Form 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 1-4482
ARROW ELECTRONICS, INC.
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(Exact name of Registrant as specified in its charter)
New York 11-1806155
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Hub Drive, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 391-1300
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $1 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 26, 1999 was $1,365,898,195.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock, $1 par value: 95,632,701 shares outstanding at February 26,
1999.
The following documents are incorporated herein by reference:
1. Proxy Statement filed in connection with Annual Meeting of Shareholders to
be held May 12, 1999(incorporated in Part III).
PART I
Item 1. Business.
--------
Arrow Electronics, Inc. (the "company") is the world's largest distributor of
electronic components and computer products to industrial and commercial
customers. As the global electronics distribution industry's leader in state-
of-the-art operating systems, employee productivity, value-added programs, and
total quality assurance, the company is the distributor of choice for over 600
suppliers.
The company's global distribution network spans the world's three dominant
electronics markets - North America, Europe, and the Asia/Pacific region. The
company is the largest electronics distributor in each of these vital
industrialized regions, serving a diversified base of original equipment
manufacturers (OEMs) and commercial customers worldwide. OEMs include
manufacturers of computer and office products, industrial equipment (including
machine tools, factory automation, and robotic equipment), telecommunications
products, aircraft and aerospace equipment, and scientific and medical devices.
Commercial customers are mainly value-added resellers (VARs) of computer
systems. The company maintains over 200 sales facilities and 26 distribution
centers in 34 countries.
The North American components operations ("NACO") is comprised of eight
segmented marketing groups. As the largest distributor of electronic components
in North America, NACO offers the broadest line card in the industry.
Gates/Arrow Distributing, Inc. ("Gates/Arrow") is a full-line technical
distributor of computer systems, peripherals, and software to value-added
resellers in the U.S. and Canada.
In May 1998, Gates/Arrow acquired a majority interest in Scientific and Business
Minicomputers, Incorporated, a leading technical distributor of mass storage
products in the United States. In November 1998, the company entered into a
joint venture with Marubun Corporation, Japan's largest independent distributor
to serve Japanese customers in the Asia/Pacific region and North America.
In November 1998, the company acquired Unitronics Componentes, S.A., one of the
leading distributors of electronic components in Spain and Portugal.
In January 1999, the company acquired Richey Electronics, Inc. a leading
specialty distributor of interconnect, electromechanical, and passive electronic
components and a provider of related value-added services to customers
throughout North America. In January 1999, the company also acquired Bell
Industries, Inc.'s Electronics Distribution Group, one of the ten largest
distributors of electronic components in North America. In February 1999,
Spoerle Electronic acquired Industrade AG, one of Switzerland's leading
distributors of electronic components.
Through its wholly-owned subsidiary, Arrow Electronics Distribution Group-Europe
B.V., Arrow is the largest pan-European electronics distributor. In its
Northern European region, the company is among the largest distributors in
Britain, Denmark, Finland, Norway, and Sweden. In its Central European region
the company is the largest distributor in Germany, Austria, Switzerland,
Belgium, and the Netherlands, and in its Southern European region it is the
largest distributor in Italy, France, Spain, and Portugal.
Arrow is the largest electronics distributor in the Asia/Pacific region.
Components Agent Limited (C.A.L.), the Lite-On Group, and the Melbourne-based
Veltek and Zatek companies in Australia are the region's leading multi-national
distributors. C.A.L., headquartered in Hong Kong, maintains additional
facilities in key cities in Singapore, Malaysia, the People's Republic of China,
India, and South Korea. Lite-On, Inc., headquartered in Taipei, serves
customers Taiwan, South Korea, Singapore, and Malaysia. Arrow Ally also serves
customers in Taiwan and Arrow Components (NZ) services customers in New Zealand.
The company distributes a broad range of electronic components, computer
products, and related equipment. About 59 percent of the company's consolidated
sales are comprised of semiconductor products; industrial and commercial
computer products, including microcomputer boards and systems, design systems,
desktop computer systems, terminals, printers, disk drives, controllers, and
communication control equipment account for about 33 percent; and the remaining
sales are of passive, electromechanical, and interconnect products, principally
capacitors, resistors, potentiometers, power supplies, relays, switches, and
connectors.
Most manufacturers of electronic components and computer products rely on
independent authorized distributors, such as the company, to augment their
product marketing operations. As a stocking, marketing, and financial
intermediary, the distributor relieves manufacturers of a portion of the costs
and personnel associated with stocking and selling their products (including
otherwise sizable investments in finished goods inventories and accounts
receivable), while providing geographically dispersed selling, order processing,
and delivery capabilities. At the same time, the distributor offers a broad
range of customers the convenience of diverse inventories and rapid or scheduled
deliveries as well as other value-added services such as kitting and memory
programming capabilities. The growth of the electronics distribution industry
has been fostered by the many manufacturers who recognize their authorized
distributors as essential extensions of their marketing organizations.
The company and its affiliates serve over 175,000 industrial and
commercial customers. Industrial customers range from major original equipment
manufacturers to small engineering firms, while commercial customers include
value-added resellers.
Most of the company's customers require delivery of the products they have
ordered on schedules that are generally not available on direct purchases from
manufacturers, and frequently their orders are of insufficient size to be placed
directly with manufacturers. No single customer accounted for more than two
percent of the company's 1998 sales.
The electronic components and other products offered by the company are sold by
field sales representatives, who regularly call on customers in assigned market
areas, and by telephone from the company's selling locations, from which inside
sales personnel with access to pricing and stocking data provided by computer
display terminals accept and process orders. Each of the company's North
American selling locations, warehouses, and primary distribution centers is
electronically linked to the business' central computer, which provides fully
integrated, on-line, real-time data with respect to nationwide inventory levels
and facilitates control of purchasing, shipping, and billing. The company's
foreign operations utilize Arrow's Worldwide Stock Check System, which affords
access to the company's on-line, real-time inventory system.
There are approximately 600 manufacturers whose products are sold by the
company. Intel Corporation accounted for approximately 18 percent and Hewlett-
Packard accounted for approximately 13 percent of the business' purchases.
No other supplier accounted for more than 9 percent of 1998 purchases. The
company does not regard any one supplier of products to be essential to its
operations and believes that many of the products presently sold by the
company are available from other sources at competitive prices. Most of
the company's purchases are pursuant to authorized distributor agreements
which are typically cancelable by either party at any time or on short notice.
Approximately 69 percent of the company's inventory consists of semiconductors.
It is the policy of most manufacturers to protect authorized distributors, such
as the company, against the potential write-down of such inventories due to
technological change or manufacturers' price reductions. Under the terms of the
related distributor agreements, and assuming the distributor complies with
certain conditions, such suppliers are required to credit the distributor for
inventory losses incurred through reductions in manufacturers' list prices of
the items. In addition, under the terms of many such agreements, the
distributor has the right to return to the manufacturer for credit a defined
portion of those inventory items purchased within a designated period of time.
A manufacturer who elects to terminate a distributor agreement is generally
required to purchase, from the distributor, the total amount of its products
carried in inventory. While these industry practices do not wholly protect the
company from inventory losses, management believes that they currently provide
substantial protection from such losses.
The company's business is extremely competitive, particularly with respect to
prices, franchises, and, in certain instances, product availability. The
company competes with several other large multi-national, national, and numerous
regional and local distributors. As the world's largest electronics
distributor, the company's financial resources and sales are greater than those
of its competitors.
The company and its affiliates employ over 9,700 people worldwide.
Executive Officers
The following table sets forth the names and ages of, and the positions and
offices with the company held by, each of the executive officers of the company.
Name Age Position or Office Held
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Stephen P. Kaufman 57 Chairman and Chief Executive Officer
Robert E. Klatell 53 Executive Vice President, General
Counsel, and Secretary
Francis M. Scricco 49 Executive Vice President and Chief
Operating Officer
Carlo Giersch 61 Chief Executive Officer of Spoerle
Electronic
Sam R. Leno 53 Senior Vice President and Chief
Financial Officer
Steven W. Menefee 54 Senior Vice President
Betty Jane Scheihing 50 Senior Vice President
Michael J. Long 40 Vice President
Jan M. Salsgiver 42 Vice President
Set forth below is a brief account of the business experience during the past
five years of each executive officer of the company. Stephen P. Kaufman has been
Chairman since May 1994 and President and Chief Executive Officer of the company
for more than five years prior thereto.
Robert E. Klatell has been Executive Vice President since July 1995 and has
served as Senior Vice President, General Counsel, and Secretary of the company
for more than five years. He also served as Chief Financial Officer from
January 1992 to April 1996 and Treasurer from 1990 to April 1996.
Francis M. Scricco has been Executive Vice President and Chief Operating Officer
since September 1997. From March 1994 through August 1997 he was a Group Vice
President at Fischer Scientific International, Inc. Prior thereto he was
President of Whirlpool Canada.
Carlo Giersch has been Chief Executive Officer of Spoerle Electronic for more
than five years.
Sam R. Leno was appointed Senior Vice President and Chief Financial Officer
effective March 1999. From July 1995 through February 1999, he served as
Executive Vice President and Chief Financial Officer of Corporate Express, Inc.
Prior thereto he was Chief Financial Officer of Coram Healthcare.
Steven W. Menefee has been a Senior Vice President of the company since July
1995 and prior thereto a Vice President of the company since November 1990.
Betty Jane Scheihing has been a Senior Vice President since May 1996 and has
served as Vice President of the company for more than five years prior thereto.
Michel J. Long has been a Vice President of the company since September 1991 and
President of Gates/Arrow Distributing since November 1995. Prior thereto, he
was President of Capstone Electronics since 1994.
Jan M. Salsgiver has been a Vice President of the company since September 1993
and President of the Arrow Supplier Services Group since its inception in
January 1998. Prior thereto she was President of the Arrow/Schweber Electronics
Group since November 1995 and President of Zeus Electronics from July 1993 to
November 1995.
Item 2. Properties.
