Filed Pursuant to Rule 424(b)(2)
Registration No. 333-50572
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION. WE ARE NOT USING THIS PROSPECTUS TO
OFFER TO SELL THESE SECURITIES OR TO SOLICIT OFFERS TO BUY THESE SECURITIES IN
ANY PLACE WHERE THE OFFER AND SALE IS NOT PERMITTED.
Subject to Completion, dated June 23, 2003
PROSPECTUS SUPPLEMENT
(to Prospectus dated February 15, 2001)
[ARROW ELECTRONICS LOGO]
ARROW ELECTRONICS, INC.
$250,000,000
% Notes due 2013
Interest payable and
Issue price: %
The notes will mature on , 2013. Interest on the notes will accrue
from June , 2003, and the first interest payment date will be . We
may redeem the notes, in whole or in part, at any time prior to maturity at the
redemption price described in this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
------------------------------------------------------------------------------------------------------------------
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO ARROW
------------------------------------------------------------------------------------------------------------------
Per Note % % %
------------------------------------------------------------------------------------------------------------------
Total $ $ $
------------------------------------------------------------------------------------------------------------------
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from June , 2003 and must
be paid by the purchasers if the notes are delivered after June , 2003. The
notes will not be listed on any national securities exchange. Currently, there
is no public market for the notes.
The underwriters expect to deliver the notes to investors through the book-entry
delivery system of The Depository Trust Company on or about June , 2003.
------------------------------
GOLDMAN, SACHS & CO. JPMORGAN BANC OF AMERICA SECURITIES LLC
------------------------------
CREDIT SUISSE FIRST BOSTON
FLEET SECURITIES, INC.
HSBC
SCOTIA CAPITAL
WACHOVIA SECURITIES
June , 2003
In making your investment decision, you should rely only on the information
contained in or incorporated by reference in this prospectus supplement and the
accompanying prospectus. We and the underwriters have not authorized anyone to
provide you with any additional information. If you receive any other
information, you should not rely on it. Any statement contained in this
prospectus supplement will be deemed to modify and supercede any previous
statement contained or incorporated by reference in the accompanying prospectus.
This prospectus supplement and accompanying prospectus do not constitute an
offer to sell, or the solicitation of an offer to buy, the notes offered by this
prospectus supplement and the accompanying prospectus in any jurisdiction where
the offer or sale is not permitted. Neither the delivery of this prospectus
supplement and the accompanying prospectus nor any distribution of notes
pursuant to this prospectus supplement and the accompanying prospectus shall,
under any circumstances, create any implication that there has been no change in
the information set forth in or incorporated by reference into this prospectus
supplement and the accompanying prospectus or in our affairs since the date of
this prospectus supplement.
As used in this prospectus supplement, the terms "Arrow," the "Company,"
"we," "us" and "our" refer to Arrow Electronics, Inc. and its subsidiaries,
unless the context indicates otherwise.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary..................................................... S-3
Forward-Looking Information................................. S-7
Use of Proceeds............................................. S-7
Consolidated Ratios of Earnings to Fixed Charges............ S-8
Capitalization.............................................. S-9
Selected Historical Financial Data.......................... S-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-12
Business.................................................... S-28
Management Overview......................................... S-31
Description of the Notes.................................... S-32
Underwriting................................................ S-35
Legal Matters............................................... S-36
PROSPECTUS
About This Prospectus....................................... 2
Where You Can Find More Information......................... 2
Arrow....................................................... 3
Use of Proceeds............................................. 4
Consolidated Ratios of Earnings to Fixed Charges............ 4
Description of Debt Securities.............................. 5
Plan of Distribution........................................ 24
Validity of Securities...................................... 25
Experts..................................................... 25
S-2
SUMMARY
This summary highlights selected information from this prospectus
supplement and may not contain all the information that is important to you. You
should read the following summary together with the more detailed information
and financial statements and notes to the financial statements contained
elsewhere or incorporated by reference in this prospectus supplement or the
accompanying prospectus, as described under the heading "Where You Can Find More
Information" in the accompanying prospectus. To fully understand this offering,
you should read all these documents.
ARROW ELECTRONICS, INC.
We are one of the world's largest providers of electronic components and
computer products to industrial and commercial customers and a leading provider
of services, including materials planning, programming and assembly services,
inventory management, a suite of online supply chain tools, and design services,
to the electronics industry. We believe we are one of the electronics
distribution industry's leaders in operating systems, employee productivity,
value-added programs, and total quality assurance. We are a leading distributor
for over 600 suppliers.
Our global distribution network spans the world's three largest electronics
markets -- the Americas, Europe, and the Asia/Pacific region. We serve a
diversified base of original equipment manufacturers (OEMs), contract
manufacturers, and commercial customers worldwide. OEMs include manufacturers of
computer and office products, industrial equipment (including machine tools,
factory automation, and robotic equipment), telecommunications products,
aircraft and aerospace equipment, and scientific and medical devices. Commercial
customers are mainly value-added resellers and OEMs of computer systems. We
maintain over 190 sales facilities and 21 distribution centers in 40 countries
and territories. Through this network, we can offer one of the broadest product
offerings in the industry and a wide range of value-added services to help
customers reduce their time to market, lower their total cost of ownership, and
enhance their overall competitiveness.
