Item 1. Business. -------- Arrow Electronics, Inc. (the "company"), incorporated in New York in 1946, 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 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 largest electronics markets - the Americas, Europe, and the Asia/Pacific region. The company serves a diversified base of original equipment manufacturers (OEMs), contract manufacturers (CM's), 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 225 sales facilities and 23 distribution centers in 39 countries. Through this network, the company can offer one of the broadest line cards in the industry and a wide range of value-added services to help customers reduce their time to market, lower their total cost of ownership, and enhance their overall competitiveness.
The company continues to lead the electronics distribution industry by forging alliances around the world. In April 2000, the company acquired Tekelec Europe ("Tekelec"), one of Europe's leading distributors of high-tech components and systems. The company acquired a majority interest in the electronics distribution business of Rapac Electronics Ltd. ("Rapac"), one of the leading distribution groups in Israel, in May 2000. In June 2000, the company acquired Jakob Hatteland Electronic AS ("Hatteland"), one of the Nordic region's leading distributors of electronic components. In addition, the company acquired a majority interest in Dicopel S.A. de C.V. ("Dicopel"), one of the largest distributors in Mexico, in July 2000. In October 2000, the company acquired Wyle Components and Wyle Systems (collectively, "Wyle"), part of the electronics distribution businesses of E.ON AG (formerly VEBA AG) and the open computing alliance subsidiary of Merisel, Inc. ("MOCA"), one of the leading distributors of Sun Microsystems products. The company also increased its holdings in both Silverstar Ltd., S.p.A. and Consan Incorporated to 100 percent and acquired an additional 6 percent interest in Scientific and Business Minicomputers, Inc.
The company has made strategic investments in selected Internet start-ups, in addition to its own Internet venture, arrow.com, to tap into certain market segments not reached today. In January 2000, the company acquired an interest in Viacore, Inc., a service provider of an eBusiness hub for business processes between trading partners in the information technology supply chain. In April 2000, the company acquired an interest in eConnections, an internet company which provides supply chain partners with integrated, independent, and custom-tailored solutions to improve communications, cut costs, and enhance margins. In June 2000, the company acquired an interest in Buckaroo.com, an Internet marketplace for the DRAM industry. In October 2000, QuestLink Technology, Inc. and ChipCenter LLC, two e-commerce companies the company had previously invested in, agreed to be merged to form eChips, a sales and marketing channel that serves the global electronics engineering and purchasing communities.
During the fourth quarter of 1999 Arrow introduced arrow.com PRO-Series, a suite of on-line supply chain management tools. PRO-Series gives customers Internet-based, 24 hour access to the company's inventory plus the ability to place, modify, monitor, and manage every order on-line.
The Americas Components is comprised of targeted sales and marketing groups providing tailored solutions to nine distinct customer segments. The Americas Components offers one of the broadest line cards in the industry.
North American Computer Products ("NACP"), formerly Gates/Arrow Distributing, Inc., is a full-line technical distributor of computer systems, peripherals, and software to value-added resellers in the U.S. and Canada.
The company is one of the largest Pan-European electronics components distributor as well as the largest electronics distributor in Northern, Central and Southern Europe. In its Northern European region, the company serves Denmark, Estonia, Finland, Ireland, Norway, Sweden, and the United Kingdom. In its Central European region, the company serves Austria, Belgium, the Czech Republic, Germany, Hungary, the Netherlands, Poland, Slovenia, and Switzerland, and in its Southern European region the company serves France, Greece, Israel, Italy, Portugal, Spain, and Turkey.
The company is the largest electronics distributor in the Asia/Pacific region. Arrow/Components Agent Limited ("CAL"), Arrow/Strong Electronics ("Strong"), and Arrow/Australia are the region's leading multi-national distributors. CAL, headquartered in Hong Kong, maintains additional facilities in key cities in Singapore, Malaysia, the People's Republic of China, India, Thailand, the Philippines, and South Korea. Strong, headquartered in Taipei, serves customers in Taiwan, South Korea, Singapore, Thailand, 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 64 percent of the company's consolidated sales are comprised of semiconductor products; industrial and commercial computer products, including servers, workstations, storage products, microcomputer boards and systems, design systems, desktop computer systems, terminals, printers, controllers, and communication control equipment, account for about 20 percent; and the remaining sales are of passive, electromechanical, and interconnect products, principally capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors.
The financial information about the company's reportable segments and foreign and domestic operations can be found in Note 12 of the Notes to Consolidated Financial Statements.
Most manufacturers of electronic components and computer products rely on authorized distributors, such as the company, to augment their sales and 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, accounts receivable systems, and distribution networks), 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 accessing from a single source multiple products from multiple suppliers 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 200,000 industrial and commercial customers. Industrial customers range from major OEMs and CMs to small engineering firms, while commercial customers include principally VARs and OEMs.
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 5 percent of the company's 2000 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 international operations have similar on-line, real-time computer systems and they can access Arrow's Worldwide Stock Check System, which provides access to the company's on-line, real-time inventory system.
There are over 600 manufacturers whose products are sold by the company. Altera Corporation accounted for approximately 10 percent of the business' 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 71 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 12,200 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 - ---- --- -----------------------
Stephen P. Kaufman 59 Chairman Francis M. Scricco 51 President and Chief Executive Officer Robert E. Klatell 55 Executive Vice President, General Counsel, and Secretary Sam R. Leno 55 Senior Vice President and Chief Financial Officer Betty Jane Scheihing 52 Senior Vice President Steven W. Menefee 55 Senior Vice President and President of Arrow Asia Arthur H. Baer 54 Vice President and President of Arrow Europe Jan M. Salsgiver 44 Vice President and President of the Americas Components Michael J. Long 42 Vice President and President of North American Computer Products
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 of the company since May 1994. In addition, he served as Chief Executive Officer from September 1986 to July 2000.
Francis M. Scricco has been Chief Executive Officer since July 2000 and President since June 1999. From September 1997 through July 2000 he served as Chief Operating Officer. Prior thereto he was Executive Vice President since August 1997. From March 1994 through August 1997 he was a Group President at Fischer Scientific International, Inc.
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 October 1990 to April 1996.
Sam R. Leno has been Senior Vice President and Chief Financial Officer since March 1999. From July 1995 through February 1999, he served as Executive Vice President and Chief Financial Officer of Corporate Express, Inc.
Betty Jane Scheihing has been a Senior Vice President since May 1996 and served as a Vice President of the company for more than five years prior thereto.
Steven W. Menefee has been a Senior Vice President of the company since July 1995 and served as a Vice President of the company for more than five years prior thereto. In addition, he was appointed President of Arrow Asia in September 1998.
Arthur H. Baer was named President of Arrow Europe and a Vice President of the company in January 2000. Prior to joining the company, he was President of Hudson Valley Publishing, Inc. from February 1998 through December 1999 and President of Xyan, Inc. from April 1996 through February 1998. Prior thereto, he served as Dean of the College of Business Administration at Drexel University from May 1993 through April 1996.
Jan M. Salsgiver has been President of the Americas Components since July 1999. Prior thereto, she served as 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. In addition, she has been a Vice President of the company for more than five years.
Michael J. Long has been President and Chief Operating Officer of NACP since July 1999. In addition, he has been a Vice President of the company for more than five years and President of Gates/Arrow Distributing since November 1995.
