Form 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from............to................. Commission file number 1-4482 ARROW ELECTRONICS, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) New York 11-1806155 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 25 Hub Drive, Melville, New York 11747 - -------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 391-1300 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------- ---------------- Common Stock, $1 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of voting stock held by nonaffiliates of the registrant as of February 26, 1999 was $1,365,898,195. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $1 par value: 95,632,701 shares outstanding at February 26, 1999. The following documents are incorporated herein by reference: 1. Proxy Statement filed in connection with Annual Meeting of Shareholders to be held May 12, 1999(incorporated in Part III).
PART I Item 1. Business. -------- Arrow Electronics, Inc. (the "company") is the world's largest distributor of electronic components and computer products to industrial and commercial customers. As the global electronics distribution industry's leader in state- of-the-art operating systems, employee productivity, value-added programs, and total quality assurance, the company is the distributor of choice for over 600 suppliers. The company's global distribution network spans the world's three dominant electronics markets - North America, Europe, and the Asia/Pacific region. The company is the largest electronics distributor in each of these vital industrialized regions, serving a diversified base of original equipment manufacturers (OEMs) and commercial customers worldwide. OEMs include manufacturers of computer and office products, industrial equipment (including machine tools, factory automation, and robotic equipment), telecommunications products, aircraft and aerospace equipment, and scientific and medical devices. Commercial customers are mainly value-added resellers (VARs) of computer systems. The company maintains over 200 sales facilities and 26 distribution centers in 34 countries. The North American components operations ("NACO") is comprised of eight segmented marketing groups. As the largest distributor of electronic components in North America, NACO offers the broadest line card in the industry. Gates/Arrow Distributing, Inc. ("Gates/Arrow") is a full-line technical distributor of computer systems, peripherals, and software to value-added resellers in the U.S. and Canada. In May 1998, Gates/Arrow acquired a majority interest in Scientific and Business Minicomputers, Incorporated, a leading technical distributor of mass storage products in the United States. In November 1998, the company entered into a joint venture with Marubun Corporation, Japan's largest independent distributor to serve Japanese customers in the Asia/Pacific region and North America. In November 1998, the company acquired Unitronics Componentes, S.A., one of the leading distributors of electronic components in Spain and Portugal. In January 1999, the company acquired Richey Electronics, Inc. a leading specialty distributor of interconnect, electromechanical, and passive electronic components and a provider of related value-added services to customers throughout North America. In January 1999, the company also acquired Bell Industries, Inc.'s Electronics Distribution Group, one of the ten largest distributors of electronic components in North America. In February 1999, Spoerle Electronic acquired Industrade AG, one of Switzerland's leading distributors of electronic components. Through its wholly-owned subsidiary, Arrow Electronics Distribution Group-Europe B.V., Arrow is the largest pan-European electronics distributor. In its Northern European region, the company is among the largest distributors in Britain, Denmark, Finland, Norway, and Sweden. In its Central European region the company is the largest distributor in Germany, Austria, Switzerland, Belgium, and the Netherlands, and in its Southern European region it is the largest distributor in Italy, France, Spain, and Portugal. Arrow is the largest electronics distributor in the Asia/Pacific region. Components Agent Limited (C.A.L.), the Lite-On Group, and the Melbourne-based Veltek and Zatek companies in Australia are the region's leading multi-national distributors. C.A.L., headquartered in Hong Kong, maintains additional facilities in key cities in Singapore, Malaysia, the People's Republic of China, India, and South Korea. Lite-On, Inc., headquartered in Taipei, serves customers Taiwan, South Korea, Singapore, and Malaysia. Arrow Ally also serves customers in Taiwan and Arrow Components (NZ) services customers in New Zealand. The company distributes a broad range of electronic components, computer products, and related equipment. About 59 percent of the company's consolidated sales are comprised of semiconductor products; industrial and commercial computer products, including microcomputer boards and systems, design systems, desktop computer systems, terminals, printers, disk drives, controllers, and communication control equipment account for about 33 percent; and the remaining sales are of passive, electromechanical, and interconnect products, principally capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors. Most manufacturers of electronic components and computer products rely on independent authorized distributors, such as the company, to augment their product marketing operations. As a stocking, marketing, and financial intermediary, the distributor relieves manufacturers of a portion of the costs and personnel associated with stocking and selling their products (including otherwise sizable investments in finished goods inventories and accounts receivable), while providing geographically dispersed selling, order processing, and delivery capabilities. At the same time, the distributor offers a broad range of customers the convenience of diverse inventories and rapid or scheduled deliveries as well as other value-added services such as kitting and memory programming capabilities. The growth of the electronics distribution industry has been fostered by the many manufacturers who recognize their authorized distributors as essential extensions of their marketing organizations. The company and its affiliates serve over 175,000 industrial and commercial customers. Industrial customers range from major original equipment manufacturers to small engineering firms, while commercial customers include value-added resellers. Most of the company's customers require delivery of the products they have ordered on schedules that are generally not available on direct purchases from manufacturers, and frequently their orders are of insufficient size to be placed directly with manufacturers. No single customer accounted for more than two percent of the company's 1998 sales. The electronic components and other products offered by the company are sold by field sales representatives, who regularly call on customers in assigned market areas, and by telephone from the company's selling locations, from which inside sales personnel with access to pricing and stocking data provided by computer display terminals accept and process orders. Each of the company's North American selling locations, warehouses, and primary distribution centers is electronically linked to the business' central computer, which provides fully integrated, on-line, real-time data with respect to nationwide inventory levels and facilitates control of purchasing, shipping, and billing. The company's foreign operations utilize Arrow's Worldwide Stock Check System, which affords access to the company's on-line, real-time inventory system. There are approximately 600 manufacturers whose products are sold by the company. Intel Corporation accounted for approximately 18 percent and Hewlett- Packard accounted for approximately 13 percent of the business' purchases. No other supplier accounted for more than 9 percent of 1998 purchases. The company does not regard any one supplier of products to be essential to its operations and believes that many of the products presently sold by the company are available from other sources at competitive prices. Most of the company's purchases are pursuant to authorized distributor agreements which are typically cancelable by either party at any time or on short notice. Approximately 69 percent of the company's inventory consists of semiconductors. It is the policy of most manufacturers to protect authorized distributors, such as the company, against the potential write-down of such inventories due to technological change or manufacturers' price reductions. Under the terms of the related distributor agreements, and assuming the distributor complies with certain conditions, such suppliers are required to credit the distributor for inventory losses incurred through reductions in manufacturers' list prices of the items. In addition, under the terms of many such agreements, the distributor has the right to return to the manufacturer for credit a defined portion of those inventory items purchased within a designated period of time. A manufacturer who elects to terminate a distributor agreement is generally required to purchase, from the distributor, the total amount of its products carried in inventory. While these industry practices do not wholly protect the company from inventory losses, management believes that they currently provide substantial protection from such losses. The company's business is extremely competitive, particularly with respect to prices, franchises, and, in certain instances, product availability. The company competes with several other large multi-national, national, and numerous regional and local distributors. As the world's largest electronics distributor, the company's financial resources and sales are greater than those of its competitors. The company and its affiliates employ over 9,700 people worldwide. Executive Officers The following table sets forth the names and ages of, and the positions and offices with the company held by, each of the executive officers of the company. Name Age Position or Office Held - ---- --- ----------------------- Stephen P. Kaufman 57 Chairman and Chief Executive Officer Robert E. Klatell 53 Executive Vice President, General Counsel, and Secretary Francis M. Scricco 49 Executive Vice President and Chief Operating Officer Carlo Giersch 61 Chief Executive Officer of Spoerle Electronic Sam R. Leno 53 Senior Vice President and Chief Financial Officer Steven W. Menefee 54 Senior Vice President Betty Jane Scheihing 50 Senior Vice President Michael J. Long 40 Vice President Jan M. Salsgiver 42 Vice President Set forth below is a brief account of the business experience during the past five years of each executive officer of the company. Stephen P. Kaufman has been Chairman since May 1994 and President and Chief Executive Officer of the company for more than five years prior thereto. Robert E. Klatell has been Executive Vice President since July 1995 and has served as Senior Vice President, General Counsel, and Secretary of the company for more than five years. He also served as Chief Financial Officer from January 1992 to April 1996 and Treasurer from 1990 to April 1996. Francis M. Scricco has been Executive Vice President and Chief