SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 COMMISSION FILE NUMBER: 1-10560
BENCHMARK ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2211011
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(979) 849-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
--- ---
As of August 11, 2000 there were 19,099,641 shares of Common Stock, par
value $0.10 per share, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................ $ 22,847 $ 9,437
Accounts receivable, net ................. 241,132 197,239
Income taxes receivable .................. 404 3,351
Inventories .............................. 277,655 214,554
Prepaid expenses and other assets ........ 16,431 15,499
Deferred tax asset ....................... 2,303 2,334
--------- ---------
Total current assets ................... 560,772 442,414
--------- ---------
Property, plant and equipment .............. 177,827 175,774
Accumulated depreciation ................... (55,744) (53,766)
--------- ---------
Net property, plant and equipment ...... 122,083 122,008
--------- ---------
Other assets, net .......................... 26,458 23,625
Goodwill, net .............................. 167,889 172,791
--------- ---------
$ 877,202 $ 760,838
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other
long-term debt ......................... $ 18,815 $ 19,184
Accounts payable ......................... 258,347 215,971
Accrued liabilities ...................... 28,423 29,333
--------- ---------
Total current liabilities .............. 305,585 264,488
Revolving line of credit ................... 121,600 41,500
Convertible subordinated notes ............. 80,200 80,200
Other long-term debt, excluding current
installments ............................. 72,100 81,111
Other long-term liability .................. 6,157 5,939
Deferred income taxes ...................... 5,898 5,665
Shareholders' equity:
Preferred shares, $0.10 par value;
5,000,000 shares
authorized, none issued ................ -- --
Common shares, $0.10 par value;
30,000,000 shares authorized; issued -
16,358,910 and 16,290,010, respectively;
outstanding - 16,309,426 and 16,240,526,
respectively ........................... 1,631 1,624
Additional paid-in capital ............... 202,369 200,980
Retained earnings ........................ 84,357 78,774
Accumulated other comprehensive
income (loss) .......................... (2,575) 677
Less treasury shares, at cost; 49,484
shares ................................. (120) (120)
--------- ---------
Total shareholders' equity ............. 285,662 281,935
Commitments and contingencies.............
--------- ---------
$ 877,202 $ 760,838
========= =========
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales ............................. $ 406,572 $ 162,621 $ 755,726 $ 309,167
Cost of sales ..................... 376,868 145,767 702,376 277,623
--------- --------- --------- ---------
Gross profit ................ 29,704 16,854 53,350 31,544
Selling, general and administrative
expenses ........................ 13,432 5,677 26,113 10,628
Amortization of goodwill .......... 3,100 910 6,320 1,819
--------- --------- --------- ---------
Income from operations ...... 13,172 10,267 20,917 19,097
Interest expense .................. (7,050) (1,190) (12,613) (2,315)
Other income (expense) ............ (648) (266) 181 (50)
--------- --------- --------- ---------
Income before income taxes .. 5,474 8,811 8,485 16,732
Income tax expense ................ 1,869 3,206 2,902 6,090
--------- --------- --------- ---------
Net income .................. $ 3,605 $ 5,605 $ 5,583 $ 10,642
========= ========= ========= =========
Earnings per share:
Basic ....................... $ 0.22 $ 0.44 $ 0.34 $ 0.87
Diluted ..................... $ 0.21 $ 0.41 $ 0.32 $ 0.80
========= ========= ========= =========
Weighted average number of shares
outstanding:
Basic ....................... 16,297 12,756 16,272 12,209
Diluted ..................... 17,547 13,789 17,330 13,256
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 5,583 $ 10,642
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............... 25,681 10,173
Deferred income taxes ....................... 264 100
(Gain) loss on the sale of property,
plant and equipment ........................ 51 (61)
Federal tax benefit of stock options
exercised ................................. 461 261
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable ......................... (45,821) (30,753)
Inventories ................................. (64,420) (478)
Prepaid expenses and other assets ........... (2,706) (2,824)
Accounts payable ............................ 78,994 16,346
Accrued liabilities ......................... (370) 1,410
Other long term liability ................... 218 --
Income taxes receivable ..................... 2,947 539
-------- --------
Net cash provided by operations ......... 882 5,355
-------- --------
Cash flows from investing activities:
Capital expenditures, net ....................... (19,780) (9,787)
Additions to capitalized software ............... (1,529) (1,373)
Acquisitions .................................... (35,303) (42,310)
-------- --------
Net cash used in investing activities ... (56,612) (53,470)
-------- --------
Cash flows from financing activities:
Net proceeds from stock offering ................ -- 93,694
Debt issuance costs ............................. (1,383) (152)
Proceeds from issuance of debt .................. 80,100 25,000
Proceeds from stock options exercised ........... 935 540
Principal payments on other long-term debt ...... (9,380) (49,181)
-------- --------
Net cash provided by financing activities 70,272 69,901
-------- --------
Effect of exchange rate changes ................... (1,132) --
-------- --------
Net increase in cash and cash equivalents ......... 13,410 21,786
Cash and cash equivalents at beginning of year .. 9,437 23,077
-------- --------
Cash and cash equivalents at June 30 ............ $ 22,847 $ 44,863
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) .................... $ (1,721) $ 5,241
======== ========
Interest paid ................................... $ 12,211 $ 2,449
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Benchmark Electronics, Inc. (the Company) is a Texas corporation which
provides electronics manufacturing and design services to original equipment
manufacturers (OEMs) of telecommunication equipment, computers and related
products for business enterprises, video/ audio/entertainment products,
industrial control equipment, testing and instrumentation products, personal
computer and medical devices. The Company has manufacturing operations located
in the Americas, Europe and Asia.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements reflect all
normal and recurring adjustments which in the opinion of management are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOTE 2 - EARNINGS PER SHARE
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 1,058 and 1,047 for the six months ended June 30, 2000 and 1999,
respectively and 1,250 and 1,033 for the three months ended June 30, 2000 and
1999, respectively, were used in the calculation of diluted earnings per share.
