<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 [X]
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 15, 1998
Dear Stockholders:
Our Annual Meeting of Stockholders will be held on May 20, 1998, at 9:30
a.m., Pacific Time, at the Orange County Airport Hilton, 18800 MacArthur
Boulevard, 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, 1997 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 20, 1998
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 20, 1998
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders of
Smartflex Systems, Inc. (the "Company"), will be held at the Orange County
Airport Hilton, 18800 MacArthur Boulevard, Irvine, California, on Wednesday, May
20, 1998, at 9:30 a.m., Pacific Time, and any and all adjournments or
postponements, 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, 1998; 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 as the Company may determine.
The Board of Directors has fixed the close of business on March 30, 1998,
as the record date for determination of the stockholders entitled to notice of
and to vote at the 1998 Annual Meeting of Stockholders.
By Order of the Board of Directors,
/s/ Nick E. Yocca
Nick E. Yocca
Secretary
Tustin, California
April 15, 1998
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 20, 1998
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 Orange County
Airport Hilton, 18800 MacArthur Boulevard, Irvine, California, at 9:30 a.m.
Pacific Time, on Wednesday, May 20, 1998, and at any and all adjournments or
postponements thereof (the "Meeting").
This Proxy Statement is first being mailed or given on or about April 15,
1998 to stockholders entitled to vote at the Meeting.
REVOCABILITY OF PROXIES
A form of proxy to vote 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 6,373,752 shares of the Company's Common Stock were
outstanding at the close of business on March 30, 1998, 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............... 53 President, Chief Executive Officer and
Chairman of the Board of Directors
William E. Bendush.............. 49 Director
Alan V. King.................... 63 Director
William A. Klein................ 57 Director
Gary E. Liebl................... 56 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 principal supplier to the Company 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.
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 President and Chairman of the Board of Directors
of Volterra Semiconductor Corporation, a developer of battery management
integrated circuits and as Chairman of the Board of Directors of Arithmos, Inc.,
a developer of mixed signal application-specific integrated circuits for flat
panel displays. Mr. King also sits on the boards of publicly traded Information
Storage Devices, a designer and developer of integrated circuit products for
voice recording and playback using high density storage technology and mixed
signal expertise, and Elantec Semiconductor Corporation, a designer and
manufacturer of high performance analog integrated circuits for the
video/multimedia, data processing, instrumentation and communications markets.
From 1991
2
<PAGE> 6
to November 1994, Mr. King was the President and Chief Executive Officer of
Silicon Systems (See "Compensation Committee Interlocks and Insider
Participation"). From 1986 to 1991, Mr. King served as the President and Chief
Executive Officer of Precision Monolithics, Inc., a semiconductor company.
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
until 1998. 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, and on the Board of
privately held Pressure Systems, Inc., a satellite components supplier. Prior to
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, 1997. The Board of Directors has established a standing
Compensation Committee and an Audit Committee. The Compensation Committee held
four meetings in 1997, 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
1997. 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 1997. 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 the members of the Compensation Committee.
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 the members of 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............ 53 President, Chief Executive Officer and Chairman of
the Board of Directors
Anthony R.W. Richardson...... 53 Executive Vice President and Chief Operating Officer
Richard D. Bell.............. 53 Vice President of Marketing and Sales
John W. Hohener.............. 42 Vice President, Chief Financial Officer and
Treasurer
Christopher J. Rollison...... 39 Vice President of Operations
</TABLE>
For information on the business background of Mr. Healey, see "Election of
Directors -- Nominees" above.
Anthony R.W. Richardson joined Smartflex in February 1998 as Executive Vice
President and Chief Operating Officer. Prior to joining Smartflex, Mr.
Richardson spent twenty-four years in senior management roles at Raychem
Corporation ("Raychem"), a material sciences company. Mr. Richardson's positions
at
3
<PAGE> 7
Raychem included Director of Operations, Director of Sales and Marketing, and
General Manager for businesses in Asia, North America, South America, Europe and
the Middle East.
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.
John W. Hohener has served as Vice President, Chief Financial Officer and
Treasurer since August 1997. From May 1988 through July 1997, Mr. Hohener served
as the Company's Corporate Controller and Treasurer. 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.