Operating Officer since September 1997. From March 1994 through August 1997 he was a Group Vice President at Fischer Scientific International, Inc. Prior thereto he was President of Whirlpool Canada. Carlo Giersch has been Chief Executive Officer of Spoerle Electronic for more than five years. Sam R. Leno was appointed Senior Vice President and Chief Financial Officer effective March 1999. From July 1995 through February 1999, he served as Executive Vice President and Chief Financial Officer of Corporate Express, Inc. Prior thereto he was Chief Financial Officer of Coram Healthcare. Steven W. Menefee has been a Senior Vice President of the company since July 1995 and prior thereto a Vice President of the company since November 1990. Betty Jane Scheihing has been a Senior Vice President since May 1996 and has served as Vice President of the company for more than five years prior thereto. Michel J. Long has been a Vice President of the company since September 1991 and President of Gates/Arrow Distributing since November 1995. Prior thereto, he was President of Capstone Electronics since 1994. Jan M. Salsgiver has been a Vice President of the company since September 1993 and President of the Arrow Supplier Services Group since its inception in January 1998. Prior thereto she was President of the Arrow/Schweber Electronics Group since November 1995 and President of Zeus Electronics from July 1993 to November 1995. Item 2. Properties. ---------- The company's executive office, located in Melville, New York, is owned by the company. The company occupies additional locations under leases due to expire on various dates to 2053. Five additional facilities are owned by the company, and another facility has been sold and leased back in connection with the financing thereof. Item 3. Legal Proceedings. ----------------- Through a wholly-owned subsidiary, the company was previously engaged in the refining and selling of lead. The subsidiary was sold in 1988, except for a battery-breaking site used by the subsidiary in Plant City, Florida, which had been placed on the National Priorities List under the Federal Super Fund program. The company remains liable for the environmental remediation of the site, and in 1992 entered into a consent decree setting forth the terms of that remediation with the U.S. EPA and the State of Florida. The environmental remediation of the site has been substantially completed. All contaminated soils on the site have been collected, treated and stabilized, and the EPA has acknowledged that the soil stabilization aspects of the consent decree have been met. Groundwater on the site has been treated and is being monitored, as required by the consent decree, to ensure that it continues to meet the standards set forth in the decree. Approximately 11 acres of wetlands have been recreated and are being managed in accordance with the requirements of the consent decree. Final approval of the wetlands phase of the remediation is expected shortly. The company believes that the amount expected to be expended in any year in connection with the continued monitoring of the site and the completion of activities thereon will not have a material adverse impact on the company's liquidity, capital resources or results of operations. On March 23, 1999, the company, its Gates/Arrow subsidiary and certain officers and employees, were named as defendants in a civil action in the U.S. District Court for the Eastern District of New York, filed by Henry N. Camferdam, Jr. and others who were formerly stockholders or employees of Support Net, Inc. ("Support Net"", a corporation in which Gates/Arrow, through a wholly-owned subsidiary, SN Holding, Inc. ("SN Holding") acquired a 50.1% stock interest on December 1, 1997 for approximately $28,000,000. Plaintiffs allege that they were fraudulently induced into selling their shares in Support Net, that the company and Gates/Arrow have breached the employment agreements and shareholders agreement also entered into on December 1, 1997 in connection with the acquisition, and that defendants have denied them certain rights under the several agreements, including their right to pit a portion of their remaining Support Net shares to Gates/Arrow. Plaintiffs have asked for compensatory damages of $162,000,000, punitive damages of $300,000,000 and an injunction that would, among other things, prevent the company from disposing of Support Net or SN Holding, pending a determination of the fair value of plaintiffs' minority interest. The company has not yet filed an answer to the complaint. The company believes the claims are unfounded and without merit, and it intends to contest them vigorously. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. PART II 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 1998 and 1997 were as follows (1997 has been restated to reflect the two-for-one stock split effective October 15, 1997): Year High Low - ---- ---- ---- 1998: Fourth Quarter $26 7/8 $11 3/4 Third Quarter 22 5/8 12 1/2 Second Quarter 28 3/8 20 9/16 First Quarter 36 1/4 27 1997: Fourth Quarter $36 $25 1/8 Third Quarter 32 1/16 26 5/16 Second Quarter 29 7/16 25 3/4 First Quarter 29 7/8 25 7/8 Holders On February 26, 1999, there were approximately 4,500 shareholders of record of the company's common stock. Dividend History and Restrictions The company has not paid cash dividends on its common stock during the past five years. While the board of directors considers the payment of dividends on the common stock from time to time, the declaration of future dividends will be dependent upon the company's earnings, financial condition, and other relevant factors. The terms of the company's global multi-currency credit facility, senior notes, and senior debentures (see Note 4 of the Notes to Consolidated Financial Statements) limit, among other things, the payment of cash dividends and the incurrence of additional borrowings and require that working capital, net worth, and certain other financial ratios be maintained at designated levels. Item 6. Selected Financial Data. ----------------------- The following table sets forth certain selected consolidated financial data and should be read in conjunction with the company's consolidated financial statements and related notes appearing elsewhere in this annual report. <TABLE> <CAPTION> SELECTED FINANCIAL DATA (In thousands except per share data) For the year: 1998 1997(a) 1996 1995 1994(b) - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Sales Components $6,343,890 $6,465,521 $5,520,202 $5,127,258 $3,914,737 Gates/Arrow 2,000,769 1,298,424 1,014,375 792,162 734,497 ---------- ---------- ---------- ---------- ---------- Consolidated 8,344,659 7,763,945 6,534,577 5,919,420 4,649,234 - ------------------------------------------------------------------------------ Operating income Components 326,695 426,778 401,849 444,029 312,103 Gates/Arrow 54,397 31,229 19,932 3,803 16,415 Corporate (28,588) (83,286) (21,154) (24,623) (72,544) ---------- ---------- ---------- ---------- --------- Consolidated 352,504 374,721 400,627 423,209 255,974 - ------------------------------------------------------------------------------ Net income $ 145,828 $ 163,656 $ 202,709 $ 202,544 $ 111,889 ============================================================================== Diluted earnings per share (c) $ 1.50 $ 1.64 $ 1.98 $ 2.03 $ 1.16 ============================================================================== At year-end: - ------------------------------------------------------------------------------ Accounts receivable and inventories $2,675,612 $2,475,407 $1,947,719 $1,979,160 $1,422,457 Total assets 3,839,871 3,537,873 2,710,351 2,701,01 2,038,774 Total long-term debt and subordinated debentures 1,040,173 823,099 344,562 451,706 349,398 Shareholders' equity 1,487,319 1,360,758 1,358,482 1,195,881 837,885 - ------------------------------------------------------------------------------- (a) Operating and net income include special charges totaling $59.5 million ($40.4 million after taxes) associated with the realignment of Arrow's North American components operations and the acquisition and integration of the volume electronic component distribution businesses of Premier Farnell plc. Excluding these charges, operating income, net income, and net income per share on a diluted basis were $434.2 million, $204.1 million, and $2.05, respectively. (b) Operating and net income include special charges totaling $45.3 million ($28.8 million after taxes) associated with the acquisition and integration of Gates/FA Distributing, Inc. and Anthem Electronics, Inc. in transactions accounted for as poolings of interests. Excluding these charges, operating income, net income, and net income per share on a diluted basis were $301.3 million, $140.7 million, and $1.44, respectively. (c) All per share amounts have been restated to reflect the two-for-one stock split effective October 15, 1997. </TABLE> Item 7. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations. ----------------------------------- For an understanding of the significant factors that influenced the company's performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this report. Sales Consolidated sales of $8.3 billion in 1998 were 7 percent higher than 1997 sales of $7.8 billion. This sales growth was due to increased sales of commercial computer products in the company's Gates/Arrow operation from $1.3 billion in 1997 to more than $2 billion in 1998. Excluding the impact of acquisitions, 1998 sales of Gates/Arrow increased by 24 percent when compared to 1997. The worldwide market for electronic components continued to be characterized by product availability well in excess of demand and resultant pressure on average selling prices and gross profit margins resulting in a decline in sales from $6.5 billion in 1997 to $6.3 billion in 1998. In 1997, consolidated sales increased to $7.8 billion, an increase of 19 percent over 1996 sales of $6.5 billion. This sales growth was due to increased activity levels throughout the world and acquisitions, principally the volume electronic component distribution businesses of Premier Farnell plc offset, in part, by the impact of a stronger U.S. dollar. Sales of Gates/Arrow increased by 21 percent, excluding the impact of acquistions. Consolidated sales of $6.5 billion in 1996 were 10 percent higher than 1995 sales of $5.9 billion. This sales growth was principally due to increased sales of commercial computer products and microprocessors. The sales of semiconductor products were characterized by an oversupply of product, competitive pricing pressures, and reductions in memory prices. Operating Income The company's consolidated operating income decreased to $352.5 million in 1998, compared with operating income of $374.7 million in 1997, including special charges of $59.5 million. Excluding the special charges, operating income in 1997 was $434.2 million. The reduction in operating income reflected a decline in the sales of the North American components operation, a further decline in gross margins due to proportionately higher sales of lower margin commercial computer products, and competitive pricing pressures throughout the world offset, in part, by the impact of increased sales and the benefits of continuing economies of scale. Operating expenses as a percent of sales remained consistent