UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K --------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10560 BENCHMARK ELECTRONICS, INC. (Exact name of registrant as specified in its charter) --------------- TEXAS 74-2211011 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3000 TECHNOLOGY DRIVE 77515 ANGLETON, TEXAS (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 849-6550 --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ---------------------- Common Stock, par value New York Stock Exchange, Inc. $0.10 per share Preferred Stock Purchase Rights New York Stock Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 26, 1999, the number of outstanding shares of Common Stock was 11,666,083. As of such date, the aggregate market value of the shares of Common Stock held by non-affiliates, based on the closing price of the Common Stock on the New York Stock Exchange on such date, was approximately $328.8 million. DOCUMENTS INCORPORATED BY REFERENCE: (1) Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998 (Part II Items 5-8 and Part IV Item 14(a)(1)). (2) Portions of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders (Part III, Items 10-13). TABLE OF CONTENTS PAGE PART I ITEM 1. Business................................................. 1 ITEM 2. Properties............................................... 7 ITEM 3. Legal Proceedings........................................ 8 ITEM 4. Submission of Matters to a Vote of Security Holders...... 8 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters.................................... 8 ITEM 6. Selected Financial Data.................................. 8 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................ 8 ITEM 8. Financial Statements and Supplementary Data.............. 8 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 9 PART III ITEM 10. Directors and Executive Officers of the Registrant....... 9 ITEM 11. Executive Compensation................................... 9 ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................................. 9 ITEM 13. Certain Relationships and Related Transactions........... 9 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................... 9 ii PART I ITEM 1. BUSINESS GENERAL Benchmark Electronics, Inc. (the "Company") provides contract electronics manufacturing and design services to original equipment manufacturers ("OEMs") in select industries, including medical devices, communications equipment, industrial and business computers, testing instrumentation and industrial controls. The Company specializes in manufacturing high quality, technologically complex printed circuit board assemblies with computer-automated equipment using surface mount and pin-through-hole interconnection technologies for customers requiring low to medium volume production runs. The Company frequently works with customers from product design and prototype stages through ongoing production and, in some cases, final assembly of the customers' products and provides manufacturing services for successive product generations. As a result, the Company believes that it is often an integral part of its customers' operations. Substantially all of the Company's manufacturing services are provided on a turnkey basis, whereby the Company purchases customer-specified components from its extensive network of suppliers, assembles the components on finished printed circuit boards, performs post-production testing and provides the customer with production process and testing documentation. The Company offers its customers flexible, "just-in-time" delivery programs allowing product shipments to be closely coordinated with the customers' inventory requirements. In certain instances, the Company completes the assembly of its customers' products at the Company's facilities by integrating printed circuit board assemblies into other elements of the customers' products. The Company also provides manufacturing services on a consignment basis, whereby the Company, utilizing components provided by the customer, provides only assembly and post-production testing services. The Company operates a total of 39 surface mount production lines at its facilities in Angleton, Texas, Beaverton, Oregon, Hudson, New Hampshire, Winona, Minnesota, and Dublin, Ireland. The Company, formerly named Electronics, Inc., began operations in 1979 and was incorporated under Texas law in 1981 as a wholly owned subsidiary of Intermedics, Inc. ("Intermedics"), a medical implant manufacturer based in Angleton, Texas. In 1986, Intermedics sold 90% of the outstanding shares of common stock of the Company to Electronic Investors Corp. ("EIC"), a corporation formed by Donald E. Nigbor, Steven A. Barton and Cary T. Fu, the Company's three executive officers. In 1988, EIC was merged into the Company, and in 1990 the Company completed the initial public offering of its common stock. RECENT ACQUISITIONS In July 1996, the Company acquired all of the outstanding common stock of EMD Technologies, Inc. ("EMD"), an independent provider of contract manufacturing and product design services for OEMs in industries comparable to those targeted by the Company. EMD's manufacturing services focus on manufacturing complex printed circuit board assemblies, operating 15 surface mount production lines at its Winona, Minnesota facilities. EMD's product design services include the complete design and development of electronics products and mechanical packages, from conceptual design of circuit boards to configuring subsystems and enclosures. In February 1998, the Company acquired all of the outstanding stock of Lockheed Commercial Electronics Company ("LCEC"), 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. On March 1, 1999, the Company acquired certain assets from Stratus Computer Ireland (Stratus), a wholly-owned subsidiary of Ascend Communications, Inc. (Ascend) for approximately $48 million, subject to adjustment. In connection with the transaction, the Company entered into a three-year supply agreement to provide system integration services to Ascend and Stratus Holding Limited and the Company hired 260 employees. In conjunction with the purchase of the Stratus assets, the Company increased its revolving line of credit to $65 million and borrowed $25 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" for a description of the revolving line of credit. Under Stratus, the plant operated as a systems integration facility for large and very sophisticated fault-tolerant mainframe computers. The Company will continue to operate this new Benchmark Division from the Company's Dublin, Ireland facility with the bulk of its present staff and with additional personnel transferred there, under a multi-year exclusive service contract with Stratus, as a key supplier to Ascend. 