RECENT DEVELOPMENTS
On May 28, 2003, we announced that we are continuing to take actions to
increase our operational and organizational efficiencies. These actions, across
multiple locations and functions, will eliminate approximately 400 jobs
(approximately 3 percent of our global work force) and will include a further
rationalization of our physical logistics network. We expect to realize
approximately $25 million of annual operating expense savings, with the majority
of the expense reduction being realized at the beginning of the third quarter of
2003. We will record restructuring charges of between $12 million and $15
million in connection with these actions and expect that about half of the
charges will be included in our second quarter results.
On June 17, 2003, Moody's Investors Service affirmed the Baa3 rating for
our senior unsecured debt, and stated that the long-term rating outlook remains
negative based upon, among other factors, the use of approximately $230 million
of cash to acquire most of the component distribution assets of Pioneer-Standard
Electronics, Inc. and poor revenue visibility in the overall IT sector. Our
short-term rating was downgraded to Not-Prime, with Moody's citing, among other
things, recent declines in cash generated from operations and current cash
balances (at March 31, 2003, $341 million) relative to scheduled debt maturities
in October 2003 of $207 million. We expect to use the net proceeds of this
offering to repay all of our senior notes that mature on October 5, 2003, as
described under "Use of Proceeds" and "Capitalization". Further information
bearing on our liquidity position can be found under "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity".
We are aware that Fitch Ratings Delivery Service is contemplating
initiating coverage of us, but we are unaware of when the coverage may begin or
what ratings Fitch may issue for our securities.
S-3
THE OFFERING
SECURITIES OFFERED............ $250,000,000 initial principal amount of %
Notes due 2013.
MATURITY DATE................. , 2013.
INTEREST PAYMENT DATES........ and of each year,
commencing .
REDEMPTION.................... At our option, we may redeem any or all of the
notes, in whole or in part, at any time, at the
redemption prices described under "Description
of the Notes -- Optional Redemption" in this
prospectus supplement.
RANKING....................... The notes:
- are unsecured;
- rank equally with all our existing and future
unsecured and unsubordinated debt;
- are senior to any future subordinated debt;
and
- are effectively junior to any secured debt
and to all existing and future debt and other
liabilities of our subsidiaries.
COVENANTS..................... We will issue the notes under an indenture
containing covenants for your benefit. These
covenants restrict our ability, with certain
exceptions, to:
- incur debt secured by liens;
- engage in sale/leaseback transactions; or
- merge or consolidate with another entity or
sell substantially all of our assets to
another entity.
USE OF PROCEEDS............... We estimate that the net proceeds we will
receive from the sale of the notes we are
offering will be approximately $ million
after deducting underwriting discounts and
commissions and our estimated offering
expenses. We expect to use the net proceeds
from this offering to repay our 8.20% senior
notes outstanding ($207 million outstanding as
of March 31, 2003), which will mature on
October 5, 2003. Until the repayment of our
8.20% senior notes in October 2003, such net
proceeds from this offering will be maintained
as cash and short-term investments. We expect
to use the remainder of the net proceeds from
this offering for general corporate purposes.
FURTHER ISSUES................ We may from time to time, without notice to or
the consent of the registered holders of the
notes, create and issue further notes ranking
pari passu with the notes in all respects (or
in all respects except for the payment of
interest accruing prior to the issue date of
such further notes or except for the first
payment of interest following the issue date of
such further notes) and so that such further
notes may be consolidated and form a single
series with the notes and have the same terms
as to status, redemption or otherwise as the
notes.
S-4
SELECTED HISTORICAL FINANCIAL DATA
The following table contains our selected historical financial data as of
the dates and for the periods indicated. We have derived the selected historical
financial data as of and for each of the years in the five-year period ended
December 31, 2002 from our audited consolidated financial statements. We have
derived the selected historical financial data as of March 31, 2003 and for the
three month periods ended March 31, 2003 and March 31, 2002 from our unaudited
consolidated financial statements which, in the opinion of management, include
all adjustments necessary for a fair presentation. Three month results, however,
are not necessarily indicative of the results that may be expected for any other
interim period or for a full year.
You should read the following data together with our other historical
financial information and statements (including related notes) incorporated by
reference in this prospectus supplement. Please also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Capitalization" included or incorporated by reference in this prospectus
supplement.
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
2003(A) 2002(B)(C) 2002(B)(D) 2001(C)(E) 2000(C) 1999(C)(F) 1998(C)
------- ---------- ---------- ---------- ------- ---------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Sales......................... $1,980 $1,845 $7,390 $9,487 $12,065 $8,325 $7,236
Operating income.............. 35 45 168 153 773 326 328
EBITDA(g)..................... 49 64 223 225 867 402 383
Interest expense, net......... 33 41 153 211 170 106 81
Income (loss) from continuing
operations.................. (1) 2 (1) (76) 352 115 135
Net income (loss)............. (1) (601) (610) (74) 358 124 146
Diluted earnings (loss) per
share....................... (.01) (5.93) (6.04) (.75) 3.62 1.29 1.50
AT AT DECEMBER 31,
MARCH 31, -----------------------------------------------
2003 2002(B) 2001(C) 2000(C) 1999(C) 1998(C)
--------- ------- ------- ------- ------- -------
(IN MILLIONS)
BALANCE SHEET DATA
Cash and short-term investments........... $ 341 $ 694 $ 557 $ 56 $ 45 $ 159
Accounts receivable and inventory......... 2,854 2,580 2,763 5,419 2,890 2,432
Total assets.............................. 4,679 4,668 5,359 7,605 4,483 3,840
Long-term debt............................ 1,817 1,807 2,442 3,028 1,553 1,047
Shareholders' equity...................... 1,232 1,235 1,766 1,914 1,551 1,487
---------------
(a) The acquisition of substantially all of the assets of the Industrial
Electronics Division (IED) of Pioneer-Standard Electronics, Inc. in
February 2003 is accounted for as a purchase transaction in accordance with
Financial Accounting Standards Board (FASB) Statement No. 141, Business
Combinations. Accordingly, our consolidated results in 2003 include IED's
performance from the date of acquisition.
Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include integration costs of $6.9 million or $4.8
million net of related taxes related to the acquisition of IED and a
restructuring charge of $6.7 million or $4.7 million net of related taxes.
EBITDA, loss from continuing operations, net loss, and diluted loss per
share include a loss on the prepayment of debt of $2.6 million or $1.5
million net of related taxes.
(b) Net loss and diluted loss per share include the impact of our adoption of
FASB Statement No. 142, Goodwill and Other Intangible Assets, on January 1,
2002. Statement No. 142, which requires that ratable amortization of
goodwill be replaced with periodic tests for goodwill impairment, resulted
in an impairment charge and a reduction of shareholders' equity of $603.7
million.
S-5
(c) The disposition of the Gates/Arrow operations in May 2002 represents a
disposal of a component of an entity as defined in FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly,
the three months ended March 31, 2002 and the years ended December 31, 1998
through 2001 have been restated to exclude Gates/Arrow.
(d) Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include a severance charge of $5.4 million or $3.2
million net of related taxes.
EBITDA, loss from continuing operations, net loss, and diluted loss per
share include a loss on the prepayment of debt of $20.9 million or $12.9
million net of related taxes.
(e) Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include restructuring costs and other special charges
of $227.6 million (of which $174.6 million is in operating income) or $145.1
million net of related taxes, and an integration charge associated with the
acquisition of Wyle Electronics and Wyle Systems of $9.4 million or $5.7
million net of related taxes.
(f) Operating income, EBITDA, income from continuing operations, net income, and
diluted earnings per share include a special charge of $24.6 million or
$16.5 million net of related taxes, associated with the acquisition and
integration of Richey Electronics, Inc. and the electronics distribution
group of Bell Industries, Inc.
(g) EBITDA consists of the sum of net income (loss), cumulative effect of change
in accounting principle, income taxes, net interest expense, and
depreciation and amortization. We present EBITDA because investors use
EBITDA to determine our ability to meet our debt service obligations, fund
capital expenditures, and expand our business. You should not consider this
information to be an alternative to net income, operating income, cash flow
from operations or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles (GAAP). Our
presentation of EBITDA may not be comparable to EBITDA defined and presented
by other companies. The table below presents a reconciliation from net
income (loss) to EBITDA.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ---------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Net income (loss)............................... $(1) $(601) $(610) $(74) $358 $124 $146
Cumulative effect of change in accounting
principle..................................... -- 604 604 -- -- -- --
Income taxes.................................... -- 1 6 (35) 245 98 102
Interest expense, net........................... 33 41 153 211 170 106 81
Depreciation and amortization................... 17 19 70 123 94 74 54
--- ----- ----- ---- ---- ---- ----
EBITDA.......................................... $49 $ 64 $ 223 $225 $867 $402 $383
=== ===== ===== ==== ==== ==== ====
Below is a table of the items, discussed in more detail in the footnotes
above, which are included in our historical operating results and which
also impact EBITDA.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ---------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Restructuring charges(a)(e)..................... $7 $-- $-- $228 $-- $-- $--
Integration charges(a)(e)(f).................... 7 -- -- 9 -- 25 --
Severance charge(d)............................. -- -- 5 -- -- -- --
Loss on prepayment of debt(a)(d)................ 3 -- 21 -- -- -- --
S-6
FORWARD-LOOKING INFORMATION
This prospectus supplement includes forward-looking statements that are
subject to certain risks and uncertainties which could cause actual results or
facts to differ materially from such statements for a variety of reasons,
including, but not limited to:
- industry conditions;
- changes in product supply, pricing, and customer demand;
- competition;
- other vagaries in the electronic components and commercial computer
products markets;
- changes in relationships with key suppliers;
- the effects of additional actions taken to lower costs; and
- our ability to generate additional cash flow.
Forward-looking statements are those statements which are not statements of
historical fact. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates," and similar expressions. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date on which they are made. We undertake no
obligation to update publicly or revise any of the forward-looking statements.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
notes we are offering will be approximately $ million after deducting
underwriting discounts and commissions and our estimated offering expenses. We
expect to use the net proceeds from this offering to repay our 8.20% senior
notes outstanding ($207 million outstanding as of March 31, 2003), which will
mature on October 5, 2003. Until the repayment of our 8.20% senior notes in
October 2003, such net proceeds from this offering will be maintained as cash
and short-term investments. We expect to use the remainder of the net proceeds
from this offering for general corporate purposes.
S-7
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth our historical ratios of earnings to fixed
charges for the periods indicated.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------- --------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges(a)......... (b) 1.07 (b) (b) 4.23 2.78 3.73
---------------
(a) "Earnings" are defined as income from continuing operations before taxes and
minority interest, reduced by equity in earnings of unconsolidated
affiliates, plus fixed charges. "Fixed charges" are defined as interest
expense plus the estimated interest portion of rental expense.