Item 2.
Item 2. Properties. ----------
The company owns and leases sales offices, distribution centers, and administrative facilities worldwide. The company's executive office, a 132,000 square foot facility in Melville, New York, is owned by the company. Including the executive office, eighteen locations are owned throughout the Americas, Europe, and Asia, and another facility has been sold and leased back in connection with the financing thereof. The company occupies over 290 additional locations under leases due to expire on various dates to 2053. The company believes its facilities are well maintained and suitable for company operations.
Item 3.
Item 3. Legal Proceedings. -----------------
The environmental remediation of a "superfund site" the company owns (as the result of the discontinued lead-refining operations of a subsidiary formerly owned by the company) has been completed pursuant to the terms of a consent decree with U.S. EPA and the State of Florida. Removal of the site from the National Priorities List is expected shortly. Long-term monitoring activities at the site for which the company remains responsible are not expected to have a material adverse impact on the company's liquidity, resources, or results.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
None.
PART II
Item 5.
Item 5. Market Price of the Registrant's Common Equity and 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 2000 and 1999 were as follows:
Year High Low - ---- ---- ---
2000: Fourth Quarter $37-3/16 $22-1/16 Third Quarter 39-7/8 30-3/8 Second Quarter 46 28-1/4 First Quarter 37-1/2 20-1/2
1999: Fourth Quarter $26-1/2 $14-3/4 Third Quarter 23-1/8 16-5/8 Second Quarter 19-7/8 14-5/8 First Quarter 26-9/16 13-3/16
Holders
On March 2, 2001, there were approximately 3,200 shareholders of record of the company's common stock.
Dividend History
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.
Item 6.
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.
Item 7.
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 annual report.
Sales
Consolidated sales of $13 billion in 2000 were 39 percent higher than 1999 sales of $9.3 billion. This sales increase was driven by a 61 percent growth in the sales of core components and acquisitions offset, in part, by foreign exchange rate differences, fewer sales of low margin microprocessors (a product segment not considered a part of the company's core business), and market conditions for computer products. Excluding the impact of acquisitions, foreign exchange rate differences, and lower microprocessor sales, sales increased by 34 percent over the prior year.
In 1999, consolidated sales increased to $9.3 billion. This 12 percent sales growth over 1998 was principally due to growth in the worldwide core components operations and acquisitions offset, in part, by fewer sales of low margin microprocessors and foreign exchange rate differences. Excluding the impact of acquisitions, foreign exchange rate differences, and lower microprocessor sales, consolidated revenue increased by 8 percent over the prior year and sales of core components increased by 10 percent. Sales of commercial computer products increased marginally over 1998's level due principally to softening demand and lower average selling prices, offset by increasing unit shipments, as a result of market conditions.
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 an approximate $700 million increase in sales of commercial computer products. 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.
Operating Income
Operating income increased to $784.1 million in 2000, compared to $363.2 million in 1999, excluding the integration charge of $24.6 million associated with the acquisition and integration of Richey Electronics, Inc. ("Richey") and the electronics distribution group of Bell Industries, Inc. ("EDG"). This increase in operating income was a result of increased sales in the core components businesses around the world and increased gross profit margins, as well as the full year impact of cost savings resulting from the integration of Richey and EDG offset, in part, by lower sales of computer products and increased spending in the company's Internet business. Operating expenses as a percentage of sales were 9.6 percent, the lowest in the company's history.
In 1999, the company's consolidated operating income decreased to $338.7 million from $352.5 million in 1998, principally as a result of the special charge of $24.6 million. Excluding this integration charge, operating income was $363.2 million. Operating income, excluding the integration charge, increased as a result of higher sales, improved gross profit margins in the core components operations in the latter part of 1999, and improved operating efficiencies resulting from the integration of Richey and EDG into the company offset, in part, by lower gross profit margins in the computer products operations, increased non-cash amortization expense associated with goodwill, investments made in systems, including the Internet, and personnel to support anticipated increases in business activities.
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 components business in North America, 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.
Interest Expense
Interest expense of $171.3 million in 2000 increased by $65 million from 1999 as a result of increases in borrowings to fund the company's acquisitions, working capital requirements, capital expenditures, and investments in Internet joint ventures.
In 1999, interest expense increased to $106.3 million from $81.1 million in 1998, reflecting both increases in borrowings to fund acquisitions and investments in working capital.
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.
Income Taxes
The company recorded a provision for taxes at an effective tax rate of 40.7 percent in 2000 compared with 43 percent, excluding the integration charge, in 1999. The lower rate for 2000 is due to the company's significantly increased operating income, which lowered the negative effect of non- deductible goodwill amortization on the company's effective tax rate.
In 1999, the company recorded a provision for taxes at an effective tax rate of 43 percent, excluding the integration charge, compared with 42.2 percent in 1998. The increased rate for 1999 is due to the non-deductibility of goodwill amortization.
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.
Net Income
Net income in 2000 was $357.9 million, an increase from $124.2 million in 1999 ($140.6 million excluding the integration charge). The increase in net income is a result of increased sales, improved gross profit margins, and continued expense control offset, in part, by higher levels of interest expense.
In 1999, the company's net income decreased to $124.2 million from $145.8 million in 1998. Excluding the integration charge, net income was $140.6 million. The decrease in net income, excluding the integration charge, was primarily attributable to an increase in operating income and a decrease in minority interest, offset by an increase in interest expense.
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.
Liquidity and Capital Resources
The company maintains a significant investment in accounts receivable and inventories. Consolidated current assets, as a percentage of total assets, were approximately 76 percent and 70 percent in 2000 and 1999, respectively.
In 2000, working capital increased by 74 percent, or $1.36 billion, compared with 1999. Excluding the impact of acquisitions, working capital increased by 28 percent, or $508 million, due to increased sales and higher working capital requirements.
The net amount of cash used for operating activities in 2000 was $336.4 million, principally resulting from increased accounts receivable and inventories offset, in part, by increased payables and earnings for the year. The net amount of cash used for investing activities was $1.4 billion, including $1.2 billion primarily for the acquisitions of Wyle Electronics and Wyle Systems (collectively, "Wyle"), the open computing alliance subsidiary of Merisel, Inc. ("MOCA"), Jakob Hatteland Electronic AS ("Hatteland"), and Tekelec Europe ("Tekelec"), and $80.2 million for various capital expenditures. The net amount of cash provided by financing activities was $1.7 billion, primarily reflecting the issuance of senior debentures, borrowings under the company's commercial paper program, and various short-term borrowings.
In February 2001, the company entered into a 364-day $625 million credit facility which expires in February 2002 and a three-year revolving credit agreement providing up to $625 million of available credit. These credit facilities replaced the previously existing 364-day credit facility and the global multi-currency credit facility.
In addition, during the first quarter of 2001, the company completed the sale of $1.5 billion principal amount at maturity of zero coupon convertible senior debentures (the "convertible debentures") due February 21, 2021. The convertible debentures were priced with a yield to maturity of 4% per annum and may be converted into the company's common stock at a conversion price of $37.83 per share. The company may redeem all or part of the convertible debentures at any time on or after February 21, 2006. Holders of the convertible debentures may require the company to repurchase the debentures on February 21, 2006, 2011, or 2016. The net proceeds resulting from this transaction of approximately $672 million were used to repay short-term debt.