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The company's executive office, located in Melville, New York, is owned by the
company. The company occupies additional locations under leases due to expire
on various dates to 2053. Five additional facilities are owned by the company,
and another facility has been sold and leased back in connection with the
financing thereof.
Item 3. Legal Proceedings.
-----------------
Through a wholly-owned subsidiary, the company was previously engaged in the
refining and selling of lead. The subsidiary was sold in 1988, except for a
battery-breaking site used by the subsidiary in Plant City, Florida, which had
been placed on the National Priorities List under the Federal Super Fund
program. The company remains liable for the environmental remediation of the
site, and in 1992 entered into a consent decree setting forth the terms of that
remediation with the U.S. EPA and the State of Florida.
The environmental remediation of the site has been substantially completed. All
contaminated soils on the site have been collected, treated and stabilized, and
the EPA has acknowledged that the soil stabilization aspects of the consent
decree have been met. Groundwater on the site has been treated and is being
monitored, as required by the consent decree, to ensure that it continues to
meet the standards set forth in the decree. Approximately 11 acres of wetlands
have been recreated and are being managed in accordance with the requirements
of the consent decree. Final approval of the wetlands phase of the remediation
is expected shortly.
The company believes that the amount expected to be expended in any year in
connection with the continued monitoring of the site and the completion of
activities thereon will not have a material adverse impact on the company's
liquidity, capital resources or results of operations.
On March 23, 1999, the company, its Gates/Arrow subsidiary and certain officers
and employees, were named as defendants in a civil action in the U.S. District
Court for the Eastern District of New York, filed by Henry N. Camferdam, Jr. and
others who were formerly stockholders or employees of Support Net, Inc.
("Support Net"", a corporation in which Gates/Arrow, through a wholly-owned
subsidiary, SN Holding, Inc. ("SN Holding") acquired a 50.1% stock interest on
December 1, 1997 for approximately $28,000,000. Plaintiffs allege that they
were fraudulently induced into selling their shares in Support Net, that the
company and Gates/Arrow have breached the employment agreements and shareholders
agreement also entered into on December 1, 1997 in connection with the
acquisition, and that defendants have denied them certain rights under the
several agreements, including their right to pit a portion of their remaining
Support Net shares to Gates/Arrow. Plaintiffs have asked for compensatory
damages of $162,000,000, punitive damages of $300,000,000 and an injunction that
would, among other things, prevent the company from disposing of Support Net or
SN Holding, pending a determination of the fair value of plaintiffs' minority
interest.
The company has not yet filed an answer to the complaint. The company believes
the claims are unfounded and without merit, and it intends to contest them
vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
PART II
Item 5. Market Price of the Registrant's Common Equity and
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Related Stockholder Matters.
---------------------------
Market Information
The company's common stock is listed on the New York Stock Exchange (trading
symbol: "ARW"). The high and low sales prices during each quarter of 1998 and
1997 were as follows (1997 has been restated to reflect the two-for-one stock
split effective October 15, 1997):
Year High Low
- ---- ---- ----
1998:
Fourth Quarter $26 7/8 $11 3/4
Third Quarter 22 5/8 12 1/2
Second Quarter 28 3/8 20 9/16
First Quarter 36 1/4 27
1997:
Fourth Quarter $36 $25 1/8
Third Quarter 32 1/16 26 5/16
Second Quarter 29 7/16 25 3/4
First Quarter 29 7/8 25 7/8
Holders
On February 26, 1999, there were approximately 4,500 shareholders of record of
the company's common stock.
Dividend History and Restrictions
The company has not paid cash dividends on its common stock during the past five
years. While the board of directors considers the payment of dividends on the
common stock from time to time, the declaration of future dividends will be
dependent upon the company's earnings, financial condition, and other relevant
factors.
The terms of the company's global multi-currency credit facility, senior notes,
and senior debentures (see Note 4 of the Notes to Consolidated Financial
Statements) limit, among other things, the payment of cash dividends and the
incurrence of additional borrowings and require that working capital, net worth,
and certain other financial ratios be maintained at designated levels.
Item 6. Selected Financial Data.
-----------------------
The following table sets forth certain selected consolidated financial data and
should be read in conjunction with the company's consolidated financial
statements and related notes appearing elsewhere in this annual report.
SELECTED FINANCIAL DATA
(In thousands except per share data)
For the year: 1998 1997(a) 1996 1995 1994(b)
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Sales
Components $6,343,890 $6,465,521 $5,520,202 $5,127,258 $3,914,737
Gates/Arrow 2,000,769 1,298,424 1,014,375 792,162 734,497
---------- ---------- ---------- ---------- ----------
Consolidated 8,344,659 7,763,945 6,534,577 5,919,420 4,649,234
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Operating income
Components 326,695 426,778 401,849 444,029 312,103
Gates/Arrow 54,397 31,229 19,932 3,803 16,415
Corporate (28,588) (83,286) (21,154) (24,623) (72,544)
---------- ---------- ---------- ---------- ---------
Consolidated 352,504 374,721 400,627 423,209 255,974
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Net income $ 145,828 $ 163,656 $ 202,709 $ 202,544 $ 111,889
==============================================================================
Diluted earnings
per share (c) $ 1.50 $ 1.64 $ 1.98 $ 2.03 $ 1.16
==============================================================================
At year-end:
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Accounts receivable and
inventories $2,675,612 $2,475,407 $1,947,719 $1,979,160 $1,422,457
Total assets 3,839,871 3,537,873 2,710,351 2,701,01 2,038,774
Total long-term debt
and subordinated
debentures 1,040,173 823,099 344,562 451,706 349,398
Shareholders'
equity 1,487,319 1,360,758 1,358,482 1,195,881 837,885
- -------------------------------------------------------------------------------
(a) Operating and net income include special charges totaling $59.5 million
($40.4 million after taxes) associated with the realignment of Arrow's North
American components operations and the acquisition and integration of the volume
electronic component distribution businesses of Premier Farnell plc. Excluding
these charges, operating income, net income, and net income per share on a
diluted basis were $434.2 million, $204.1 million, and $2.05, respectively.
(b) Operating and net income include special charges totaling $45.3 million
($28.8 million after taxes) associated with the acquisition and integration of
Gates/FA Distributing, Inc. and Anthem Electronics, Inc. in transactions
accounted for as poolings of interests. Excluding these charges, operating
income, net income, and net income per share on a diluted basis were $301.3
million, $140.7 million, and $1.44, respectively.
(c) All per share amounts have been restated to reflect the two-for-one stock
split effective October 15, 1997.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
-----------------------------------
For an understanding of the significant factors that influenced the company's
performance during the past three years, the following discussion should be read
in conjunction with the consolidated financial statements and other information
appearing elsewhere in this report.
Sales
Consolidated sales of $8.3 billion in 1998 were 7 percent higher than 1997 sales
of $7.8 billion. This sales growth was due to increased sales of commercial
computer products in the company's Gates/Arrow operation from $1.3 billion in
1997 to more than $2 billion in 1998. Excluding the impact of acquisitions,
1998 sales of Gates/Arrow increased by 24 percent when compared to 1997. The
worldwide market for electronic components continued to be characterized by
product availability well in excess of demand and resultant pressure on average
selling prices and gross profit margins resulting in a decline in sales from
$6.5 billion in 1997 to $6.3 billion in 1998.
In 1997, consolidated sales increased to $7.8 billion, an increase of 19 percent
over 1996 sales of $6.5 billion. This sales growth was due to increased
activity levels throughout the world and acquisitions, principally the volume
electronic component distribution businesses of Premier Farnell plc offset, in
part, by the impact of a stronger U.S. dollar. Sales of Gates/Arrow increased
by 21 percent, excluding the impact of acquistions.
Consolidated sales of $6.5 billion in 1996 were 10 percent higher than 1995
sales of $5.9 billion. This sales growth was principally due to increased sales
of commercial computer products and microprocessors. The sales of semiconductor
products were characterized by an oversupply of product, competitive pricing
pressures, and reductions in memory prices.
Operating Income
The company's consolidated operating income decreased to $352.5 million in 1998,
compared with operating income of $374.7 million in 1997, including special
charges of $59.5 million. Excluding the special charges, operating income in
1997 was $434.2 million. The reduction in operating income reflected a decline
in the sales of the North American components operation, a further decline in
gross margins due to proportionately higher sales of lower margin commercial
computer products, and competitive pricing pressures throughout the world
offset,
in part, by the impact of increased sales and the benefits of continuing
economies of scale. Operating expenses as a percent of sales remained
consistent with 1997 at 9.7 percent, the lowest in the company's history.
In 1997, the company's consolidated operating income decreased to $374.7
million, compared with operating income of $400.6 million in 1996, principally
as a result of special charges of $59.5 million associated with the realignment
of the North American components operations and the acquisition and integration
of the volume electronic component distribution businesses of Premier Farnell
plc. The improvement in operating income, excluding the special charges,
reflects the impact of increased sales, acquisitions, and continuing economies
of scale
offset, in part, by lower gross profit margins caused by competitive pricing
pressures and a greater sales mix of commercial computer products. Operating
expenses, excluding the special charges, as a percent of sales declined to 9.7
percent in 1997.
The company's consolidated operating income decreased to $400.6 million in 1996,
compared with operating income of $423.2 million in 1995. The reduction in
operating income reflected a further decline in gross margins due to
proportionately higher sales of lower margin commercial computer products and
microprocessors throughout the world and competitive pricing pressures in Europe
and the Asia/Pacific region offset, in part, by the impact of increased sales
and the benefits of continuing economies of scale. Operating expenses as a
percent of sales declined to 9.8 percent in 1996.
Interest
Interest expense of $81.1 million in 1998 increased by $14 million from the 1997
level, reflecting increases in borrowings associated with acquisitions and
investments in working capital.
In 1997, interest expense increased to $67.1 million from $38 million in 1996,
reflecting increases in borrowings associated with acquisitions, the purchases
of the company's common stock, and investments in working capital.