(b) As a result of a loss in the first three months of 2003 (which includes the
effect of a restructuring charge of $6.7 million, an integration charge of
$6.9 million, and a loss on prepayment of debt of $2.6 million), in 2002
(which includes a severance charge of $5.4 million and a loss on prepayment
of debt of $20.9 million), and in 2001 (which includes a restructuring
charge of $227.6 million and an integration charge of $9.4 million),
earnings were not sufficient to cover fixed charges by the amounts of $1.1
million, $6 million and $111 million, respectively.
S-8
CAPITALIZATION
The following table sets forth our consolidated capitalization at March 31, 2003
on a historical basis and as adjusted to give effect to the issuance of the
notes in this offering and the application of the net proceeds from the sale of
the notes to repay our 8.20% senior notes and for general corporate purposes, as
described under "Use of Proceeds." This table should be read in conjunction with
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes of Arrow appearing elsewhere or incorporated by reference in this
prospectus supplement.
MARCH 31, 2003
--------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(IN MILLIONS)
Short-term debt:
Various borrowings, including current maturities of
long-term debt........................................ $ 221 $ 14
Long-term debt:
8.20% senior notes due 2003............................... 207 --
8.70% senior notes due 2005............................... 250 250
7% senior notes due 2007.................................. 199 199
9.15% senior notes due 2010............................... 200 200
% senior notes due 2013................................ -- 250
6 7/8% senior debentures due 2018......................... 197 197
Zero coupon convertible debentures due 2021............... 750 750
7 1/2% senior debentures due 2027......................... 197 197
Interest rate swaps....................................... 11 11
Other obligations with various interest rates and due
dates.................................................. 13 13
------ ------
Total long-term debt............................ 2,024 2,067
------ ------
Less current maturities of long-term debt....... 207 --
------ ------
Total debt...................................... $2,038 $2,081
====== ======
Shareholders' equity:
Common stock, par value $1:
Authorized -- 160,000,000 shares
Issued -- 103,879,000 shares........................... $ 104 $ 104
Capital in excess of par value............................ 505 505
Retained earnings......................................... 912 912
Foreign currency translation adjustment................... (148) (148)
------ ------
1,373 1,373
Less: Treasury stock -- 3,057,000 shares, at cost......... (82) (82)
Unamortized employee stock awards.................. (13) (13)
Other.............................................. (46) (46)
------ ------
Total shareholders' equity...................... 1,232 1,232
------ ------
Total capitalization............................ $3,270 $3,313
====== ======
S-9
SELECTED HISTORICAL FINANCIAL DATA
The following table contains our selected historical financial data as of
the dates and for the periods indicated. We have derived the selected historical
financial data as of and for each of the years in the five-year period ended
December 31, 2002 from our audited consolidated financial statements. We have
derived the selected historical financial data as of March 31, 2003 and for the
three month periods ended March 31, 2003 and March 31, 2002 from our unaudited
consolidated financial statements which, in the opinion of management, include
all adjustments necessary for a fair presentation. Three month results, however,
are not necessarily indicative of the results that may be expected for any other
interim period or for a full year.
You should read the following data together with our other historical
financial information and statements (including related notes) incorporated by
reference in this prospectus supplement. Please also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Capitalization" included or incorporated by reference in this prospectus
supplement.
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
2003(A) 2002(B)(C) 2002(B)(D) 2001(C)(E) 2000(C) 1999(C)(F) 1998(C)
------- ---------- ---------- ---------- ------- ---------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Sales......................... $1,980 $1,845 $7,390 $9,487 $12,065 $8,325 $7,236
Operating income.............. 35 45 168 153 773 326 328
EBITDA(g)..................... 49 64 223 225 867 402 383
Interest expense, net......... 33 41 153 211 170 106 81
Income (loss) from continuing
operations.................. (1) 2 (1) (76) 352 115 135
Net income (loss)............. (1) (601) (610) (74) 358 124 146
Diluted earnings (loss) per
share....................... (.01) (5.93) (6.04) (.75) 3.62 1.29 1.50
AT AT DECEMBER 31,
MARCH 31, -----------------------------------------------
2003 2002(B) 2001(C) 2000(C) 1999(C) 1998(C)
--------- ------- ------- ------- ------- -------
(IN MILLIONS)
BALANCE SHEET DATA
Cash and short-term investments........... $ 341 $ 694 $ 557 $ 56 $ 45 $ 159
Accounts receivable and inventory......... 2,854 2,580 2,763 5,419 2,890 2,432
Total assets.............................. 4,679 4,668 5,359 7,605 4,483 3,840
Long-term debt............................ 1,817 1,807 2,442 3,028 1,553 1,047
Shareholders' equity...................... 1,232 1,235 1,766 1,914 1,551 1,487
---------------
(a) The acquisition of substantially all of the assets of the Industrial
Electronics Division (IED) of Pioneer-Standard Electronics, Inc. in February
2003 is accounted for as a purchase transaction in accordance with Financial
Accounting Standards Board (FASB) Statement No. 141, Business Combinations.
Accordingly, our consolidated results in 2003 include IED's performance from
the date of acquisition.
Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include integration costs of $6.9 million or $4.8
million net of related taxes related to the acquisition of IED and a
restructuring charge of $6.7 million or $4.7 million net of related taxes.
EBITDA, loss from continuing operations, net loss, and diluted loss per
share include a loss on the prepayment of debt of $2.6 million or $1.5
million net of related taxes.
(b) Net loss and diluted loss per share include the impact of our adoption of
FASB Statement No. 142, Goodwill and Other Intangible Assets, on January 1,
2002. Statement No. 142, which requires that ratable amortization of
goodwill be replaced with periodic tests for goodwill impairment, resulted
in an impairment charge and a reduction of shareholders' equity of $603.7
million.