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.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by the Company for services rendered for the fiscal years ended
December 31, 1997, 1996 and 1995 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 $100,000 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ---------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(2)(3) OPTIONS/SARS(#) ($)(4)
------------------ ---- --------- -------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
William L. Healey 1997 281,858 18,325 39,287 44,500 13,539
Chairman of the Board, 1996 259,056 110,776 40,957 -- 12,967
President and 1995 226,273 110,186 43,050 50,000 10,665
Chief Executive Officer
Richard D. Bell 1997 159,195 7,721 38,551 11,500 4,500
Vice President, Marketing 1996 140,452 44,950 10,332 -- 3,623
and Sales 1995 123,123 29,543 -- 10,000 3,515
John W. Hohener 1997 118,774 7,400 5,549 14,500 4,072
Vice President, Chief 1996 105,654 23,558 329 -- 3,592
Financial Officer, 1995 96,427 28,443 -- 7,000 3,416
Treasurer
Christopher J. Rollison 1997 130,303 9,078 10,773 11,500 4,500
Vice President, 1996 119,651 38,721 9,248 -- 3,563
Operations 1995 103,235 28,790 -- 10,000 3,512
</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) In fiscal 1997, "Other Annual Compensation" for Mr. Healey includes tax
reimbursements paid on Mr. Healey's behalf totaling $16,920, auto allowance
payments totaling $10,800 and other miscellaneous reimbursements of $11,567
for a total of $39,287.
(3) In fiscal 1997, "Other Annual Compensation" for Mr. Bell includes the gain
on incentive stock options exercised during the period totaling $28,080.
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<PAGE> 8
(4) In fiscal 1997, "All Other Compensation" includes matching contributions to
the Company's 401(k) savings plan for Messrs. Healey, Bell, Hohener and
Rollison totaling $4,500, $4,500, $4,072 and $4,500, respectively. For Mr.
Healey, the amount also includes fiscal 1997 term life insurance premiums
paid by the Company which totaled $9,039.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In February 1998, the Company appointed Anthony R.W. Richardson ("Mr.
Richardson") as Executive Vice President and Chief Operating Officer. Mr.
Richardson's base salary is $190,000 per year, plus a target bonus based on both
Company and individual performance. In addition, Mr. Richardson was granted an
incentive stock option to purchase 65,000 shares of the Company's Common Stock
under the 1995 Equity Incentive Plan.
None of the Company's executive officers has a formal 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 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
The following table sets forth certain information concerning grants of
options to each of the Named Executive Officers during the year ended December
31, 1997. In addition, in accordance with the rules and regulations of the
Securities and Exchange Commission, the following table sets forth the
hypothetical gains or "option spreads" that would exist for the options. Such
gains are based on assumed rates of annual compound stock appreciation of 5% and
10% from the date on which the options were granted over the full term of the
options. The rates do not represent the Company's estimate or projection of
future Common Stock prices, and no assurance can be given that any appreciation
will occur or that the rates of annual compound stock appreciation assumed for
the purposes of the following table will be achieved.
5
<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF PERCENTAGE VALUE AT ASSUMED
SECURITIES OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM($)
GRANTED EMPLOYEES IN OR BASE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR(2) PRICE ($/SH) DATE 5% 10%
---- ---------- -------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William L. Healey........... 35,000 15.0% $16.50 01/14/07 $363,187 $920,386
9,500 4.1 10.25 07/07/07 61,239 155,191
Richard D. Bell............. 9,000 3.9 16.50 01/14/07 93,391 236,671
2,500 1.1 10.25 07/07/07 16,115 40,840
John W. Hohener............. 7,000 3.0 16.50 01/14/07 72,637 184,077
7,500 3.2 10.25 07/07/07 48,346 122,519
Christopher J. Rollison..... 9,000 3.9 16.50 01/14/07 93,391 236,671
2,500 1.1 10.25 07/07/07 16,115 40,840
</TABLE>
- ---------------
(1) Options granted in fiscal 1997 become exercisable starting 12 months after
the grant date, with 25% of the total number of shares covered by such
options becoming exercisable at that 12-month anniversary and 6.25% of the
total number of shares covered by such options becoming exercisable on the
last day of each successive quarter.
