-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S/KNAC0XU6WWZv2SgrTUDCdd0jbVqJkKqSl3xN0CQrSaZp4vBaESMYltZw1m7psi YZuN/8A/75bjW3kSUUM4Lw== 0001068800-03-000236.txt : 20030327 0001068800-03-000236.hdr.sgml : 20030327 20030327154136 ACCESSION NUMBER: 0001068800-03-000236 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAYBAR ELECTRIC CO INC CENTRAL INDEX KEY: 0000205402 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPARATUS & EQUIPMENT, WIRING SUPPLIES [5063] IRS NUMBER: 130794380 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00255 FILM NUMBER: 03620930 BUSINESS ADDRESS: STREET 1: 34 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3145129200 MAIL ADDRESS: STREET 1: P O BOX 7231 CITY: ST LOUIS STATE: MO ZIP: 63177 10-K 1 tenk.txt GRAYBAR ELECTRIC COMPANY, INC. FORM 10-K CONFORMED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002. 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 0-255 GRAYBAR ELECTRIC COMPANY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-0794380 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 34 NORTH MERAMEC AVENUE, ST. LOUIS, MISSOURI 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 573-9200 Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Preferred Stock - Par Value $20 Common Stock - Par Value $1 Per Share with a Stated Value of $20 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, 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 (Paragraph 229.405 of this chapter) 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) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Securities Exchange Act of 1934). Yes ( ) No (X) The aggregate stated value of the Common Stock beneficially owned with respect to rights of disposition by persons who are not affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant on June 30, 2002, was approximately $124,585,180. Pursuant to a Voting Trust Agreement, dated as of April 1, 1997, approximately 95% of the outstanding shares of Common Stock are held of record by five Voting Trustees who are each directors and officers of the registrant and who collectively exercise the voting rights with respect to such shares. The registrant is 100% owned by its active and retired employees, and there is no public trading market for the registrant's Common Stock. See Item 5 of this Annual Report on Form 10-K. The number of shares of Common Stock oustanding at March 27, 2003 was 6,050,936. DOCUMENTS INCORPORATED BY REFERENCE Portions of the documents listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K: (1) Annual Report to Shareholders for the fiscal year ended December 31, 2002 - Part II, Items 5-8. (2) Information Statement relating to the 2003 Annual Meeting of Shareholders - Part III, Items 10-13. PART I ------ Item 1. Business - ------- -------- Graybar Electric Company, Inc. (the "Company") is engaged internationally in the distribution of electrical, telecommunications and networking products and the provision of related supply chain management and logistics services, primarily to contractors, industrial plants, telephone companies, power utilities, and commercial users. All products sold by the Company are purchased by the Company from others. The Company was incorporated under the laws of the State of New York on December 11, 1925 to take over the wholesale supply department of Western Electric Company, Incorporated. The location and telephone number of the principal executive offices of the Company are 34 North Meramec Avenue, St. Louis, Missouri 63105, (314) 573-9200. Suppliers - --------- The Company acts as a distributor of approximately 1.4 million products (stockkeeping units) of more than 4,200 manufacturers. The relationship of the Company with a number of its principal suppliers goes back many years. It is customarily a nonexclusive national or regional distributorship, terminable upon 30 to 90 days notice by either party. During 2002, the Company purchased approximately 48% of the products it distributes from its top 25 suppliers. However, the Company generally deals with more than one supplier for any product category and there are alternative sources of comparable products available for all product categories. Products Distributed - -------------------- The Company stocks more than 158,000 of the products it distributes and, therefore, is able to supply its customers locally with a wide variety of electrical, telecommunications and networking products. The products distributed by the Company consist primarily of wire, cable, conduit, wiring devices, tools, motor controls, transformers, lamps, lighting fixtures and hardware, power transmission equipment, telephone station apparatus, key systems, PBXs, data products for local area networks or wide area networks, fiber optic products, and CATV products. These products are sold to customers such as contractors (both industrial and residential), industrial plants, telephone companies, private and public utilities, and commercial users. 2 On December 31, 2002 and 2001, the Company had orders on hand which totaled approximately $305,541,000 and $356,670,000, respectively. The decrease reflects the marked decline in business experienced by the Company in each of the last two years reflecting the generally depressed economic conditions that continue to be prevalent on an industry-wide basis in the electrical and communications markets in which the Company operates. The market for electrical products continues to be affected by reduced capital spending by manufacturing and commercial customers for both new construction projects and maintenance, repair and operations. In the communications industry, the excess infrastructure and plant and network capacity following the aggressive growth in the late 1990s through 2000 resulted in a dramatic decrease in spending in 2002. The Company expects that approximately 85% of the orders on hand at December 31, 2002 will be filled within the twelve-month period ending December 31, 2003. Generally, orders placed by customers and accepted by the Company have resulted in sales. However, customers from time to time request cancellation, and the Company has historically allowed such cancellations. Marketing - --------- The Company sells its products through a network of distribution facilities located in 15 geographical districts throughout the United States. In each district the Company maintains a main distribution facility and a number of branch distribution facilities, each of which carries an inventory of supply materials and operates as a wholesale distributor for the territory in which it is located. The main distribution facility in each district carries a substantially larger inventory than the branch facilities so that the branch facilities can call upon the main distribution facility for additional items of inventory. In addition, the Company maintains 14 zone warehouses with both standard and specialized inventory products. The zone warehouses replenish the inventories carried at the distribution facilities and also make shipments directly to customers. The Company has subsidiary operations with distribution facilities located in Puerto Rico, Mexico and Canada. 3 The distribution facilities operated by the Company are shown in the following table:
Number of Branch Location of Main Distribution Distribution Facility Facilities in District Zone Warehouses - --------------------- ---------------------- --------------- Boston, MA 11 Austell, GA Cincinnati, OH 14 Charlotte, NC City of Industry, CA 21 Cranbury, NJ Dallas, TX 8 Dallas, TX Glendale Heights, IL 16 Fresno, CA Houston, TX 7 Hamilton, OH Minneapolis, MN 17 Joliet, IL New York, NY 15 Puyallup, WA Norcross, GA 21 Rogers, MN Phoenix, AZ 9 Springfield, MO Pittsburgh, PA 11 Stafford, TX Richmond, VA 16 Tampa, FL Seattle, WA 9 Taunton, MA St. Louis, MO 10 Youngstown, OH Tampa, FL 19 Number of Distribution Facilities ------------ Graybar International, Inc. --------------------------- Puerto Rico 1 Graybar Electric Canada, Ltd. ----------------------------- Canada 24 Graybar de Mexico, S. de R.L. de C.V. ------------------------------------- Mexico City, Mexico 1
Where the specialized nature or size of a particular shipment warrants, the Company has products shipped directly from its suppliers to the place of use, while in other cases orders are filled from the Company's inventory. On a dollar volume basis, approximately 63% of the orders are filled from the Company's inventory and the remainder are shipped directly from the supplier to the place of use. The Company generally finances its inventory through collections of accounts receivable and accounts payable terms with its suppliers. The Company's short-term borrowing facilities may be used to finance inventory as needed. Currently, the Company does not use long-term borrowings for inventory financing. No inventory is pledged as collateral for any borrowings. The Company distributes its products to more than 170,000 customers, which fall into six general classes. The following list shows the estimated percentage of the Company's total sales for each of the last three years, attributable to each of these classes: 4
PERCENTAGE OF SALES CLASS OF CUSTOMERS ------------------- ------------------ 2002 2001 2000 ----------------- ----------------- ----------------- Electrical Contractors 41.5% 37.6% 34.9 Commercial & Industrial 22.4 21.1 20.4 Telecommunication Companies 24.5 31.6 32.7 Private and Public Power Utilities 4.0 3.4 3.1 International 3.2 2.9 2.8 Other 4.4 3.4 6.1 ----------------- ----------------- ----------------- 100.0% 100.0% 100.0% ================= ================= =================
At December 31, 2002, the Company employed approximately 3,000 persons in sales capacities. Approximately 1,300 of these sales personnel were sales representatives who work in the field making sales to customers at the work site. The remainder of the sales personnel were sales and marketing managers, and telemarketing, advertising, quotation, counter and clerical personnel. Competition - ----------- The Company believes that it is one of the three largest distributors of electrical and comm/data products in the United States. The field is highly competitive, and the Company estimates that the three largest distributors account for only a small portion of the total market, with the balance of the market being accounted for by several thousand independent distributors and manufacturers operating on a local, state-wide or regional basis. While price is an important consideration, the Company believes that it is the service that it is able to offer -- the ability to quickly supply its customers with a broad range of electrical, telecommunications and networking products through conveniently located distribution facilities -- that distinguishes it from most of its competitors, whether they are also distributors or are manufacturers selling direct. The Company's pricing structure for the products it sells reflects the costs associated with the services that it provides and its prices are generally competitive. However, if a customer is not looking for one supplier for a wide range of products and does not require prompt delivery or other services, a competitor that has not incurred those costs may be in a position to offer a better price. 5 Foreign Sales - ------------- Sales by the Company to customers in foreign countries accounted for approximately three percent of consolidated revenues in each of the last three years. Export activities are handled from Company facilities in Texas and California. In addition, subsidiaries of the Company have operations in Canada and Mexico. Long-lived assets located outside the United States represented less than one percent of the Company's consolidated assets at the end of each of the last three years. The Company does not have significant foreign currency exposure and does not believe there are any other significant risks attendant to its limited foreign operations. Employees - --------- At December 31, 2002, the Company employed approximately 8,300 persons on a full-time basis. Approximately 200 of these persons were covered by union contracts. The Company has not had a material work stoppage and considers its relations with its employees to be good. Item 2. Properties - ------- ---------- As of December 31, 2002, the Company has 14 zone warehouses, ranging in size from approximately 140,000 to 300,000 square feet. See Note 7 of Notes to Consolidated Financial Statements for a discussion of the off-balance sheet operating lease agreements with an independent lessor that have been used to fund the acquisition and, in some cases, construction, of nine of the zone warehouses. The rest of these warehouses are also leased, with the remaining lease terms ranging from approximately 6 to 9 years. At December 31, 2002, the Company operated in 15 geographical districts in the United States, each of which maintains a main distribution facility that consists primarily of warehouse space (ranging from approximately 50,000 to 140,000 square feet). A small portion of the space in each of the main distribution facilities is used for offices. All of these were owned by the Company. Each district has a number of branch distribution facilities consisting of warehouse and office space. The number of branches in a district varies from 7 to 21 and totals 204. The branch facilities range in size from approximately 4,000 square feet to 100,000 square feet, with the average being approximately 25,000 square feet. The Company owns 110 of the branch facilities and leases 94. The leases of the branch facilities are for varying terms, with the majority having a remaining term of less than five years. 6 As of December 31, 2002, the Company has a 22,000 square foot leased facility in Puerto Rico and an 18,000 square foot leased facility in Mexico. In Canada, the Company has 24 distribution facilities, of which 9 are owned and 15 are leased, ranging in size from approximately 5,000 to 100,000 square feet. The Company's headquarters are located in St. Louis, Missouri in a 93,000 square foot building owned by the Company. The Company also leases a 200,000 square foot operations and administration center in St. Louis, Missouri. The Company has an option to purchase this facility at the expiration of the lease in 2021. As of December 31, 2002, approximately $12.0 million in debt of the Company was secured by mortgages on 13 buildings. Six of these facilities are subject to a first mortgage securing a 9.23% note, of which $8.2 million in principal amount remains outstanding. Six of these facilities are subject to first mortgages securing variable rate notes, of which $.9 million in principal remains outstanding. A facility in Kitchener, Ontario, Canada is subject to a first mortgage securing a 7.95% note, of which $2.9 million in principal remains outstanding. Item 3. Legal Proceedings - ------- ----------------- There are presently no pending legal proceedings that are expected to have a material impact on the Company or its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matter was submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K. Executive Officers of the Registrant - ------------------------------------ Certain information with respect to the executive officers of the Company is set forth in Item 10 of this Annual Report on Form 10-K. 7 PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- ----------------------------------------------------------------- Matters ------- The Company is 100% owned by its active and retired employees, and there is no public trading market for its Common Stock, par value $1 per share with a stated value of $20 per share. Since 1928, substantially all of the issued and outstanding shares of Common Stock have been held of record by voting trustees under successive voting trust agreements. Under applicable state law, a voting trust may not have a term greater than ten years. At December 31, 2002, approximately 95% of the Common Stock was held in a Voting Trust that expires by its terms on March 31, 2007. The participation of shareholders in a voting trust is voluntary at the time the voting trust is created but is irrevocable during its term. Shareholders who elect not to participate in a newly formed voting trust hold their Common Stock as the shareholders of record. No shareholder may sell, transfer or otherwise dispose of shares of Common Stock (or the Voting Trust Certificates issued with respect thereto) without first offering the Company the option to purchase such shares (or Voting Trust Certificates) at the price at which the shares were issued. The Company also has the option to purchase the Common Stock (or Voting Trust Certificates) of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. In the past all shares issued by the Company have been issued at $20 per share, and the Company has always exercised its repurchase option, and expects to continue to do so. The information as to number of holders of Common Stock and frequency and amount of dividends, required to be included pursuant to this Item 5, is included under the captions "Capital Stock Data" and "Dividend Data" on page 1 of the Company's Annual Report to Shareholders for the year ended December 31, 2002, (the "2002 Annual Report") furnished to the Securities and Exchange Commission (the "Commission") pursuant to Rule 14c-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such information is incorporated herein by reference. 8 Item 6. Selected Financial Data - ------- ----------------------- The selected financial data for the Company as of December 31, 2002 and for the five years then ended, which is required to be included pursuant to this Item 6, is included under the caption "Selected Consolidated Financial Data" on page 16 of the 2002 Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations ------------------------- Management's discussion and analysis required to be included pursuant to this Item 7 is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17 through 19 of the 2002 Annual Report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------- ---------------------------------------------------------- The Company's interest expense is sensitive to changes in the general level of interest rates. Changes in interest rates have different impacts on the fixed-rate and variable-rate portions of the Company's debt portfolio. A change in interest rates on the fixed-rate portion of the debt portfolio impacts the net financial instrument position but has no impact on interest incurred or cash flows. A change in interest rates on the variable-rate portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position. To mitigate the cash flow impact of interest rate fluctuations, the Company generally maintains a significant portion of its debt as fixed rate in nature by borrowing on a long-term basis. The following table provides information about financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates.
