EXHIBIT 13 Strategic Growth (Illustration of map showing locations with beginning year) Benchmark Electronics 1997 Annual Report Financial Highlights Benchmark Electronics, Inc. and Subsidiaries Year ended December 31, (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------ Sales ............................. $325,229 201,296 97,353 98,168 75,859 Income from operations ............ $ 25,112 15,391 9,250 8,778 6,590 Net income ........................ $ 15,090 8,864 6,148 5,769 4,582 Earnings per common share (diluted) $ 1.25 0.96 0.75 0.71 0.56 Working capital ................... $ 87,879 72,586 37,285 30,890 29,160 Total assets ...................... $190,322 168,174 57,037 48,333 47,425 Long-term debt .................... $ 30,330 30,485 -- -- -- Shareholders' equity .............. $120,872 104,999 46,624 40,131 34,213 Weighted average common and equivalent shares outstanding . 12,049 9,222 8,213 8,176 8,132 The Company at a Glance Benchmark Electronics, Inc., provides contract manufacturing and design services to original equipment manufacturers (OEMs) in the electronics industry, including manufacturers of medical devices, communications equipment, industrial and business computers, and testing and industrial instruments. The company specializes in assembling high quality, technologically complex printed circuit boards with computer-automated equipment using surface mount and pin-thru-hole interconnection technology for customers requiring low-to-medium volume assembly. The company frequently works with customers from product design stages through ongoing production and provides manufacturing services for successive product generations. About the Cover The map shows Benchmark's growth beginning in Texas in 1986, expanding to Oregon in 1991, to Minnesota in 1996, and to New Hampshire in 1998. Benchmark expects to open a greenfield office in Europe later in 1998. Table of Contents The Company at a Glance 1 Financial Highlights 1 President's Letter 2 Strategic Growth Programs 6 Management's Discussion and Analysis 9 Financial Statements 15 Notes to Financial Statements 19 Independent Auditors' Report 28 Management's Report 28 Quarterly Financial Data 29 Market for the Registrant's Common Equity and Related Shareholder Matters 30 Selected Financial Data 31 Corporate and Shareholder Data 32 President's letter Dear Shareholder: It is my pleasure to report to you once again our company's outstanding financial results in calendar year 1997. The acquisition of EMD Technologies, Inc. in 1996, and the continued growth and expansion of our traditional business, meant that Benchmark Electronics, Inc. generated record net income of $15,089,663, or diluted earnings per share of $1.25. The company posted record sales of $325,229,015--approximately 62% greater than 1996. And once again we showed a record year-end backlog, reaching $302,000,000 as of December 31, 1997. (Charts of Sales ($ millions), Income ($ millions), Diluted EPS ($) for the last 5 years. Caption: Benchmark achieved record-breaking financial results for calendar year 1997.) Our revenue growth during 1997 was once again more than twice that of the electronic contract manufacturing industry's average, as compiled by the Institute for Interconnecting and Packaging Electronic Circuits (IPC). (Chart of Compound Average Growth Rate Comparison of IPC of 20% and Benchmark* of 40% *includes the effect of merger and acquisition activities. Caption: Benchmark's compound sales revenue growth versus the IPC average for 1993-1997.) One of our more important objectives during this past year was the integration of EMD into the Benchmark family. We expanded and focused the marketing and sales activities of that operation and increased significantly the business attributed to existing customers, at the same time adding a number of promising new customers. Rather than shrinking, or downsizing, as workers so often fear following the change of corporate ownership, the number of employees at EMD actually grew by approximately 20% during the year following its acquisition by Benchmark. (Pie chart of Market Segments of Telecommunications 21%, Test & Instruments 11%, Medical Devices 17%, Computer Systems 39%, Industrial Controls 12%. Caption: Benchmark's 1997 sales by market segment) Looking to the future, we formed a company-wide team which last year began to concentrate on the selection and installation of an extensive Enterprise Resource Planning System to allow all of our existing operations to function on the same business system, and, more importantly perhaps, enable additional domestic and international acquisitions or start-up facilities to tie in to this state-of-the-art management information system. This new Enterprise Resource Planning System will be initially implemented during 1998 and is designed to accommodate the projected growth of our management information system needs into the foreseeable future. This year I am especially pleased to report to you that, as of May 15, 1997, the common stock of Benchmark Electronics, Inc. trades on the New York Stock Exchange. Effective July 28, 1997, to further our efforts to increase the trading volume of Benchmark shares, we completed a 2 for 1 stock split. These three factors--the excellent operating results produced during 1997, the listing on the New York Stock Exchange, and the stock split--combined with a positive stock market climate boosted the shareholder value of Benchmark common stock dramatically. Another key area of management emphasis during 1997 was our merger and acquisition activity. As the contract manufacturing industry has matured, the rate of mergers and acquisitions has increased quite rapidly. During the latter part of 1997 we began evaluating the business prospects, negotiating the purchase terms and performing due diligence on the contract electronics manufacturing subsidiary of the Lockheed Martin Corporation, which is located in Hudson, New Hampshire. We formally announced the acquisition in January of 1998 and closed the transaction with Lockheed on February 23, 1998. The acquisition of this Lockheed subsidiary is expected to play a significant role in Benchmark's continued growth. Finally, we figuratively broke new ground during 1997, beginning to plan for our global expansion initially to serve our customers' outsourcing needs in Europe. International expansion is an important step in Benchmark's future, enabling us to increase our business with those existing customers which have European sales and support operations and require an outsourcing capability. Beyond that, though, we expect to garner new international customers, thus diversifying the overall revenue base at Benchmark. Growth opportunities from international expansion are especially promising since outsourcing and electronic contract manufacturing are not quite as widespread in Europe as it is domestically. Once again, my sincere thanks and appreciation to all the Benchmark Electronics employees who worked so hard to make 1997 a very successful year for our company. You'll find more details about your company's strategic growth programs in the following pages of this shareholder report. Sincerely, Donald E. Nigbor President and Chief Executive Officer February 28, 1998 (Photo of management. Caption: The officers responsible for Benchmark's previous growth continued to serve the company in the same capacities during 1997. Seated left to right: Donald Nigbor and Cary Fu. Standing left to right: Lenora Gurton, Christopher Nawrocki, Gayla Delly, Steven Barton.) Strategic Growth Programs Acquisition of Lockheed Martin Subsidiary Thanks to a combination of Benchmark's strategic focus on serving high-end industrial electronics original equipment manufacturers (OEM), and to our close business fit with Lockheed Martin Corporation's commercial electronics subsidiary, plus the geographic location of Lockheed's facility, that organization became a favorable acquisition candidate for our company. The Hudson, New Hampshire, location of the Lockheed Martin commercial electronics subsidiary is ideally positioned to serve the Boston Metro electronics market, which is one of the fastest growing markets for electronic manufacturing services in the United States. Our new subsidiary operates from 250,000 square-foot facility on a 40-acre campus that we are currently leasing from Lockheed. The largest customer served by this affiliate is engaged in manufacturing mass storage for high-end computers. It is also important to note that there is no overlap with existing Benchmark customers. The acquisition directly and immediately diversifies our existing revenue base and should provide us access to both other markets and other geographical regions where we can expand our customer base. The manufacturing capabilities in Hudson are quite similar to other Benchmark facilities; the facility does not service high volume consumer products such as personal computers or automotive electronics. (Photo of New Hampshire facility. Caption: The Hudson, New Hampshire facility leased by Benchmark from the Lockheed Martin Corporation is located near the Boston Metro electronics market.) Our new subsidiary has advanced manufacturing and test technologies but lacks the corporate engineering resources available within the Benchmark family. Those Benchmark resources will expand the New Hampshire operation's design and test capabilities. That should be a strong competitive factor helping this business unit achieve its full potential within its marketing territory. At the same time, our acquisition is expected to enhance the company's existing marketing abilities, enabling us to provide improved service to outsourcing clients nationwide. (Illustration of map of USA with locations with beginning years. Caption: Benchmark is moving more quickly to expand its manufacturing and marketing capabilities to customers across the country and overseas.) Another opportunity arising from the acquisition of the New Hampshire operation is the improvement of our corporation's procurement leverage, allowing each of our facilities to offer more cost effective material solutions to our outsourcing clients. Since material