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FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2002
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4482
ARROW ELECTRONICS, INC. |
(Exact name of Registrant as specified in its charter) |
New York |
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11-1806155 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification Number) |
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25 Hub Drive, Melville, New York |
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11747 |
(Address of principal executive |
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(Zip Code) |
Offices) |
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Registrant's telephone number, |
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including area code |
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(516) 391-1300 |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes X |
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No |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock, $1 par value: 100,433,678 shares outstanding at August 2, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Six Months Ended |
Three Months Ended |
||||||||||||||
June 30, |
June 30, |
||||||||||||||
2002 |
2001 |
2002 |
2001 |
||||||||||||
Sales |
$ |
3,687,856 |
$ |
5,452,364 |
$ |
1,843,317 |
$ |
2,355,745 |
|||||||
Costs and expenses: |
|||||||||||||||
Cost of products sold |
3,053,736 |
4,525,985 |
1,523,729 |
1,966,790 |
|||||||||||
Selling, general and administrative |
|||||||||||||||
expenses |
509,348 |
606,447 |
257,158 |
290,469 |
|||||||||||
Depreciation and amortization |
34,310 |
58,169 |
16,639 |
29,585 |
|||||||||||
Severance costs |
5,375 |
- |
5,375 |
- |
|||||||||||
Integration charges |
- |
9,375 |
- |
- |
|||||||||||
3,602,769 |
5,199,976 |
1,802,901 |
2,286,844 |
||||||||||||
Operating income |
85,087 |
252,388 |
40,416 |
68,901 |
|||||||||||
Equity in earnings (losses) of affiliated |
|||||||||||||||
companies |
966 |
(1,393 |
) |
813 |
(997 |
) |
|||||||||
Interest expense, net |
82,072 |
120,072 |
40,830 |
54,479 |
|||||||||||
Earnings before income taxes and minority |
|||||||||||||||
interest |
3,981 |
130,923 |
399 |
13,425 |
|||||||||||
Provision for income taxes |
1,404 |
53,260 |
33 |
7,435 |
|||||||||||
Earnings before minority interest |
2,577 |
77,663 |
366 |
5,990 |
|||||||||||
Minority interest |
(84 |
) |
(263 |
) |
(210 |
) |
(294 |
) |
|||||||
Earnings from continuing operations |
2,661 |
77,926 |
576 |
6,284 |
|||||||||||
Income (loss) from discontinued |
|||||||||||||||
operations, net of taxes (including |
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loss from disposal of $6,120, net of |
|||||||||||||||
tax benefit of $4,114, in 2002) |
(5,911 |
) |
707 |
(6,610 |
) |
670 |
|||||||||
Earnings (loss) before cumulative effect |
|||||||||||||||
of change in accounting principle |
(5,250 |
) |
78,633 |
(6,034 |
) |
6,954 |
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Cumulative effect of change in accounting |
|||||||||||||||
principle |
(603,709 |
) |
- |
- |
- |
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Net income (loss) |
$ |
(606,959 |
) |
$ |
78,633 |
$ |
(6,034 |
) |
$ |
6,954 |
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Net income (loss) per basic and diluted |
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share: |
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Income from continuing operations |
$ |
.03 |
$ |
.79 |
$ |
.01 |
$ |
.06 |
|||||||
Income (loss) from discontinued operations |
(.06 |
) |
.01 |
(.07 |
) |
.01 |
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Cumulative effect of change in accounting |
|||||||||||||||
principle |
(6.06 |
) |
- |
- |
- |
||||||||||
Net income (loss) per basic share |
$ |
(6.09 |
) |
$ |
.80 |
$ |
(.06 |
) |
$ |
.07 |
|||||
Income from continuing operations |
$ |
.03 |
$ |
.74 |
$ |
.01 |
$ |
.06 |
|||||||
Income (loss) from discontinued operations |
(.06 |
) |
.01 |
(.07 |
) |
.01 |
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Cumulative effect of change in accounting |
|||||||||||||||
principle |
(6.06 |
) |
- |
- |
- |
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Net income (loss) per diluted share |
$ |
(6.09 |
) |
$ |
.75 |
$ |
(.06 |
) |
$ |
.07 |
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Average number of shares outstanding: |
|||||||||||||||
Basic |
99,667 |
97,957 |
99,813 |
98,006 |
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Diluted |
99,667 |
113,017 |
99,813 |
99,580 |
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See accompanying notes
.ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, |
December 31 |
, |
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2002 |
2001 |
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(Unaudited |
) |
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ASSETS |
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Current assets: |
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Cash and short-term investments |
$ |
909,102 |
$ |
556,861 |
|||||
Accounts receivable, net |
1,403,031 |
1,389,882 |
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Inventories |
1,248,989 |
1,372,797 |
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Prepaid expenses and other assets |
65,104 |
52,892 |
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Assets from discontinued operations |
- |
98,954 |
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Total current assets |
3,626,226 |
3,471,386 |
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Property, plant and equipment at cost: |
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Land |
42,648 |
42,288 |
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Buildings and improvements |
174,533 |
164,111 |
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Machinery and equipment |
366,625 |
347,170 |
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583,806 |
553,569 |
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Less accumulated depreciation and |
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amortization |
(289,150 |
) |
(252,374 |
) |
|||||
294,656 |
301,195 |
||||||||
Investments in affiliated companies |
36,292 |
32,917 |
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Cost in excess of net assets of |
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companies acquired, net of amortization |
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($190,940 in 2001) |
757,255 |
1,224,283 |
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Other assets |
349,632 |
326,024 |
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Assets from discontinued operations |
- |
3,179 |
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$ |
5,064,061 |
$ |
5,358,984 |
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See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
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June 30, |
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December 31 |
, |
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2002 |
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2001 |
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(Unaudited |
) |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
867,032 |
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$ |
641,454 |
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Accrued expenses |
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383,657 |
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342,670 |
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Short-term borrowings |
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10,475 |
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37,289 |
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Liabilities from discontinued operations |
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- |
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25,572 |
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Total current liabilities |
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1,261,164 |
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1,046,985 |
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Long-term debt |
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2,458,574 |
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2,441,983 |
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Other liabilities |
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107,937 |
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103,555 |
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Shareholders' equity: |
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Common stock, par value $1: |
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Authorized - 160,000,000 shares |
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Issued - 103,868,002 shares in 2002 |
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and 103,856,024 shares in 2001 |
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103,868 |
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103,856 |
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Capital in excess of par value |
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523,392 |
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|
524,299 |
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Retained earnings |
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|
916,125 |
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1,523,084 |
|
Foreign currency translation adjustment |
|
|
(196,896 |
) |
|
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|
(259,694 |
) |
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|
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1,346,489 |
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1,891,545 |
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Less: Treasury stock (3,445,650 shares in 2002 |
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and 3,998,063 shares in 2001), at cost |
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(92,165 |
) |
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(106,921 |
) |
Unamortized employee stock awards |
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(12,838 |
) |
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(12,363 |
) |
Other |
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(5,100 |
) |
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(5,800 |
) |
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|
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|
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|
|
|
|
|
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1,236,386 |
|
|
|
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1,766,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,064,061 |
|
|
|
$ |
5,358,984 |
|
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended |
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June 30, |
|||||||||||||
2002 |
2001 |
||||||||||||
Cash flows from operating activities: |
|||||||||||||
Net income (loss) |
$ |
(606,959 |
) |
$ |
78,633 |
||||||||
Income (loss) from discontinued operations, net |
(5,911 |
) |
707 |
||||||||||
Net income (loss) from continuing operations |
(601,048 |
) |
77,926 |
||||||||||
Adjustments to reconcile net income (loss) to net |
|||||||||||||
cash provided by (used for) operations: |
|||||||||||||
Minority interest |
(84 |
) |
(263 |
) |
|||||||||
Depreciation and amortization |
41,540 |
65,106 |
|||||||||||
Accretion of discount on convertible debentures |
14,278 |
9,782 |
|||||||||||
Equity in (earnings) losses of affiliated companies |
(966 |
) |
1,393 |
||||||||||
Deferred income taxes |
(6 |
) |
(43,640 |
) |
|||||||||
Severance costs, net of taxes |
3,214 |
- |
|||||||||||
Integration charge, net of taxes |
- |
5,719 |
|||||||||||
Cumulative effect of change in accounting principle |
603,709 |
- |
|||||||||||
Change in assets and liabilities, net of effects of |
|||||||||||||
acquired businesses: |
|||||||||||||
Accounts receivable |
85,689 |
681,130 |
|||||||||||
Inventories |
174,423 |
688,625 |
|||||||||||
Prepaid expenses and other assets |
(6,808 |
) |
(4,902 |
) |
|||||||||
Accounts payable |
195,523 |
(740,825 |
) |
||||||||||
Accrued expenses |
9,312 |
(55,818 |
) |
||||||||||
Other |
(32,768 |
) |
(8,567 |
) |
|||||||||
Net cash provided by operating activities |
486,008 |
675,666 |
|||||||||||
Cash flows from investing activities: |
|||||||||||||
Acquisition of property, plant and equipment, net |
(21,440 |
) |
(36,283 |
) |
|||||||||
Proceeds from sale of discontinued operations |
37,087 |
- |
|||||||||||
Cash consideration paid for acquired business |
(110,335 |
) |
- |
||||||||||
Investments |
(2,724 |
) |
(15,509 |
) |
|||||||||
Net cash used for investing activities |
(97,412 |
) |
(51,792 |
) |
|||||||||
Cash flows from financing activities: |
|||||||||||||
Change in short-term borrowings |
(55,309 |
) |
(496,154 |
) |
|||||||||
Change in credit facilities |
13,071 |
112,928 |
|||||||||||
Change in long-term debt |
(17,873 |
) |
(894,468 |
) |
|||||||||
Proceeds from convertible debentures |
- |
670,883 |
|||||||||||
Proceeds from exercise of stock options |
8,323 |
1,985 |
|||||||||||
Sale of accounts receivable under securitization program |
- |
251,737 |
|||||||||||
Repayment under securitization program |
- |
(252,865 |
) |
||||||||||
Net cash used for financing activities |
(51,788 |
) |
(605,954 |
) |
|||||||||
Effect of exchange rate changes on cash |
15,433 |
(4,372 |
) |
||||||||||
Net increase in cash and short-term investments |
352,241 |
13,548 |
|||||||||||
Cash and short-term investments at beginning of period |
556,861 |
55,546 |
|||||||||||
Cash and short-term investments at end of period |
$ |
909,102 |
$ |
69,094 |
|||||||||
Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Income taxes |
$ |
31,633 |
$ |
46,753 |
|||||||||
Interest |
72,787 |
112,999 |
See accompanying notes.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note C -- Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." This Statement, among other things, eliminates the amortization of goodwill and requires annual tests for determining impairment of goodwill. On January 1, 2002, the company adopted Statement No. 142, and accordingly, discontinued the amortization of goodwill.