Fair Market There- Value 2003 2004 2005 2006 2007 after Total 12/31/02 ---- ---- ---- ---- ---- ----- ----- -------- Long-term debt principal payments by expected maturity dates, including current portion - Fixed-rate debt(A) 23,314 22,807 38,364 31,754 31,705 142,080 290,024 294,580 Average interest rate 7.10% 7.19% 7.37% 7.15% 7.15% 7.08% Short-term variable- rate borrowings 0 0 0 Average interest rate (A) Dollars stated in thousands
9 The fair value of long-term debt is estimated by discounting cash flows using current borrowing rates available for debt of similar maturities. In September 2000 the Company entered into a swap agreement to manage interest rates on amounts due under certain operating leases. The agreement, which expires in July 2013, is based on a notional amount of $28.7 million. The agreement calls for an exchange of interest payments with the Company receiving payments based on a London Interbank Offered Rate (LIBOR) floating rate, and making payments based on a fixed rate of 6.92%. There is no exchange of the notional amount upon which the payments are based. The fair value of the agreement at December 31, 2002 was $(7,036,000). The negative value of this agreement reflects the decline in interest rates generally. Foreign Exchange Rate Risk -------------------------- The Company conducts business in several foreign countries including Canada and Mexico. Exposure from foreign currency exchange rate fluctuations is not material. Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- The financial statements and Report of Independent Auditors required by this Item 8 are listed in Item 14(a)(1) of this Annual Report on Form 10-K under the caption "Index to Financial Statements." Such financial statements specifically referenced from the 2002 Annual Report in such list are incorporated herein by reference. Selected quarterly financial data for the years ended December 31, 2002 and 2001 required by Item 302(a) is included in Note 10 - "Quarterly Financial Information (Unaudited)" to the consolidated financial statements on page 29 of the 2002 Annual Report and is incorporated herein by reference. There is no other supplementary financial information required by this item which is applicable to the Company. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- None. 10 PART III Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- The information with respect to the directors of the Company required to be included pursuant to this Item 10 will be included under the caption "Directors -- Nominees for Election as Directors" in the Company's Information Statement relating to the 2003 Annual Meeting (the "Information Statement"), to be filed with the Commission pursuant to Rule 14c-5 under the Exchange Act, and is incorporated herein by reference. The following directors are also executive officers of the Company: D. E. DeSousa, T. F. Dowd, L. R. Giglio, J. H. Hinshaw, R. A. Reynolds, Jr., C. R. Udell and J. F. Van Pelt. Information regarding the other executive officers appears below. All executive officers are elected annually. Name Age Business experience last five years - ---- --- ----------------------------------- J. H. Kipper 50 Employed by Company in 1974; Assistant Comptroller 1989 to 1999; Vice President and Comptroller 1999 to present. J. N. Reed 46 Employed by Company in 1980; Assistant to Treasurer 1993 to 2001; Vice President and Treasurer 2000 to present. Item 11. Executive Compensation - -------- ---------------------- The information with respect to executive compensation required to be included pursuant to this Item 11 will be included under the captions "Executive Compensation -- General" and "Executive Compensation -- Pension Plan" in the Information Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- The information with respect to the security ownership of beneficial owners of more than 5% of the Common Stock and directors and executive officers of the Company, which is required to be included pursuant to this Item 12, will be included under the captions "Beneficial Ownership of More Than 5% of the Outstanding Common Stock" and "Beneficial Ownership of Management" in the Information Statement and is incorporated herein by reference. 11 Item 13. Certain Relationships and Related Transactions - -------- ---------------------------------------------- At the date of this report, there are no reportable transactions, business relationships or indebtedness of the type required to be included pursuant to this Item 13 between the Company and the beneficial owners of more than 5% of the Common Stock, the directors or nominees for director of the Company, the executive officers of the Company or the members of the immediate families of such individuals. If there is any change in that regard prior to the filing of the Information Statement, such information will be included under the caption "Directors" in the Information Statement and shall be incorporated herein by reference. Item 14. Controls and Procedures - -------- ----------------------- Within the ninety-day period preceding the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. 12 PART IV ------- Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- ---------------------------------------------------------------- (a) Documents filed as part of this report: -------------------------------------- The following financial statements and Report of Independent Auditors are included on the indicated pages in the 2002 Annual Report and are incorporated by reference in this Annual Report on Form 10-K: 1. Index to Financial Statements ----------------------------- (i) Consolidated Statements of Income and Retained Earnings for each of the three years ended December 31, 2002 (page 20). (ii) Consolidated Balance Sheets, as of December 31, 2002 and December 31, 2001 (page 21). (iii) Consolidated Statements of Cash Flows for each of the three years ended December 31, 2002 (page 22). (iv) Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended December 31, 2002 (page 23) (v) Notes to Consolidated Financial Statements (pages 24 to 29). (vi) Report of Independent Auditors (page 30). 2. Index to Financial Schedule --------------------------- The following schedule to the financial statements for each of the three years ended December 31, 2002 is included on the indicated page in this Annual Report on Form 10-K: (i) Schedule II. Valuation and Qualifying Accounts (page 19). All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the required information is set forth in the financial statements and the accompanying notes thereto. 3. Exhibits -------- The following exhibits required to be filed as part of this Annual Report on Form 10-K have been included: (3) Articles of incorporation and by-laws (i) Restated Certificate of Incorporation, as amended, filed as Exhibit 4(i) to the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference. 13 (ii) By-laws as amended through July 25, 2000 filed as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (Commission File No. 0-255) and incorporated herein by reference. (4)and(9) Voting Trust Agreements Voting Trust Agreement dated as of April 1, 1997, attached as Annex A to the Prospectus, dated January 21, 1997, constituting a part of the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference. The Company hereby agrees to furnish to the Commission upon request a copy of each instrument omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (10) Material contracts. (i) Management Incentive Plan, filed as Exhibit 4(a)(1) to the Annual Report on Form 10-K for the year ended December 31, 1972 (Commission File No. 0-255), as amended by the Amendment effective January 1, 1974, filed as Exhibit 13-c to the Registration Statement on Form S-1 (Registration No. 2-51832), the Amendment effective January 1, 1977, filed as Exhibit 13(d) to the Registration Statement on Form S-1 (Registration No. 2-59744), and the Amendment effective January 1, 1980, filed as Exhibit 5(f) to the Registration Statement on Form S-7 (Registration No. 2-68938) and incorporated herein by reference.* (ii) Form of Deferral Agreement entered into between the Company and certain employees, including R. A. Cole, T. F. Dowd, L. R. Giglio, T. S. Gurganous, G. D. Hodges, J. C. Loff, R. D. Offenbacher, R. A. Reynolds, Jr., K. B. Sparks, C. R. Udell and J. F. Van Pelt.* (iii) Form of Supplemental Benefit Plan covering certain employees, including R. A. Cole, D. E. DeSousa, T. F. Dowd, L. R. Giglio, T. S. Gurganous, J. H. Hinshaw, G. D. Hodges, J. C. Loff, R. D. Offenbacher, R. A. Reynolds, Jr., K. B. Sparks, C. R. Udell and J. F. Van Pelt.* (13) Annual Report to Shareholders for 2002 (except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, this exhibit is furnished for the information of the Commission and is not deemed to be filed as part of this Annual Report on Form 10-K). (21) List of subsidiaries of the Company. (23) Independent Auditors' Consent of Ernst and Young LLP. (99) Additional Exhibits. (i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer. (ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer. * Compensation arrangement. (b) Reports on Form 8-K: ------------------- No reports on Form 8-K were filed during the last quarter of the Company's fiscal year ended December 31, 2002. 14 SIGNATURES ---------- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 27th day of March, 2003. GRAYBAR ELECTRIC COMPANY, INC. By /S/ R. A. REYNOLDS, JR. ------------------------------------- (R. A. Reynolds, Jr., Chairman of the Board and President) Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Company, in the capacities indicated, on March 27, 2003. /S/ R. A. REYNOLDS, JR. Director, Chairman of - ---------------------------- the Board and President (R. A. Reynolds, Jr.) (Principal Executive Officer) /S/ J. H. HINSHAW Director - ---------------------------- (Principal Financial Officer) (J. H. Hinshaw) /S/ R. A. COLE Director - ---------------------------- (R. A. Cole) /S/ D. E. DeSOUSA Director - ---------------------------- (D. E. DeSousa) /S/ T. F. DOWD Director - ---------------------------- (T. F. Dowd) /S/ L. R. GIGLIO Director - ---------------------------- (L. R. Giglio) /S/ T. S. GURGANOUS Director - ---------------------------- (T. S. Gurganous) /S/ G. D. HODGES Director - ---------------------------- (G. D. Hodges) /S/ J. C. LOFF Director - ---------------------------- (J. C. Loff) 15 /S/ R. D. OFFENBACHER Director - ---------------------------- (R. D. Offenbacher) /S/ K. B. SPARKS Director - ---------------------------- (K. B. Sparks) /S/ C. R. UDELL Director - ---------------------------- (C. R. Udell) /S/ J. F. VAN PELT Director - ---------------------------- (J. F. Van Pelt) 16 CERTIFICATIONS -------------- I, Robert A. Reynolds, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Graybar Electric Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ ROBERT A. REYNOLDS, JR. ----------------------------------------- Robert A. Reynolds, Jr. President and Principal Executive Officer 17 CERTIFICATIONS -------------- I, Juanita H. Hinshaw, certify that: 1. I have reviewed this annual report on Form 10-K of Graybar Electric Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ JUANITA H. HINSHAW ---------------------------- Juanita H. Hinshaw Senior Vice President and Principal Financial Officer 18 GRAYBAR ELECTRIC COMPANY, INC. AND SUBSIDIARIES ----------------------------------------------- SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS ---------------------------------------------
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Balance Beginning Charged to at End of Period Income Deductions of Period --------- ---------- ---------- --------- Description ----------- FOR THE YEAR ENDED DECEMBER 31, 2002: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $ 7,955,000 $ 5,512,000 $ 7,848,000(1) $ 5,619,000 Allowance for cash discounts 679,000 12,071,000 12,062,000(2) 688,000 ----------- ----------- ----------- ----------- Total $ 8,634,000 $17,583,000 $19,910,000 $ 6,307,000 =========== =========== =========== =========== FOR THE YEAR ENDED DECEMBER 31, 2001: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $ 8,634,000 $ 5,486,000 $ 6,165,000(1) $ 7,955,000 Allowance for cash discounts 777,000 13,282,000 13,380,000(2) 679,000 ----------- ----------- ----------- ----------- Total $ 9,411,000 $18,768,000 $19,545,000 $ 8,634,000 =========== =========== =========== =========== FOR THE YEAR ENDED DECEMBER 31, 2000: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $ 5,021,000 $ 8,888,000 $ 5,275,000(1) $ 8,634,000 Allowance for cash discounts 708,000 13,633,000 13,564,000(2) 777,000 ----------- ----------- ----------- ----------- Total $ 5,729,000 $22,521,000 $18,839,000 $ 9,411,000 =========== =========== =========== =========== (1) Amount of trade receivables written off against the reserve provided. (2) Discounts allowed to customers.
19 INDEX TO EXHIBITS ----------------- Exhibits -------- (3) Articles of incorporation and by-laws. (i) Restated Certificate of Incorporation, as amended, filed as Exhibit 4(i) to the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference. (ii) By-laws as amended through July 25, 2000 filed as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (Commission File No. 0-255) and incorporated herein by reference. (4)and(9) Voting Trust Agreements Voting Trust Agreement dated as of April 1, 1997, attached as Annex A to the Prospectus, dated January 21, 1997, constituting a part of the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference. (10) Material contracts. (i) Management Incentive Plan, filed as Exhibit 4(a)(1) to the Annual Report on Form 10-K for the year ended December 31, 1972 (Commission File No. 0-255), as amended by the Amendment effective January 1, 1974, filed as Exhibit 13-c to the Registration Statement on Form S-1 (Registration No. 2-51832), the Amendment effective January 1, 1977, filed as Exhibit 13(d) to the Registration Statement on Form S-1 (Registration No. 2-59744), and the Amendment effective January 1, 1980, filed as Exhibit 5(f) to the Registration Statement on Form S-7 (Registration No. 2-68938) and incorporated herein by reference.* (ii) Form of Deferral Agreement entered into between the Company and certain employees, including R. A. Cole, T. F. Dowd, L. R. Giglio, T. S. Gurganous, G. D. Hodges, J. C. Loff, R. D. Offenbacher, R. A. Reynolds, Jr., K. B. Sparks, C. R. Udell and J. F. Van Pelt.* (iii) Form of Supplemental Benefit Plan covering certain employees, including R. A. Cole, D. E. DeSousa, T. F. Dowd, L. R. Giglio, T. S. Gurganous, J. H. Hinshaw, G. D. Hodges, J. C. Loff, R. D. Offenbacher, R. A. Reynolds, Jr., K. B. Sparks, C. R. Udell and J. F. Van Pelt.* (13) Annual Report to Shareholders for 2002 (except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, this exhibit is furnished for the information of the Commission and is not deemed to be filed as part of this Annual Report on Form 10-K) (21) List of subsidiaries of the Company. (23) Independent Auditors' Consent of Ernst and Young LLP. (99) Additional Exhibits. (i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer. (iii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer. * Compensation arrangement. 20 ` EX-10.(II) 3 exh10p2.txt FORM OF DEFERRAL AGREEMENT EXHIBIT 10 (ii) DEFERRAL AGREEMENT ------------------ THIS AGREEMENT is made this day of December, 2002, by and ---- between Graybar Electric Company, Inc., ("Employer") and --------------------- ("Employee"). WHEREAS, the Employee has been performing valuable services for the Employer and desires to defer receipt of certain compensation to be earned by Employee in the service of Employer; and WHEREAS, the Employer desires to encourage the Employee to continue to perform such services and is willing to defer payment of such compensation and to credit "interest" thereon; NOW, THEREFORE, 1. Subject to Section 6 of this agreement, the parties hereto agree that annually, beginning January 1, 2003, the Employee may elect to defer receipt of the amounts set forth in Section 1 (a), (b), and (c) below and any amounts deferred ("Deferred Compensation") shall be paid to Employee at the time and in the manner set forth in Section 2. (a) % (no less than 2% nor more than 15%) of the Employee's --- annual salary, together with interest on such amount as determined under paragraph (e) below. (b) % (no less than 2% nor more than 25%) of the Employee's --- incentive payment, together with interest on such amounts as determined under paragraph (e) below. (c) The excess, if any, of the annual Employer contribution which would be paid or credited to the Employee's account in the Profit Sharing and Savings Plan of Graybar Electric Company, Inc. ("Profit Sharing Plan") but for (i) the limitation set forth in Sections 401 and 415 of the Internal Revenue Code and but for (ii) the deferral of compensation under paragraph (a) and (b) above, over the actual amount of the annual Employer contribution paid or credited to the Employee's account in the Profit Sharing Plan, together with interest on such amount as determined under paragraph (e) below. (d) By his signature to this Agreement, the Employee has elected, effective January 1, 2003, to defer the amounts set forth in paragraphs (a), (b), and (c) to be earned in 2003 and such election to defer shall remain effective for succeeding years until modified or revoked. The Employee may revoke the election to defer amounts under paragraphs (a), (b), and (c) or change the percentage to be deferred set forth in paragraph (a) (but not below 2% nor higher than 15%); and/or paragraph (b) (but not below 2% nor higher than 25%), provided that, such election must be in writing, must be signed by the Employee, must apply to an entire calendar year and must be delivered to the Employer on or before the last day of the calendar year immediately preceding the calendar year for which the election is to be effective. (e) Interest on Deferred Compensation shall be compounded and credited at the end of each calendar quarter based on the average crediting rate for the prior calendar quarter under the Stable Value (Fixed) Income Fund of the Profit Sharing Plan as determined by Dwight Asset Management Company. Interest will be paid beginning with the date the amount would otherwise have been paid to the Employee or credited to the Employee's account and ending with the date of payment to the Employee. 2. Deferred Compensation shall become payable to the Employee as of the earlier of: (a) the Employee's Retirement from the employment of the Employer as that term is defined in Article 1.30 of the Profit Sharing Plan; or (b) the Employee's termination of employment with the Employer prior to such Retirement. Deferred Compensation payable after retirement on other than a deferred service pension shall be paid as soon as administratively possible in January of the year following the year of the participant's retirement date in one lump sum if the amount is $50,000 or less, paid in five annual installments if the amount is over $50,000 but less than $500,000, and paid in ten annual installments if the amount is $500,000 or more. Payments may be made in such other manner and at such other times as the Employee shall request, not less than 90 days prior to retirement on other than a deferred service pension as the Employer, in its sole discretion, shall approve. Deferred Compensation payable after termination of employment (not including retirement on a service pension) shall be paid in a lump sum as soon as administratively possible in January of the year following the year of the participant's termination date or in such other manner and at such other time as the Employee shall request prior to termination of employment and as the Employer, in its sole discretion, shall approve. If the Employee dies prior to the date any or all of the Deferred Compensation has been paid to him, the Employer shall pay any remaining balance to the beneficiary previously designated in writing by the Employee in the manner designated herein, or in such other manner as the Employer in its sole discretion, shall approve. If no beneficiary has been designated in writing or if no designated beneficiary survives the Employee, the unpaid Deferred Compensation shall be paid to the Employee's estate in a lump sum. 3. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employ of the Employer. 4. The right of the Employee or any other person to receive Deferred Compensation is not assignable or transferable except by will or the laws of descent and distribution and may not, during the life of the Employee, be --- pledged or encumbered. 5. Nothing contained in this Agreement and no action taken pursuant to the provisions hereof shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Employer and the Employee, his beneficiary or any other person. To the extent that any person acquires a right to receive payments under this Agreement, such right shall be no greater than that of an unsecured general creditor of the Employer. 6. This agreement may be terminated by the Employer with respect to amounts set forth in Section 1 (a) and (b) by notice in writing to Employee provided such notice is given prior to the commencement of any calendar year and shall affect only those amounts set forth in Section 1 (a) and (b) not yet deferred. 7. This Agreement may be amended only by the mutual written consent of the parties. 8. This Agreement shall be construed in accordance with the laws of the State of Missouri. 9. Taxes. If the Employee becomes entitled to receive cash or other taxable income pursuant to this Agreement, Employer shall have the right to withhold from the amount Employer would otherwise be required to pay to the Employee pursuant to this Agreement, the amount of any taxes which the Employer is or will be required to withhold under the applicable federal, state and local income and employment tax laws. Furthermore, the Employer may elect to deduct such taxes from any other amounts payable at any time thereafter in cash or otherwise to the Employee. The Employer shall bear no responsibility whatsoever for the Employee's taxes or tax effects resulting from this Agreement. 