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, 1997 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 March 6, 1998 was $3,336,528,009. 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: 97,274,399 shares outstanding at March 6, 1998. The following documents are incorporated herein by reference: 1. Proxy Statement filed in connection with Annual Meeting of Shareholders to be held May 13, 1998(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 33 countries. In January 1997, the company acquired the volume electronic component distribution businesses of Premier Farnell plc with operations in 15 countries. In February 1997, the company, through its subsidiary, Gates/Arrow Distributing, Inc. ("Gates/Arrow"), acquired a majority interest in Consan Incorporated, a leading technical distributor of mass storage products in the United States. In November 1997, the company formed a joint venture, Arrow/Altech Industries (Pty) Ltd., with Allied Technologies Limited , a member of the Altron Group, to distribute electronic components throughout South Africa. In December 1997, the company, through Gates/Arrow, acquired a majority interest in Support Net, Inc., one of the preeminent technical distributors of IBM mid-range products in the United States. On January 5, 1998, the company implemented the previously announced realignment of its North American components operations and created the following business units: * Arrow Contract Manufacturing Services (CMS) Distribution Group - exclusively serving contract manufacturing customers, the group offers a broad line card of semiconductors and industrial computer products, as well as passive, electromechanical and connector devices. * Arrow Alliance Group - focuses on delivering the full line card, including semiconductors, passives, connectors, and industrial computer products, to large customers with complex needs. The group offers tailored solutions and innovative programs from a single point of contact. * Arrow Industrial Computer Products Group - focuses on providing demand creation, fulfillment, and value-added services to industrial customers who mainly buy subsystems and industrial computer products. * Arrow Semiconductor Group - concentrates on core semiconductor customers, offering a broad semiconductor line card to drive demand creation and fulfillment and providing customers with value-added solutions. * Arrow Supplier Services Group - manages all semiconductor supplier relationships, including line card strategy, marketing programs, purchasing, asset management, and market price programs, as well as Arrow's value-added programs and the technical resource center. * Arrow Passive Electromechanical Connector (PEMCO) Group - formerly called Capstone Electronics, specializes in providing high-quality passive, electromechanical, and connector products to original equipment manufacturers (other than those customers of the Arrow CMS Distribution Group and the Arrow Alliance Group). * Arrow/Zeus Electronics - is a fully-dedicated specialist serving the high- reliability, military and aerospace markets. * Gates/Arrow - is a full-line technical distributor of computer systems, peripherals, and software to value-added resellers in the U.S. and Canada. 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, headquartered in Taipei, serves customers in Taiwan, South Korea, Singapore, and Malaysia. Arrow Ally serves customers in Taipei and Arrow Components (NZ) services customers in New Zealand. The company distributes a broad range of electronic components, computer products, and related equipment. About 63 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 27 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 approximately 160,000 industrial and commercial customers. Industrial customers range from major original equipment manufacturers to small engineering firms, while commercial customers include value-added resellers, small systems integrators, and large end-users. 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 1997 or 1996 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 16 percent of the business' purchases. No other supplier accounted for more than 8 percent of 1997 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 63 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 9,800 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 56 Chairman and Chief Executive Officer Robert E. Klatell 52 Executive Vice President, General Counsel, and Secretary Francis M. Scricco 48 Executive Vice President and Chief Operating Officer Carlo Giersch 60 Chief Executive Officer of Spoerle Electronic Gerald Luterman 54 Senior Vice President, Chief Financial Officer, and Treasurer Steven W. Menefee 53 Senior Vice President Betty Jane Scheihing 49 Senior Vice President Jan M. Salsgiver 41 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 joined the company in September 1997 as Executive Vice President and Chief Operating Officer. 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. Gerald Luterman has been Senior Vice President, Chief Financial Officer, and Treasurer of the company since April 1996. Prior thereto he was Executive Vice President and Chief Financial Officer of American Express Travel Related Services Consumer Card Group for more than five years. 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 became Senior Vice President in May 1996 and has served as Vice President of the company for more than five years prior thereto. 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. Prior to July 1993, she held a variety of senior marketing positions in the company.
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. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- None.