Interest expense of $38 million in 1996 decreased by $8.4 million from the 1995
level. The decrease reflected the conversion of the company's 5 3/4%
convertible subordinated debentures in October 1995, lower borrowings resulting
from improved working capital usage, and lower borrowing costs offset, in part,
by borrowings to fund purchases of common stock.
Income Taxes
The company recorded a provision for taxes at an effective tax rate of 42.2
percent in 1998 compared with 41 percent, excluding the special charges, in
1997. The higher effective rate in 1998 is due to the non-deductibility of
goodwill amortization.
In 1997, the company recorded a provision for taxes at an effective tax rate of
41 percent, excluding the special charges, compared with 39.9 percent in 1996.
The increased rate for 1997 is due to increased earnings in countries with
higher marginal tax rates and the non-deductibility of goodwill amortization.
The company recorded a provision for taxes at an effective tax rate of 39.9
percent in 1996, compared with 40.4 percent in 1995. The lower effective rate
was the result of decreased earnings in countries with higher marginal tax
rates.
Net Income
Net income in 1998 was $145.8 million, a decrease from $204.1 million, before
the special charges of $59.5 million ($40.4 million after taxes), in 1997. The
decrease in net income is attributable to lower operating income and increases
in interest expense.
In 1997, the company's net income advanced to $204.1 million from $202.7 million
in 1996, before the special charges. The increase in net income was
attributable to higher operating income offset, in part, by an increase in
interest expense.
Net income in 1996 was $202.7 million, an increase from $202.5 million in 1995.
The increase in net income was attributable to decreases in interest expense,
income taxes, and minority interest offset, in part, by lower operating income.
Liquidity and Capital Resources
The company maintains a high level of current assets, primarily accounts
receivable and inventories. Consolidated current assets, as a percentage of
total assets, were approximately 75 percent and 74 percent in 1998 and 1997,
respectively.
In 1998, working capital increased by 18 percent, or $262 million, compared with
1997. This increase was due to higher working capital requirements and
acquisitions.
The net amount of cash provided by operations in 1998 was $43.6 million, the
principal element of which was the cash flow resulting from net earnings offset,
in part, by working capital usage. The net amount of cash used by the company
for investing purposes was $129.6 million, including $70.6 million for various
acquisitions. Cash flows provided by financing activities were $131.4 million,
principally reflecting the $445.7 million of proceeds from the issuance of the
company's 6 7/8% senior debentures and 6.45% senior notes offset, in part, by
the reduction in the company's credit facilities, purchases of common stock, and
distributions to partners.
Working capital increased by $160 million, or 13 percent, in 1997 compared with
1996, primarily as a result of increased sales and acquisitions. This
percentage increase was less than the percentage increase of sales as a result
of improvements in working capital usage.
The net amount of cash used for the company's operating activities in 1997 was
$14.2 million, principally reflecting earnings offset by increased working
capital requirements supporting higher sales. The net amount of cash used for
investing activities was $410.8 million, including $381.5 million for
acquisitions and investments. The net amount of cash provided by financing
activities was $422.1 million, principally reflecting the $392.8 million of
proceeds from the issuance of the company's senior notes and senior debentures
and increases in the company's credit facilities offset, in part, by the
purchase of the company's common stock.
In 1996, working capital increased by 5 percent, or $56 million, compared with
1995. This percentage increase was less than the percentage increase of sales
as a result of improvements in working capital usage.
The net amount of cash provided by operations in 1996 was $306.8 million, the
principal element of which was the cash flow resulting from higher net earnings
and improved working capital usage. The net amount of cash used by the company
for investing purposes was $55.3 million, including $38.9 million for various
acquisitions. Cash flows from financing activities were $202.6 million,
principally reflecting the reduction in the company's borrowings, purchases of
common stock, and distributions to partners.
Market and Other Risks
The company, as a large international organization, faces exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as business practices evolve and could have a material impact on the
company's financial results in the future. The company's primary exposure
relates to transactions in which the currency collected from customers is
different from the currency utilized to purchase the product sold in Europe and
the Asia/Pacific region. At the present time, the company hedges only these
currency exposures and does not hedge anticipated foreign currency cash flows
and earnings or its investments in businesses in Europe and the Asia/Pacific
region as in many instances there are natural offsetting positions. The
translation of the financial statements of the non-North American operations is
impacted by fluctuation in foreign currency exchange rates. Had the various
average foreign currency exchange rates remained the same during 1998 as
compared with 1997, 1998 sales and operating income would have been $48 million
and $3 million higher, respectively, than the actual results for 1997.
The company's interest expense, in part, is sensitive to the general level of
short-term interest rates in the United States and Europe. To mitigate the
impact of fluctuations in interest rates, at December 31, 1998, the company has
approximately 74 percent of its debt as fixed rate long-term borrowings and 26
percent of its debt subject to short-term floating rates. Interest expense
would fluctuate by approximately $1 million if average short-term interest rates
had changed by one percentage point in 1998. This amount was determined by
considering the impact of a hypothetical interest rate on the company's
borrowing cost. This analysis does not consider the effect of the level of
overall economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management could likely take actions to
further mitigate any potential negative exposure to the change. However, due to
the uncertainty of the specific actions that would be taken and their possible
effects, the sensitivity analysis assumes no changes in the company's
financial structure.
Year 2000 Update
The company previously initiated a comprehensive, worldwide review to identify,
evaluate and address Year 2000 issues and implemented a plan to resolve those
issues. Included within the scope of this initiative are operational and
information technology computer systems; embedded systems contained in machinery
and equipment including warehousing and telecommunications equipment; and third
party relationships, including trade and non-trade vendors, carriers, and other
principal business partners.
In the information technology arena, the company divided its remediation plan
into the following phases: inventory, assessment, remediation, testing, and
monitoring. The inventory, assessment, and remediation phases have been
substantially completed, and the testing and monitoring phases are progressing
on schedule, with completion anticipated by June 30, 1999. With respect to non-
information technology, or embedded systems, the company has substantially
completed the inventory and assessment phases, and remediation and testing are
progressing according to schedule, with completion anticipated during the third
quarter of 1999. Spending related to Year 2000 modification is not expected to
exceed $10 million in 1999. Amounts incurred to date in addressing Year 2000
issues have not exceeded $10 million.
The company is currently engaged in a review of the Year 2000 compliance efforts
of key suppliers and other principal business partners upon whom it depends for
essential products and services. There can be no guarantee that these parties
will resolve their Year 2000 issues with respect to products, services or
critical systems, and processes in a timely manner. Management believes that
failure or delay by any of these parties could possibly cause a significant
disruption to the company's business. The company is in the process of
developing contingency plans to address these and other issues.
Information Relating to Forward-Looking Statements
This report includes forward-looking statements that are subject to certain
risks and uncertainties which could cause actual results or facts to differ
materially from such statements for a variety of reasons, including, but not
limited to: industry conditions, changes in product supply, pricing, and
customer demand, competition, other vagaries in the computer and electronic
components markets, and changes in relationships with key suppliers.
Shareholders and other readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. The company undertakes no obligation to update publicly or revise any
forward-looking statements.
Item 8. Financial Statements.
--------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Arrow Electronics, Inc.
We have audited the accompanying consolidated balance sheet of Arrow
Electronics, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, cash flows, and shareholders' equity for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and the schedule are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Arrow
Electronics, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 17, 1999
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Arrow Electronics, Inc. have been
prepared by management, which is responsible for their integrity and
objectivity. These statements, prepared in accordance with generally accepted
accounting principles, reflect our best use of judgment and estimates where
appropriate. Management also prepared the other information in the annual report
and is responsible for its accuracy and consistency with the consolidated
financial statements.
The company's system of internal controls is designed to provide reasonable
assurance that company assets are safeguarded from loss or unauthorized use or
disposition and that transactions are executed in accordance with management's
authorization and are properly recorded. In establishing the basis for
reasonable assurance, management balances the costs of the internal controls
with the benefits they provide. The system contains self-monitoring mechanisms,
and compliance is tested through an extensive program of site visits and audits
by the company's operating controls staff.
The Audit Committee of the board of directors, consisting entirely of outside
directors, meets regularly with the company's management, operating controls
staff, and independent auditors and reviews audit plans and results as well as
management's actions taken in discharging its responsibilities for accounting,
financial reporting, and internal controls. Members of management, the
operating controls staff, and the independent auditors have direct and
confidential access to the Audit Committee at all times.
The company's independent auditors, Ernst & Young LLP, were engaged to audit the
consolidated financial statements in accordance with generally accepted auditing
standards. These standards include a study and evaluation of internal controls
for the purpose of establishing a basis for reliance thereon relative to the
scope of their audit of the consolidated financial statements.