with 1997 at 9.7 percent, the lowest in the company's history. In 1997, the company's consolidated operating income decreased to $374.7 million, compared with operating income of $400.6 million in 1996, principally as a result of special charges of $59.5 million associated with the realignment of the North American components operations and the acquisition and integration of the volume electronic component distribution businesses of Premier Farnell plc. The improvement in operating income, excluding the special charges, reflects the impact of increased sales, acquisitions, and continuing economies of scale offset, in part, by lower gross profit margins caused by competitive pricing pressures and a greater sales mix of commercial computer products. Operating expenses, excluding the special charges, as a percent of sales declined to 9.7 percent in 1997. The company's consolidated operating income decreased to $400.6 million in 1996, compared with operating income of $423.2 million in 1995. The reduction in operating income reflected a further decline in gross margins due to proportionately higher sales of lower margin commercial computer products and microprocessors throughout the world and competitive pricing pressures in Europe and the Asia/Pacific region offset, in part, by the impact of increased sales and the benefits of continuing economies of scale. Operating expenses as a percent of sales declined to 9.8 percent in 1996. Interest Interest expense of $81.1 million in 1998 increased by $14 million from the 1997 level, reflecting increases in borrowings associated with acquisitions and investments in working capital. In 1997, interest expense increased to $67.1 million from $38 million in 1996, reflecting increases in borrowings associated with acquisitions, the purchases of the company's common stock, and investments in working capital. Interest expense of $38 million in 1996 decreased by $8.4 million from the 1995 level. The decrease reflected the conversion of the company's 5 3/4% convertible subordinated debentures in October 1995, lower borrowings resulting from improved working capital usage, and lower borrowing costs offset, in part, by borrowings to fund purchases of common stock. Income Taxes The company recorded a provision for taxes at an effective tax rate of 42.2 percent in 1998 compared with 41 percent, excluding the special charges, in 1997. The higher effective rate in 1998 is due to the non-deductibility of goodwill amortization. In 1997, the company recorded a provision for taxes at an effective tax rate of 41 percent, excluding the special charges, compared with 39.9 percent in 1996. The increased rate for 1997 is due to increased earnings in countries with higher marginal tax rates and the non-deductibility of goodwill amortization. The company recorded a provision for taxes at an effective tax rate of 39.9 percent in 1996, compared with 40.4 percent in 1995. The lower effective rate was the result of decreased earnings in countries with higher marginal tax rates. Net Income Net income in 1998 was $145.8 million, a decrease from $204.1 million, before the special charges of $59.5 million ($40.4 million after taxes), in 1997. The decrease in net income is attributable to lower operating income and increases in interest expense. In 1997, the company's net income advanced to $204.1 million from $202.7 million in 1996, before the special charges. The increase in net income was attributable to higher operating income offset, in part, by an increase in interest expense. Net income in 1996 was $202.7 million, an increase from $202.5 million in 1995. The increase in net income was attributable to decreases in interest expense, income taxes, and minority interest offset, in part, by lower operating income. Liquidity and Capital Resources The company maintains a high level of current assets, primarily accounts receivable and inventories. Consolidated current assets, as a percentage of total assets, were approximately 75 percent and 74 percent in 1998 and 1997, respectively. In 1998, working capital increased by 18 percent, or $262 million, compared with 1997. This increase was due to higher working capital requirements and acquisitions. The net amount of cash provided by operations in 1998 was $43.6 million, the principal element of which was the cash flow resulting from net earnings offset, in part, by working capital usage. The net amount of cash used by the company for investing purposes was $129.6 million, including $70.6 million for various acquisitions. Cash flows provided by financing activities were $131.4 million, principally reflecting the $445.7 million of proceeds from the issuance of the company's 6 7/8% senior debentures and 6.45% senior notes offset, in part, by the reduction in the company's credit facilities, purchases of common stock, and distributions to partners. Working capital increased by $160 million, or 13 percent, in 1997 compared with 1996, primarily as a result of increased sales and acquisitions. This percentage increase was less than the percentage increase of sales as a result of improvements in working capital usage. The net amount of cash used for the company's operating activities in 1997 was $14.2 million, principally reflecting earnings offset by increased working capital requirements supporting higher sales. The net amount of cash used for investing activities was $410.8 million, including $381.5 million for acquisitions and investments. The net amount of cash provided by financing activities was $422.1 million, principally reflecting the $392.8 million of proceeds from the issuance of the company's senior notes and senior debentures and increases in the company's credit facilities offset, in part, by the purchase of the company's common stock. In 1996, working capital increased by 5 percent, or $56 million, compared with 1995. This percentage increase was less than the percentage increase of sales as a result of improvements in working capital usage. The net amount of cash provided by operations in 1996 was $306.8 million, the principal element of which was the cash flow resulting from higher net earnings and improved working capital usage. The net amount of cash used by the company for investing purposes was $55.3 million, including $38.9 million for various acquisitions. Cash flows from financing activities were $202.6 million, principally reflecting the reduction in the company's borrowings, purchases of common stock, and distributions to partners. Market and Other Risks The company, as a large international organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material impact on the company's financial results in the future. The company's primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe and the Asia/Pacific region. At the present time, the company hedges only these currency exposures and does not hedge anticipated foreign currency cash flows and earnings or its investments in businesses in Europe and the Asia/Pacific region as in many instances there are natural offsetting positions. The translation of the financial statements of the non-North American operations is impacted by fluctuation in foreign currency exchange rates. Had the various average foreign currency exchange rates remained the same during 1998 as compared with 1997, 1998 sales and operating income would have been $48 million and $3 million higher, respectively, than the actual results for 1997. The company's interest expense, in part, is sensitive to the general level of short-term interest rates in the United States and Europe. To mitigate the impact of fluctuations in interest rates, at December 31, 1998, the company has approximately 74 percent of its debt as fixed rate long-term borrowings and 26 percent of its debt subject to short-term floating rates. Interest expense would fluctuate by approximately $1 million if average short-term interest rates had changed by one percentage point in 1998. This amount was determined by considering the impact of a hypothetical interest rate on the company's borrowing cost. This analysis does not consider the effect of the level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company's financial structure. Year 2000 Update The company previously initiated a comprehensive, worldwide review to identify, evaluate and address Year 2000 issues and implemented a plan to resolve those issues. Included within the scope of this initiative are operational and information technology computer systems; embedded systems contained in machinery and equipment including warehousing and telecommunications equipment; and third party relationships, including trade and non-trade vendors, carriers, and other principal business partners. In the information technology arena, the company divided its remediation plan into the following phases: inventory, assessment, remediation, testing, and monitoring. The inventory, assessment, and remediation phases have been substantially completed, and the testing and monitoring phases are progressing on schedule, with completion anticipated by June 30, 1999. With respect to non- information technology, or embedded systems, the company has substantially completed the inventory and assessment phases, and remediation and testing are progressing according to schedule, with completion anticipated during the third quarter of 1999. Spending related to Year 2000 modification is not expected to exceed $10 million in 1999. Amounts incurred to date in addressing Year 2000 issues have not exceeded $10 million. The company is currently engaged in a review of the Year 2000 compliance efforts of key suppliers and other principal business partners upon whom it depends for essential products and services. There can be no guarantee that these parties will resolve their Year 2000 issues with respect to products, services or critical systems, and processes in a timely manner. Management believes that failure or delay by any of these parties could possibly cause a significant disruption to the company's business. The company is in the process of developing contingency plans to address these and other issues. Information Relating to Forward-Looking Statements This report includes forward-looking statements that are subject to certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing, and customer demand, competition, other vagaries in the computer and electronic components markets, and changes in relationships with key suppliers. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any forward-looking statements. Item 8. Financial Statements. -------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Arrow Electronics, Inc. We have audited the accompanying consolidated balance sheet of Arrow Electronics, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrow Electronics, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New York, New York February 17, 1999 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements of Arrow Electronics, Inc. have been prepared by management, which is responsible for their integrity and objectivity. These statements, prepared in accordance with generally accepted accounting principles, reflect our best use of judgment and estimates where appropriate. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. The company's system of internal controls is designed to provide reasonable assurance that company assets are safeguarded from loss or unauthorized use or disposition and that transactions are executed in accordance with management's authorization and are properly recorded. In establishing the basis for reasonable assurance, management balances the costs of the internal controls with the benefits they provide. The system contains self-monitoring mechanisms, and compliance is tested through an extensive program of site visits and audits by the company's operating controls staff. The Audit Committee of the board of directors, consisting entirely of outside directors, meets regularly with the company's management, operating controls staff, and independent auditors and reviews audit plans and results as well as management's actions taken in discharging its responsibilities for accounting, financial reporting, and internal controls. Members of management, the operating controls staff, and the independent auditors have direct and confidential access to the Audit Committee at all times. The company's independent auditors, Ernst & Young LLP, were engaged to audit the consolidated financial statements in accordance with generally accepted auditing standards. These standards include a study and evaluation of internal controls for the purpose of establishing a basis for reliance thereon relative to the scope of their audit of the consolidated financial statements. Stephen P. Kaufman Chairman and Chief Executive Officer Paul J. Reilly Vice President and Corporate Controller