10. Claims Procedure. (a) Claim - The Employee or other person who believes that he is being denied a benefit to which he is entitled (hereinafter referred to as "Claimant") may file a written request for such benefit with the Employer setting forth his claim. The Employer shall advise the Claimant that a reply will be forthcoming within thirty (30) days and deliver a reply within thirty (30) days. However, the Employer may extend the reply period for an additional fifteen (15) days for reasonable cause. If the claim is denied in whole or in part, the Employer will adopt a written opinion using language calculated to be understood by the Claimant setting forth: (i) the specific reason or reasons for denial; (ii) the specific references to pertinent Agreement provisions on which the denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or such information is necessary; 2 (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) the time limits for review under Subparagraph (b), below. (b) Review - Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the previous determination be reviewed by the Employees' Benefit Committee (hereinafter referred to as the "Committee"). The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. Within thirty (30) days after the Committee's receipt of a request for review, it will render a written opinion setting forth the specific reasons for the decision and containing specific references to the pertinent Agreement provisions on which the decision is based. If special circumstances require that the thirty (30) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible but not later than sixty (60) days after receipt of the request for review. 11. The Vice President, Human Resources, is responsible for the administration and interpretation of this Plan and any questions should be directed to his attention. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officers and the Employee has hereunto set his hand as of the date first above written. GRAYBAR ELECTRIC COMPANY, INC. By ----------------------------------- ---------------------------- Employee Date ----------------------------------- ---------------------------- Company Date Employee hereby designates the following Beneficiary or Beneficiaries for this Deferral Agreement and any previous Deferral Agreement entered into between the employee and the company. If upon the death of the employee, none of the above Beneficiaries have survived the employee, then the employee designates the following as Contingent Beneficiaries under such agreements: The execution of this form hereby revokes any prior designation of Beneficiary(s) or Contingent Beneficiary(s) made by the employee with respect to this deferral agreement or any previous deferral agreement entered into between the employee and the company. ----------------------------------- ---------------------------- Signed Date ---- 3 EX-10.(III) 4 exh10p3.txt FORM OF SUPPLEMENTAL BENEFIT PLAN EXHIBIT 10 (iii) GRAYBAR ELECTRIC COMPANY, INC. SUPPLEMENTAL BENEFIT PLAN 1. Purpose Sections 401(a)(17), 415 and 417(e) of the Internal Revenue Code of 1986 (the "Code") restrict benefit payments under the Graybar Electric Company, Inc. Pension Plan (the "Pension Plan") and allocations to a Member's account under the Profit Sharing and Savings Plan of Graybar Electric Company, Inc. (the "Profit Sharing Plan"). Code Section 401(a) also proscribes the inclusion of certain deferred compensation in the compensation taken into account under such Plans. However, a company may pay benefits and/or make allocations without regard to such restrictions through an unfunded supplemental benefit plan. The purpose of this "Supplemental Benefit Plan" is to provide benefits to those Pension Plan and Profit Sharing Plan Participants whose benefits may be limited by any provision of Code Sections 401(a), 415 and 417(e), on a basis consistent with the Pension Plan and Profit Sharing Plan without regard to any limitations contained in such sections. 2. Eligibility Any Participant in the Pension Plan or Member of the Profit Sharing Plan whose Retirement Income or annual allocation is limited, directly or indirectly, by any requirement of Code Sections 401(a), 415 or 417(e), or whose compensation as defined in Section 4 hereof is not used in calculating such Retirement Income or annual allocation shall be eligible for benefits under this Supplemental Benefit Plan. 3. Amount of Benefits (a) Supplemental Pension Benefit. The supplemental pension benefit payable to an eligible Participant or his spouse shall equal the excess, if any, of (A) over (B), where: (A) is the Retirement Income which would have been paid to such Participant or his spouse under the Pension Plan if the provisions of Code Sections 401(a)(17), 415 and 417(e) did not apply and Compensation as defined in Section 4 hereof were used in determining such Retirement Income; and (B) is the Retirement Income which is payable to the Participant or his spouse under the Pension Plan. (b) Supplemental Profit Sharing Benefit. The supplemental profit sharing benefit payable to an eligible Participant for a Plan Year shall equal the excess, if any, of (C) over (D), where: (C) is the allocation which would have been made to such Participant's Account B under the Profit Sharing Plan for any Plan Year if the limitations imposed by Code Sections 401(a)(17) and 415 did not apply and Compensation as defined in Section 4 hereof were used in determining such allocation; and (D) is the allocation which is made to such Participant's Account B under the Profit Sharing Plan for such Plan Year. 4. Compensation For purposes of making the calculations described in clauses (A) and (C) of Section 3 above, Compensation means the Participant's total regular salary paid by the Company, excluding living allowances and Employer contributions to this or any other benefit plan, but including (1) any overtime, (2) payments under any regular incentive plans, (3) any compensation relating to such Plan Year which has been deferred under a deferred compensation agreement between the Company and the Participant, and (4) contributions made by salary reduction under a plan described in Code Section 125. 5. Funding Benefits under the Supplemental Benefit Plan shall be payable from the general assets of Graybar Electric Company, Inc. and no funds shall be set aside for the purpose of making payments under the Supplemental Benefit Plan. 6. Payment of Benefits (a) Supplemental Pension Benefit. A Participant entitled to a supplemental pension benefit shall be paid the Actuarial Present Value of such benefit in 10 annual installments, beginning during the month of January of the year following the year of the Participant's Retirement Date, with subsequent payments made within 10 days of each anniversary of the first payment. For this purpose, the Actuarial Present Value of the Participant's benefit shall be determined as of the Participant's Retirement Date using the generally applicable actuarial factors set forth in the Pension Plan before any application of Code Sections 415 or 417(e). Interest on any unpaid installments shall be credited at the rate used to calculate the Actuarial Present Value. (1) The Participant may request, and, in its sole and absolute discretion, the Company may agree to an alternate method or time for distribution of any supplemental pension benefit payable hereunder, provided such agreement is reached and recorded at least 90 days prior to the Participant's Retirement Date under the Pension Plan. (2) Prior to the Participant's Retirement Date, the same pre-retirement joint and surviving spouse protections as are applicable to the Participant under the Pension Plan shall apply to the Participant's (3) (A) Upon the death of a married Participant on or after his Retirement Date, any unpaid installments, plus interest to the date of payment, shall be paid to his surviving spouse in the same form and at the same times as such installments would have been paid to the Participant. If such spouse should die prior to receiving all payments due under this paragraph, any installments remaining to be paid to such spouse, plus interest to the date of payment, shall be paid to the spouse's estate in a single sum. (B) Upon the death of an unmarried Participant on or after his Retirement Date, any unpaid installments, plus interest to the date of payment, shall be paid to his estate in a single sum. (C) If the Participant is receiving a form of payment other than installments, post-retirement death benefits, if any, shall be determined under such form. (b) Supplemental Profit Sharing Benefit. If the Participant has executed a deferred compensation agreement with the Company for the Plan Year prior to January 1 thereof, any supplemental profit sharing benefit to which the Participant is entitled hereunder for such Plan Year shall automatically be credited to the deferred compensation account established for the Participant on the Company's books pursuant to such agreement, and shall be payable, at or after the termination of the Participant's service, in accordance with the terms of such deferred compensation agreement. If no deferred compensation agreement is in force with respect to the Participant for the Plan Year, any supplemental profit sharing benefit payable for such Plan Year shall be paid to the Participant in cash as soon as may be practicable after the amount thereof is determined. 7. Administration The Supplemental Benefit Plan shall be administered by the Company in a manner generally consistent with the substance of Article IX of the Pension Plan. 8. Amendment and Termination The Supplemental Benefit Plan may be amended by the Board of Directors of Graybar Electric Company, Inc. at any time and for any reason and shall terminate when both the Pension Plan and the Profit Sharing Plan terminate. 2 EX-13 5 exh13.txt ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS FOR 2002 [Graybar Logo] ANNUAL REPORT 2002 [PHOTOS] [PHOTO] BOARD OF DIRECTORS Standing, left to right: ROBERT A. REYNOLDS, JR. Chairman, President and Chief Executive Officer JUANITA H. HINSHAW Senior Vice President and Chief Financial Officer Seated, left to right: DENNIS E. DeSOUSA Senior Vice President-Sales and Marketing LAWRENCE R. GIGLIO Senior Vice President-Operations CHARLES R. UDELL Senior Vice President-Business Management [PHOTO] Standing: RICHARD A. COLE Group Vice President-Minneapolis, Cincinnati and Chicago Districts Seated, left to right: GARY D. HODGES Group Vice President-California District THOMAS F. DOWD Vice President, Secretary and General Counsel JACK F. VAN PELT Vice President-Human Resources [PHOTO] Standing: KENNETH B. SPARKS Group Vice President-Seattle and Phoenix Districts Seated, left to right: JOHN C. LOFF Group Vice President-St. Louis, Dallas and Houston Districts THOMAS S. GURGANOUS Group Vice President-Pittsburgh and Richmond Districts RICHARD D. OFFENBACHER Group Vice President-Atlanta and Tampa Districts COMPANY'S BUSINESS Graybar Electric Company, Inc. is engaged internationally in the distribution of electrical and communications products and integrated supply services primarily to contractors, industrial plants, telephone companies, power utilities, and commercial users. All products sold by the Company are purchased by the Company from others. CLASSES OF CUSTOMERS SERVED Electrical Contractor Commercial & Industrial Voice & Data Communications Power Utility International CAPITAL STOCK DATA Number of Equity Security Holders as of December 31, 2002: - ---------------------------------------------------------------------- Title of Class Number of Security Holders - ---------------------------------------------------------------------- Preferred Stock 57 Common Stock 141 Voting Trust Certificates for Common Stock 6,203 - ---------------------------------------------------------------------- DIVIDEND DATA Common Stock, par value $1; stated value $20. Dividends declared for year: 2002 2001 2000 - ---------------------------------------------------------------------- First Quarter $ .30 $ .30 $ .30 Second Quarter .30 .30 .30 Third Quarter .30 .30 .30 Fourth Quarter $1.10 $1.10 $1.10 - ---------------------------------------------------------------------- CONTENTS Board of Directors . . . . . . . . . . . . . . . .Inside Front Cover Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . 2 Market Review. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Operations Review. . . . . . . . . . . . . . . . . . . . . . . . .11 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . .15 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .17 Consolidated Financial Statements. . . . . . . . . . . . . . . . .20 Report of Independent Auditors . . . . . . . . . . . . . . . . . .30 Group and District Management. . . . . . . . . . . . . . . . . . .31 Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 LETTER TO SHAREHOLDERS - ----------------------------------------------------------------------- This past year can best be summarized by one central theme: building for the future. It was a challenging, yet productive year for our company. Despite being tested by the most brutal economy in decades, we remained focused on putting in place the building blocks that will propel Graybar to greater heights in the years ahead. Graybar continues to be financially sound. Despite lower overall sales and profitability, we were able to maintain positive cash flow, which allowed us to pay down debt and continue making important investments that will position us for future growth regardless of external economic pressures. It was a year of change, in which we defined and communicated the vision for our company -- where we want to go, how we plan to get there, and the role each of us plays in making it happen. We also began to carry out several strategic initiatives designed to support that vision. These initiatives focused primarily on our corporate culture and our people -- on understanding how our organizational structure can more effectively serve our markets and on the investments needed to continue developing and training our people who are so key to attaining Graybar's financial and business objectives. The business boom of the late 1990s has given way to a difficult period. Entire industries have collapsed, large companies have filed for bankruptcy, customers have gone out of business, and corporate credibility has been called into question. Turbulence clearly challenges a company's character. We have proven that we are built to deliver in even the most difficult environment. While many companies within and outside our industry have been forced to take cover, we have not. In fact, we moved forward in 2002. We continued to look for ways to bring innovation to the marketplace and maintained our leadership as the number one electrical and comm/data distributor in North America. We made significant progress in 2002 toward achieving our goal of firmly positioning our company as more than just a distribution company, but as one of the nation's leading supply chain experts. What follows is a summary of our accomplishments and a brief look ahead at where we go from here. MAINTAINING FINANCIAL STABILITY Market conditions continued to deteriorate in 2002, not only in the telecommunications sector -- which was hardest hit -- but also in the electrical business. Because distribution companies serve markets rather than create markets, our results are dependent upon the success of our customers. To ensure our business remained aligned with changing general economic and market conditions, we had to make some difficult decisions. We instituted layoffs, imposed restrictions on new hiring and did not make a profit sharing contribution. In addition, we continued to review operating costs and capital expenditures carefully to ensure investments were being made in areas that would have the greatest impact on improved business results down the road. Despite the economic downturn, we continued our unbroken record of paying dividends to shareholders. During the year, we generated more than $213 million of operating cash flow. We used this money to fund investments in our business and pay down more than $98 million in short-term debt and over $51 million in long-term debt. Like most businesses nationwide, we continued to experience sharp rises in health care costs. As these costs continue escalating at an alarming rate, it is clear that changes are necessary. Consider this: just three years ago, Graybar spent approximately $16 million on health care for our employees and retirees. In 2002, we spent over $37 million -- an increase of more than 127%. Graybar absorbed the majority of this huge increase in 2002, maintaining our commitment to cover 75 percent of overall costs, while employees and covered retirees pay 25 percent. Due to the poor performance of the stock market and the impact of low interest rates, we also had substantial increases in the cost of funding our defined benefit pension plan. Our responsibility and our challenge are to balance the need to manage a successful business with our dedication to continuing to provide valuable and competitive benefits to employees and retirees. 2 - ---------------------------------------------------------------------- DEFINING OUR VISION We started 2002 by bringing clarity to Graybar's mission -- to be the vital link in the supply chain, adding value with efficient and cost-effective service and solutions for our customers and our suppliers. We then defined the vision we have for bringing value to our customers, our suppliers, our employees, our shareholders and our community. INVESTING IN INFRASTRUCTURE To deliver on that vision, we remained committed to our Enterprise Resource Planning (ERP) project, which when fully deployed will help us enhance our supply chain management services and ultimately improve customer service. Following through with our ERP plans amid an economic downturn offered us some unexpected advantages; it saved significantly on cost and gave us more undivided attention from senior management and the top experts at SAP and Deloitte Consulting. Most important, ERP is an investment in the future management of our business. Information technology is the backbone of modern distribution, impacting the performance and profitability of our company. Our ERP will raise the bar on performance and value for our customers and suppliers. At the end of 2002, following signs that business conditions might improve, we invested in additional inventories, bringing products closer to our customers by enhancing our zone warehouse strategy and preparing ourselves to benefit from a revived economy. INVESTING IN PEOPLE During 2002, we took time to speak with customers and suppliers to get their perceptions of our company. We wanted them to tell us, in their own words, what differentiates us from our competitors. The response was unanimous: our employees. - ---------------------------------------------------------------------- VISION STATEMENT FOR OUR CUSTOMERS We will add value for our customers by anticipating and identifying their needs and providing cost-effective solutions. Through excellent and efficient service we will meet our customers' expectations. They will see us as a leader in the industry. FOR OUR SUPPLIERS We will be the channel of choice for our suppliers by providing cost- effective and efficient ways to bring their products, services and solutions to our mutual customers. They will see us as a leader in the industry. FOR OUR EMPLOYEES We will provide an environment for our employees that challenges them to learn, grow and prosper in an atmosphere of respect and recognition. Our employees will be proud to work for a profitable and thriving employee-owned company. FOR OUR SHAREHOLDERS We will be the industry leader in the products and services we offer while providing increased shareholder value at optimal risk. FOR OUR COMMUNITY Graybar will be a solid corporate citizen and will encourage community involvement among its employees and retirees. - ---------------------------------------------------------------------- "GRAYBAR'S MISSION -- TO BE THE VITAL LINK IN THE SUPPLY CHAIN, ADDING VALUE WITH EFFICIENT AND COST-EFFECTIVE SERVICE AND SOLUTIONS FOR OUR CUSTOMERS AND OUR SUPPLIERS." 3 - ---------------------------------------------------------------------- Customers described Graybar's dedicated employees as the driver behind our company's ability to deliver superior service, and said, without question, employees were our company's most valuable competitive advantage. Customers and suppliers offered comments like these: "Their corporate culture is enviable. A lot of companies try to emulate them, but can't." "They know the products and have the technical expertise." "They have integrity." "They are always trying to be innovative and bring value to their customers." While this came as no surprise, the comments underscored the importance of investing in our employees so they are equipped to continue delivering the difference. We made a concerted effort to improve the dialogue with employees this past year. I had the pleasure of meeting with hundreds of employees throughout the year to discuss our business and answer questions regarding the future direction of the company. And for the first time in more than a decade, we surveyed employees to find out where we were doing well and where we were falling short. The results confirmed the need to continue communicating frequently and with clarity up and down the organization. There also was recognition that, at times, we have become complacent. We need to embrace the idea that we are all, individually, responsible for Graybar's success. We also made investments in training. More than 700 representatives from various sectors of the electrical industry gathered in Dallas at Graybar's National Electrical Training Conference. Dedicated to heightening employees' and customers' understanding of existing and emerging products and services, the conference marked the first time Graybar had held such an event focused on the electrical industry. This was a successful and significant event that built on our existing comm/data conference, which was held again in 2002 for the 10th consecutive year. These conferences provided a hands-on opportunity for employees and customers to learn about new products, as well as reintroduce themselves to existing products. We have an enviable culture, which contributes to the pride employees feel in working for Graybar. While cost controls slowed the implementation of some employee-driven programs, we made progress and will continue to invest in our greatest asset in the years ahead. CULTIVATING LEADERSHIP For the first time in our history, Graybar was named to Fortune's list of America's Most Admired Companies in 2002. In addition, we continued to rise in Forbes' ranking of America's Largest Private Companies, were named to Business Week's ranking of the Top Private Info-Tech Companies, and finished first on Electrical Wholesaling's list of Top 250 Electrical Distributors. All are signs of a company on the move and a leader in its industry. Our company has great leaders at every level of the organization. We placed a greater emphasis in 2002 on identifying and developing our future leaders. I am convinced that leadership is what will take us to the next level. We need to continue developing our people with the skills, dedication and determination to ensure we maintain and build on our well-earned reputation as the leading distributor. I challenged our people to embrace three key leadership values: The passion to want to get the job done, the commitment to make it happen, and the discipline to make it happen within the structure of our company. "WE ARE IN THE BUSINESS OF HELPING OUR CUSTOMERS POWER AND NETWORK INDUSTRIAL FACILITIES, OFFICES AND HOUSING WITH SPEED, INTELLIGENCE AND EFFICIENCY." 