Working capital increased by $138 million, or 8 percent, in 1999 compared with 1998. This increase was due to increased sales, higher working capital requirements, and acquisitions.
The net amount of cash used for the company's operating activities in 1999 was $33.5 million, principally reflecting increased customer receivables due to accelerated sales growth in the fourth quarter offset, in part, by earnings for the year. The net amount of cash used for investing activities was $543.3 million, including $459.1 million for the acquisitions of Richey, EDG, Industrade AG, interests in the Elko Group and Panamericana Comercial Importadora, S.A., the remaining interests in Spoerle Electronic and Support Net, Inc., and an additional interest in Scientific and Business Minicomputers, Inc. (SBM), as well as certain Internet-related investments, and $84.2 million for various capital expenditures. The net amount of cash provided by financing activities was $479.1 million, reflecting borrowings under the company's commercial paper program, the issuance of the company's floating rate notes, and credit facilities offset, in part, by the repayment of Richey's 7% convertible subordinated notes and debentures, 8.29% senior debentures, and distributions to partners.
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.
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 electronic components and commercial computer products 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 7A.
Item 7A. Market and Other Risks. ----------------------
The company is exposed to market risk from changes in foreign currency exchange rates and interest rates.
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, the Asia/Pacific region, and Latin and South America. At the present time, the company hedges only those currency exposures for which natural hedges do not exist. Anticipated foreign currency cash flows and earnings and investments in businesses in Europe, the Asia/Pacific region, and Latin and South America are not hedged as in many instances there are natural offsetting positions. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Had the various average foreign currency exchange rates remained the same during 2000 as compared with 1999, 2000 sales and operating income would have been $466 million and $44 million higher, respectively, than the actual results for 2000.
The company's interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company manages its exposure to interest rate risk through the proportion of fixed rate and variable rate debt in its total debt portfolio. At December 31, 2000, approximately 48 percent of the company's debt was subject to fixed rates and 52 percent of its debt was subject to variable rates. Interest expense would fluctuate by approximately $12 million if average interest rates had changed by one percentage point in 2000. 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.
Item 8.
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, 2000 and 1999, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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.
/s/ ERNST & YOUNG LLP
New York, New York February 13, 2001, except for paragraph 11 of Note 4, as to which date is March 1, 2001
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.
/s/ Francis M. Scricco - ---------------------- Francis M. Scricco President and Chief Executive Officer
/s/ Sam R. Leno - --------------- Sam R. Leno Senior Vice President and Chief Financial Officer
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. 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, Plant and Equipment - -----------------------------
Property, plant and equipment are stated at cost. 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. Long-lived assets are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.
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 over periods of 20 to 40 years. Management reassesses the carrying value and remaining life of the excess cost over fair value of net assets of companies acquired on an ongoing basis. Whenever events indicate that the carrying values are impaired, the excess cost over fair value of those assets is adjusted appropriately. As of December 31, 2000, management believes there is no impairment with respect to these assets.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation - ----------------------------
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.
Earnings Per Share ("EPS") - --------------------------
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 - --------------------
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 Reporting - -----------------
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The company's operations are classified into two reportable business segments, the distribution of electronic components and the distribution of computer products.
Revenue Recognition - -------------------
The company recognizes revenue when customers' orders are shipped.
Software Development Costs - --------------------------
The company capitalizes certain costs incurred in connection with developing or obtaining software for internal use. The company capitalized $21,945,000 and $23,933,000 of computer software costs in 2000 and 1999, respectively. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally three years.
Reclassification - ----------------
Certain prior year amounts have been reclassified to conform with current year presentation.
Impact of Recently Issued Accounting Standards - ----------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." As its effective date was deferred, the company will adopt the new Statement as of January 1, 2001. The Statement will require the company to recognize all derivatives on the balance sheet at fair value. Gains and losses resulting from changes in the value of the derivatives would be accounted for depending on the intended use of the derivative and whether it qualifies for hedge accounting. Due to the company's limited use of derivative financial
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments, adoption of Statement No. 133 is not expected to have a significant effect on the company's consolidated results of operations or financial position.
2. Acquisitions
During 2000, the company acquired California-based Wyle Electronics and Wyle Systems (collectively, "Wyle"), part of the electronics distribution businesses of Germany-based E.ON AG (formerly VEBA AG), and the open computing alliance subsidiary of Merisel, Inc. ("MOCA"), one of the leading distributors of Sun Microsystems products in North America. In addition, the company acquired Tekelec Europe ("Tekelec"), one of Europe's leading distributors of high-tech components and systems, and Jakob Hatteland Electronic AS ("Hatteland"), one of the Nordic region's leading distributors of electronic components. The company also acquired a majority interest in the electronics distribution business of Rapac Electronics Ltd., one of the leading electronics distribution groups in Israel, and Dicopel S.A. de C.V., one of the largest electronic distributors in Mexico. The company increased its holdings in both Silverstar Ltd. S.p.A. and Consan Incorporated to 100 percent, and acquired an additional 6 percent interest in Scientific and Business Minicomputers, Inc. ("SBM"). The aggregate cost of these acquisitions was $1,249,015,000, which includes 775,000 shares of the company's common stock valued at $27,754,000.
A summary of the allocation of the aggregate consideration paid for the aforementioned acquisitions, excluding amounts paid for increases in majority holdings, to the fair market value of assets acquired and liabilities assumed is as follows (in thousands):
Current assets: Accounts receivable, net of allowance for doubtful accounts of $55,192 $697,847 Inventories 595,282 Other 32,389 $1,325,518 --------
Property, plant and equipment 101,812 Cost in excess of net assets of companies acquired 348,764 Other assets 25,238 ---------- $1,801,332 ---------- Current liabilities: Accounts payable $306,831 Accrued expenses 164,883 $ 471,714 --------
Long-term debt 65,522 Other 27,876 ---------- $ 565,112 ---------- Net consideration paid $1,236,220 ==========
Set forth below is the unaudited pro forma combined summary of operations for the years ended December 31, 2000 and 1999 as though the acquisitions made during 2000 and 1999 occurred on January 1, 1999 (in thousands except per share data):
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999(a) ---- ------- Sales $15,943,194 $12,638,457 Operating income 907,923 402,174 Earnings before income taxes and minority interest 655,392 189,987 Net income 385,418 93,590
Per common share: Basic $3.97 $.98 Diluted 3.89 .97
Average number of common shares outstanding: Basic 97,058 95,898 Diluted 99,184 96,820
(a) Excluding the charge associated with the acquisition and integration of Richey Electronics, Inc. ("Richey") and the electronics distribution group of Bell Industries, Inc. ("EDG"), pro forma operating income, income before income taxes and minority interest, net income, and earnings per share on a basic and diluted basis would have been $426,700,000, $214,500,000, $110,100,000, $1.15, and $1.14, respectively.
The unaudited pro forma combined summary of operations does not purport to be indicative of the results which actually would have been obtained if the acquisitions had been made at the beginning of 1999 or of those results which may be obtained in the future. The company has achieved costs savings from the acquisition of Richey and EDG and expects to achieve further substantial cost savings from the combination of its acquisitions. The anticipated cost savings have not been reflected in the unaudited pro forma combined summary of operations. In addition, the unaudited pro forma combined summary does not reflect any sales attrition which may result from the combinations.