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands except per share data) Years Ended December 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Sales $8,344,659 $7,763,945 $6,534,577 ---------- ---------- ---------- Costs and expenses: Cost of products sold 7,183,413 6,574,415 5,492,556 Selling, general, and administrative expenses 756,770 712,213 604,412 Depreciation and amortization 51,972 43,096 36,982 Integration charge - 21,600 - Realignment charge - 37,900 - ---------- ---------- ---------- 7,992,155 7,389,224 6,133,950 ---------- ---------- ---------- Operating income 352,504 374,721 400,627 Equity in earnings (loss) of affiliated companies 937 781 (97) Interest expense, net 81,126 67,117 37,959 ---------- ---------- ---------- Earnings before income taxes and minority interest 272,315 308,385 362,571 Provision for income taxes 115,018 131,617 144,667 ---------- ---------- ---------- Earnings before minority interest 157,297 176,768 217,904 Minority interest 11,469 13,112 15,195 ---------- ---------- ---------- Net income $ 145,828 $ 163,656 $ 202,709 ========== ========== ========== Per common share: Basic $ 1.53 $ 1.67 $ 2.01 ========== ========== ========== Diluted $ 1.50 $ 1.64 $ 1.98 ========== ========== ========== Average number of common shares outstanding: Basic 95,397 98,006 100,972 ====== ====== ======= Diluted 97,113 99,769 102,380 ====== ====== ======= See accompanying notes. </TABLE>
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands) December 31, ----------------------- 1998 1997 ---- ---- <S> <C> <C> ASSETS Current assets: Cash and short-term investments $ 158,924 $ 112,665 Accounts receivable, less allowance for doubtful accounts ($48,423 in 1998 and $46,055 in 1997) 1,354,351 1,245,354 Inventories 1,321,261 1,230,053 Prepaid expenses and other assets 26,279 42,268 ---------- ---------- Total current assets 2,860,815 2,630,340 ---------- ---------- Property, plant and equipment at cost Land 15,087 9,699 Buildings and improvements 90,851 75,431 Machinery and equipment 183,227 143,030 ---------- ---------- 289,165 228,160 Less accumulated depreciation and amortization 134,359 113,923 ---------- ---------- 154,806 114,237 ---------- ---------- Investment in affiliated companies 23,279 54,914 Cost in excess of net assets of companies acquired, less accumulated amortization ($91,837 in 1998 and $69,899 in 1997) 721,323 645,152 Other assets 79,648 93,230 ---------- ---------- $3,839,871 $3,537,873 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 785,596 $ 767,088 Accrued expenses 211,438 285,673 Short-term borrowings, including current maturities of long-term debt 168,066 143,723 --------- --------- Total current liabilities 1,165,100 1,196,484 Long-term debt 1,040,173 823,099 Other liabilities 77,587 87,254 Minority interest 69,692 70,278 Shareholders' equity: Common stock, par value $1: Authorized--120,000,000 shares in 1998 and 1997 Issued--102,949,640 shares in 1998 and 1997 102,950 102,950 Capital in excess of par value 506,002 506,656 Retained earnings 1,114,826 968,998 Foreign currency translation adjustment (23,648) (35,881) --------- --------- 1,700,130 1,542,723 Less: Treasury stock (7,321,540 and 6,011,903 shares in 1998 and 1997), at cost 198,281 164,207 Unamortized employee stock award 14,530 17,758 ---------- ---------- Total shareholders' equity 1,487,319 1,360,758 ---------- ---------- $3,839,871 $3,537,873 ========== ========== See accompanying notes. </TABLE>
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Years Ended December 31, --------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 145,828 $ 163,656 $ 202,709 Adjustments to reconcile net income to net cash provided by (used for) operations: Minority interest in earnings 11,469 13,112 15,195 Depreciation and amortization 55,101 47,057 39,453 Equity in (earnings) loss of affiliated companies (937) (781) 97 Deferred income taxes 19,661 (9,814) 10,280 Integration charge - 21,600 - Realignment charge - 37,900 - Change in assets and liabilities, net of effects of acquired businesses: Accounts receivable (38,792) (219,488) 45,845 Inventories (33,490) (94,144) (8,426) Prepaid expenses and other assets 10,785 (8,048) (2,893) Accounts payable (17,049) 36,784 26,276 Accrued expenses (88,808) (4,917) (23,870) Other (20,164) 2,913 2,135 --------- --------- --------- Net cash provided by (used for) operating activities 43,604 (14,170) 306,801 --------- --------- --------- Cash flows from investing activities: Acquisition of property, plant and equipment (59,006) (29,335) (28,596) Proceeds from sale of building - - 10,442 Cash consideration paid for acquired businesses (67,521) (364,499) (38,851) Investment in affiliates (3,078) (16,973) 1,734 -------- -------- --------- Net cash used for investing activities (129,605) (410,807) (55,271) --------- -------- --------- Cash flows from financing activities: Change in short-term borrowings (4,850) 55,018 (53,992) Change in credit facilities (223,127) 122,830 (96,906) Proceeds from long-term debt 445,665 392,844 - Repayment of long-term debt (25,411) (338) (7,097) Proceeds from exercise of stock options 7,504 20,209 12,323 Distributions to minority partners (18,227) (17,464) (7,967) Purchases of common stock (50,129) (151,010) (48,993) --------- -------- --------- Net cash provided by (used for) financing activities 131,425 422,089 (202,632) --------- -------- --------- Effect of exchange rate changes on cash (3,964) (20,847) (6,445) --------- --------- --------- Net increase (decrease) in cash and short-term investments 41,460 (23,735) 42,453 Cash and short-term investments at beginning of year 112,665 136,400 93,947 Cash and short-term investments of acquired affiliate 4,799 - - --------- -------- --------- Cash and short-term investments at end of year $ 158,924 $ 112,665 $ 136,400 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 88,718 $ 121,251 $ 130,834 Interest 81,500 52,265 38,118 See accompanying notes. </TABLE>
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands) Common Foreign Unamortized Stock Capital in Currency Employee at Par Excess of Retained Translation Treasury Stock Awards Value Par Value Earnings Adjustment Stock and Other Total -------- ---------- -------- ----------- --------- ------------ ---------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1995 $101,296 $479,676 $602,633 $18,398 $ (24) $(6,098) $1,195,881 Net income - - 202,709 - - - 202,709 Translation adjustment - - - (9,645) - - (9,645) Comprehensive income 193,064 Exercise of stock options 924 11,774 - - (375) - 12,323 Tax benefits related to exercise of stock options - 3,345 - - - - 3,345 Restricted stock awards, net 172 3,922 - - 327 (4,421) - Amortization of employee stock awards - - - - - 2,862 2,862 Purchases of common stock - - - - (48,993) - (48,993) ------- -------- ------- -------- ------- ------ --------- Balance at December 31, 1996 102,392 498,717 805,342 8,753 (49,065) (7,657) 1,358,482 Net income - - 163,656 - - - 163,656 Translation adjustments - - - (44,634) - - (44,634) Comprehensive income 119,022 Exercise of stock options 198 (8,626) - - 28,637 - 20,209 Tax benefits related to exercise of stock options - 7,074 - - - - 7,074 Restricted stock awards, net 360 9,491 - - 7,231 (17,082) - Amortization of employee stock awards - - - - - 6,981 6,981 Purchases of common stock - - - - (151,010) - (151,010) -------- -------- -------- -------- -------- -------- ---------- Balance at December 31, 1997 102,950 506,656 968,998 (35,881) (164,207) (17,758) 1,360,758 Net income - - 145,828 - - - 145,828 Translation adjustments - - - 12,233 - - 12,233 Comprehensive income 158,061 Exercise of stock options - (2,777) - - 10,281 - 7,504 Tax benefits related to exercise of stock options - 1,619 - - - - 1,619 Restricted stock awards, net - 503 - - 5,766 (6,269) - Amortization of employee stock awards - - - - - 9,497 9,497 Purchases of common stock - - - - (50,129) - (50,129) Other - 1 - - 8 - 9 -------- -------- ---------- -------- -------- -------- --------- Balance at December 31, 1998 $102,950 $506,002 $1,114,826 $(23,648) $(198,281) $(14,530) $1,487,319 ======== ======== ========== ======== ========= ======== ========== See accompanying notes. </TABLE> ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. The company's investments in affiliated companies which are not majority-owned are accounted for using the equity method. All significant intercompany transactions are eliminated. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Short-term Investments - ------------------------------- Short-term investments which have a maturity of ninety days or less at time of purchase are considered cash equivalents in the consolidated statement of cash flows. The carrying amount reported in the consolidated balance sheet for short- term investments approximates fair value. Financial Instruments - --------------------- The company uses various financial instruments, including derivative financial instruments, for purposes other than trading. The company does not use derivative financial instruments for speculative purposes. Derivatives used as part of the company's risk management strategy are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Inventories - ----------- Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Property and Depreciation - ------------------------- Depreciation is computed on the straight-line method for financial reporting purposes and on accelerated methods for tax reporting purposes. Leasehold improvements are amortized over the shorter of the term of the related lease or the life of the improvement. Cost in Excess of Net Assets of Companies Acquired - -------------------------------------------------- The cost in excess of net assets of companies acquired is being amortized on a straight-line basis, principally over 40 years. Foreign Currency - ---------------- The assets and liabilities of foreign operations are translated at the exchange rates in effect at the balance sheet date, with the related translation gains or losses reported as a separate component of shareholders' equity. The results of foreign operations are translated at the monthly weighted average exchange rates. Income Taxes - ------------ Income taxes are accounted for under the liability method. Deferred taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Split - ----------- The company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend distributed on October 15, 1997 to shareholders of record on October 3, 1997. Shareholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from capital in excess of par value to common stock the par value of the additional shares arising from the split. All references in the financial statements and the related notes to the number of shares and per share amounts for 1997 and 1996 have been restated to reflect the two-for-one stock split. Net Income Per Share - -------------------- Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Comprehensive Income - -------------------- Effective January 1, 1998, the company adopted Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" which requires disclosure of comprehensive income and its components. Comprehensive income is defined as the aggregate change in shareholders' equity excluding changes in ownership interests. The foreign currency translation adjustments included in comprehensive income have not been tax effected as investments in foreign affiliates are deemed to be permanent. Segment and Geographic Information - ---------------------------------- Effective January 1, 1998, the company adopted Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures about Segments of an Enterprise and Related Information" which requires that an enterprise disclose the factors that management considers most significant in determining its reportable segments. 2. Acquisitions During 1998, the company acquired a majority interest in Scientific and Business Minicomputers, Inc. and Unitronics Componentes S.A. The company also increased its holdings in Spoerle Electronic Handelsgesellschaft mbH ("Spoerle") to 90 percent and the Veltek/Zatek companies in Australia and Strong Electronics Co., Ltd. in Taiwan to 100 percent. The aggregate cost of these acquisitions was $62,918,000. During 1997, the company acquired the volume electronic component distribution businesses of Premier Farnell plc for approximately $298,000,000 and a majority interest in Consan Incorporated and Support Net, Inc. During 1997, the company increased its holdings in Spoerle to 80 percent; Silverstar Ltd., S.p.A. ("Silverstar") to 98 percent; and TH:s Elektronik AB, Exatec A/S, Amitron S.A., and ATD Electronica S.A. to 100 percent. The aggregate cost of these acquisitions was $364,499,000. In September 1997, the company recorded a special charge of $21,600,000 before taxes ($.17 per share on a diluted basis) associated with the integration of the volume electronic component distribution businesses of Premier Farnell plc and related transaction fees. Such integration costs include real estate termination costs, severance and other expenses related to personnel performing duplicative functions, professional fees, and the disposal of duplicative fixed assets. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The cost of each acquisition has been allocated among the net assets acquired on the basis of the respective fair values of the assets acquired and liabilities assumed. For financial reporting purposes, the acquisitions are accounted for as purchase transactions beginning in the respective month of acquisition. The aggregate consideration paid for all acquisitions exceeded the net assets acquired by $46,591,000 and $296,379,000 in 1998 and 1997, respectively. In connection with certain acquisitions, the company may be required to make additional payments that are contingent upon the acquired businesses achieving certain operating goals. During 1998, the company made additional payments of $2,942,000 which have been capitalized as cost in excess of net assets of companies acquired. 3. Investment in Affiliated Companies During 1998, the company acquired a 50 percent interest in Marubun/Arrow, a joint venture with Marubun Corporation, Japan's largest independent distributor. This joint venture was formed to specifically serve Japanese customers in the Asia/Pacific region and North America. The company also has a 50 percent interest in Altech Industries (Pty) Ltd., a joint venture with Allied Technologies Limited, a South African electronics distributor. Prior to 1998 when it increased its holdings to 100 percent, the company had a 45 percent interest in Strong Electronics Co., Ltd., a joint venture with Lite-On, Inc. 4. Debt Long-term debt consisted of the following at December 31 (in thousands): 1998 1997 ---- ---- Global multi-currency credit facility $ 173,633 $377,765 7% senior notes, due 2007 197,976 197,623 7 1/2% senior debentures, due 2027 196,071 196,033 8.29% senior notes 50,000 75,000 6 7/8% senior debentures, due 2018 195,939 - 6.45% senior notes, due 2003 249,855 - Other obligations with various interest rates and due dates 1,699 1,678 ---------- -------- 1,065,173 848,099 ---------- -------- Less installments due within one year 25,000 25,000 $1,040,173 $823,099 ========== ======== The company's revolving credit agreement (the "global multi-currency credit facility"), as amended, provides up to $650,000,000 of available credit and has a maturity date of September 2001. The interest rate for loans under this facility is at the applicable eurocurrency rate (5.0625 percent for U.S. dollar denominated loans at December 31, 1998) plus a margin of .225 percent. The company may also utilize the facility's competitive advance option to obtain loans, generally at a lower rate. The company pays the banks a facility fee of.125 percent per annum. The 7% senior notes and the 7 1/2% senior debentures are not redeemable prior to their maturity. The 8.29% senior notes are payable in three equal annual installments. The first installment was paid on December 30, 1998 with the remaining installments due in 1999 and 2000. The 6 7/8% senior debentures and the 6.45% senior notes may be prepaid at the option of the company on at least 30 days' prior notice subject to a "make whole" clause. The global multi-currency credit facility, the senior notes, and the senior debentures limit, among other things, the payment of cash dividends and the incurrence of additional borrowings and require that working capital, net worth, and certain other financial ratios be maintained at designated levels. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The company maintains uncommitted lines of credit with a group of banks under which up to $65,000,000 could be borrowed at December 31, 1998 on such terms as the company and the banks may agree. Borrowings under the lines of credit would be classified as long-term debt as the company has the ability to renew them or refinance them under the global multi-currency credit facility. There are no fees or compensating balances associated with these borrowings. There were no outstanding borrowings under the lines of credit at December 31, 1998. Short-term borrowings are principally utilized to support the working capital requirements of certain foreign operations. The weighted average interest rates of these borrowings at December 31, 1998 and 1997 were 7 percent and 8 percent, respectively. At December 31, 1998, the estimated fair market value of the 7% senior notes and the 7 1/2% senior debentures was 103 percent of par, the 8.29% senior notes was 109 percent of par, and the 6 7/8% senior debentures was 97 percent of par. The balance of the company's borrowings approximate their fair value. 5. Income Taxes The provision for income taxes consists of the following (in thousands): 1998 1997 1996 ---- ---- ---- Current Federal $ 46,449 $ 81,278 $ 78,715 State 11,373 19,679 21,482 Foreign 35,796 31,096 29,507 -------- -------- -------- 93,618 132,053 129,704 -------- -------- -------- Deferred Federal 15,667 (9,321) 4,758 State 3,815 (2,130) 1,087 Foreign 1,918 11,015 9,118 -------- -------- -------- 21,400 (436) 14,963 -------- -------- -------- $115,018 $131,617 $144,667 ======== ======== ======== The principal causes of the difference between the U.S. statutory and effective income tax rates are as follows (in thousands): 1998 1997 1996 ---- ---- ---- Provision at statutory rate $ 95,311 $107,935 $126,900 State taxes, net of federal benefit 9,872 11,407 14,670 Foreign tax rate differential 858 2,499 6,625 Other 8,977 9,776 (3,528) -------- -------- -------- $115,018 $131,617 $144,667 ======== ======== ======== For financial reporting purposes, income before income taxes attributable to the United States was $183,048,000 in 1998, $216,993,000 in 1997, and $279,149,000 in 1996, and income before income taxes attributable to foreign operations was $89,267,000 in 1998, $91,392,000 in 1997, and $83,422,000 in 1996. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of the company's deferred tax assets, which are included in other assets, are as follows (in thousands): 1998 1997 ---- ---- Inventory reserves $11,148 $14,407 Allowance for doubtful accounts 9,208 10,803 Accrued expenses 919 7,789 Realignment reserve 1,869 11,002 Integration reserve 19,116 20,897 Other (3,912) (1,076) ------- ------- $38,348 $63,822 ======= ======= Included in other liabilities are deferred tax liabilities of $40,909,000 and $40,327,000 at December 31, 1998 and 1997, respectively. The deferred tax liabilities are principally the result of the differences in the bases of the German assets and liabilities for tax and financial reporting purposes. 6. Shareholders' Equity The company has 2,000,000 authorized shares of serial preferred stock with a par value of $1. In 1988, the company paid a dividend of one preferred share purchase right on each outstanding share of common stock. Each right, as amended, entitles a shareholder to purchase one one-hundredth of a share of a new series of preferred stock at an exercise price of $50 (the "exercise price"). The rights are exercisable only if a person or group acquires 20 percent or more of the company's common stock or announces a tender or exchange offer that will result in such person or group acquiring 30 percent or more of the company's common stock. Rights owned by the person acquiring such stock or transferees thereof will automatically be void. Each other right will become a right to buy, at the exercise price, that number of shares of common stock having a market value of twice the exercise price. The rights, which do not have voting rights, and may be redeemed by the company at a price of $.01 per right at any time until ten days after a 20 percent ownership position has been acquired. In the event that the company merges with, or transfers 50 percent or more of its consolidated assets or earning power to, any person or group after the rights become exercisable, holders of the rights may purchase, at the exercise price, a number of shares of common stock of the acquiring entity having a market value equal to twice the exercise price. The rights, as amended, expire on March 1, 2008. 