4 - ----------------------------------------------------------------------- We need an organization that will lead and drive corporate strategy. We operate in an increasingly competitive environment, one in which we must remain focused on delivering value, consistently and without compromise across our organization. LIMITLESS OPPORTUNITIES This past year has been a time of investment -- investment in our systems, our infrastructure and our people -- to prepare us for a strong 2003 and beyond. As we look ahead at the balance of 2003, it is clear we must increase our attention to delivering to our customers the value- added services they need. When we do, the result will be increased sales, profits and market share. We are no longer just in the pick, pack, and ship business. We are in the business of helping our customers power and network industrial facilities, offices and housing with speed, intelligence and efficiency. Tomorrow's success will depend on our ability to engage customers, listen to their needs and then help them accomplish their goals. This will require a sharper customer focus. We need to expand the dialogue we began internally this past year to our customers, so we can find out more about their expectations and how Graybar can meet or exceed those expectations. Graybar is a company with a strong tradition. We have a solid base from which to draw. Like any business, we must deal with market conditions and changing customer demands. To build on our strong heritage, we must remain profitable, which means being nimble enough to adjust to changing market dynamics. This past year has shown that we have the fortitude and commitment to continue leading the charge as America's largest electrical and comm/data distributor. And, as one of North America's largest employee-owned companies, we benefit from having both the power and stability of a big company and the integrity and drive of an employee-owned business. But, it is clear that we must continue to find ways to build relationships that work for... OUR EMPLOYEES, by identifying ways to inspire and motivate individuals and teams to achieve operational excellence. OUR CUSTOMERS, by understanding, anticipating and fulfilling their needs, which have gone far beyond just "distributing" products. OUR SUPPLIERS, by helping drive strong brand and product loyalty, which allows us to consistently deliver the breadth and depth of products that sets us apart as America's leading distributor of electrical and comm/data products. We have established the foundation to get us where we need to be operationally. Now it is time to turn our attention outward -- to focus on the customer -- with the goal of fueling growth and profitability. Great people delivering on great ideas to build relationships that work -- with our customers and with our suppliers -- is what will ensure we continue to deliver positive results in the future. And because Graybar is owned by its employees and retirees and not publicly traded, we control our own destiny. This is why I am so confident that our best years lie ahead. The leadership of this company has a plan for the future. I believe -- thanks to the combined efforts of our more than 8,000 employees -- it is working. /s/ Robert A. Reynolds, Jr. Robert A. Reynolds, Jr. Chairman, President and CEO St. Louis, Missouri March 2003 5 MARKET REVIEW The Electrical and Comm/Data Markets served by the Company continued to struggle with a difficult economy for the second consecutive year. As companies reduced non-essential expenditures to improve profitability, capital spending decreased dramatically. Concurrently, investment in telecommunications infrastructure went from boom to bust early in 2001 and is not expected to approach previous spending levels for several years. Even in the tough economy of 2002, Graybar continued to secure new national strategic alliance agreements with industry leading companies due to our ability to deliver cost-effective services and solutions nationally. Our corporate accounts group plays a leadership role in defining Graybar's value proposition for our customers. Directors of corporate accounts are responsible for strategic customers within targeted industries, which include automotive, food and beverage, health care, petrochemical, microelectronics and national contractors/resellers. In addition, senior management has identified specific customer sectors -- comm/data service providers, engineering and construction contractors, government, and utility companies -- that are served by the corporate accounts team. The expanded focus by our corporate accounts group on sales to federal, state and local governments has resulted in significant growth with these customers. The Company currently has six regional contracts with the Defense Logistics Agency (DLA). In 2002, Graybar was awarded General Services Administration (GSA) contracts covering both electrical and comm/data products. Additionally, contracts with U. S. Communities (USC) continue to give us the opportunity to offer any product Graybar sells to any state, county or municipal government. Collaboration within our Electrical and Comm/Data product groups supported the growing convergence within our customer base. In 2002, we expanded upon our successful supplier selectivity and category management programs of earlier years by initiating the Strategic Sourcing process, an element of supply chain management. This process develops objective criteria and tools for evaluating and selecting suppliers within specified product categories. Strategic sourcing, coupled with marketplace analyses, led Graybar to reduce the number of suppliers and products in several categories, while adding appropriate new ones. By narrowing the number of suppliers within a category, we can drive operational efficiencies and economies of scale. This process has enabled us to make better decisions with regard to Graybar's strategic plans while also prioritizing countless tactical decisions. The tools we now use help Graybar focus -- along with our strategic suppliers -- on the primary components of supply chain management, formally integrating our operations and financial groups into the process. By comparing brand preference, service capabilities and other applicable data, Graybar is now able to compare performance within and among our primary product categories. We make better decisions as to which products to stock and how to deploy them. We reviewed several product groups in 2002 and saw improvements across the board in supplier programs. Through these efforts, Graybar upholds its position as the industry leader in the products and services we offer. In all markets, our goals are to improve penetration and create specific marketing programs to support the needs of our customers. Although some sectors are struggling, opportunities exist across the country in both the Electrical and Comm/Data Markets. ELECTRICAL MARKET Graybar's sales in the Electrical Market experienced a slight year-over-year decrease, reflecting the projected revenue decrease in the Electrical Market overall in 2002. We continued our emphasis on specialization in our sales and customer service teams. Through specialization we can address the unique needs of our customers in the various sectors within the electrical marketplace. Our Project Management Services Teams are a prime example of the added value specialization provides. By developing centers of competence, with specialized training for team members in lighting and switchgear, Graybar provides the assistance required to design and manage complicated projects. In 2002, these teams, using our proprietary material tracking, reporting and services package, helped manage major projects with the largest contractors in the country. The ePoint program, a Graybar exclusive customer loyalty program, was expanded to include electrical 6 contractors nationally, with excellent results. Our sales to customers in this program grew beyond 2001 levels, bucking the industry trend. The ePoint program has been recognized as a premier customer loyalty program in the industry. Graybar's industrial customers continued to be affected by the reduction in capital expenditures across the country. Manufacturing levels remain below the thresholds that will require an expansion of plant capacity, which reduces the potential spending in the sector. We have expanded our focus on industrial OEM (original equipment manufacturing) customers, and as the economic factors improve, we anticipate additional sales opportunities due to these efforts. Bundling of services and products from our best-in-class suppliers helps Graybar industrial sales representatives earn project business and MRO (maintenance and repair operations) servicing opportunities every day. Also, existing and emerging corporate account agreements across the country make Graybar a distributor of choice for customers requiring national service capabilities. The convergence of electrical and communications products in manufacturing processes provides an [PHOTO] CHARLIE SEWELL, Senior Sales Representative, Orlando, Florida "Understanding my customers and discovering their needs allows me to put forth long-lasting solutions that solidify our relationship. I'm constantly thinking of ways I can raise the bar on my performance and be better than my competition. I always ask my customers if the solution I have provided is performing as promised. My customers know I have their best interest at heart, because our long-term relationship is my key goal." "GRAYBAR CONTINUED TO SECURE NEW NATIONAL STRATEGIC ALLIANCE AGREEMENTS WITH INDUSTRY LEADING COMPANIES DUE TO OUR ABILITY TO DELIVER COST- EFFECTIVE SERVICES AND SOLUTIONS NATIONALLY." 7 increasing market opportunity for Graybar. Capitalizing on our expertise in servicing factory floor automation and networking requirements, we have positioned automation specialists strategically across the country to assist our customers in developing improved manufacturing processes. Graybar fared well with utilities customers in 2002 due to our participation in the utility online marketplaces and our ongoing commitment to the rural and municipal utilities. We have expanded our utility offering with several new major MRO contracts initiated in 2002 while continuing to pursue and maintain the traditional business. As we enter 2003, Graybar is positioned to be a more significant participant in both the traditional and the emerging portions of the utility industry. COMM/DATA MARKET The telecommunication sector in 2002 was a disappointment worldwide, and Graybar's business with our comm/data customers was no exception. For the second consecutive year, spending by our communications customers was down significantly. The market for sales of structured wiring products such as copper data cabling, indoor fiber optic cable, data outlets and patch panels was down substantially. A reduction in spending on infrastructure development, combined with price deterioration and a cutback in construction, contributed to the decline. The reduction in available market potential made our sales growth in areas like wireless and VoIP (Voice over Internet Protocol) technologies even more significant. Key relationships with 3Com and Mitel have fueled this continuing growth opportunity. We expect continued success with these two technologies in 2003. The long-awaited ratification of the Category 6 cabling standard, which occurred in June 2002, is expected to raise the performance expectations of customers installing cabling projects. The VIP 2000 program, Graybar's independently verified cabling system benchmark, has seen significant usage as the performance level for customers that want more than the minimum performance. When products meet the stringent requirements of VIP, customers are assured that their cabling systems will support the technology requirements of their businesses. As for comm/data resellers, Graybar's ePoint program was expanded to include products from structured cabling system suppliers. Our increased sales to participants enrolled in this customer loyalty program helped soften the impact of the Comm/Data Market contraction. The Service Provider sales potential continues to adjust to the current requirements for voice and data grade connections in the marketplace. The survivors emerging from the difficult market conditions appear to be the regional holding companies and the independent telephone companies (ITCO) that dominate the rural areas. Sales and marketing strategies focused on both of these customer sectors were implemented in 2002. As many comm/data manufacturers struggle with sales that are significantly lower than previous market peak levels, an opportunity is developing for Graybar. As a recognized leader in serving ITCO customers, we are becoming the distribution channel of choice for many companies that had previously employed direct sales strategies to these customers. Our commitment to the Service Provider business is expected to pay dividends as this beleaguered sector turns around in the coming years. INTERNATIONAL MARKETS While sales for the first six months were lower than the same period the previous year, Graybar Canada had another profitable year in 2002. Both Canadian operations, Harris and Roome Supply in the Atlantic Provinces and Graybar Ontario, were affected by a weaker industrial market in 2002. By focusing more resources on the commercial project business, we capitalized on opportunities in that sector. Improved sales performance during the last half of the year produced results that exceeded industry averages. Although sales were flat compared to 2001, profits increased. We remain focused on controlling operational costs, improving service levels and monitoring the quality of inventory. In 2003, Graybar Canada expects continuation of the growth experienced in the last six months of 2002 with the anticipated resurgence of the traditional industrial base and inflation predicted at a manageable rate. Graybar de Mexico continued to be affected by a soft overall Mexican economy, and it responded by remaining focused on trimming expenses and monitoring inventory investments and accounts receivable. 8 A successful reorganization and change in business plans with a strong emphasis on the Comm/Data Market brought about profitable bottom line results. Graybar Puerto Rico had another strong year in 2002. Serving primarily contractor and industrial customers with heavy emphasis in the pharmaceutical industry, Graybar Puerto Rico utilizes the team approach to sales and service to produce results. Teams consisting of a sales representative, an inside sales person, and a customer service representative now support each customer's service needs. We expect continued growth in 2003 with this solution selling approach. MARKETING SUPPORT GRAYBAR FINANCIAL SERVICES (GFS) In addition to providing access to an alternative form of financing for customers purchasing equipment, Graybar's leasing and financing subsidiary also arranges project financing for customers selling communication and data systems as well as entire modernization projects. This value-added service clearly differentiates Graybar from other distributors. State-of-the-art technology allows GFS to provide a high level of customer service, and it enables our lease [PHOTO] CAROL ANDREWS, Manager Customer Service, Nashville, Tennessee "I have a great team here in Nashville -- great people who are dedicated to doing things right the first time. When customers or suppliers tour our facility, they are always impressed by our capabilities and our bright and friendly people. Every employee here is empowered to do what it takes to serve our customers. Whether we ship from local stock or from our vast zone warehouse inventory, our customers can be confident their material will arrive when they need it." "AS A RECOGNIZED LEADER IN SERVING ITCO CUSTOMERS, WE ARE BECOMING THE DISTRIBUTION CHANNEL OF CHOICE FOR MANY COMPANIES THAT HAD PREVIOUSLY EMPLOYED DIRECT SALES STRATEGIES TO THESE CUSTOMERS." 9 administrators to provide real time information to customers during the lease process. Our online services were further enhanced in 2002 with the added capability for resellers and contractors to input their customers' lease applications directly into the GFS credit system, generate proposals and check the status on pending transactions. Resellers and contractors can now track their existing customers' leases and proactively market to these customers prior to lease termination. COUNTER MARKETING Counters at more than 200 locations across the country received a makeover in 2002. Our merchandising strategy was simplified, with a focus on displaying impulse items. The emphasis on tools, test equipment and on-the-job consumables has been well received by walk-in customers. Renewed focus on will-call service helps move our customers in and out quickly and with the right material. A new banner and poster program for the counters delivers standardized marketing messages focusing on our value-added services and the products of key suppliers. E-BUSINESS Graybar customers continue to request e-business solutions to reduce their procurement costs. More than 15 of Graybar's largest industrial, utility, and commercial customers use Graybar's e-catalog, which continues to mature and now includes 73% of the items sold more than 100 times annually. During 2002, the e-catalog became a valuable business tool for many of our key customers. In 2003, we will create e-catalogs specific to customer sectors to drive additional sales and new customer acquisition. Our contractor customers focused on the bid request process to decrease their purchasing costs. Graybar participates with Electricsmarts, a service that provides contractors an electronic means of responding to requests for product price estimates. Once Graybar provides a list of customer-specific products and prices to Electricsmarts, the contractor's estimating software can pull pricing from Graybar's database to develop web-based price quotes. Eliminating the time needed to quote standard material prices allows the customer service representative or quotations specialist to focus on the non-traditional items on the bid request. With turn around in hours rather than days, Graybar can be the first to provide the bid back to the contractor. Graybar is also working with TradePower, a company that provides contractors with integrated solutions for estimating, purchasing and accounting, to facilitate the bid request process with contractors that subscribe to their service. In 2002, in addition to expanding our electronic data interchange (EDI) program for supplier purchase orders and invoices, we began utilizing EDI for processing cost recoveries with three key manufacturers. Using EDI has provided improved accuracy as well as increased productivity for these processes. The value-added services provided by manufacturers include Graybar-specific web sites for checking item availability, order status and detailed product specifications. As a complement to Hot Key and EDI, these sites assist Graybar personnel in providing excellent customer service. To support our inventory initiatives, Graybar created a store on eBay(R) focused on selling discontinued, obsolete and excess inventory. We also created an employee store on Infolink, our employee intranet, that gives our employees a single place to look for discounted Graybar merchandise as well as discount offers from our vendors and suppliers. MINORITY/WOMEN OWNED BUSINESS ENTERPRISE (MWBE) Our minority, women and small business vendor base continues to expand. During 2002, we continued to invest in data and resources to more accurately identify new services and products provided by minority and women-owned businesses. Our database indicates we are transacting with over 10,000 companies with socioeconomic classifications. Innov8 Solutions USA, LLC is a minority owned and operated business that provides creative and value-added services not normally provided by distribution. The reduced activity in the telecommunications Service Provider Market in 2002 impacted Innov8 as well, and financial results were disappointing from our one-third-ownership interest in Innov8. 