PART II Item 5. Market for 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 1997 and 1996 were as follows (restated to reflect the two-for-one stock split effective October 15, 1997): Year High Low - ---- ---- --- 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 1996: Fourth Quarter $27-11/16 $21-1/2 Third Quarter 23-9/16 18-3/4 Second Quarter 26-13/16 21-1/8 First Quarter 25 17-5/8 Holders On March 6, 1998, there were approximately 4,000 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.
<TABLE> <CAPTION> Item 6. Selected Financial Data. ------------------------ The following table sets forth certain selected consolidated financial data and should be read in conjunction with the company's consolidated financial statements and related notes appearing elsewhere in this annual report. SELECTED FINANCIAL DATA (In thousands except per share data) For the year: 1997(a) 1996 1995 1994(b)(c) 1993(b)(d) - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Sales $7,763,945 $6,534,577 $5,919,420 $4,649,234 $3,560,856 Operating income 374,721 400,627 423,209 255,974 226,089 Equity in earnings (loss) of affiliated companies 781 (97) 2,493 - 1,673 Interest expense 67,117 37,959 46,361 36,168 26,573 - ----------------------------------------------------------------------------------------- Net income $ 163,656 $ 202,709 $202,544 $ 111,889 $ 106,559 - ----------------------------------------------------------------------------------------- Diluted earnings per share (e) $ 1.64 $ 1.98 $ 2.03 $ 1.16 $ 1.12 - ----------------------------------------------------------------------------------------- At year-end: - ----------------------------------------------------------------------------------------- Accounts receivable and inventories $2,475,407 $1,947,719 $1,979,160 $1,422,457 $1,094,175 Total assets 3,537,873 2,710,351 2,701,016 2,038,774 1,569,152 Total long-term debt and subordinated debentures 823,099 344,562 451,706 349,398 314,859 Shareholders' equity 1,360,758 1,358,482 1,195,881 837,885 701,799 - ----------------------------------------------------------------------------------------- (a) Net income includes special charges totaling $59.5 million 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) In 1994, Arrow acquired Gates/FA Distributing, Inc. ("Gates") and Anthem Electronics, Inc. ("Anthem") in transactions accounted for as poolings of interests. Accordingly, all financial information for years prior thereto have been restated to include the operations of Gates and Anthem. Also, 1994 includes special charges of $45.3 million associated with the acquisition and integration of Gates and Anthem. 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) Includes results of Silverstar which was accounted for under the equity method prior to January 1994. (d) Net income is after a restructuring charge of $7.8 million associated with the disposition of a business unit by Anthem. Excluding this charge, operating income, net income, and net income per share on a diluted basis were $233.9 million, $111.1 million, and $1.17, respectively. (e) 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 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. 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. In 1995, consolidated sales increased to $5.9 billion, a 27 percent increase over 1994 sales of $4.6 billion. This sales growth reflected strong activity levels in each of the company's businesses as well as the impact of key strategic acquisitions and alliances forged around the world during 1994. Operating Income 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 $37.9 million associated with the realignment of the North American components operations and $21.6 million associated with 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 lowest in the company's history. 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. In 1995, the company's consolidated operating income increased to $423.2 million, compared with operating income of $256 million in 1994. Included in the 1994 results were special charges of $45.3 million associated with the acquisition and integration of Gates and Anthem into Arrow. The improvement in operating income outpaced the growth in sales as the company benefited from cost savings following the integration of Gates and Anthem. These cost savings principally reflected reductions in personnel performing duplicative functions and the elimination of duplicative administrative facilities, computer and telecommunications equipment, and selling and stocking locations. Operating expenses as a percentage of sales declined to 10.3 percent in 1995. Interest In 1997, interest expense increased to $67.1 million from $38 million in 1996, reflecting increases in borrowings associated with acquisitions, the repurchase 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. In 1995, interest expense increased to $46.4 million from $36.2 million in 