The following table provides a reconciliation of reported earnings from continuing operations and earnings per share to the adjusted earnings from continuing operations and earnings per share, which reflects the exclusion of goodwill amortization, net of the related tax effect (in thousands except per share data):
For the Six |
For the Three |
||||||||||||||
Months Ended |
Months Ended |
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June 30, |
June 30, |
||||||||||||||
2002 |
2001 |
2002 |
2001 |
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Earnings from continuing |
|||||||||||||||
operations, as reported |
$ |
2,661 |
$ |
77,926 |
$ |
576 |
$ |
6,284 |
|||||||
Add: Goodwill amortization from |
|||||||||||||||
continuing operations, net of tax |
- |
20,314 |
- |
10,078 |
|||||||||||
Adjusted earnings from continuing |
|||||||||||||||
operations |
$ |
2,661 |
$ |
98,240 |
$ |
576 |
$ |
16,362 |
|||||||
Basic earnings per share from |
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continuing operations, as reported |
$ |
.03 |
$ |
.79 |
$ |
.01 |
$ |
.06 |
|||||||
Add: Goodwill amortization, from |
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continuing operations, net of tax |
- |
.21 |
- |
.10 |
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Adjusted basic earnings per share |
|||||||||||||||
from continuing operations |
$ |
.03 |
$ |
1.00 |
$ |
.01 |
$ |
.16 |
|||||||
Diluted earnings per share from |
|||||||||||||||
continuing operations, as reported |
$ |
.03 |
$ |
.74 |
$ |
.01 |
$ |
.06 |
|||||||
Add: Goodwill amortization from |
|||||||||||||||
continuing operations, net of tax |
- |
.18 |
- |
.10 |
|||||||||||
Adjusted diluted earnings per share |
|||||||||||||||
from continuing operations |
$ |
.03 |
$ |
.92 |
$ |
.01 |
$ |
.16 |
|||||||
In addition, on a proforma basis adjusting for the amortization of goodwill, income before cumulative effect of change in accounting principle and net income would have been $98,947,000 ($1.01 per basic share and $.93 per diluted share) and $17,032,000 ($.17 per basic and diluted share) for the six and three months ended June 30, 2001, respectively.
As required under the transitional accounting provisions of Statement No. 142, the company completed the two steps required to identify and measure goodwill impairment for each reporting unit as of January 1, 2002. The first step involved identifying all reporting units with carrying values (including goodwill) in excess of fair value. The identified reporting units from the first step were then measured for impairment by comparing the fair value of the reporting unit, determined by reference to comparable businesses using a weighted average EBITDA multiple, with the carrying amount of the goodwill. Those reporting units having a carrying value exceeding the fair value were identified as being fully impaired, and the company fully wrote down those assets. For reporting units with potential impairment, the company obtained an independent appraisal of the fair value of the assets and liabilities of the unit and wrote down the goodwill to its implied fair value accordingly. No other impairment indicators have a
risen since January 1, 2002.
In determining a reporting unit, the company looked to its current reporting structure at the date of adoption and allocated goodwill to the reporting units. In most cases, the goodwill was identifiable to specific acquisitions, so the allocation was direct. The following were determined to be the reporting units of the company: (i) North America Components, (ii) North America Computer Products, (iii) on an individual country basis for Europe Components, (iv) on an individual country basis for Europe Computer Products, (v) South America, and (vi) Asia.
As a result of the evaluation process discussed above the company recorded an impairment charge of $603,709,000, which was recorded as a cumulative effect of a change in accounting principle at January 1, 2002. Accordingly, the first quarter's results have been modified to include this charge as required under the transitional rules of Statement No. 142. The following table presents the carrying amount of goodwill, allocated to reportable segments, for the periods presented (in thousands):
|
Electronic |
|
|
|
Computer |
|
|
|
|
|
|
Components |
|
|
|
Products |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at December 31, 2001 |
|
$902,093 |
|
|
|
$322,190 |
|
|
$1,224,283 |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in |
|
|
|
|
|
|
|
|
|
|
accounting principle |
|
(281,519 |
) |
|
|
(322,190 |
) |
|
(603,709 |
) |
Additions |
|
110,335 |
|
|
|
- |
|
|
110,335 |
|
Other (principally foreign currency |
|
|
|
|
|
|
|
|
|
|
translation) |
|
26,346 |
|
|
|
- |
|
|
26,346 |
|
Carrying value at June 30, 2002 |
|
$757,255 |
|
|
|
$ - |
|
|
$ 757,255 |
|
The following table reflects the impact of the cumulative effect of change in accounting principle on the reported results for the company's first quarter ended March 31, 2002 (in thousands):
Net income from continuing operations |
|
|
$ 2,085 |
|
Net income from discontinued operations |
|
|
699 |
|
Cumulative effect of change in accounting principle |
|
|
(603,709 |
) |
Net loss, as adjusted |
|
|
$(600,925 |
) |
Net loss per share, as adjusted: |
|
|
|
|
Basic |
|
|
$ (6.04 |
) |
Diluted |
|
|
$ (6.04 |
) |
The company does not have any other intangibles subject to valuation under Statement No. 142.
Note D -- Discontinued Operations
In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within the company's North American Computer Product Group that sells commodity computer products such as printers, monitors, other peripherals, and software to value-added resellers in North America. On May 31, 2002, the company completed the sale of this business unit to Synnex Information Technologies, Inc. for estimated cash proceeds of $44,700,000, subject to price adjustments, of which $37,087,000 has been collected as of June 30, 2002. The remaining amount due is payable in two increments: 50 percent due 90 days after closing and the remaining 50 percent due 180 days after closing. The assets sold consisted primarily of accounts receivable, inventories, and property and equipment. The buyer also assumed certain liabilities.
The disposition of the Gates/Arrow operations represents a disposal of a "component of an entity" as defined in Statement No. 144. Accordingly, the company's financial statements have been presented to reflect Gates/Arrow as a discontinued operation for all periods. Its assets and liabilities have been segregated from continuing operations in the accompanying consolidated balance sheet, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations, and related notes.
In connection with the sale of Gates/Arrow, the company recorded a loss on disposal of $6,120,000, net of the related tax benefit of $4,114,000. The loss consists approximately of the following:
Personnel related |
$ |
1,250,000 |
Facilities |
|
3,144,000 |
Professional fees |
|
599,000 |
Write-down of asset carrying value |
|
3,000,000 |
Other |
|
2,241,000 |
|
$ |
10,234,000 |
The personnel costs are due to the termination of 88 people employed by the Gates/Arrow business and 57 warehouse personnel of the North American Computer Products Group due to reduced activity levels as a result of the sale of Gates/Arrow. The facilities costs are principally related to vacated warehouse space no longer required due to reduced activity levels as a result of the sale of Gates/Arrow. The write-down of assets was to adjust the carrying value of the assets sold to the value agreed to under the terms of the contract of sale.
The utilization of these charges as of June 30, 2002 is as follows (in thousands):
|
Personnel |
|
|
|
Professional |
|
Asset |
|
|
|
|
|
Costs |
|
Facilities |
|
Fees |
|
Write-down |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Original accrual |
$1,250 |
|
$3,144 |
|
$599 |
|
$3,000 |
|
$2,241 |
|
$10,234 |
2002 payments |
257 |
|
2 |
|
70 |
|
- |
|
92 |
|
421 |
2002 non-cash |
- |
|
- |
|
- |
|
2,000 |
|
- |
|
2,000 |
June 2002 balance |
$ 993 |
|
$3,142 |
|
$529 |
|
$1,000 |
|
$2,149 |
|
$ 7,813 |
Operating results of Gates/Arrow for the six and three months ended June 30, are as follows (in thousands):
For the Six |
For the Three |
||||||||||
Months Ended |
Months Ended |
||||||||||
June 30, |
June 30, |
||||||||||
2002 (a) |
2001 |
2002 (a |
) |
2001 |
|||||||
Net sales |
$ |
180,534 |
|
$ |
333,510 |
|
$ |
72,822 |
|
$ |
154,382 |
Income (loss) from discontinued |
|
|
|
|
|
|
|
|
|
|
|
operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
(including loss from disposal of |
|
|
|
|
|
|
|
|
|
|
|
$6,120, net of tax benefit of |
|
|
|
|
|
|
|
|
|
|
|
$4,114, in 2002) |
$ |
(5,911 |
) |
$ |
707 |
|
$ |
(6,610 |
) |
$ |
670 |
(a) Operating results for the six and three months ended June 30, 2002 |
The following is a summary of the net assets as of December 31, 2001 (in thousands):
Accounts receivable |
$ |
68,676 |
|
Inventories |
30,278 |
||
Property, plant and equipment, net |
3,179 |
||
Assets from discontinued operations |
$ |
102,133 |
|
Accounts payable |
23,909 |
||
Accrued expenses |
1,663 |
||
Liabilities from discontinued operations |
$ |
25,572 |
|
Note E -- Accounts Receivable
Accounts receivable consists of the following (in thousands):
June 30, |
December 31 |
, |
|||||||||||||
2002 |
2001 |
||||||||||||||
Accounts receivable |
$ |
790,897 |
$ |
744,864 |
|||||||||||
Retained interest in securitized |
|||||||||||||||
accounts receivable |
678,934 |
725,988 |
|||||||||||||
Allowance for doubtful accounts |
(66,800 |
) |
(80,970 |
) |
|||||||||||
$ |
1,403,031 |
$ |
1,389,882 |
||||||||||||
In March 2002, the company renewed its one-year, $750,000,000 asset securitization program (the "program") under which it sells, on a revolving basis, an individual interest in a pool of its trade accounts receivable. Under the program, the company sells receivables and retains a subordinated interest and servicing rights to those receivables. At June 30, 2002 and December 31, 2001, there were no receivables sold to and held by third parties under the program, and, as such, the company had no indebtedness outstanding under this program. In the event that the company had sold receivables to third parties under the program at June 30, 2002 and December 31, 2001, those receivables would not have been recorded on the company's balance sheet and the related financing provided by the program would not be reflected as indebtedness on the company's balance sheet.