S-10
(c) The disposition of the Gates/Arrow operations in May 2002 represents a
disposal of a component of an entity as defined in FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly,
the three months ended March 31, 2002 and the years ended December 31, 1998
through 2001 have been restated to exclude Gates/Arrow.
(d) Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include a severance charge of $5.4 million or $3.2
million net of related taxes.
EBITDA, loss from continuing operations, net loss, and diluted loss per
share include a loss on the prepayment of debt of $20.9 million or $12.9
million net of related taxes.
(e) Operating income, EBITDA, loss from continuing operations, net loss, and
diluted loss per share include restructuring costs and other special charges
of $227.6 million (of which $174.6 million is in operating income) or $145.1
million net of related taxes, and an integration charge associated with the
acquisition of Wyle Electronics and Wyle Systems of $9.4 million or $5.7
million net of related taxes.
(f) Operating income, EBITDA, income from continuing operations, net income, and
diluted earnings per share include a special charge of $24.6 million or
$16.5 million net of related taxes, associated with the acquisition and
integration of Richey Electronics, Inc. and the electronics distribution
group of Bell Industries, Inc.
(g) EBITDA consists of the sum of net income (loss), cumulative effect of change
in accounting principle, income taxes, net interest expense, and
depreciation and amortization. We present EBITDA because investors use
EBITDA to determine our ability to meet our debt service obligations, fund
capital expenditures, and expand our business. You should not consider this
information to be an alternative to net income, operating income, cash flow
from operations or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles (GAAP). Our
presentation of EBITDA may not be comparable to EBITDA defined and presented
by other companies. The table below presents a reconciliation from net
income (loss) to EBITDA.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ---------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Net income (loss)............................... $(1) $(601) $(610) $(74) $358 $124 $146
Cumulative effect of change in accounting
principle..................................... -- 604 604 -- -- -- --
Income taxes.................................... -- 1 6 (35) 245 98 102
Interest expense, net........................... 33 41 153 211 170 106 81
Depreciation and amortization................... 17 19 70 123 94 74 54
--- ----- ----- ---- ---- ---- ----
EBITDA.......................................... $49 $ 64 $ 223 $225 $867 $402 $383
=== ===== ===== ==== ==== ==== ====
Below is a table of the items, discussed in more detail in the footnotes
above, which are included in our historical operating results and which
also impact EBITDA.
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ---------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Restructuring charges(a)(e)..................... $7 $-- $-- $228 $-- $-- $--
Integration charges(a)(e)(f).................... 7 -- -- 9 -- 25 --
Severance charge(d)............................. -- -- 5 -- -- -- --
Loss on prepayment of debt(a)(d)................ 3 -- 21 -- -- -- --
S-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced our
performance during the periods described below, the following discussion should
be read in conjunction with our consolidated financial statements and other
information included in or incorporated by reference in this prospectus
supplement. In May 2002, we sold substantially all of the assets of Gates/Arrow,
a business unit within our North American Computer Products group that sold
commodity computer products such as printers, monitors, other peripherals, and
software in North America. The disposition of the Gates/Arrow operations
represents a disposal of a component of an entity as defined in Financial
Accounting Standards Board (FASB) Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Accordingly, our consolidated
financial information is presented to reflect Gates/Arrow as a discontinued
operation for all periods. In February 2003, we acquired substantially all of
the assets of the Industrial Electronics Division (IED) of Pioneer-Standard
Electronics, Inc. and integrated IED into our North American Components group.
For financial reporting purposes, the acquisition is accounted for as a purchase
transaction in accordance with FASB Statement No. 141, Business Combinations.
Accordingly, our consolidated results for the first three months of 2003 include
IED's performance from the date of acquisition.
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
SALES
Consolidated sales for the first three months of 2003 increased by $135.6
million, or 7.4 percent, compared with the comparable prior-year period. This
increase was principally due to a $141 million, or 10.5 percent, increase in
sales of electronic components for the first three months of 2003. The sales
growth was primarily a result of the translation of our international operations
into U.S. dollars which resulted in increased revenues of $101.9 million for the
first three months of 2003, because of a weakening U.S. dollar compared with the
comparable prior-year period. Our acquisition of IED in late February 2003 also
contributed to the increase in sales. The aggregate increase in consolidated
sales was offset, in part, by significantly lower sales to our
telecommunications and networking customers as well as the large contract
manufacturers that serve them. Such sales in the first three months of 2003 were
26 percent below those in the comparable prior-year period, reflecting these
customers' continuing reduced levels of business activity. Since the beginning
of the industry's economic downturn early in 2001, sales of our operating groups
that service these customers have declined substantially.
Computer products sales for the first three months of 2003 were relatively
flat when compared with the comparable prior-year period. Our computer products
businesses' strategy has been to focus less on sales volume and place more
emphasis on profitability. While sales of computer products were relatively
flat, operating income increased by 32.8 percent for the first three months of
2003 when compared with the comparable prior-year period. This increase was
primarily a result of a 73.7 percent increase in operating income of the North
American mid-range computer products business on a sales increase of 9.7
percent. This increase in operating income was offset by a 34.7 percent decrease
in operating income of the North American computer products' original equipment
manufacturers business on a sales decrease of 14 percent. The OEM market
continues to be impacted by reduced activity levels at large complex
telecommunications and networking companies. In the first three months of 2003,
sales of low margin microprocessors (a product segment not considered a part of
our core business) decreased by approximately 10.1 percent compared with the
comparable prior-year period.