content is the most significant cost factor in our clients' products, our additional strength in this area is crucial. Moreover, we've found that customers now tend to outsource their engineering requirements as well as their manufacturing. As the contract electronics manufacturing industry matures, it will be even more critical to offer strong engineering and design capabilities and to provide state-of-the-art manufacturing services in order to maintain our status as a top tier supplier. European Greenfield Operation Last year a Benchmark work group researched the most likely merger or acquisition candidates from among electronic manufacturing firms and original equipment manufacturers across Europe. Reviewing their findings, we decided at the present time to initiate a Greenfield (start-up) operation there. The key strategic reason for locating in Europe is to serve our existing customer base of European clients. A start-up operation is attractive because of the favorable climate for government support and the readily available base of trained engineers and technicians to support manufacturing and design engineering requirements. (Illustration of map of Europe, no caption) Our European operation will initially perform test, repair and upgrade services for our existing customer base requiring European outsourcing. We believe this operation will be of great benefit to those customers, since overseas repairs or upgrades allow them a faster turnaround for their products, guaranteeing greater goodwill from their customers. Within a year or two, we intend to add state-of-the-art thru-hole and surface mount manufacturing capabilities to our European operation. Eventually we expect to provide engineering and design services for European clients, either by acquisition of an engineering firm or expansion of our own corporate engineering resources. The overall use of electronic contract manufacturing services by European OEMs is somewhat further behind in Europe than in the United States indicating to us a positive environment for growth. Our initial personnel level will be quite modest at our new European facility, but by providing leading edge outsourcing solutions to European customers we expect that the new operation will continually grow and improve. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the "Selected Financial Data" and the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere herein. The following discussion and analysis contains certain forward-looking statements regarding future financial condition and results of operations and the Company's business operations. The words "expect," "estimate," "anticipate," "predict," and similar expressions are intended to identify forward looking statements. Such statements involve risks, uncertainties, and assumptions, including but not limited to, industry and economic conditions and customer actions and other factors discussed in the Company's Form 10-K and in the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Acquisition On July 30, 1996, the Company completed its acquisition of EMD Technologies, Inc. (EMD). This business, headquartered in Winona, Minnesota, was acquired for 1,349,928 shares of common stock, $30.5 million in cash, and the Company paid $2.2 million in acquisition costs. The transaction was accounted for under the purchase method of accounting, and, accordingly, the results of operations of EMD since July 30, 1996 have been included in the accompanying consolidated statements of income. The acquisition resulted in goodwill of approximately $25.0 million which is being amortized on a straight line basis over 15 years. See Note 2 of Notes to Consolidated Financial Statements. In order to finance a portion of the cash consideration for the acquisition of EMD, the Company issued a $30 million, 8.02% Senior Note due 2006 (Senior Note) to Northwestern Mutual Life Insurance Company and obtained a four-year, $15 million revolving line of credit with a commercial bank which replaced the Company's prior revolving line of credit. See Note 5 of Notes to Consolidated Financial Statements. This revolving line of credit was replaced in February 1998. See "Liquidity and Capital Resources". Results of Operations The following table presents the percentage relationship that certain items in the Company's Consolidated Statements of Income bear to sales for the periods indicated. Percentage of Sales Year ended December 31, 1997 1996 1995 -------------------------- Sales ............................................. 100.0% 100.0% 100.0% Cost of sales ..................................... 87.8 88.4 87.5 -------------------------- Gross profit .................................. 12.2 11.6 12.5 Selling, general and administrative expenses ...... 3.9 3.6 3.0 Amortization of goodwill .......................... .5 .3 -- -------------------------- Income from operations ........................ 7.8 7.7 9.5 -------------------------- Other income (expense) ............................ (.5) (.5) .3 -------------------------- Income before income taxes .................... 7.4 7.2 9.8 Income tax expense ................................ 2.7 2.8 3.5 -------------------------- Net Income .................................... 4.6% 4.4% 6.3% -------------------------- Year Ended December 31, 1997 Compared With Year Ended December 31, 1996 Sales in 1997 increased $123.9 million, or 61.6% over 1996 sales. The increase in sales resulted primarily from increased sales volume from existing customers, the addition of new customers and the acquisition of EMD on July 30, 1996. A substantial percentage of the Company's sales have been to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect the Company. During 1997, the Company's three largest customers accounted for approximately 55.8% of the Company's sales, and the Company's largest customer accounted for approximately 37% of sales. The Company's future sales are dependent on the success of its customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to the Company's major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on the Company. The Company had a record year-end backlog of $302 million at December 31, 1997, as compared to the 1996 year-end backlog of $230 million. Although the Company expects to fill substantially all of this backlog in 1998, the Company has no long-term contract agreements from its customers and customer orders can be canceled, changed or delayed by customers. The timely replacement of canceled, changed or delayed orders with new customers cannot be assured, nor can there be any assurance that any of the Company's current customers will continue to utilize the Company's services. Gross profit increased $16.3 million, or 69.8% over 1996. Gross profit as a percentage of sales increased from 11.6% for 1996 to 12.2% for 1997. The increase in gross profit was due primarily to higher sales volumes and normal changes in product mix and customer mix. The Company's gross profit reflects a number of factors, including product mix, the level of start up costs and efficiencies associated with new programs, capacity utilization of surface mount and other equipment, and pricing with the electronics industry. All of these factors are continually changing and are interrelated, making it impracticable to determine separately the effect of each factor. The increase in gross profit as a percentage of sales during 1997 was due primarily to the product mix and the initiation of new programs during 1996. Selling, general and administrative expenses increased $5.6 million, or 77.3%, from 1996 to $12.8 million. In order to satisfy the increased level of business activity and to continue the development and improvement of the systems and processes necessary to accommodate future growth, the Company has continued to add personnel. The increase in selling, general and administrative expenses reflects these additional personnel and related departmental expense, as well as the additional administrative expenses resulting from the inclusion of EMD in the full year of 1997. The Company anticipates selling, general and administrative expenses will continue to increase in nominal terms as the Company continues to build the internal management and support systems necessary to support higher revenue levels. The amortization of goodwill associated with the acquisition of EMD for the years ended December 31, 1997 and 1996 was $1.7 million and $0.7 million, respectively. Interest expense incurred by the Company on the debt incurred in connection with the acquisition of EMD was approximately $2.5 million and $1.4 million, respectively, in 1997 and 1996. The increased amortization and interest expense in 1997 reflected the effect of including EMD's operations for a full year. Interest income was approximately $1.2 million in 1997 compared to $0.4 million in 1996. The increase was due to the investment by the Company of available cash in interest bearing marketable securities and cash equivalents. Income tax expense of $8.9 million represented an effective tax rate of 37% for the year ended December 31, 1997, compared with an effective tax rate of 38.8% for the year ended December 31, 1996. The decrease was due to the benefit from the use of a foreign sales corporation and non-taxable interest earned on municipal investments partially offset by nondeductible amortization of goodwill. The Company reported net income of approximately $15.1 million, or diluted earnings of $1.25 per share, for 1997 compared with net income of approximately $8.9 million, or diluted earnings of $0.96 per share for 1996. The approximately $6.2 million increase in net income during 1997 was a result of the combined effects of the acquisition of EMD and the overall increase in income from operations resulting from the factors discussed above. Year Ended December 31, 1996 Compared With Year Ended December 31, 1995 Sales in 1996 increased $103.9 million, or 106.8% over 1995 sales. Approximately 65% of this increase in sales was due to the acquisition of EMD during the third quarter of 1996 and the remainder of the sales increase resulted from increased production volumes made possible