The unaudited pro forma combined summary of operations includes the effects of the additional interest expense on debt incurred in connection with the acquisitions as if the debt had been outstanding from the beginning of the periods presented. In addition, the summary of operations includes amortization of the cost in excess of net assets of companies acquired in connection with the acquisitions as if they had been acquired from the beginning of the periods presented.
In 2000, the company recorded $31,354,000 as cost in excess of net assets of companies acquired to integrate Wyle into the company. Of the amount recorded, $9,770,000 represented costs associated with the closing of various office facilities and distribution and value-added centers, $7,390,000 represented costs associated with severance and other personnel costs, $7,890,000 represented professional fees principally related to investment banking and legal and accounting services, and $6,304,000 represented costs associated with outside services related to the conversion of systems and certain other costs of the integration of Wyle into the company. Of the total amount recorded, $9,109,000 has been spent to date. Approximately $6,900,000 of the remaining amount relates to severance and other personnel costs to be paid in 2001, $9,500,000 relates to vacated facilities leased with expiration dates through 2005, and the balance relates to various license and maintenance agreement obligations, with various expiration dates through 2003, and other costs associated with the integration of Wyle into the company. In the first quarter of 2001, the company expects to record a special charge of not more than $10,000,000 before taxes related to the integration of Wyle into the company.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2000, the company made additional payments of $2,365,000, which have been capitalized as cost in excess of net assets of companies acquired.
During 1999, the company acquired Richey, a leading specialty distributor of interconnect, electromechanical, and passive electronic components and provider of related value-added services to customers throughout North America, and EDG, one of the ten largest distributors of electronic components in North America. In addition, during 1999 the company acquired a two-thirds interest in Panamericana Comercial Importadora, S.A., the largest distributor of electronic components in Brazil, and a 70 percent interest in the Elko Group, the largest distributor of electronic components in Argentina. The company also increased its holdings in Spoerle Electronic Handelsgesellschaft mbH ("Spoerle") and Support Net, Inc. to 100 percent and acquired an additional 4 percent interest in SBM. Also during 1999 Spoerle acquired Industrade AG, one of Switzerland's leading distributors of electronic components and related products. The aggregate cost of these acquisitions was $428,969,000.
In 1999, the company recorded a special charge of $24,560,000 related to the acquisition and integration of Richey and EDG. The company also recorded an additional $38,241,000, as adjusted, as cost in excess of net assets of companies acquired. Of the total amount recorded, $30,301,000 represented costs associated with the closing of various office facilities and distribution and value-added centers, $12,442,000 represented costs associated with severance and other personnel costs, $14,662,000 represented costs associated with outside resources related to the conversion of systems, professional fees principally related to legal and accounting services, and certain other costs of the integration of these businesses into the company, and $5,396,000 represented the write-down of inventories to estimated fair value and supplier termination costs. Of the expected $54,700,000 to be spent in cash in connection with the acquisition and integration of Richey and EDG, $33,090,000 has been spent to date. The remaining $21,610,000 principally relates to vacated facilities leased with various expiration dates through 2010.
It is not anticipated that the integration related items will have a significant impact upon cash flow in any one particular year.
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. The preliminary purchase price allocations for the 2000 acquisitions are subject to adjustment in 2001 when finalized. For financial reporting purposes, the acquisitions are accounted for as purchase transactions in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the consolidated results of the company in 2000 include these companies from their respective dates of acquisition. The aggregate consideration paid for all acquisitions exceeded the net assets acquired by $356,488,000 and $303,326,000 in 2000 and 1999, respectively.
3. Investments
During 2000, the company entered into three new e-commerce ventures. At December 31, 2000, the company held an interest in eConnections, which serves suppliers, distributors, OEMs, and other members of the electronics supply chain continuum by providing them with integrated, independent, and custom-tailored solutions, improving communications, cutting costs, and enhancing margins. In addition, the company acquired an interest in Viacore, Inc., an eBusiness service provider of a reliable and transparent eBusiness hub for business processes between trading partners in the information technology
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
supply chain, and an interest in Buckaroo.com, an Internet marketplace for the DRAM industry. These investments are accounted for using the cost method.
In October 2000, QuestLink Technology, Inc. and ChipCenter LLC, two e-commerce companies the company had previously invested in, agreed to be merged to form eChips, a sales and marketing channel that serves the global electronics engineering and purchasing communities. This investment is accounted for using the equity method.
During 1999, the company acquired an interest in VCE Virtual Chip Exchange, Inc. ("VCE"), an Internet marketplace for electronic components. VCE matches buyers with sellers and provides its members with supporting services such as real-time market availability and pricing information by device type or technology. This investment is accounted for using the equity method. The company also acquired an interest in QuestLink Technology, Inc., a technical design resource for engineers and an interest in Technologies Interactives Mediagrif Inc. These investments are accounted for using the cost method.
In addition, the company has a 50 percent interest in Marubun/Arrow, a joint venture with Marubun Corporation, Japan's largest independent components distributor and a 50 percent interest in Altech Industries (Pty) Ltd., a joint venture with Allied Technologies Limited, a South African electronics distributor. These investments are accounted for using the equity method.
4. Debt
During 2000, the company's revolving credit agreement (the "global multi-currency credit agreement"), as then amended, provided up to $650,000,000 of available credit with a maturity date of September 2001. The interest rate for loans under this facility was at the applicable eurocurrency rate (6.56125% for U.S. dollar denominated loans at December 31, 2000) plus a margin of .225%. The company pays the banks a facility fee of .125% per annum.
In March 2000, the company entered into a 364-day $550,000,000 credit facility which expires in March 2001. There were no outstanding borrowings under this facility at December 31, 2000.
In October 2000, the company issued the following series of senior debentures to finance the acquisition of Wyle, with the proceeds in excess of the applicable purchase price utilized for general corporate purposes (in thousands):
Floating rate notes, due 2001 $200,000 8.2% senior debentures, due 2003 425,000 8.7% senior debentures, due 2005 250,000 9.15% senior debentures, due 2010 200,000
The floating rate notes bear interest at LIBOR plus 1% with interest payable on a quarterly basis.
In December 2000, the company entered into a $400,000,000 short-term credit facility scheduled to mature on March 19, 2001 which, under certain conditions, could be extended at the company's option to June 19, 2001.
In November 1999, the company established a commercial paper program, providing for the issuance of up to $1,000,000,000 in aggregate maturity value of commercial paper. Interest rates on outstanding commercial paper borrowings as of December 31, 2000, ranged from 6.96% to 7.65% with an effective average rate of 7.35%.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, short-term debt consisted of the following (in thousands):
2000 1999 ---- ----
Floating rate notes $ 200,000 $120,000 Global multi-currency facility 388,069 - Short-term credit facility 400,000 - Commercial paper 541,366 - Money market loan 41,000 - Other short-term borrowings 255,665 110,977 ----------- -------- 1,826,100 230,977 Current maturities of long-term debt - 25,000 Less debt refinanced (1,296,839) - ----------- -------- $ 529,261 $255,977 =========== ========
Other short-term borrowings are principally utilized to support the working capital requirements of certain foreign operations. The weighted average interest rates on these borrowings at December 31, 2000 and 1999 were 5.5% and 4.8%, respectively.