Stephen P. Kaufman
Chairman and Chief Executive Officer
Paul J. Reilly
Vice President and
Corporate Controller
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
Years Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Sales $8,344,659 $7,763,945 $6,534,577
---------- ---------- ----------
Costs and expenses:
Cost of products sold 7,183,413 6,574,415 5,492,556
Selling, general, and
administrative expenses 756,770 712,213 604,412
Depreciation and amortization 51,972 43,096 36,982
Integration charge - 21,600 -
Realignment charge - 37,900 -
---------- ---------- ----------
7,992,155 7,389,224 6,133,950
---------- ---------- ----------
Operating income 352,504 374,721 400,627
Equity in earnings (loss)
of affiliated companies 937 781 (97)
Interest expense, net 81,126 67,117 37,959
---------- ---------- ----------
Earnings before income taxes
and minority interest 272,315 308,385 362,571
Provision for income taxes 115,018 131,617 144,667
---------- ---------- ----------
Earnings before minority
interest 157,297 176,768 217,904
Minority interest 11,469 13,112 15,195
---------- ---------- ----------
Net income $ 145,828 $ 163,656 $ 202,709
========== ========== ==========
Per common share:
Basic $ 1.53 $ 1.67 $ 2.01
========== ========== ==========
Diluted $ 1.50 $ 1.64 $ 1.98
========== ========== ==========
Average number of common
shares outstanding:
Basic 95,397 98,006 100,972
====== ====== =======
Diluted 97,113 99,769 102,380
====== ====== =======
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
December 31,
-----------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and short-term investments $ 158,924 $ 112,665
Accounts receivable, less allowance for
doubtful accounts ($48,423 in 1998 and
$46,055 in 1997) 1,354,351 1,245,354
Inventories 1,321,261 1,230,053
Prepaid expenses and other assets 26,279 42,268
---------- ----------
Total current assets 2,860,815 2,630,340
---------- ----------
Property, plant and equipment at cost
Land 15,087 9,699
Buildings and improvements 90,851 75,431
Machinery and equipment 183,227 143,030
---------- ----------
289,165 228,160
Less accumulated depreciation
and amortization 134,359 113,923
---------- ----------
154,806 114,237
---------- ----------
Investment in affiliated companies 23,279 54,914
Cost in excess of net assets of companies
acquired, less accumulated amortization
($91,837 in 1998 and $69,899 in 1997) 721,323 645,152
Other assets 79,648 93,230
---------- ----------
$3,839,871 $3,537,873
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 785,596 $ 767,088
Accrued expenses 211,438 285,673
Short-term borrowings, including current
maturities of long-term debt 168,066 143,723
--------- ---------
Total current liabilities 1,165,100 1,196,484
Long-term debt 1,040,173 823,099
Other liabilities 77,587 87,254
Minority interest 69,692 70,278
Shareholders' equity:
Common stock, par value $1:
Authorized--120,000,000 shares in 1998 and 1997
Issued--102,949,640 shares in 1998 and 1997 102,950 102,950
Capital in excess of par value 506,002 506,656
Retained earnings 1,114,826 968,998
Foreign currency translation adjustment (23,648) (35,881)
--------- ---------
1,700,130 1,542,723
Less: Treasury stock (7,321,540 and
6,011,903 shares in 1998 and 1997),
at cost 198,281 164,207
Unamortized employee stock award 14,530 17,758
---------- ----------
Total shareholders' equity 1,487,319 1,360,758
---------- ----------
$3,839,871 $3,537,873
========== ==========
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 145,828 $ 163,656 $ 202,709
Adjustments to reconcile net income
to net cash provided by (used for)
operations:
Minority interest in earnings 11,469 13,112 15,195
Depreciation and amortization 55,101 47,057 39,453
Equity in (earnings) loss of
affiliated companies (937) (781) 97
Deferred income taxes 19,661 (9,814) 10,280
Integration charge - 21,600 -
Realignment charge - 37,900 -
Change in assets and liabilities,
net of effects of acquired
businesses:
Accounts receivable (38,792) (219,488) 45,845
Inventories (33,490) (94,144) (8,426)
Prepaid expenses and other
assets 10,785 (8,048) (2,893)
Accounts payable (17,049) 36,784 26,276
Accrued expenses (88,808) (4,917) (23,870)
Other (20,164) 2,913 2,135
--------- --------- ---------
Net cash provided by (used for)
operating activities 43,604 (14,170) 306,801
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (59,006) (29,335) (28,596)
Proceeds from sale of building - - 10,442
Cash consideration paid for acquired
businesses (67,521) (364,499) (38,851)
Investment in affiliates (3,078) (16,973) 1,734
-------- -------- ---------
Net cash used for investing
activities (129,605) (410,807) (55,271)
--------- -------- ---------
Cash flows from financing activities:
Change in short-term borrowings (4,850) 55,018 (53,992)
Change in credit facilities (223,127) 122,830 (96,906)
Proceeds from long-term debt 445,665 392,844 -
Repayment of long-term debt (25,411) (338) (7,097)
Proceeds from exercise of stock
options 7,504 20,209 12,323
Distributions to minority partners (18,227) (17,464) (7,967)
Purchases of common stock (50,129) (151,010) (48,993)
--------- -------- ---------
Net cash provided by (used for)
financing activities 131,425 422,089 (202,632)
--------- -------- ---------
Effect of exchange rate changes on
cash (3,964) (20,847) (6,445)
--------- --------- ---------
Net increase (decrease) in cash and
short-term investments 41,460 (23,735) 42,453
Cash and short-term investments at
beginning of year 112,665 136,400 93,947
Cash and short-term investments of
acquired affiliate 4,799 - -
--------- -------- ---------
Cash and short-term investments at
end of year $ 158,924 $ 112,665 $ 136,400
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes $ 88,718 $ 121,251 $ 130,834
Interest 81,500 52,265 38,118
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
Common Foreign Unamortized
Stock Capital in Currency Employee
at Par Excess of Retained Translation Treasury Stock Awards
Value Par Value Earnings Adjustment Stock and Other Total
-------- ---------- -------- ----------- --------- ------------ ----------
Balance at December
31, 1995 $101,296 $479,676 $602,633 $18,398 $ (24) $(6,098) $1,195,881
Net income - - 202,709 - - - 202,709
Translation
adjustment - - - (9,645) - - (9,645)
Comprehensive
income 193,064
Exercise of
stock options 924 11,774 - - (375) - 12,323
Tax benefits
related to
exercise of
stock options - 3,345 - - - - 3,345
Restricted stock
awards, net 172 3,922 - - 327 (4,421) -
Amortization of
employee stock
awards - - - - - 2,862 2,862
Purchases of
common stock - - - - (48,993) - (48,993)
------- -------- ------- -------- ------- ------ ---------
Balance at December
31, 1996 102,392 498,717 805,342 8,753 (49,065) (7,657) 1,358,482
Net income - - 163,656 - - - 163,656
Translation
adjustments - - - (44,634) - - (44,634)
Comprehensive
income 119,022
Exercise of
stock options 198 (8,626) - - 28,637 - 20,209
Tax benefits
related to
exercise of
stock options - 7,074 - - - - 7,074
Restricted stock
awards, net 360 9,491 - - 7,231 (17,082) -
Amortization
of employee
stock awards - - - - - 6,981 6,981
Purchases of
common stock - - - - (151,010) - (151,010)
-------- -------- -------- -------- -------- -------- ----------
Balance at December
31, 1997 102,950 506,656 968,998 (35,881) (164,207) (17,758) 1,360,758
Net income - - 145,828 - - - 145,828
Translation
adjustments - - - 12,233 - - 12,233
Comprehensive
income 158,061
Exercise of
stock options - (2,777) - - 10,281 - 7,504
Tax benefits
related to
exercise of
stock options - 1,619 - - - - 1,619
Restricted stock
awards, net - 503 - - 5,766 (6,269) -
Amortization of
employee stock
awards - - - - - 9,497 9,497
Purchases of
common stock - - - - (50,129) - (50,129)
Other - 1 - - 8 - 9
-------- -------- ---------- -------- -------- -------- ---------
Balance at December
31, 1998 $102,950 $506,002 $1,114,826 $(23,648) $(198,281) $(14,530) $1,487,319
======== ======== ========== ======== ========= ======== ==========
See accompanying notes.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the company and
its majority-owned subsidiaries. The company's investments in affiliated
companies which are not majority-owned are accounted for using the equity
method. All significant intercompany transactions are eliminated.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Short-term Investments
- -------------------------------
Short-term investments which have a maturity of ninety days or less at time of
purchase are considered cash equivalents in the consolidated statement of cash
flows. The carrying amount reported in the consolidated balance sheet for short-
term investments approximates fair value.
Financial Instruments
- ---------------------
The company uses various financial instruments, including derivative financial
instruments, for purposes other than trading. The company does not use
derivative financial instruments for speculative purposes. Derivatives used as
part of the company's risk management strategy are designated at inception as
hedges and measured for effectiveness both at inception and on an ongoing basis.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) method.
Property and Depreciation
- -------------------------
Depreciation is computed on the straight-line method for financial reporting
purposes and on accelerated methods for tax reporting purposes. Leasehold
improvements are amortized over the shorter of the term of the related lease or
the life of the improvement.
Cost in Excess of Net Assets of Companies Acquired
- --------------------------------------------------
The cost in excess of net assets of companies acquired is being amortized on a
straight-line basis, principally over 40 years.
Foreign Currency
- ----------------
The assets and liabilities of foreign operations are translated at the exchange
rates in effect at the balance sheet date, with the related translation gains or
losses reported as a separate component of shareholders' equity. The results of
foreign operations are translated at the monthly weighted average exchange
rates.
Income Taxes
- ------------
Income taxes are accounted for under the liability method. Deferred taxes
reflect the tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Split
- -----------
The company's board of directors authorized a two-for-one stock split effected
in the form of a 100 percent stock dividend distributed on October 15, 1997 to
shareholders of record on October 3, 1997. Shareholders' equity has been
restated to give retroactive recognition to the stock split in prior periods by
reclassifying from capital in excess of par value to common stock the par value
of the additional shares arising from the split.
All references in the financial statements and the related notes to the number
of shares and per share amounts for 1997 and 1996 have been restated to reflect
the two-for-one stock split.
Net Income Per Share
- --------------------
Basic EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Comprehensive Income
- --------------------
Effective January 1, 1998, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 130 "Reporting Comprehensive Income" which requires
disclosure of comprehensive income and its components. Comprehensive income is
defined as the aggregate change in shareholders' equity excluding changes in
ownership interests. The foreign currency translation adjustments included in
comprehensive income have not been tax effected as investments in foreign
affiliates are deemed to be permanent.
Segment and Geographic Information
- ----------------------------------
Effective January 1, 1998, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 131 "Disclosures about Segments of an Enterprise and
Related Information" which requires that an enterprise disclose the factors that
management considers most significant in determining its reportable segments.
2. Acquisitions
During 1998, the company acquired a majority interest in Scientific and Business
Minicomputers, Inc. and Unitronics Componentes S.A. The company also increased
its holdings in Spoerle Electronic Handelsgesellschaft mbH ("Spoerle") to 90
percent and the Veltek/Zatek companies in Australia and Strong Electronics Co.,
Ltd. in Taiwan to 100 percent. The aggregate cost of these acquisitions was
$62,918,000.