by the expansion of the surface mount assembly capacity at the Company's Angleton, Texas facility, which was completed during the second quarter of 1996. In addition, the increase in production volumes during 1996 was attributable in part to the fulfillment during the first quarter of 1996 of orders that were subject to customers' changes in production schedules and product mix experienced by the Company in the last quarter of 1995 and to the absence of component shortages during 1996 which had caused delays during 1995. A substantial percentage of the Company's sales have been to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect the Company. During 1996, the Company's three largest customers accounted for approximately 42% of the Company's sales, and the Company's largest customer accounted for approximately 17% of sales. The Company had a then record year-end backlog of $230 million at December 31, 1996, as compared to the 1995 year-end backlog of $117 million. Gross profit increased $11.1 million, or 90.5% over 1995. Gross profit as a percentage of sales decreased from 12.5% for 1995 to 11.6% for 1996. The increase in gross profit was due primarily to higher sales volumes and normal changes in product mix and customer mix. The Company's gross profit reflects a number of factors, including product mix, the level of start up costs and efficiencies associated with new programs, capacity utilization of surface mount and other equipment, and pricing with the electronics industry. All of these factors are continually changing and are interrelated, making it impracticable to determine separately the effect of each factor. The decrease in gross profit as a percentage of sales during 1996 was due primarily to the product mix and the initiation of new programs. Selling, general and administrative expenses increased $4.2 million, or 141.8%, from 1995 to $7.2 million. The acquisition of EMD resulted in additional personnel and related expenses supporting the subsidiary operations. Additionally in order to satisfy the increased level of business activity and to continue the development and improvement of the systems and processes necessary to accommodate future growth, the Company has added management personnel. The increase in selling, general and administrative expenses reflects these additional personnel and related departmental expenses, as well as the additional administrative expenses, such as travel and communication costs incurred in connection with the acquisition of EMD. The amortization of goodwill associated with the acquisition of EMD for the year ended December 31, 1996 was $0.7 million. Interest expense incurred by the Company on the debt incurred in connection with the acquisition of EMD was approximately $1.4 million in 1996. Neither of these costs were present in 1995. Interest income was approximately $0.4 million in 1996 compared to $0.2 million in 1995. The increase was due to the investment by the Company of excess cash in interest bearing marketable securities. Income tax expense of $5.6 million represented an effective tax rate of 38.8% for the year ended December 31, 1996, compared with an effective tax rate of 35.5% for the year ended December 31, 1995. The increase is due to nondeductible amortization of goodwill partially offset by the benefit from the use of a foreign sales corporation. The Company reported net income of approximately $8.9 million, or diluted earnings of $0.96 per share, for 1996 compared with net income of approximately $6.1 million, or diluted earnings of $0.75 per share for 1995. The approximately $2.7 million increase in net income during 1996 was a result of the combined effects of the acquisition of EMD and the overall increase in income from operations resulting from the factors discussed above. Liquidity and Capital Resources The Company has financed its growth and operations through funds generated from operations, proceeds from the sale of its common stock and, during 1996, funds borrowed under its credit facilities. Prior to the second quarter of 1996, the Company had never borrowed any amounts under its available line of credit. Cash provided by (used in) operating activities was $19.3 million, $12.3 million and ($3.4 million) in 1997, 1996 and 1995, respectively. In 1997, substantial increases in inventory were offset by net income, depreciation and amortization, and increases in accounts payable. The Company's inventories have increased from $48.1 million at December 31, 1996 to $61.1 million at December 31, 1997, reflecting the Company's increased sales and backlog during this period. In 1996, substantial increases in accounts receivable were offset by net income, depreciation and amortization, and increases in accounts payable and accrued liabilities and decreases in inventory, net of effects from the acquisition of EMD. The Company's accounts receivable and inventories increased from $20.2 million and $23.0 million, respectively, at December 31 1995 to $39.2 million and $48.1 million, respectively at December 31, 1996, reflecting the Company's increased sales during this period. In 1995, increases in accounts receivables and inventories were offset by net income, depreciation and increases in accounts payable. The Company's accounts receivable and inventories increased from $16.3 million and $13.2 million, respectively, at December 31 1994 to $20.2 million and $23.0 million, respectively at December 31, 1995, reflecting the Company's increased backlog during this period. The Company expects continued increases in inventories to support the anticipated growth in sales. The Company continued and is continuing the practice of purchasing components only after customer orders are received, which mitigates, but does not eliminate, the risk of loss on inventories. Supplies of electronic components and other materials used in operations are subject to industry-wide shortages. In certain instances, suppliers may allocate available quantities to the Company. The Company has not experienced significant supply constraints in the past year nor does it expect to in the near future. Cash used in investing activities was $12.4 million, $49.0 million and $0.7 million, respectively, for the years ended December 31, 1997, 1996 and 1995. Capital expenditures of $10.4 million during 1997 were primarily concentrated in surface mount assembly, test and manufacturing production equipment. The Company completed the planned expansion of its production capacity at the Angleton plant during 1996, after which the Company had 12 surface mount assembly lines in operation at the Angleton plant. Capital expenditures of $8.6 million during 1996 and $2.3 million during 1995 were primarily concentrated in the expansion of the Angleton facility and surface mount assembly equipment associated with this expansion. On July 30, 1996, the Company completed its acquisition of EMD for approximately $30.5 million in cash. See Note 2 of Notes to Consolidated Financial Statements. The Company invested $2.3 million and $9.5 million, respectively, during 1997 and 1996, of available cash in interest bearing marketable securities. Cash provided by financing activities was $0.4 million, $47.7 million and $0.2 million, respectively, for the years ended December 31, 1997, 1996 and 1995. During 1997, cash provided by financing activities consisted primarily of $0.7 million of proceeds from stock options exercised, offset by $0.2 million of principal payments on long-term debt. During 1996, cash provided by financing activities consisted primarily of $30 million of proceeds from the issuance of long-term debt, $28.5 million of net proceeds from the public offering of common shares, offset by $10.9 million of principal payments on long-term debt. During 1995, cash provided by financing activities consisted of $0.2 million of proceeds from stock options exercised. On February 23, 1998, the Company acquired Lockheed Commercial Electronics Company (LCEC) for $70 million in cash, $40 million of which was obtained through borrowings under a five-year term loan (the Term Loan) with a commercial bank. LCEC, situated in Hudson, New Hampshire, is one of New England's largest electronics manufacturing services companies, providing a broad range of services including printed circuit board assembly and test, system assembly and test, prototyping, depot repair, materials procurement, and engineering support services. Principal on the Term Loan is payable in quarterly installments of $2,000,000 beginning June 30, 1998 with a final installment of the unpaid principal amount due March 31, 2003. The Term Loan bears interest, at the Company's option, at either the bank's Eurodollar rate plus .625% to 1.375% or its prime rate, and interest is payable quarterly. The margin on the Eurodollar rate fluctuates with the Company's ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The Term Loan includes customary affirmative and negative covenants requiring the Company to maintain a minimum tangible net worth, minimum current, fixed charge coverage and interest coverage ratios and a maximum ratio of debt to EBITDA. The Term Loan also restricts the Company's ability to incur additional indebtedness and to pay dividends. In conjunction with the acquisition of LCEC, the Company obtained a five-year, $25 million revolving line of credit which replaced the Company's prior revolving credit facility. The Company is entitled to borrow under the line of credit up to the lessor of $25 million or the sum of 75% of its eligible accounts receivable plus 25% of its eligible inventory. As of December 31, 1997, the Company had no outstanding debt under its line of credit. The Company's operations are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. Some risk of costs and liabilities related to these matters is inherent in the Company's business as with many similar businesses. Management believes that the Company's business is operated in substantial compliance with applicable environmental, waste management, health and safety regulations. The Company may require additional capital to finance further enhancements to or acquisitions or expansions of its manufacturing