been Chairman of the Board of The Cerplex Group,
Inc., a provider of electronic repair services, since its inception in May 1990.
Mr. Klein was President and Chief Executive Officer of Century Data, Inc., a
disk drive manufacturer, from 1986 to 1990.
Gary E. Liebl has served on the Company's Board of Directors since January
1994. Mr. Liebl is a private investor and business advisor to chief executive
officers and boards of directors. Mr. Liebl serves as Chairman of the Board of
Directors of QLogic Corporation, a semiconductor company, as Vice Chairman of
the Board of Artisoft, Inc., a software company, and on the Board of privately
held Pressure Systems, Inc., a satellite components supplier. Until November,
1996, Mr. Liebl served on the Board of Emulex Corporation, a networking products
company, and until April 1990 he held senior management positions, including
Chairman and Chief Executive Officer, at Cipher Data Products, Inc., a supplier
of tape and optical disk drives to the computer industry.
There are no family relationships among any of the Company's officers or
directors.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held six meetings during the fiscal
year ended December 31, 1996. The Board of Directors has established a standing
Compensation Committee and an Audit Committee. The Compensation Committee held
three meetings in 1996, and also acted from time to time by written consent of
all of the members of such Committee. The Audit Committee held two meetings in
1996. Each director attended at least 75% of the aggregate number of meetings of
the Board and of the Committees of which he was a member in 1996. The Board of
Directors has no nominating committee or any committee performing the functions
of such a committee.
The Compensation Committee provides recommendations concerning salaries and
incentive compensation for executive officers and key personnel, and administers
the Company's equity incentive plans. Gary E. Liebl (Chairman) and Alan V. King
are currently members of the Compensation Committee. Mr. William E. Bendush
served on the Compensation Committee from May 1996 to November 1996. During
fiscal 1995, Dr. Richard A. Charpie, who resigned from the Company's Board of
Directors in January 1996, also served on the Compensation Committee and was its
Chairman.
The Audit Committee is responsible for recommending to the Board of
Directors the appointment of the Company's outside auditors, examining the
results of audits and reviewing internal accounting controls. William E. Bendush
(Chairman) and William A. Klein are currently members of the Audit Committee.
During fiscal 1996, Dr. Carmelo J. Santoro, whose term of office as member of
the Company's Board of Directors expired immediately preceding the 1996 Annual
Meeting, also served on the Audit Committee.
EXECUTIVE OFFICERS
The following table and paragraphs set forth the names of and certain
information regarding the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- -------------------------- ---- -----------------------------------------
<S> <C> <C>
William L. Healey......... 52 President, Chief Executive Officer and
Chairman of the Board of Directors
Richard D. Bell........... 52 Vice President of Marketing and Sales
Alfred B. Castleman....... 58 Vice President and Chief Financial
Officer
Christopher J. Rollison... 38 Vice President of Operations
John W. Hohener........... 41 Corporate Controller and Treasurer
</TABLE>
3
<PAGE> 7
For information on the business background of Mr. Healey, see "Election of
Directors -- Nominees" above.
Richard D. Bell joined Smartflex in 1987, and has served as Vice President
of Marketing and Sales of the Company since 1993. Prior to joining Smartflex,
Mr. Bell spent nine years in senior technical marketing and sales management
positions with Scientific-Atlanta, Inc., a manufacturer of communications and
electronics equipment, and Rogers Corporation, a supplier of flex circuits to
the hard disk drive market. Mr. Bell served as a member of the Company's Board
of Directors in 1993.
Alfred B. Castleman has served as the Vice President and Chief Financial
Officer of the Company since March 1994. Mr. Castleman served as Chief Financial
Officer of MCI/Quantel Corporation, an electronic equipment manufacturing and
service company, from January 1982 to February 1984, of Micro Linear
Corporation, an integrated circuit manufacturer, from February 1984 to March
1992, and of Sherpa Corporation, a commercial software development company, from
March 1992 to September 1993.
Christopher J. Rollison has served as Vice President of Operations since
July 1995. Mr. Rollison joined Smartflex at its inception in August 1985 as a
senior process engineer. Subsequently, he held a series of positions of
increasing responsibility including Director of Operations from 1992 to 1995,
culminating in his current role as Vice President of Operations.