1994, reflecting increases in working capital required to support higher sales, interest related to borrowings associated with acquisitions, and capital expenditures. Income Taxes 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 tax rates. In 1995, the company recorded a provision for taxes at an effective tax rate of 40.4 percent compared with 40.6 percent, excluding the special charges associated with the Gates and Anthem acquisitions, in 1994. Net Income In 1997, the company's net income advanced to $204.1 million from $202.7 million in 1996, before the special charges of $59.5 million ($40.4 million after taxes). The increase in net income is 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. In 1995, the company's net income advanced to $202.5 million from $140.7 million in 1994, before the special charges of $45.3 million ($28.8 million after taxes) associated with Gates and Anthem. The significant improvement in net income was principally the result of the increase in operating income offset, in part, by higher interest expense. 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 74 percent and 78 percent in 1997 and 1996, respectively. 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 January 1997, the company issued $200 million of 10 year senior notes bearing interest at 7% and $200 million of 30 year senior debentures bearing interest at 7 1/2%. The net proceeds of $392.8 million were used primarily to fund acquisitions, working capital, and other general corporate purposes. In 1996, working capital increased by five 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 $308.6 million, the principal element of which was the cash flow resulting from net earnings and improved working capital usage. The net amount of cash used by the company for investing purposes was $57.1 million, including $38.9 million for various acquisitions. Cash flows used for financing activities were $202.6 million, principally reflecting the reduction in the company's borrowings, purchases of common stock, and distributions to partners. Working capital increased by $349 million, or 40 percent, in 1995 compared with 1994, primarily as a result of increased sales and, to a lesser extent, acquisitions in Europe and the Asia/Pacific region. The net amount of cash used for the company's operating activities in 1995 was $114.1 million, as the growth in accounts receivable and inventories outpaced the increase in net income. The net amount of cash used for investing activities was $132.7 million, including $90.7 million for various investments and acquisitions. The net amount of cash provided by financing activities was $228.1 million, principally reflecting the company's borrowings to finance investments and acquisitions, distributions to partners, and the repayment of certain debt. In October 1995, the company redeemed its 5 3/4% convertible subordinated debentures due 2002, which resulted in the issuance of 7,544,508 shares of common stock and eliminated approximately $125 million in long-term debt and $7.2 million in annual interest charges.
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 1997 as compared with 1996, 1997 sales and operating income would have been approximately $182 million and $11 million higher, respectively, than the actual results for 1997. The company's interest expense 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, 1997, the company has approximately 48 percent of its debt as fixed rate long-term borrowings and 52 percent of its debt subject to short-term floating rates. Interest expense would fluctuate by approximately $5 million if average short-term interest rates had changed by one percentage point in 1997. 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. The Company has initiated a comprehensive, worldwide review of its computer systems so as to identify all "Year 2000" issues and has implemented a plan to resolve those issues. The company believes that, after modifications to its systems, the Year 2000 issue will not pose significant operational problems. However, if such modifications are not completed, the Year 2000 issue may have a material impact on the operations of the company. The costs associated with the required systems modifications is expected to be less than $20 million over the next two years.
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. Accounting Matters In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information." SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. Both statements are effective for fiscal years beginning after December 15, 1997 and will be adopted in the fiscal year ending December 31, 1998.
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, 1997 and 1996, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 16, 1998
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 Gerald Luterman Senior Vice President and Chief Financial Officer