Options to purchase 36 shares of common stock for the six-month period ended
June 30, 2000 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. For the three-month period ended June 30, 2000 and for the
three and six-month periods ended June 30, 1999, no options were excluded in the
computation of diluted earnings per share since the option exercise price was
lower than the average market price of the common stock. The effect of the
if-converted method for the 6% Convertible Subordinated Notes is antidilutive
and 1,995 of potential common shares have not been considered in computing
diluted earnings per share for the three-month and six-month periods ended June
30, 2000.
NOTE 3 - BORROWING FACILITIES
In order to finance the acquisition of AVEX Electronics, Inc. and Kilbride
Holdings, B.V. (AVEX), the Company obtained $100 million through borrowings
under a five-year term loan (the Term Loan) through a syndicate of commercial
banks. Principal on the Term Loan is payable in quarterly installments in annual
amounts of $16 million in 2000, $18 million in 2001, $20 million in 2002, $22
million in 2003 and $21 million in 2004. The Term Loan bears interest, at the
Company's option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or
its prime rate plus 0.00% to 1.75%, based upon the Company's debt ratio as
specified in the agreement and interest is payable quarterly. As of June 30,
2000, the Company had $89 million outstanding under the Term Loan, bearing
interest at rates ranging from 8.75% to 9.5625%.
5
<PAGE>
The Company has a $175 million revolving line of credit facility (the
Revolving Credit Facility) with a commercial bank. The Company is entitled to
borrow under the Revolving Credit Facility up to the lesser of $175 million or
the sum of 75% of its eligible accounts receivable, 45% of its eligible
inventories and 50% of its eligible fixed assets. Interest on the Revolving
Credit Facility is payable quarterly, at the Company's option, at either the
bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to
1.75%, based upon the Company's debt ratio as specified in the agreement. A
commitment fee of 0.375% to 0.500% per annum on the unused portion of the
Revolving Credit Facility is payable quarterly in arrears. The Revolving Credit
Facility matures on September 30, 2004. As of June 30, 2000, the Company had
$121.6 million outstanding under the Revolving Credit Facility, bearing interest
at rates ranging from 9.434% to 10.5%, $5.2 million outstanding letters of
credit and $48.2 million was available for future borrowings. The Company
increased the availability under the revolving credit facility by $50 million
from $125 million effective June 23, 2000.
The Term Loan and the Revolving Credit Facility (collectively the
Facility) are secured by the Company's domestic inventory and accounts
receivable, 100% of the stock of the Company's domestic subsidiaries, and 65% of
the voting capital stock of each direct foreign subsidiary and substantially all
of the other tangible and intangible assets of the Company and its domestic
subsidiaries. The Facility contains customary financial covenants and restricts
the ability of the Company to incur additional debt, pay dividends, sell assets,
and to merge or consolidate with other persons, without the consent of the bank.
In August 1999, the Company issued $80.2 million principal amount of 6%
Convertible Subordinated Notes due August 15, 2006 (the Notes). The indenture
relating to the Notes contains affirmative and negative covenants including
covenants restricting the Company's ability to merge or engage in certain other
extraordinary corporate transactions unless certain conditions are satisfied.
Upon the occurrence of a change of control of the Company (as defined in the
indenture relating to the Notes), each holder of Notes will have the right to
require the Company to repurchase all or part of the Holder's notes at 100% of
the face amount thereof, plus accrued and unpaid interest.
The Notes are convertible, unless previously redeemed or repurchased, at
the option of the holder at any time prior to maturity, into shares of the
Company's common stock at an initial conversion price of $40.20 per share,
subject to adjustment in certain events. The Notes are convertible into a total
of 1,995 shares of the Company's common stock. Interest is payable February 15
and August 15 each year.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
Raw materials ...... $ 238,017 $ 191,952
Work in process .... 60,432 42,603
Obsolescence reserve (20,794) (20,001)
--------- ---------
$ 277,655 $ 214,554
========= =========
6
<PAGE>
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
------ ------
Federal - Current $ 911 $4,995
Foreign - Current 1,440 315
State - Current . 287 680
Deferred ........ 264 100
------ ------
Total ...... $2,902 $6,090
====== ======
Income tax expense differs from the amount computed by applying the U.S.
federal statutory income tax rate to pretax income due to the impact of
nondeductible amortization of goodwill, foreign income taxes, state income
taxes, net of federal benefit and the benefit from the use of a foreign sales
corporation.
The Company considers earnings from its foreign subsidiaries to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been made for these earnings. Upon distribution of
foreign subsidiary earnings in the form of dividends or otherwise, the Company
would be subject to U.S. income taxes (subject to adjustment for foreign tax
credits).
In addition, for a period of up to ten years the Company will be subject
to taxes in Ireland at rates substantially less than the statutory tax rates for
that jurisdiction. As a result of these reduced rates, income tax expense for
the quarter and six months ended June 30, 2000 is approximately $228
(approximately $0.01 per share diluted) and $519 (approximately $0.03 per share
diluted), respectively, lower than the amount computed by applying the statutory
tax rates. Income tax expense for the quarter and six months ended June 30, 1999
is approximately $69 (approximately $0.01 per share diluted) and $79
(approximately $0.01 per share diluted), respectively, lower than the amount
computed by applying the statutory rates.
NOTE 6 - RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
On March 31, 2000, the Financial Accounting Standards Board (FASB) issued
FASB interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25" (FIN 44). FIN 44
provides guidance for issues that have arisen in applying Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Because none
of the earlier transition provisions of FIN44 apply to the Company, FIN 44 will
be applied prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after July 1, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative financial instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that companies recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company expects to adopt SFAS No. 133, as amended, on January 1, 2001, but has
not determined the impact on its financial position, results of operations or
liquidity.