1 THE CONTRACT ELECTRONICS MANUFACTURING INDUSTRY The basis for the development of the contract manufacturing industry in recent years has been the increasing reliance by OEMs on contract manufacturing specialists such as the Company for the manufacture of printed circuit board assemblies. As a result of outsourcing manufacturing services, the contract manufacturing industry in the United States grew at a compound annual rate of 21% from 1994 through 1998, according to the Institute for Interconnecting and Packaging Electronic Circuits ("IPC"). The IPC estimated the size of the United States contract manufacturing industry for 1998 in terms of sales to be $22.5 billion. The Company expects the trend toward outsourcing to continue and to result in continued growth in the contract manufacturing industry. A 1997 IPC study forecast that the contract manufacturing industry would grow at an approximate compound annual rate of 20% through 2000 as OEMs continue to outsource their manufacturing requirements and look to contract manufacturers to provide additional services. Some of the advantages OEMs receive as a result of outsourcing are: ACCELERATION OF TIME TO MARKET. Rapid technological advances in the Company's targeted industries require OEMs to make their products available to their customers quickly to remain competitive. Delays in bringing a new product to market can result in obsolescence of the product before it becomes available. Contract manufacturers who specialize in printed circuit board assembly are often able to provide manufacturing services in a more timely manner than OEMs, thus allowing OEMs to reduce the time to market for their products. REDUCTION OF PRODUCTION COSTS. Contract manufacturers generally are able to manufacture printed circuit board assemblies at a lower cost than OEMs because of the efficiencies associated with specialization and greater production volumes. Additionally, the purchasing power of contract manufacturers allows OEMs to save on costs of procurement of components. OEMs also benefit from the inventory management services provided by contract manufacturers in connection with turnkey manufacturing services. ACCESS TO ADVANCED TECHNOLOGY. Using contract manufacturers affords OEMs access to advanced technology in printed circuit board assembly equipment and techniques that OEMs may consider too costly for in-house investment. The increasing use of surface mount interconnection technology, which requires significant investments in computer-automated equipment and the expertise to operate such equipment, is an example. Many OEMs have been unwilling to make such investments, relying instead on contract manufacturers for surface mount assembly. More recent technological advancements that contract manufacturers are now able to offer to OEMs include ball grid array and chip on board assembly processes. IMPROVED MANUFACTURING QUALITY. Because it is the focus of their operations, contract manufacturers are consistently able to provide contract manufacturing services of a higher quality than OEMs can provide in-house. Printed circuit board assembly and other services provided by contract manufacturers are typically a small part of the broader operations of the OEMs. OPPORTUNITY TO FOCUS RESOURCES. By outsourcing printed circuit board assembly and other manufacturing services, OEMs are able to focus their resources on their primary activities, such as research and development of new products and marketing. Other factors in the contract manufacturing industry may have a positive impact on established contract manufacturers such as the Company. The increasing cost of automated equipment used in the industry, the working capital requirements relating to inventory and the additional services that contract manufacturers are providing make it more difficult for smaller manufacturers and start-up companies to compete with the services that are provided by larger, well-capitalized companies. Furthermore, the Company believes that these factors are driving consolidation in the industry and may provide opportunities for growth through acquisition. BUSINESS STRATEGY The Company's business strategy is to provide high quality contract electronics manufacturing services to OEMs in targeted industries. The Company seeks to provide services that reduce OEM costs and time to market and increase OEM product quality. The Company's strategy to achieve these objectives includes the following key elements: ESTABLISH AND MAINTAIN LONG-TERM RELATIONSHIPS. The Company pursues opportunities to provide turnkey manufacturing services whereby the Company becomes an integral part of its customers' manufacturing operations. The Company seeks to work closely with its customers in all phases of design and production. By aggressively marketing its services to its targeted customers and involving design, marketing and senior management personnel in the pursuit and maintenance of customer relationships, the Company attempts to establish itself as the sole or primary source for its customers' manufacturing requirements. The Company believes that working to develop close, long-term relationships builds customer loyalty that is difficult for competitors to overcome. 