capacity. Management believes that the level of working capital will continue to grow at a rate generally consistent with the growth of the Company's operations. Although no assurance can be given that future financing will be available on terms acceptable to the Company, the Company may seek additional funds from time to time through public or private debt or equity offerings or through bank borrowings to the extent permitted by its existing debt agreements. Management believes that the existing cash balances, funds generated from operations, and borrowings under Company's credit facility will be sufficient to permit the Company to meet its liquidity requirements in 1998 and for the foreseeable future. The Company does not hold or issue derivative financial instruments in the normal course of business. Inflation and changing prices have not significantly affected the Company's operating results or the markets in which the Company performs services during recent years. The Company recognizes that it must ensure that its products and operations will not be adversely impacted by Year 2000 software failures which can arise in time-sensitive software applications which utilize a field of two digits to define the applicable year. In such applications, a date using "00" as the year may be recognized as the year 1900 rather than the year 2000. Many of the Company's business and operating systems are currently Year 2000 compliant, and the Company is undertaking additional research and development efforts to address those systems which are not currently Year 2000 compliant. In addition, the Company is in the process of selecting and installing an Enterprise Resource Planning System which will be Year 2000 compliant. The Company is planning to complete all necessary Year 2000 upgrades of its major systems in 1999, and is currently identifying and developing conversion strategies for any and all remaining systems that may be impacted by the Year 2000 issue. The Company currently does not have an overall estimate of the costs associated with the purchase and implementation of the new Enterprise Resource Planning System. The costs of this software will be capitalized and amortized over the estimated useful life of the software, and costs associated with the preliminary project stage and post-implementation stage will be expensed as incurred. The year 2000 component of this system can not be readily segregated from the total cost of the company-wide Enterprise Resource Planning System implementation. Consolidated Balance Sheets Benchmark Electronics, Inc. and Subsidiaries December 31, 1997 1996 ------------------------------ Assets Current assets: Cash and cash equivalents ................................................ $ 21,029,347 $ 13,800,013 Accounts receivable, net ................................................. 39,772,435 39,182,629 Income taxes receivable .................................................. 313,594 387,864 Inventories .............................................................. 61,133,963 48,100,338 Prepaid expenses and other assets ........................................ 1,545,110 819,806 Deferred tax asset ....................................................... 1,359,205 1,091,170 ------------------------------ Total current assets ............................................... 125,153,654 103,381,820 Property, plant and equipment ............................................... 54,061,241 44,468,964 Accumulated depreciation .................................................... (23,245,264) (13,834,261) ------------------------------ Net property, plant and equipment .................................. 30,815,977 30,634,703 Goodwill, net ............................................................... 22,680,551 24,350,291 Marketable securities ....................................................... 11,430,757 9,508,234 Other ....................................................................... 240,859 298,483 ------------------------------ $ 190,321,798 $ 168,173,531 ------------------------------ Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt ................................... $ 155,505 $ 239,165 Accounts payable ......................................................... 31,694,123 24,352,472 Accrued liabilities ...................................................... 5,424,939 6,204,535 ------------------------------ Total current liabilities .......................................... 37,274,567 30,796,172 ------------------------------ Long-term debt, excluding current installments .............................. 30,329,828 30,485,333 Deferred tax liability ...................................................... 1,845,846 1,892,612 Shareholders' equity: Preferred shares, $.10 par value; 5,000,000 shares authorized, none issued -- -- Common shares, $.10 par value; 30,000,000 shares authorized: issued 11,623,252 and 11,526,552, respectively; outstanding 11,573,768 and 11,477,068, respectively .............................................. 1,157,376 1,147,706 Additional paid-in capital ............................................... 69,407,600 68,634,790 Retained earnings ........................................................ 50,427,531 35,337,868 Less treasury shares, at cost, 49,484 shares ............................. (120,950) (120,950) ------------------------------ Total shareholders' equity ......................................... 120,871,557 104,999,414 Commitments and contingencies - -------------------------------------------------------------------------------------------------------------- $ 190,321,798 $ 168,173,531 ------------------------------ See accompanying notes to consolidated financial statements. Consolidated Statements of Income Benchmark Electronics, Inc. and Subsidiaries Year ended December 31, 1997 1996 1995 ---------------------------------------------- Sales ........................................ $ 325,229,015 $ 201,296,320 $ 97,352,935 Cost of sales ................................ 285,630,163 177,981,328 85,113,385 ---------------------------------------------- Gross profit ........................... 39,598,852 23,314,992 12,239,550 Selling, general and administrative expenses . 12,817,317 7,227,833 2,989,498 Amortization of goodwill ..................... 1,669,740 695,722 -- ---------------------------------------------- Income from operations ................. 25,111,795 15,391,437 9,250,052 Interest expense ............................. (2,472,183) (1,441,834) -- Interest income .............................. 1,162,958 442,384 268,029 Other income ................................. 149,276 90,880 12,601 ---------------------------------------------- Income before income taxes ............. 23,951,846 14,482,867 9,530,682 Income tax expense ........................... (8,862,183) (5,619,352) (3,382,727) ---------------------------------------------- Net income .......................... $ 15,089,663 $ 8,863,515 $ 6,147,955 ---------------------------------------------- Earnings per share: Basic ..................................... $ 1.31 $ 0.99 $ 0.77 Diluted ................................... $ 1.25 $ 0.96 $ 0.75 ---------------------------------------------- Weighted average number of shares outstanding: Basic ..................................... 11,508,407 8,976,192 8,030,992 Diluted ................................... 12,048,710 9,222,076 8,212,952 ---------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity Benchmark Electronics, Inc. and Subsidiaries Additional Total Common paid-in Retained Treasury shareholders' Shares shares capital earnings shares equity --------------------------------------------------------------------------------------- Balances, December 31, 1994 ............ 8,015,400 $ 801,540 $ 19,124,306 $20,326,398 $(120,950) $ 40,131,294 Stock options exercised ................ 27,400 2,740 197,515 -- -- 200,255 Federal tax benefit of stock options exercised ............. -- -- 144,564 -- -- 144,564 Net income ............................. -- -- -- 6,147,955 -- 6,147,955 --------------------------------------------------------------------------------------- Balances, December 31, 1995 ............ 8,042,800 804,280 19,466,385 26,474,353 (120,950) 46,624,068 Common shares issued in public offering, net of expenses ........... 2,033,000 203,300 28,287,841 -- -- 28,491,141 Stock options exercised ................ 51,340 5,134 402,310 -- -- 407,444 Federal tax benefit of stock options exercised ................... -- -- 88,536 -- -- 88,536 Acquisition of EMD Technologies, Inc. .............. 1,349,928 134,992 20,375,814 -- -- 20,510,806 Net income ............................. -- -- -- 8,863,515 -- 8,863,515 Effect of difference between fair value and cost of shares released from collateral ............ -- -- 13,904 -- -- 13,904 --------------------------------------------------------------------------------------- Balances, December 31, 1996 ............ 11,477,068 1,147,706 68,634,790 35,337,868 (120,950) 104,999,414 Stock options exercised ................ 96,700 9,670 669,927 -- -- 679,597 Federal tax benefit of stock options exercised ................... -- -- 154,820 -- -- 154,820 Net income ............................. -- -- -- 15,089,663 -- 15,089,663 Other .................................. -- -- (51,937) -- -- (51,937) --------------------------------------------------------------------------------------- Balances, December 31, 1997 ............ 11,573,768 $1,157,376 $ 69,407,600 $50,427,531 $(120,950) $ 120,871,557 --------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Benchmark Electronics, Inc. and Subsidiaries Year ended December 31, 1997 1996 1995 ------------------------------------------------- Cash flows from operating activities: Net income .............................................................. $ 15,089,663 $ 8,863,515 $ 6,147,955 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ........................................ 10,150,586 5,723,922 2,059,262 Amortization of premiums on marketable securities .................... 342,193 25,940 66,718 Deferred income taxes ................................................ (314,801) 408,346 132,963 Federal tax benefit of stock options exercised ....................... 154,820 88,536 144,564 Amortization of goodwill ............................................. 1,669,740 695,722 -- Gain on the sale of property, plant and equipment .................... (86,973) (42,878) -- ESOP shares contribution ............................................. -- 13,904 -- Changes in operating assets and liabilities, net of effects from acquisition of business: Accounts receivable ............................................... (589,806) (10,119,586) (3,820,096) Income taxes receivable ........................................... 74,270 994,179 (537,170) Inventories ....................................................... (13,033,625) 3,131,340 (9,794,358) Prepaid expenses and other assets ................................. (729,367) (124,259) (52,133) Accounts payable .................................................. 7,341,651 1,782,239 2,679,659 Accrued liabilities ............................................... (779,596) 895,208 (502,300) Current income taxes payable ...................................... -- -- 45,701 ------------------------------------------------- Net cash (used in) provided by operations ...................... 19,288,755 12,336,128 (3,429,235) Cash flows from investing activities: Additions to property, plant and equipment .............................. (10,352,112) (8,684,400) (2,290,160) Proceeds from the sale of property, plant and equipment ................. 168,912 75,281 -- Acquisition, net of cash acquired ....................................... -- (30,833,300) -- Proceeds from the sale or maturity of short-term investments ............ -- -- 1,542,000 Purchase of marketable securities ....................................... (2,264,716) (9,534,174) -- ------------------------------------------------- Net cash used in investing activities ............................. (12,447,916) (48,976,593) (748,160) Cash flows from financing activities: Net proceeds from public offering of common shares ...................... (51,937) 28,491,141 -- Proceeds from issuance of long-term debt ................................ -- 30,000,000 -- Principal payments on long-term debt .................................... (239,165) (10,928,329) -- Debt issuance costs ..................................................... -- (315,114) -- Proceeds from stock options exercised ................................... 679,597 407,444 200,255 ------------------------------------------------- Net cash provided by financing activities ......................... 388,495 47,655,142 200,255 ------------------------------------------------- Net (decrease) increase in cash and cash equivalents ....................... 7,229,334 11,014,677 (3,977,140) ------------------------------------------------- Cash and cash equivalents at beginning of year ............................. 13,800,013 2,785,336 6,762,476 ------------------------------------------------- Cash and cash equivalents at end of year ................................... $ 21,029,347 $ 13,800,013 $ 2,785,336 ------------------------------------------------- Supplemental disclosures of cash flow information: Income taxes paid ....................................................... $ 8,491,894 $ 4,171,224 $ 3,391,495 ------------------------------------------------- Interest paid ........................................................... $ 2,537,089 $ 369,021 -- ------------------------------------------------- See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements Note 1 -- Summary of Significant Accounting Policies (a) Business Benchmark Electronics, Inc. (the Company) is a Texas corporation which provides contract manufacturing and design services to original equipment manufacturers (OEMs) in select industries, including medical devices, communications equipment, industrial and business computers, testing instruments, and industrial controls. (b) Principles of Consolidation The consolidated financial statements include the financial statements of Benchmark Electronics, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. (d) Marketable Securities Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts to maturity. Such amortization and interest are included in interest income. Realized gains and losses from the sale of available for sale securities are included in other income or expense and are determined on a specific identification method. At December 31, 1997, the Company's investments in held-to-maturity marketable securities consist of Texas state guaranteed obligation bonds with an amortized cost of $4,831,833, fair value of $4,851,000 and unrealized gain of $19,167; Lynnwood, Washington guaranteed obligation bonds with an amortized cost of $4,359,096, fair value of $4,362,000 and unrealized gain of $2,904; Austin, Texas guaranteed obligation bonds with an amortized cost of $1,213,257, fair value of $1,212,000, and unrealized loss of $1,257; and Maryland state guaranteed obligation bonds with an amortized cost of $1,026,571, fair value of $1,032,000, and unrealized gain of $5,429. These investments are classified as long-term as the scheduled maturities range from October 1998 to December 1999. At December 31, 1996, the Company's investments in marketable securities consist of Texas state guaranteed obligation bonds with an amortized cost of $4,996,276, fair value of $4,985,000 and unrealized loss of $11,276; and Lynnwood, Washington guaranteed obligation bonds with an amortized cost of $4,511,958, fair value of $4,509,000 and unrealized loss of $2,958. At such dates, the Company had no marketable securities classified as available for sale. (e) Inventories Inventories include material, labor and overhead and are stated at the lower of cost (first-in, first-out) or market. (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the useful lives of the assets, which range from three to thirty years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the remainder of the lease term. The Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this Statement did not have a material impact of the Company's financial position, results of operations, or liquidity. (g) Goodwill and Other Assets Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the period of expected benefit of 15 years. The accumulated amortization of goodwill at December 31, 1997 and 1996 was $2,365,462 and $695,722, respectively. The Company periodically reviews goodwill to assess recoverability based on the undiscounted cash flows of the entity acquired over the remaining amortization period. Other assets consist principally of deferred financing costs, which are amortized over the life of the related debt. The accumulated amortization of deferred financing costs at December 31, 1997 and 1996 was $85,521 and $25,082, respectively. (h) Earnings Per Share The Company adopted SFAS No. 128, "Earnings per Share", in the fourth quarter of 1997. All prior period earnings per share data have been restated to conform to the provisions of SFAS No. 128. Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock options to purchase common stock. Incremental shares of 540,303, 245, 884, and 181,960 in 1997, 1996 and 1995, respectively, were used in the calculation of diluted earnings per share. Options to purchase 124,000 shares of common stock in 1997 were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common stock. The adoption of SFAS No. 128 had no effect on the calculation of diluted earnings per share for prior periods. (i) Revenue Recognition Revenues are recognized at the time the circuit boards are shipped to the customer, for both turnkey and consignment method sales. Under the consignment method, OEMs provide the Company with the electronic components to be assembled, and the Company recognizes revenue only on the labor used to assemble the product. (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. De-ferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On January 1, 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternately, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Fair Values of Financial Instruments The fair values of the Company's cash equivalents, accounts receivable, accrued liabilities, and accounts payable approximated their carrying values due to the short-term maturities of these instruments. The estimated fair value of long-term debt is equivalent to its carrying value based on the Company's current incremental borrowing rates for similar types of borrowing agreements. (n) Recently Enacted Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company currently does not have any items that would require additional presentation of Comprehensive Income and operates in a single business segment. Accordingly, adoption of these standards in 1998 is not expected to affect the Company's consolidated financial statements. Note 2 -- Acquisition On July 30, 1996, the Company completed its acquisition of EMD Technologies, Inc. (EMD). This business, headquartered in Winona, Minnesota, was acquired for 1,349,928 shares of common stock, $30,447,033 in cash, and the Company paid $2,208,136 in acquisition costs. The transaction was accounted for under the purchase method of accounting, and accordingly, the results of operations of EMD since July 30, 1996 have been included in the consolidated statements of income. The acquisition resulted in goodwill of $25,046,013 which will be amortized on a straight line basis over 15 years. The net purchase price was allocated as follows: Working capital, other than cash ......................... $ 10,638,671 Property, plant and equipment ............................ 17,598,785 Other assets ............................................. 12,379 Goodwill ................................................. 25,046,013 Other liabilities ........................................ (1,951,742) -------------- Purchase price, net of cash received ................... $ 51,344,106 -------------- Net cash portion of purchase price ....................... $ 30,833,300 Common stock issued ...................................... 