(2) Options to purchase an aggregate of 233,750 shares of Common Stock were
granted to employees, including the Named Executive Officers, during the
fiscal year ended December 31, 1997.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table and footnotes set forth certain information concerning
all option exercises, and the number of shares covered by both exercisable and
unexercisable stock options for the Named Executive Officers as of December 31,
1997. Also reported are the values for "in the money" options that represent the
positive spread between the exercise prices of any of such existing stock
options and the closing sale price of the Company's Common Stock as of December
31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William L. Healey.............. 40,125 66,375 $102,510 $ --
Richard D. Bell(2)............. 10,625 15,875 42,713 --
John W. Hohener................ 11,938 17,562 68,340 --
Christopher J. Rollison........ 13,625 15,875 68,340 --
</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,
1997, of $9.50 per share, less the applicable exercise price.
(2) Mr. Bell exercised an option to purchase 2,000 shares of Common Stock in
February 1997 at an exercise price of $0.9575. The aggregate dollar value
realized was $28,080 based on the sale price of the Common Stock.
COMPENSATION OF DIRECTORS
Non-employee directors are paid an annual retainer of $20,000 per year plus
$1,000 for each meeting attended in person. Mr. Healey receives no additional
compensation for services rendered by him as a director of the Company.
6
<PAGE> 10
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. Each of
Messrs. Bendush, King, Klein, and Liebl received a grant of 3,000 shares of
Common Stock, upon their election to the Board at the May 1997 Annual Meeting.
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.
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. Silicon Systems leases warehouse
and office facilities, and provided certain maintenance services, in Tustin,
California to the Company pursuant to a Facilities and Services Agreement. In
1997, the Company paid Silicon Systems approximately $30,000 per month under
this agreement. In addition, the Company's Singapore subsidiary received
administrative and maintenance services support pursuant to a Facility and
Service Agreement from a subsidiary of Silicon Systems. The Company paid 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 from other
suppliers. During 1997 the Company purchased approximately $5.5 million of
material from Silicon Systems.
In July 1996, Silicon Systems, then a subsidiary of TDK USA Corporation,
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.
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 1997.
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.
7
<PAGE> 11
- Company performance should generally 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 other executive officers.
According to the regulations adopted under Section 162(m), the limitation shall
not apply (for a period ending with next year's annual meeting) 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 1993 Equity Incentive Plan, 1994 Equity Incentive Plan for Officers,
Directors and Consultants and 1995 Plan are not subject to the restrictions of
Section 162(m). The Company does not foresee any payment made or authorized in
fiscal 1997 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 in
many 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 Executive
Officers, were increased in 1997 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 in the area of
international operations.
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 1997 the percentage of bonus
compensation was approximately 4% to 6% 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. Incentive stock options
to purchase a total of 82,000 shares of the Company's Common Stock were granted
to the Named Executive Officers during the fiscal year ended December 31, 1997,
all of which were granted under the 1995 Plan.
8
<PAGE> 12
Chief Executive Officer's Compensation. Mr. Healey's base salary level is
subject to annual review and evaluation. During fiscal 1997, Mr. Healey's base
salary was increased to $281,900, and he was awarded an annual incentive award
of $15,000 and granted incentive stock options to purchase 44,500 shares of
common stock. As mentioned above, the Committee considered both objective and
subjective factors in determining Mr. Healey's base salary and incentive award
for 1997. Some of the factors that were considered by the Committee in
determining Mr. Healey's compensation were: the Company's implementation of a
restructure of its operations in conformance with market conditions, staying
relatively debt free in a market slow down, 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 or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate other
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.
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 Market Index"), and a weighted
composite industry index ("the SIC Code Index"), 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, 1997. The Company's
Industry Index is NASDAQ's SIC Code 7373 Index, and the Industry 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.
COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG SMARTFLEX SYSTEMS, INC., NASDAQ MARKET INDEX AND SIC CODE INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD 'SMARTFLEX SIC CODE NASDAQ
(FISCAL YEAR COVERED) SYSTEMS, INC.' INDEX MARKET INDEX
<S> <C> <C> <C>
8/1/95 100.00 100.00 100.00
12/31/95 114.52 123.73 102.74
2/31/96 106.40 131.32 127.67
12/31/97 61.29 156.93 156.17
</TABLE>
9
<PAGE> 13
CERTAIN TRANSACTIONS
The Company was incorporated in Delaware on September 17, 1993 to acquire
all of the assets and liabilities of Smartflex Systems, 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. See "Compensation
Committee Interlocks and Insider Participation."