2 TARGET AND MAINTAIN BALANCE AMONG SELECT OEM INDUSTRIES AND CUSTOMERS. The Company targets industries and customers that have strict quality control standards for their products and that have service-intensive manufacturing requirements. The Company focuses on complex assemblies in low to medium volumes for commercial and industrial customers. The Company has not been, and does not intend to become, a manufacturer of high volume printed circuit board assemblies for personal computers or consumer-oriented products, which typically have relatively low margins. The Company targets customers in the medical devices, communications equipment, industrial and business computers, testing instrumentation and industrial controls industries and seeks to maintain a balance of customers among these industries and within each industry. By balancing its operations among industries and customers, the Company seeks to avoid becoming dependent on any one industry or customer. In addition, the Company believes that the industries and customers that it targets produce products that generally have longer life cycles, more stable demand and less price pressure as compared to consumer-oriented products. PROVIDE COMPREHENSIVE DESIGN AND MANUFACTURING SERVICES. The Company believes that OEMs increasingly expect a broad range of services from contract manufacturers and that attracting and retaining customers depends on the Company's ability to provide such services. The Company provides its customers with services ranging from initial product design and development and prototype production to the manufacture of printed circuit board assemblies, post-production testing and final assembly of customers' products. PURSUE OPPORTUNITIES FOR GROWTH. The Company is committed to pursuing opportunities to grow its operations through acquiring additional facilities or businesses and achieving additional operating efficiencies in the Company's existing operations. MAINTAIN FLEXIBILITY. The Company believes that many of its customers are leaders in their respective industries, and, as a result, routinely re-engineer their products to incorporate new and more competitive product features. Accordingly, the Company has organized its manufacturing operations into flexible work centers, as opposed to dedicated production lines, which allow the Company to incorporate complex design specifications and to respond rapidly to design changes. SERVICES PROVIDED BY THE COMPANY The Company provides turnkey manufacturing services, including the purchase of customer-specified components from its extensive network of component suppliers, assembly of the components onto printed circuit boards and performance of post-production testing. In certain instances, the Company completes the assembly of its customers' products at the Company's facilities by integrating printed circuit boards into other elements of the customers' products. The Company provides design-for-manufacturability engineering services for products it manufactures. With respect to product design, the Company provides the complete design and development of new electronic products and mechanical packages, as well as the redesign, surface mount conversion and printed circuit board layout of existing products. The Company also provides test process design capabilities that include the design and development of test fixtures and procedures and software for both in-circuit tests and functional tests of circuit boards, components and products. The Company's component procurement services for turnkey projects consist of planning, purchasing, expediting, inspecting, warehousing and financing the components required to manufacture printed circuit board assemblies. OEMs increasingly have required manufacturers to purchase all or some components directly from component manufacturers or distributors and to warehouse and finance the components. See "-- Suppliers." In its manufacturing services, the Company offers both surface mount and pin-through-hole interconnection technologies. Surface mount technology is a computer-automated process that allows the placement of a higher density of components directly on both sides of a printed circuit board. The surface mount process is a more recent 3 advancement over the mature pin-through-hole technology, which normally permits electronic components to be attached to only one side of a printed circuit board by inserting the components into holes drilled through the board. The surface mount process allows OEMs to use advanced circuitry while permitting the placement of a greater number of components on a printed circuit board without having to increase the size of the board. By allowing increasingly complex circuits to be packaged with the components placed in closer proximity to each other, surface mount technology greatly enhances circuit processing speed and thus board and system performance. The surface mount process allows a reduction in the number of printed circuit boards required per system and allows the use of more fully automated production processes. The Company performs pin-through-hole assembly both manually and with computer-automated component insertion and soldering equipment. Although surface mount technology is the leading interconnection technology, the Company intends to continue providing pin-through-hole assembly services for its customers. Pin-through-hole technology is of continuing viability because most printed circuit boards assembled using surface mount technology require some pin-through-hole assembly. In addition, the Company believes that by continuing to provide pin-through-hole assembly services, the Company appeals to current and prospective customers that have not shifted, or do not wish to change, their manufacturing process to utilize surface mount technology. Because the Company may be the sole source or a major source of printed circuit board assemblies for a customer, frequent communication between the Company and the customer is necessary to ensure that the Company's manufacturing services meet the customer's specifications. Accordingly, the Company maintains a customer service department whose personnel work closely with the customer throughout the manufacturing process. The Company's engineering and manufacturing personnel coordinate the implementation of new and reengineered products with the customer, thereby providing the customer with feedback on such issues as the overall ease of manufacture of the printed circuit board assembly and anticipated production lead times. Component procurement begins after component specifications are verified and approved sources are confirmed with the customer. Concurrently, the Company's technical personnel establish complete