20,510,806 -------------- Purchase price, net of cash received ..................... $ 51,344,106 -------------- The following unaudited summary pro forma condensed financial information reflects the acquisition as if it had occurred on January 1, 1995 for purposes of the consolidated statements of income. The summary pro forma information is not necessarily representative of what the Company's results of operations would have been had the acquisition in fact occurred on January 1, 1995 and is not intended to project the Company's results of operations for any future period or date. (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - -------------------------------------------------------------------------------- Net sales ....................................... $292,298 258,107 Gross profit .................................... 30,320 29,836 Income from operations .......................... 17,131 15,913 Income from continuing operations ............... 8,572 7,667 Earnings per share: Basic ......................................... $ 0.88 0.82 Diluted ......................................... $ 0.86 0.80 Weighted average number of shares outstanding: Basic ......................................... 9,758 9,381 Diluted ....................................... 10,004 9,562 Note 3 -- Inventories Inventory costs are summarized as follows: December 31, 1997 1996 -------------------------------- Raw materials ....................... $41,837,205 31,670,562 Work in process ..................... 19,296,758 16,429,776 -------------------------------- $61,133,963 48,100,338 - -------------------------------------------------------------------------------- Note 4 -- Property, Plant and Equipment Property, plant and equipment consists of the following: December 31, 1997 1996 ------------------------------ Land .................................... $ 391,969 391,969 Buildings ............................... 8,417,497 8,361,254 Machinery and equipment ................. 38,025,436 29,499,683 Furniture and fixtures .................. 6,480,183 5,373,335 Vehicles ................................ 14,383 51,087 Leasehold improvements .................. 731,773 491,578 Construction in progress ................ -- 300,058 ------------------------------ $54,061,241 44,468,964 - -------------------------------------------------------------------------------- Note 5 -- Borrowing Facilities Long-term debt consists of the following: December 31, 1997 1996 ------------------------------ Senior note ............................. $30,000,000 30,000,000 Other ................................... 485,333 724,498 ------------------------------ Total long-term debt .................. 30,485,333 30,724,498 Less current installments ............... 155,505 239,165 ------------------------------ Long-term debt .......................... $30,329,828 30,485,333 ------------------------------ In order to finance a portion of the cash consideration for the acquisition of EMD, the Company issued a $30 million, 8.02% Senior Note due 2006 ("Senior Note") to Northwestern Mutual Life Insurance Company. The Senior Note is unsecured and guaranteed by each of the Company's United States subsidiaries. Principal on the Senior Note is payable in annual installments of $5.0 million beginning July 31, 2001 with a final installment on the unpaid principal amount due July 31, 2006. Interest on the Senior Note is payable semi-annually on January 31st and July 31st. The purchase agreement relating to the Senior Note (the "Purchase Agreement") includes customary affirmative and negative convenants and restricts the ability of the Company to incur additional debt and to pay dividends. Upon any prepayment of all or a portion of the Senior Note, the Company is obligated to pay the holder a premium on the amount prepaid. The Purchase Agreement contains a provision that in the event of a change of control (defined generally to mean the acquisition by a person or group (as defined in the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) of beneficial ownership of more than 50% of the total voting power of the outstanding voting stock of the Company), the Company must offer to repurchase the Senior Note at par plus any prepayment penalty. The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1997 are as follows: 1998, $155,505; 1999, $212,004; 2000, $20,224; 2001, $5,021,771; 2002, $5,023,437 and thereafter $20,052,392. The Company has a $15,000,000, four-year revolving line of credit with a commercial bank which is available primarily to finance accounts receivable and inventory requirements. The Company is entitled to borrow under the line of credit up to the lesser of $15,000,000 or the sum of 80% of its eligible accounts receivable and 25% of its eligible inventories. As of December 31, 1997 and 1996, the Company had no borrowings outstanding under this line of credit. Interest on the line of credit is payable quarterly and accrues, at the Company's option, at either the bank's prime rate or its Fixed Eurodollar Rate plus 0.625% to 1.75% per annum. A commitment fee of 0.17% per annum on the unused portion of the line of credit is payable quarterly in arrears. The line of credit agreement contains certain financial covenants and restricts the ability of the Company to incur additional debt without the consent of the bank and to pay dividends. The line of credit matures on July 31, 2000. Note 6 -- Commitments The Company has several noncancelable operating leases for office space and manufacturing facilities that expire through 2006. Rental expense under the leases for each of the years in the three-year period ended December 31, 1997 was $1,354,607, $921,526, and $213,765, respectively. The Company leases manufacturing and office facilities in Minnesota from a partnership whose partners include stockholders and a director of the Company. These operating leases have initial terms of eight to ten years, expiring through December 2006 with annual renewals thereafter. Total rent expense associated with these leases for the years ended December 31, 1997 and 1996 was $828,900 and $413,784, respectively. Aggregate annual rental payments on future lease commitments at December 31, 1997 were as follows: 1998 $1,251,905 1999 1,115,287 2000 1,119,900 2001 1,128,900 2002 828,900 Thereafter 2,978,750 ---------- $8,423,642 - --------------------------------- Note 7 -- Common Stock and Stock Option Plans During 1996, the Company issued 2,033,000 shares of common stock in a public offering for net proceeds of $28,491,141. In July 1997, the Company's Board of Directors approved a two-for-one stock split effected in the form of a stock dividend effective for shareholders of record as of August 7, 1997. Shareholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from additional paid-in-capital to common stock the par value of the additional shares arising from the split. All share and per share data have been retroactively adjusted for the stock split. The Company's stock option plan authorizes the Company, upon recommendation of the compensation committee of the Board of Directors, to grant options to purchase a total of 2,200,000 shares of the Company's common stock to key employees of the Company. The stock option plan provides for the discretionary granting by the Company of "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended, as well as non qualified stock options. The exercise price of any incentive stock option must not be less than the fair market value of the common stock on the date of grant. The stock options will terminate no later than 10 years after the date of grant. Although options may vest in increments over time, they historically have become 20% vested two years after the options are granted and 100% vested after 5 years. In December of 1994, the Board of Directors of the Company adopted the Benchmark Electronics, Inc., 1994 Stock Option Plan for Non-Employee Directors (the "Plan") for the benefit of members of the Board of Directors of the Company or its Affiliates who are not employees of the Company or its Affiliates (as defined in the Plan). The aggregate number of shares of Common Stock for which options may be granted under the Plan is 200,000. Under the terms of the Plan, each member of the Board of Directors of the Company or its Affiliates who was not an employee of the Company or any of its Affiliates on the date of the grant (a "Non-Employee Director") will receive a grant of an option to purchase 6,000 shares of the Company's Common Stock upon the date of his election or re-election to the Board of Directors. Additionally, any Non-Employee Director who was a director on the date the Board of Directors adopted the Plan received (a) an option to purchase 6,000 shares of Common Stock for the fiscal year in which the Plan was adopted by the Board of Directors and (b) an option to purchase shares of Common Stock in amount equal to (i) 6,000, multiplied by (ii) the number of consecutive fiscal years (immediately preceding the fiscal year during which the Plan was adopted) that the individual served as a director of the Company, provided that the number under clause (ii) shall not exceed three (3). During 1997, 1996 and 1995, pursuant to the Plan, 24,000, 30,000 and 24,000 options, respectively, were granted to Directors to purchase shares of Common Stock at an exercise price of $16.32, $14.69 and $10.75 per share, respectively. The following table summarizes the activities relating to the Company's stock option plans: Weighted Number of Average Shares Exercise Price --------------------------- Balance at December 31, 1994 ................... 704,200 $ 9.30 Granted ...................................... 216,000 $11.76 Exercised .................................... (27,400) $ 7.16 Canceled ..................................... (91,600) $10.88 ------------------------ Balance at December 31, 1995 ................... 801,200 $ 9.85 Granted ...................................... 653,000 $14.43 Exercised .................................... (51,340) $ 8.13 Canceled ..................................... (45,200) $13.80 ------------------------ Balance at December 31, 1996 ................... 