10 OPERATIONS REVIEW INVESTMENT AND INVENTORY MANAGEMENT The Company's inventory management efforts focused on monitoring our product offering to serve the available business, while more closely aligning our inventory investment with our sales. The overall investment was reduced from the prior year, and the product mix was improved as our fastest moving merchandise comprised a greater percentage of the total inventory. Non-moving and distressed merchandise was reduced significantly. Corporate Purchasing initiated numerous actions with our purchasing software - -- adjusting control factors for lead times, service levels, forecast and order cycles -- to achieve results needed to serve our customers. Inventory expansion orders placed with many strategic suppliers enhanced our product offerings and provided commercial incentives. A computer application enabling mass changes to customer price authorizations (CPAs) was developed to replace a time-consuming manual procedure. Now price changes can be accomplished electronically, eliminating the computing and inputting of hundreds of thousands of CPA entries. [PHOTO] CHRIS MEINDERS, Senior Counter Sales Representative, Bel Ridge, Missouri "My customers rely on me for product knowledge and prompt turnaround on their counter and will call orders. The hands-on experience and training I've received at Graybar make me even more valuable to our customers. One question that is always foremost in my mind is 'how can I help my customer find solutions that will help him perform his job better or more efficiently?' My job is to be here to help." "THE OVERALL INVESTMENT WAS REDUCED FROM THE PRIOR YEAR, AND THE PRODUCT MIX WAS IMPROVED AS OUR FASTEST MOVING MERCHANDISE COMPRISED A GREATER PERCENTAGE OF THE TOTAL INVENTORY." 11 A procedural change in the branch cluster reviews by the Inventory Planning group now allows for the retention of slower moving products in the branch inventories when needed to serve customers. To reduce unnecessary cross-dock shipments, a process was implemented to increase the product breadth at branch locations. Supplier Assisted Inventory Management (SAIM) relationships with two suppliers were expanded to include all domestic locations. We now have three national SAIM suppliers and expect the use of this process to grow. At mid-year, the Company implemented an electronic data interchange cost recovery process (ECRP) with three suppliers. Similar to the electronic cost recovery process that we have had in place with GE Lighting for many years, this process benefits both Graybar and our suppliers by streamlining the request for credits, the receipt of credits and the identification and investigation of any discrepancies. Transportation carrier reviews with our dedicated carrier and LTL companies have been successful and will be continued. The practice of shipping bulk items to branches using our dedicated carrier routes was changed to take advantage of the more economical LTL carrier routes. In addition, we were able to reduce supplementary charges from UPS, our primary small package carrier. CUSTOMER SERVICE Customer Service focused on core processes that impact both customers and Company cash flow. In the warehouse, extra attention was devoted to locator maintenance and cycle counting to ensure greater order accuracy to our customers and more efficient inventory control. In the office, we emphasized prompt handling of direct billings, especially for job projects. The districts were challenged to process all directs same day, with a zero balance over five days old. Improvement was dramatic, assuring customers they could collect their project draws and helping Graybar improve collection of open receivables. New quarterly pre-inventory closes now require all districts to explain or resolve all outstanding returns, hold items and cancelled reships by the end of each quarter. The result is fewer dollars tied up in this type of inventory and a smoother year-end accounting close. To facilitate this new approach, an online operational dashboard report was created, providing a quick monthly update to the districts on several external and internal performance metrics. ZONE OPERATIONS In February, our state-of-the-art zone distribution center in Tampa opened for shipments to customers, bringing the Company's total zone facilities to 14. The Taunton Zone was converted to the Warehouse Management System (WMS). WMS uses bar code and radio frequency technology to track product as it flows into and out of the warehouse. Thirteen zones are now utilizing WMS. WMS technology improves our accuracy on both inbound shipments from our suppliers and outbound orders to our customers. We continued the process of registering our zone facilities to the ISO 9002 standard. The Joliet, Tampa, Cincinnati, and Springfield zones were successfully registered during the year, and we expect to have all zones registered by June 2003. SAFETY We continue to make improvements in the Company's safety performance. Our OSHA recordable injury rate was reduced significantly in 2002. The Company's vehicle accident rate decreased slightly. Our emphasis on safety precautions and training in 2003 will have special focus on reducing vehicle accidents. BUILDINGS & PROPERTIES During 2002, a major remodel/expansion project was completed at our location in Corpus Christi, Texas. Three branches -- Chattanooga, Tennessee; Buffalo, New York; and Cartersville, Georgia -- moved to new locations. We successfully negotiated several national vendor programs to provide cost savings for our building and property maintenance. EMPLOYEE TRAINING During 2002, the Company transitioned to its third generation of learning management systems software. This conversion provides state-of-the-art learning management functions for our online Graybar Virtual Campus, while producing significant cost savings. We continue to leverage our twelve years of investment and experience in online learning. Changes to the Virtual Campus allow managers and employees 12 more flexibility to create specific training and development plans with goal setting functionality. Graybar eClasses continue to reduce educational costs and the related travel expenses. eClasses are delivered in multiple short sessions to allow the use of group and individual research assignments between sessions. This serves to enhance the overall learning experience and allows direct application of new skills in one's current job assignment. EMPLOYEE BENEFITS The Company successfully converted the recordkeeping and trustee services for the Profit Sharing and Savings Plan to The Vanguard Group in August 2002. The Employees' Benefit Committee recommended this change to streamline administrative processes, eliminate participant transaction fees and offer online improvements via one source to all participants. In addition, five investment funds were added to provide greater asset diversification opportunities for participants. INFORMATION SYSTEMS In 2002, the Information Systems Department began preparing the Company's infrastructure to support the Enterprise Resource Planning (ERP) project and the subsequent implementation and deployment of the SAP system. New UNIX and [PHOTO] RICK TURNER, Director of Systems and Process Development, St. Louis, Missouri "My 23 years in Graybar operations and inventory planning gave me the experience I needed to be a part of the Advanced Planning and Optimization (APO) team for the ERP implementation. With the new ERP processes and tools and our dedicated team of people, Graybar's inventory planning and logistics will be state of the art. Our forecasts will be more accurate, and we'll have greater ability to gather and use input from our customers and suppliers to help us have the right products in the right place to serve their needs." "WE CONTINUE TO LEVERAGE OUR TWELVE YEARS OF INVESTMENT AND EXPERIENCE IN ONLINE LEARNING." 13 Windows(R) 2000 servers were installed in the St. Louis and Kansas City data centers, and a major upgrade to the core local area networks was required. In addition, the operating system on all personal computers was updated from Windows(R) 95 to Windows(R) 2000 in preparation for the new SAP system. In May, the Company moved its entire computer infrastructure to a new data center with no interruption of service. A new telecommunications contract significantly reduced our telecommunications cost and allowed the flexibility to increase the data network without exceeding 2001 expense levels. The data network has been expanded in all district offices as well as the branches in the Minneapolis district, the first rollout district, in preparation for SAP. Web-based access to mainframe functions (Glink) was made available for the first time. From any Internet connected personal computer with a web browser, Graybar users can now perform Glink transactions from home or a customer's office. Quality of Service (QOS) functionality implemented in the Minneapolis district allows the prioritization of different types of data traffic over our network. Glink and SAP functions receive priority over web traffic, and web traffic receives priority over e-mail. This priority scheme makes better use of our networking resources. QOS will be installed by June 2003 in all Graybar locations. [PHOTO] MARTY JOYCE, Director of Technical Systems Implementation, St. Louis, Missouri "With our new SAP system, Graybar is raising the bar on performance and value for our customers. The ERP system will integrate our business processes and give us real time access to data for better decision making throughout the organization. With ERP, our trained and knowledgeable people will be able to serve our customers faster and more efficiently, reducing cost throughout the supply chain. I'm proud to be on the team developing and implementing this project. It's been hard work, but the payoff for Graybar and our customers and suppliers will be tremendous." 14 FINANCIAL REVIEW ------------------------------------------------------------------------------ TABLE OF CONTENTS Selected Consolidated Financial Data 16 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Consolidated Financial Statements 20 Report of Independent Auditors 30 15 FINANCIAL REVIEW - ------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA (Stated in thousands except for per share data) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- SALES $ 3,986,954 $ 4,829,862 $ 5,231,901 $ 4,311,405 $ 3,744,075 Less -- Cash discounts (12,062) (13,380) (13,564) (11,465) (11,872) - -------------------------------------------------------------------------------------------------------------------------------- NET SALES 3,974,892 4,816,482 5,218,337 4,299,940 3,732,203 - -------------------------------------------------------------------------------------------------------------------------------- COST OF MERCHANDISE SOLD (3,229,791) (3,934,719) (4,271,745) (3,514,228) (3,042,176) - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE (26,301) (39,073) (46,681) (30,241) (23,998) - -------------------------------------------------------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES Current (7,233) (22,915) (44,395) (43,899) (37,167) Deferred 14 3,302 1,196 (130) (4,919) - -------------------------------------------------------------------------------------------------------------------------------- Total provision for income taxes (7,219) (19,613) (43,199) (44,029) (42,086) - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME 11,401 31,688 66,157 64,659 59,544 - -------------------------------------------------------------------------------------------------------------------------------- INCOME APPLICABLE TO COMMON STOCK 11,399 31,685 66,154 64,654 59,539 - -------------------------------------------------------------------------------------------------------------------------------- AVERAGE COMMON SHARES OUTSTANDING (A) 6,245 5,846 6,101 6,276 5,848 - -------------------------------------------------------------------------------------------------------------------------------- INCOME PER SHARE OF COMMON STOCK (A) 1.83 5.42 10.84 10.30 10.18 - -------------------------------------------------------------------------------------------------------------------------------- Cash dividends per share 2.00 2.00 2.00 2.00 2.00 - -------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 310,521 290,405 241,473 193,838 149,226 Add -- Net income 11,401 31,688 66,157 64,659 59,544 - -------------------------------------------------------------------------------------------------------------------------------- 321,922 322,093 307,630 258,497 208,770 - -------------------------------------------------------------------------------------------------------------------------------- Less dividends Preferred ($1.00 per share) (2) (3) (3) (5) (5) Common (in cash) (12,486) (11,569) (11,583) (11,442) (10,031) Common (in stock) -- -- (5,639) (5,577) (4,896) - -------------------------------------------------------------------------------------------------------------------------------- (12,488) (11,572) (17,225) (17,024) (14,932) - -------------------------------------------------------------------------------------------------------------------------------- Balance, end of year 309,434 310,521 290,405 241,473 193,838 Proceeds on stock subscriptions, shares unissued 50 -- 49 56 -- STOCK OUTSTANDING Preferred 45 51 57 68 108 Common 123,272 114,424 119,828 118,270 103,690 - -------------------------------------------------------------------------------------------------------------------------------- $ 432,801 $ 424,996 $ 410,339 $ 359,867 $ 297,636 - -------------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) (44,958) (17,504) (542) (204) (836) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 387,843 $ 407,492 $ 409,797 $ 359,663 $ 296,800 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 1,400,171 1,535,998 1,843,438 1,698,544 1,167,847 LONG-TERM DEBT $ 266,710 $ 315,549 $ 238,349 $ 255,897 $ 269,570 - -------------------------------------------------------------------------------------------------------------------------------- (A) Adjusted for the declaration of 5% stock dividends in 2000, 1999 and 1998. Prior to adjusting for the stock dividends, the average common shares outstanding for 1999 and 1998 were 5,692 and 5,052, respectively.
This summary should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this annual report. 16 FINANCIAL REVIEW - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Stated in thousands except for share and per share data) RESULTS OF OPERATIONS OPERATING RESULTS AS A PERCENTAGE OF NET SALES The following table sets forth certain information relating to the operations of the Company expressed as a percentage of net sales:
Years Ended December 31: 2002 2001 2000 - ---------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of Merchandise Sold (81.3) (81.7) (81.9) - ---------------------------------------------------------------------------- Gross Margin 18.7 18.3 18.1 Selling, General and Administrative Expenses (15.8) (14.9) (13.8) Taxes, other than income taxes (1.0) (1.0) (.8) Depreciation and amortization (.8) (.7) (.6) - ---------------------------------------------------------------------------- Income from operations 1.1 1.7 2.9 Other Income, net .1 .2 .1 Interest Expense (.7) (.8) (.9) Loss on debt extinguishment -- -- -- - ---------------------------------------------------------------------------- Income Before Provision for Income Taxes .5 1.1 2.1 - ---------------------------------------------------------------------------- Provision for Income Taxes (.2) (.4) (.8) - ---------------------------------------------------------------------------- Net Income .3% .7% 1.3% - ----------------------------------------------------------------------------
2002 COMPARED TO 2001 Net sales in 2002 decreased $841,590, or 17.5%, to $3,974,892 compared to $4,816,482 in 2001. The lower net sales resulted from the generally depressed economic conditions that continue to be prevalent on an industry-wide basis in the electrical and communications market sectors in which the Company operates. The reduction in capital spending by commercial and industrial customers and the general slowdown in new construction projects that began in 2001 continued during 2002. Activity in the communications market remained severely depressed, leading to continued and substantial contraction in the Company's business in that market. Electrical market sales decreased 6.4% and communications market sales decreased 32.1% when comparing 2002 to 2001. Gross margin decreased $136,662, or 15.5%, from $881,763 in 2001 to $745,101 in 2002 primarily due to the lower sales in the electrical and communications markets. Selling, general and administrative expenses decreased $91,366, or 12.7%, when comparing 2002 to 2001, due largely to current year and prior year reductions in the Company's employment levels which resulted in decreases in related employee compensation costs of approximately $60,000 in 2002. The decrease in these expenses was partially offset by increases in pension plan expense and health care plan costs of approximately $4,600. The Company expects that the decrease in employment levels will be sustainable until such time as there is a significant growth in sales. The balance of the reduction in selling, general and administrative expenses in 2002 compared to 2001 resulted from decreases in transportation, warehousing and other general operating expenses due to decreased sales and lower transaction volumes. As a percentage of sales, selling, general and administrative expenses increased to 15.8% in 2002 compared to 14.9% in 2001, primarily because the rate at which expenses were reduced lagged the rate at which sales volume decreased. The reduction in taxes, other than income taxes of $5,653 in 2002 compared to 2001 resulted primarily from lower payroll tax expenses due to the reduction in the Company's employment levels and lower incentive plan payments with respect to 2001 paid in the first quarter of 2002. Depreciation and amortization increased $1,214 from $33,422 in 2001 to $34,636 in 2002 due to purchases of equipment and facilities improvements. Other income, net includes gains on sale of property of $0 and $2,677 and accounts receivable interest charges to customers of $1,552 and $2,433 in 2002 and 2001, respectively. Interest expense decreased $12,772, or 32.7%, when comparing 2002 to 2001 primarily due to lower interest rates on short-term borrowings and decreased levels of short-term borrowings required to finance lower levels of inventory and receivables. The average amount of short-term borrowings outstanding during 2002 and 2001 amounted to approximately $101,000 and $305,000 at weighted average interest rates of 2.11% and 4.86%, respectively. Loss on debt extinguishment consists of a $545 make-whole premium paid to a lender for early retirement of long-term debt. The combined effect of the decreases in gross margin and other income, together with the increase in depreciation and amortization and decreases in selling, general and administrative expenses and interest expense, resulted in a decrease in pretax earnings of $32,681 in 2002 compared to 2001. 2001 COMPARED TO 2000 Net sales in 2001 decreased $401,855, or 7.7%, to $4,816,482 compared to $5,218,337 in 2000. The lower net sales resulted from a generally depressed economy in the electrical and communications market sectors in which the Company operates. The market for the electrical products sold by the Company was affected in 2001 by a general slowdown in new construction projects and in maintenance, repair and operations by manufacturing and commercial customers as capital spending budgets were cut as a result of the downturn in the U.S. economy. The economic downturn was even more pronounced in the communications industry, which experienced severe contraction of expansion plans following the period of aggressive growth in the late 1990s through 2000 that led to excess infrastructure and plant and network capacity. Electrical market sales decreased 2.2% and communications market sales decreased 15.3% when comparing 2001 to 2000. 