During March 2001, the company sold $251,737,000 of outstanding trade accounts receivable, which was subsequently repurchased during the second quarter of 2001 for $252,865,000. Upon the initial sale, the company recognized a loss of $1,700,000 and removed the sold assets from the balance sheet, reduced previously established allowance for uncollectible accounts and recognized the present value of future net cash flow related to the assets sold. The present value amount was recorded in accounts receivable and represented the company's retained interests. The key assumptions used in measuring the fair value of the retained interests upon the initial sale were as follows:
Coupon rate of 5.19% |
Estimated future uncollectible accounts 6.3% |
Coverage life of trade accounts receivable of 48 days |
Upon the repurchase, all costs related to the program were expensed as incurred in the quarter ended June 30, 2001. Those expenses included servicing, interest, uncollectible accounts, facility and program fees. Servicing fees received by the company approximated the market value of servicing and thus no servicing asset or liability was recorded.
During the second quarter of 2002, the company purchased additional shares in Marubun Corporation increasing its ownership interest from 5.4 percent to 8.4 percent, increased its holdings in IR Electronic, a distributor in Slovenia, to 100 percent, and acquired an additional 10.6 percent interest in Ally, Inc., increasing the company's ownership from 75 percent to 85.6 percent. The aggregate cost of these acquisitions was approximately $5,422,000.
The company, in connection with certain acquisitions, may be required to make future payments that are contingent upon the acquired businesses' earnings and, in certain instances, the achievement of operating goals. During the second quarter of 2002, the company made such payments aggregating $108,470,000 in connection with three acquisitions, which have been capitalized as cost in excess of net assets of companies acquired. The company may be contractually required to make these types of payments in the future. Based on the performance of those businesses, for which contingent payments remain open as of June 30, 2002, the company currently estimates such payments to be approximately $15,000,000.
In May 2002, the company sold its interest in VCE Virtual Chip Exchange, Inc. for $3,250,000.
Note G -- Severance Costs
During the second quarter of 2002, the company's chief executive officer resigned. As a result, the company recorded severance costs totalling $3,214,000 (net of the related tax effect) principally based on the terms of his employment agreement. Included therein, are provisions principally related to salary continuation, retirement benefits and the vesting of restricted stock and options.
Note H -- Integration and Restructuring Charges
During the first quarter of 2001, the company recorded an integration charge of $9,375,000 ($5,719,000 net of the related tax effect) associated with the acquisition of Wyle Electronics and Wyle Systems. In connection with this integration, approximately 240 positions, largely performing duplicate functions were eliminated.
The utilization of all of the company's integration, realignment, and restructuring reserves are as follows (in thousands):
|
Personnel |
|
|
|
Customer |
|
IT |
|
Asset |
|
|
|
|
Costs |
|
Facilities |
|
Termination |
|
and Other |
|
Write-down |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2000 balance |
$16,922 |
|
$41,040 |
|
$ - |
|
$19,290 |
|
$8,134 |
|
$85,386 |
|
Additions |
19,989 |
|
9,749 |
|
38,800 |
|
23,093 |
|
151,692 |
|
243,323 |
|
Reversals |
- |
|
11,814 |
|
- |
|
500 |
|
- |
|
12,314 |
|
2001 payments |
26,315 |
|
8,729 |
|
- |
|
14,536 |
|
898 |
|
50,478 |
|
2001 non-cash usage |
- |
|
578 |
|
14,600 |
|
5,977 |
|
83,278 |
|
104,433 |
|
Foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
translation |
50 |
|
282 |
|
- |
|
(377 |
) |
101 |
|
56 |
|
December 2001 balance |
10,646 |
|
29,950 |
|
24,200 |
|
20,993 |
|
75,751 |
|
161,540 |
|
2002 payments |
6,603 |
|
2,105 |
|
- |
|
5,812 |
|
217 |
|
14,737 |
|
2002 non-cash usage |
- |
|
- |
|
14,132 |
|
- |
|
48,324 |
|
62,456 |
|
Foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
translation |
(137 |
) |
(255 |
) |
- |
|
(49 |
) |
(78 |
) |
(519 |
) |
June 2002 balance |
$ 3,906 |
|
$27,590 |
|
$10,068 |
|
$15,132 |
|
$27,132 |
|
$83,828 |
|
Included in the column "Asset Write-down" are valuation reserves of $53,000,000 related to the companies internet investments and $97,475,000 related to inventories.
Note I -- Earnings per Share
The following table sets forth the calculation of basic and diluted earnings per share (in thousands except per share data):
For the Six |
For the Three |
||||||||||||||
Months Ended |
Months Ended |
||||||||||||||
June 30, |
June 30, |
||||||||||||||
2002 (a) |
2001 (b) |
2002 (a |
) |
2001 |
|||||||||||
Earnings from continuing operations |
|||||||||||||||
used for basic earnings per share |
$ |
2,661 |
$ |
77,926 |
$ |
576 |
$ |
6,284 |
|||||||
Interest on convertible debentures, |
|||||||||||||||
net of tax |
- |
5,761 |
- |
- |
|||||||||||
Adjusted earnings from continuing |
|||||||||||||||
operations |
2,661 |
83,687 |
576 |
6,284 |
|||||||||||
Income (loss) from discontinued |
|||||||||||||||
operations, net of tax |
(5,911 |
) |
707 |
(6,610 |
) |
670 |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income (loss) before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cumulative effect of change in |
|||||||||||||||
accounting principle |
(3,250 |
) |
84,394 |
(6,034 |
) |
6,954 |
|||||||||
Cumulative effect of change in |
|||||||||||||||
accounting principle |
(603,709 |
) |
- |
- |
- |
||||||||||
Adjusted net income (loss) |
$ |
(606,959 |
) |
$ |
84,394 |
$ |
(6,034 |
) |
$ |
6,954 |
|||||
Weighted average shares outstanding |
|||||||||||||||
for basic earnings per share |
99,667 |
97,957 |
99,813 |
98,006 |
|||||||||||
Net effect of dilutive stock options |
|||||||||||||||
and restricted stock awards |
- |
2,119 |
- |
1,574 |
|||||||||||
Net effect of convertible debentures |
- |
12,941 |
- |
- |
|||||||||||
Weighted average shares outstanding |
|||||||||||||||
for diluted earnings per share |
99,667 |
113,017 |
99,813 |
99,580 |
|||||||||||
Net income (loss) per basic and |
|||||||||||||||
diluted share: |
|||||||||||||||
Income from continuing operations |
$ |
.03 |
$ |
.79 |
$ |
.01 |
$ |
.06 |
|||||||
Income (loss) from discontinued |
|||||||||||||||
operations |
(.06 |
) |
.01 |
(.07 |
) |
.01 |
|||||||||
Cumulative effect of change in |
|||||||||||||||
accounting principle |
(6.06 |
) |
- |
- |
- |
||||||||||
Net income(loss) per basic share |
$ |
(6.09 |
) |
$ |
.80 |
$ |
(.06 |
) |
$ |
.07 |
|||||
Income from continuing operations |
$ |
.03 |
$ |
.74 |
$ |
.01 |
$ |
.06 |
|||||||
Income(loss) from discontinued |
|||||||||||||||
operations |
(.06 |
) |
.01 |
(.07 |
) |
.01 |
|||||||||
Cumulative effect of change in |
|||||||||||||||
accounting principle |
(6.06 |
) |
- |
- |
- |
||||||||||
Net income(loss) per diluted |
|||||||||||||||
share (c) |
$ |
(6.09 |
) |
$ |
.75 |
$ |
(.06 |
) |
$ |
.07 |
|||||
(a) Excluding the severance costs, net income and net income per share from |
(b) Excluding the integration charge, net income and net income per share from |
(c) Earnings per share on a diluted basis for the six and three months ended |
Note J -- Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the aggregate change in shareholders' equity excluding changes in ownership interests. The components of comprehensive income (loss) are as follows (in thousands):
For the Six |
For the Three |
||||||||||||||||||||||||||||||
Months Ended |
Months Ended |
||||||||||||||||||||||||||||||
June 30, |
June 30, |
||||||||||||||||||||||||||||||
2002 |
2001 |
2002 |
2001 |
||||||||||||||||||||||||||||
Net income (loss) |
$ |
(606,959 |
) |
$ |
78,633 |
$ |
(6,034 |
) |
$ |
6,954 |
|||||||||||||||||||||
Foreign currency translation |
|||||||||||||||||||||||||||||||
adjustments (a) |
62,798 |
(45,021 |
) |
64,021 |
10,907 |
||||||||||||||||||||||||||
Unrealized gain (loss) on |
|||||||||||||||||||||||||||||||
securities |
700 |
- |
(300 |
) |
- |
||||||||||||||||||||||||||
Comprehensive income (loss)(b)(c) |
$ |
(543,461 |
) |
$ |
33,612 |
$ |
57,687 |
$ |
17,861 |
||||||||||||||||||||||
(a) The foreign currency translation adjustments have not been tax effected as |
related tax effect), comprehensive loss would have been $540,247,000 and $60,901,000 for the six and three months ended June 30, 2002, respectively. |
|
Note K -- Segment and Geographic Information
The company is engaged in the distribution of electronic components to original equipment manufacturers and computer products to value-added resellers. As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings and prior to 2002, goodwill amortization, are not directly attributable to the individual operating segments. Computer products includes North American Computer Products together with UK Microtronica, Nordic Microtronica, ATD (in Iberia), and Arrow Computer Products (in France).