GROSS PROFIT
We recorded gross profit of $335.1 million in the first three months of
2003, compared with gross profit of $314.5 million in the comparable prior-year
period. The increase in gross profit is
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principally due to the increase in sales in the first three months of 2003. The
gross profit margin for the first three months of 2003 decreased by
approximately 20 basis points when compared to the comparable prior-year period.
The decrease in gross profit percentage is due primarily to the downward
pressure on components pricing offset, in part, by the computer products
businesses' increasing focus on higher margin business.
RESTRUCTURING, INTEGRATION, AND OTHER CHARGES
RESTRUCTURING
During the first three months of 2003, we recorded a restructuring charge
of $6.7 million ($4.7 million net of related taxes, or $.05 per share on a
diluted basis) as part of our cost reduction initiatives in North America. The
charge consisted primarily of severance costs relating to the elimination of
approximately 300 positions out of a North American total of 5,400, or
approximately 5.5 percent. We have taken these steps in order to make our
organizational structure, systems, and processes in North America more
efficient. There was no single group of employees impacted by this
restructuring. Instead it impacted both exempt and non-exempt employees across a
broad range of functions, including finance, legal, operations, and IT.
Approximately $6.5 million of the charge is expected to be spent in cash. The
cost savings anticipated as a result of these actions are estimated to be
approximately $40 million annually. We anticipate an additional restructuring
charge related to these actions, in the range of $5 million to $8 million, will
be recorded in the second quarter of 2003.
INTEGRATION
In the first three months of 2003, we recorded integration costs of $18.4
million ($14.1 million net of related taxes) related to the acquisition of IED.
Of the total amount recorded, $6.9 million ($4.8 million net of related taxes or
$.05 per share on a diluted basis), relating primarily to severance costs for
our employees, was expensed in the first three months of 2003 and $11.5 million
($9.2 million net of related taxes), relating primarily to severance costs for
IED employees and professional fees, was recorded as additional goodwill.
Approximately $18.2 million of the integration costs is expected to be spent in
cash.
The remaining restructuring, integration, and other charges of $58.5
million as of March 31, 2003, of which $45.3 million is expected to be spent in
cash, will be utilized as follows:
- Personnel accruals of $14.9 million will be principally utilized to cover
the extended costs associated with the termination of personnel resulting
from the IED acquisition and the first quarter restructuring as well as
international personnel costs relating to prior restructurings and are
expected to be spent over the next 15 months.
- Facilities accruals totaling $22.1 million relate to terminated leases
with expiration dates through 2010. Approximately $5.1 million is
expected to be paid before the end of 2003. The minimum lease payments
for these leases are approximately $5.8 million in 2004, $4.2 million in
2005, $3.9 million in 2006, $1 million in 2007, and $2.1 million
thereafter.
- Customer terminations accruals of $5.4 million relate to the termination
of certain customer programs principally related to services not
traditionally provided by us and is expected to be utilized before the
end of 2003.
- Asset and inventory write-downs of $.4 million relate primarily to
inventory write-downs, the majority of which is expected to be disposed
of or scrapped before the end of 2003.
- IT and Other of $15.7 million primarily represents leases for hardware
and software, consulting contracts for logistics services, and
professional fees related to investment banking, legal and accounting
services, and contractual obligations for certain customer
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terminations with expected utilization dates through 2005. Approximately
$11 million is expected to be utilized in 2003, $3 million in 2004, and
$1.7 million in 2005.
LOSS ON PREPAYMENT OF DEBT
In the first three months of 2003, we recorded a loss on the prepayment of
debt of $2.6 million ($1.5 million net of related taxes) in connection with the
repurchase of senior notes with a principal amount of $70.3 million, due in the
fourth quarter of 2003. The loss relates to the premium paid and deferred
financing costs written-off upon the repurchase of this debt.
DISCONTINUED OPERATIONS
In May 2002, we sold substantially all of the assets of Gates/Arrow. Total
cash proceeds are estimated to be $43.2 million, subject to price adjustments,
of which $41.8 million has been collected as of March 31, 2003. The assets sold
consisted primarily of accounts receivable, inventories, and property and
equipment. The buyer also assumed certain liabilities. We recorded a loss in May
2002 of $6.1 million (net of related taxes of $4.1 million) on the disposal of
Gates/ Arrow.
The disposition of the Gates/Arrow operation represents a disposal of a
component of an entity as defined in FASB Statement No. 144. Accordingly, the
first three months of 2002 includes $.7 million of income from discontinued
operations, net of taxes.
CHANGE IN ACCOUNTING PRINCIPLE
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, we adopted Statement No. 142, and accordingly,
discontinued the amortization of goodwill.
As required by Statement No. 142, we 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 determined by reference to
comparable businesses using a weighted average EBIT multiple. The reporting
units identified from the first step were then measured for impairment by
comparing the units' fair value to their carrying value. Those reporting units
having a carrying value substantially exceeding their fair value were identified
as being fully impaired, and we fully wrote down the related goodwill. For
reporting units with potential impairment, we determined the fair value of the
assets and liabilities of the unit and wrote down the goodwill to its implied
fair value accordingly. The majority of the reporting units' assets and
liabilities were inventory, accounts receivable, accounts payable, and accrued
expenses, which are carried at fair value. No other impairment indicators have
arisen since January 1, 2002. All remaining and future acquired goodwill will be
subject to an impairment test in the fourth quarter of each year, or earlier if
indicators of potential impairment exist.