John W. Hohener has served as Corporate Controller and Treasurer of the
Company since May 1988. Prior to joining Smartflex, Mr. Hohener spent eight
years with Silicon Systems, where he held numerous financial management
positions, including Director of Corporate Accounting. Mr. Hohener served as a
member of the Company's Board of Directors in 1993.
4
<PAGE> 8
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by the Company for services rendered for the fiscal year ended
December 31, 1996, to the Company's Chief Executive Officer and each of the
Company's other four most highly compensated executive officers whose total
annual salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
ALL OTHER UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS ($)(2) SARS(#) ($)(3)
- ------------------------------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
William L. Healey.............. $259,056 $110,776 $ 40,957 -- $ 12,967
Chairman of the Board,
President and Chief Executive
Officer
Richard D. Bell................ 140,452 44,950 10,332 -- 3,623
Vice President, Marketing
and Sales
Alfred B. Castleman............ 131,089 40,961 10,914 -- 3,594
Vice President and Chief
Financial Officer
Christopher J. Rollison........ 119,651 38,721 9,248 -- 3,563
Vice President, Operations
John W. Hohener................ 105,654 23,558 329 -- 3,592
Corporate Controller and
Treasurer
</TABLE>
- ---------------
(1) The Company operates and reports financial results on a 52- or 53-week year,
ending on the Saturday nearest December 31 each year, and follows a
four-four-five week quarterly cycle. For clarity of presentation, the
Company has described all periods presented as if the fiscal year ended
December 31.
(2) "Other Annual Compensation" for Mr. Healey includes fiscal 1996 auto
allowance payments totaling $10,800, tax reimbursements paid on Mr. Healey's
behalf totaling $17,520, Long Term Disability Insurance payments totaling
$5,643, tax preparation fees of $2,250, Group Life Insurance payments
totaling $2,016, medical insurance payments of $1,381, and gasoline expenses
of $1,347 for a total of $40,957.
(3) "All Other Compensation" includes fiscal 1996 matching contributions to the
Company's 401(k) savings plan for Messrs. Healey, Bell, Castleman, Rollison
and Hohener totaling $4,500, $3,623, $3,594, $3,563 and $3,592,
respectively. Additionally, for Mr. Healey, the amount includes fiscal 1996
life insurance premiums paid by the Company which totaled $8,467.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None of the Company's executive officers has an employment contract with
the Company, and each one's employment may be terminated at any time at the
discretion of the Board of Directors.
The Compensation Committee has the authority as administrator of the
Company's equity incentive plans to provide for the accelerated vesting of the
shares of Common Stock subject to outstanding unvested options held by
individuals under such plans, including the Company's executive officers and
directors, in the event that a change-in-control of the Company occurs.
Effective January 1, 1996, the Board of Directors adopted an Executive
Involuntary Termination Policy (the "Policy"), the purpose of which is to assist
terminated executives while they seek other employment. Under the Policy, the
President, each Vice President, and certain other executives ("executives")
reporting directly to the President are eligible to receive salary continuation
and certain other benefits following any
5
<PAGE> 9
involuntary termination of their employment, including a deemed termination
resulting from a change-in-control transaction. Under the policy, the term
"involuntary termination" excludes termination for cause (which for purposes of
this policy is deemed to be gross misconduct and/or willful neglect of duties),
retirement, or death. The post-termination salary and benefits continuation
period is up to 24 months, in the case of the President, and one month for each
year of service to the Company for other covered executives, up to a maximum of
12 months, in the case of Vice Presidents, and up to a maximum of six months, in
the case of all other covered executives. All salary continuation benefits will
cease upon a terminated executive's obtaining new employment.
OPTION GRANTS
During the year ended December 31, 1996, options to purchase an aggregate
of 20,000 shares of Common Stock were granted to employees. Such options to
purchase shares of Common Stock were not granted to any of the Named Executive
Officers. Options were granted to the Named Executive Officers commensurate with
the Initial Public Offering approximately six months earlier which negated the
necessity to issue options in early fiscal 1996.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information concerning the number of
shares covered by both exercisable and unexercisable stock options for the Named
Executive Officers as of December 31, 1996. Also reported are the values for "in
the money" options that represent the positive spread between the exercise
prices of any of such existing stock options and the closing sale price of the
Company's Common Stock as of December 31, 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, AT DECEMBER 31, 1996($)(1)
1996(#)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William L. Healey................................ 25,375 36,625 $ 221,852 $ 189,658
Richard D. Bell(2)............................... 8,250 8,750 93,718 60,080
Alfred B. Castleman.............................. 30,625 19,375 381,875 198,125
Christopher J. Rollison.......................... 9,625 8,375 115,089 54,251
John W. Hohener.................................. 8,688 6,312 110,872 44,968
</TABLE>
- ---------------
(1) Calculated based on a fair market value equal to the reported closing price
of the Company's Common Stock on The Nasdaq National Market at December 31,
1996, of $16.50 per share, less the applicable exercise price.