7
<PAGE>
NOTE 7 - ACQUISITIONS
On August 24, 1999, the Company completed the acquisition of all of the
outstanding capital stock of AVEX from J.M. Huber Corporation (the Seller). AVEX
has manufacturing plants or design centers in the United States in Huntsville,
Alabama and Pulaski, Tennessee, and elsewhere in Campinas, Brazil, Csongrad,
Hungary, Guadalajara, Mexico, Cork, Ireland, Singapore, East Kilbride, Scotland,
and Katrineholm, Sweden. In consideration of the capital stock of AVEX, the
Company paid $265.3 million in cash at closing, subject to certain adjustments,
including a working capital adjustment, and issued one million shares of the
Company's common stock to the Seller. In addition, the Company paid $5.2 million
in acquisition costs. In order to finance the AVEX acquisition, the Company (i)
obtained a term loan from a syndicate of commercial banks in the amount of $100
million, (ii) obtained a new revolving credit facility permitting draws of up to
$125 million, subject to a borrowing base calculation, and borrowed $46 million
under such facility and (iii) issued $80.2 million in Notes. In connection with
the AVEX acquisition, the Company borrowed $30 million under the new revolving
credit facility to refinance existing debt pursuant to the Company's prior
Senior Note . The AVEX acquisition was accounted for using the purchase method
of accounting. The acquisition resulted in goodwill of approximately $133.1
million that is being amortized on a straight-line basis over 15 years.
Pursuant to the terms of the purchase agreement in connection with the
acquisition of AVEX on August 24,1999, the Company was required to agree upon a
working capital adjustment with the Seller by November 22, 1999. The Company was
unable to reach an agreement with the Seller prior to the November 22, 1999
deadline and entered into several agreements extending this deadline. The
parties hired an independent accounting firm to serve as arbitrator to resolve
the dispute and to calculate the final closing working capital adjustment. On
May 22, 2000 the arbitrator released its findings and held that the working
capital adjustment was $2.0 million greater than the current liability recorded
by the Company at March 31, 2000 as an estimate of the working capital
adjustment. The Company recorded the $2.0 million increase in goodwill during
the quarter ended June 30, 2000.
On March 1, 1999, the Company acquired certain equipment and inventories
from Stratus Computer Ireland (Stratus), a wholly-owned subsidiary of Ascend
Communications, Inc. (Ascend) for approximately $42.3 million in cash as
adjusted. The acquisition price was allocated $6.1 million to equipment and
other assets, and $36.2 million to inventories. Stratus provided systems
integration services for large and sophisticated fault-tolerant mainframe
computers. In connection with the transaction, the Company entered into a
three-year supply agreement to provide these system integration services to
Ascend and Stratus Holdings Limited and the Company hired approximately 260
employees.
NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company has 14 manufacturing facilities in the Americas, Europe and
Asia to serve its customers. The Company is operated and managed geographically.
The Company's management evaluates performance and allocates the Company's
resources on a geographic basis. Intersegment sales, primarily constituting
sales from the Americas to Europe, are generally recorded at prices that
approximate arm's length transactions. Operating segments' measure of
profitability is based on income from operations prior to goodwill amortization.
Certain corporate expenses, including items such as insurance and software
licensing costs, are allocated to these operating segments and are included for
performance evaluation. Amortization expense associated with capitalized
software costs is allocated to these operating segments, but the related assets
are not allocated. The unamortized balance of goodwill is allocated to the
operating segments, but goodwill amortization
8
<PAGE>
is not considered in the operating segments' measure of profitability. The
accounting policies for the reportable operating segments are the same as for
the Company taken as a whole.
Information about operating segments for the three and six-month periods
ended June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
Americas ................... $ 405,089 140,207 721,911 273,029
Europe ..................... 67,040 43,398 144,225 60,518
Asia ....................... 10,028 -- 19,070 --
Elimination of intersegment
sales .................... (75,586) (20,984) (129,480) (24,380)
--------- --------- --------- ---------
$ 406,571 162,621 755,726 309,167
========= ========= ========= =========
Depreciation and amortization:
Americas ................... $ 7,428 3,614 14,496 7,187
Europe ..................... 2,110 832 4,507 1,167
Asia ....................... 183 -- 358 --
Corporate - goodwill ....... 3,100 909 6,320 1,819
--------- --------- --------- ---------
$ 12,821 5,355 25,681 10,173
========= ========= ========= =========
Income from operations:
Americas ................... $ 11,793 8,501 18,836 17,824
Europe ..................... 4,150 2,865 8,219 3,914
Asia ....................... 822 -- 1,965 --
Corporate and intersegment
eliminations ............. (3,593) (1,099) (8,103) (2,641)
--------- --------- --------- ---------
$ 13,172 10,267 20,917 19,097
========= ========= ========= =========
</TABLE>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
Total assets:
Americas . $711,391 572,904
Europe ... 125,069 146,004
Asia ..... 19,976 20,026
Corporate 20,766 21,903
-------- --------
$877,202 760,837
======== ========
The following enterprise-wide information is provided in accordance with
SFAS No. 131. Geographic net sales information reflects the destination of the
product shipped. Long-lived assets information is based on the physical location
of the asset.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales derived from:
Printed circuit boards .......... $379,084 125,382 701,477 254,808
Systems integration and box build 27,487 37,239 54,249 54,359
-------- -------- -------- --------
$406,571 162,621 755,726 309,167
======== ======== ======== ========
Geographic net sales:
United States ................... $270,023 124,294 488,297 243,613
Europe .......................... 65,418 37,937 141,799 64,982
Asia and other .................. 71,130 390 125,630 572
-------- -------- -------- --------
$406,571 162,621 755,726 309,167
======== ======== ======== ========
</TABLE>
9
<PAGE>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
Long-lived assets:
United States ...... $101,004 99,221
Europe ............. 19,290 24,538
Asia and other ..... 28,247 21,874
-------- --------
$148,541 145,633
======== ========
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income, which includes net income and the change in the
cumulative translation adjustment, for the three-month and six-month periods
ended June 30, 2000, was $0.5 million and $2.3 million, respectively. For the
1999 periods, comprehensive income and net income was the same.
NOTE 10 - SUBSEQUENT EVENTS
On July 12, 2000, the Company entered into a definitive agreement for the
sale of its Swedish operations for approximately $13.8 million, depending on the
actual inventory levels on the date of the closing. The Swedish operations
accounted for 5.2% and 5.9% of the Company's sales and 19.7% and 27.2% of its
operating income for the three and six-month periods ended June 30, 2000,
respectively.