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands except per share data) Years Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Sales $7,763,945 $6,534,577 $5,919,420 ---------- ---------- ---------- Costs and expenses: Cost of products sold 6,574,415 5,492,556 4,888,746 Selling, general and administrative expenses 712,213 604,412 574,166 Depreciation and amortization 43,096 36,982 33,299 Integration charge 21,600 - - Realignment charge 37,900 - - ---------- ---------- ---------- 7,389,224 6,133,950 5,496,211 ---------- ---------- ---------- Operating income 374,721 400,627 423,209 Equity in earnings (loss) of affiliated companies 781 (97) 2,493 Interest expense, net 67,117 37,959 46,361 ---------- ---------- ---------- Earnings before income taxes and minority interest 308,385 362,571 379,341 Provision for income taxes 131,617 144,667 153,139 ---------- ---------- ---------- Earnings before minority interest 176,768 217,904 226,202 Minority interest 13,112 15,195 23,658 ---------- ---------- ---------- Net income $ 163,656 $ 202,709 $ 202,544 ========== ========== ========== Per common share: Basic $ 1.67 $ 2.01 $ 2.15 ========== ========== ========== Diluted $ 1.64 $ 1.98 $ 2.03 ========== ========== ========== Average number of common shares and common share equivalents outstanding: Basic 98,006 100,972 94,174 ========== ========== ========== Diluted 99,769 102,380 101,736 ========== ========== ========== See accompanying notes. </TABLE>
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands) December 31, ----------------------- 1997 1996 ASSETS ---- ---- <S> <C> <C> Current assets: Cash and short-term investments $ 112,665 $ 136,400 Accounts receivable, less allowance for doubtful accounts ($46,055 in 1997 and $39,753 in 1996) 1,245,354 902,878 Inventories 1,230,053 1,044,841 Prepaid expenses and other assets 42,268 36,004 ---------- ---------- Total current assets 2,630,340 2,120,123 ---------- --------- Property, plant and equipment at cost Land 9,699 8,712 Buildings and improvements 75,431 77,257 Machinery and equipment 143,030 127,633 ---------- ---------- 228,160 213,602 Less accumulated depreciation and amortization 113,923 98,377 ---------- ---------- 114,237 115,225 ---------- ---------- Investment in affiliated companies 54,914 34,200 Cost in excess of net assets of companies acquired, less accumulated amortization ($69,899 in 1997 and $57,802 in 1996) 645,152 388,787 Other assets 93,230 52,016 ---------- ---------- $3,537,873 $2,710,351 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 767,088 $ 594,474 Accrued expenses 285,673 180,129 Short-term borrowings, including current maturities of long-term debt 143,723 71,504 ---------- ---------- Total current liabilities 1,196,484 846,107 ---------- ---------- Long-term debt 823,099 344,562 Other liabilities 87,254 68,488 Minority interest 70,278 92,712 Shareholders' equity: Common stock, par value $1: Authorized--120,000,000 shares in 1997 and 1996 Issued--102,949,640 and 102,392,770 shares in 1997 and 1996 102,950 102,392 Capital in excess of par value 506,656 498,717 Retained earnings 968,998 805,342 Foreign currency translation adjustment (35,881) 8,753 ---------- ---------- 1,542,723 1,415,204 Less: Treasury stock (6,011,903 and 2,139,398 shares in 1997 and 1996), at cost 164,207 49,065 Unamortized employee stock awards 17,758 7,657 ---------- ---------- Total shareholders' equity 1,360,758 1,358,482 ---------- ---------- $3,537,873 $2,710,351 ========== ========== See accompanying notes. </TABLE>
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Years Ended December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net income $163,656 $202,709 $202,544 Adjustments to reconcile net income to net cash provided by (used for) operations: Integration charge 21,600 - - Realignment charge 37,900 - - Minority interest in earnings 13,112 15,195 23,658 Depreciation and amortization 47,057 39,453 35,192 Equity in undistributed (earnings) loss of affiliated companies (781) 97 (2,493) Deferred income taxes (9,814) 10,280 14,210 Change in assets and liabilities, net of effects of acquired businesses: Accounts receivable (219,488) 45,845 (221,840) Inventories (94,144) (8,426) (288,301) Prepaid expenses and other assets (8,048) (2,893) (8,675) Accounts payable 36,784 26,276 139,257 Accrued expenses (4,917) (23,870) (3,848) Other 2,913 3,926 (3,791) -------- -------- -------- Net cash provided by (used for) operating activities (14,170) 308,592 (114,087) -------- -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (29,335) (28,596) (42,254) Proceeds from sale of building - 10,442 - Cash consideration paid for acquired businesses (364,499) (38,851) (59,119) Investment in affiliates (16,973) 1,734 (31,538) Other - (1,791) 190 -------- -------- -------- Net cash used for investing activities (410,807) (57,062) (132,721) -------- -------- -------- Cash flows from financing activities: Change in short-term borrowings 55,018 (53,992) 49,976 Change