7. Realignment Charge During 1997, the company announced the realignment of its North American components operations into seven operating groups based upon customer needs. The company recorded a special charge of $37,900,000 before taxes ($.24 per share on a diluted basis) for costs associated with the realignment, including real estate termination costs, severance and other expenses related to personnel as well as costs of communicating the realignment to customers, suppliers, and employees. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share ("EPS") for the years ended December 31 (in thousands): 1998 1997 1996 ---- ---- ---- Net income for EPS $145,828 $163,656(a) $202,709 Weighted average common shares outstanding for basic EPS 95,397 98,006 100,972 Net effect of dilutive stock options and restricted stock awards 1,716 1,763 1,408 ------- -------- -------- Weighted average common shares outstanding for diluted EPS 97,113 99,769 102,380 ======= ======== ======== Basic EPS $ 1.53 $ 1.67(a) $ 2.01 ======= ======== ======== Diluted EPS $ 1.50 $ 1.64(a) $ 1.98 ======= ======== ======== (a) Net income includes special charges totaling $59,500,000 ($40,435,000 after taxes) associated with the realignment of the North American components operations and the acquisition and integration of the volume electronic component distribution businesses of Premier Farnell plc. Excluding these charges, net income and net income per share on a basic and diluted basis were $204,091,000, $2.08, and $2.05, respectively. 9. Employee Stock Plans Restricted Stock Plan - --------------------- Under the terms of the Arrow Electronics, Inc. Restricted Stock Plan (the "Plan"), a maximum of 3,960,000 shares of common stock may be awarded at the discretion of the board of directors to key employees of the company. Shares awarded under the Plan may not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, except as provided in the Plan. Shares awarded become free of vesting restrictions generally over a four-year period. The company awarded 275,000 shares of common stock in early 1999 to 100 key employees in respect of 1998, 215,400 shares of common stock to 140 key employees during 1998, 292,304 shares of common stock to 209 key employees during 1997, and 239,720 shares of common stock to 81 key employees during 1996. Forfeitures of shares awarded under the Plan were 7,359, 31,250 and 49,274 during 1998, 1997, and 1996, respectively. The aggregate market value of outstanding awards under the Plan at the respective dates of award is being amortized over the vesting period, and the unamortized balance is included in shareholders' equity as unamortized employee stock awards. Stock Option Plan - ----------------- Under the terms of the Arrow Electronics, Inc. Stock Option Plan (the "Option Plan"), both nonqualified and incentive stock options for an aggregate of 21,000,000 shares of common stock were authorized for grant to key employees at prices determined by the board of directors at its discretion or, in the case of incentive stock options, prices equal to the fair market value of the shares at the dates of grant. Options granted under the plan after May 1997 are exercisable in equal installments over a four-year period. Previously, options became exercisable over a two- or three-year period. Options currently outstanding have terms of ten years. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In October 1997, all employees of the North American operations below the level of vice president were granted a special award of stock options totaling 1,255,320 at the then market price of the company's stock as an incentive related to the realignment of the North American components operation. In December 1998, the board of directors approved the repricing of the remaining unforfeited options, totaling 1,050,760, reducing the exercise price from $27.50 to $22.5625. The company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Option Plan. Accordingly, no compensation expense has been recognized in the company's accounts for this plan. The following information relates to the Option Plan for the years ended December 31: Average Average Average Exercise Exercise Exercise 1998 Price 1997 Price 1996 Price ---- -------- ---- -------- ---- ------- Options outstanding at beginning of year 8,231,809 $24.00 7,107,042 $20.25 4,877,150 $16.69 Granted 131,120 (a) 25.87 2,648,340 29.51 3,267,920 23.67 Exercis (375,501) 19.96 (1,316,962) 15.34 (923,970) 13.75 Forfeited (425,279)(a) 26.53 (206,611) 22.16 (114,058) 18.88 --------- ---------- --------- Options outstanding at end of year 7,562,149 $23.41 8,231,809 $24.00 7,107,042 $20.25 ========= ========= ========= Prices per share of options outstanding $1.81-34.00 $1.81-32.25 $1.81-27.69 Options available for future grant: Beginning of year 6,962,805 432,700 3,586,562 End of year 7,255,214 6,962,805 432,700 (a) Excludes 1,050,760 options granted in October 1997 to all employees of the North American operations below the level of vice president and repriced on December 14, 1998 from $27.50 to $22.5625. The following table summarizes information about stock options outstanding at December 31, 1998: Options Outstanding Options Exercisable - ----------------------------------------------- ---------------------- Weighted Weighted Weighted Maximum Average Average Average Exercise Number Remaining Exercise Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price - -------- ----------- ---------------- ------- ----------- -------- $20.00 1,318,899 61 months $15.90 1,291,949 $15.88 25.00 3,236,353 87 months 21.75 2,406,262 21.46 30.00 1,821,447 94 months 26.20 1,574,959 26.07 35.00 1,185,450 107 months 31.99 288,918 31.97 --------- --------- All 7,562,149 90 months 23.41 5,562,088 22.02 ========= ========= Had stock-based compensation costs been determined as prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," net income would have been reduced by $6.7 million ($.04 per share on a diluted basis) in 1998, $7.6 million ($.06 per share on a diluted basis) in 1997 and $5.2 million ($.04 per share on a diluted basis) in 1996. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated weighted average fair value, utilizing the Black-Scholes option- pricing model, at date of option grant during 1998 and 1997 was $8.35 and $9.41, per option, respectively. The weighted average fair value was estimated using the following assumptions: 1998 1997 ---- ---- Expected life (months) 48 47 Risk-free interest rate (percent) 5.4 5.8 Expected volatility (percent) 31 29 There is no expected dividend yield. Stock Ownership Plan The company maintains a noncontributory employee stock ownership plan which enables most North American employees to acquire shares of the company's common stock. Contributions, which are determined by the board of directors, are in the form of common stock or cash which is used to purchase the company's common stock for the benefit of participating employees. Contributions to the plan for 1998, 1997, and 1996 amounted to $5,531,000, $5,147,000, and $4,218,000, respectively. 10. Retirement Plans The company has a defined contribution plan for eligible employees, which qualifies under Section 401(k) of the Internal Revenue Code. The company's contribution to the plan, which is based on a specified percentage of employee contributions, amounted to $4,387,000, $4,988,000 and $4,608,000, in 1998, 1997, and 1996, respectively. Certain domestic and foreign subsidiaries maintain separate defined contribution plans for their employees and made contributions thereunder, which amounted to $2,035,000, $1,915,000 and $1,162,000, in 1998, 1997, and 1996, respectively. The company maintains an unfunded supplemental retirement plan for certain executives. The company's board of directors determines those employees eligible to participate in the plan and their maximum annual benefit upon retirement. 11. Lease Commitments The company leases certain office, warehouse, and other property under noncancelable operating leases expiring at various dates through 2053. Rental expenses of noncancelable operating leases amounted to $29,231,000 in 1998, $29,190,000 in 1997, and $29,390,000 in 1996. Aggregate minimum rental commitments under all noncancelable operating leases, exclusive of real estate taxes, insurance, and leases related to facilities closed in connection with the North American realignment and the integration of the acquired businesses, approximate $153,039,000. Such commitments on an annual basis are: 1999- $30,604,000; 2000-$21,876,000; 2001-$15,821,000; 2002-$13,706,000; 2003- $11,951,000; and $50,111,000 thereafter. 12. Financial Instruments The company enters into foreign exchange forward contracts (the "contracts") to mitigate the impact of changes in foreign currency exchange rates, principally French francs, German deutsche marks, Italian lira, and British pound sterling. These contracts are executed to facilitate the netting of offsetting foreign currency exposures resulting from inventory purchases and sales, and generally have terms of no more than three months. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized. The company does not enter into forward contracts for trading purposes. The risk of loss on a contract is the risk of nonperformance by the counterparties which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the contracts is estimated using market quotes. The notional amount of the contracts at December 31, 1998 and ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, was $79,595,000 and $97,321,000, respectively. The carrying amounts, which are nominal, approximated fair value at December 31, 1998 and 1997. 13. Segment and Geographic Information The company is engaged in the distribution of electronic components to original equipment manufacturers and computer products to value-added resellers (VARS). Operating income excludes the effects of special charges relating to the integration of acquired businesses and the realignment of the North American components operations. Revenue, operating income, and assets by segment are as follows (in thousands): Electronic Computer Components Products Corporate Total ---------- -------- --------- ----- 1998 - ---- Revenue from external customers $6,343,890 $2,000,769 $ - $8,344,659 Operating income (loss) 343,129 55,889 (46,514) 352,504 Total assets 3,014,100 640,786 184,985 3,839,871 1997 - ---- Revenue from external customers $6,465,521 $1,298,424 $ - $7,763,945 Operating income (loss) 440,917 31,672 (97,868)(a) 374,721 Total assets 2,777,625 545,872 214,376 3,537,873 1996 - ---- Revenue from external customers $5,520,202 $1,014,375 $ - $6,534,577 Operating income (loss) 411,607 20,226 (31,206) 400,627 Total assets 2,293,495 283,555 133,301 2,710,351 (a) Includes special charges totaling $59,500,000 million associated with the realignment of the North American components operations and the acquistion and integration of the volume electronic component distribution businesses of Premier Farnell plc. As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, borrowings, and goodwill amortization are not directly ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS attributable to the individual operating segments. In its evaluation of its operating groups performance, the company ignores the impact of unusual items such as realignment and integration charges. Revenues, by geographic area, are as follows (in thousands): 1998 1997 1996 ---- ---- ---- North America $5,351,061 $4,964,660 $4,309,839 Europe 2,396,452 2,279,951 1,855,821 Asia/Pacific 597,146 519,334 368,917 $8,344,659 $7,763,945 $6,534,577 Total assets, by geographic area, are as follows (in thousands): 1998 1997 1996 ---- ---- ---- North America $2,066,785 $1,952,348 $1,525,551 Europe 1,473,857 1,386,976 1,030,343 Asia/Pacific 299,229 198,549 154,457 $3,839,871 $3,537,873 $2,710,351 14. Quarterly Financial Data (Unaudited) A summary of the company's quarterly results of operations follows (in thousands except per share data): First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 - ---- Sales $2,025,760 $2,023,966 $2,134,769 $2,160,164 Gross profit 294,879 291,331 285,282 289,754 Net income 41,945 35,990 35,563 32,330 Per common share: Basic .44 .37 .37 .34 Diluted .43 .37 .37 .34 1997 - ---- Sales $1,855,333 $1,848,742 $1,949,396 $2,110,474 Gross profit 285,561 293,390 291,546 319,033 Net income 50,294 51,779 9,282(a) 52,301 Per common share: Basic .51 .52 .10(a) .54 Diluted .50 .52 .09(a) .53 (a) Net income includes special charges totaling $59,500,000 ($40,435,000 after taxes) associated with the realignment of the North American components operations and the acquisition and integration of the volume electronic component distribution businesses of Premier Farnell plc. Excluding these charges, net income and net income per share on a basic and diluted basis were $49,717,000, $.51, and $.50, respectively. 