documentation files on components and the appropriate set-up, assembly and testing procedures. The Company's personnel monitor all stages of the manufacturing process in order to provide flexible and rapid responses to the customer's requirements, including changes in design, order size and delivery schedules. In addition, the Company utilizes an automated materials planning system which allows the customer to monitor the status of an order on a real-time basis. The Company also provides testing services for completed printed circuit board assemblies in connection with the manufacturing process. In-circuit tests verify that the components have been inserted properly and meet certain functional standards and that the electrical circuits have been completed properly. These tests are performed on industry standard testing equipment using proprietary software developed either by the customer or test consultants on a contractual basis. In-circuit tests normally are performed on all printed circuit board assemblies for turnkey projects. In addition, using specialized testing equipment designed and provided by the customer, the Company performs customized functional tests designed to ensure that the printed circuit board assembly will perform its intended functions. Because defective components normally fail after a relatively short period of use, customers occasionally request that certain printed circuit board assemblies be subjected by the Company to controlled environmental stresses, typically thermal or electrical stresses. These procedures accelerate the effects of operational use without affecting the useful life of the component. The Company also offers its customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with the customers' inventory requirements. Several of the Company's larger customers utilize a just-in-time inventory management system. The Company believes that the attractiveness of just-in-time inventory management will lead other customers to implement such systems and, accordingly, anticipates that a greater percentage of the Company's business will be performed on this basis in the future. In establishing a turnkey relationship with a manufacturer, OEMs must incur expense in qualifying the contract manufacturer and in some cases its sources of component supply, refining product design and manufacturing processes, and developing mutually compatible information and reporting systems. The Company believes that once this relationship is established, OEMs typically experience significant difficulty in expeditiously reassigning turnkey projects to another manufacturer and, as a result, seek sources of turnkey manufacturing services that they perceive will be able to meet their production requirements over a long period of time and successive product generations. Accordingly, the Company believes that its increasing turnkey business has resulted in greater stability in its customer base. 4 MARKETING AND CUSTOMERS To better implement its service-intensive business strategy, the Company markets its services to existing and potential customers through its direct sales force, independent marketing representatives and its executive officers. The Company's sales force consists of nine in-house salesmen and two independent marketing representatives, through which the Company continues to aggressively market the enhanced service capabilities of the Benchmark Design Center located in Winona, Minnesota. Four of the nine in-house salesmen are based at the Winona, Minnesota facility, three at the Hudson, New Hampshire facility and one each at the Angleton, Texas and Beaverton, Oregon facilities. 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 1998, the Company's three largest customers accounted for approximately 28%, 14% and 11%, respectively, of the Company's sales. See Note 9 of Notes to Consolidated Financial Statements. The Company targets customers in five industries and seeks to maintain a balance in its sales to those industries. The following table sets forth the percentages of the Company's sales to each of the five industries for 1996, 1997 and 1998. 1996 1997 1998 ----------------------- Medical Devices ..................... 18% 17% 11% Telecommunications .................. 26 21 31 Computer Systems .................... 25 39 44 Tests and Instrumentation ........... 15 11 5 Industrial Controls ................. 16 12 9 SUPPLIERS The Company maintains an extensive network of suppliers of components and other materials used in assembling printed circuit boards. The Company procures components only when a purchase order or forecast is received from a customer and occasionally utilizes components or other materials for which a supplier is the single source of supply. Although the Company experiences component shortages and longer lead times of various components from time to time, the Company has generally been able to reduce the impact of the component shortages by working with customers to reschedule deliveries, by working with suppliers to provide the needed components using just-in-time inventory programs, or by purchasing components at somewhat higher prices from distributors, rather than directly from manufacturers. These procedures reduce, but do not eliminate, the Company's inventory risk. In addition, by developing long-term relationships with suppliers, the Company has been better able to minimize the effects of component shortages than manufacturers without such relationships. Because of the continued increase in demand for surface mount components, the Company anticipates continued component shortages with respect to certain components and longer lead times for various components from time to time. BACKLOG The Company's backlog was approximately $317 million at December 31, 1998, compared to $302 million at December 31, 1997 and $230 million at December 31, 1996. Backlog consists of customer orders that are expected to be filled within twelve months. Because orders generally may be rescheduled or cancelled by the payment of cancellation charges and because the Company's customers update their orders at different intervals and provide orders to be filled over different periods, the Company's backlog does not necessarily provide an accurate measure of the timing or amount of future sales. COMPETITION The contract manufacturing services provided by the Company are available from many independent sources as well as in-house manufacturing capabilities of current and potential customers. The Company's competitors include Solectron Corporation, SCI Systems, Inc., The DII Group, Inc., Avex Electronics, Inc., Jabil Circuit, Inc. and Plexus Corp., some of which are more established in the industry and have substantially greater financial, manufacturing or marketing resources than the Company. The Company believes that the principal competitive factors in its targeted markets are product quality, flexibility and timeliness in responding to design and schedule changes, reliability in meeting product delivery schedules, pricing, technological sophistication and geographic location. The Company believes that it competes effectively with respect to these factors. 