in credit facilities 122,830 (96,906) 289,680 Proceeds from long-term debt 392,844 - 5,701 Repayment of long-term debt (338) (7,097) (102,370) Proceeds from exercise of stock options 20,209 12,323 13,717 Distributions to minority partners (17,464) (7,967) (28,590) Purchases of common stock (151,010) (48,993) - -------- -------- -------- Net cash provided by (used for) financing activities 422,089 (202,632) 228,114 -------- -------- -------- Effect of exchange rate changes on cash (20,847) (6,445) 7,035 -------- -------- -------- Net increase (decrease) in cash and short-term investments (23,735) 42,453 (11,659) Cash and short-term investments at beginning of year 136,400 93,947 105,606 -------- -------- -------- Cash and short-term investments at end of year $112,665 $136,400 $ 93,947 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $121,251 $130,834 $142,101 Interest 52,265 38,118 44,019 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, 1994 $ 92,336 $342,745 $400,089 $ 6,367 $ (13) $ (3,639) $ 837,885 Net income - - 202,544 - - - 202,544 Conversion of subordinated debentures 7,546 114,911 - - - - 122,457 Exercise of stock options 1,134 12,583 - - - - 13,717 Tax benefits related to exercise of stock options - 4,758 - - - - 4,758 Restricted stock awards, net 280 4,679 - - (11) (4,948) - Amortization of employee stock awards - - - - - 2,313 2,313 Other - - - - - 176 176 Translation adjustments - - - 12,031 - - 12,031 -------- -------- -------- -------- --------- --------- --------- 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 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) Translation adjustments - - - (9,645) - - (9,645) -------- -------- -------- -------- --------- --------- ---------- Balance at December 31, 1996 $102,392 $498,717 $805,342 $ 8,753 $ (49,065) $ (7,657) $1,358,482 (continued) </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, 1996 $102,392 $498,717 $805,342 $ 8,753 $ (49,065) $ (7,657) $1,358,482 Net income - - 163,656 - - - 163,656 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) Translation adjustments - - - (44,634) - - (44,634) -------- -------- -------- -------- --------- -------- ---------- Balance at December 31, 1997 $102,950 $506,656 $968,998 $(35,881) $(164,207) $(17,758) $1,360,758 ======== ======== ======== ========= ========== ========= ========== 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. 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 have been restated to reflect the two-for-one stock split in all years. Net Income Per Share - -------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way in which earnings per share ("EPS") is calculated in 1997. Accordingly, all prior period EPS data presented has been restated. 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 or resulted in the issuance of common stock that then shared in the earnings of the company. Diluted EPS for 1995 has been calculated assuming that the 5 3/4% convertible subordinated debentures were converted into common stock at the beginning of the year and the related interest expense, net of taxes, was eliminated. 2. Acquisitions 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 Electronic Handelsgesellschaft mbH ("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. A summary of the allocation of the aggregate consideration paid for the aforementioned acquisitions, excluding amounts paid for increases in majority holdings, to the fair market value of the assets acquired and liabilities assumed is as follows (in thousands): Current assets: Accounts receivable $166,109 Inventory 127,016 Other 4,011 $297,136 -------- Property, plant and equipment 6,756 Cost in excess of net assets of companies acquired 264,266 Other assets 445 ------- 568,603 Current liabilities: Accounts payable 162,056 Accrued expenses 61,334 Other 20,698 244,088 -------- -------- Net consideration paid $324,515 ======== 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. During 1996, the company increased its holding in Spoerle to 75 percent and Silverstar to 93 percent. 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 $296,379,000 and $20,674,000 in 1997 and 1996, 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 1996, the company made additional payments of $9,675,000 which have been capitalized as cost in excess of net assets of companies acquired. 3. Investment in Affiliated Companies During 1997, the company acquired a 50 percent interest in Altech Industries (Pty) Ltd., a joint venture with Allied Technologies Limited, a South African electronics distributor. The company also has a 45 percent interest in Strong Electronics Co., Ltd., a joint venture with Lite-On Inc., a Taiwan-based electronics distributor. 