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, 1997, were timely satisfied.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of March 16, 1998 (unless otherwise
indicated), 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 18.2
12 Harbor Park Drive
Port Washington, NY 11050-4649
Kopp Investment Advisors......................... 826,795(2) 13.0
7701 France Avenue South, Suite 500
Edina, MN 55435
Dalton, Greiner, Harman, Maher & Co. ............ 387,400(3) 6.1
1100 Fifth Avenue south Suite 301
Naples, FL 34102
The TCW Group, Inc. ............................. 320,300(4) 5.0
865 South Figueroa Street
Los Angeles, CA 90017
William L. Healey................................ 219,192(5) 3.4
William E. Bendush............................... 14,500(6) *
Alan V. King..................................... 12,500(6) *
William A. Klein................................. 12,500(6) *
Gary E. Liebl.................................... 12,500(6) *
Richard D. Bell.................................. 65,087(7) 1.0
John W. Hohener.................................. 45,614(8) *
Christopher J. Rollison.......................... 38,043(9) *
All directors and executive officers as a group
(9 persons).................................... 419,936(10) 6.6
</TABLE>
(footnotes continued on following page)
10
<PAGE> 14
- ---------------
(*) Indicates less than 1%.
(1) Calculated based on 6,372,952 shares of the Company's Common Stock
outstanding on March 16, 1998. 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 16, 1998 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 801,795 shares deemed to be beneficially owned by
Kopp Investment Advisors.
(3) Based on a Schedule 13G filed by Dalton, Greiner, Hartman, Maher & Co.,
which reported stock ownership as of December 31, 1997. Amount includes
387,400 shares deemed to be beneficially owned by Dalton, Greiner, Hartman,
Maher & Co.
(4) Based on a Schedule 13G filed jointly by The TCW Group, Inc. and Mr. Robert
Day, 200 Park Avenue, Suite 2200, New York 10166, an individual who may be
deemed to control the TCW Group. Amount includes 320,300 shares deemed to
be beneficially owned by the TCW Group, Inc., and the shares reported for
Mr. Robert Day include the shares reported for the TCW Group, Inc.
(5) Includes 57,313 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 16, 1998.
(6) As to Mr. Bendush, includes 14,500 shares, and as to each of Messrs. King,
Klein, and Liebl, includes 4,500 shares subject to presently exercisable
options or options that become exercisable within 60 days of March 16,
1998.
(7) Includes 14,688 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 16, 1998.
(8) Includes 15,001 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 16, 1998.
(9) Includes 17,688 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 16, 1998.
(10) Includes 132,690 shares subject to presently exercisable options or options
that become exercisable within 60 days of March 16, 1998.
11
<PAGE> 15
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,
1997. The Board of Directors has selected Ernst & Young LLP to audit the
Company's consolidated financial statements for the year ending December 31,
1998, 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 1999 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 14, 1998, 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.
Dated: April 15, 1998
/s/ Nick E. Yocca
Nick E. Yocca, Secretary
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE 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.
12
<PAGE> 16
DETACH HERE
PROXY
SMARTFLEX SYSTEMS, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS - MAY 20, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William L. Healey and John W. Hohener, and
each of them, individually, as the attorney, agent and 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 Smartflex Systems, Inc. which the undersigned
is entitled to vote at the Annual Meeting of Stockholders of Smartflex Systems,
Inc. to be held at the Orange County Airport Hilton, 18800 MacArthur Boulevard,
Irvine, California on Wednesday, May 20, 1998, at 9:30 a.m., Pacific Time, or at
any adjournment thereof.
- ------------- -------------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- ------------- -------------
<PAGE> 17
DETACH HERE
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
<TABLE>
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.
<S> <C>
1. ELECTION OF DIRECTORS
Nominees: William L. Healey, William E. Bandush, 2. RATIFICATION OF APPOINTMENT FOR AGAINST ABSTAIN
Alan V. King, William A. Klein and Gary E. Liebl OF ERNST & YOUNG LLP AS [ ] [ ] [ ]
INDEPENDENT AUDITORS.
FOR WITHHELD
[ ] [ ]
3. IN THEIR DISCRETION, UPON OTHER BUSINESS WHICH
PROPERLY COMES BEFORE THE MEETING OR ANY
ADJOURNMENT THEREOF.
[ ]
--------------------------------------
For all nominees except as noted above
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:
------------------------- -------------------- ------------------------- --------------------
</TABLE>