On August 14, 2000, the Company completed the public offering of 3,162,500
shares of its common stock for net proceeds of approximately $113.4 million. The
Company used the net proceeds to temporarily repay indebtedness under its
Revolving Credit Facility.
NOTE 11- CONTINGENCIES
On October 18, 1999, the Company announced that its third quarter earnings
announcement would be delayed and subsequently, on October 22, the Company
announced its earnings for the third quarter were below the level of the same
periods during 1998 and were below expectations. Several class action lawsuits
were filed in federal district court in Houston, Texas against the Company and
two of its officers and directors alleging violations of the federal securities
laws. The lawsuits seek to recover unspecified damages. The Company denies the
allegations in the lawsuits, however, and further denies that such allegations
provide a basis for recovery of damages as the Company believes that it has made
all required disclosures on a timely basis. Management intends to vigorously
defend against these actions. At the present time, the Company is unable to
reasonably estimate the possible loss, if any, associated with these matters.
Benchmark filed suit against Seller in the United States District Court
for the Southern District of Texas for breach of contract, fraud and negligent
misrepresentation on December 14, 1999 and is seeking an unspecified amount of
damages in connection with the Amended and Restated Stock Purchase Agreement
dated August 12, 1999 between the parties whereby Benchmark acquired all of the
stock of AVEX from Seller. On January 5, 2000, Seller filed suit in the United
States District Court for the Southern District of New York alleging that
Benchmark failed to comply with certain obligations under the contract requiring
Benchmark to register shares of its common stock issued to Seller as partial
consideration for the acquisition. Seller's suit has been consolidated with
Benchmark's suit in the United States District Court for the Southern District
of Texas. Management intends to vigorously pursue its claims against Seller
10
<PAGE>
and defend against Seller's allegations. At the present time, the Company is
unable to reasonably estimate the possible loss, if any, associated with these
matters.
During the second quarter of 2000, the Company, along with numerous other
companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit, which
has not been formally served on the Company, alleges that the Company has
infringed certain of the Foundation's patents relating to machine vision and bar
code technology utilized in machines the Company has purchased. The Company has
been in contact with representatives of the Foundation, and is currently
investigating the nature of the Foundation's claims, the Company's potential
defenses and any indemnity or similar rights the Company may have against
manufacturers of the machines or other third parties. The Company's
investigation of these matters is not complete. If the Foundation's complaint is
served on the Company, the Company intends to vigorously defend against such
claim and pursue all rights it has against third parties. At the present time,
the Company is unable to reasonably estimate the possible loss, if any,
associated with these matters.
The Company is also involved in various other 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.
ITEM 2. 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, and the discussion of Market Risk in Item 3 below,
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. These forward-looking
statements are identified as any statement that does not relate strictly to
historical or current facts. They use words such as "anticipate," "believe,"
"intend," "plan," "projection," "forecast," "strategy," "position," "continue,"
"estimate," "expect," "may," "will," or the negative of those terms or other
variations of them or by comparable terminology. In particular, statements,
express or implied, concerning future operating results or the ability to
generate sales, income or cash flow are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results of our operations may
differ materially from those expressed in these forward-looking statements. Many
of the factors that will determine these results are beyond our ability to
control or predict. Specific factors which could cause actual results to differ
from those in the forward-looking statements, include:
o incurrence of operating losses at AVEX;
o availability and cost of customer specified components;
o loss of one or more of our major customers;
o absence of long-term sales contracts with our customers;
o our substantial indebtedness;
o a decline in the condition of the capital markets or a substantial rise
in interest rates;
o our dependence on the industries we serve;
o competition from other providers of electronics manufacturing services;
o inability to maintain technical and manufacturing process expertise;
o risks associated with international operations;
o our dependence on certain key executives;
o resolution of the pending legal proceedings;
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o integration of the operations of acquired companies;
o effects of domestic and foreign environmental laws;
o fluctuations in our quarterly results of operation; and
o volatility of the price of our common stock.
You should not put undue reliance on any forward-looking statements.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
GENERAL
We are in the business of manufacturing electronics and provide our
services to original equipment manufacturers of telecommunication equipment,
computers and related products for business enterprises, video / audio /
entertainment products, industrial control equipment, testing and
instrumentation products, personal computer and medical devices. Our
headquarters are in Angleton, Texas and we have 14 facilities in eight
countries. As original equipment manufacturers expand internationally, they are
increasingly requiring their electronics manufacturing services providers to
have strategic regional locations and global procurement abilities. We believe a
global manufacturing solution increases our ability to be responsive to our
customers' needs by providing accelerated time-to-market and time-to-volume
production of high quality products. These enhanced capabilities should enable
us to build stronger strategic relationships with our customers and to become a
more integral part of their operations.
Sales are recognized at the time products are shipped to customers and may
vary depending on the timing of customers' orders, product mix and availability
of component parts. Substantially all of our business is performed on a turnkey
basis, which involves the procurement of component parts. The gross profit
margin for such materials is generally lower than the gross profit associated
with the manufacturing process and other value-added services.
We do not typically obtain long-term purchase orders or commitments from
our customers. Instead we work with our customers to develop forecasts for
future orders, which are not binding. Customers may cancel their orders, change
their orders, change production quantities from forecast volumes or delay
production for a number of reasons beyond our control. Cancellations, reductions
or delays by a significant customer or by a group of customers would have an
adverse effect on us. In addition, as many of our costs and operating expenses
are relatively fixed, a reduction in customer demand can adversely affect our
gross margins and operating income.
A substantial percentage of our sales have been made to a relatively small
number of customers, and the loss of a major customer would adversely affect us.
During the six months ended June 30, 2000, our two largest customers each
represented in excess of 10% of our sales and together represented 26.1% of our
sales. We expect to continue to depend on the sales from our largest customers
and any material delay, cancellation or reduction of orders from these or other
significant customers would have a material adverse effect on our results of
operations. We are dependent on the continued growth, viability and financial
stability of our customers, some of which operate in industries that are, to a
varying extent, subject to technological change, vigorous competition and short
product life cycles. When our customers are adversely affected by these factors,
we may be similarly affected.