Long-term debt consisted of the following at December 31 (in thousands):
2000 1999 ---- ----
6.45% senior notes, due 2003 $ 249,915 $ 249,885 8.2% senior debentures, due 2003 424,796 - 8.7% senior debentures, due 2005 249,995 - 7% senior notes, due 2007 198,477 198,227 9.15% senior debentures, due 2010 199,967 - 6 7/8% senior debentures, due 2018 196,357 196,148 7 1/2% senior debentures, due 2027 196,351 196,211 Global multi-currency credit facility - 381,726 Commercial paper - 298,123 8.29% senior notes - 25,000 Other obligations with various interest rates and due dates 14,974 13,101 Short-term debt refinanced 1,296,839 - ---------- ---------- 3,027,671 1,558,421 Less installments due within one year - (25,000) ---------- ---------- $3,027,671 $1,533,421 ========== ==========
The 7% senior notes and the 7 1/2% senior debentures are not redeemable prior to their maturity. The 6 7/8% senior debentures, 6.45% senior notes, 8.2% senior debentures, 8.7% senior debentures, and 9.15% senior debentures may be prepaid at the option of the company subject to a "make whole" clause. The 8.29% senior notes were repaid in December 2000.
In February 2001, the company entered into a 364-day $625,000,000 credit facility (the "364-day facility") which expires in February 2002 and a three-year revolving credit agreement providing up to $625,000,000 of available credit. These credit facilities replaced the previously existing 364-day credit facility and the global multi-currency credit facility. The 364-day facility and three-year revolving credit facility bear interest at the applicable eurocurrency rate plus a margin of .75% and .725%, respectively. The company pays the banks a facility fee of .125% and .15% per annum, respectively, related to the 364-day facility and three-year revolving credit facility. In addition, during the first quarter of 2001, the company completed the sale of $1,523,750,000 principal amount at maturity of zero coupon convertible senior debentures (the "convertible debentures") due February 21, 2021. The convertible debentures were priced with a yield to maturity of 4% per annum and may be converted into the company's common stock at a conversion price of $37.83 per share. Holders of the convertible debentures may require the company to repurchase the convertible debentures (at the issue price plus accrued original issue discount through the date of repurchase) on
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 21, 2006, 2011, or 2016. The company, at its option, may redeem all or part of the convertible debentures (at the issue price plus accrued original issue discount through the date of redemption) any time on or after February 21, 2006. The net proceeds of approximately $672,000,000 were used to repay short-term debt. The consolidated balance sheet has been restated to reflect the reclassification of certain short-term debt to long-term as a result of the debt refinancing subsequent to December 31, 2000.
At December 31, 2000, the estimated fair market value of the 7% senior notes was 93 percent of par, the 7 1/2% senior debentures was 78 percent of par, the 6 7/8% senior debentures was 77 percent of par, the 6.45% senior notes was 95 percent of par, the 8.2% senior debentures was 98 percent of par, the 8.7% senior debentures was 102 percent of par, and the 9.15% senior debentures was 102 percent of par. The balance of the company's borrowings approximate their fair value.
Annual payments of borrowings during each of the years 2001 through 2005, reflecting the refinancing, are $529,261,000, $4,222,000, $675,359,000, $625,608,000, and $250,474,000, respectively, and $1,472,008,000 for all years thereafter.
The three-year revolving credit facility, the 364-day facility, the short- term credit facility, and the senior notes and debentures limit the incurrence of additional borrowings and require that working capital, net worth, and certain other financial ratios be maintained at designated levels.
5. Income Taxes
The provision for income taxes for the years ended December 31 consists of the following (in thousands):
2000 1999 1998 ---- ---- ---- Current - ------- Federal $105,007 $ 42,189 $ 46,449 State 25,350 9,968 11,373 Foreign 144,892 40,014 35,796 -------- -------- -------- 275,249 92,171 93,618 -------- -------- -------- Deferred - -------- Federal (5,044) 8,922 15,667 State (1,253) 2,144 3,815 Foreign (20,757) (1,449) 1,918 -------- -------- -------- (27,054) 9,617 21,400 -------- -------- -------- $248,195 $101,788 $115,018 ======== ======== ========
The principal causes of the difference between the U.S. statutory and effective income tax rates for the years ended December 31 are as follows (in thousands):
2000 1999 1998 ---- ---- ----
Provision at statutory rate $213,546 $ 80,921 $ 95,311 State taxes, net of federal benefit 15,663 7,873 9,872 Foreign tax rate differential 4,953 2,860 858 Non-deductible goodwill 8,537 6,904 4,704 Other 5,496 3,230 4,273 -------- -------- -------- $248,195 $101,788 $115,018 ======== ======== ========
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial reporting purposes, income before income taxes attributable to the United States was $277,188,000 in 2000, $131,007,000 in 1999, and $183,048,000 in 1998 and income before income taxes attributable to foreign operations was $332,943,000 in 2000, $100,198,000 in 1999, and $89,267,000 in 1998.
The significant components of the company's deferred tax assets at December 31, which are included in prepaid expenses and other assets, are as follows (in thousands):
2000 1999 ---- ----
Inventory reserves $ 36,625 $13,642 Allowance for doubtful accounts 26,171 4,376 Accrued expenses 6,092 2,187 Integration reserves 57,361 27,101 Other 2,824 (738) -------- ------- $129,073 $46,568 ======== =======
Deferred tax liabilities, which are included in other liabilities, were $20,995,000 and $39,474,000 at December 31, 2000 and 1999, respectively. The deferred tax liabilities are principally the result of the differences in the bases of the company's German assets and liabilities for tax and financial reporting purposes.
6. Shareholders' Equity
In October 2000, the shareholders approved an amendment to the certificate of incorporation to increase the number of authorized shares of common stock from 120,000,000 shares to 160,000,000 shares.
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, 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.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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):
2000 1999 1998 ---- ---- ----
Net income $357,931 $124,153(a) $145,828 ======== ======== ========
Weighted average common shares outstanding for basic EPS 96,707 95,123 95,397 Net effect of dilutive stock options and restricted stock awards 2,126 922 1,716 -------- -------- -------- Weighted average common shares outstanding for diluted EPS 98,833 96,045 97,113 ======== ======== ========
Basic EPS $3.70 $1.31(a) $1.53 ===== ===== ===== Diluted EPS $3.62 $1.29(a) $1.50 ===== ===== =====
(a) Net income includes a special charge totaling $24,560,000 ($16,480,000 after taxes) related to the company's acquisition and integration of Richey and EDG. Excluding the integration charge, net income and net income per share on a basic and diluted basis were $140,633,000, $1.48, and $1.46, respectively.
8. 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 forfeiture restrictions (i.e., vest) generally over a four-year period. The company awarded 211,200 shares of common stock to 115 key employees in early 2001 in respect of 2000, 134,784 shares of common stock to 43 key employees during 2000, 182,525 shares of common stock to 106 key employees in early 2000 in respect of 1999, 325,750 shares of common stock to 114 key employees during 1999, and 215,400 shares of common stock to 140 key employees during 1998.
Forfeitures of shares awarded under the Plan were 31,624, 10,335, and 7,359 during 2000, 1999, and 1998, 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 Plans - ------------------
Under the terms of various Arrow Electronics, Inc. Stock Option Plans (the "Option Plans"), both nonqualified and incentive stock options for an aggregate of 21,500,000 shares of common stock were authorized for grant to directors and 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 plans after May 1997 become 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
Included in the 1999 options granted are the options converted in January 1999 relating to the acquisition of Richey. The options converted on January 7, 1999 totaled 233,381, with a weighted average exercise price of $21.17 per share.