During 1997, the company acquired the volume electronic component distribution
businesses of Premier Farnell plc for approximately $298,000,000 and a majority
interest in Consan Incorporated and Support Net, Inc. During 1997, the company
increased its holdings in Spoerle to 80 percent; Silverstar Ltd., S.p.A.
("Silverstar") to 98 percent; and TH:s Elektronik AB, Exatec A/S, Amitron S.A.,
and ATD Electronica S.A. to 100 percent. The aggregate cost of these
acquisitions
was $364,499,000.
In September 1997, the company recorded a special charge of $21,600,000 before
taxes ($.17 per share on a diluted basis) associated with the integration of the
volume electronic component distribution businesses of Premier Farnell plc and
related transaction fees. Such integration costs include real estate
termination costs, severance and other expenses related to personnel performing
duplicative functions, professional fees, and the disposal of duplicative fixed
assets.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost of each acquisition has been allocated among the net assets acquired on
the basis of the respective fair values of the assets acquired and liabilities
assumed. For financial reporting purposes, the acquisitions are accounted for
as purchase transactions beginning in the respective month of acquisition. The
aggregate consideration paid for all acquisitions exceeded the net assets
acquired by $46,591,000 and $296,379,000 in 1998 and 1997, respectively.
In connection with certain acquisitions, the company may be required to make
additional payments that are contingent upon the acquired businesses achieving
certain operating goals. During 1998, the company made additional payments of
$2,942,000 which have been capitalized as cost in excess of net assets of
companies acquired.
3. Investment in Affiliated Companies
During 1998, the company acquired a 50 percent interest in Marubun/Arrow, a
joint venture with Marubun Corporation, Japan's largest independent distributor.
This joint venture was formed to specifically serve Japanese customers in the
Asia/Pacific region and North America. The company also has a 50 percent
interest in Altech Industries (Pty) Ltd., a joint venture with Allied
Technologies Limited, a South African electronics distributor. Prior to 1998
when it increased its holdings to 100 percent, the company had a 45 percent
interest in Strong Electronics Co., Ltd., a joint venture with Lite-On, Inc.
4. Debt
Long-term debt consisted of the following at December 31 (in thousands):
1998 1997
---- ----
Global multi-currency credit facility $ 173,633 $377,765
7% senior notes, due 2007 197,976 197,623
7 1/2% senior debentures, due 2027 196,071 196,033
8.29% senior notes 50,000 75,000
6 7/8% senior debentures, due 2018 195,939 -
6.45% senior notes, due 2003 249,855 -
Other obligations with various
interest rates and due dates 1,699 1,678
---------- --------
1,065,173 848,099
---------- --------
Less installments due within one year 25,000 25,000
$1,040,173 $823,099
========== ========
The company's revolving credit agreement (the "global multi-currency credit
facility"), as amended, provides up to $650,000,000 of available credit and has
a maturity date of September 2001. The interest rate for loans under this
facility is at the applicable eurocurrency rate (5.0625 percent for U.S. dollar
denominated loans at December 31, 1998) plus a margin of .225 percent. The
company may also utilize the facility's competitive advance option to obtain
loans, generally at a lower rate. The company pays the banks a facility fee
of.125 percent per annum.
The 7% senior notes and the 7 1/2% senior debentures are not redeemable prior to
their maturity. The 8.29% senior notes are payable in three equal annual
installments. The first installment was paid on December 30, 1998 with the
remaining installments due in 1999 and 2000. The 6 7/8% senior debentures and
the 6.45% senior notes may be prepaid at the option of the company on at least
30 days' prior notice subject to a "make whole" clause.
The global multi-currency credit facility, the senior notes, and the senior
debentures limit, among other things, the payment of cash dividends and the
incurrence of additional borrowings and require that working capital, net worth,
and certain other financial ratios be maintained at designated levels.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company maintains uncommitted lines of credit with a group of banks under
which up to $65,000,000 could be borrowed at December 31, 1998 on such terms as
the company and the banks may agree. Borrowings under the lines of credit would
be classified as long-term debt as the company has the ability to renew them or
refinance them under the global multi-currency credit facility. There are no
fees or compensating balances associated with these borrowings. There were no
outstanding borrowings under the lines of credit at December 31, 1998.
Short-term borrowings are principally utilized to support the working capital
requirements of certain foreign operations. The weighted average interest rates
of these borrowings at December 31, 1998 and 1997 were 7 percent and 8 percent,
respectively.
At December 31, 1998, the estimated fair market value of the 7% senior notes and
the 7 1/2% senior debentures was 103 percent of par, the 8.29% senior notes was
109 percent of par, and the 6 7/8% senior debentures was 97 percent of par. The
balance of the company's borrowings approximate their fair value.
5. Income Taxes
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
---- ---- ----
Current
Federal $ 46,449 $ 81,278 $ 78,715
State 11,373 19,679 21,482
Foreign 35,796 31,096 29,507
-------- -------- --------
93,618 132,053 129,704
-------- -------- --------
Deferred
Federal 15,667 (9,321) 4,758
State 3,815 (2,130) 1,087
Foreign 1,918 11,015 9,118
-------- -------- --------
21,400 (436) 14,963
-------- -------- --------
$115,018 $131,617 $144,667
======== ======== ========
The principal causes of the difference between the U.S. statutory and effective
income tax rates are as follows (in thousands):
1998 1997 1996
---- ---- ----
Provision at statutory rate $ 95,311 $107,935 $126,900
State taxes, net of federal
benefit 9,872 11,407 14,670
Foreign tax rate differential 858 2,499 6,625
Other 8,977 9,776 (3,528)
-------- -------- --------
$115,018 $131,617 $144,667
======== ======== ========
For financial reporting purposes, income before income taxes attributable to the
United States was $183,048,000 in 1998, $216,993,000 in 1997, and $279,149,000
in 1996, and income before income taxes attributable to foreign operations was
$89,267,000 in 1998, $91,392,000 in 1997, and $83,422,000 in 1996.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the company's deferred tax assets, which are
included in other assets, are as follows (in thousands):
1998 1997
---- ----
Inventory reserves $11,148 $14,407
Allowance for doubtful accounts 9,208 10,803
Accrued expenses 919 7,789
Realignment reserve 1,869 11,002
Integration reserve 19,116 20,897
Other (3,912) (1,076)
------- -------
$38,348 $63,822
======= =======
Included in other liabilities are deferred tax liabilities of $40,909,000 and
$40,327,000 at December 31, 1998 and 1997, respectively. The deferred tax
liabilities are principally the result of the differences in the bases of the
German assets and liabilities for tax and financial reporting purposes.
6. Shareholders' Equity
The company has 2,000,000 authorized shares of serial preferred stock with a par
value of $1.
In 1988, the company paid a dividend of one preferred share purchase right on
each outstanding share of common stock. Each right, as amended, entitles a
shareholder to purchase one one-hundredth of a share of a new series of
preferred stock at an exercise price of $50 (the "exercise price"). The rights
are exercisable only if a person or group acquires 20 percent or more of the
company's common stock or announces a tender or exchange offer that will result
in such person or group acquiring 30 percent or more of the company's common
stock. Rights owned by the person acquiring such stock or transferees thereof
will automatically be void. Each other right will become a right to buy, at the
exercise price, that number of shares of common stock having a market value of
twice the exercise price. The rights, which do not have voting rights, and may
be redeemed by the company at a price of $.01 per right at any time until ten
days after a 20 percent ownership position has been acquired. In the event that
the company merges with, or transfers 50 percent or more of its consolidated
assets or earning power to, any person or group after the rights become
exercisable, holders of the rights may purchase, at the exercise price, a number
of shares of common stock of the acquiring entity having a market value equal to
twice the exercise price. The rights, as amended, expire on March 1, 2008.
7. Realignment Charge
During 1997, the company announced the realignment of its North American
components operations into seven operating groups based upon customer needs.
The company recorded a special charge of $37,900,000 before taxes ($.24 per
share on a diluted basis) for costs associated with the realignment, including
real estate termination costs, severance and other expenses related to personnel
as well as costs of communicating the realignment to customers, suppliers, and
employees.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per
share ("EPS") for the years ended December 31 (in thousands):
1998 1997 1996
---- ---- ----
Net income for EPS $145,828 $163,656(a) $202,709
Weighted average common shares
outstanding for basic EPS 95,397 98,006 100,972
Net effect of dilutive stock
options and restricted stock
awards 1,716 1,763 1,408
------- -------- --------
Weighted average common shares
outstanding for diluted EPS 97,113 99,769 102,380
======= ======== ========
Basic EPS $ 1.53 $ 1.67(a) $ 2.01
======= ======== ========
Diluted EPS $ 1.50 $ 1.64(a) $ 1.98
======= ======== ========
(a) Net income includes special charges totaling $59,500,000 ($40,435,000 after
taxes) associated with the realignment of the North American components
operations and the acquisition and integration of the volume electronic
component distribution businesses of Premier Farnell plc. Excluding these
charges, net income and net income per share on a basic and diluted basis were
$204,091,000, $2.08, and $2.05, respectively.
9. Employee Stock Plans
Restricted Stock Plan
- ---------------------
Under the terms of the Arrow Electronics, Inc. Restricted Stock Plan (the
"Plan"), a maximum of 3,960,000 shares of common stock may be awarded at the
discretion of the board of directors to key employees of the company.
Shares awarded under the Plan may not be sold, assigned, transferred, pledged,
hypothecated, or otherwise disposed of, except as provided in the Plan. Shares
awarded become free of vesting restrictions generally over a four-year period.
The company awarded 275,000 shares of common stock in early 1999 to 100 key
employees in respect of 1998, 215,400 shares of common stock to 140 key
employees during 1998, 292,304 shares of common stock to 209 key employees
during 1997, and 239,720 shares of common stock to 81 key employees during 1996.
Forfeitures of shares awarded under the Plan were 7,359, 31,250 and 49,274
during 1998, 1997, and 1996, respectively. The aggregate market value of
outstanding awards under the Plan at the respective dates of award is being
amortized over the vesting period, and the unamortized balance is included in
shareholders' equity as unamortized employee stock awards.