15. Subsequent Event In January 1999, the company completed its previously announced acquisitions of Richey Electronics, Inc. and the Electronics Distribution Group of Bell Industries, Inc. for an estimated $315,000,000, including the assumption of approximately $38,000,000 of debt. Item 9. Changes In and Disagreements with Accountants on ------------------------------------------------ Accounting and Financial Disclosure. ----------------------------------- None. Part III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- See "Executive Officers" in the response to Item 1 above. In addition, the information set forth under the heading "Election of Directors" in the company's Proxy Statement filed in connection with the Annual Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated herein by reference. Item 11. Executive Compensation. ---------------------- The information set forth under the heading "Executive Compensation and Other Matters" in the company's Proxy Statement filed in connection with the Annual Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management. ---------- The information is included in the company's Proxy Statement filed in connection with the Annual Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. ---------------------------------------------- The information set forth under the heading "Executive Compensation and Other Matters" in the company's Proxy Statement filed in connection with the Annual Meeting of Shareholders scheduled to be held May 12, 1999 hereby is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. -------------------------------------------------------------- (a)1. Financial Statements. -------------------- The financial statements listed in the accompanying index to financial statements and financial statement schedule are filed as part of this annual report. 2. Financial Statement Schedule. ---------------------------- The financial statement schedule listed in the accompanying index to financial statements is filed as part of this annual report. All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. ARROW ELECTRONICS, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (Item 14 (a)) Page Report of Ernst & Young LLP, independent auditors 13 Management's responsibility for financial reporting 14 Consolidated statement of income for the years ended December 31, 1998, 1997, and 1996 15 Consolidated balance sheet at December 31, 1998 and 1997 16 For the years ended December 31, 1998, 1997, and 1996: Consolidated statement of cash flows 17 Consolidated statement of shareholders' equity 18 Notes to consolidated financial statements for the years ended December 31, 1998, 1997, and 1996 20 Consolidated schedule for the three years ended December 31, 1998: II - Valuation and qualifying accounts 39 3. Exhibits. (2)(a)(i) Share Purchase Agreement, dated as of October 10, 1991, among EDI Electronics Distribution International B.V., Aquarius Investments Ltd., Andromeda Investments Ltd., and the other persons named therein (incorporated by reference to Exhibit 2.2 to the company's Registration Statement on Form S-3, Registration No. 33-42176). (ii) Standstill Agreement, dated as of October 10, 1991, among Arrow Electronics, Inc., Aquarius Investments Ltd., Andromeda Investments Ltd., and the other persons named therein (incorporated by reference to Exhibit 4.1 to the company's Registration Statement on Form S-3, Registration No. 33-42176). (iii) Shareholder's Agreement, dated as of October 10, 1991, among EDI Electronics Distribution International B.V., Giorgio Ghezzi, Germano Fanelli, and Renzo Ghezzi (incorporated by reference to Exhibit 2(f)(iii) to the company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-4482). (b) Agreement and Plan of Merger, dated as of June 24, 1994, by and among Arrow Electronics, Inc., AFG Acquisition Company and Gates/FA Distributing, Inc. (incorporated by reference to Exhibit 2 to the company's Registration Statement on Form S-4, Commission File No. 35-54413). (c) Agreement and Plan of Merger, dated as of September 21, 1994, by and among Arrow Electronics, Inc., MTA Acquisition Company and Anthem Electronics, Inc. (incorporated by reference to Exhibit 2 to the company's Registration Statement on Form S-4, Commission File No. 33-55645). (d) Master Agreement, dated as of December 20, 1996, among Premier Farnell plc and Arrow Electronics, Inc. relating to the sale and purchase of the Farnell Volume Business (incorporated by reference to Exhibit 2(d) to the company's Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-4482). (e) Agreement and Plan of Merger, dated as of September 30, 1998, by and among Arrow Electronics, Inc., Lear Acquisition Corp. and Richey Electronics, Inc. (i) Amendment to Agreement and Plan of Merger, dated as of October 21, 1998 by and among Arrow Electronics, Inc., Lear Acquisition Corp. and Richey Electronics, Inc. (f) Agreement of Purchase and Sale, dated as of October 1, 1998, by and between Bell Industries, Inc. and Arrow Electronics, Inc. (3)(a)(i) Restated Certificate of Incorporation of the company, as amended (incorporated by reference to Exhibit 3(a) to the company's Annual Report on Form 10-K for the year ended December 31, 1994 Commission File No. 1- 4482). (ii) Certificate of Amendment of the Certificate of Incorporation of Arrow Electronics, Inc., dated as of August 30, 1996 (incorporated by reference to Exhibit 3 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Commission File No. 1-4482). (b) By-Laws of the company, as amended (incorporated by reference to Exhibit 3(b) to the company's Annual Report on Form 10-K for the year ended December 31, 1986, Commission File No. 1-4482). (4)(a)(i) Rights Agreement dated as of March 2, 1988 between Arrow Electronics, Inc. and Manufacturers Hanover Trust Company, as Rights Agent, which includes as Exhibit A a Certificate of Amendment of the Restated Certificate of Incorporation for Arrow Electronics, Inc. for the Participating Preferred Stock, as Exhibit B a letter to shareholders describing the Rights and a summary of the provisions of the Rights Agreement and as Exhibit C the forms of Rights Certificate and Election to Exercise (incorporated by reference to Exhibit 1 to the company's Current Report on Form 8-K dated March 3, 1988, Commission File No. 1-4482). (ii) First Amendment, dated June 30, 1989, to the Rights Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 30, 1989, Commission File No. 1- 4482). (iii) Second Amendment, dated June 8, 1991, to the Rights Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i)(iii) to the company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-4482). (iv) Third Amendment, dated July 19, 1991, to the Rights Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-4482). (v) Fourth Amendment, dated August 26, 1991, to the Rights Agreement in (4)(a)(i) above (incorporated by reference to Exhibit 4(i) (v) to the company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-4482). (vi) Fifth Amendment, dated February 25, 1998, to the Rights Agreement in (4)(i)above (incorporated by reference to Exhibit 7 to the company's current report on Form 8 A/A dated March 2, 1998, Commission File No. 1-4482). (b)(i) Indenture, dated as of January 15, 1997, between the company and the Bank of Montreal Trust Company, as Trustee (incorporated by reference to Exhibit 4 (b)(i) to the company's Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-4482). (ii) Officers' Certificate, as defined by the Indenture in 4(b)(i) above, dated as of January 22, 1997, with respect to the company's $200,000,000 7% Senior Notes due 2007 and $200,000,000 7 1/2% Senior Debentures due 2027 (incorporated by reference to Exhibit 4 (b)(ii) to the company's Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1- 4482). (iii) Officers' Certificate, as defined by the indenture in 4(b)(i) above, dated as of January 15, 1997, with respect to the $200,000,000 6 7/8% Senior Debentures due 2018, dated as of May 29, 1998. (iv) Officers' Certificate, as defined by the indenture in 4(b)(i) above, dated as of January 15, 1997, with respect to the $250,000,000 6.45% Senior Notes due 2003, dated October 21, 1998. (10)(a)(i) Arrow Electronics Savings Plan, as amended and restated through December 28, 1994 (incorporated by reference to Exhibit 10(a)(iii) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (ii) Amendment No. 1, dated March 29, 1996, to the Arrow Electronics Savings Plan in (10)(a)(i) above (incorporated by reference to Exhibit 10(a)(iv) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (iii) Second Amendment No. 1 to the Arrow Electronics Savings Plan in (10)(a)(i) above. (iv) Amendment No. 3 to the Arrow Electronics Savings Plan in (10)(a)(i) above. (v) Amendment No. 4 dated May 26, 1998 to the Arrow Electronics Savings Plan in (10)(a)(i) above. (vi) Arrow Electronics Stock Ownership Plan, as amended and restated through December 28, 1994 (incorporated by reference to Exhibit 10(a)(i) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (vii) Amendment No. 1, dated March 29, 1996, to the Arrow Electronics Stock Ownership Plan in (10)(a)(iii) above (incorporated by reference to Exhibit 10(a)(ii) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (viii) Second Amendment No. 1 to the Arrow Electronics Stock Ownership Plan in (10)(b)(i). (ix) Amendment No. 3 to the Arrow Electronics Stock Ownership Plan in (10)(b)(i). (x) Amendment No. 4 dated May 26, 1998, to the Arrow Electronics Stock Ownership Plan in (10)(b)(i). (b)(i) Employment Agreement, dated as of February 22, 1995, between the company and Stephen P. Kaufman (incorporated by reference to Exhibit 10(c)(ii) to the company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-4482). (ii) Employment Agreement, dated as of January 1, 1998 between the company and Robert E. Klatell. (incorporated by reference to Exhibit 10(c)(iii) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (iii) Form