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In connection with the AVEX acquisition, we acquired operations in Sweden.
On July 12, 2000, we entered into a definitive agreement for the sale of our
Swedish operations. The Swedish operations accounted for 5.2% and 5.9% of our
sales and 19.7% and 27.2% of our operating income for the three and six-month
periods ended June 30, 2000, respectively.
On a pro forma basis, after giving effect to the disposition of the
Swedish operations as if it had occurred on January 1, 2000, our income before
income taxes for the three and six month periods ended June 30, 2000 would have
been $2.9 million and $2.7 million, respectively. We are currently obtaining
additional business from new and existing customers, which we believe may offset
the loss of the sales and operating income we derived from the Swedish
operations.
RECENT ACQUISITIONS
On August 24, 1999, we acquired AVEX from J.M. Huber Corporation. As
consideration for the acquisition, we paid $265.3 million in cash at closing,
subject to certain adjustments, including a working capital adjustment, and
issued one million shares of our common stock. The transaction was accounted for
under the purchase method of accounting, and, accordingly, the results of
operations of AVEX since August 24, 1999 have been included in our financial
statements. The acquisition resulted in goodwill of approximately $133.1
million, which is being amortized on a straight line basis over 15 years. The
amortization of goodwill, which is a noncash charge, negatively impacted our net
income. In order to finance the AVEX acquisition, we (i) obtained a term loan
from a syndicate of commercial banks in the amount of $100 million, (ii)
obtained a new revolving credit facility permitting draws of up to $125 million,
subject to a borrowing base calculation, and borrowed $46 million under such
facility and (iii) issued $80.2 million in convertible subordinated debt. In
connection with the AVEX acquisition, we borrowed $30 million under the new
revolving credit facility to refinance our prior Senior Note. Disputes have
arisen between us and Huber relating to the AVEX acquisition resulting in legal
proceedings between the parties over the transaction.
On March 1, 1999, we acquired certain assets from Stratus, a wholly-owned
subsidiary of Ascend Communications, Inc. for approximately $42.3 million in
cash, as adjusted. The acquisition price was allocated $6.1 million to equipment
and other assets, and $36.2 million to inventories. Stratus provided systems
integration services for large and sophisticated fault-tolerant mainframe
computers. In connection with the transaction, we entered into a three-year
supply agreement to provide these system integration services to Ascend and
Stratus Holdings Limited and we hired approximately 260 employees.
The inclusion in our accounts of the operations of AVEX and the systems
integration facility in Ireland are responsible for a substantial portion of the
variations in the results of our operations (including components thereof) from
period to period. The effects of these on our reported financial condition,
liquidity and results of operations should be considered when reading the
financial information contained in this document.
The acquisition of AVEX constitutes a significant expansion of our
operations. Accordingly, the potential effect of the AVEX acquisition on our
future financial condition, liquidity and results of operations should be
considered when reading the historical financial information and related
discussions set forth in the following section.
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RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain
items in the Company's Condensed Consolidated Statements of Income bear to sales
for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2000 1999 2000 1999
----- ----- ----- -----
Sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................... 92.7 89.6 92.9 89.8
----- ----- ----- -----
Gross profit ................. 7.3 10.4 7.1 10.2
Selling, general and administrative
expense .......................... 3.3 3.5 3.5 3.4
Amortization of goodwill ........... 0.8 0.6 0.8 0.6
----- ----- ----- -----
Income from operations ....... 3.2 6.3 2.8 6.2
Interest expense ................... (1.7) (0.7) (1.7) (0.7)
Other income (expense) ............. (0.2) (0.2) 0.0 0.0
----- ----- ----- -----
Income before income taxes ... 1.3 5.4 1.1 5.4
Income tax expense ................. 0.4 2.0 0.4 2.0
----- ----- ----- -----
Net income ................... 0.9% 3.4% 0.7% 3.4%
===== ===== ===== =====
We have experienced consistent sales growth over the past few years. The
net increase in sales reflects the impact of growth from acquisitions combined
with internal growth resulting from the trend towards outsourcing among original
equipment manufacturers. Sales for the second quarter of 2000 were approximately
$406.6 million, a 150.0% increase from sales of approximately $162.6 million for
the same quarter in 1999. Sales for the first six months of 2000 were
approximately $755.7 million, a 144.4% increase from sales of approximately
$309.2 million for the same period in 1999. Of this total increase in sales for
the quarter and first six months of 2000, approximately 77% and 81%,
respectively, was attributable to the acquisition of AVEX and approximately 23%
and 19%, respectively, resulted from the ramping up of new programs and
increases in sales volume from both existing and new customers.
Sales in the Americas for the three and six-month periods ended June 30,
2000 increased $264.9 million and $448.9 million, respectively, with
approximately 79% and 75%, respectively, of this increase resulting from the
acquisition of AVEX. The remaining 21% and 25% increases were the result of
demand increases from existing and new customers. Sales in Europe increased
$23.6 million and $83.7 million for the quarter and first six months of 2000,
respectively, due primarily to the effect of the AVEX acquisition (representing
approximately 166% and 106%, respectively, of this net increase). The net
increase in sales also includes the impact of the decrease of approximately 66%
and 6%, respectively, of the systems integration facility revenues in Dublin,
Ireland. The 1999 Dublin, Ireland revenues were positively impacted by
significant backlog fulfillment, during that period resulting from a period of
customer transition. Dublin's sales during the remainder of 1999 and the first
two quarters of 2000 have returned to normalized run rates. Sales in Asia
increased by $10.0 million and $19.1 million, respectively, as a result of the
acquired AVEX facility in Asia.
After giving effect to the AVEX acquisition, we would have derived 46% of
our pro forma combined sales in fiscal year 1999 from our international
operations. In the first six months of 2000, 25% of our sales were from our
international operations. The decrease in the percentage of international sales
on an actual basis for the first six months of 2000 as compared to the pro forma
basis for 1999 reflects lower sales at our systems integration facility in
Dublin, Ireland and the loss of two of AVEX's customers. The loss of one of
these customers, as well as the
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deterioration in other customer relationships, including the major customer of
the Swedish operations, are the subject of litigation between Huber and us.