17 FINANCIAL REVIEW - ------------------------------------------------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Stated in thousands except for share and per share data) Gross margin decreased $64,829, or 6.8%, from $946,592 in 2000 to $881,763 in 2001 primarily due to lower sales in the electrical and communications markets. Selling, general and administrative expenses decreased $2,963, or .4%, when comparing 2001 to 2000 due largely to a decrease in overall compensation expenses of approximately $23,000, including lower incentive plan expenses and profit sharing expenses as a result of the Company's performance in 2001. Reductions in employment levels over the course of 2001 had a corresponding impact on salary expenses and employee benefit costs. The decrease in these expenses was partially offset by the continued implementation of a company-wide customer service and logistics project, which resulted in increased selling, general and administrative expenses of approximately $13,000 in 2001 compared to 2000 due to increases in the Company's number of facilities and related staffing and start-up expenses. The objective of the project, which began in 1998, is to redeploy inventory into a system of national zone warehouses, regional zone warehouses and branch locations for the purpose of providing better customer service, reducing overall warehousing and distribution costs and improving inventory turnover. The increased expenses related to the logistics project implementation were anticipated by management and are expected to provide future benefits to the Company's results of operations. Health care plan costs and pension plan expense were also higher in 2001 compared to 2000. Selling, general and administrative expenses as a percentage of sales increased from 13.8% in 2000 to 14.9% in 2001 primarily because the rate at which expenses were reduced lagged the rate at which sales volume decreased. The increase in taxes, other than income of $3,929 in 2001 compared to 2000 resulted primarily from higher payroll tax expenses due to higher taxable wage payments made in 2001 compared to 2000, including year 2000 incentive plan payments made in the first quarter of 2001. Depreciation and amortization increased $4,202, or 14.4%, from $29,220 in 2000 to $33,422 in 2001. The increase resulted primarily from capital expenditures for facilities and equipment made in 2000 and 2001, due largely to the implementation of the Company's customer service and logistics project. Other income, net includes gains on sale of property of $2,677 and $0 and accounts receivable interest charges to customers of $2,433 and $1,805 in 2001 and 2000, respectively. Interest expense decreased $7,608, or 16.3%, when comparing 2001 to 2000 primarily due to lower interest rates on short-term borrowings and decreased levels of short-term borrowings required to finance lower levels of inventory and receivables. The combined effect of the decrease in gross margin and the increase in other income, together with the increase in depreciation and amortization and decreases in selling, general and administrative expenses and interest expense, resulted in a decrease in pretax earnings of $58,055 in 2001 compared to 2000. FINANCIAL CONDITION AND LIQUIDITY At December 31, 2002 current assets exceeded current liabilities by $445,633, down $68,313 from December 31, 2001. The reduction in accounts receivable from December 31, 2002 to December 31, 2001 resulted primarily from the decrease in sales experienced by the Company. The average number of days of sales in accounts receivable decreased approximately three days during 2002. Merchandise inventory levels were lower at December 31, 2002 when compared to December 31, 2001 inventory levels due largely to continuing reductions in specific inventory carried to support customer contract agreements and slightly improved inventory turnover. The Company is converting its existing computer systems to an Enterprise Resource Planning (ERP) system. The project is currently in the application design and development stage, and the Company expects to begin implementation of the new system in the second quarter of 2003. The total project costs are expected to be approximately $90,000. The Company is funding the project through a combination of equipment leases and working capital. Project costs through December 31, 2002 are approximately $61,000, of which $50,236 has been capitalized. The Company expects that conversion to the new ERP system will provide future benefits to its results of operations. The Company does not have any other plans or commitments that would require significant amounts of additional working capital. At December 31, 2002 the Company had available to it unused lines of credit amounting to $506,226. These lines are available to meet short-term cash requirements of the Company. Included in the Company's lines of credit is a Revolving Credit Loan Agreement with a group of banks at an interest rate based on the London Interbank Offered Rate (LIBOR) which had previously consisted of a $140,000, 364-day facility and a $205,000, five-year facility. In July 2002 the Company elected to decline renewal of the $140,000, 364-day facility. The $205,000, five-year facility agreement expires in July 2004. There were no amounts outstanding under the Revolving Credit Loan Agreement at December 31, 2002. Short-term borrowings outstanding during 2002 and 2001 varied from a minimum of $0 and $86,000 to a maximum of $216,779 and $479,000, respectively. At December 31, 2002 the Company had a $275 million accounts receivable securitization program that expires in October 2003. The securitization program provides for the sale of certain of the Company's trade receivables on a revolving basis to Graybar Commerce Corporation (GCC), a wholly owned, bankruptcy remote, special purpose subsidiary. GCC sells an undivided interest in the receivables to an unrelated multi-seller commercial paper conduit. The Company accounts for the securitization as an on-balance sheet financing arrangement because the Company has maintained effective control of the accounts receivable through a call option that gives GCC the unilateral right to repurchase the undivided interests. Accordingly, the accounts receivable and related 18 FINANCIAL REVIEW - ------------------------------------------------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Stated in thousands except for share and per share data) debt are included in the accompanying consolidated balance sheets. GCC has granted a security interest in its trade receivables to the commercial paper conduit. There were no borrowings outstanding under the securitization program at December 31, 2002. The Company elected to reduce the total amount available for borrowing under the program from $275 million to $200 million in January 2003. The Company has two off-balance sheet operating lease arrangements with an independent lessor to fund up to $73,720 for the financing of nine of the Company's zone distribution facilities. Each of the agreements carries a five-year term. The Company has the option, with the consent of the lenders to the lessor, to renew the leases for up to two additional five-year terms or to purchase the property for a price including the outstanding lease balance. If the Company elects not to renew the lease or purchase the property, or such lenders refuse to consent to a renewal, the Company may elect to remarket the property and arrange for its sale to a third party. Under the remarketing option, at December 31, 2002, the Company has guaranteed $60,881 as the residual fair value of the property. The Revolving Credit Loan Agreement and certain other note agreements have various covenants that limit the Company's ability to make investments, pay dividends, incur debt, dispose of property, and issue equity securities. The Company is also required to maintain certain financial ratios as defined in the agreements. The Company has funded its capital requirements from operations, stock issuances to its employees and long-term debt. During 2002, cash provided by operations amounted to $213,379 compared to $280,913 cash provided by operations in 2001. Cash provided from the sale of common stock and proceeds received on stock subscriptions amounted to $15,191 and $402 in 2002 and 2001, respectively. Capital expenditures for property were $55,532, $53,985 and $58,747 for the years ended December 31, 2002, 2001 and 2000, respectively. Purchases of treasury stock were $6,299, $5,861 and $5,179 for the years ended December 31, 2002, 2001 and 2000, respectively. Dividends paid were $11,984, $11,616 and $11,498 for the years ended December 31, 2002, 2001 and 2000, respectively. CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements). The Company believes the following accounting policies have the potential to have a more significant impact on the financial statements either because of the significance of the financial statement item to which they relate or because they involve a higher degree of judgment and complexity. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company performs ongoing credit evaluations of its customers, and a significant portion of trade receivables is secured by lien or bond rights. The Company maintains allowances to reflect the expected uncollectibility of accounts receivable based on past collection history, the economic environment and specific risks identified in the receivables portfolio. Although actual credit losses have historically been within management's expectations, additional allowances may be required if the financial condition of the Company's customers were to deteriorate. INVENTORY The Company values its inventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company makes judgments as to rights of return to suppliers and future demand requirements. If actual future demand, market conditions or supplier return provisions are less favorable than those projected by management, additional inventory write-downs may be required. PENSION PLAN The Company's pension plan expense and obligations are determined based on the selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rate used to discount plan liabilities. While management believes that the assumptions selected by the Company are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension plan obligation and future pension expense. In 2002, the Company reduced the expected long-term rate of return on plan assets to 9.00%, down from 9.50% in 2001. The discount rate used to discount plan liabilities was changed from 7.25% at December 31, 2001 to 6.75% at December 31, 2002. The Company reduced the expected long-term rate of return on plan assets from 9.00% in 2002 to 8.75% for 2003. The change in assumptions and poor return on assets experienced by the plan in recent years are expected to result in additional 2003 pension expense of approximately $2,800. SUPPLIER VOLUME INCENTIVES The Company's agreements with many of its suppliers provide for the Company to earn incentives based on purchases during the agreement period. These agreements typically provide for the incentives to be paid in arrears, and the Company estimates amounts to be received from suppliers at the end of each reporting period based on the earnout level that the Company estimates is probable of being achieved. Amounts received have historically been within management's estimates. In the event that the operating performance of the Company's suppliers should decline, however, there can be no assurance that amounts earned will be paid or that the incentives will be included in future agreements. 19 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Stated in thousands except for share and per share data)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- SALES, NET OF RETURNS AND ALLOWANCES $ 3,986,954 $ 4,829,862 $ 5,231,901 Less -- Cash discounts (12,062) (13,380) (13,564) - --------------------------------------------------------------------------------------------------------------- Net Sales 3,974,892 4,816,482 5,218,337 - --------------------------------------------------------------------------------------------------------------- COST OF MERCHANDISE SOLD (3,229,791) (3,934,719) (4,271,745) - --------------------------------------------------------------------------------------------------------------- Gross Margin 745,101 881,763 946,592 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (627,015) (718,381) (721,344) TAXES, OTHER THAN INCOME TAXES (41,297) (46,950) (43,021) DEPRECIATION AND AMORTIZATION (34,636) (33,422) (29,220) - --------------------------------------------------------------------------------------------------------------- Income from operations 42,153 83,010 153,007 OTHER INCOME, NET 3,313 7,364 3,030 INTEREST EXPENSE (26,301) (39,073) (46,681) LOSS ON DEBT EXTINGUISHMENT (545) -- -- - --------------------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 18,620 51,301 109,356 - --------------------------------------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES Current (7,233) (22,915) (44,395) Deferred 14 3,302 1,196 - --------------------------------------------------------------------------------------------------------------- Total provision for income taxes (7,219) (19,613) (43,199) - --------------------------------------------------------------------------------------------------------------- NET INCOME 11,401 31,688 66,157 - --------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF YEAR 310,521 290,405 241,473 Cash dividends- Preferred, $1.00 per share each year (2) (3) (3) Common, $2.00 per share each year (12,486) (11,569) (11,583) Common Stock dividend -- -- (5,639) - --------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR $ 309,434 $ 310,521 $ 290,405 - --------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE OF COMMON STOCK $ 1.83 $ 5.42 $ 10.84 - --------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements
20 CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS December 31, (Stated in thousands except for share and per share data) 2002 2001 - ----------------------------------------------------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash $ 20,826 $ 10,079 Trade receivables (less allowances of $6,307 and $8,634, respectively) 504,102 592,752 Merchandise inventory 515,691 612,976 Other current assets 17,270 14,442 - ----------------------------------------------------------------------------------------------------------------- Total current assets 1,057,889 1,230,249 - ----------------------------------------------------------------------------------------------------------------- PROPERTY, AT COST Land 25,601 25,402 Buildings 235,205 233,979 Furniture and fixtures 167,371 168,918 Computer software 50,236 1,510 Capital equipment leases 24,159 24,159 - ----------------------------------------------------------------------------------------------------------------- 502,572 453,968 Less -- Accumulated depreciation and amortization 209,189 187,492 - ----------------------------------------------------------------------------------------------------------------- 293,383 266,476 - ----------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES 24,294 10,653 - ----------------------------------------------------------------------------------------------------------------- OTHER ASSETS 24,605 28,620 - ----------------------------------------------------------------------------------------------------------------- $1,400,171 $1,535,998 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Short-term borrowings $ -- $ 98,737 Current portion of long-term debt 23,314 25,795 Trade accounts payable 498,855 495,143 Accrued payroll and benefit costs 22,667 26,816 Other accrued taxes 12,036 11,760 Dividends payable 6,802 6,299 Other payables and accruals 48,582 51,753 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 612,256 716,303 - ----------------------------------------------------------------------------------------------------------------- POSTRETIREMENT BENEFITS LIABILITY 77,586 77,431 - ----------------------------------------------------------------------------------------------------------------- PENSION LIABILITY 55,776 19,223 - ----------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 266,710 315,549 - ----------------------------------------------------------------------------------------------------------------- Shares at December 31, 2002 2001 - ------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Capital stock- Preferred, par value $20 per share, authorized 300,000 shares -- Issued to shareholders 2,337 2,593 In treasury, at cost (87) (27) - ----------------------------------------------------------------------------------------------------------------- Outstanding 2,250 2,566 45 51 - ----------------------------------------------------------------------------------------------------------------- Common, stated value $20 per share, Authorized 7,500,000 7,500,000 Issued to voting trustees 5,879,436 5,427,152 Issued to shareholders 311,549 305,754 In treasury, at cost (27,380) (11,700) - ----------------------------------------------------------------------------------------------------------------- Outstanding 6,163,605 5,721,206 123,272 114,424 - ----------------------------------------------------------------------------------------------------------------- Common shares subscribed 1,124 16,265 Retained earnings 309,434 310,521 Accumulated other comprehensive income (loss) (44,958) (17,504) - ----------------------------------------------------------------------------------------------------------------- 388,917 423,757 Less -- Subscriptions receivable 1,074 16,265 - ----------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 387,843 407,492 - ----------------------------------------------------------------------------------------------------------------- $1,400,171 $1,535,998 - ----------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements
21 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Stated in thousands) FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS Net Income $ 11,401 $ 31,688 $ 66,157 - ----------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operations - Depreciation and amortization 34,636 33,422 29,220 Deferred income taxes (14) (3,302) (1,196) Gain on sale of property -- (2,677) -- Changes in assets and liabilities: Trade receivables 88,650 172,794 (176,915) Merchandise inventory 97,285 135,778 94,307 Other current assets (2,828) 11,002 (17,955) Other assets 3,655 1,633 (6,483) Trade accounts payable (7,988) (37,995) 20,515 Accrued payroll and benefit costs (4,149) (31,380) 8,089 Other accrued liabilities (7,269) (30,050) 15,513 - ----------------------------------------------------------------------------------------------------------------- 201,978 249,225 (34,905) - ----------------------------------------------------------------------------------------------------------------- Net cash flow provided by operations 213,379 280,913 31,252 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property 5,689 3,974 2,756 Capital expenditures for property (55,532) (53,985) (58,747) Investment in joint venture 360 1,405 2,745 - ----------------------------------------------------------------------------------------------------------------- Net cash flow used by investing activities (49,483) (48,606) (53,246) - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (98,737) (307,462) 65,595 Proceeds from long-term debt -- 100,000 3,524 Repayment of long-term debt (46,430) (21,439) (17,499) Principal payments under capital equipment leases (4,890) (3,866) (3,165) Sale of common stock 15,191 402 1,080 Purchases of treasury stock (6,299) (5,861) (5,179) Dividends paid (11,984) (11,616) (11,498) - ----------------------------------------------------------------------------------------------------------------- Net cash flow provided (used) by financing activities (153,149) (249,842) 32,858 - ----------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH 10,747 (17,535) 10,864 - ----------------------------------------------------------------------------------------------------------------- CASH, BEGINNING OF YEAR 10,079 27,614 16,750 - ----------------------------------------------------------------------------------------------------------------- CASH, END OF YEAR $ 20,826 $ 10,079 $ 27,614 - ----------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements
22 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 (Stated in thousands)
COMMON ACCUMULATED STOCK OTHER COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE STOCK STOCK UNISSUED EARNINGS INCOME (LOSS) TOTAL -------- --------- ----------- -------- ------------- -------- December 31, 1999 $118,270 $ 68 $ 56 $241,473 $ (204) $359,663 ======== ======== ======== ======== ========= ======== Net income 66,157 66,157 Currency translation adjustments (338) (338) -------- Comprehensive income 65,819 -------- Stock issued 1,087 1,087 Stock redeemed (5,168) (11) (5,179) Advance payments (7) (7) Dividends declared 5,639 (17,225) (11,586) -------- -------- -------- -------- --------- -------- December 31, 2000 $119,828 $ 57 $ 49 $290,405 $ (542) $409,797 ======== ======== ======== ======== ========= ======== Net income 31,688 31,688 Currency translation adjustments (267) (267) Cumulative impact of adoption of SFAS 133 (net of tax of $877) (1,342) (1,342) Unrealized gain/(loss) from interest rate swap (net of tax of $317) (590) (590) Minimum pension liability (net of tax of $9,125) (14,763) (14,763) -------- Comprehensive income 14,726 -------- Stock issued 451 451 Stock redeemed (5,855) (6) (5,861) Advance payments (49) (49) Dividends declared (11,572) (11,572) -------- -------- -------- -------- --------- -------- December 31, 2001 $114,424 $ 51 $ 0 $310,521 $ (17,504) $407,492 ======== ======== ======== ======== ========= ======== Net income 11,401 11,401 Currency translation adjustments (441) (441) Unrealized gain/(loss) from interest rate swap (net of tax of $1,536) (2,374) (2,374) Minimum pension liability (net of tax of $15,621) (24,639) (24,639) -------- Comprehensive income (16,053) -------- Stock issued 15,141 15,141 Stock redeemed (6,293) (6) (6,299) Advance payments 50 50 Dividends declared (12,488) (12,488) -------- -------- -------- -------- --------- -------- DECEMBER 31, 2002 $123,272 $ 45 $ 50 $309,434 $ (44,958) $387,843 ======== ======== ======== ======== ========= ======== See accompanying Notes to Consolidated Financial Statements