Stock Option Plan
- -----------------
Under the terms of the Arrow Electronics, Inc. Stock Option Plan (the "Option
Plan"), both nonqualified and incentive stock options for an aggregate of
21,000,000 shares of common stock were authorized for grant to key employees at
prices determined by the board of directors at its discretion or, in the case of
incentive stock options, prices equal to the fair market value of the shares at
the dates of grant. Options granted under the plan after May 1997 are
exercisable in equal installments over a four-year period. Previously, options
became exercisable over a two- or three-year period. Options currently
outstanding have terms of ten years.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1997, all employees of the North American operations below the level
of vice president were granted a special award of stock options totaling
1,255,320 at the then market price of the company's stock as an incentive
related to the realignment of the North American components operation. In
December 1998, the board of directors approved the repricing of the remaining
unforfeited options, totaling 1,050,760, reducing the exercise price from $27.50
to $22.5625.
The company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for the
Option Plan. Accordingly, no compensation expense has been recognized in the
company's accounts for this plan.
The following information relates to the Option Plan for the years ended
December 31:
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
---- -------- ---- -------- ---- -------
Options outstanding
at beginning
of year 8,231,809 $24.00 7,107,042 $20.25 4,877,150 $16.69
Granted 131,120 (a) 25.87 2,648,340 29.51 3,267,920 23.67
Exercis (375,501) 19.96 (1,316,962) 15.34 (923,970) 13.75
Forfeited (425,279)(a) 26.53 (206,611) 22.16 (114,058) 18.88
--------- ---------- ---------
Options outstanding
at end
of year 7,562,149 $23.41 8,231,809 $24.00 7,107,042 $20.25
========= ========= =========
Prices per share of
options
outstanding $1.81-34.00 $1.81-32.25 $1.81-27.69
Options available for future grant:
Beginning of
year 6,962,805 432,700 3,586,562
End of
year 7,255,214 6,962,805 432,700
(a) Excludes 1,050,760 options granted in October 1997
to all employees of the North American operations below the level of vice
president and repriced on December 14, 1998 from $27.50 to $22.5625.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------- ----------------------
Weighted Weighted Weighted
Maximum Average Average Average
Exercise Number Remaining Exercise Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------- ----------- ---------------- ------- ----------- --------
$20.00 1,318,899 61 months $15.90 1,291,949 $15.88
25.00 3,236,353 87 months 21.75 2,406,262 21.46
30.00 1,821,447 94 months 26.20 1,574,959 26.07
35.00 1,185,450 107 months 31.99 288,918 31.97
--------- ---------
All 7,562,149 90 months 23.41 5,562,088 22.02
========= =========
Had stock-based compensation costs been determined as prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," net income would have been reduced by $6.7 million ($.04 per
share on a diluted basis) in 1998, $7.6 million ($.06 per share on a diluted
basis) in 1997 and $5.2 million ($.04 per share on a diluted basis) in 1996.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated weighted average fair value, utilizing the Black-Scholes option-
pricing model, at date of option grant during 1998 and 1997 was $8.35 and $9.41,
per option, respectively. The weighted average fair value was estimated using
the following assumptions:
1998 1997
---- ----
Expected life (months) 48 47
Risk-free interest rate (percent) 5.4 5.8
Expected volatility (percent) 31 29
There is no expected dividend yield.
Stock Ownership Plan
The company maintains a noncontributory employee stock ownership plan which
enables most North American employees to acquire shares of the company's common
stock. Contributions, which are determined by the board of directors, are in
the form of common stock or cash which is used to purchase the company's common
stock for the benefit of participating employees. Contributions to the plan for
1998, 1997, and 1996 amounted to $5,531,000, $5,147,000, and $4,218,000,
respectively.
10. Retirement Plans
The company has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. The company's
contribution to the plan, which is based on a specified percentage of employee
contributions, amounted to $4,387,000, $4,988,000 and $4,608,000, in 1998, 1997,
and 1996, respectively. Certain domestic and foreign subsidiaries maintain
separate defined contribution plans for their employees and made contributions
thereunder, which amounted to $2,035,000, $1,915,000 and $1,162,000, in 1998,
1997, and 1996, respectively.
The company maintains an unfunded supplemental retirement plan for certain
executives. The company's board of directors determines those employees
eligible to participate in the plan and their maximum annual benefit upon
retirement.
11. Lease Commitments
The company leases certain office, warehouse, and other property under
noncancelable operating leases expiring at various dates through 2053. Rental
expenses of noncancelable operating leases amounted to $29,231,000 in 1998,
$29,190,000 in 1997, and $29,390,000 in 1996. Aggregate minimum rental
commitments under all noncancelable operating leases, exclusive of real estate
taxes, insurance, and leases related to facilities closed in connection with the
North American realignment and the integration of the acquired businesses,
approximate $153,039,000. Such commitments on an annual basis are: 1999-
$30,604,000; 2000-$21,876,000; 2001-$15,821,000; 2002-$13,706,000; 2003-
$11,951,000; and $50,111,000 thereafter.
12. Financial Instruments
The company enters into foreign exchange forward contracts (the "contracts") to
mitigate the impact of changes in foreign currency exchange rates, principally
French francs, German deutsche marks, Italian lira, and British pound sterling.
These contracts are executed to facilitate the netting of offsetting foreign
currency exposures resulting from inventory purchases and sales, and generally
have terms of no more than three months. Gains or losses on these contracts are
deferred and recognized when the underlying future purchase or sale is
recognized. The company does not enter into forward contracts for trading
purposes. The risk of loss on a contract is the risk of nonperformance by the
counterparties which the company minimizes by limiting its counterparties to
major financial institutions. The fair value of the contracts is estimated using
market quotes. The notional amount of the contracts at December 31, 1998 and
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, was $79,595,000 and $97,321,000, respectively. The carrying
amounts, which are nominal, approximated fair value at December 31, 1998 and
1997.
13. Segment and Geographic Information
The company is engaged in the distribution of electronic components to original
equipment manufacturers and computer products to value-added resellers (VARS).
Operating income excludes the effects of special charges relating to the
integration of acquired businesses and the realignment of the North American
components operations. Revenue, operating income, and assets by segment are as
follows (in thousands):
Electronic Computer
Components Products Corporate Total
---------- -------- --------- -----
1998
- ----
Revenue from external
customers $6,343,890 $2,000,769 $ - $8,344,659
Operating income
(loss) 343,129 55,889 (46,514) 352,504
Total assets 3,014,100 640,786 184,985 3,839,871
1997
- ----
Revenue from external
customers $6,465,521 $1,298,424 $ - $7,763,945
Operating income
(loss) 440,917 31,672 (97,868)(a) 374,721
Total assets 2,777,625 545,872 214,376 3,537,873
1996
- ----
Revenue from external
customers $5,520,202 $1,014,375 $ - $6,534,577
Operating income
(loss) 411,607 20,226 (31,206) 400,627
Total assets 2,293,495 283,555 133,301 2,710,351
(a) Includes special charges totaling $59,500,000 million associated with the
realignment of the North American components operations and the acquistion and
integration of the volume electronic component distribution businesses of
Premier Farnell plc.
As a result of the company's philosophy of maximizing operating efficiencies
through the centralization of certain functions, selected fixed assets and
related depreciation, borrowings, and goodwill amortization are not directly
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
attributable to the individual operating segments. In its evaluation of its
operating groups performance, the company ignores the impact of unusual items
such as realignment and integration charges.
Revenues, by geographic area, are as follows (in thousands):
1998 1997 1996
---- ---- ----
North America $5,351,061 $4,964,660 $4,309,839
Europe 2,396,452 2,279,951 1,855,821
Asia/Pacific 597,146 519,334 368,917
$8,344,659 $7,763,945 $6,534,577
Total assets, by geographic area, are as follows (in thousands):
1998 1997 1996
---- ---- ----
North America $2,066,785 $1,952,348 $1,525,551
Europe 1,473,857 1,386,976 1,030,343
Asia/Pacific 299,229 198,549 154,457
$3,839,871 $3,537,873 $2,710,351
14. Quarterly Financial Data (Unaudited)
A summary of the company's quarterly results of operations follows (in thousands
except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
- ----
Sales $2,025,760 $2,023,966 $2,134,769 $2,160,164
Gross profit 294,879 291,331 285,282 289,754
Net income 41,945 35,990 35,563 32,330
Per common share:
Basic .44 .37 .37 .34
Diluted .43 .37 .37 .34
1997
- ----
Sales $1,855,333 $1,848,742 $1,949,396 $2,110,474
Gross profit 285,561 293,390 291,546 319,033
Net income 50,294 51,779 9,282(a) 52,301
Per common share:
Basic .51 .52 .10(a) .54
Diluted .50 .52 .09(a) .53
(a) Net income includes special charges totaling $59,500,000 ($40,435,000 after
taxes) associated with the realignment of the North American components
operations and the acquisition and integration of the volume electronic
component distribution businesses of Premier Farnell plc. Excluding these
charges, net income and net income per share on a basic and diluted basis were
$49,717,000, $.51, and $.50, respectively.
15. Subsequent Event
In January 1999, the company completed its previously announced acquisitions of
Richey Electronics, Inc. and the Electronics Distribution Group of Bell
Industries, Inc. for an estimated $315,000,000, including the assumption of
approximately $38,000,000 of debt.
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.
--------------------------------------------------
See "Executive Officers" in the response to Item 1 above. In addition, the
information set forth under the heading "Election of Directors" in the company's
Proxy Statement filed in connection with the Annual Meeting of Shareholders
scheduled to be held May 12, 1999 hereby is incorporated herein by reference.
Item 11. Executive Compensation.
----------------------
The information set forth under the heading "Executive Compensation and Other
Matters" in the company's Proxy Statement filed in connection with the Annual
Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
---------------------------------------------------
Management.
----------
The information is included in the company's Proxy Statement filed in connection
with the Annual Meeting of Shareholders scheduled to be held May 12, 1999 hereby
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information set forth under the heading "Executive Compensation and Other
Matters" in the company's Proxy Statement filed in connection with the Annual
Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated
herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
--------------------------------------------------------------
(a)1. Financial Statements.