For the Six |
For the Three |
||||||||||||||||||
Months Ended |
Months Ended |
||||||||||||||||||
June 30, |
June 30, |
||||||||||||||||||
2002 (a) |
2001 (b) |
2002 (a) |
2001 |
||||||||||||||||
Revenue: |
|||||||||||||||||||
Electronic Components |
$ |
2,689,646 |
$ |
4,275,460 |
$ |
1,340,379 |
$ |
1,787,687 |
|||||||||||
Computer Products |
998,210 |
1,176,904 |
502,938 |
568,058 |
|||||||||||||||
Consolidated |
$ |
3,687,856 |
$ |
5,452,364 |
$ |
1,843,317 |
$ |
2,355,745 |
|||||||||||
Operating income (loss): |
|||||||||||||||||||
Electronic Components |
$ |
100,410 |
$ |
307,728 |
$ |
50,342 |
$ |
92,684 |
|||||||||||
Computer Products |
24,802 |
15,820 |
12,968 |
8,340 |
|||||||||||||||
Corporate |
(40,125 |
) |
(71,160 |
) |
(22,894 |
) |
(32,123 |
) |
|||||||||||
Consolidated |
$ |
85,087 |
$ |
252,388 |
$ |
40,416 |
$ |
68,901 |
|||||||||||
(a) Excluding the severance costs of $5,375,000, operating income would have |
(b) Excluding the integration charge of $9,375,000, operating income would |
Total assets, by segment, are as follows (in thousands):
|
|
|
June 30, |
|
|
December 31 |
, |
|||||||
|
|
|
2002 |
|
|
2001 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|||||
Electronic Components |
|
$ |
3,064,742 |
|
|
|
$ |
3,767,595 |
|
|||||
Computer Products |
|
|
483,270 |
|
|
|
|
929,240 |
|
|||||
Corporate |
|
|
1,516,049 |
|
|
|
|
662,149 |
|
|||||
Consolidated |
|
$ |
5,064,061 |
|
|
|
$ |
5,358,984 |
|
|||||
Revenues, by geographic area, are as follows (in thousands):
For the Six |
For the Three |
|||||||||||||||||
Months Ended |
Months Ended |
|||||||||||||||||
June 30, |
June 30, |
|||||||||||||||||
2002 |
2001 |
2002 |
2001 |
|||||||||||||||
Americas |
$ |
2,149,187 |
$ |
3,247,520 |
$ |
1,096,099 |
$ |
1,385,441 |
||||||||||
Europe |
1,211,525 |
1,717,810 |
585,840 |
737,986 |
||||||||||||||
Asia/Pacific |
327,144 |
487,034 |
161,378 |
232,318 |
||||||||||||||
Consolidated |
$ |
3,687,856 |
$ |
5,452,364 |
$ |
1,843,317 |
$ |
2,355,745 |
||||||||||
Total assets, by geographic area, are as follows (in thousands):
June 30, |
December 31 |
, |
||||||||
2002 |
2001 |
|||||||||
Americas |
$ |
3,136,038 |
$ |
3,253,575 |
||||||
Europe |
1,616,268 |
1,771,137 |
||||||||
Asia/Pacific |
311,755 |
334,272 |
||||||||
Consolidated |
$ |
5,064,061 |
$ |
5,358,984 |
||||||
Note L -- Subsequent Event
On August 8, 2002, the company repurchased $250,000,000 of its 6.45% senior notes, due in November 2003, at a price of 104.65 percent of the principal amount. The premium paid and deferred financing costs written-off upon the repurchase of this debt, aggregated approximately $11,000,000, net of the related tax effect, will be recognized as an extraordinary loss in the company's consolidated statement of operations in the third quarter of 2002. As a result of this transaction net interest expense will be reduced by approximately $21,000,000 from the date of the repurchase through the original maturity date, if current interest rates remain the same.
In August 2002, the company entered into a series of interest rate swaps (the "swaps"), with third parties, with an aggregate notional amount of $250,000,000 million in order to hedge the change in fair value of the company's 8.7% senior debentures, due 2005, related to fluctuations in interest rates. These contracts are classified as fair value hedges and mature in October 2005. The swaps modify the company's interest rate exposure by effectively converting the fixed 8.7% senior debentures issued in October 2000 to a floating rate based on the six-month U.S. dollar LIBOR plus a spread through their maturities.
In July 2002, the company sold its investment in Mediagrif Interactive Technologies, Inc. for $3,714,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Sales
Consolidated sales for the first six months and second quarter of 2002 decreased 32.4 percent and 21.8 percent, respectively, compared with the year-earlier periods. This decline was principally due to a 37.1 percent and 25 percent decrease in sales of electronic components for the first six months and second quarter of 2002, respectively, principally as a result of continued lower volume from telecommunications and networking customers and the large contract manufacturers that serve them reflecting the continued low levels of business activity in those industries. Since the beginning of the economic downturn in our industry, the company's operating groups that service these customers have experienced the greatest absolute decline in sales levels. Sales have declined by 60.5 percent and 47.2 percent to such customers for the first six months and second quarter of 2002, respectively, compared with the year-earlier period. In addition, contributing to the decline is lower demand in the company's core OE
M businesses due to the weakened, general economic conditions worldwide. Historically, in our industry, Europe has trailed the business cycles experienced in North America by six to nine months; however, the company believes, the decline in activity levels in Europe, should be less than in North America due to the fact that sales to telecommunication and networking customers and the contract manufacturers that serve them is a lower percentage of total business activity in Europe, than it is in North America. Computer product sales declined 15.2 percent and 11.5 percent for the first six months and second quarter of 2002, respectively, compared with the year-earlier periods. Beginning in mid-2001, the company's computer products businesses implemented a new strategy which focused less on sales volume and placed more emphasis on profitability. While sales of computer products declined compared with the first six months and second quarter of 2002, operating income increased by 56.8 percent and 55.5 percent for
the first six months and second quarter of 2002 as compared with the year-earlier periods, respectively. In the first six months and second quarter of 2002, sales of low margin microprocessors (a product segment not considered a part of the company's core business) decreased by approximately 31.7 percent and 32.9 percent, respectively, compared with the year-earlier periods. Sales declined in Asia/Pac principally due to the termination of a single large customer engagement. Lastly, the translation of the financial statements of the company's international operations into U.S. dollars resulted in increased revenues of $2.4 million and $26.9 million for the first six months and second quarter of 2002, respectively, because of a weakening U.S. dollar compared with the year-earlier periods.
Operating Income
The company recorded operating income of $85.1 million and $40.4 million in the first six months and second quarter of 2002, compared with operating income of $252.4 million and $68.9 million in the year-earlier periods. Included in operating income for the first six months of 2002 and second quarter is severance costs of $5.4 million associated with the resignation of the company's chief executive officer. Excluding these costs, operating income for the first six months and second quarter of 2002 would have been $90.5 million and $45.8 million. Included in operating income for the first six months of 2001 is an integration charge of $9.4 million associated with the acquisition of Wyle Electronics and Wyle Systems (collectively, "Wyle") and goodwill amortization of $23.5 million. Excluding the charge and goodwill amortization, operating income for the first six months and second quarter of 2001 would have been $285.2 and $80.5 million, respectively. The reduction in operating income is principally due to the decline in sales, offset, in part by a decrease in operating expenses.
Gross profit of $634.1 million and $319.6 million for the first six months and second quarter of 2002 decreased from $926.4 million and $389 million in the year-earlier periods principally due to the 32.4 percent and 21.8 percent declines in sales for the first six months and second quarter, respectively. The gross profit margins for the six months and quarter ended June 30, 2002 improved by 20 basis points and 80 basis points, respectively, when compared to the year-earlier periods. The increase in gross profit percentage is principally due to a change in the mix of sales, which is more heavily concentrated on the businesses serving core OEM customers that typically have higher margins and fewer sales to large accounts that typically have a lower gross profit percentage, and the computer products businesses' increasing focus on higher margin business.
Interest Expense
Interest expense of $82.1 million and $40.8 million in the first six months and second quarter of 2002 decreased from $120.1 million and $54.5 million in the year-earlier periods as a result of lower debt balances. During the past twelve months, free cash flow has totaled $2 billion, thereby permitting the company to reduce debt by $838 million and increase cash by $840 million.
Income Taxes
The company recorded an income tax provision at an effective tax rate of 35.3 percent and 8.3 percent for the first six months and second quarter of 2002, respectively, compared with a provision for taxes at an effective tax rate of 40.7 percent and 55.4 percent, respectively, in the comparable year-earlier periods. The company's effective tax rate is principally impacted by, among other factors, the statutory tax rates in the countries in which it operates and the related level of earnings generated by these operations.
Net Income
The company recorded a net loss of $607 million and $6 million in the first six months and second quarter of 2002, respectively, compared with net income of $78.6 million and $7 million, respectively, in the year-earlier periods. Included in the 2002 net income is a goodwill impairment charge and the loss on disposal of the Gates/Arrow commodity computer products business as discussed below.
The company recorded earnings from continuing operations of $2.7 million and $.6 million in the first six months and second quarter of 2002, respectively, compared with earnings from continuing operations of $77.9 million and $6.3 million, respectively, in the year-earlier periods. Excluding the previously mentioned severance costs, earnings from continuing operations would have been $5.9 million ($.06 per share) and $ 3.8 million ($.04 per share) in the first six months and second quarter of 2002, respectively. Excluding the integration charge and goodwill amortization, earnings from continuing operations for the first six months and second quarter of 2001 would have been $104.0 million ($1.06 and $.97 on a basic and diluted basis, respectively) and $16.4 million ($.17 and $.16 on a basic and diluted basis), respectively. The decrease in income from continuing operations is due to the significant reduction in sales offset, in part, by a decrease in operating expenses and interest expense.
In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within the company's North American Computer Product Group that sells commodity computer products such as printers, monitors, other peripherals, and software to value-added resellers in North America. On May 31, 2002, the company completed the sale of this business unit to Synnex Information Technologies, Inc. for estimated cash proceeds of $44.7 million, subject to price adjustments, of which $37.1 million has been collected as of June 30, 2002. The remaining amount due is payable in two increments: 50 percent due 90 days after closing and the remaining 50 percent due 180 days after closing. The assets sold consisted primarily of accounts receivable, inventories, and property and equipment. The buyer also assumed certain liabilities.