Our results of operations are dependent upon the success of our customers,
and a prolonged period of reduced demand for our customers' products would have
an adverse effect on our business. During the six months ended June 30, 2000,
our two largest customers each represented in excess of 10% of our sales and
represented 26.1% of our sales in the aggregate. The loss of a major customer,
if not replaced, would adversely affect us.
Gross profit increased 76.2% to approximately $29.7 million in the second
quarter of 2000 from approximately $16.9 million in the same quarter in 1999.
Gross profit increased 69.1% to approximately $53.4 million during the first six
months of 2000 from approximately $31.5 million in the same period in 1999. The
increase in gross profit was due primarily to the higher sales volumes
attributable to the AVEX acquisition and also to the operation of the new
systems integration facility in Ireland and to a shift in mix to customer
programs with higher gross margins, for example, those programs which are more
complex and labor intensive, for the second quarter of 2000. Gross profit as a
percentage of sales decreased from 10.4% and 10.2% for the three and six-month
periods of 1999 to 7.3% and 7.1% for the same periods of 2000 due to the fact
that AVEX has historically had lower gross margins than our operations. Our
gross margin reflects a number of factors. The reduction in the gross margin for
the three and six-month periods of 2000, as compared to the same periods of
1999, is primarily attributable to the inclusion of the AVEX operations and the
presence of underutilized capacity at the AVEX facilities. Additionally, the
level of start up costs and inefficiencies associated with new programs, product
mix, capacity utilization of surface mount and other equipment and pricing
within the electronics industry affect our gross margin. The combined effect of
these factors, which are continually changing and are interrelated, make it
impracticable to determine with precision the separate effect of each factor. We
expect that a number of high volume programs serving customers in price
sensitive markets will remain subject to competitive restraints on the margin
that may be realized from these programs and that these restraints will exert
downward pressure on our margins in the near future.
In recent months, component shortages have become more prevalent in our
industry and, as a result, suppliers of such components are occasionally
delivering components to customers such as us on a delayed basis. We expect this
trend to continue from time to time in the future. When there are shortages, or
if the components we receive are defective, we may be forced to delay shipments,
which could have an adverse effect on our sales and our profit margins. While
the full effect of this period of constrained supplies of components on us is
not known at this time, we expect prices for such components will increase. If
such events were to occur, they would have an adverse effect on our results of
operations. Also, we typically bear the risk of component price increases our
suppliers may institute, as there may be some lag time before we can implement a
price increase to our customers for the affected board assembly. Accordingly,
component price increases could adversely affect our gross profit margins.
Selling, general and administrative expenses were $13.4 million in the
second quarter of 2000, an increase of 136.6% from $5.7 million for the same
quarter in 1999. Selling, general and administrative expenses were $26.1 million
during the first six months of 2000, an increase of 145.7% from $10.6 million
for the same period in 1999. Selling, general and administrative expenses as a
percentage of sales decreased from 3.5% for the second quarter of 1999 to 3.3%
for the second quarter of 2000. Selling, general and administrative expenses as
a percentage of sales increased from 3.4% for the first six months of 1999 to
3.5% for the same period of 2000. The increase in selling, general and
administrative expenses during the three and six-month periods ended June 30,
2000 reflects the additional administrative expenses resulting from the
acquisition
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of AVEX. For the six months ended June 30, 1999 prior to our acquisition of
AVEX, AVEX recorded $17.6 million of selling, general and administrative
expenses. Additionally, the increase reflects the investment in personnel and
the incurrence of related corporate and administrative expenses necessary to
support the increased size and complexity of our business. We anticipate
selling, general and administrative expenses will continue to increase in
absolute dollars in the future as we continue to develop the infrastructure
necessary to support our current and prospective business.
The amortization of goodwill for the three and six-month periods ended
June 30, 2000 was $3.1 million and $6.3 million, respectively compared to $1.8
million and $0.9 million, respectively for the same periods of 1999. The
increase was due to the acquisition of AVEX on August 24, 1999.
Interest expense for the three and six-month periods ended June 30, 2000
was $7.1 million and $12.6 million, respectively compared to $1.2 million and
$2.3 million, respectively for the same periods of 1999. The increase was due to
the additional debt incurred in connection with the acquisition of AVEX on
August 24, 1999.
Income tax expense of approximately $2.9 million represented an effective
tax rate of 34.2% for the six-month period ended June 30, 2000, compared with an
effective tax rate of 36.4% for the six-month period ended June 30, 1999. The
decrease was due primarily to lower foreign tax rates applicable to a portion of
pretax income in 2000, partially offset by nondeductible amortization of
goodwill.
We reported net income for the three and six-month periods ended June 30,
2000 of approximately $3.6 million and $5.6 million, or diluted earnings of
$0.21 and $0.32 per share, respectively, compared with net income of
approximately $5.6 million and $10.6 million, or diluted earnings of $0.41 and
$0.80 per share for the same periods of 1999, respectively. The approximate $2.0
million and $5.0 million decreases were a result of the combined effects of the
acquisition of AVEX, the ramping up of new projects and the increase in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our growth and operations through funds generated from
operations, proceeds from the sale of our securities and funds borrowed under
our credit facilities.
Cash provided by operating activities was $0.9 million and $5.4 million
for the six months ended June 30, 2000 and 1999, respectively. The decrease in
cash provided by operations was primarily the result of a decrease in net income
and increases in accounts receivable and inventories partially offset by
increases in depreciation and amortization and accounts payable. Our accounts
receivables and inventories at June 30, 2000 increased $45.8 million and $64.4
million, respectively, over their levels at December 31, 1999, reflecting our
increased sales and backlog during the first six months of 2000, as compared to
the corresponding period in the prior year. We expect increases in inventories
to support the anticipated growth in sales. We continued and are 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 us for less volume than we ordered.