--------------------
The financial statements listed in the accompanying index to financial
statements and financial statement schedule are filed as part of this annual
report.
2. Financial Statement Schedule.
----------------------------
The financial statement schedule listed in the accompanying index to financial
statements is filed as part of this annual report.
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
ARROW ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
Page
Report of Ernst & Young LLP, independent auditors 13
Management's responsibility for financial reporting 14
Consolidated statement of income for the years ended
December 31, 1998, 1997, and 1996 15
Consolidated balance sheet at December 31, 1998 and 1997 16
For the years ended December 31, 1998, 1997, and 1996:
Consolidated statement of cash flows 17
Consolidated statement of shareholders' equity 18
Notes to consolidated financial statements for
the years ended December 31, 1998, 1997, and 1996 20
Consolidated schedule for the three years
ended December 31, 1998:
II - Valuation and qualifying accounts 39
3. Exhibits.
(2)(a)(i) Share Purchase Agreement, dated as of October 10, 1991,
among EDI Electronics Distribution International B.V., Aquarius Investments
Ltd., Andromeda Investments Ltd., and the other persons named therein
(incorporated by reference to Exhibit 2.2 to the company's Registration
Statement on Form S-3, Registration No. 33-42176).
(ii) Standstill Agreement, dated as of October 10, 1991, among
Arrow Electronics, Inc., Aquarius Investments Ltd., Andromeda Investments Ltd.,
and the other persons named therein (incorporated by reference to Exhibit 4.1 to
the company's Registration Statement on Form S-3, Registration No. 33-42176).
(iii) Shareholder's Agreement, dated as of October 10,
1991, among EDI Electronics Distribution International B.V., Giorgio Ghezzi,
Germano Fanelli, and Renzo Ghezzi (incorporated by reference to Exhibit
2(f)(iii) to the company's Annual Report on Form 10-K for the year ended
December 31, 1993, Commission File No. 1-4482).
(b) Agreement and Plan of Merger, dated as of June 24, 1994,
by and among Arrow Electronics, Inc., AFG Acquisition Company and Gates/FA
Distributing, Inc. (incorporated by reference to Exhibit 2 to the company's
Registration Statement on Form S-4, Commission File No. 35-54413).
(c) Agreement and Plan of Merger, dated as of September
21, 1994, by and among Arrow Electronics, Inc., MTA Acquisition Company and
Anthem Electronics, Inc. (incorporated by reference to Exhibit 2 to the
company's Registration Statement on Form S-4, Commission File No. 33-55645).
(d) Master Agreement, dated as of December 20, 1996, among
Premier Farnell plc and Arrow Electronics, Inc. relating to the sale and
purchase of the Farnell Volume Business (incorporated by reference to Exhibit
2(d) to the company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-4482).
(e) Agreement and Plan of Merger, dated as of September 30,
1998, by and among Arrow Electronics, Inc., Lear Acquisition Corp. and Richey
Electronics, Inc.
(i) Amendment to Agreement and Plan of Merger, dated as of
October 21, 1998 by and among Arrow Electronics, Inc., Lear Acquisition Corp.
and Richey Electronics, Inc.
(f) Agreement of Purchase and Sale, dated as of October 1,
1998, by and between Bell Industries, Inc. and Arrow Electronics, Inc.
(3)(a)(i) Restated Certificate of Incorporation of the company,
as amended (incorporated by reference to Exhibit 3(a) to the company's Annual
Report on Form 10-K for the year ended December 31, 1994 Commission File No. 1-
4482).
(ii) Certificate of Amendment of the Certificate of
Incorporation of Arrow Electronics, Inc., dated as of August 30, 1996
(incorporated by reference to Exhibit 3 to the company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, Commission File No. 1-4482).
(b) By-Laws of the company, as amended (incorporated by
reference to Exhibit 3(b) to the company's Annual Report on Form 10-K for the
year ended December 31, 1986, Commission File No. 1-4482).
(4)(a)(i) Rights Agreement dated as of March 2, 1988 between Arrow
Electronics, Inc. and Manufacturers Hanover Trust Company, as Rights Agent,
which includes as Exhibit A a Certificate of Amendment of the Restated
Certificate of Incorporation for Arrow Electronics, Inc. for the Participating
Preferred Stock, as Exhibit B a letter to shareholders describing the Rights and
a summary of the provisions of the Rights Agreement and as Exhibit C the forms
of Rights Certificate and Election to Exercise (incorporated by reference to
Exhibit 1 to the company's Current Report on Form 8-K dated March 3, 1988,
Commission File No. 1-4482).
(ii) First Amendment, dated June 30, 1989, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(b) to the
Company's Current Report on Form 8-K dated June 30, 1989, Commission File No. 1-
4482).
(iii) Second Amendment, dated June 8, 1991, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i)(iii) to
the company's Annual Report on Form 10-K for the year ended December 31, 1991,
Commission File No. 1-4482).
(iv) Third Amendment, dated July 19, 1991, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i)(iv) to
the company's Annual Report on Form 10-K for the year ended December 31, 1991,
Commission File No. 1-4482).
(v) Fourth Amendment, dated August 26, 1991, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i) (v) to
the company's Annual Report on Form 10-K for the year ended December 31, 1991,
Commission File No. 1-4482).
(vi) Fifth Amendment, dated February 25, 1998, to the Rights
Agreement in (4)(i)above (incorporated by reference to Exhibit 7 to the
company's current report on Form 8 A/A dated March 2, 1998, Commission File No.
1-4482).
(b)(i) Indenture, dated as of January 15, 1997, between the
company and the Bank of Montreal Trust Company, as Trustee (incorporated by
reference to Exhibit 4 (b)(i) to the company's Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 1-4482).
(ii) Officers' Certificate, as defined by the Indenture in
4(b)(i) above, dated as of January 22, 1997, with respect to the company's
$200,000,000 7% Senior Notes due 2007 and $200,000,000 7 1/2% Senior Debentures
due 2027 (incorporated by reference to Exhibit 4 (b)(ii) to the company's Annual
Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-
4482).
(iii) Officers' Certificate, as defined by the indenture in
4(b)(i) above, dated as of January 15, 1997, with respect to the $200,000,000 6
7/8% Senior Debentures due 2018, dated as of May 29, 1998.
(iv) Officers' Certificate, as defined by the indenture in
4(b)(i) above, dated as of January 15, 1997, with respect to the $250,000,000
6.45% Senior Notes due 2003, dated October 21, 1998.
(10)(a)(i) Arrow Electronics Savings Plan, as amended and restated
through December 28, 1994 (incorporated by reference to Exhibit 10(a)(iii) to
the company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, Commission File No. 1-4482).
(ii) Amendment No. 1, dated March 29, 1996, to the Arrow
Electronics Savings Plan in (10)(a)(i) above (incorporated by reference to
Exhibit 10(a)(iv) to the company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, Commission File No. 1-4482).
(iii) Second Amendment No. 1 to the Arrow Electronics Savings
Plan in (10)(a)(i) above.
(iv) Amendment No. 3 to the Arrow Electronics Savings Plan in
(10)(a)(i) above.
(v) Amendment No. 4 dated May 26, 1998 to the Arrow
Electronics Savings Plan in (10)(a)(i) above.
(vi) Arrow Electronics Stock Ownership Plan, as amended and
restated through December 28, 1994 (incorporated by reference to Exhibit
10(a)(i) to the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, Commission File No. 1-4482).
(vii) Amendment No. 1, dated March 29, 1996, to the Arrow
Electronics Stock Ownership Plan in (10)(a)(iii) above (incorporated by
reference to Exhibit 10(a)(ii) to the company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, Commission File No. 1-4482).
(viii) Second Amendment No. 1 to the Arrow Electronics Stock
Ownership Plan in (10)(b)(i).
(ix) Amendment No. 3 to the Arrow Electronics Stock Ownership
Plan in (10)(b)(i).
(x) Amendment No. 4 dated May 26, 1998, to the Arrow
Electronics Stock Ownership Plan in (10)(b)(i).
(b)(i) Employment Agreement, dated as of February 22, 1995,
between the company and Stephen P. Kaufman (incorporated by reference to Exhibit
10(c)(ii) to the company's Annual Report on Form 10-K for the year ended
December 31, 1995, Commission File No. 1-4482).
(ii) Employment Agreement, dated as of January 1, 1998
between the company and Robert E. Klatell. (incorporated by reference to Exhibit
10(c)(iii) to the company's Annual Report on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-4482).
(iii) Form of agreement between the company and the employees
parties to the Employment Agreements listed in 10(b)(i)-(iii) above providing
extended separation benefits under certain circumstances (incorporated by
reference to Exhibit 10(c)(iv) to the company's Annual Report on Form 10-K for
the year ended December 31, 1988, Commission File No. 1-4482).
(iv) Employment Agreement, dated as of March 1, 1999, between
the company and Sam R. Leno.
(v) Employment Agreement, dated as of January 1, 1998,
between the company and Betty Jane Scheihing (incorporated by reference to
Exhibit 10(c)(v) to the company's Annual Report on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-4482).
(vi) Employment Agreement, dated as of September 1, 1997,
between the company and Jan M. Salsgiver (incorporated by reference to Exhibit
10(c)(vi) to the company's Annual Report on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-4482).
(vii) Employment Agreement, dated as of September 1, 1997,
between the company and Francis M. Scricco (incorporated by reference to Exhibit
10(c)(vi) to the company's Annual Report on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-4482).
(viii) Employment Agreement, dated as of April 15, 1996,
between the company and Gerald Luterman (incorporated by reference to Exhibit
10(c)(vi) to the company's Annual Report on Form 10-K for the year ended
December 31, 1997, Commission File No. 1-4482).
(ix) Employment Agreement, dated as of September 21, 1994,
between the company and Robert S. Throop (incorporated by reference to Exhibit
10(c)(x) to the company's Annual Report on Form 10-K for the year ended December
31, 1994, Commission File No. 1-4482).