(2) Mr. Bell exercised an option to purchase 3,000 shares of Common Stock in
April 1996 at an exercise price of $0.9575.
COMPENSATION OF DIRECTORS
Commencing with the third fiscal quarter of 1995, non-employee directors
are paid an annual retainer of $20,000 per year plus $1,000 for each meeting
attended in person. Prior to such time, non-employee directors received no cash
compensation for serving on the Board of Directors. Mr. Healey receives no
additional compensation for services rendered by him as a director of the
Company.
Pursuant to the Company's 1994 Equity Incentive Plan for Officers,
Directors and Consultants (the "1994 Plan"), each of Messrs. King and Klein
purchased 8,000 shares of restricted Common Stock and Mr. Liebl was granted an
option to purchase 8,000 shares of Common Stock. Such awards became vested as
6
<PAGE> 10
to 25% in June 1994, and vested at the rate of 12.5% per quarter thereafter
through December 1995. Pursuant to the Company's 1995 Equity Incentive Plan (the
"1995 Plan"), which became effective as of July 31, 1995, each non-employee
director is automatically granted a non-qualified stock option to purchase
10,000 shares of Common Stock upon his or her initial election to the Board of
Directors, and an additional automatic grant of a non-qualified stock option to
purchase 3,000 shares of Common Stock each time such director is reelected to
the Board of Directors. Automatic grants are at the fair market price of the
Common Stock on the date a director is elected or reelected, as the case may be,
and vest as to 50% of the shares covered thereby on the first anniversary of the
grant date, and thereafter at the rate of 12.5% of the shares every three
months. Mr. Bendush was automatically granted a stock option to purchase 10,000
shares under the 1995 Plan upon his initial election to the Board to fill a
vacancy that existed in January 1996. Each of Messrs. Bendush, King, Klein, and
Liebl received a grant of 3,000 shares of Common Stock, respectively, upon their
election to the board at the May 1996 Annual Meeting. Concurrent with the
effectiveness of the 1995 Plan, new grants under the 1994 Plan were
discontinued.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, which currently consists of Messrs. Liebl and
King, is primarily responsible for approving the Company's general compensation
policies and setting compensation levels for the Company's executive officers.
The Compensation Committee also administers the Company's equity-based incentive
plans.
During the fiscal year ended December 31, 1996, Dr. Richard A. Charpie, who
resigned from the Company's Board of Directors in January 1996, was also a
member of the Compensation Committee and served as its Chairman. Dr. Charpie is
the President of Ampersand Venture Management Corporation and the Managing
General Partner of Ampersand Ventures, a venture capital investment firm. As of
March 19, 1997, Ampersand Specialty Materials and Chemicals II Limited
Partnership ("Ampersand Chemicals") and Ampersand Specialty Materials Ventures
Limited Partnership ("Ampersand Materials") together owned over 4% of the
Company's outstanding Common Stock. During 1995, Dr. Charpie was also a member
of the board of directors of ADFlex Solutions, Inc. ("ADFlex"), a principal
supplier of components to the Company, and, by virtue of his pecuniary interest
in Ampersand Chemicals and Ampersand Materials, indirectly owns over 9% of the
outstanding common stock of ADFlex. See "Certain Transactions."
Until November 1, 1994, Mr. King was the President and Chief Executive
Officer of Silicon Systems, and Mr. Bendush is currently Senior Vice President
and Chief Financial Officer of Silicon Systems; Carmelo J. Santoro, Ph.D., a
member of the Company's Board of Directors during fiscal 1995 and a portion of
fiscal 1996, served on the fiduciary Board of Directors of Silicon Systems.