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 Operations ("NACO"). 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 following information relates to the Option Plans for the years ended December 31:
Average Average Average Exercise Exercise Exercise 2000 Price 1999 Price 1998 Price --------- -------- --------- -------- --------- -------- Options outstanding at beginning of year 9,846,680 $21.90 7,562,149 $23.41 8,231,809 $24.00 Granted 2,327,764 27.55 2,914,601 18.20 131,120 (a) 25.87 Exercised (1,324,321) 21.09 (93,956) 13.60 (375,501) 19.96 Forfeited (444,508) 22.96 (536,114) 24.51 (425,279)(a) 26.53 --------- --------- --------- Options outstanding at end of year 10,405,615 $23.22 9,846,680 $21.90 7,562,149 $23.41 ========== ========= ========= Prices per share of options outstanding $5.94-41.25 $1.81-34.00 $1.81-34.00
Options available for future grant: Beginning of year 5,533,128 7,255,214 6,962,805 End of year 3,622,944 5,533,128 7,255,214
(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, 2000:
Options Outstanding Options Exercisable ---------------------------------------- ---------------------- Weighted Weighted Weighted Maximum Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price -------- ----------- ---------------- -------- ----------- --------
$20 1,978,948 72 months $15.65 1,077,313 $15.68 25 3,767,965 78 months 21.23 2,533,844 21.43 30 3,386,458 100 months 26.43 1,338,384 26.17 35+ 1,272,244 89 months 32.34 725,925 31.92 ---------- --------- All 10,405,615 85 months $23.22 5,675,466 $22.80 ========== =========
The company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Option Plans.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had stock-based compensation costs been determined as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net income would have been reduced by $6,144,000 ($.08 per share on a diluted basis) in 2000, $4,143,000 ($.03 per share on a diluted basis) in 1999, and $6,650,000 ($.04 per share on a diluted basis) in 1998.
The estimated weighted average fair value, utilizing the Black-Scholes option-pricing model, at the date of option grant during 2000, 1999, and 1998 was $12.25, $7.07, and $8.35, per share, respectively. The weighted average fair value was estimated using the following assumptions:
2000 1999 1998 ---- ---- ----
Expected life (months) 48 48 48 Risk-free interest rate (percent) 5.5 5.8 5.4 Expected volatility (percent) 50 40 31
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 2000, 1999, and 1998 amounted to $8,128,000, $6,810,000, and $5,531,000, respectively.
9. Employee Benefit 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 $7,279,000, $5,801,000, and $4,387,000, in 2000, 1999, and 1998, respectively. Certain domestic and foreign subsidiaries maintain separate defined contribution plans for their employees and made contributions thereunder which amounted to $2,510,000, $2,056,000, and $1,813,000 in 2000, 1999, and 1998, respectively. As a result of the Wyle acquisition, the company has an additional defined contribution 401(k) plan for Wyle employees. This plan is expected to be merged with the company's 401(k) plan on April 2, 2001. The company's contribution in respect of 2000 includes $386,000 for contributions made to the Wyle 401(k) plan since acquisition.
The company maintains an unfunded supplemental retirement plan for certain executives. The board of directors determines those employees eligible to participate in the plan and their maximum annual benefit upon retirement. Wyle also sponsored a supplemental executive retirement plan for certain of its executives. Benefit accruals for the Wyle plan have been frozen as of December 31, 2000. Expenses relating to the plans were $4,597,000, $2,150,000, and $2,367,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Included in the 2000 amount is $147,000 relating to the Wyle plan since acquisition.
Wyle provided retirement benefits for certain employees under a defined benefit plan. Benefits under this plan have been frozen as of December 31, 2000 and former participants may now participate in the company's stock ownership plan. Pension information as of the year ended December 31, 2000 is as follows (in thousands):
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit obligation at end of year $75,321
Fair value of plan assets at end of year 80,219
Funded status of the plan: Funded status $ 4,899 Unamortized net loss 1,636 ------- Net amount recognized $ 6,535 =======
Weighted average assumptions: Discount rate 7.5% Expected return on assets 8.5%
10. Lease Commitments
The company leases certain office, distribution, and other property under noncancelable operating leases expiring at various dates through 2053. Rental expense under noncancelable operating leases, net of sublease income of $3,151,000, $3,362,000, and $2,469,000 in 2000, 1999, and 1998, respectively, amounted to $47,863,000 in 2000, $40,382,000 in 1999, and $29,231,000 in 1998. 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 realignment of NACO and the integration of the acquired businesses, are $63,417,000 in 2001, $45,386,000 in 2002, $34,535,000 in 2003, $27,959,000 in 2004, $20,102,000 in 2005, and $96,498,000 thereafter.
11. 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 franc, Swedish krona, 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, 2000 and 1999, was $81,736,000 and $59,348,000, respectively. The carrying amounts, which are nominal, approximated fair value at December 31, 2000 and 1999.
12. Segment and Geographic Information
The company is engaged in the distribution of electronic components to original equipment and contract manufacturers and computer products to value-added resellers (VARs) and original equipment manufacturers. Operating income for the electronic components and computer products segments excludes the effect of special charges relating to the integration of acquired businesses. During the first quarter of 2000, the company redefined its reportable segments to present two distinct worldwide businesses that have different economic cycles, structures, and competitors. Computer products includes North American Computer Products together with UK Microtronica, Nordic Microtronica, ATD (in Iberia), and Arrow Computer Products (in France). The prior years have been restated for comparative purposes.
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue, operating income, and total assets by segment are as follows (in thousands):
Electronic Computer Components Products Corporate Total ---------- -------- --------- ----- - ---- Revenue from external customers $9,851,041 $3,108,209 $ - $12,959,250
Operating income (loss) 892,441 33,945 (142,279) 784,107
Total assets 5,954,527 1,394,157 255,857 7,604,541
- ---- Revenue from external customers $6,111,605 $3,201,020 $ - $9,312,625
Operating income (loss) 368,510 56,195 (86,044)(a) 338,661(a)
Total assets 3,317,253 991,785 174,217 4,483,255
- ---- Revenue from external customers $4,875,574 $3,469,085 $ - $8,344,659
Operating income (loss) 293,417 106,821 (47,734) 352,504
Total assets 2,683,350 971,536 184,985 3,839,871
(a) Includes a special charge totaling $24,560,000 associated with the acquisition and integration of Richey and EDG.
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 attributable to the individual operating segments. In the evaluation of its operating groups' performance, the company excludes the impact of unusual items such as realignment and integration charges.