The disposition of the Gates/Arrow operations represents a disposal of a "component of an entity" as defined in Statement No. 144. Accordingly, the company's financial statements have been presented to reflect Gates/Arrow as a discontinued operation for all periods. Its assets and liabilities have been segregated from continuing operations in the accompanying consolidated balance sheet, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations and related notes.
In connection with the sale of Gates/Arrow, the company recorded a loss on disposal of $6.1 million, net of the related tax benefit of $4.1 million. The loss consists of the following (in millions):
Personnel related |
$ |
1.3 |
Facilities |
|
3.1 |
Professional fees |
|
.6 |
Write-down of asset carrying value |
|
3.0 |
Other |
|
2.2 |
|
$ |
10.2 |
The personnel costs are due to the termination of 88 people employed by the Gates/Arrow business and 57 warehouse personnel of the North American Computer Products Group due to reduced activity levels as a result of the sale of Gates/Arrow. The facilities costs are principally related to vacated warehouse space no longer required due to reduced activity levels as a result of the sale of Gates/Arrow. The write-down of assets was to adjust the carrying value of the assets sold to the value agreed to under the terms of the contract of sale.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." This Statement, among other things, eliminates the amortization of goodwill and requires annual tests for determining impairment of goodwill. On January 1, 2002, the company adopted Statement No. 142, and accordingly discontinued the amortization of goodwill. As required under the transitional accounting provisions of Statement No. 142, the company completed the two steps required to identify and measure goodwill impairment for each reporting unit as of January 1, 2002. The first step involved identifying all reporting units with carrying values (including goodwill) in excess of fair value. The identified reporting units from the first step were then measured for impairment by comparing the fair value of the reporting unit, determined by reference to comparable businesses using a weighted average EBITDA multiple, with the carrying amount of the goodwill. Those reporting units having a carrying value exceeding the fair value were identified as being fully impaired, and the company fully wrote down those assets. For reporting units with potential impairment, the company obtained an independent appraisal of the fair value of the assets and liabilities of the unit and wrote down the goodwill to its implied fair value accordingly. No other impairment indicators have arisen since January 1, 2002.
In determining a reporting unit, the company looked to its current reporting structure at the date of adoption and allocated goodwill to the reporting units. In most cases, the goodwill was identifiable to specific acquisitions, so the allocation was direct. The following were determined to be the reporting units of the company: (i) North America Components, (ii) North America Computer Products, (iii) on an individual country basis for Europe Components, (iv) on an individual country basis for Europe Computer Products, (v) South America, and (vi) Asia.
As a result of the evaluation process discussed above the company recorded an impairment charge of $603.7 million, which was recorded as a cumulative effect of a change in accounting principle at January 1, 2002. Accordingly, the first quarter's results have been modified to include this charge as required under the transitional rules of Statement No. 142. The company does not have any other intangibles subject to valuation under Statement No. 142. If last year's first six months and second quarter results were restated to reflect the elimination of goodwill amortization, earnings would have increased by approximately $.21 and $.10 per share.
Severance Costs
During the second quarter of 2002, the company's chief executive officer resigned. As a result, the company recorded severance costs totalling $3.2 million (net of the related tax effect) principally based on the terms of his employment agreement. Included therein, are provisions principally related to salary continuation, retirement benefits and the vesting of restricted stock and options.
Integration Charge
During the first quarter of 2001, the company recorded an integration charge of $9.4 million ($5.7 net of the related tax effect) associated with the acquisition of Wyle. In connection with this integration, approximately 240 positions, largely performing duplicate functions, were eliminated. A summary of the integration charge is as follows (in millions):
Personnel |
$ |
4.1 |
Facilities |
|
1.5 |
Leasehold Improvements |
|
1.1 |
MIS and miscellaneous |
|
2.7 |
|
$ |
9.4 |
Of the expected $8.2 million to be spent in cash, approximately $7.4 million was spent as of June 30, 2002.
Liquidity and Capital Resources
The company maintains a significant investment in accounts receivable and inventories. As a percentage of total assets, accounts receivable and inventories were approximately 52.4 percent and 51.6 percent at June 30, 2002 and December 31 2001, respectively. At June 30, 2002, cash and short-term investments increased to $909.1 million from $556.9 million at December 31, 2001.
One of the characteristics of the company's business is that in periods of revenue growth, investments in accounts receivable and inventories grow, and the company's need for financing increases. In the periods in which revenue declines, investments in accounts receivable and inventories generally decrease, generating cash.
The net amount of cash provided by the company's operating activities during the first six months of 2002 was $486 million, principally reflecting lower working capital requirements as a result of lower sales. In addition, the company was able to improve net working capital utilization during the period. The net amount of cash used for investing activities was $97.4 million, including $110.3 million for consideration paid to acquired businesses and $21.4 million for various capital expenditures offset, in part, by the $37.1 million of cash proceeds collected on the sale of Gates/Arrow. The net amount of cash used for financing activities was $51.8 million, primarily reflecting the repayment of short-term debt, offset, in part, by proceeds from the exercise of stock options.
The net amount of cash provided by the company's operating activities during the first six months of 2001 was $675.7 million, principally reflecting changes in working capital. The net amount of cash used for investing activities was $51.8 million, including $36.3 million for various capital expenditures. The net amount of cash used for financing activities was $606 million, primarily reflecting the repayment of short-term and long-term debt, offset, in part, by proceeds from the sale of convertible debentures.
The company's three-year revolving credit facility and the asset securitization program limit the incurrence of additional borrowings and require that working capital, net worth, and certain other financial ratios be maintained at designated levels. In addition, in the event that the company's credit rating is reduced to non-investment grade by either Standard & Poor's or Moody's Investors Service, Inc. the company would no longer be able to utilize its asset securitization program in its present form. At June 30, 2002, there were no amounts outstanding under the asset securitization program or the three-year revolving credit facility.
The company's credit rating is currently investment grade, though it has been notified by Standard & Poor's and Moody's Investors Service, Inc. that it has been placed on credit watch.
On August 8, 2002, the company repurchased $250 million of its 6.45% senior notes, due in November 2003, at a price of 104.65 percent of the principal amount. The premium paid and deferred financing costs written-off upon the repurchase of this debt, aggregated approximately $11 million, net of the related tax effect, will be recognized as an extraordinary loss in the company's consolidated statement of operations in the third quarter of 2002. As a result of this transaction net interest expense will be reduced by approximately $21 million from the date of the repurchase through the original maturity date, if current interest rates remain the same. After the affect of this transaction, the company will have in excess of $600 million in cash and unutilized credit facilities of $625 million and the asset securitization program of $750 million, aggregating available credit of $1.375 billion.
In August 2002, the company entered into a series of interest rate swaps (the "swaps"), with third parties, with an aggregate notional amount of $250 million in order to hedge the change in fair value of the company's 8.7% senior debentures, due 2005, related to fluctuations in interest rates. These contracts are classified as fair value hedges and mature in October 2005. The swaps modify the company's interest rate exposure by effectively converting the fixed 8.7% senior debentures issued in October 2000 to a floating rate based on the six-month U.S. dollar LIBOR plus a spread through their maturities.
The company, in connection with certain acquisitions, may be required to make future payments that are contingent upon the acquired businesses' earnings and, in certain instances, the achievement of operating goals. During the second quarter of 2002, the company made such payments aggregating $108.5 million in connection with three acquisitions, which have been capitalized as cost in excess of net assets of companies acquired. The company may be contractually required to make these types of payments in the future. Based on the performance of those businesses, for which contingent payments remain open as of June 30, 2002, the company currently estimates such payments to be approximately $15 million.
Information Relating to Forward-Looking Statements
This report includes forward-looking statements that are subject to certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing, and customer demand, competition, other vagaries in the electronic components and computer products markets, and changes in relationships with key suppliers. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The company is exposed to market risk from changes in foreign currency exchange rates and interest rates.
The company, as a large international organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material impact on the company's financial results in the future. The company's primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe, the Asia/Pacific region, and Latin and South America. At the present time, the company hedges only those currency exposures for which natural hedges do not exist. Natural hedges exist when purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange contract. In Asia, for example, sales and purchases are primarily denominated in U.S. dollars, resulting in a "natural hedge". Natural hedges exist in most countries in which the company operates, although the percentage o f natural offsets vs. offsets which need to be hedged by foreign exchange contracts will vary from country to country. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Had the various average foreign currency exchange rates remained the same during the first six months of 2002 as compared with December 31, 2001, 2002 sales and operating income would have been $6 million and $.4 million lower, respectively, than the reported results. Sales and operating income would have fluctuated by approximately $11 million and $1 million, respectively if average foreign exchange rates had changed by one percentage point in 2002. This amount was determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company's international operations.
The company's interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company historically has managed its exposure to interest rate risk through the proportion of fixed rate and variable rate debt in its total debt portfolio. At June 30, 2002, as a result of significant generation of operating cash flow, the company had paid down nearly all of its variable rate debt with the net result being that approximately 99 percent of the company's debt was subject to fixed rates and 1 percent of its debt was subject to variable rates. Interest expense, net of interest income, would have fluctuated by approximately $4 million if average interest rates had changed by one percentage point during the first six months of 2002. This amount was determined by considering the impact of a hypothetical interest rate on the company's average variable rate of investments and outstanding borrowings. This analysis does not consider the effect of the
level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company's financial structure.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10(i) Consulting Agreement, dated as of June 3, 2002, between the
company and Stephen R. Kaufman
10(ii) Amended and Restated Agreement, dated as of June 13, 2002,
between the company and Francis M. Scricco
(b) Reports on Form 8-K
None
A certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanies this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARROW ELECTRONICS, INC.
Date: August 12, 2002 By:/s/ Paul J. Reilly
Paul J. Reilly
Chief Financial Officer
Arrow Electronics, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Quarterly Report of Arrow Electronics, Inc (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen P. Kaufman, Chief Executive Officer of the Company, certify, pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. Sections 1350(a) and (b)), that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
and
(2) The information in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the Company.