Silicon Systems leases warehouse and office facilities, and provides certain
maintenance services, in Tustin, California to the Company pursuant to a
Facilities and Services Agreement. The Company pays Silicon Systems
approximately $30,000 per month under this agreement. In addition, the Company's
Singapore subsidiary receives administrative and maintenance services support
pursuant to a Facility and Service Agreement from a subsidiary of Silicon
Systems. The Company pays the Silicon Systems Singapore subsidiary approximately
$25,000 per month under this agreement. The Company is also party to a Volume
Purchase Agreement with Silicon Systems, whereby the Company purchases
integrated circuits from Silicon Systems and is entitled to certain discounts on
purchases made from Silicon Systems if the Company purchases certain minimum
volumes of integrated circuits. The Company believes that such purchases and
such discounts are on terms and conditions no less favorable to the Company than
are available to other volume purchasers of integrated circuits similar to the
Company. During 1996 the Company purchased approximately $9.7 million of
material from Silicon Systems.
In July 1996, Silicon Systems, then a subsidiary of TDK was sold to Texas
Instruments. In connection with this transaction, the 1,161,614 shares of the
Company's Common Stock held by Silicon Systems were transferred to TDK USA
Corporation.
7
<PAGE> 11
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") is a standing committee of the
Board of Directors of the Company. The Committee's purpose is to provide
recommendations to the full Board on salaries and incentive compensation for
executive officers and key employees. The Committee is primarily responsible for
establishing the criteria for, and the effectiveness of, the Company's executive
compensation policies. The Committee is also responsible for the administration
of the Company's equity incentive plans.
The following report is submitted by the Committee regarding executive
compensation policies established and executive compensation paid during fiscal
year 1996.
Executive Compensation Policies and Administration. The Committee's
compensation policy is designed to provide a competitive compensation system
which will enable the Company to attract, retain and reward its executive
officers, including the Chief Executive Officer. At present, annual compensation
of the Company's executive officers typically consists of base salary, an annual
incentive bonus and a grant of stock options. To establish and evaluate the
competitiveness and effectiveness of the Company's executive compensation
policies the Committee has adopted the following general guidelines:
- Base salaries must be competitive, within the industry and the local
markets where the Company operates, so that the Company can attract and
retain qualified executive and management personnel.
- Company performance should be the primary determinant for both annual
bonuses and long-term equity incentives.
- Senior executives' financial interests should be aligned with those of
the other stockholders of the Company, primarily through the use of stock
options or other appropriate equity-based awards.
Section 162(m) of the Internal Revenue Code establishes a limitation on the
deductibility of compensation payable in any particular tax year to the Chief
Executive Officer and the four most highly compensated executive officers.
According to the regulations adopted under Section 162(m), the limitation shall
not apply to a compensation plan of a company that becomes public provided the
compensation plan existed prior to the time of the company's becoming a public
company and provided the compensation plan was described in the company's
prospectus for the initial public offering in accordance with applicable
securities laws. The Company's 1994 Plan and 1995 Plan are therefore not subject
to the restrictions of Section 162(m). The Company has not paid, and does not
foresee any payment authorized in fiscal 1996 of, any compensation that would be
non-deductible under Section 162(m).
Base Salaries and Employee Benefit Programs. In order to retain executives
and other key employees, and to be able to attract additional well-qualified
executives when the need arises, the Committee believes that base salary rates
and employee benefits should be comparable to those of similar companies in the
Company's industry, taking into account factors such as geographic location,
size and operating history. In establishing executive salaries, the Committee
also considers the Southern California location of the Company's headquarters.
The cost of living in Southern California is generally more expensive than other
geographic areas of the United States.
At the beginning of each fiscal year, the Committee establishes base
salaries of executives based upon independent studies of comparable salaries in
similarly sized companies in the Company's industry segment. The performance of
the Company with respect to annual revenue growth and earnings as well as the
individual's performance are also considered in establishing base salaries. Base
salaries and employee benefits of executives, including the Named Executives,
were increased in 1996 based on the Committee's subjective evaluation of the
Company's need to be more competitive and to fairly compensate employees for
enlarged responsibilities occasioned by the Company's growth.