As a result of the evaluation process, we recorded an impairment charge of
$603.7 million, which was recorded as a cumulative effect of change in
accounting principle at January 1, 2002. Accordingly, the results for the three
months ended March 31, 2002 have been restated to include this charge as
required by the transition rules of Statement No. 142.
OPERATING INCOME
We recorded operating income of $34.8 million in the first three months of
2003, compared with operating income of $44.7 million in the comparable
prior-year period. Included in the operating income for the first three months
of 2003 are the restructuring charge of $6.7 million and the integration charge
of $6.9 million described above. The decrease in operating income of
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$9.9 million for the first three months of 2003, compared to the comparable
prior-year period is principally a result of these charges and a decrease in
gross profit percentage offset, in part, by increased sales.
Operating expenses increased $30.4 million in the first three months of
2003 compared to the comparable prior-year period. The increase in operating
expenses is principally due to the previously mentioned charges, unfavorable
foreign exchange impact, the acquisition of IED, and variable expenses tied to
changes in the mix of sales between components and computer products offset, in
part, by the cost savings initiatives commenced in mid-2001.
INTEREST EXPENSE
Net interest expense of $33.3 million in the first three months of 2003
decreased from $41.2 million in the comparable prior-year period primarily as a
result of lower debt balances, offset, in part, by the loss of interest income
from the cash utilized to pay for the acquisition of IED together with declining
interest rates on high quality liquid investments.
INCOME TAXES
We recorded an income tax provision from continuing operations at an
effective tax rate of 5.9 percent for the first three months of 2003, compared
with a provision for taxes at an effective tax rate of 38.3 percent in the
comparable prior-year period. The tax rate for the first three months of 2003 is
impacted by the estimated tax benefit related to the charges described above.
Our effective tax rate is principally impacted by, among other factors, the
statutory tax rates in the countries in which we operate and the related level
of income generated by these operations.
NET LOSS
We recorded a net loss of $.9 million in the first three months of 2003,
compared with a net loss of $600.9 million in the comparable prior-year period.
Included in the results for the first three months of 2003 are the previously
discussed restructuring and integration charges. Included in the results for the
first three months of 2002 is the goodwill impairment charge resulting from a
change in accounting principle described above.
We recorded a loss from continuing operations of $.9 million in the first
three months of 2003, compared with income from continuing operations of $2.1
million in the comparable prior-year period. Included in the loss from
continuing operations for the first three months of 2003 are the previously
discussed restructuring charge of $6.7 million ($4.7 million net of related
taxes), the integration charge of $6.9 million ($4.8 million net of related
taxes), and the loss on prepayment of debt of $2.6 million ($1.5 million net of
related taxes). The decrease in net income from continuing operations of $3
million, is principally due to the previously discussed charges offset, in part,
by an increase in sales together with increased operating income and the
reduction in net interest expense.
YEARS ENDED DECEMBER 31, 2002, DECEMBER 31, 2001, AND DECEMBER 31, 2000
SALES
Consolidated sales for 2002 decreased 22.1 percent from $9.5 billion in
2001 to $7.4 billion. Sales of electronic components declined 25.6 percent,
principally as a result of significantly lower demand from telecommunications
and networking customers and the large contract manufacturers that serve them
reflecting continued low levels of business activity in those industries. Since
the beginning of the economic downturn in the industry early in 2001, our
operating groups that service these customers have experienced the greatest
absolute decline in sales levels. Sales declined by 54.1 percent to these
customers in 2002, compared with the prior-year period. In addition,
contributing to the decline is lower demand in our core OEM
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businesses due to the weakened general economic conditions worldwide.
Historically, in the electronics distribution industry, Europe has trailed the
business cycles experienced in North America by six to nine months. However, the
decline in activity levels in Europe is less than in North America due to the
fact that in Europe sales to telecommunication and networking customers, and the
contract manufacturers that serve them, is a lower percentage of total business
activity than it is in North America. Sales declined in Asia/Pacific principally
due to the termination of a single large customer engagement during the middle
of 2001, and a 60 percent decrease in the sales of microprocessors (a product
segment not considered a part of our core business).
Computer products sales declined 11.4 percent for 2002, compared with the
prior-year period. Beginning in mid-2001, our 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 2001, operating income increased by 33.2 percent, excluding goodwill
amortization. Sales of North American mid-range computer products were
relatively flat compared with 2001, while operating income increased by 38
percent, excluding goodwill amortization in 2001. Sales of low margin
microprocessors in 2002 decreased by 27.9 percent compared with the comparable
prior-year period. The OEM market continues to be impacted by reduced activity
levels at large complex telecommunications and networking companies. As a
result, OEM sales were down 23 percent compared with the comparable prior-year
period. Lastly, translation of the financial statements of our international
operations into U.S. dollars resulted in increased revenues of $118 million
because of a weakening U.S. dollar in 2002 when compared with 2001.