Revenues, by geographic area, for the years ended December 31 are as follows (in thousands):
2000 1999 1998 ---- ---- ----
Americas $ 8,089,687 $6,160,726 $5,351,061 Europe 3,474,990 2,393,705 2,396,452 Asia/Pacific 1,394,573 758,194 597,146 ----------- ---------- ---------- $12,959,250 $9,312,625 $8,344,659 =========== ========== ==========
Total assets, by geographic area, at December 31 are as follows (in thousands):
2000 1999 1998 ---- ---- ----
Americas $4,840,169 $2,642,601 $2,066,785 Europe 2,104,837 1,460,439 1,473,857 Asia/Pacific 659,535 380,215 299,229 ---------- ---------- ---------- $7,604,541 $4,483,255 $3,839,871 ========== ========== ==========
ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 ------- ------- ------- ------- - ---- Sales $2,769,424 $3,161,670 $3,337,068 $3,691,088 Gross profit 422,999 490,300 531,706 588,936 Net income 63,059 83,970 101,943 108,959 Per common share: Basic .66 .87 1.05 1.12 Diluted .65 .84 1.02 1.09
- ---- Sales $2,201,632 $2,250,028 $2,375,797 $2,485,168 Gross profit 308,282 314,139 323,227 355,558 Net income 28,341 15,022(a) 36,753 44,037 Per common share: Basic .30 .16(a) .39 .46 Diluted .30 .16(a) .38 .46
(a) Net income includes a special charge totaling $24,560,000 ($16,480,000 after taxes) associated with the acquisition and integration of Richey and EDG. Excluding this charge, net income was $31,502,000 or $.33 per share on a basic and diluted basis.
Item 9.
Item 9. Changes in and disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------
See "Executive Officers" in 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 11, 2001 hereby is incorporated herein by reference.
Item 11.
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 11, 2001 hereby is incorporated herein by reference.
Item 12.
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 11, 2001 hereby is incorporated herein by reference.
Item 13.
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 11, 2001 hereby is incorporated herein by reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ---------------------------------------------------------------
(a) The following documents are filed as part of this report:
Page ---- 1. Financial Statements. Report of Ernst & Young LLP, Independent Auditors 13
Consolidated Statement of Income for the years ended December 31, 2000, 1999, and 1998 15
Consolidated Balance Sheet at December 31, 2000 and 1999 16
Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999, and 1998 17
Consolidated Statement of Shareholders' Equity for the years ended December 31, 2000, 1999, and 1998 18
Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999, and 1998 20
2. Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts 46
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.
3. Exhibits.
See index of Exhibits included on pages 37 - 44.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2000 the following Current Reports on Form 8-K were filed:
Date of Report Item Reported -------------- -------------
December 22, 2000 Announcement of completion of acquisition of Wyle Components and Wyle Systems and pro forma financial information related to the acquisition
February 13, 2001 Press release announcing earnings for the fourth quarter and year ended December 31, 2000
February 15, 2001 Announcement of completion of offering of zero coupon convertible senior debentures due 2021
March 20, 2001 Press release announcing that earnings for the first quarter ended March 31, 2001 would be lower than anticipated
(a)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)(i) Agreement and Plan of Merger, dated as of September 30, 1998, by and among Arrow Electronics, Inc., Lear Acquisition Corp. and Richey Electronics, Inc. (incorporated by reference to Exhibit 2(e) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 1-4482).
(ii) 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. in 2(e)(i) above (incorporated by reference to Exhibit 2(e)(i) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(f) Agreement of Purchase and Sale, dated as of October 1, 1998, by and between Bell Industries, Inc. and Arrow Electronics, Inc. (incorporated by reference to Exhibit 2(f) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(g) Share Purchase Agreement, dated as of February 7, 2000, by and between Arrow Electronics, Inc., Tekelec Airtronic, Zedtek, Investitech, and Natec.
(h) Agreement for Sale and Purchase of Shares of Jakob Hatteland Electronic AS, dated as of April 20, 2000, between Jakob Hatteland Holding AS, Jakob Hatteland, and Arrow Electronics, Inc.
(i) Share Purchase Agreement, dated as of August 7, 2000, among VEBA Electronics GmbH, EBV Verwaltungs GmbH i.L., Viterra Grundstucke Verwaltungs GmbH, VEBA Electronics LLC, VEBA Electronics Beteiligungs GmbH, VEBA Electronics (UK) Plc, Raab Karcher Electronics Systems Plc, and E.ON AG and Arrow Electronics, Inc., Avnet, Inc., and Cherrybright Limited regarding the sale and purchase of VEBA electronics distribution group.
(j) Stock Sale Agreement, dated as of September 15, 2000, by and among Merisel, Inc., Merisel Americas, 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).
(iii) Certificate of Amendment of the Restated Certificate of Incorporation of the company, dated as of October 12, 2000.
(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)(a)(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 (incoporated by reference to Exhibit 4(b)(iii) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 1-4482).
(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 (incorporated by reference to Exhibit 4(b)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(v) Supplemental Indenture, dated as of February 21, 2001, between the company and The Bank of New York (as successor to the Bank of Montreal Trust Company), as trustee (incorporated by reference to Exhibit 4.2 to the company's current report on Form 8-K dated February 15, 2001, Commission File No. 1-4482).
(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 (incorporated by reference to Exhibit 10(a)(iii) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(iv) Amendment No. 3 to the Arrow Electronics Savings Plan in (10)(a)(i) above (incorporated by reference to Exhibit 10(a)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(v) Amendment No. 4 dated May 26, 1998 to the Arrow Electronics Savings Plan in (10)(a)(i) above (incorporated by reference to Exhibit 10(a)(v) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(b)(i) 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).
(ii) Amendment No. 1, dated March 29, 1996, to the Arrow Electronics Stock Ownership Plan in (10)(b)(i) 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).
(iii) Second Amendment No. 1 to the Arrow Electronics Stock Ownership Plan in 10(b)(i) above (incorporated by reference to Exhibit 10(a)(viii) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(iv) Amendment No. 3 to the Arrow Electronics Stock Ownership Plan in 10(b)(i) above (incorporated by reference to Exhibit 10(a)(ix) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(v) Amendment No. 4 dated May 26, 1998, to the Arrow Electronics Stock Ownership Plan in 10(b)(i) above (incorporated by reference to Exhibit 10(a)(x) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(c)(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) Employment Agreement, dated as of July 1, 2000, by and between the company and Francis M. Scricco.
(iv) Form of agreement between the company and the employees parties to the Employment Agreements listed in 10(c)(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).
(v) Employment Agreement, dated as of January 1, 2001, by and between the company and Michael J. Long.
(vi) Employment Agreement, dated as of January 1, 2000, between the company and Arthur H. Baer (incorporated by reference to Exhibit 10(c)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission No. 1-4482).
(vii) Amended and Restated Employment Agreement, dated as of December 22, 1999, by and between the company and Steven W. Menefee.
(viii) Employment Agreement, dated as of March 1, 1999, between the company and Sam R. Leno (incorporated by reference to Exhibit 10(b)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(ix) 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).
(x) 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).
(xi) 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).
(xii) Form of agreement between the company and all corporate Vice Presidents, including the employees parties to the Employment Agreements listed in 10(c)(v)-(xi) 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).
(xiii) 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).
(xiv) 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).
(xv) Amendment, dated May 1998, to the Unfunded Pension Plan for Selected Executives of Arrow Electronics, Inc. (incorporated by reference to Exhibit 10(b)(xiv) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(xvi) Grantor Trust Agreement, dated June 25, 1998, by and between Arrow Electronics, Inc. and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10(b)(xv) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission No. 1-4482).
(xvii) 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).