8
<PAGE> 12
Performance-Based Compensation. Annual bonuses are granted by the Board of
Directors, based upon recommendations of the Committee, and are intended to
provide an annual incentive to executive officers by recognizing individual
achievement and Company performance during the fiscal year. Incentive
compensation target levels, with the relative weightings ascribed to such target
levels, are set in advance at the beginning of each fiscal year by the
Compensation Committee based upon:
- the Company achieving certain revenue and earnings targets
- specific performance goals for each plan participant
At the end of the fiscal year, the actual performance is measured against these
goals to determine the amount of an executive's bonus. In addition, the
Committee also considers the incentive compensation policies instituted by
companies with comparable revenues and numbers of employees, among other factors
that the Committee deems significant. In 1996 the percentage of bonus
compensation was approximately 11% to 38% of each executive's base salary.
Stock Options. In order to reward performance and to provide an incentive
that will align the financial interests of management with those of the
stockholders, the Committee makes discretionary grants of stock options under
the Company's equity incentive plans to executive officers and key employees of
the Company on a periodic basis. The Committee believes that stock option grants
reward executives and other key employees for long-term performance, which
maximizes stockholder value, and that such grants should represent a significant
portion of each executive's total compensation package. Prior to July 1995, such
stock option grants to management were granted under the Company's 1993 Equity
Incentive Plan (the "1993 Plan"). Concurrent with the effectiveness of the
Company's initial public offering of stock on July 31, 1995, the 1993 Plan was
discontinued and such grants are now being made under the Company's 1995 Plan.
There were no stock options grants to executive officers during the fiscal year
ended December 31, 1996, because meaningful grants had been made to such persons
shortly before commencement of fiscal 1996.
Chief Executive Officer's Compensation. Mr. Healey's base salary level is
subject to annual review and evaluation. During fiscal 1996, Mr. Healey's base
salary was increased to $261,450, and he was awarded an annual incentive award
of $99,709. As mentioned above, the Committee considered both objective and
subjective factors in determining Mr. Healey's base salary and incentive award
for 1996. Some of the factors that were considered by the Committee in
determining Mr. Healey's compensation were: the Company's consistent
profitability over 28 consecutive fiscal quarters, overall financial
performance, Mr. Healey's role in implementing the Company's stated strategic
goals, and recruiting and organizing a cohesive management team. The Committee
also based Mr. Healey's compensation on published surveys that track
compensation levels of executives in similarly sized companies.
Alan V. King
Gary E. Liebl, Chairman
Notwithstanding anything to the contrary set forth in the Company's
previous filings under the Securities Act of 1933, as amended (the "Securities
Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that might incorporate future filings, including this Proxy Statement, in whole
or in part, the foregoing Report, and the performance graph immediately
following, shall not be incorporated by reference into any such filings.
9
<PAGE> 13
COMPANY PERFORMANCE
The following graph shows a comparison of cumulative total returns for the
Company, the Center for Research in Securities Prices Index for The NASDAQ Stock
Market (United States Companies) (the "NASDAQ Index"), and a weighted composite
peer group selected by the Company (the "Peer Group"), for the period that
commenced on July 31, 1995 (the date on which the Company's Common Stock was
first registered under the Exchange Act) and ended on December 31, 1996. The
Company's Peer Group is NASDAQ's SIC Code 7373 Index, and the Peer Group index
is weighted by the market equity capitalization of each constituent company.
Cumulative total returns are calculated assuming that $100 was invested on July
31, 1995, and that all dividends were reinvested.
COMPARISON OF TOTAL CUMULATIVE RETURN
(NASDAQ INDEX, PEER GROUP AND THE COMPANY)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD SMARTFLEX INDUSTRY
(FISCAL YEAR COVERED) SYSTEMS INC INDEX BROAD MARKET
<S> <C> <C> <C>
1995 100.00 100.00 100.00
1995 114.52 123.73 102.74
1996 106.45 131.32 127.67
</TABLE>
CERTAIN TRANSACTIONS
The Company was incorporated in Delaware on September 17, 1993 to acquire
all of the assets and liabilities of Smartflex Systems (the "Smartflex
Partnership"), which was founded in November 1985 as a joint venture between
Rogers Corporation, a supplier of flex circuits to the hard disk drive ("HDD")
market, and Silicon Systems, a supplier of mixed signal integrated circuits to
the HDD market. In June 1993, J.V. Acquisition Corporation ("JVAC") purchased a
partnership interest in the Smartflex Partnership and Rogers' partnership
interest was thereupon redeemed. In September 1993, the Company was incorporated
for the purpose of acquiring all of the assets and assuming all of the
liabilities of the Smartflex Partnership.