Dated: August 12, 2002
By: /s/ Stephen P. Kaufman
Stephen P. Kaufman
Chief Executive Officer
Arrow Electronics, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Quarterly Report of Arrow Electronics, Inc (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul J. Reilly, Chief Financial Officer of the Company, certify, pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. Sections 1350(a) and (b)), that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); and
(2) The information in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the Company.
Dated: August 12, 2002
By: /s/ Paul J. Reilly
Paul J. Reilly
Chief Financial Officer
3
CONSULTING AGREEMENT
This Consulting Agreement is entered into as of June 3, 2002 (the "Effective Date") by and between Arrow Electronics, Inc., a New York Corporation (the "Company"), and Stephen R. Kaufman (the "Consultant").
WHEREAS, the Consultant is currently serving as the Chairman of the Board of Directors of the Company (the "Board"), and has previously also served as the Chief Executive Officer of the Company, pursuant to the Employment Agreement, dated as of the 22nd day of February, 1995, as amended as of December 31, 2001 (the "Employment Agreement");
WHEREAS, the Consultant's "Employment Period" under the Employment Agreement (as amended) will terminate on July 31, 2002 or such later date as may be mutually agreed to in writing by the Company and the Consultant;
WHEREAS, the Company wishes to avail itself of the Consultant's knowledge, expertise and experience by hiring the Consultant as a consultant for a period of five years following the expiration of the Employment Period; and
WHEREAS, the Consultant is willing to serve as a consultant to the Company during such period upon the terms and conditions set forth below;
NOW THEREFORE, the Company and the Consultant agree as follows:
The Consultant shall promptly furnish in writing to the Company, its subsidiaries or affiliates, any information reasonably requested by the Company (including any third party confirmations) with respect to any activity or interest the Consultant may have in any business, which business could reasonably be construed to be competitive with the principal business or businesses then conducted by the Company, its subsidiaries or affiliates.
If the business of the Company, its subsidiaries and/or its affiliates is expanded due to a merger, consolidation, acquisition of assets, reorganization or similar transaction, then for purposes of applying this Section 4, references to the business of the Company, its subsidiaries and its affiliates shall refer to the business as conducted immediately prior to any such transaction.
Arrow Electronics, Inc.
25 Hub Drive
Melville, New York 11747
Attention: Senior Vice President and General Counsel;
provided, however, that either party may, by notice to the other, change his or its address for notice hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
ARROW ELECTRONICS, INC.
By:/s/ Robert E. Klatell
Name: Robert E. Klatell
Title: Executive Vice President
CONSULTANT
/s/ Stephen R. Kaufman
4:
AMENDED AND RESTATED AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, made as of the 13th day of June, 2002, by and between Arrow Electronics, Inc., a New York corporation (the "Corporation"), and Francis M. Scricco (the "Executive"), hereby amends and restates that certain Agreement, made as of the 10th day of June, 2002, by and between the Corporation and the Executive.
WHEREAS, the Executive has served as President and Chief Executive Officer of the Corporation;
WHEREAS, the Executive and the Corporation have entered into an employment agreement dated as of the first day of July, 2000 (the "Employment Agreement"); and
WHEREAS, the Executive and the Corporation have agreed that the Executive will separate from employment with the Corporation on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and of the mutual agreements herein contained, the Executive and the Corporation agree with each other as follows:
1. Resignation. The Executive hereby resigns from his positions as President and Chief Executive Officer of the Corporation and resigns his membership on the Board of Directors of the Corporation (the "Board"), and from any and all offices and directorships of any and all corporations and other entities controlling, controlled by or under common control with the Corporation (the "Affiliated Companies"), effective as of 3:45 P.M. on June 10, 2002 (the "Effective Date").
2. Continuing Payments and Benefits. In lieu of any other cash payments or benefits to which the Executive may be entitled under the Employment Agreement or otherwise, provided that the Executive shall not have revoked this Agreement pursuant to Section 4(g) hereof, the Executive shall receive the following:
(a) Separation Payments. During the period commencing on the Effective Date and continuing through June 30, 2004 (the "Term"), the Executive shall receive separation payments, payable in equal monthly installments, at an annualized rate of $1,333,333.
(b) Other Payments. In exchange for the surrender by the Executive on the Effective Date of employee stock options to purchase 23,000 shares of common stock, $1 par value ("Common Stock"), of the Corporation, which options were granted to the Executive under the Arrow Electronics, Inc. Stock Option Plan (the "Option Plan") on February 27, 2002, the Executive shall receive a payment of $200,000 upon the date of the expiration of the Revocation Period (as defined in Section 4(g); such date, the "Revocation Expiration Date"). In addition, the Executive shall receive a payment of $50,000 on the Revocation Expiration Date to be applied by the Executive to his transition costs and expenses at his discretion and with no obligation to account to the Corporation with respect to such costs and expenses.
(c) Stock Options. The Executive shall be entitled to retain and exercise all employee stock options ("Stock Options") heretofore granted to him under the Option Plan and listed in Schedule 1, in accordance with the terms and conditions of the Stock Options; provided, however, that (i) all Stock Options which were originally scheduled to become exercisable or "vest" on or prior to June 30, 2004 shall vest on the Revocation Expiration Date, (ii) all Stock Options that are vested or vest on the Revocation Expiration Date as aforesaid shall remain exercisable until the earlier of the expiration of their full terms or June 30, 2007, and (iii) no provision contained in any Stock Option which provides the Corporation with a right of first refusal to purchase the shares of Common Stock covered thereby shall be applicable after the Effective Date. For the avoidance of doubt, any Stock Options which were not originally scheduled to become exer cisable or vest on or prior to June 30, 2004 shall be forfeited as of the date hereof.
(d) Restricted Stock. (i) All shares of Common Stock (the "Restricted Stock") heretofore awarded to the Executive under the Arrow Electronics, Inc. Restricted Stock Plan (the "Restricted Stock Plan") and listed in Schedule 1 and which were originally scheduled to become free of restrictions or "vest" on or before June 30, 2004, shall vest on the Revocation Expiration Date; (ii) 4,705 shares of Restricted Stock which were originally scheduled to vest on February 21, 2005, shall vest on the Revocation Expiration Date; and (iii) no provisions contained in any Restricted Stock award which provide the Corporation with a right of first refusal to purchase the Restricted Stock shall be applicable after the Effective Date. For the avoidance of doubt, except as provided above, any shares of Restricted Stock that are not scheduled to become free of restrictions or vest on or before June 30, 2004 shall be forfeited and rescinded as of the date h ereof.
(e) Supplemental Executive Retirement Plan. Commencing at age 60, the Executive (or his surviving spouse, as the case may be) shall be entitled to receive an annual lifetime benefit as hereinafter provided, in accordance with the provisions of the Corporation's Unfunded Pension Plan for Selected Executives (the "SERP"). For the avoidance of doubt, the Executive (or his surviving spouse, as the case may be) shall be entitled to receive such benefit regardless of whether the SERP is amended or terminated after the Effective Date. Such benefit shall be in the form of a joint and 50% surviving spouse lifetime annuity as provided for in the SERP, with a $150,000 annual lifetime benefit payable to the Executive and a $75,000 annual lifetime benefit payable to the Executive's spouse for any period in which she survives him (regardless of the date of his death). The Executive hereby elects in accordance with the SERP the optional joint and 50 % surviving spouse lifetime annuity provided for in the SERP. Promptly after the Revocation Expiration Date, the Corporation will deposit in the rabbi trust which has been created pursuant to the SERP, with Wachovia Bank, as the trustee, for the benefit of the Executive (or his surviving spouse, as the case may be), in an account for the exclusive benefit of the Executive and the Corporation's creditors, an amount which is equal to the present value actuarially determined in accordance with the SERP, of the actuarially determined aggregate benefit payable to the Executive (or his surviving spouse, as the case may be) pursuant to the SERP as contemplated in this Subsection 2(e). As promptly as practicable, the Corporation shall take such further action as is necessary to entitle the Executive (or his surviving spouse, as the case may be) to the benefits contemplated in this Subsection 2(e).
(f) Other Benefits. During the Term, the Executive, his spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan), as the case may be, shall be entitled to participate in or be covered under all medical, dental and other health plans and programs of the Corporation (the "Health Benefit Plans") at such levels of participation and benefits as were available to the Executive and his spouse and dependents under the Health Benefit Plans as of the Effective Date. Without limiting the generality of the foregoing, from time to time during the Term, the Executive shall be permitted to elect or eliminate any coverage for any spouse or dependents that may be available under any Health Benefit Plan, subject to the terms and conditions of such Health Benefit Plan.
(g) Expenses and Perquisites.
(i) The Executive shall be entitled to prompt reimbursement for all business expenses incurred by him prior to the Effective Date, in accordance with the policies and procedures of the Corporation.
(ii) The Corporation shall promptly pay the amount of $65,000 to the Law Offices of Joseph E. Bachelder (the "Law Firm") in satisfaction of all legal fees and other expenses incurred by the Law Firm in connection with the negotiation of the Executive"s separation from employment with the Corporation and the preparation of this Agreement, subject to the Law Firm providing the Corporation with appropriate documentation of such fees and expenses.
(iii) The Corporation agrees to reimburse the Executive for the reasonable costs incurred by the Executive in connection with obtaining and maintaining an appropriate office, including appropriate furnishings, equipment and utilities, and secretarial services, at a location in the Cold Spring Harbor, New York area selected by the Executive, from September 3, 2002 through September 3, 2003. The amounts provided for above shall be paid promptly upon the request of the Executive which is accompanied by appropriate documentation thereof.