of agreement between the company and the employees parties to the Employment Agreements listed in 10(b)(i)-(iii) above providing extended separation benefits under certain circumstances (incorporated by reference to Exhibit 10(c)(iv) to the company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-4482). (iv) Employment Agreement, dated as of March 1, 1999, between the company and Sam R. Leno. (v) Employment Agreement, dated as of January 1, 1998, between the company and Betty Jane Scheihing (incorporated by reference to Exhibit 10(c)(v) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (vi) Employment Agreement, dated as of September 1, 1997, between the company and Jan M. Salsgiver (incorporated by reference to Exhibit 10(c)(vi) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (vii) Employment Agreement, dated as of September 1, 1997, between the company and Francis M. Scricco (incorporated by reference to Exhibit 10(c)(vi) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (viii) Employment Agreement, dated as of April 15, 1996, between the company and Gerald Luterman (incorporated by reference to Exhibit 10(c)(vi) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (ix) Employment Agreement, dated as of September 21, 1994, between the company and Robert S. Throop (incorporated by reference to Exhibit 10(c)(x) to the company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-4482). (x) Employment Agreement, dated as of September 1, 1994 between the company and Steven W. Menefee (incorporated by reference to Exhibit 10(c)(v) to the company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-4482). (xi) Form of agreement between the company and all corporate Vice Presidents, including the employees parties to the Employment Agreements listed in 10(b)(v)-(x) above, providing extended separation benefits under certain circumstances (incorporated by reference to Exhibit 10(c)(ix) to the company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-4482). (xii) Form of agreement between the company and non-corporate officers providing extended separation benefits under certain circumstances (incorporated by reference to Exhibit 10(c)(x) to the company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-4482). (xiii) Unfunded Pension Plan for Selected Executives of Arrow Electronics, Inc., as amended (incorporated by reference to Exhibit 10(c)(xiii) to the company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-4482). (xiv) Amendment, dated May 1998, to the Unfunded Pension Plan for Selected Executives of Arrow Electronics, Inc. (xv) Grantor Trust Agreement, dated June 25, 1998, by and between Arrow Electronics, Inc. and Wachovia Bank, N.A. (xvi) English translation of the Service Agreement, dated January 19, 1993, between Spoerle Electronic and Carlo Giersch (incorporated by reference to Exhibit 10(f)(v) to the company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-4482). (c)(i) Senior Note Purchase Agreement, dated as of December 29, 1992, with respect to the company's 8.29 percent Senior Secured Notes due 2000 (incorporated by reference to Exhibit 10(d) to the company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-4482). (ii) First Amendment, dated as of December 22, 1993, to the Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to Exhibit 10(d)(ii) in the company's Annual Report on form 10-K for the year ended December 31, 1993, Commission File No. 1-4482). (iii) Second Amendment, dated as of April 24, 1995, to the Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to Exhibit 10(c)(iii) in the company's Annual Report on form 10-K for the year ended December 31, 1996, Commission File No. 1-4482). (iv) Third Amendment, dated as of December 23, 1996, to the Senior Note Purchase Agreement in 10(c)(i) above (incorporated by reference to Exhibit 10(c)(iv) in the company's Annual Report on form 10-K for the year ended December 31, 1996, Commission File No. 1-4482). (v) Fourth Amendment, dated as of October 28, 1998, to the Senior Note Purchase Agreement in 10(c)(i). (d)(i) Amended and Restated Credit Agreement, dated as of August 16, 1995 among Arrow Electronics, Inc., the several Banks from time to time parties hereto, Bankers Trust Company and Chemical Bank, as agents (incorporated by reference to Exhibit 10(d) in the company's Annual Report on form 10-K for the year ended December 31, 1995, Commission File No. 1-4482). (ii) First Amendment, dated as of September 30, 1996, to the Arrow Electronics, Inc. Second Amended and Restated Credit Agreement, dated August 16, 1995 in (10)(d)(i) above (incorporated by reference to Exhibit 10 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Commission File No. 1-4482). (e)(i) Arrow Electronics, Inc. Stock Option Plan, as amended and restated, effective as of May 15, 1997 (incorporated by reference to 99(a) to the company's Registration Statement on Form S-8, Registration No. 333- 45631). (ii) Form of Stock Option Agreement under (e)(i) above (incorporated by reference to Exhibit 10(e)(ii)in the company's Annual Report on form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (iii) Form of Nonqualified Stock Option Agreement under (e)(i) above (incorporated by reference to Exhibit 10(k)(iv) to the company's Registration Statement on Form S-4, Registration No. 33-17942). (f)(i) Restricted Stock Plan of Arrow Electronics, Inc., as amended and restated effective May 15, 1997 (incorporated by reference to Exhibit 99(b) to the company's Registration Statement on Form S-8, Registration No. 333-45631). (ii) Form of Restricted Stock Award Agreement under (f)(i) above (incorporated by reference to Exhibit 10(f)(ii) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1- 4482). (g)(i) Non-Employee Directors Stock Option Plan as of May 15, 1997 (incorporated by reference to Exhibit 99(c) to the company's Registration Statement on Form S-8, Registration No.333-45631). (ii) Form of Nonqualified Stock Option Agreement under 10(g)(i) above (incorporated by reference to Exhibit 10(g)(ii) to the company's Annual Report on Form 10-K for the year ended December 31, 1997, Commission File No. 1-4482). (h) Non-Employee Directors Deferral Plan as of May 15, 1997 (incorporated by reference to Exhibit 99(d) to the Company's Registration Statement on Form S-8, Registration No. 333-45631). (i) Form of Indemnification Agreement between the company and each director (incorporated by reference to Exhibit 10(m) to the company's Annual Report on Form 10-K for the year ended December 31, 1986, Commission File No. 1-4482). (11) Statement Re: Computation of Earnings Per Share. (21) List of Subsidiaries. (23) Consent of Ernst & Young LLP. (28)(i) Record of Decision, issued by the EPA on September 28, 1990, with respect to environmental clean-up in Plant City, Florida (incorporated by reference to Exhibit 28 to the company's Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-4482). (ii) Consent Decree lodged with the U.S. District Court for the Middle District of Florida, Tampa Division, on December 18, 1991, with respect to environmental clean-up in Plant City, Florida (incorporated by reference to Exhibit 28(ii) to the company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-4482). 14(b) Reports on Form 8-K During the quarter ended December 31, 1998, the following Current Reports on Form 8-K were filed: Date of Report (Date of Earliest Event Reported) Items Reported -------------------------------- -------------- EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 333-45631, No. 33-55565, No. 33-66594, No. 33-48252, No. 33-20428 and No. 2-78185) and in the related Prospectuses pertaining to the employee stock plans of Arrow Electronics, Inc., in Amendment No. 1 to the Registration Statement (Form S-3 No. 333-19431) and in the related Prospectus pertaining to the registration and issuance of the senior notes and senior debentures of Arrow Electronics, Inc., in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-54473) and in the related Prospectus pertaining to the registration of 1,376,843 shares of Arrow Electronics, Inc. Common Stock, in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-67890) and in the related Prospectus pertaining to the registration of 1,009,086 shares of Arrow Electronics, Inc. Common Stock, and in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-42176) and in the related Prospectus pertaining to the registration of up to 944,445 shares of Arrow Electronics, Inc. Common Stock held by Aquarius Investments Ltd. and Andromeda Investments Ltd. of our report dated February 17, 1999 with respect to the consolidated financial statements and schedule of Arrow Electronics, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 1998. ERNST & YOUNG LLP New York, New York March , 1999 ARROW ELECTRONICS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the three years ended December 31, 1998 Additions Balance at Balance beginning Charged Charged at end of year to income to other (1) Write-offs of year ---------- --------- ----------- ---------- -------- Allowance for doubtful accounts 1998 $46,055,000 $31,643,000 $ 542,000 $29,817,000 $48,423,000 =========== =========== ========== =========== =========== 1997 $39,753,000 $20,360,000 $1,896,000 $15,954,000 $46,055,000 =========== =========== ========== =========== =========== 1996 $38,670,000 $15,495,000 $ - $14,412,000 $39,753,000 =========== =========== ========== =========== =========== (1) Represents the allowance for doubtful accounts of the businesses acquired by the company during each year. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. ARROW ELECTRONICS, INC. By: /s/ Robert E. Klatell ----------------------- Robert E. Klatell. Executive Vice President March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By: /s/ Stephen P. Kaufman March 30, 1999 ------------------------------------------- Stephen P. Kaufman, Chairman, Principal Executive Officer, and Director By: /s/ Robert E. Klatell March 30, 1999 ------------------------------------------- Robert E. Klatell, Executive Vice President, Secretary, and Director By: /s/ Sam R. Leno March 30, 1999 -------------------------------------------- Sam R. Leno, Senior Vice President and Chief Financial Officer By: /s/ Paul J. Reilly March 30, 1999 -------------------------------------------- Paul J. Reilly, Vice President, Controller and Principal Accounting Officer By: /s/ Daniel W. Duval March 30, 1999 -------------------------------------------- Daniel W. Duval, Director By: /s/ Carlo Giersch March 30, 1999 -------------------------------------------- Carlo Giersch, Director By: /s/ John N. Hanson March 30, 1999 -------------------------------------------- John N. Hanson, Director By: /s/ Roger King March 30, 1999 -------------------------------------------- Roger King, Director By: /s/ Karen Gordon Mills March 30, 1999 -------------------------------------------- Karen Gordon Mills, Director By: /s/ Barry W. Perry March 30, 1999 -------------------------------------------- Barry W. Perry, Director By: /s/ Richard S. Rosenbloom March 30, 1999 -------------------------------------------- Richard S. Rosenbloom, Director By: /s/ Robert S. Throop March 30, 1999 -------------------------------------------- Robert S. Throop, Director By: /s/ John C. Waddell March 30, 1999 -------------------------------------------- John C. Waddell, Director