23 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in thousands except for share and per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Graybar Electric Company, Inc. is engaged internationally in the distribution of electrical and communications products and integrated supply services primarily to contractors, industrial plants, telephone companies, power utilities, and commercial users. All products sold by the Company are purchased by the Company from others. The Company's business activity is primarily with customers in the United States; however, the Company has limited sales activity in several international locations. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Graybar Electric Company, Inc. and its subsidiary companies. All significant intercompany balances and transactions have been eliminated. REVENUE RECOGNITION Revenue is recognized when products are shipped and title transfers to the customer. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications of prior year presentations have been made to conform to the 2002 presentation. MERCHANDISE INVENTORY Inventory is stated at the lower of cost (determined using the last-in, first-out (LIFO) cost method) or market. LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current revenues. At December 31, 2002 and 2001 FIFO (first-in, first-out) inventory approximated LIFO inventory. The Company liquidated a portion of a previously created LIFO layer in 2002, resulting in an increase in cost of goods sold of $5,446. SUPPLIER VOLUME INCENTIVES The Company's agreements with many of its suppliers provide for the Company to earn incentives based on purchases during the agreement period. The Company estimates the amount to be received from suppliers at the end of each reporting period based on the earnout level that the Company estimates is probable of being achieved. The Company records the incentive ratably over the year as a reduction of cost of sales. Changes in the estimated amount of incentives are treated as changes in estimate and are recognized using a cumulative catch-up adjustment. PROPERTY AND DEPRECIATION The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives of the assets: - -------------------------------------------------------------------------------- Buildings 42 years - -------------------------------------------------------------------------------- Permanent fixtures-- Over the lives of the leased property respective leases - -------------------------------------------------------------------------------- Furniture, fixtures and equipment 4 to 14 years - -------------------------------------------------------------------------------- Capital equipment Over the lives of the leases respective leases - -------------------------------------------------------------------------------- At the time property is retired, or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to other income. Equipment under capital leases is recorded in property with the corresponding obligations carried in long-term debt. The amount capitalized is the present value at the beginning of the lease term of the aggregate future minimum lease payments. Maintenance and repairs are expensed as incurred. Major renewals and betterments that extend the life of the property are capitalized. The Company capitalizes interest expense on major construction and development projects while in progress. Interest capitalized in 2002 was $1,505. The Company capitalizes qualifying internal and external costs incurred to develop or obtain software for internal use during the application development stage. Costs incurred during the pre-application development stage are expensed as incurred. During 2002 and 2001, the Company capitalized $48,726 and $1,510, respectively. 24 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers, and a significant portion of trade receivables is secured by lien or bond rights. The Company maintains allowances for potential credit losses, and such losses historically have been within management's expectations. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, as amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." The statement requires the Company to recognize all derivative instruments on the balance sheet at fair value. The adoption of SFAS No. 133 impacts the accounting for the Company's interest rate swap agreement that effectively converts its floating rate payments to a fixed-rate basis. The Company manages interest rates on amounts due under certain operating leases through its swap agreement. The Company's interest rate swap agreement is designated as a cash flow hedge. Upon adoption of SFAS No. 133, the Company recorded a liability for the fair value of the interest rate swap of $2,219 in its consolidated balance sheet. On an ongoing basis, the Company reflects the current fair value of the interest rate swap on its balance sheet. The effective portion of the related gains or losses on the swap are deferred in accumulated other comprehensive income. Because the swap is completely effective, no ineffectiveness was recorded in the consolidated statements of income during 2002 or 2001. At January 1, 2001 the Company included unrealized net losses of $1,342 (net of tax) in accumulated other comprehensive income to record the cumulative transition adjustment as a result of adopting SFAS No. 133. Unrealized net losses of $2,374 (net of tax) and $590 (net of tax) related to the swap were recorded in accumulated other comprehensive income during the twelve month periods ended December 31, 2002 and 2001, respectively. These deferred gains and losses are recognized in income in the period in which the related interest payments being hedged are recognized in expense. GOODWILL On January 1, 2002 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill and indefinite-lived intangible assets will no longer be amortized but rather will be tested annually for impairment. The effect of amortization expense related to goodwill on net income in prior periods was not material. As of December 31, 2002 the company has completed its initial and annual impairment tests and concluded that there is no impairment of the Company's goodwill. At December 31, 2002 the Company has $6,680 of goodwill included in Other Assets in the balance sheet. 2. INCOME TAXES The provisions for income taxes recorded in the Consolidated Statements of Income and Retained Earnings are as follows:
Years Ended December 31: 2002 2001 2000 - -------------------------------------------------------------------------------- Federal income tax Current $6,724 $21,804 $38,621 Deferred 693 (3,087) (1,118) State income tax Current 509 1,111 5,774 Deferred (707) (215) (78) - -------------------------------------------------------------------------------- Financial statement income tax provision $7,219 $19,613 $43,199 - --------------------------------------------------------------------------------
Deferred income taxes are provided based upon differences between the financial statement and tax bases of assets and liabilities. The following deferred tax assets (liabilities) are recorded at December 31:
Assets/(Liabilities) 2002 2001 - -------------------------------------------------------------------------------- Postretirement benefits $ 30,181 $ 30,121 Payroll accruals 3,419 4,590 Bad debt reserves 2,238 3,257 Other deferred tax assets 11,444 8,480 Inventory 4,474 645 Accrued (prepaid) pension 17,213 1,319 Fixed asset depreciation (14,264) (11,631) Fixed asset gains (7,392) (7,442) Computer software (1,945) -- Other deferred tax liabilities (10,628) (11,769) - -------------------------------------------------------------------------------- $ 34,740 $ 17,570 - --------------------------------------------------------------------------------
25 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ Deferred tax assets included in Other Current Assets were $10,446 and $6,917 in 2002 and 2001, respectively. The Company's deferred tax assets include state net operating loss carryforwards of $2,690 as of December 31, 2002 that expire from 2006 to 2022. A valuation allowance of $529 has been established for a portion of these deferred tax assets. A reconciliation between the "statutory" federal income tax rate and the effective tax rate in the Consolidated Statements of Income and Retained Earnings is as follows:
Years Ended December 31: 2002 2001 2000 - -------------------------------------------------------------------------------- "Statutory" tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal benefit (3.2) (0.2) 3.0 Other, net 7.0 3.4 1.5 - -------------------------------------------------------------------------------- Effective tax rate 38.8% 38.2% 39.5% - --------------------------------------------------------------------------------
3. CAPITAL STOCK The Company's capital stock is owned by its employees and retirees. Neither common nor preferred stock may be sold by the holder thereof, except by first offering it to the Company. The Company may buy any common shares so offered at the price at which they were issued ($20) with appropriate adjustments for current dividends or may call all or part of the preferred stock at par plus accrued dividends. During 2001 the Company offered to eligible employees the right to subscribe to 1,300,000 shares of common stock at $20 per share in accordance with the provisions of the Company's Common Stock Purchase Plan dated October 8, 2001. This resulted in the subscription of 813,251 shares $(16,265). Subscribers under the Plan elected to make payments under one of the following options: (i) all shares subscribed for prior to January 18, 2002; (ii) a portion of such shares prior to January 18, 2002, and the balance in monthly installments through payroll deductions (or in certain cases where a subscriber is no longer on the Company's payroll, through pension deductions or direct monthly payments) over a 34-month period; or (iii) all shares pursuant to the installment method. Shares were issued and Voting Trust Certificates were delivered to subscribers as of January 18, 2002, in the case of shares paid for prior to January 18, 2002. Shares will be issued and Voting Trust Certificates will be delivered to subscribers on a quarterly basis, as of the tenth day of March, June, September and December to the extent full payments of shares are made in the case of subscriptions under the installment method. Shown below is a summary of shares reacquired and retired by the Company in the three years ended December 31:
PREFERRED COMMON REACQUIRED RETIRED REACQUIRED RETIRED - -------------------------------------------------------------------------------- 2002 316 256 314,647 298,967 2001 299 397 292,732 310,472 2000 547 422 258,431 240,720 - --------------------------------------------------------------------------------
26 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 4. LONG-TERM DEBT AND BORROWINGS UNDER SHORT-TERM CREDIT AGREEMENTS
DECEMBER 31, LONG-TERM DEBT WAS COMPOSED OF: 2002 2001 - ------------------------------------------------------------------------------ 7.49% note, unsecured, due in annual installments of $14,286 in each of the years 2005 through 2011 $100,000 $100,000 6.59% note, unsecured, due in semiannual installments of $3,750 beginning in October 2003 through April 2013 75,000 75,000 7.36% note, unsecured, maturing May 2011, installments of $3,095 due semiannually in each of the years 2001 through 2010 with final payment of $3,094 due in 2011 52,619 58,809 6.65% note, unsecured, due in annual installments of $3,636 in each of the years 2003 through 2013 40,000 40,000 6.25% note, unsecured, maturing June 2004, installments of $7,000 due annually in each of the years 2000 through 2004 0 21,000 6.21% to 8.80% capital equipment leases, various maturities 10,434 15,346 6.44% note, unsecured, due in quarterly installments of $893 through January 2005 0 11,607 9.23% note secured by a first mortgage on various properties, maturing May 2005, installments of $2,725 due annually in each of the years 1995 through 2004 with final payment of $2,750 due in 2005 8,200 10,925 Variable rate mortgages, secured by facilities, various maturities 3,771 4,032 7.74% note, secured by facility, due in quarterly installments through August 2006 0 3,325 7.75% note, secured by facility, due in quarterly installments through March 2005 0 1,300 - ------------------------------------------------------------------------------ $290,024 $341,344 Less current portion 23,314 25,795 - ------------------------------------------------------------------------------ $266,710 $315,549 - ------------------------------------------------------------------------------ LONG-TERM DEBT MATURES AS FOLLOWS: - ------------------------------------------------------------------------------ 2004 $ 22,807 2005 38,364 2006 31,754 2007 31,705 2008-2013 142,080 - ------------------------------------------------------------------------------ $266,710 - ------------------------------------------------------------------------------
The net book value of property securing various long-term debt instruments was $14,990 at December 31, 2002. The Company's borrowings under short-term credit agreements consist of issuances of commercial paper and borrowings under revolving credit agreements and bank lines of credit. Included in the Company's lines of credit is a Revolving Credit Loan Agreement with a group of banks at an interest rate based on the London Interbank Offered Rate (LIBOR) which had previously consisted of a $140,000, 364-day facility and a $205,000, five-year facility. In July 2002 the Company elected to decline renewal of the $140,000, 364-day facility. The $205,000, five-year facility agreement expires in July 2004. There were no amounts outstanding under the Revolving Credit Loan Agreement at December 31, 2002. The Company has a $275 million accounts receivable securitization program that expires in October 2003. The securitization program provides for the sale of certain of the Company's trade receivables on a revolving basis to Graybar Commerce Corporation (GCC), a wholly owned, bankruptcy remote, special purpose subsidiary. GCC sells an undivided interest in the receivables to an unrelated multi-seller commercial paper conduit. The Company accounts for the securitization as an on-balance sheet financing arrangement because the Company has maintained effective control of the accounts receivable through a call option that gives GCC the unilateral right to repurchase the undivided interests. Accordingly, the accounts receivable and related debt are included in the accompanying consolidated balance sheets. GCC has granted a security interest in its trade receivables to the commercial paper conduit. There were no borrowings outstanding under the securitization program at December 31, 2002. Borrowings under short-term credit agreements varied from a minimum of $0 and $86,000 to a maximum of $216,779 and $479,000 in 2002 and 2001, respectively. The average amount of borrowings outstanding under short-term credit agreements during 2002 and 2001 amounted to approximately $101,000 and $305,000 at weighted average interest rates of 2.11% and 4.86%, respectively. The averages are based on the daily amounts outstanding during each year. The weighted average interest rate for amounts outstanding at December 31, 2002 and 2001 was 0% and 2.47%, respectively. The Company had unused lines of credit of approximately $506,226 as of December 31, 2002. Certain committed lines of credit have annual fees of up to twenty-seven basis points of the committed lines of credit. The Revolving Credit Loan Agreement and certain other note agreements have various covenants which limit the Company's ability to make investments, pay dividends, incur debt, dispose of property, and issue equity securities. The Company is also required to maintain certain financial ratios as defined in the agreements. The carrying amounts of the Company's outstanding long-term debt and short-term borrowings approximate their fair values at December 31, 2002. 27 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 5. PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees. The plan provides retirement benefits based on an employee's final average earnings and years of service. Employees become 100% vested after five years of service, regardless of age. The Company's funding policy is to contribute the net periodic pension cost accrued each year, provided that the contribution will not be less than the ERISA minimum or greater than the maximum tax deductible amount. The assets of the defined benefit pension plan are invested primarily in equity and fixed income securities and money market funds. The Company and its subsidiaries provide certain health care and life insurance benefits for retired employees through the Retiree Welfare Plan (the Plan). Substantially all of the Company's employees may become eligible to participate in the Plan if they reach normal retirement age while working for the Company. Benefits are provided through insurance coverage with premiums based on the benefits paid during the year. The Company funds the Plan on a pay-as-you-go basis, and accordingly, the Plan has no assets at December 31, 2002 or 2001. The following table sets forth information regarding the Company's pension and other postretirement benefits as of December 31, 2002 and 2001:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 2002 2001 2002 2001 ----------------------- ----------------------- Accumulated benefit obligation $ 157,065 $148,696 $ 118,500 $ 96,070 --------- -------- --------- -------- Projected benefit obligation 203,100 201,600 -- -- Fair value of plan assets 101,132 129,473 -- -- --------- -------- --------- -------- Funded status $(101,968) $(72,127) $(118,500) $(96,070) --------- -------- --------- --------
Amounts recognized in the balance sheet at December 31, 2002 consist of the following:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 2002 2001 2002 2001 ----------------------- ----------------------- Prepaid (accrued) benefit cost $(55,776) $(19,223) $(77,586) $(77,431) Intangible asset 13,673 17,380 -- -- Accumulated other comprehensive loss 39,402 14,763 -- -- --------- -------- --------- -------- Net amount recognized $ (2,701) $ 12,920 $ (77,586) $(77,431) --------- -------- --------- --------
Weighted average assumptions as of December 31 are:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 2002 2001 2002 2001 ----------------------- ----------------------- Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 9.00% 9.50% -- -- Rate of compensation increase 3.75% 4.25% -- -- Health care cost trend on covered charges -- -- 10%/6% 6.75%
The following presents information regarding the plans for the years ended December 31, 2002 and 2001:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 2002 2001 2002 2001 ----------------------- ----------------------- Employer contributions $ 14,074 $ 9,852 $ 9,148 $ 8,494 Participant contributions -- -- 300 245 Benefits paid $(25,556) $(12,855) $(9,448) $(8,739) -------- -------- ------- -------
The net periodic cost recognized for the defined benefit pension plan was $14,231, $11,707 and $9,532 for each of the three years ended December 31, 2002, 2001 and 2000, respectively. The net periodic cost recognized for the postretirement benefit plan was $9,533, $8,719 and $7,594 for each of the three years ended December 31, 2002, 2001 and 2000, respectively. For measurement of the net periodic postretirement benefit obligation, a 10.0% annual rate of increase in per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to gradually decrease to 6.0% for 2012 and to remain at that level thereafter. 28 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ The Company also provides a defined contribution profit sharing and savings plan covering substantially all of its full-time employees. Annual contributions by the Company to the plan are at the discretion of management and are generally determined based on the profitability of the Company. Employees may also contribute to the plan subject to limitations imposed by federal tax law and ERISA. 6. NET INCOME PER SHARE OF COMMON STOCK The computation of net income per share of common stock is based on the weighted average number of common shares outstanding during each year. The average numbers of shares used in computing net income per share of common stock were 6,245,008, 5,845,840 and 6,101,310 in 2002, 2001 and 2000, respectively, adjusted for the declaration of a 5% stock dividend in 2000. 7. COMMITMENTS The Company has two off-balance sheet operating lease arrangements with an independent lessor to fund the financing of nine of the Company's zone distribution facilities. Each of the agreements carries a five-year term. The Company has the option, with the consent of the lenders to the lessor, to renew the leases for up to two additional five-year terms or to purchase the property for a price including the outstanding lease balance. If the Company elects not to renew the lease or purchase the property, or such lenders refuse to consent to a renewal, the Company may elect to remarket the property and arrange for its sale to a third party. Under the remarketing option, at December 31, 2002, the Company has guaranteed $60,881 as the residual fair value of the property. In addition, the Company leases various other property under noncancellable long-term leases. Certain of these leases include renewal options. Rental expense was $43,936, $34,989 and $28,576 in 2002, 2001 and 2000, respectively. Future minimum rental payments required under operating leases that have either initial or remaining noncancellable lease terms in excess of one year as of December 31, 2002 are as follows:
YEARS ENDING DECEMBER 31: - ------------------------------------------------------------------------------ 2003 $41,409 2004 33,379 2005 21,573 2006 12,997 2007 9,456 Subsequent to 2007 42,663 - ------------------------------------------------------------------------------
In September 2000 the Company entered into a swap agreement to manage interest rates on amounts due under certain operating leases. The agreement, which expires in July 2013, is based on a notional amount of $28.7 million. The agreement calls for an exchange of interest payments with the Company receiving payments based on a London Interbank Offered Rate (LIBOR) floating rate, and making payments based on a fixed rate of 6.92%. There is no exchange of the notional amount upon which the payments are based. The fair value of the swap was $(7,036) at December 31, 2002 and is recorded in Other Payables and Accruals in the balance sheet. 8. STATEMENTS OF CASH FLOWS During 2002, 2001 and 2000 income taxes paid totaled $12,484, $8,526 and $55,241; interest paid totaled $26,976, $38,764 and $48,610; and liabilities assumed in connection with capitalized leases totaled $0, $3,779 and $3,754, respectively. In addition, the Company has $11,700 of trade payables at December 31, 2002 related to the purchase of computer software licenses. 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The components of accumulated other comprehensive income (loss) as of December 31, 2002 and 2001 are as follows:
2002 2001 - ------------------------------------------------------------------------------ Currency translation adjustments $ (1,250) $ (809) Unrealized gain/(loss) from interest rate swap (4,306) (1,932) Minimum pension liability (39,402) (14,763) - ------------------------------------------------------------------------------ $(44,958) $(17,504) - ------------------------------------------------------------------------------
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial data for 2002 and 2001 is as follows:
FOR THE QUARTERS ENDED, 2002 3/31 6/30 9/30 12/31 - ------------------------------------------------------------------------------ Net sales $967,910 $1,046,092 $1,013,783 $ 947,107 Gross margin 181,742 190,238 188,820 184,301 Net income (loss) (1,456) 3,396 5,554 3,907 Net income (loss) per share of common stock $ (.23) $ .54 $ .89 $ .63 - ------------------------------------------------------------------------------ FOR THE QUARTERS ENDED, 2001 3/31 6/30 9/30 12/31 - ------------------------------------------------------------------------------ Net sales $1,263,068 $1,284,667 $1,195,318 $1,073,429 Gross margin 229,300 227,331 211,095 214,037 Net income 5,988 7,430 10,654 7,616 Net income per share of common stock $ 1.01 $ 1.26 $ 1.83 $ 1.33 - ------------------------------------------------------------------------------