Cash used in investing activities was $56.6 million and $53.5 million for
the six months ended June 30, 2000 and 1999, respectively. Capital expenditures
of $19.8 million for the six months ended June 30, 2000 were primarily
concentrated in test and manufacturing production
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equipment. Capitalized software costs of $1.5 million for the six months ended
June 30, 2000, were for the implementation of our new Enterprise Resource
Planning System software which was completed on May 1, 2000. Pursuant to the
terms of the purchase agreement in connection with the acquisition of AVEX on
August 24, 1999, we were required to agree upon a closing working capital
adjustment with Huber by November 22, 1999. We were unable to reach an agreement
with Huber prior to the November 22, 1999 deadline and on May 22, 2000, the
independent accounting firm hired by Huber and us to resolve the dispute between
the companies released its findings and held that the final working capital
adjustment was $35.3 million. We made the payment to Huber on June 1, 2000 by
drawing on our revolving credit facility. The final working capital adjustment
was $2.0 million greater than the current liability we had recorded at December
31, 1999 as an estimate of the working capital adjustment. We recorded the $2.0
million increase in goodwill during the quarter ended June 30, 2000. On March 1,
1999, we completed the purchase of inventories and plant and equipment from
Stratus for $42.3 million, as adjusted.
Cash provided by financing activities was $70.2 million and $69.9 million
for the six months ended June 30, 2000 and 1999, respectively. During the first
six months of 2000, we increased borrowings outstanding under our revolving line
of credit by $80.1 million and made principal payments on long-term debt
totaling $9.4 million.
We have a $175 million revolving line of credit facility with a commercial
bank. We are entitled to borrow under the revolving credit facility up to the
lesser of $175 million or the sum of 75% of our eligible accounts receivable,
45% of our eligible inventories and 50% of our eligible fixed assets. Interest
on the revolving credit facility and the term loan is payable quarterly, at our
option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or its prime
rate plus 0.00% to 1.75%, based upon our debt ratio as specified in the
agreement. A commitment fee of 0.375% to 0.500% per annum on the unused portion
of the revolving credit facility is payable quarterly in arrears. The revolving
credit facility matures on September 30, 2004. As of June 30, 2000, we had
$121.6 million outstanding under the revolving credit facility, bearing interest
at rates ranging from 9.434% to 10.5%, $5.2 million outstanding letters of
credit and $48.2 million was available for future borrowings. We increased the
availability under the revolving credit facility by $50 million from $125
million effective June 23, 2000.
The term loan and the revolving credit facility are secured by our
domestic inventory and accounts receivable, 100% of the stock of our domestic
subsidiaries, and 65% of the voting capital stock of each direct foreign
subsidiary and substantially all of our and our domestic subsidiaries other
tangible and intangible assets. The term loan and revolving credit facility
contains customary financial covenants and restricts our ability to incur
additional debt, pay dividends, sell assets, and to merge or consolidate with
other persons, without the consent of the bank.
We have outstanding $80.2 million principal amount of 6% Convertible
Subordinated Notes. The indenture relating to the notes contains affirmative and
negative covenants, including covenants restricting our ability to merge or
engage in certain other extraordinary corporate transactions unless certain
conditions are satisfied. Upon the occurrence of a change of control of our
Company (as defined in the indenture relating to the notes), each holder of
notes will have the right to require us to repurchase all or part of the
holder's notes at 100% of the face amount thereof, plus accrued and unpaid
interest. The notes are convertible into shares of our common stock at an
initial conversion price of $40.20 per share at the option of the holder at any
time prior to maturity, unless previously redeemed or repurchased.
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We have no significant capital lease obligations. Aggregate annual rental
payments on future lease commitments at June 30, 2000 were as follows:
2001 2002 2003
---- ---- ----
$4,699,000 $3,997,000 $3,554,000
Additionally, we have an approximately $4 million commitment to expand our
Dublin facility.
Our operations, and the operations of businesses we acquire, are subject
to certain foreign, federal, state and local regulatory requirements relating to
environmental, waste management, health and safety matters. We believe we
operate in substantial compliance with all applicable requirements and we seek
to ensure that newly acquired businesses comply or will comply substantially
with applicable requirements. To date the costs of compliance and workplace and
environmental remediation have not been material to us. However, material costs
and liabilities may arise from these requirements or from new, modified or more
stringent requirements in the future. In addition, past, current and future
operations may give rise to claims of exposure by employees or the public, or to
other claims or liabilities relating to environmental, waste management or
health and safety concerns.
We may require additional capital to finance further enhancements to or
acquisitions or expansions of our manufacturing capacity. Management believes
that the level of working capital will continue to grow at a rate generally
consistent with the growth of our operations. Management continually evaluates
potential strategic acquisitions and investments, but at the present time, we
have no understandings, commitments or agreements with respect to any such
acquisition or investment. Although no assurance can be given that future
financing will be available on terms acceptable to us, we 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 our existing debt agreements.
Our acquisitions in 1999 have significantly increased our leverage ratio
and decreased our interest coverage ratio. At June 30, 2000, our debt to total
capitalization ratio was 51%, as compared to 11% at June 30, 1999, the last
fiscal quarter end prior to the AVEX acquisition. The level of indebtedness,
among other things, could make it difficult for us to obtain any necessary
financing in the future for other acquisitions, working capital, capital
expenditures, debt service requirements and other expenses; limit our
flexibility in planning for, or reacting to changes in, our business; and make
us more vulnerable in the event of an economic downturn in our business.
On August 14, 2000, we completed the public offering of 3,162,500 shares
of our common stock for net proceeds of $113.4 million. We used such proceeds to
temporarily repay indebtedness outstanding under our revolving credit facility.
The actual net cash proceeds we receive from the disposition of the Swedish
operations, estimated at $13.8 million, will depend on actual inventory levels
at our Swedish operations on the closing of the disposition. After giving effect
to such repayment, we will have approximately $175 million of availability under
our revolving credit facility. We expect to reborrow a portion of the amount we
repay under the revolving credit facility in the near future for working
capital.