4. Debt Long-term debt consisted of the following at December 31 (in thousands): 1997 1996 -------- -------- Global multi-currency credit facility $377,765 $267,512 7% senior notes, due 2007 196,033 - 7 1/2% senior debentures, due 2027 197,623 - 8.29% senior notes 75,000 75,000 Other obligations with various interest rates and due dates 1,678 2,254 -------- -------- 848,099 344,766 Less installments due within one year 25,000 204 -------- -------- $823,099 $344,562 ======== ======== The company's revolving credit agreement (the "global multi-currency credit facility") was amended in September 1996 to increase to $650,000,000 the amount of available credit, to reduce the applicable borrowing rates, and to extend the maturity date to September 2001. The interest rate for loans under this facility is at the applicable eurocurrency rate (5.71875 percent for U.S. dollar denominated loans at December 31, 1997) plus a margin of .20 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 .08 percent per annum. The 8.29% senior notes are payable in three equal annual installments commencing in 1998. The 7% senior notes and the 7 1/2% senior debentures are not redeemable prior to their maturity. 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. The company maintains uncommitted lines of credit with a group of banks under which up to $100,000,000 could be borrowed at December 31, 1997 on such terms as the company and the banks may agree. Borrowings under the lines of credit are 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, 1997. 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, 1997 and 1996 were 8 percent and 9 percent, respectively. At December 31, 1997, the estimated fair market value of the 7% senior notes was 103 percent of par, the 7 1/2% senior debentures was 107 percent of par, and the 8.29% senior notes was 104 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): 1997 1996 1995 -------- -------- -------- Current Federal $ 81,278 $ 78,715 $ 78,639 State 19,679 21,482 19,989 Foreign 31,096 29,507 37,330 -------- -------- -------- 132,053 129,704 135,958 -------- -------- -------- Deferred Federal (9,321) 4,758 2,625 State (2,130) 1,087 600 Foreign 11,015 9,118 13,956 -------- -------- -------- (436) 14,963 17,181 -------- -------- -------- $131,617 $144,667 $153,139 ======== ======== ======== The principal causes of the difference between the U.S. statutory and effective income tax rates are as follows (in thousands): 1997 1996 1995 -------- -------- -------- Provision at statutory rate $107,935 $126,900 $132,769 State taxes, net of federal benefit 11,407 14,670 13,383 Foreign tax rate differential 2,499 6,625 4,959 Other 9,776 (3,528) 2,028 -------- -------- -------- $131,617 $144,667 $153,139 ======== ======== ======== For financial reporting purposes, income before income taxes attributable to the United States was $216,993,000 in 1997, $279,149,000 in 1996, and $252,894,000 in 1995, and income before income taxes attributable to foreign operations was $91,392,000 in 1997, $83,422,000 in 1996, and $126,447,000 in 1995. The significant components of the company's deferred tax assets, which are included in other assets, are as follows (in thousands): 1997 1996 ------- ------- Inventory reserves $14,407 $12,730 Allowance for doubtful accounts 10,803 8,045 Accrued expenses 7,789 5,675 Realignment reserve 11,002 - Integration reserve 20,807 7,151 Other (1,076) (5,101) ------- ------- $63,822 $28,500 ======= ======= Included in other liabilities are deferred tax liabilities of $40,327,000 and $36,156,000 at December 31, 1997 and 1996, 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. As amended in 1998, the rights 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. 8. Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share for the years ended December 31 (in thousands): 1997 1996 1995 -------- -------- -------- Net income for basic EPS $163,656(a) $202,709 $202,544 Add interest on 5 3/4% convertible subordinated debentures, net of income taxes - - 3,471 -------- -------- -------- Net income for diluted EPS $163,656(a) $202,709 $206,015 ======== ======== ======== Weighted average common shares outstanding for basic EPS 98,006 100,972 94,174 Net effect of dilutive stock options and restricted stock awards 1,763 1,408 1,504 Assumed conversion of 5 3/4% convertible subordinated debentures - - 6,058 -------- -------- -------- Weighted average common shares outstanding for diluted EPS 99,769 102,380 101,736 ======== ======== ======= Basic EPS $ 1.67(a) $ 2.01 $ 2.15 ======== ======== ======= Diluted EPS $ 1.64(a) $ 1.98 $ 2.03 ======== ======== ======= (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 99,000 shares of common stock in early 1998 to 60 key employees in respect of 1997, 292,304 shares of common stock to 209 key employees during 1997, 239,720 shares of common stock to 81 key employees during 1996, and 212,700 shares of common stock to 79 key employees during 1995. Forfeitures of shares awarded under the Plan were 31,250, 49,274, and 20,850, during 1997, 1996, and 1995, 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. Effective May 1997, future options granted under the plan become exercisable in equal installments over a four-year period. Previously, options became exercisable over a two- or three-year period. Options currently outstanding have terms of ten years. 