1,357,660 $12.00 Granted ...................................... 426,000 $19.27 Exercised .................................... (96,700) $ 7.03 Canceled ..................................... (96,800) $15.95 ------------------------ Balance at December 31, 1997 ................... 1,590,160 $14.11 --------- The following table summarizes information concerning outstanding and exercisable options at December 31, 1997: Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Outstanding Average Average Exercise Number Contractual Exercise Number Exercise PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------------------------------------------------------------------- $4.38-$10 197,200 4.98 $ 7.12 197,200 $ 7.12 $10-$15 937,960 7.63 $ 13.20 265,720 $ 12.00 $15-$20 305,000 8.37 $ 15.52 30,000 $ 16.13 $20-$25 26,000 9.67 $ 23.90 -- -- $25-$30 124,000 9.50 $ 26.51 -- -- ------- -- 1,590,160 492,920 ----------------------------------------------- At December 31, 1997, the range of exercise prices and weighted average remaining contractual life of outstanding options was $4.38 - $26.88 and 8.01 years, respectively. At December 31, 1997, 1996 and 1995, the number of options exercisable was 492,920, 500,340 and 345,280, respectively, and the weighted average exercise price of those options was $10.30, $9.20 and $7.90, respectively. The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been approximately $13,396,245, or $1.11 per share diluted during 1997, $7,851,515, or $0.85 per share diluted during 1996, and $5,856,955, or $0.71 per share diluted during 1995. Pro forma net income reflects only options granted in 1997, 1996 and 1995. The weighted average fair value of the options granted during 1997, 1996 and 1995 is estimated as $8.55, $5.23 and $4.93, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, volatility of 30%, risk-free interest rate of 6%, assumed annual forfeiture rate of 5%, and an expected life of 5 years. Note 8 -- Income Taxes Income tax expense consists of: Year ended December 31, 1997 1996 1995 ------------------------------------------ Federal - current .............. $ 8,178,203 4,322,471 2,913,464 State - current ................ 998,781 888,535 336,300 Federal/State - deferred ....... (314,801) 408,346 132,963 ------------------------------------------ $ 8,862,183 5,619,352 3,382,727 - -------------------------------------------------------------------------------- Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate to pretax income as a result of the following: Year ended December 31, 1997 1996 1995 ---------------------------------------- Tax at statutory rate ............... $ 8,383,146 4,924,175 3,240,432 State taxes, net of federal benefit . 649,208 586,433 221,958 Tax exempt interest ................. (386,658) (49,882) (84,492) Tax benefit from use of foreign sales corporation ........ (393,839) (139,218) -- Amortization of goodwill ............ 562,413 236,545 -- Other ............................... 47,913 61,299 4,829 ---------------------------------------- Total income tax expense ............ $ 8,862,183 5,619,352 3,382,727 ---------------------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: Year ended December 31, 1997 1996 ---------------------------- Deferred tax assets: Carrying values of inventories ............. $ 710,124 647,075 Accrued liabilities deductible for tax purposes on a cash basis ...... 649,081 444,095 ---------------------------- 1,359,205 1,091,170 Less valuation allowance .................... -- -- ---------------------------- Net deferred tax assets ................... $ 1,359,205 1,091,170 ---------------------------- Deferred tax liabilities: Plant and equipment, due to differences in depreciation ............... $(1,797,228) (1,892,612) Other ....................................... (48,618) -- ---------------------------- Gross deferred tax liability ................ (1,845,846) (1,892,612) ---------------------------- Net deferred tax liability ................ $ (486,641) (801,442) ---------------------------- Note 9 -- Major Customers The Company's customers operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to the electronics industry, the Company's customers or their products could impact the Company's overall credit risk. The Company extends credit based on evaluation of its customers' financial condition and generally does not require collateral or other security from its customers and would incur an accounting loss equal to the carrying value of the accounts receivable if its customer failed to perform according to the terms of the credit arrangement. Sales to major customers were as follows for the indicated periods: Year ended December 31, (IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------- Customer A $120,500 33,680 -- Customer B 42,983 28,638 9,718 Customer C 18,101 22,160 16,666 Customer D 13,892 6,536 -- Customer E 13,381 8,938 114 In 1997 and 1996, the Company had export sales of approximately $86 million and $29 million, respectively, to Europe from the Company's United States operations. There were no export sales in 1995. Note 10 -- Employee Benefit Plans The Company has a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code for the benefit of its employees. The Plan covers all employees with at least one year of service. The Company has agreed to contribute an amount equal to 50% of each participant's contributions to the extent such participant's contribution does not exceed 4% of their compensation for the year and 1% of each participant's compensation. A participant's contribution may not exceed 20% of annual compensation, or the maximum amount allowed as determined by the Internal Revenue Code. The Company may also make discretionary contributions to the plan. During 1997, 1996 and 1995 the Company made contributions to the plan of approximately $689,000, $430,000 and $185,000, respectively. Effective May 6, 1992, the Company adopted an Incentive Bonus Plan ("Bonus Plan") for the benefit of its employees, including executive officers. The Bonus Plan replaced the Com-pany's Incentive Bonus Plan which was adopted in 1990. The Bonus Plan is administered by the Compensation Committee. The total amount of cash bonus awards to be made under the Bonus Plan for any plan year depends primarily on the Company's sales and net income for such year. For any plan year, the Company's sales and net income must meet or exceed, or in combination with other factors satisfy, levels targeted by the Company in its business plan, as established at the beginning of each fiscal year, for any bonus awards to be made. Aggregate bonus awards to all participants under the Bonus Plan may not exceed 7% of the Company's net income. The Compensation Committee has the authority to determine the total amount of bonus awards, if any, to be made to the eligible employees for any plan year based on its evaluation of the Company's financial condition and results of operations, the Company's business and prospects, and such other criteria as it may determine to be relevant or appropriate. The Company expensed $738,000 in 1997 and $320,000 in 1996 in conjunction with the bonus plans. No bonus amounts were accrued or expensed in 1995. Note 11 -- Concentrations of Business Risk The Company uses numerous suppliers of electronic components and other materials for its operations. Some components used by the Company have been subject to industry-wide shortages, and suppliers have been forced to allocate available quantities among their customers. The Company's inability to obtain any needed components during periods of allocation could cause delays in manufacturing and could adversely affect results of operations. Note 12 -- Contingencies The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. Note 13 -- Year 2000 The Company recognizes that it must ensure that its products and operations will not be adversely impacted by Year 2000 software failures which can arise in time-sensitive software applications which utilize two digits rather than four to define the applicable year. Many of the Company's business and operating systems are currently Year 2000 compliant, and the Company is undertaking additional research and development efforts to address those systems which are not currently Year 2000 compliant. In addition, the Company is in the process of selecting and installing an Enterprise Resource Planning System which will be Year 2000 compliant. The Company is planning to complete all necessary Year 2000 upgrades of its major systems in 1999, and is currently identifying and developing conversion strategies for any and all remaining systems that may be impacted by the Year 2000 issue. Note 14 -- Event Subsequent to Date of Auditors' Report On February 23, 1998, The Company completed the acquisition of Lockheed Commercial Electronics Company (LCEC) for $70 million in cash, $40 million of which was obtained through borrowings under a five year term loan with a commercial bank. LCEC, situated in Hudson, New Hampshire, is one of New England's largest electronics manufacturing services companies, providing a broad range of services including printed circuit board assembly and test, system assembly and test, prototyping, depot repair, materials procurement, and engineering support services. The acquisition will be accounted for under the purchase method of accounting. The following unaudited summary pro forma condensed financial information reflects the acquisition of LCEC as if it had occurred on January 1, 1996 for purposes of the consolidated statements of income. The summary pro forma information is not necessarily representative of what the Company's results of operations would have been had the acquisition in fact occurred on January 1, 1996 and is not intended to project the Company's results of operations for any future period or date. (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - -------------------------------------------------------------- Net sales ............................ $607,439 566,802 Gross profit ......................... 52,069 43,510 Income from operations ............... 25,615 22,683 Earnings per share: Basic .............................. $ 0.98 1.20 Diluted ............................ $ 0.94 1.16 Weighted average number of shares outstanding: Basic .............................. 11,508 8,976 Diluted ............................ 12,049 9,222 Independent Auditors' Report The Board of Directors and Shareholders Benchmark Electronics, Inc.: We have audited the accompanying consolidated balance sheets of Benchmark Electronics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Benchmark Electronics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Houston, Texas January 19, 1998 Management's Report The management of Benchmark Electronics, Inc. has prepared and is responsible for the consolidated financial statements and related financial data contained in this report. The consolidated financial statements were prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based upon management's best estimates and judgments. The financial information contained elsewhere in this annual report is consistent with that in the consolidated financial statements. The Company maintains internal accounting control systems that are adequate to prepare financial records and to provide reasonable assurance that the assets are safeguarded from loss or unauthorized use. We believe these systems are effective, and the cost of the systems does not exceed the benefits obtained. The Audit Committee, composed exclusively of outside directors, has reviewed all financial data included in this report. The committee meets periodically with the Company's management and independent public accountants on financial reporting matters. The independent public accountants have complete access to the Audit Committee and may meet with the committee, without management present, to discuss their audit results and opinions on the quality of financial reporting. The role of independent public accountants is to render a professional, independent opinion on management's financial statements to the extent required by generally accepted auditing standards. Benchmark's responsibility is to conduct its affairs according to the highest standards of personal and corporate conduct. Donald E. Nigbor Cary T. Fu President & Chief Executive Officer Executive Vice President Corporate Information Quarterly Financial Data (unaudited) The following table sets forth certain unaudited quarterly information with respect to the Company's results of operations for the years 1997, 1996 and 1995. Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total earnings per share amounts for the fiscal year. 1997 Quarter (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH - ------------------------------------------------------------------------------ Sales $75,724 78,156 83,183 88,166 Gross profit 9,242 9,466 10,157 10,734 Net income 3,291 3,557 4,013 4,229 Earnings per common share: Basic .29 .31 .35 .37 Diluted .28 .30 .33 .35 1996 Quarter 1ST 2ND 3RD 4Th ------------------------------------ Sales $30,383 33,500 62,304 75,109 Gross profit 3,825 4,484 6,550 8,456 Net income 1,839 2,025 2,365 2,635 Earnings per common share: Basic .23 .25 .26 .24 Diluted .22 .24 .26 .24 1995 Quarter 1ST 2ND 3RD 4TH ------------------------------------ Sales $ 23,115 23,646 24,393 26,199 Gross profit 3,089 3,125 3,108 2,918 Net income 1,569 1,588 1,561 1,430 Earnings per common share: Basic .20 .20 .19 .18 Diluted .19 .19 .19 .18 Market for the Registrant's Common Equity and Related Shareholder Matters The Company's Common Stock is listed on the New York Stock Exchange under the symbol "BHE." The following table shows the high and low sales prices for the Common Stock as reported on the New York Stock Exchange (American Stock Exchange prior to May 1997) for the fiscal quarters (or portions thereof) indicated, as adjusted for the July 1997 stock split. 1 2 3 4 ----------------------------------------- 1996 High $14 15/16 16 17 1/8 15 7/8 Low $12 1/16 14 14 5/16 12 1/4 1997 High $16 5/16 20 1/4 28 3/16 29 15/16 Low $14 1/4 13 3/16 20 22 1998 (through March 19, 1998) High $27 7/8 Low $21 1/8 The last reported sale price of Common Stock on March 19, 1998, as reported by the New York Stock Exchange, was $23 5/8. There were approximately 124 record holders of Common Stock as of March 19, 1998. The Company has not paid any cash dividends on the Common Stock in the past and anticipates that, for the foreseeable future, it will retain any earnings available for dividends for use in its business. Selected Financial Data Benchmark Electronics, Inc. and Subsidiaries Year ended December 31, (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Selected Statements of Income Data Sales .......................................... $ 325,229 $ 201,296 $ 97,353 $ 98,168 $ 75,859 Cost of sales .................................. 285,630 177,981 85,113 86,236 66,462 ---------------------------------------------------------- Gross profit ............................... 39,599 23,315 12,240 11,932 9,397 ---------------------------------------------------------- Selling, general and administrative expenses ... 12,817 7,228 2,990 3,154 2,870 Amortization of goodwill ....................... (1,670) (696) -- -- 63 ---------------------------------------------------------- Income from operations ..................... 25,112 15,391 9,250 8,778 6,590 Interest expense ............................... (2,472) (1,442) -- -- -- Interest income ................................ 1,163 442 268 252 384 Other income (expense) ......................... 149 92 13 11 (30) Income tax expense ............................. (8,862) (5,619) (3,383) (3,272) (2,478) ---------------------------------------------------------- Income before cumulative effect of change in accounting principle .......... 15,090 8,864 6,148 5,769 4,466 Cumulative effect at January 1, 1993 of change in accounting for income taxes .... -- -- -- -- 116 Net income ................................. $ 15,090 $ 8,864 $ 6,148 $ 5,769 $ 4,582 ---------------------------------------------------------- Basic earnings per common share (1) Earnings before cummulative effect of change in accounting principle .................. $ 1.31 $ 0.99 $ 0.77 $ 0.72 $ 0.56 Cumulative effect at January 1, 1993 of change in accounting for income taxes . -- -- -- -- .02 ---------------------------------------------------------- Earnings per common share (1) .............. $ 1.31 $ 0.99 $ 0.77 $ 0.72 $ 0.58 ---------------------------------------------------------- Weighted average number of shares outstanding ....................... 11,508 8,976 8,031 7,998 7,948 Diluted earnings per common share (1) Earnings before cummulative effect of change in accounting principle .................. $ 1.25 $ 0.96 $ 0.75 $ 0.71 $ 0.55 Cumulative effect at January 1, 1993 of change in accounting for income taxes . -- -- -- -- .01 ---------------------------------------------------------- Earnings per common share (1) .............. $ 1.25 $ 0.96 $ 0.75 $ 0.71 $ 0.56 ---------------------------------------------------------- Weighted average number of shares outstanding ....................... 12,049 9,222 8,213 8,176 8,132 ---------------------------------------------------------- December 31, (IN THOUSANDS) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Selected Balance Sheet Data Working capital ............ $ 87,879 $ 72,586 $37,285 $30,890 $29,160 Total assets ............... 190,322 168,174 57,037 48,333 47,425 Long-term debt ............. 30,330 30,485 -- -- -- Shareholders' equity ....... $120,872 $104,999 $46,624 $40,131 $34,213 (1) See Note 1 of Notes to Consolidated Financial Statements for the basis of computing earnings per common share. Corporate and Shareholder Data Officers Donald E. Nigbor (3) President and Chief Executive Officer Steven A. Barton (1), (3) Executive Vice President Cary T. Fu (3) Executive Vice President Lenora A. Gurton Secretary Gayla J. Delly Treasurer Christopher Nawrocki Vice President; President of Benchmark Electronics, Inc. - Winona Division (1) Part-time since June 1993 General Counsel Bracewell & Patterson, L.L.P. Houston, Texas Independent Auditors KPMG Peat Marwick LLP Houston, Texas Directors David H. Arnold President and Chairman of the Board DCM Technology, Inc. Winona, Minnesota (Machine Tool Manufacturing) Benchmark Electronics, Inc. Donald E. Nigbor President and Chief Executive Officer Benchmark Electronics, Inc. John C. Custer (1) Retired - Former Chairman of the Board Mason & Hanger-Silas Mason Co., Inc. Lexington, Kentucky (Technical services contracting and engineering firm) Steven A. Barton Executive Vice President Benchmark Electronics, Inc. Gerald W. Bodzy (2) Senior Vice President and Managing Director Stephens Inc. Houston, Texas (Investment banking) Peter G. Dorflinger (1) (2) President and Chief Operating Officer Physicians Resource Group, Inc. Dallas, Texas (Physicians practice management) Cary T. Fu Executive Vice President (1) Member of Compensation Committee (2) Member of Audit Committee (3) Executive Officer Notices Stock Transfer Agent and Registrar Communications concerning stock transfer requirements, lost certificates or changes of address should be directed to: Harris Trust and Savings Bank, c/o Harris Trust Company of New York, 77 Water Street, 4th floor, New York, NY 10005, 800/926-1269. Stock Trading The common stock of Benchmark Electronics, Inc. trades on the New York Stock Exchange under the symbol BHE. SEC Form 10-K A copy of the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission, is available without charge upon written request to: Gayla J. Delly, Treasurer, Benchmark Electronics, Inc., 3000 Technology Drive, Angleton, TX 77515. Financial Mailing List Shareholders whose stock is held in trust or by a brokerage firm may receive timely financial mailings directly from Benchmark by writing to Ms. Gayla J. Delly at the above address. Annual Meeting Interested shareholders are invited to attend the Benchmark Electronics, Inc. annual meeting, which will be held at 10:00 a.m. on Tuesday, May 19, 1998, at the Doubletree Hotel at Allen Center, 400 Dallas Street, Houston, Texas. This annual report is printed on recycled paper. Benchmark logo 3000 Technology Drive Angleton, Texas 77515 (409) 849-6550 www.bench.com