5 GOVERNMENTAL REGULATION The Company's operations, and the operations of businesses that the Company acquires, are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. There can be no assurance that material costs and liabilities will not be incurred or that past or future operations will not result in exposure to injury or claims of injury by employees or the public. Although some risk of costs and liabilities related to these matters is inherent in the Company's business, as with many similar businesses, the Company believes that its business is operated in substantial compliance with applicable regulations. However, new, modified or more stringent requirements or enforcement policies could be adopted, which could adversely affect the Company. The Company periodically generates and temporarily handles limited amounts of materials that are considered hazardous waste under applicable law. The Company contracts for the off-site disposal of these materials and has implemented a waste management program to address related regulatory issues. EMPLOYEES As of December 31, 1998, the Company had 2,280 employees, of whom 1,701 were engaged in manufacturing and operations, 316 in materials control and procurement, 84 in design and development, 40 in marketing and sales, and 139 in administration. None of the Company's employees is subject to a collective bargaining agreement. Management believes that the Company's relationship with its employees is satisfactory. EXPORT SALES In 1998, the Company had export sales of approximately $87 million to Europe, $2 million to Canada, $92,000 to Asia, and $8,000 to Australia from the Company's United States operations. 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. YEAR 2000 ISSUES 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 date-sensitive software applications which utilize a field of two digits rather than four to define a specific year. Absent corrective actions, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. Many of the Company's business and operating systems are currently Year 2000 compliant, and the Company initiated a review of those systems during 1997 to address those systems that are not currently Year 2000 compliant. Areas addressed included major third-party suppliers of components of the Company's products as well as full reviews of the Company's manufacturing equipment, telephone and voice mail systems, security systems and other office support systems. The Company has also initiated formal communications with significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. Based on its inquiries to date, the Company believes satisfactory progress is being made by its significant suppliers and customers on Year 2000 issues. No significant information technology initiatives have been deferred by the Company as a result of its Year 2000 project. In addition, the Company has selected Baan U.S.A., Inc. to provide an Enterprise Resource Planning System, which will be Year 2000 compliant, to improve processes and to increase efficiencies. The new Enterprise Resource Planning System implementation is scheduled for completion at all locations by November 1999. All necessary Year 2000 upgrades of major systems, including those supplied by vendors, have been identified and conversion strategies developed and are under deployment. The estimated total cost to address the Company's Year 2000 issues, including the cost associated with the new Enterprise Resource Planning System, is approximately $13.5 million. Costs incurred and expected to be incurred consist primarily of the cost of Company personnel involved in updating applications and operating systems and the costs of software updates and patches (many of which are provided free of charge from the vendors). The estimated total cost associated with the purchase and implementation of the new Enterprise Resource Planning System is approximately $13 million. The costs of this software will be capitalized and amortized over the estimated useful life 6 of the software, and costs associated with the preliminary project stage and post-implementation stage has been and 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. The total amount expended on Year 2000 issues and the new Enterprise Resource Planning System through December 31, 1998, is approximately $9 million, of which $8.8 million related to the new Enterprise Resource Planning System implementation and approximately $200,000 related to the cost of identifying and communicating with third parties and installing software patches. The costs of the Year 2000 process and the timetable on which the Company believes it will complete any Year 2000 modifications are based on management's best estimates, which are derived utilizing a number of assumptions of future events, including the availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. In addition, there can be no assurance that the systems of other companies on which the Company's systems rely will be converted on a timely basis or that such failure by another company to convert would not have an adverse effect on the Company's systems. There is considerable uncertainty inherent in assessing the Company's vulnerability to Year 2000 problems, arising in part from the uncertainty of the Year 2000 readiness of the Company's suppliers and customers. It is