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 1997 Price 1996 Price 1995 Price --------- -------- --------- -------- --------- -------- Options outstanding at beginning of year 7,107,042 $20.25 4,877,150 $16.69 4,328,076 $13.91 Granted 2,648,340 29.51 3,267,920 23.67 1,834,900 20.64 Exercised (1,316,962) 15.34 (923,970) 13.75 (1,133,008) 12.11 Forfeited (206,611) 22.16 (114,058) 18.88 (152,818) 18.07 --------- ------ --------- ------ --------- ------ Options outstanding at end of year 8,231,809 $24.00 7,107,042 $20.25 4,877,150 $16.69 Prices per share of ========= ====== ========= ====== ========= ====== options outstanding $1.81-32.25 $1.81-27.69 $1.81-27.69 Options available for future grant: Beginning of year 432,700 3,586,562 5,334,778 End of year 6,962,805 432,700 3,586,562 The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable - ------------------------------------------------- --------------------------- Weighted Weighted Weighted Maximum Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price - -------- ----------- ---------------- -------- -------------- ---------- $20.00 1,472,040 72 months $15.86 1,447,431 $15.86 25.00 2,335,003 91 months 21.31 1,435,190 21.11 30.00 3,221,766 111 months 26.69 1,075,994 26.00 35.00 1,203,000 119 months 31.98 - - --------- --------- All 8,231,809 103 months $24.00 3,958,615 $20.52 ========= ========= 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 $7.6 million ($.06 per share on a diluted basis) in 1997 and $5.2 million ($.04 per share on a diluted basis) in 1996. The estimated weighted average fair value, utilizing the Black-Scholes option- pricing model, at date of option grant during 1997 and 1996 was $9.41 and $5.99, per option, respectively. The weighted average fair value was estimated using the following assumptions: 1997 1996 ---- ---- Expected life (months) 47 31 Risk-free interest rate (percent) 5.8 5.6 Expected volatility (percent) 29 30 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 1997, 1996, and 1995 amounted to $5,147,000, $4,218,000, and $3,878,000, 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 $4,988,000, $4,608,000, and $3,966,000 in 1997, 1996, and 1995, respectively. Certain domestic and foreign subsidiaries maintain separate defined contribution plans for their employees and made contributions thereunder, which amounted to $1,915,000, $1,162,000, and $822,000 in 1997, 1996, and 1995, 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 $29,190,000 in 1997, $29,390,000 in 1996, and $27,594,000 in 1995. 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: 1998- $29,004,000; 1999-$23,453,000; 2000-$16,546,000; 2001-$12,400,000; 2002- $10,986,000; and $60,650,000 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 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, 1997 and December 31, 1996, was $97,321,000 and $53,462,000, respectively. The carrying amount, which is nominal, approximated fair value at December 31, 1997 and 1996. 13. Segment and Geographic Information The company is engaged in one business, the distribution of electronic components, systems, and related products. The geographic distribution of consolidated sales, operating income (loss), and identifiable assets is as follows (in thousands): Sales to Identifiable Unaffiliated Operating Assets at Customers Income (Loss) December 31, ------------ ------------ ------------ 1997 - ---- North America $4,964,660 $322,813 $1,847,976 Europe 2,279,951 117,918 1,394,456 Asia/Pacific 519,334 11,617 199,884 Realignment and integration charges - (59,500) - Corporate - (18,127) 40,643 Investment in affiliated companies - - 54,914 ---------- -------- ---------- $7,763,945 $374,721 $3,537,873 ========== ======== ========== 1996 - ---- North America $4,309,839 $317,846 $1,463,528 Europe 1,855,821 101,326 1,040,326 Asia/Pacific 368,917 96 155,830 Corporate - (18,641) 16,467 Investment in affiliated company - - 34,200 ---------- -------- ---------- $6,534,577 $400,627 $2,710,351 ========== ======== ========== 1995 - ---- North America $3,929,016 $295,941 $1,476,420 Europe 1,719,523 135,519 1,018,755 Asia/Pacific 270,881 8,884 134,947 Corporate - (17,135) 34,863 Investment in affiliated company - - 36,031 ---------- -------- ---------- $5,919,420 $423,209 $2,701,016 ========== ======== ========== 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 ---------- ---------- ---------- ---------- 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 1996 - ---- Sales $1,703,318 $1,601,651 $1,597,379 $1,632,229 Gross profit 281,817 265,336 243,985 250,883 Net income 56,808 54,097 43,756 48,048 Per common share: Basic .56 .53 .43 .48 Diluted .56 .53 .43 .47 (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.