(x) Employment Agreement, dated as of September 1, 1994
between the company and Steven W. Menefee (incorporated by reference to Exhibit
10(c)(v) to the company's Annual Report on Form 10-K for the year ended December
31, 1994, Commission File No. 1-4482).
(xi) Form of agreement between the company and all corporate
Vice Presidents, including the employees parties to the Employment Agreements
listed in 10(b)(v)-(x) above, providing extended separation benefits under
certain circumstances (incorporated by reference to Exhibit 10(c)(ix) to the
company's Annual Report on Form 10-K for the year ended December 31, 1988,
Commission File No. 1-4482).
(xii) Form of agreement between the company and non-corporate
officers providing extended separation benefits under certain circumstances
(incorporated by reference to Exhibit 10(c)(x) to the company's Annual Report on
Form 10-K for the year ended December 31, 1988, Commission File No. 1-4482).
(xiii) Unfunded Pension Plan for Selected Executives of Arrow
Electronics, Inc., as amended (incorporated by reference to Exhibit 10(c)(xiii)
to the company's Annual Report on Form 10-K for the year ended December 31,
1994, Commission File No. 1-4482).
(xiv) Amendment, dated May 1998, to the Unfunded Pension Plan
for Selected Executives of Arrow Electronics, Inc.
(xv) Grantor Trust Agreement, dated June 25, 1998, by and
between Arrow Electronics, Inc. and Wachovia Bank, N.A.
(xvi) English translation of the Service Agreement, dated
January 19, 1993, between Spoerle Electronic and Carlo Giersch (incorporated by
reference to Exhibit 10(f)(v) to the company's Annual Report on Form 10-K for
the year ended December 31, 1992, Commission File No. 1-4482).
(c)(i) Senior Note Purchase Agreement, dated as of December 29,
1992, with respect to the company's 8.29 percent Senior Secured Notes due 2000
(incorporated by reference to Exhibit 10(d) to the company's Annual Report on
Form 10-K for the year ended December 31, 1992, Commission File No. 1-4482).
(ii) First Amendment, dated as of December 22, 1993, to the
Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to
Exhibit 10(d)(ii) in the company's Annual Report on form 10-K for the year ended
December 31, 1993, Commission File No. 1-4482).
(iii) Second Amendment, dated as of April 24, 1995, to the
Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to
Exhibit 10(c)(iii) in the company's Annual Report on form 10-K for the year
ended December 31, 1996, Commission File No. 1-4482).
(iv) Third Amendment, dated as of December 23, 1996, to the
Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to
Exhibit 10(c)(iv) in the company's Annual Report on form 10-K for the year ended
December 31, 1996, Commission File No. 1-4482).
(v) Fourth Amendment, dated as of October 28, 1998, to the
Senior Note Purchase Agreement in 10(c)(i).
(d)(i) Amended and Restated Credit Agreement, dated as of
August 16, 1995 among Arrow Electronics, Inc., the several Banks from time to
time parties hereto, Bankers Trust Company and Chemical Bank, as agents
(incorporated by reference to Exhibit 10(d) in the company's Annual Report on
form 10-K for the year ended December 31, 1995, Commission File No. 1-4482).
(ii) First Amendment, dated as of September 30, 1996, to the
Arrow Electronics, Inc. Second Amended and Restated Credit Agreement, dated
August 16, 1995 in (10)(d)(i) above (incorporated by reference to Exhibit 10 to
the company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, Commission File No. 1-4482).
(e)(i) Arrow Electronics, Inc. Stock Option Plan, as amended
and restated, effective as of May 15, 1997 (incorporated by reference to 99(a)
to the company's Registration Statement on Form S-8, Registration No. 333-
45631).
(ii) Form of Stock Option Agreement under (e)(i) above
(incorporated by reference to Exhibit 10(e)(ii)in the company's Annual Report on
form 10-K for the year ended December 31, 1997, Commission File No. 1-4482).
(iii) Form of Nonqualified Stock Option Agreement under (e)(i)
above (incorporated by reference to Exhibit 10(k)(iv) to the company's
Registration Statement on Form S-4, Registration No. 33-17942).
(f)(i) Restricted Stock Plan of Arrow Electronics, Inc., as
amended and restated effective May 15, 1997 (incorporated by reference to
Exhibit 99(b) to the company's Registration Statement on Form S-8, Registration
No. 333-45631).
(ii) Form of Restricted Stock Award Agreement under (f)(i)
above (incorporated by reference to Exhibit 10(f)(ii) to the company's Annual
Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-
4482).
(g)(i) Non-Employee Directors Stock Option Plan as of May 15,
1997 (incorporated by reference to Exhibit 99(c) to the company's Registration
Statement on Form S-8, Registration No.333-45631).
(ii) Form of Nonqualified Stock Option Agreement under
10(g)(i) above (incorporated by reference to Exhibit 10(g)(ii) to the company's
Annual Report on Form 10-K for the year ended December 31, 1997, Commission File
No. 1-4482).
(h) Non-Employee Directors Deferral Plan as of May 15, 1997
(incorporated by reference to Exhibit 99(d) to the Company's Registration
Statement on Form S-8, Registration No. 333-45631).
(i) Form of Indemnification Agreement between the company
and each director (incorporated by reference to Exhibit 10(m) to the company's
Annual Report on Form 10-K for the year ended December 31, 1986, Commission File
No. 1-4482).
(11) Statement Re: Computation of Earnings Per Share.
(21) List of Subsidiaries.
(23) Consent of Ernst & Young LLP.
(28)(i) Record of Decision, issued by the EPA on September 28,
1990, with respect to environmental clean-up in Plant City, Florida
(incorporated by reference to Exhibit 28 to the company's Annual Report on Form
10-K for the year ended December 31, 1990, Commission File No. 1-4482).
(ii) Consent Decree lodged with the U.S. District Court for the
Middle District of Florida, Tampa Division, on December 18, 1991, with respect
to environmental clean-up in Plant City, Florida (incorporated by reference to
Exhibit 28(ii) to the company's Annual Report on Form 10-K for the year ended
December 31, 1991, Commission File No. 1-4482).
14(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the following Current
Reports on Form 8-K were filed:
Date of Report
(Date of Earliest Event Reported) Items Reported
-------------------------------- --------------
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-45631, No. 33-55565, No. 33-66594, No. 33-48252, No. 33-20428
and No. 2-78185) and in the related Prospectuses pertaining to the employee
stock plans of Arrow Electronics, Inc., in Amendment No. 1 to the Registration
Statement (Form S-3 No. 333-19431) and in the related Prospectus pertaining to
the registration and issuance of the senior notes and senior debentures of Arrow
Electronics, Inc., in Amendment No. 1 to the Registration Statement (Form S-3
No. 33-54473) and in the related Prospectus pertaining to the registration of
1,376,843 shares of Arrow Electronics, Inc. Common Stock, in Amendment No. 1 to
the Registration Statement (Form S-3 No. 33-67890) and in the related Prospectus
pertaining to the registration of 1,009,086 shares of Arrow Electronics, Inc.
Common Stock, and in Amendment No. 1 to the Registration Statement (Form S-3 No.
33-42176) and in the related Prospectus pertaining to the registration of up to
944,445 shares of Arrow Electronics, Inc. Common Stock held by Aquarius
Investments Ltd. and Andromeda Investments Ltd. of our report dated February 17,
1999 with respect to the consolidated financial statements and schedule of Arrow
Electronics, Inc. included in this Annual Report on Form 10-K for the year ended
December 31, 1998.
ERNST & YOUNG LLP
New York, New York
March , 1999
ARROW ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the three years ended December 31, 1998
Additions
Balance at Balance
beginning Charged Charged at end
of year to income to other (1) Write-offs of year
---------- --------- ----------- ---------- --------
Allowance for
doubtful accounts
1998 $46,055,000 $31,643,000 $ 542,000 $29,817,000 $48,423,000
=========== =========== ========== =========== ===========
1997 $39,753,000 $20,360,000 $1,896,000 $15,954,000 $46,055,000
=========== =========== ========== =========== ===========
1996 $38,670,000 $15,495,000 $ - $14,412,000 $39,753,000
=========== =========== ========== =========== ===========
(1) Represents the allowance for doubtful accounts of the businesses acquired by
the company during each year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARROW ELECTRONICS, INC.
By: /s/ Robert E. Klatell
-----------------------
Robert E. Klatell.
Executive Vice President
March 30, 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 and on the dates indicated:
By: /s/ Stephen P. Kaufman March 30, 1999
-------------------------------------------
Stephen P. Kaufman, Chairman, Principal
Executive Officer, and Director
By: /s/ Robert E. Klatell March 30, 1999
-------------------------------------------
Robert E. Klatell, Executive Vice President,
Secretary, and Director
By: /s/ Sam R. Leno March 30, 1999
--------------------------------------------
Sam R. Leno, Senior Vice President and Chief
Financial Officer
By: /s/ Paul J. Reilly March 30, 1999
--------------------------------------------
Paul J. Reilly, Vice President, Controller
and Principal Accounting Officer
By: /s/ Daniel W. Duval March 30, 1999
--------------------------------------------
Daniel W. Duval, Director
By: /s/ Carlo Giersch March 30, 1999
--------------------------------------------
Carlo Giersch, Director
By: /s/ John N. Hanson March 30, 1999
--------------------------------------------
John N. Hanson, Director
By: /s/ Roger King March 30, 1999
--------------------------------------------
Roger King, Director
By: /s/ Karen Gordon Mills March 30, 1999
--------------------------------------------
Karen Gordon Mills, Director
By: /s/ Barry W. Perry March 30, 1999
--------------------------------------------
Barry W. Perry, Director
By: /s/ Richard S. Rosenbloom March 30, 1999
--------------------------------------------
Richard S. Rosenbloom, Director
By: /s/ Robert S. Throop March 30, 1999
--------------------------------------------
Robert S. Throop, Director
By: /s/ John C. Waddell March 30, 1999
--------------------------------------------
John C. Waddell, Director