(d)(i) 8.20% Senior Exchange Notes due October 1, 2003, dated as of October 6, 2000, among Arrow Electronics, Inc. and Goldman, Sachs & Co., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Fleet Securities, Inc., and HSBC Securities (USA) Inc., as underwriters (incorporated by reference to Exhibit 4.2 to the company's Registration Statement on Form S-4, Registration No. 333-51100).
(ii) 8.70% Senior Exchange Notes due October 1, 2005, dated as of October 6, 2000, among Arrow Electronics, Inc. and Goldman, Sachs & Co., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Fleet Securities, Inc., and HSBC Securities (USA) Inc., as underwriters (incorporated by reference to Exhibit 4.3 to the company's Registration Statement on Form S-4, Registration No. 333-51100).
(iii) 9.15% Senior Exchange Notes due October 1, 2010, dated as of October 6, 2000, among Arrow Electronics, Inc. and Goldman, Sachs & Co., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Fleet Securities, Inc., and HSBC Securities (USA) Inc., as underwriters (incorporated by reference to Exhibit 4.4 to the company's Registration Statement on Form S-4, Registration No. 333-51100).
(e)(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(e)(i) above (incorporated by reference to Exhibit 10(d)(ii) to 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(e)(i) above (incorporated by reference to Exhibit 10(c)(iii) to 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(e)(i) above (incorporated by reference to Exhibit 10(c)(iv) to 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(e)(i) above (incorporated by reference to Exhibit 10(c)(v) to the company's Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 1-4482).
(vi) Fifth Amendment, dated as of March 25, 1999, to the Senior Note Purchase Agreement in 10(e)(i) above (incorporated by reference to Exhibit 10(d)(vi) to the company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-4482).
(f)(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) to 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)(f)(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).
(g)(i) Amended and Restated 364-Day Credit Agreement, dated as of February 22, 2001, among Arrow Electronics, Inc., the Subsidiary Borrowers, the several banks from time to time parties hereto, Bank of America, N.A., as syndication agent, Fleet National Bank, as documentation agent, and The Chase Manhattan Bank, as administrative agent.
(ii) Amended and Restated 364-Day Credit Agreement, dated as of March 24, 2000, among Arrow Electronics, Inc., the Subsidiary Borrowers, the several banks from time to time parties hereto, The Bank of Nova Scotia, Bank One, NA, Banque Nationale de Paris, New York Branch, Den Danske Bank Aktieselskab, HSBC Bank USA, and Mellon Bank, N.A., as co-agents, Bank of America, N.A., as syndication agent, Fleet Bank, N.A., as documentation agent, and The Chase Manhattan Bank, as administrative agent.
(iii) 364-Day Credit Agreement, dated as of March 30, 1999, among Arrow Electronics, Inc., the Subsidiary Borrowers, the several banks and other financial institutions from time to time parties hereto, Chase Securities Inc., as arranger, and The Chase Manhattan Bank, as administrative agent (incorporated by reference to Exhibit 10(f) to the company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-4482).
(h) Amended and Restated Three Year Credit Agreement, dated as of February 22, 2001, among Arrow Electronics, Inc., the Subsidiary Borrowers, the several banks from time to time parties hereto, Bank of America, N.A., as syndication agent, Fleet National Bank, as documentation agent, and The Chase Manhattan Bank, as administrative agent.
(i) $400,000,000 Credit Agreement, dated as of December 18, 2000, among Arrow Electronics, Inc., the several banks from time to time parties hereto, and Morgan Stanley Senior Funding Inc., as syndication agent, documentation agent, and administrative agent.
(j) Floating Rate Exchange Notes due October 5, 2001, dated as of October 6, 2000, among Arrow Electronics, Inc. and Goldman, Sachs & Co., Chase Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, BNY Capital Markets, Inc., Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Fleet Securities, Inc., and HSBC Securities (USA) Inc., as underwriters (incorporated by reference to Exhibit 4.5 to the company's Registration Statement on Form S-4, Registration No. 333-51100).
(k) $120,000,000 Arrow Electronics, Inc. Floating Rate Notes due November 24, 2000, dated as of November 19, 1999, among Arrow Electronics, Inc. and Chase Securities Inc. and Bank of America Securities LLC as underwriters (incorporated by reference to Exhibit 4.1 to the company's Registration Statement on Form S-3, Registration No. 333-91387).
(l) Commercial Paper Private Placement Agreement, dated as of November 9, 1999, among Arrow Electronics, Inc., as issuer, and Chase Securities Inc., Bank of America Securities LLC, Goldman, Sachs & Co., and Morgan Stanley & Co. Incorporated as placement agents (incorporated by reference to Exhibit 10(g) to the company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-4482).
(m)(i) Arrow Electronics, Inc. Stock Option Plan, as amended and restated, effective as of May 15, 1997 (incorporated by reference to Exhibit 99(a) to the company's Registration Statement on Form S-8, Registration No. 333-45631).
(ii) Form of Stock Option Agreement under 10(m)(i) above (incorporated by reference to Exhibit 10(e)(ii) 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 Nonqualified Stock Option Agreement under 10(m)(i) above (incorporated by reference to Exhibit 10(k)(iv) to the company's Registration Statement on Form S-4, Registration No. 33-17942).
(n)(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 10(n)(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).
(o)(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(o)(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).
(p) 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).
(q) 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).
(21) Subsidiary Listing.
(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).
ARROW ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the three years ended December 31, 2000
Additions ------------------------ Balance at Balance beginning Charged Charged to at end of year to income other (1) Write-offs of year ----------- ----------- ----------- ----------- ------------
Allowance for doubtful accounts
2000 $32,338,000 $59,321,000 $55,192,000 $38,709,000 $108,142,000 =========== =========== =========== =========== ============ 1999 $48,423,000 $26,151,000 $ 1,567,000 $43,803,000 $ 32,338,000 =========== =========== =========== =========== ============ 1998 $46,055,000 $31,643,000 $ 542,000 $29,817,000 $ 48,423,000 =========== =========== =========== =========== ============
(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 29, 2001
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 29, 2001 ---------------------------- Stephen P. Kaufman, Chairman
By: /s/ Francis M. Scricco March 29, 2001 --------------------------------------- Francis M. Scricco, President and Chief Executive Officer, and Director
By: /s/ Robert E. Klatell March 29, 2001 -------------------------------------------- Robert E. Klatell, Executive Vice President, Secretary, and Director
By: /s/ Sam R. Leno March 29, 2001 -------------------------------------------- Sam R. Leno, Senior Vice President and Chief Financial Officer
By: /s/ Paul J. Reilly March 29, 2001 -------------------------------------- Paul J. Reilly, Vice President-Finance and Principal Accounting Officer
By: /s/ Daniel W. Duval March 29, 2001 ------------------------- Daniel W. Duval, Director
By: /s/ Carlo Giersch March 29, 2001 ----------------------- Carlo Giersch, Director
By: /s/ John N. Hanson March 29, 2001 ------------------------ John N. Hanson, Director
By: /s/ Roger King March 29, 2001 -------------------- Roger King, Director
By: /s/ Karen Gordon Mills March 29, 2001 ---------------------------- Karen Gordon Mills, Director
By: /s/ Barry W. Perry March 29, 2001 ------------------------ Barry W. Perry, Director
By: /s/ Richard S. Rosenbloom March 29, 2001 ------------------------------- Richard S. Rosenbloom, Director
By: /s/ John C. Waddell March 29, 2001 ------------------------- John C. Waddell, Director