3. Indemnification
(a) The Corporation agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he was a director, officer or employee of the Corporation or was serving at the request of the Corporation as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent (a "Proceeding"), the Executive shall be indemnified and held harmless by the Corporation to the fullest extent legally permitted or authorized by the Corporation's certificate of incorporation or bylaws or resolutions of the Board (in each case as in effect on the Effecti ve Date) or, if greater, by the laws of the State of New York, against all cost, expense, liability and loss (including, without limitation, attorneys' fees and expenses, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even though he has ceased to be a director, officer, member, employee or agent of the Corporation or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators; provided, however, that the Corporation shall have no obligation to indemnify or hold harmless the Executive if a judgment or other final adjudication adverse to the Executive establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled. Any requests for indemnification shall be made by the Executive in writing to the Corporation and such requests shall be handled in the manner provided therefor by the bylaws of the Corporation. Notwithstanding the foregoing, in the event that the Corporation's certificate of incorporation or its bylaws or the laws of the State of New York are amended to provide greater protections to the indemnified party, the Executive shall be entitled to the benefit of such amendments. The Corporation shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after the receipt by the Corporation of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses.
(b) The Corporation shall cause the Executive to continue to be covered, until the sixth anniversary of the Effective Date, by the policies of directors' and officers' liability insurance maintained by the Corporation for directors and senior officers generally as in effect from time to time; provided, that if there is any claim affecting the Executive outstanding and unresolved as of such sixth anniversary, such insurance shall be continued in respect of such claim until final disposition thereof.
4. Acknowledgment and Release.
(a) The Corporation for and on behalf of itself, its Affiliated Companies, and the directors, officers, agents, consultants and assigns of the Corporation and its Affiliated Companies (collectively, "Corporation Released Parties") hereby unconditionally and forever waives, discharges and releases any common law, statutory or other complaint, claim, demand, obligation, liability or cause of action that the Corporation or any Corporation Released Party has, may have had or now has against the Executive or his dependents, heirs, legal representatives, administrators, agents, executors, successors and assigns (collectively, the "Executive Released Parties") arising out of or relating to the Executive's employment, or termination thereof, with the Corporation, or his serving in any capacity in respect of the Corporation or any of the Affiliated Companies, whether known or unknown, in law or in equity, including, but not limited to, any complaint, claim, demand, obligation, liability or cause of action arising under any federal, state or local law or ordinance, tort, contract, or breach of public policy theory, or alleged violation of any other legal, contractual or fiduciary obligation. Anything herein to the contrary notwithstanding, nothing herein shall release any Executive Released Party from any claims or damages based on (i) any right or claim the Corporation may have pursuant to this Agreement, (ii) any right or claim that arises out of conduct of the Executive occurring after the Effective Date, (iii) any right the Corporation may have to obtain contribution as permitted by law in the event of entry of judgment against it as a result of any act or failure to act for which the Corporation and the Executive are jointly liable, or (iv) any criminal conduct by the Executive.
(b) The Executive for himself and on behalf of any Executive Released Party hereby unconditionally and forever waives, discharges and releases any common law, statutory or other complaint, claim, demand, obligation, liability or cause of action that the Executive or any Executive Released Party has, may have had or now has against the Corporation or any Corporation Released Party arising out of or relating to the Executive's employment, or termination thereof, with the Corporation, or his serving in any capacity in respect of the Corporation or any of the Affiliated Companies, whether known or unknown, in law or in equity, including, but not limited to, any complaint, claim, demand, obligation, liability or cause of action regarding any severance benefit which but for this Agreement might have been due the Executive under any previous agreement executed by and between the Corporation or any Affiliated Companies and the Executive, and any com plaint, claim, demand, obligation, liability or cause of action arising out of his employment, or termination thereof, with the Corporation under the Age Discrimination in Employment Act of 1967 ("ADEA," a law which prohibits termination on the basis of age), as amended (including the Older Workers Benefit Protection Act); the National Labor Relations Act, as amended; the Civil Rights Act of 1991; 42 U.S.C. 1981, as amended; the Americans with Disabilities Act of 1990; Title VII of the Civil Rights Act of 1964, as amended; the Employee Retirement Income Security Act of 1974, as amended (except for any claim which cannot be waived by law); the New York State Human Rights Act, the New York State Labor Laws; and any other federal, state and local laws. Anything herein to the contrary notwithstanding, nothing herein shall release the Corporation or any Corporation Released Party from any claims or damages based on (i) any right or claim the Executive may have pursuant to this Agreement, (ii) any right or claim that arises out of conduct occurring after the Effective Date, (iii) any right that the Executive may have to benefits or entitlements under the Health Benefit Plans, the SERP, the Stock Options, and the awards with respect to the Restricted Stock, as contemplated in Section 2 of this Agreement, (iv) any right that the Executive may have to benefits or entitlements under any other qualified pension plans and any conversion or continuation rights under any other welfare plans of which the Executive was a participant as of the Effective Date, or (v) any right the Executive may have to obtain contribution as permitted by law in the event of entry of judgment against him as a result of any act or failure to act for which the Executive and the Corporation are jointly liable.
(c) As of the Effective Date, the Executive and the Corporation acknowledge that they have not filed or assigned to any other party any complaint, charge, claim or proceeding against each other or any Corporation Released Party or Executive Released Party before any local, state or federal agency, court or other body relating to any claims released herein (each individually a "Section 4 Proceeding"). The Executive and the Corporation represent that they are not aware of any basis on which such a Section 4 Proceeding could reasonably be instituted.
(d) (i) The Executive (A) acknowledges that he will not initiate or cause to be initiated on his behalf any Section 4 Proceedings and will not participate in any Section 4 Proceeding, in each case, except as required by law; and (B) waives any right he may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any Section 4 Proceeding, including any Proceeding conducted by the Equal Employment Opportunity Commission ("EEOC"). Further, the Executive understands that by entering into this Agreement, he will be limiting the availability of certain remedies that he might have against the Corporation and limiting also his ability to pursue certain claims released herein against the Corporation Released Parties.
(ii) Notwithstanding the foregoing, nothing in this Section 4 shall prevent the Executive from (A) initiating or causing to be initiated on his behalf any complaint, charge, claim or proceeding against the Corporation before the EEOC or any court of competent jurisdiction challenging the validity of the waiver of his claims under ADEA contained in Section 4 of this Agreement (but no other portion of such waiver); or (B) initiating or participating in an investigation or proceeding conducted by the EEOC with respect to ADEA. Notwithstanding the foregoing, if the Executive exercises any right with respect to ADEA under Section 4 of this Agreement, the Corporation shall have all of the defenses that would otherwise have been available to it in the absence of this Agreement.
(e) The Corporation (i) acknowledges that it will not initiate or cause to be initiated on its behalf any Section 4 Proceedings and will not participate in any Section 4 Proceeding, in each case, except as required by law; and (ii) waives any right it may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any Section 4 Proceeding. Further, the Corporation understands that by entering into this Agreement, it will be limiting the availability of certain remedies that it might have against the Executive and limiting also its ability to pursue certain claims released herein against the Executive Released Parties.
(f) THE EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN GIVEN AND HAS WAIVED THE OPPORTUNITY TO CONSIDER THIS AGREEMENT FOR AT LEAST 21 DAYS, THAT HE HAS READ THIS AGREEMENT CAREFULLY, HAS BEEN ADVISED BY THE CORPORATION TO, AND HAS IN FACT, CONSULTED AN ATTORNEY, AND FULLY UNDERSTANDS THAT BY SIGNING BELOW HE IS GIVING UP CERTAIN RIGHTS WHICH HE MAY HAVE, TO SUE OR ASSERT A CLAIM AGAINST ANY OF THE CORPORATION RELEASED PARTIES, AS DESCRIBED IN THIS SECTION 4. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS NOT BEEN FORCED OR PRESSURED IN ANY MANNER WHATSOEVER TO SIGN THIS AGREEMENT AND THE EXECUTIVE AGREES TO ALL OF ITS TERMS VOLUNTARILY.
(g) The Executive shall have seven days (the "Revocation Period") from the Effective Date to revoke this Agreement, including the release given under this Section 4 with respect to all claims referred to herein (including, without limitation, any and all claims arising under ADEA). If the Executive revokes this Agreement within the Revocation Period including, without limitation, the release given under this Section 4, neither the Executive nor the Corporation will be deemed not to have accepted the terms of this Agreement, including without limitation any action required of the Corporation by any Section of this Agreement. Notwithstanding the foregoing, no act, or failure to act, by the Executive in consequence of the negotiation, execution or revocation of this Agreement shall be deemed to be a voluntary resignation by the Executive under the Employment Agreement and no act, or failure to act, by the Executive in consequence of the neg otiation, execution or revocation of this Agreement shall provide the Corporation with grounds to terminate the Executive for Cause (as that term is defined in the Employment Agreement) pursuant to the Employment Agreement; provided, however, that if the Executive revokes this Agreement, his employment by the Corporation as President and Chief Executive Officer, his membership on the Board and his service in any offices or on any directorships of any Affiliated Companies shall nonetheless terminate as of the Effective Date.-
5. Return of Corporation Property.
No later than the Effective Date, the Executive shall return to the Corporation (A) all originals and copies of papers, notes and documents (in any medium, including computer disks) relating to the business or affairs of the Corporation and its Affiliated Companies, whether property of the Corporation or any of its Affiliated Companies which are in his possession or under his control, and (B) all equipment and property of the Corporation or any of its Affiliated Companies which are in the Executive's possession or under his control, whether at the Corporation's offices, the Executive's home or elsewhere, except for any documents or equipment for which the Corporation or any of its Affiliated Companies has given written consent for the Executive either to remove or retain. Anything herein to the contrary notwithstanding, the Executive shall be entitled to retain (i) any computers and any other office equipment at his home office, (ii) personal awards and recognition gifts, (ii i) papers and other materials of a personal nature, including, but not limited to, photographs, personal diaries, calendars and Rolodexes, personal files and phone books, (iv) information showing his compensation or relating to reimbursement of expenses, (v) information that he reasonably believes may be needed for tax purposes and (vi) copies of Corporation agreements, plans, policies, programs or other arrangements relating to his employment, or termination thereof, with any member of the Corporation and its Affiliated Companies; provided, however, that the Corporation shall have the right to review any of the foregoing to confirm that no documents or information not coming within this exception are being retained by the Executive. As of the Effective Date, all business credit cards provided to the Executive by the Corporation shall be cancelled by the Corporation.