29 REPORT OF INDEPENDENT AUDITORS - ------------------------------------------------------------------------------ [Ernst & Young letterhead] Report of Independent Auditors The Shareholders and the Board of Directors Graybar Electric Company, Inc. We have audited the accompanying consolidated balance sheets of Graybar Electric Company, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of income and retained earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Graybar Electric Company, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill effective January 1, 2002 and its method of accounting for derivatives and hedging activities effective January 1, 2001. /s/ Ernst & Young LLP St. Louis, Missouri February 21, 2003 30 GROUP AND DISTRICT MANAGEMENT AS OF DECEMBER 31, 2002 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ NEW YORK, BOSTON AND NORTHEASTERN COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ Donald M. Block Group Vice President Joseph M. Sabatino Vice President-Service Joseph P. Peduto Director of Accounting and Finance - ------------------------------------------------------------------------------ NEW YORK DISTRICT Ronald P. Segraves Vice President-Electrical Sales John N. DeRosa Operating Manager Brian R. Buchholz Financial Manager - ------------------------------------------------------------------------------ BOSTON DISTRICT Peter R. Elkas Vice President-Electrical Sales Gerald G. Pollick Operating Manager Paul E. Smith Financial Manager - ------------------------------------------------------------------------------ NORTHEASTERN COMM/DATA DISTRICT Stephen E. Thomas Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ PITTSBURGH, RICHMOND AND MID-ATLANTIC COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ Thomas S. Gurganous Group Vice President T. N. (Nick) Fleming Vice President-Service Sharon L. Enman Director of Accounting and Finance - ------------------------------------------------------------------------------ PITTSBURGH DISTRICT Steven M. Schooley Vice President-Electrical Sales C. Robert Smith Operating Manager Peter M. Wingrove Financial Manager - ------------------------------------------------------------------------------ RICHMOND DISTRICT Wallace H. Hancock Vice President-Electrical Sales David K. Ange Operating Manager Ronald J. Grabar Financial Manager - ------------------------------------------------------------------------------ MID-ATLANTIC COMM/DATA DISTRICT Thomas R. Moore Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ ATLANTA, TAMPA AND SOUTHEASTERN COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ Richard D. Offenbacher Group Vice President Keith E. (Kip) Davis Vice President-Service Richard C. Hird Director of Accounting and Finance - ------------------------------------------------------------------------------ ATLANTA DISTRICT Donald W. Heitmeier Vice President-Electrical Sales Bertie M. Wilson Operating Manager Stephen C. Beckmann Financial Manager - ------------------------------------------------------------------------------ TAMPA DISTRICT Robert C. Lyons Vice President-Electrical Sales Dale J. Thayer, Jr. Operating Manager - ------------------------------------------------------------------------------ SOUTHEASTERN COMM/DATA DISTRICT Jeffrey W. Craig Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ CALIFORNIA ELECTRICAL AND CALIFORNIA COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ Gary D. Hodges Group Vice President Christopher O. Olsen Vice President-Service - ------------------------------------------------------------------------------ CALIFORNIA ELECTRICAL DISTRICT Scott A. Stromberg Vice President-Electrical Sales Kathy L. Edwards Operating Manager Richard T. Birkett Financial Manager - ------------------------------------------------------------------------------ CALIFORNIA COMM/DATA DISTRICT Jon D. Umene Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ MINNEAPOLIS, CINCINNATI, CHICAGO AND NORTH CENTRAL COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ Richard A. Cole Group Vice President John T. Roney Vice President-Service Timothy E. Carpenter Director of Accounting and Finance - ------------------------------------------------------------------------------ MINNEAPOLIS DISTRICT Robert L. Nowak Vice President-Electrical Sales Paul D. Wise Operating Manager Ellen S. Rebne Financial Manager - ------------------------------------------------------------------------------ CINCINNATI DISTRICT Joseph F. LaMotte Vice President-Electrical Sales J. William Grindle Operating Manager Thomas G. Karrenbauer Financial Manager - ------------------------------------------------------------------------------ CHICAGO DISTRICT Michael N. Wall Vice President-Electrical Sales Martin A. Aske Operating Manager Steven R. Bourbeau Financial Manager - ------------------------------------------------------------------------------ NORTH CENTRAL COMM/DATA DISTRICT Richard H. Harvey Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ ST. LOUIS, DALLAS, HOUSTON AND MIDWEST COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ John C. Loff Group Vice President Thomas T. Townsend Vice President-Service Thomas E. Kinate Director of Accounting and Finance - ------------------------------------------------------------------------------ ST. LOUIS DISTRICT Michael C. Dumas Vice President-Electrical Sales Cindy J. Johnson Operating Manager Reiders L. Abel Financial Manager - ------------------------------------------------------------------------------ DALLAS DISTRICT Lindsey G. Darnell Vice President-Electrical Sales Scott B. Neubauer Operating Manager Darryl B. Bain Financial Manager - ------------------------------------------------------------------------------ HOUSTON DISTRICT John H. Hawfield Vice President-Electrical Sales Dennis P. Brown Operating Manager Timothy D. Birky Financial Manager - ------------------------------------------------------------------------------ MIDWEST COMM/DATA DISTRICT William P. Mansfield Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ SEATTLE, PHOENIX, WESTERN COMM/DATA AND AURORA DISTRICTS - ------------------------------------------------------------------------------ Kenneth B. Sparks Group Vice President John C. Fischer Vice President-Service Randall R. Harwood Director of Accounting and Finance - ------------------------------------------------------------------------------ SEATTLE DISTRICT Kirk A. Snure Vice President-Electrical Sales Peter L. Johnson Operating Manager Paul A. Hansen Financial Manager - ------------------------------------------------------------------------------ PHOENIX DISTRICT Mick K. Upchurch Vice President-Electrical Sales Shayne P. Jones Operating Manager James (Chip) Bateman Financial Manager - ------------------------------------------------------------------------------ WESTERN COMM/DATA DISTRICT David G. Maxwell Vice President-Comm/Data Sales - ------------------------------------------------------------------------------ AURORA DISTRICT James A. Grimshaw Vice President-Sales - ------------------------------------------------------------------------------ SPN DISTRICT - ------------------------------------------------------------------------------ John C. Mansfield Group Vice President 31 LOCATIONS AS OF DECEMBER 31, 2002 - ------------------------------------------------------------------------------ CORPORATE OFFICE 34 North Meramec Avenue St. Louis, Missouri 63105 314 573-9200 - ------------------------------------------------------------------------------ NEW YORK DISTRICT - ------------------------------------------------------------------------------ 1300 Livingston Avenue North Brunswick, New Jersey 08902 732 568-2500 BRANCHES New York: Albany, Hauppauge, Jericho, Long Island City New Jersey: Newark, North Brunswick, Teterboro, Hackettstown, Parsippany, Wanamassa, Hamilton Pennsylvania: Philadelphia, Harrisburg, Allentown, Wilkes-Barre Delaware: New Castle - ------------------------------------------------------------------------------ BOSTON DISTRICT - ------------------------------------------------------------------------------ 345 Harrison Avenue Boston, Massachusetts 02118 617 482-9320 BRANCHES Rhode Island: Cranston Massachusetts: Worcester, Springfield, Somerville Maine: Portland New Hampshire: Manchester Vermont: Rutland, Williston Connecticut: Hamden, Hartford - ------------------------------------------------------------------------------ PITTSBURGH DISTRICT - ------------------------------------------------------------------------------ 900 Ridge Avenue Pittsburgh, Pennsylvania 15212 412 323-5200 BRANCHES Ohio: Youngstown, Cleveland, Akron, Canton, Mansfield Pennsylvania: Greensburg, Erie West Virginia: Wheeling New York: Buffalo, Rochester, Syracuse INFORMATION SYSTEMS 11885 Lackland Road St. Louis, Missouri 63146 314 573-5700 - ------------------------------------------------------------------------------ CINCINNATI DISTRICT - ------------------------------------------------------------------------------ 1022 West Eighth Street Cincinnati, Ohio 45203 513 621-0600 BRANCHES West Virginia: Charleston Ohio: Columbus, Dayton, Lima, Toledo Kentucky: Lexington, Louisville Indiana: Evansville, Fort Wayne, Indianapolis Michigan: Belleville, Auburn Hills, Livonia, Flint - ------------------------------------------------------------------------------ ATLANTA DISTRICT - ------------------------------------------------------------------------------ 2050 Nancy Hanks Drive Norcross, Georgia 30071 770 441-5580 BRANCHES Georgia: Atlanta Midtown, Marietta, Fayetteville, Savannah, Cartersville, Augusta Alabama: Birmingham, Huntsville, Mobile South Carolina: Columbia, Greenville, Spartanburg, Hilton Head, Beaufort Tennessee: Knoxville, Chattanooga, Nashville Florida: Pensacola Mississippi: Jackson - ------------------------------------------------------------------------------ RICHMOND DISTRICT - ------------------------------------------------------------------------------ 1510 Tomlynn Street Richmond, Virginia 23230 804 354-1300 BRANCHES Virginia: Norfolk, Roanoke, Hampton, Chantilly, Commonwealth Controls-Richmond North Carolina: Asheville, Raleigh, Winston-Salem, Charlotte, Greensboro, Wilmington, Monroe South Carolina: Rock Hill Tennessee: Bristol Maryland: Baltimore, Lanham - ------------------------------------------------------------------------------ TAMPA DISTRICT - ------------------------------------------------------------------------------ 801 North Rome Avenue Tampa, Florida 33606 813 253-8881 BRANCHES Florida: Sarasota, Lakeland, Orlando, Pinellas, Melbourne, North Tampa, Tallahassee, Jacksonville, Daytona Beach, Perrine, Miami, West Palm Beach, Florida City, Fort Myers, Fort Pierce, Naples, Pompano Beach, Gainesville - ------------------------------------------------------------------------------ CHICAGO DISTRICT - ------------------------------------------------------------------------------ 900 Regency Drive Glendale Heights, Illinois 60139 630 893-3600 BRANCHES Illinois: Naperville, Chicago Downtown, Joliet, Peoria, Springfield Indiana: South Bend, Hammond Michigan: Lansing, Grand Rapids Iowa: Davenport, Cedar Rapids Wisconsin: West Allis, Racine, Madison - ------------------------------------------------------------------------------ MINNEAPOLIS DISTRICT - ------------------------------------------------------------------------------ 2300 East 25th Street Minneapolis, Minnesota 55406 612 721-3545 BRANCHES Minnesota: St. Paul, Duluth, Burnsville, Plymouth, Rochester, Mankato, St. Cloud North Dakota: Fargo South Dakota: Sioux Falls, Brookings Wisconsin: Green Bay, Marinette, Manitowoc, Neenah, Stevens Point, Eau Claire Iowa: Des Moines - ------------------------------------------------------------------------------ ST. LOUIS DISTRICT - ------------------------------------------------------------------------------ 8170 Lackland Road Bel Ridge, Missouri 63114 314 573-2000 BRANCHES Missouri: Jefferson City, Kansas City, Springfield Kansas: Wichita Nebraska: Omaha Tennessee: Memphis, Jackson Arkansas: Little Rock, Springdale, Conway - ------------------------------------------------------------------------------ DALLAS DISTRICT - ------------------------------------------------------------------------------ 4601 Cambridge Road Ft. Worth, Texas 76155 817 213-1200 BRANCHES Texas: Amarillo, Austin, Abilene, Dallas (Royal Lane Counter) Oklahoma: Oklahoma City, Tulsa Louisiana: Shreveport - ------------------------------------------------------------------------------ HOUSTON DISTRICT - ------------------------------------------------------------------------------ 6161 Bingle Road Houston, Texas 77092 713 423-3200 BRANCHES Texas: Beaumont, San Antonio, Corpus Christi, Clute Louisiana: Harahan, Baton Rouge, Lake Charles 32 LOCATIONS AS OF DECEMBER 31, 2002 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SEATTLE DISTRICT - ------------------------------------------------------------------------------ 1919 Sixth Avenue South Seattle, Washington 98134 206 292-4848 BRANCHES Washington: Spokane, Tacoma, Everett Oregon: Portland, Eugene Idaho: Boise Alaska: Anchorage, Fairbanks Montana: Billings - ------------------------------------------------------------------------------ PHOENIX DISTRICT - ------------------------------------------------------------------------------ 3350 West Earll Drive Phoenix, Arizona 85017 602 269-2131 BRANCHES Arizona: Mesa, Tucson, Scottsdale Colorado: Colorado Springs, Denver New Mexico: Albuquerque Texas: El Paso Nevada: Las Vegas Utah: Salt Lake City - ------------------------------------------------------------------------------ CALIFORNIA DISTRICT - ------------------------------------------------------------------------------ 383 South Cheryl Lane City of Industry, California 91789 909 451-4000 BRANCHES California: Anaheim, Long Beach, Van Nuys, Costa Mesa, Los Angeles (Counter), San Bernardino, Hayward, San Francisco (Downtown), Martinez, San Jose, Sacramento, Roseville, San Diego, San Marcos, Santa Barbara, Santa Maria, Bakersfield, Fresno, Modesto Nevada: Sparks Hawaii: Honolulu COMM/DATA DISTRICTS - ------------------------------------------------------------------------------ MIDWEST COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 8170 Lackland Road Bel Ridge, Missouri 63114 314 573-2000 - ------------------------------------------------------------------------------ NORTH CENTRAL COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 900 Regency Drive Glendale Heights, Illinois 60139 630 893-3600 - ------------------------------------------------------------------------------ NORTHEASTERN COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 1550 South Warfield Street Philadelphia, Pennsylvania 19146 215 336-2211 - ------------------------------------------------------------------------------ SOUTHEASTERN COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 2050 Nancy Hanks Drive Norcross, Georgia 30071 770 441-5580 - ------------------------------------------------------------------------------ WESTERN COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 20 Diablo View Court Danville, California 94506 925 980-4863 - ------------------------------------------------------------------------------ MID-ATLANTIC COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 2500 Wilkinson Blvd. Charlotte, North Carolina 28208 704 392-1804 - ------------------------------------------------------------------------------ CALIFORNIA COMM/DATA DISTRICT - ------------------------------------------------------------------------------ 2368 Lincoln Avenue Hayward, California 94545 510 259-0122 REGIONAL ZONES - ------------------------------------------------------------------------------ ATLANTA REGIONAL AND NATIONAL ZONE - ------------------------------------------------------------------------------ Woodlands Business Park Building 100 8180 Troon Circle Austell, Georgia 30168 678 945-9970 - ------------------------------------------------------------------------------ CHARLOTTE REGIONAL ZONE - ------------------------------------------------------------------------------ 1700 West Pointe Drive, Suite A Charlotte, North Carolina 28214 704 602-7000 - ------------------------------------------------------------------------------ CINCINNATI REGIONAL ZONE - ------------------------------------------------------------------------------ 8814 Trade Port Drive Hamilton, Ohio 45011 513 874-8814 - ------------------------------------------------------------------------------ CRANBURY REGIONAL ZONE - ------------------------------------------------------------------------------ 4 Aurora Drive Suite 401 Cranbury, New Jersey 08512 609 409-8100 - ------------------------------------------------------------------------------ DALLAS REGIONAL ZONE - ------------------------------------------------------------------------------ 1991 Lakepointe Drive Lewisville, Texas 75057 972 459-5575 - ------------------------------------------------------------------------------ FRESNO REGIONAL AND NATIONAL ZONE - ------------------------------------------------------------------------------ 4401 E. Central Avenue Fresno, California 93725 559 264-2393 - ------------------------------------------------------------------------------ JOLIET REGIONAL AND NATIONAL ZONE - ------------------------------------------------------------------------------ 1700 Crossroad Drive Joliet, Illinois 60431 815 741-4660 - ------------------------------------------------------------------------------ ROGERS REGIONAL ZONE - ------------------------------------------------------------------------------ 13251 George Weber Drive Rogers, Minnesota 55374 612 428-1545 - ------------------------------------------------------------------------------ SEATTLE REGIONAL ZONE - ------------------------------------------------------------------------------ 1101 North Levee Road Puyallup, Washington 98371 253 848-3305 - ------------------------------------------------------------------------------ SPRINGFIELD REGIONAL ZONE - ------------------------------------------------------------------------------ 1904 N. LeCompte, Building #12 Springfield, Missouri 65802 417 864-4955 - ------------------------------------------------------------------------------ STAFFORD REGIONAL AND NATIONAL ZONE - ------------------------------------------------------------------------------ 13131 North Promenade Boulevard Stafford, Texas 77477 281 340-5500 - ------------------------------------------------------------------------------ TAMPA REGIONAL ZONE - ------------------------------------------------------------------------------ 8520 Eagle Palm Drive Riverview, Florida 33569 813 739-4100 - ------------------------------------------------------------------------------ TAUNTON REGIONAL ZONE - ------------------------------------------------------------------------------ 305 John Hancock Road Taunton, Massachusetts 02780 508 821-3838 - ------------------------------------------------------------------------------ YOUNGSTOWN REGIONAL AND NATIONAL ZONE - ------------------------------------------------------------------------------ 1100 Ohio Works Drive Youngstown, Ohio 44510 330 799-3220 INTERNATIONAL - ------------------------------------------------------------------------------ 34 North Meramec Avenue St. Louis, Missouri 63105 314 573-9211 LOCATIONS Carolina, Puerto Rico Mexico City, Mexico Kitchener, Ontario Hamilton, Ontario Guelph, Ontario Mississauga, Ontario Niagara Falls, Ontario Windsor, Ontario Halifax, Nova Scotia Dartmouth, Nova Scotia Bridgewater, Nova Scotia Kentville, Nova Scotia New Glasgow, Nova Scotia Sydney, Nova Scotia Truro, Nova Scotia Yarmouth, Nova Scotia Charlottetown, Prince Edward Island Bathurst, New Brunswick Florenceville, New Brunswick Fredericton, New Brunswick Moncton, New Brunswick Saint John, New Brunswick Corner Brook, Newfoundland Grand Falls-Windsor, Newfoundland St. John's, Newfoundland Wabush, Newfoundland 33 [PHOTOS] [Graybar Logo] Graybar Electric Company, Inc. 34 North Meramec Avenue St. Louis, Missouri 63105 www.graybar.com EX-21 6 exh21.txt LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21 GRAYBAR ELECTRIC COMPANY, INC. LIST OF SUBSIDIARIES -------------------- Graybar International, Inc., a Missouri corporation Graybar Financial Services, Inc., a Missouri corporation Graybar Electric de Mexico, S. de R.L. de C.V., a Mexican corporation Graybar Electric Limited, a Nova Scotia corporation Graybar Canada Limited, a Nova Scotia corporation Graybar Foundation, Inc., a Missouri corporation Graybar Services, Inc., an Illinois corporation Distribution Associates, Inc., a Missouri corporation Graybar Business Services, Inc., a Missouri corporation Graybar Electric Canada Limited, a Nova Scotia corporation Graybar Commerce Corporation, a Delaware corporation Commonwealth Controls Corporation, a Missouri corporation EX-23 7 exh23.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT OF ERNST AND YOUNG LLP Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Graybar Electric Company, Inc. of our report dated February 21, 2003, included in the 2002 Annual Report to Shareholders of Graybar Electric Company, Inc. Our audits also included the financial statement schedule of Graybar Electric Company, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP St. Louis, Missouri February 21, 2003 EX-99.(I) 8 exh99p1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 99(i) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the fiscal year ending December 31, 2002 of Graybar Electric Company, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert A. Reynolds, Jr., Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert A. Reynolds, Jr. Principal Executive Officer March 27, 2003 EX-99.(II) 9 exh99p2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 99(ii) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the fiscal year ending December 31, 2002 of Graybar Electric Company, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Juanita H. Hinshaw, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Juanita H. Hinshaw Principal Financial Officer March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----