In connection with the incorporation of the Company in 1993, the Company
sold to Messrs. Healey, Bell, Hohener, Rollison, Merle Ihrman, and to Robert
Fischer, a former employee of the Company, an aggregate of 320,000 shares of
Common Stock at a purchase price of $0.9575 per share, pursuant to Founders
Restricted Stock Purchase Agreements dated as of September 28, 1993.
Under an Agreement to Transfer Partnership Assets to Corporation, dated as
of October 4, 1993, among the Company, Silicon Systems and JVAC, the Company
purchased from Silicon Systems and JVAC all of the partnership assets and
liabilities of the Smartflex Partnership, in exchange for an aggregate of
8,500,000 shares
10
<PAGE> 14
of Series A Preferred Stock of the Company, and Silicon Systems and JVAC became
the Company's two largest stockholders. In July 1995, the Company issued
1,700,000 shares of Common Stock to JVAC in exchange for substantially all of
the assets of JVAC, which consisted primarily of 4,250,000 shares of the
Company's Series A Preferred Stock. Immediately after the consummation of this
exchange, JVAC dissolved and distributed all of its assets to its two
stockholders, Ampersand Chemicals and Ampersand Materials. See "Compensation
Committee Interlocks and Insider Participation."
Stuart A. Auerbach, who served on the Company's Board of Directors from
April 1995 until January 1996, joined Ampersand Venture Management Corporation
in March 1991, and has been a Partner of Ampersand Ventures since August 1993.
During 1995, Mr. Auerbach was also a member of the board of directors of ADFlex,
a material supplier to the Company, and, by virtue of his pecuniary interest in
ASMC-II Management Company Limited Partnership, indirectly owns over 9% of the
outstanding common stock of ADFlex. See "Compensation Committee Interlocks and
Insider Participation."
Immediately prior to the Company's initial public offering of Common Stock
in July 1995, AMP Incorporated ("AMP") of Harrisburg, Pennsylvania owned over
10% of the Company's outstanding Common Stock. The Company purchases components
from AMP in the ordinary course of business. These purchases totaled
approximately $2.0 million in 1996. The Company believes that such purchases are
on terms and conditions no less favorable than are available to other purchasers
of similar components who purchase in similar quantities. As of the date hereof,
the Company believes that AMP holds less than 5% of the Company's outstanding
Common Stock.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon its review of the copies of reporting forms furnished to
the Company, and written representations that no other reports were required,
the Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors, officers and any
persons holding 10% or more of the Company's Common Stock with respect to the
Company's fiscal year ended December 31, 1996, were satisfied.
11
<PAGE> 15
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of March 19, 1997, certain information
regarding the beneficial ownership of the Company's outstanding Common Stock by
(i) each person known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director, (iii) each of the
Named Executive Officers and (iv) all directors and executive officers as a
group. All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OWNERSHIP(*) CLASS(%)(1)
--------------------------------------------------------- ------------ -------------
<S> <C> <C>
TDK U.S.A. Corporation................................... 1,161,614 18.4
12 Harbor Park Drive
Port Washington, NY 11050-4649
Kopp Investment Advisors................................. 643,700(2) 10.2
6600 France Avenue South, Suite 672
Edina, MN 55435
LeRoy C. Kopp............................................ 663,700(3) 10.5
6600 France Avenue South, Suite 672
Edina, MN 55435
William L. Healey........................................ 192,254(4) 3.0
William E. Bendush....................................... 7,750(5) *
Alan V. King............................................. 9,500(5) *
William A. Klein......................................... 9,500(5) *
Gary E. Liebl............................................ 9,500(5) *
Richard D. Bell.......................................... 60,524(6) *
Alfred B. Castleman...................................... 41,230(7) *
Christopher J. Rollison.................................. 31,730(8) *
John W. Hohener.......................................... 39,341(9) *
All directors and executive officers as a group (9
persons)............................................... 401,329 6.3
</TABLE>
- ---------------
(*) Indicates less than 1%.
(1) Calculated based on 6,313,038 shares of the Company's Common Stock
outstanding on March 19, 1997. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days of March 19, 1997 are deemed beneficially owned
and outstanding for computing the percentage of the person holding such
securities, but are not considered outstanding for computing the percentage
of any other person.
(2) Based on a Schedule 13G, and amendments thereto, filed by Kopp Investment
Advisors. Amount includes 643,700 shares deemed to be beneficially owned by
Kopp Investment Advisors.