Management believes that after giving effect to the stock offering
completed on August14, 2000, our existing cash balances, funds generated from
operations and available funds under our revolving credit facility will be
sufficient to permit us to meet our liquidity requirements for the next 9-12
months. In order for us to achieve our planned growth or to obtain
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large volume customer orders, we expect that we will need to raise additional
financing during the next 12-24 months.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk under our variable rate revolving
credit and term loan facilities. These facilities are based on the spread over
the bank's Eurodollar rate or its prime rate. Inflation and changing prices have
not significantly affected our operating results or the markets in which we
perform services.
We currently have an interest rate swap transaction agreement for a
notional amount of $39 million under which we pay a fixed rate of interest
hedging against the variable interest rates charged by the term loan. The
interest rate swap expires in the year 2003, which coincides with maturity dates
on the term loan.
Our international sales are a growing portion of our net sales; we are
exposed to risks associated with operating internationally, including the
following:
o Foreign currency exchange risk;
o Import and export duties, taxes and regulatory changes;
o Inflationary economies or currencies; and
o Economic and political instability.
Historically, we have not held or issued derivative financial instruments.
We do not use derivative financial instruments for speculative purposes. Our
policy is to maintain a hedged position for certain significant transaction
exposures. These exposures are primarily, but not limited to, vendor payments
and inter-company balances in currencies other than the functional currency of
the operating entity. Our international operations in some instances operate in
a natural hedge because both operating expenses and a portion of sales are
denominated in local currency. As of June 30, 2000, we had one foreign currency
hedging contract in place to support expansion of the Dublin, Ireland facility
that expires in December 2000.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 18, 1999, we announced that our third quarter 1999 earnings
announcement would be delayed and subsequently, on October 22, we announced our
earnings for the third quarter 1999 were below the level of the same periods
during 1998 and were below expectations. Several class action lawsuits were
filed in federal district court in Houston, Texas against Benchmark and two of
its officers and directors alleging violations of the federal securities laws.
The lawsuits seek to recover unspecified damages. We deny the allegations in the
lawsuits, however, and further deny that such allegations provide a basis for
recovery of damages as we believe that we have made all required disclosures on
a timely basis. We intend to vigorously defend against these actions. No
material developments occurred in this proceeding during the period covered by
this report.
Pursuant to the terms of the Amended and Restated Stock Purchase Agreement
dated August 12, 1999 whereby Benchmark acquired all of the stock of AVEX and
Kilbride Holdings B.V from J.M. Huber Corporation (Seller), Benchmark was
required to agree upon a closing working capital adjustment with the Seller by
November 22, 1999. We were unable to reach an agreement with the Seller prior to
the November 22,1999 deadline and entered into several agreements extending this
deadline. The parties hired an independent accounting firm to serve as
arbitrator to resolve the dispute and to calculate the final closing working
capital adjustment. On May 22, 2000 the arbitrator released its findings and
held that the working capital adjustment was $2.0 million greater than the
current liability recorded by Benchmark at March 31, 2000 as an estimate of the
working capital adjustment. We made the payment to Huber on June 1, 2000 by
drawing on our revolving credit facility and recorded the $2.0 million increase
in goodwill during the quarter ended June 30, 2000.
Benchmark filed suit against Seller in the United States District Court
for the Southern District of Texas for breach of contract, fraud and negligent
misrepresentation on December 14, 1999 and is seeking an unspecified amount of
damages in connection with the contract. On January 5, 2000, Seller filed suit
in the United States District Court for the Southern District of New York
alleging that Benchmark failed to comply with certain obligations under the
contract requiring Benchmark to register shares of its common stock issued to
Seller as partial consideration for the acquisition. Seller's suit has been
consolidated with Benchmark's suit in the United States District Court for the
Southern District of Texas. Management intends to vigorously pursue its claims
against Seller and defend against Seller's allegations. No material developments
occurred in this proceeding during the period covered by this report.
During the second quarter of 2000, the Company, along with numerous other
companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit, which
has not been formally served on the Company, alleges that the Company has
infringed certain of the Foundation's patents relating to machine vision and bar
code technology utilized in machines the Company has purchased. The Company has
been in contact with representatives of the Foundation, and is currently
investigating the nature of the Foundation's claims, the Company's potential
defenses and any indemnity or similar rights the Company may have against
manufacturers of the machines or other third parties. The Company's
investigation of these matters is not complete. If the Foundation's complaint is
served on the Company, the Company intends to vigorously defend against such
claim and pursue all rights it has against third parties.
The Company is also involved in various other legal actions arising in the
ordinary course
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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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (c) At the Annual Meeting of Shareholders held on May 16, 2000, the
Company's nominees for directors to serve until the 2001 Annual Meeting of
Shareholders were elected, the appointment of KPMG LLP as the independent
auditors for the Company for the fiscal year ended December 31, 2000 was
ratified, and the Company's 2000 Stock Awards Plan was approved. With respect to
the election of directors, the voting was as follows:
NOMINEE FOR WITHHELD
John C. Custer 12,768,830 1,001,430
Donald E. Nigbor 11,660,921 2,109,339
Steven A. Barton 11,660,063 2,110,197
Cary T. Fu 11,658,721 2,111,539
Peter G. Dorflinger 12,775,330 994,997
Gerald W. Bodzy 12,775,330 994,930
David H. Arnold 12,408,728 1,361,532
With respect to the ratification of the appointment of KPMG LLP as the
independent auditors of the Company, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTE
12,734,091 1,004,508 31,661 -0-
With respect to the approval of the Company's 2000 Stock Awards Plan, the voting
was as follows:
FOR AGAINST ABSTAIN NON-VOTE
7,754,979 4,019,041 207,511 1,788,729
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed April
7, 2000.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed June
2, 2000.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed on
July 13, 2000, as amended by its Current Report on Form 8-K/A filed
on July 31, 2000.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed on
July 27, 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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 on August 14, 2000.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ DONALD E. NIGBOR
Donald E. Nigbor
President
(Principal Executive Officer)
By: /s/ CARY T. FU
Cary T. Fu
Executive Vice President
(Principal Financial Officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
27.1 Financial Data Schedule.
23