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 13, 1998 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 13, 1998 hereby is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- The information on page 3 and 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 13, 1998 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 13, 1998 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 14 Management's responsibility for financial reporting 15 Consolidated statement of income for the years ended December 31, 1997, 1996 and 1995 16 Consolidated balance sheet at December 31, 1997 and 1996 17 For the years ended December 31, 1997, 1996 and 1995: Consolidated statement of cash flows 18 Consolidated statement of shareholders' equity 19 Notes to consolidated financial statements for the years ended December 31, 1997, 1996 and 1995 21 Consolidated schedule for the three years ended December 31, 1997: II - Valuation and qualifying accounts 41
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 10K for the year ended December 31, 1996, Commission File No. 1-4482). (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 10K 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 10K for the year ended December 31, 1996, Commission File No. 1-4482). (10)(a)(i) Arrow Electronics Savings Plan, as amended and restated through December 28, 1994 (incorporated by reference to Exhibit 10(a)(iii) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (ii) Amendment No. 1, dated March 29, 1996, to the Arrow Electronics Savings Plan in (10)(a)(i) above (incorporated by reference to Exhibit 10(a)(iv) to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 1-4482). (iii) 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). (iv) 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). (b)(i) Employment Agreement, dated as of October 16, 1990, between the company and John C. Waddell (incorporated by reference to Exhibit 10(c)(i) to the company's Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-4482). (ii) 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). (iii) Employment Agreement, dated as of January 1, 1998 between the company and Robert E. Klatell. (iv) 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). (v) Employment Agreement, dated as of January 1, 1998, between the company and Betty Jane Scheihing. (vi) Employment Agreement, dated as of September 1, 1997, between the company and Jan M. Salsgiver. (vii) Employment Agreement, dated as of September 1, 1997, between the company and Francis M. Scricco. (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 10K for the year ended December 31, 1996, 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). (xi) 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). (xii) 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). (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. (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. (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. (h) Non-Employee Directors Referral Plan as of May 15, 1997 (in corporated 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). (b) Reports on Form 8-K During the quarter ended December 31, 1997, the following Current Reports on Form 8-K were filed: Date of Report (Date of Earliest Event Reported) Items Reported ------------------------------- -------------- None
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 16, 1998 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, 1997. ERNST & YOUNG LLP New York, New York March 30, 1998
<TABLE> <CAPTION> ARROW ELECTRONICS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the three years ended December 31, 1997 Additions ------------------------ Balance at Balance beginning Charged Charged at end of year to income to other(1) Write-offs of year ----------- ----------- ---------- ----------- ------------ <S> <C> <C> <C> <C> <C> Allowance for doubtful accounts 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 =========== =========== ========== =========== =========== 1995 $31,132,000 $21,344,000 $ 67,000 $13,873,000 $38,670,000 =========== =========== ========== =========== =========== (1) Represents the allowance for doubtful accounts of the businesses acquired by the company during each year. </TABLE>
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, 1998 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, 1998 ------------------------------- Stephen P. Kaufman, Chairman, Principal Executive Officer, and Director By: /s/ Robert E. Klatell March 30, 1998 ------------------------------- Robert E. Klatell, Executive Vice President, Secretary, and Director By: /s/ Gerald Luterman March 30, 1998 ------------------------------- Gerald Luterman, Senior Vice President and Principal Financial Officer By: /s/ Paul J. Reilly March 30, 1998 ------------------------------- Paul J. Reilly, Vice President, Controller and Principal Accounting Officer By: /s/ Daniel W. Duval March 30, 1998 ------------------------------- Daniel W. Duval, Director By: /s/ Carlo Giersch March 30, 1998 ------------------------------- Carlo Giersch, Director By: /s/ John N. Hanson March 30, 1998 ------------------------------- John N. Hanson, Director By: /s/ Roger King March 30, 1998 ------------------------------- Roger King, Director By: /s/ Karen Gordon Mills March 30, 1998 ------------------------------- Karen Gordon Mills, Director By: /s/ Richard S. Rosenbloom March 30, 1998 ------------------------------- Richard S. Rosenbloom, Director By: /s/ Robert S. Throop March 30, 1998 ------------------------------- Robert S. Throop, Director By: /s/ John C. Waddell March 30, 1998 ------------------------------- John C. Waddell, Director