possible that the failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business operations, and that such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Based on the information available to it, and subject to the effect of the general uncertainty on the Company's ability to make a definitive determination, the Company does not believe it has any material exposure to significant business interruption as a result of the Year 2000 problem, or that the cost of remedial actions will have a material adverse effect on its business, financial condition or result of operations. The steps taken by the Company to address the Year 2000 issues are expected to reduce significantly the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material third party suppliers and customers. The Company believes that, with the implementation of the Enterprise Resource Planning System and completion of identifying and communicating with third parties as scheduled, the possibility of significant interruptions of normal operations should be reduced. Accordingly, and as the program is on schedule to be completed during the fall of 1999, the Company has not formulated a worse case scenario in the event its Year 2000 project is not completed in a timely manner. The Company has a contingency plan in place in the event all scheduled implementations are not completed by the end of 1999. All necessary Year 2000 upgrades of major systems and software patches, including those supplied by vendors, have been identified and conversion strategies are under deployment. ITEM 2. PROPERTIES The Company's executive offices and one of its manufacturing facilities are located in an approximately 109,000 square foot facility on 18.9 acres of land owned by the Company in Angleton, Texas, where the Company has six surface mount manufacturing lines. The Company leases its approximately 52,000 square foot facility in Beaverton, Oregon, where the Company has four surface mount production lines, under a lease expiring in June 2002. The Company's facilities in Winona, Minnesota comprise five leased buildings with total square footage of approximately 137,000 and a 64,000 square foot building that the Company owns. For the primary leased facilities in Winona, the Company has leases through July 2006, each with purchase options that expire in June 1999. The Winona facilities include manufacturing facilities with 15 surface mount production lines and warehouse facilities. The Company leases its approximately 200,000 square feet facility in Hudson, New Hampshire, which contains 14 surface mount production lines, under leases expiring in June 2000, with options to extend the leases for an additional four years. The Company's approximate 44,000 square foot facility in Dublin, Ireland, where the Company will consolidate the assets purchased in March 1999 from Stratus Computer Ireland, is leased through September 2003. The Company's Angleton, Beaverton and Hudson facilities are certified under ISO-9002, and the Winona facilities are certified under ISO-9001. The Company believes that its properties are and will be sufficient to conduct the Company's operations for the foreseeable future. 7 ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information on page 30 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998 (the "1998 Annual Report") is incorporated herein by reference in response to this item. ITEM 6. SELECTED FINANCIAL DATA The information on page 31 of the 1998 Annual Report is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information on pages 9 through 14 of the 1998 Annual Report is incorporated herein by reference in response to this item. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not hold or issue derivative financial instruments in the normal course of business. However, the Company, as a result of its international operating activities, is exposed to market risks, including changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company manages exposure to changes in interest rates by balancing the amount of its borrowings between fixed rate and variable interest rates. The Company manages its exposure to foreign currency exchange rates by requiring customers to pay in U.S. dollars. Certain financial instruments used to obtain capital are subject to market risks from fluctuations in interest rates. As of March 31, 1999, the Company has $30 million of fixed rate financial instruments and $47 million of variable rate financial instruments. The Company has a subsidiary located in the Republic of Ireland. The Company predominantly conducts its foreign sales and purchase transactions in U.S. dollars. Other currency exchange risks are primarily limited to current liabilities payable in Irish pounds. Such amounts relate to foreign plant wages, taxes and facility operating costs. Accordingly, the Company does not expect that the effects of changes in currency exchange rates upon such non-U.S. dollar transactions would be material. The Company does not currently hedge against foreign currency translation risks and believes that foreign currency exchange risk is not significant to its operations. The information contained in this Item 7A contains forward looking statements regarding the future financial condition and results of operations and the Company's business operations. The word "expect" and similar expressions are intended to identify such statements. Such statements involve risks, uncertainties and assumptions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this Form 10-K for a discussion of important factors which could cause actual results to differ materially from the conclusions expressed in the forward-looking statements set forth in this Item 7A, and further discussion of the Company's exposure to market risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information on pages 15 through 29 of the 1998 Annual Report is incorporated herein by reference in response to this item. 8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement"), to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation and Other Matters" in the 1999 Proxy Statement, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the 1999 Proxy Statement, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Transactions" in