(3) Based on a Schedule 13G filed by LeRoy C. Kopp. Amount includes 663,700
shares deemed to be beneficially owned by LeRoy C. Kopp.
(4) Includes 32,375 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 19, 1997.
(5) As to Mr. Bendush, includes 7,750 shares, and as to Messrs. King, Klein, and
Liebl, includes 1,500 shares subject to presently exercisable options or
options that become exercisable within 60 days of March 19, 1997.
(6) Includes 10,125 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 19, 1997.
(7) Includes 34,375 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 19, 1997.
(8) Includes 11,375 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 19, 1997.
(9) Includes 10,063 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 19, 1997.
12
<PAGE> 16
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Since the Company's inception, Ernst & Young LLP, independent auditors,
have provided audit services to the Company including the examination of the
Company's consolidated financial statements for the year ended December 31,
1996. The Board of Directors has selected Ernst & Young LLP to audit the
Company's consolidated financial statements for the year ending December 31,
1997, and recommends that stockholders vote for the ratification of such
appointment. In the event of a negative vote on such ratification, the Board of
Directors will reconsider its selection. A representative of Ernst & Young LLP
is expected to be present at the Meeting to respond to appropriate questions
from stockholders, and will have an opportunity to make a statement if he or she
so desires.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Company's next
Annual Meeting to be held in 1998 must be received in writing at the Company's
principal executive offices, at the address set forth on the Notice of Annual
Meeting which accompanies this Proxy Statement, Attention -- Investor Relations,
on or before December 4, 1997, in order to be considered for inclusion in the
proxy materials relating to that meeting.
OTHER MATTERS
The Board of Directors does not know prior to making this solicitation of
any matters to be presented at the Meeting other than those set forth above.
However, if other matters come before the Meeting, it is the intention of the
persons named in the accompanying proxy to vote the proxy in accordance with the
recommendations of the Board of Directors on such matters, and discretionary
authority to do so is included in the proxy.
/s/ Nick E. Yocca
Nick E. Yocca, Secretary
Dated: April 4, 1997
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996, AS FILED WITH THE SECURITIES AND COMMISSION, WILL BE
PROVIDED TO STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR
RELATIONS, SMARTFLEX SYSTEMS, INC., 14312 FRANKLIN AVENUE, P.O. BOX 2085,
TUSTIN, CALIFORNIA 92781-2085.
13
<PAGE> 17
DETACH HERE
SMARTFLEX SYSTEMS, INC.
1997 ANNUAL MEETING OF STOCKHOLDERS - MAY 14, 1997
THIS PROXY IS SOLICITED IN BEHALF OF THE BOARD OF DIRECTORS
P The undersigned hereby appoints William L. Healey and Alfred B.
Castleman, and each of them, individually, as the attorney, agent and
R proxy, with full power of substitution, of the undersigned and to vote,
as designated on the reverse side, all the shares of Common Stock of
O Smartflex Systems, Inc. which the undersigned is entitled to vote at the
Annual Meeting of Stockholders of Smartflex Systems, Inc. to be held at
X the Marriott Hotel, 18000 Von Karman, Irvine, California on Wednesday,
May 14, 1997, at 9:30 a.m., Pacific Time, or at any adjournment thereof.
Y
------------
IMPORTANT - PLEASE SIGN AND DATE ON OTHER SIDE AND RETURN PROMPTLY. SEE REVERSE
SIDE
------------
<PAGE> 18
DETACH HERE
[X] Please mark votes as in this example.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER BELOW. WHERE NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED
FOR THE ELECTION OF DIRECTORS OF THE NOMINEES NAMED BELOW ON THIS PROXY AND
FOR THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS.
1. ELECTION OF DIRECTORS
NOMINEES: William L. Healey, William E. Bendush, Alan V. King,
William A. Klein and Gary E. Liebl
FOR WITHHELD
[ ] [ ]
[ ]
--------------------------------------
For all nominees except as noted above
2. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS
INDEPENDENT AUDITORS:
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. IN THEIR DISCRETION, UPON OTHER BUSINESS WHICH PROPERLY COMES BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND RETURN
THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
Please sign your name exactly as it appears hereon. Executors, administrators,
guardians, officers of corporations, and others signing in a fiduciary capacity
should state their full titles as such.
Signature: Date: Signature: Date:
------------------ ------ ------------------ ------