6. Announcements and Communications. (a) Simultaneously with or as soon as practicable after the execution of this Agreement, the Corporation shall announce the Executive's separation from employment with the Corporation. The public announcement of the Executive's separation from employment with the Corporation shall be in substantially the form attached to this Agreement as Exhibit A. Promptly after 4 P.M. on the day after the Effective Date, the Corporation shall send, on the Executive's behalf, an e-mail to all employees of the Corporation in substantially the form attached to this Agreement as Exhibit B.
(b) The Executive and the Corporation agree not to make any public statement inconsistent with the announcements referred to in Subsection (a) above. The Executive shall not intentionally make any public statements which disparage or defame the goodwill or reputation of the Corporation or any of the Affiliated Companies. The Corporation shall not intentionally make any public statements which disparage or defame the Executive's reputation and shall make reasonable efforts to cause the directors and officers of the Corporation to comply with this provision.
(c) The Corporation agrees that, from the Effective Date until the first anniversary of the Effective Date, the Corporation shall forward to the Executive all mail, e-mail and telephone messages which are addressed to the Executive at the Corporation and which are of a personal nature and unrelated to the business of the Corporation.
7. Availability of Relief.
The Executive acknowledges and agrees that the remedy at law available to the Corporation for breach of any of his obligations under this Agreement, including but not limited to his obligations under Sections 4, 5, and 6 of this Agreement, would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, the Executive acknowledges, consents and agrees that, in addition to any other rights or remedies which the Corporation may have at law, in equity or under this Agreement, upon adequate proof of his violation of any such provision of this Agreement, the Corporation shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage.
8. Entire Agreement.
(a) Except as otherwise specifically provided in Subsections (b) and (c) below, this Agreement is the entire agreement between the parties with respect to the subject matter hereof and contains all agreements, whether written, oral, express or implied, between the parties relating thereto and supersedes and extinguishes any other agreement relating thereto, whether written, oral, express or implied, between the Parties.
(b) This Agreement supersedes the Employment Agreement, which shall be deemed terminated from and after the date hereof without any remaining obligation of either party thereunder; provided, however, that notwithstanding the foregoing, the provisions of Paragraphs 9 and 10 of the Employment Agreement shall not terminate and shall remain in full force and effect in accordance with their terms. For the avoidance of doubt, (i) the provisions of Paragraph 9 of the Employment Agreement shall terminate on June 30, 2004, (ii) the provisions of Paragraph 10(a) of the Employment Agreement shall terminate on the Effective Date, (iii) the obligations of the Executive set forth in Paragraph 10(b) of the Employment Agreement shall apply only with respect to (A) any methods, developments, inventions, processes, discoveries and/or improvements acquired, conceived of or made, and (B) writings or other materials written or produced, by the Executive, in each case, during the period beginning July 1, 2000 and ending on the Effective Date, and (iv) and the provisions of Paragraph 10(c) of the Employment Agreement shall be deemed to become effective upon the Revocation Date.
(c) Except to the extent specifically provided in this Agreement, the Executive shall not have any rights under the Employment Agreement, the Health Benefit Plans, the SERP, the Stock Options, the awards with respect to the Restricted Stock and any other Corporation agreement, plan, policy, program or other arrangement. For the avoidance of doubt, (i) in the event of any inconsistency between the terms of this Agreement and the terms of any other Corporation plan, policy, program or other arrangement, the terms of this Agreement shall control, (ii) to the extent that any Corporation plan, policy, program or other arrangement has provisions relating to the reason for termination of employment, the Executive shall be treated thereunder as having been terminated by the Corporation "without cause", and (iii) nothing in any other Corporation plan, policy, program or other arrangement shall be deemed to provide any payments or benefits that duplicate any paym ents or benefits provided hereunder.
9. Miscellaneous.
(a) Notices. Any notice given pursuant to this Agreement to any party hereto shall be deemed to have been duly given (i) two days after being mailed by registered or certified mail, return receipt requested or (ii) when hand delivered (including delivery by a recognized courier service with a signed acknowledgement of delivery) as follows:
If to the Company:
Arrow Electronics, Inc.
25 Hub Drive
Melville, New York 11747
Attention: Senior Vice President and General Counsel
with a copy to:
Milbank, Tweed, Hadley & Mccloy LLP
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile No.: (212) 822-5530
Attn: Howard S. Kelberg, Esq.
If to the Executive:
Francis M. Scricco
428 Harbor Road
Cold Springs Harbor, New York 11724
with a copy to:
Law Offices of Joseph E. Bachelder
780 Third Avenue, 29th Floor
New York, New York 10017
Attention: Joseph E. Bachelder, Esq.
or at such other address as either party shall from time to time designate by written notice, in the manner provided herein, to the other party hereto.
(b) Arbitration. (i) Except as otherwise provided herein, any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration, to be held in the New York City metropolitan area in accordance with the commercial arbitration rules and procedures of the American Arbitration Association.
(ii) Each party shall appoint one arbitrator, and the two party appointed arbitrators shall appoint a third arbitrator, who shall serve as the chairperson of the three-member arbitration panel.
(iii) Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.
(iv) Each party shall bear all costs and expenses of such arbitration, including reasonable attorneys' fees and expenses, except to the extent that the arbitrators determine that the prevailing party shall be entitled to have its or his costs paid by the other party. Pending the resolution of any disputes, the Corporation shall continue payment of all amounts due to the Executive under this Agreement and all benefits to which the Executive is entitled at the time the dispute arises.
(c) Non-Admission of Liability. By entering into this Agreement, neither party admits, and each specifically denies, any liability, wrongdoing or violation of any law, statute, regulation or policy, and it is expressly understood and agreed that this Agreement is being entered into solely for the purpose of amicably resolving all matters in controversy of any kind whatsoever between the Corporation and the Executive. Moreover, by signing this Agreement, the Executive acknowledges he is not aware of any wrongdoing on the part of the Corporation.
(d) (i) Corporation Representations and Warranties. The Corporation represents and warrants that (A) it is fully authorized and empowered to enter into this Agreement and this Agreement has been duly authorized by the Board (and, to the extent required, by the appropriate committees of the Board), (B) the officer signing this Agreement is duly authorized and empowered to do so, (C) the execution, delivery or performance of its obligations pursuant to this Agreement will not violate any applicable law, regulation, order, judgment or decree or any agreement or corporate governance document to which the Corporation is a party or by which it is bound, (D) it has received all necessary approvals, if any, of any third party, (E) upon the execution and delivery of this Agreement by the parties, it shall be a valid and binding obligation of the Corporation, enforceable against it in accordance with its terms, except to the extent that enforce ability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and (F) the Board (and, to the extent required, the appropriate committees of the Board) has taken any and all action which is necessary or desirable to implement the terms and conditions of this Agreement at or before the Effective Date.
(ii) Executives Representations and Warranties. The Executive represents and warrants that (A) he has read and understands this Agreement, is fully aware of its legal effect, and has consulted an attorney with respect thereto, and (B) is entering into this Agreement knowingly and voluntarily for the purpose of making a full and final settlement of all rights and claims he may have in connection with his employment or the termination of his employment with the Corporation.
(d) Successors and Assigns. (i) This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Corporation under this Agreement may be assigned or transferred by the Corporation except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Corporation is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Corporation, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Corporation and such assignee or transferee assumes the liabilities, obligations and duties of the Corporation, as contained in this Agreement, either contractually or as a matter of law. The Corporation further agrees that, in the event of a sale or liquidation of all or substanti ally all of its assets as described in the preceding sentence, it shall take whatever action it reasonably can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Corporation hereunder.
(ii) No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law or as otherwise provided by the terms of any Corporation agreement, plan, policy, program or other arrangement. In the event of the Executive's death or a judicial determination of his incompetence, the separation payments and other benefits due to the Executive under this Agreement shall be paid to his estate, legal representative or designated beneficiary or beneficiaries, as the case may be, and any references in this Agreement to the Executive shall be deemed to refer, where appropriate, to his estate or other legal representative or to his designated beneficiary or beneficiaries.
(e) Taxes. The Executive shall be responsible for the payment of any and all required federal, state, local and foreign taxes incurred, or to be incurred, in connection with any amounts payable to the Executive under this Agreement. Notwithstanding any other provision of this Agreement, the Corporation may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws and regulations.
(f) Severability. In the event that any provision of this Agreement is determined to be invalid or unenforceable, the remaining terms and conditions of this Agreement shall be unaffected and shall remain in full force and effect.
(g) Counterparts. This Agreement may be executed by one or more of the parties hereto on any number of separate counterparts and all such counterparts shall be deemed to be one and the same instrument. Each party hereto confirms that any facsimile copy of such party's executed counterpart of this Agreement (or its signature page thereof) shall be deemed to be an executed original thereof.
(h) No Offset/Mitigation. The Executive shall be under no obligation to seek other employment or to become self-employed and there shall be no offset against amounts due the Executive under this Agreement or otherwise, on account of any remuneration attributable to any subsequent employment that he may obtain or on account of any claim that the Corporation or any Affiliated Companies may have against him.
(i) Governing Law/Venue. This Agreement shall be governed by, and construed in accordance with the internal laws of the State of New York, without regard to principles of conflicts of law.
(j) Captions/Headings. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.
(k) Amendment/Waiver. This Agreement may not be modified or amended, nor may any rights under it be waived, otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. Neither the Executive's nor the Corporation's failure to insist upon strict compliance with any provision hereof shall be deemed to be a waiver of such provision or any other provision thereof.
(l) Availability of Executive. The Executive agrees to make himself available, at reasonable times and so as not to interfere with any employment, business or family obligations, to assist the Corporation and its representatives with the prosecution and defense of any legal proceedings involving matters of which the Executive may have relevant knowledge. The Corporation will reimburse the Executive for such reasonable expenses as the Executive may incur in providing such assistance upon his submission of appropriate documentation, which shall include a mutually agreeable reasonable per diem for any time spent in satisfaction of this obligation in excess of 5 days per year.
* * *
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the Effective Date.
ARROW ELECTRONICS, INC.
By:/s/ Robert E. Klatell
Name: Robert E. Klatell
Title: Executive Vice President
/s/ Francis M. Scricco
Francis M. Scricco