the 1999 Proxy Statement, to be filed not later than 120 days after the close of the Company's fiscal year, is incorporated herein by reference in response to this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules, and Exhibits 1. FINANCIAL STATEMENTS OF THE COMPANY Reference is made to the Financial Statements, the reports thereon, the notes thereto and supplementary data commencing at page 15 of the 1998 Annual Report, which financial statements, reports, notes and data are incorporated herein by reference in response to this item. Set forth below is a list of such Financial Statements: Consolidated Financial Statements of the Company Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 9 3. EXHIBITS Each exhibit marked with an asterisk is filed with this Annual Report on Form 10-K. EXHIBIT NUMBER DESCRIPTION 2.1 -- Purchase Agreement dated as of January 22, 1998 by and between the Company and Lockheed Martin Corporation (incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated February 23, 1998). 2.2 -- Agreement and Plan of Merger dated as of March 27, 1996 by and among the Company, Electronics Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by reference to Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 2.3 -- Amendment No. 1 to Agreement and Plan of Merger dated as of April 5, 1996 by and among the Company, Electronics Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-4230)). 2.4 -- Purchase and Sale Agreement by and among Stratus Computer Ireland, Ascend Communications Inc., BEI Electronics Ireland Limited and Benchmark Electronics, Inc. dated January 22, 1999 (incorporated by reference herein to Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 22, 1999). 3.1 -- Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-46316) (the "Registration Statement")). 3.2* -- Amended and Restated Bylaws of the Company. 3.3* -- Amendment to Amended and Restated Articles of Incorporation of the Company adopted by the shareholders of the Company on May 20, 1997. 3.4 -- Statement of Resolution Establishing Series A Cumulative Junior Participating Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit B of the Rights Agreement dated December 11, 1998 between the Company and Harris Trust Savings Bank, as Rights Agent, included as Exhibit 1 to the Company's Form 8A12B filed December 11, 1998). 4.1 -- Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Registration Statement). 4.2 -- Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 4.3 -- Amendment to the Restated Articles of Incorporation of the Company adopted by the shareholders of the Company on May 20, 1997 (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 4.4 -- Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4.3 to the Registration Statement). 4.5 -- Rights Agreement dated December 11, 1998 between the Company and Harris Trust Savings Bank, as Rights Agent, together with the following exhibits thereto: Exhibit A - Form of Statement of Resolution Establishing Series A Cumulative Junior Participating Preferred Stock of Benchmark Electronics, Inc.; Exhibit B - Form of Right Certificate; and Exhibit C - Summary of Rights to Purchase Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit 1 to the Company's Form 8A12B filed December 11, 1998). 4.6 -- Summary of Rights to Purchase Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit 3 to the Company's Form 8A12B/A filed December 22, 1998). 10 10.1 -- Form of Indemnity Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.11 to the Registration Statement). 10.2 -- Benchmark Electronics, Inc. Stock Option Plan dated May 11, 1990 (incorporated herein by reference to Exhibit 10.12 to the Registration Statement). 10.3 -- Form of Benchmark Electronics, Inc. Incentive Stock Option Agreement between the Company and the optionee (incorporated herein by reference to Exhibit 10.13 to the Registration Statement). 10.4 -- Form of Benchmark Electronics, Inc. Nonqualified Stock Option Agreement between the Company and the optionee (incorporated herein by reference to Exhibit 10.14 to the Registration Statement). 10.5* -- Lease Agreement dated February 1, 1997 between Tektronix, Inc. and the Company. 10.6 -- Registration Rights Agreement dated March 30, 1992 between Mason & Hanger Corporation and the Company (incorporated herein by reference to Exhibit 10.17 to the Registration Statement). 10.7* -- Benchmark Electronics, Inc. 1992 Incentive Bonus Plan. 10.8 -- Benchmark Electronics, Inc. 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.9 -- Amended and Restated Credit Agreement dated as of February 6, 1999 by and between the Company and Chase Bank of Texas, N.A. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 1, 1999). 10.10 -- Lease Agreement dated July 30, 1996 by and among David H. Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD Associates, Inc., as amended by Amendment to Lease dated July 30, 1996 (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.11 -- Lease Agreement dated December 15, 1992 by and among David H. Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD Associates, Inc., as amended by Amendment to Lease dated January 1, 1994, Amendment to Lease dated December 15, 1995, and Amendment to Lease dated July 30, 1996 (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.12 -- Note Purchase Agreement dated as of July 30, 1996 by and between the Company and Northwestern Mutual Life Insurance Company (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated July 30, 1996). 10.14* -- Guarantee dated September 10, 1998 by the Company in favor of Kilmore Developments Limited. 13* -- Benchmark Electronics, Inc. Annual Report to Shareholders for the fiscal year ended December 31, 1998. 21* -- Subsidiaries of Benchmark Electronics, Inc. 23* -- Consent of Independent Auditors concerning incorporation by reference in the Company's Registration Statement on Form S-8 (Registration No. 33-61660, No. 333-26805, No. 333-28997 and No. 333-66889). 11 27.1* -- Financial Data Schedule. (b) Reports on Form 8-K On December 11, 1998, the Company filed a Current Report on Form 8-K under item 5 thereof to report the adoption of a Shareholder Rights Plan. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BENCHMARK ELECTRONICS, INC. By: /s/ DONALD E. NIGBOR Donald E. Nigbor PRESIDENT Date: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated. NAME POSITION DATE -------- -------------- --------- Chairman of the /s/ John C. Custer Board of Directors March 31, 1999 - ---------------------- ------------------- John C. Custer Director and President /s/ Donald E. Nigbor (principal executive officer) March 31, 1999 - ---------------------- ------------------- Donald E. Nigbor Director and Executive - ---------------------- Vice President ------------------- Stephen A. Barton Director and Executive Vice President (principal /s/ Cary T. Fu financial and accounting officer) March 31, 1999 - ---------------------- ------------------- Cary T. Fu Director - ---------------------- ------------------- Peter G. Dorflinger /s/ Gerald W. Bodzy Director March 31, 1999 - ---------------------- ------------------- Gerald W. Bodzy Director - ---------------------- ------------------- David H. Arnold 13 EXHIBIT INDEX Each exhibit marked with an asterisk is filed with this Annual Report on Form 10-K. EXHIBIT NUMBER DESCRIPTION 2.1 -- Purchase Agreement dated as of January 22, 1998 by and between the Company and Lockheed Martin Corporation (incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated February 23, 1998). 2.2 -- Agreement and Plan of Merger dated as of March 27, 1996 by and among the Company, Electronics Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by reference to Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 2.3 -- Amendment No. 1 to Agreement and Plan of Merger dated as of April 5, 1996 by and among the Company, Electronics Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-4230)). 2.4 -- Purchase and Sale Agreement by and among Stratus Computer Ireland, Ascend Communications Inc., BEI Electronics Ireland Limited and Benchmark Electronics, Inc. dated January 22, 1999 (incorporated by reference herein to Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 22, 1999). 3.1 -- Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-46316) (the "Registration Statement")). 3.2* -- Amended and Restated Bylaws of the Company. 3.3* -- Amendment to Amended and Restated Articles of Incorporation of the Company adopted by the shareholders of the Company on May 20, 1997. 3.4 -- Statement of Resolution Establishing Series A Cumulative Junior Participating Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit B of the Rights Agreement dated December 11, 1998 between the Company and Harris Trust Savings Bank, as Rights Agent, included as Exhibit 1 to the Company's Form 8A12B filed December 11, 1998). 4.1 -- Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Registration Statement). 4.2 -- Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 4.3 -- Amendment to the Restated Articles of Incorporation of the Company adopted by the shareholders of the Company on May 20, 1997 (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 4.4 -- Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4.3 to the Registration Statement). 4.5 -- Rights Agreement dated December 11, 1998 between the Company and Harris Trust Savings Bank, as Rights Agent, together with the following exhibits thereto: Exhibit A - Form of Statement of Resolution Establishing Series A Cumulative Junior Participating Preferred Stock of Benchmark Electronics, Inc.; Exhibit B - Form of Right Certificate; and Exhibit C - Summary of Rights to Purchase Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit 1 to the Company's Form 8A12B filed December 11, 1998). 14 4.6 -- Summary of Rights to Purchase Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to Exhibit 3 to the Company's Form 8A12B/A filed December 22, 1998). 10.1 -- Form of Indemnity Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.11 to the Registration Statement). 10.2 -- Benchmark Electronics, Inc. Stock Option Plan dated May 11, 1990 (incorporated herein by reference to Exhibit 10.12 to the Registration Statement). 10.3 -- Form of Benchmark Electronics, Inc. Incentive Stock Option Agreement between the Company and the optionee (incorporated herein by reference to Exhibit 10.13 to the Registration Statement). 10.4 -- Form of Benchmark Electronics, Inc. Nonqualified Stock Option Agreement between the Company and the optionee (incorporated herein by reference to Exhibit 10.14 to the Registration Statement). 10.5* -- Lease Agreement dated February 1, 1997 between Tektronix, Inc. and the Company. 10.6 -- Registration Rights Agreement dated March 30, 1992 between Mason & Hanger Corporation and the Company (incorporated herein by reference to Exhibit 10.17 to the Registration Statement). 10.7* -- Benchmark Electronics, Inc. 1992 Incentive Bonus Plan. 10.8 -- Benchmark Electronics, Inc. 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.9 -- Amended and Restated Credit Agreement dated as of February 6, 1999 by and between the Company and Chase Bank of Texas N.A. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 1, 1999). 10.10 -- Lease Agreement dated July 30, 1996 by and among David H. Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD Associates, Inc., as amended by Amendment to Lease dated July 30, 1996 (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.11 -- Lease Agreement dated December 15, 1992 by and among David H. Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD Associates, Inc., as amended by Amendment to Lease dated January 1, 1994, Amendment to Lease dated December 15, 1995, and Amendment to Lease dated July 30, 1996 (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.12 -- Note Purchase Agreement dated as of July 30, 1996 by and between the Company and Northwestern Mutual Life Insurance Company (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated July 30, 1996). 10.14* -- Guarantee dated September 10, 1998 by the Company in favor of Kilmore Developments Limited. 13* -- Benchmark Electronics, Inc. Annual Report to Shareholders for the fiscal year ended December 31, 1998. 21* -- Subsidiaries of Benchmark Electronics, Inc. 23* -- Consent of Independent Auditors concerning incorporation by reference in the Company's Registration Statement on Form S-8 (Registration No. 33-61660, No. 333-26805, No. 333-28997 and No. 333-66889). 27.1* -- Financial Data Schedule. 15