In 2001, consolidated sales decreased by 21.4 percent from $12.1 billion in
2000 to $9.5 billion. This decline was principally due to a 27.1 percent
decrease in sales of electronic components as a result of severely depressed
demand at telecommunications and networking customers and the contract
manufacturers that serve them, and lower demand in our core OEM business due to
weakened general economic conditions. In addition, we terminated a single
customer engagement in the Asia/Pacific region during 2001 which resulted in a
sales decline of approximately $193 million versus 2000. Sales of computer
products increased by 3.5 percent in 2001 when compared with 2000. In the fourth
quarter of 2000, Hewlett-Packard modified its agreements with its distributors
transforming the previously existing relationship from that of a distributor to
that of an agent. Thus, we modified our method of recognizing revenue to include
only the payment from Hewlett-Packard for our sales and marketing efforts. The
modification resulted in a reduction of more than $300 million in revenue in
2001 compared with 2000. In 2001, sales of low margin microprocessors (a product
segment not considered a part of our core business) decreased by nearly $207
million. Lastly, translation of the financial statements of our international
operations into U.S. dollars resulted in reduced revenues of $118 million
because of a strengthened U.S. dollar in 2001 when compared with 2000. Each of
these factors was offset, in part, by the acquisitions that occurred in 2000.
Consolidated sales of $12.1 billion in 2000 were 44.9 percent higher than
1999 sales of $8.3 billion. This sales increase was driven by a 60.5 percent
growth in the sales of electronic components and more than $850 million of sales
from acquired companies and positive market conditions for computer products
offset, in part, by foreign exchange rate differences and fewer sales of low
margin microprocessors. Sales of computer products were flat in 2000 when
compared with 1999. Translation of the financial statements of our international
operations into U.S. dollars resulted in reduced revenues of $466 million when
compared with 1999. Excluding the impact of acquisitions and foreign exchange
rate differences, sales increased by 40.2 percent over the prior year.
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SPECIAL CHARGES
DISCONTINUED OPERATIONS
In May 2002, we sold substantially all of the assets of Gates/Arrow. Total
cash proceeds are estimated to be $43.2 million, subject to price adjustments,
of which $41.1 million has been collected as of December 31, 2002. The assets
sold consisted primarily of accounts receivable, inventories, and property and
equipment. The buyer also assumed certain liabilities.
We recorded a net loss of $6.1 million (net of related taxes of $4.1
million) on the disposal of Gates/Arrow. The loss consists of the following (in
millions):
Personnel costs............................................. $ 1.3
Facilities.................................................. 3.1
Professional fees........................................... .6
Asset write-down............................................ 3.0
Other....................................................... 2.2
-----
Total.................................................. $10.2
=====
Personnel costs relate to the termination of 88 individuals employed by the
Gates/Arrow business and 57 NACP warehouse personnel due to reduced activity
levels as a result of the sale. Facilities costs are principally related to
vacated warehouse space no longer required as a result of the sale. The
write-down of assets adjusted the carrying value of the assets sold to the value
agreed upon under the terms of the contract of sale.
EXTRAORDINARY ITEM
During 2002, we repurchased senior notes due in the fourth quarter of 2003
with a principal amount of $398.2 million. The premium paid and the related
deferred financing costs written-off upon the repurchase of this debt,
aggregating $12.9 million, net of related taxes, was recognized as an
extraordinary loss in our consolidated statement of operations for the year
ended December 31, 2002. We adopted FASB Statement No. 145, Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of January 1, 2003, and as a result have restated income from
continuing operations within this prospectus supplement to include the loss on
prepayment of debt. As a result of this transaction, net interest expense will
be reduced by approximately $31.1 million from the date of the repurchase
through the 2003 maturity date should interest rates remain the same.
CHANGE IN ACCOUNTING PRINCIPLE
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, we adopted Statement No. 142, and accordingly,
discontinued the amortization of goodwill. If 2001 were restated to reflect the
elimination of goodwill amortization, earnings would have increased by
approximately $41.6 million and $.42 per share on a basic and diluted basis,
respectively.
As required under the accounting provisions of Statement No. 142, we
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 determined by reference to comparable businesses using a weighted average
EBIT multiple. The reporting units identified from the first step were then
measured for impairment by comparing the units' fair value to their carrying
value. Those reporting units having a carrying value substantially exceeding
their fair value were identified as being fully impaired, and we fully wrote
down the related goodwill. For reporting units with potential impairment, we
determined the fair value of the assets and liabilities of the unit and
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wrote down the goodwill to its implied fair value accordingly. The majority of
the reporting units' assets and liabilities were inventory, accounts receivable,
accounts payable and accrued expenses, which are carried at fair value. No other
impairment indicators have arisen since January 1, 2002.
In determining a reporting unit, we looked to our 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 Arrow: (i) North American Components, (ii) North American Computer Products,
(iii) individual countries for Europe Components, (iv) Europe Computer Products,
(v) South America, and (vi) individual countries for Asia.
As a result of the evaluation process discussed above, we recorded an
impairment charge of $603.7 million, which was recorded as a cumulative effect
of change in accounting principle at January 1, 2002. We do not have any other
intangible assets subject to valuation under Statement No. 142.
SEVERANCE CHARGE
During 2002, our chief executive officer resigned. As a result, we recorded
a severance charge totaling $5.4 million ($3.2 million net of related taxes)
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.
RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
In mid-2001, we took a number of significant steps, including a reduction
in our worldwide workforce, salary freezes and furloughs, cutbacks in
discretionary spending, deferral of non-strategic projects, consolidation of
facilities, and other major cost containment and cost reduction actions, to
mitigate, in part, the impact of significantly reduced revenues. As a result of
these actions, we recorded restructuring costs and other special charges of
$227.6 million or $145.1 million net of related taxes. The special charges
include costs associated with headcount reductions, the consolidation or closing
of facilities, valuation adjustments to inventory and Internet investments, the
termination of certain customer engagements, and various other miscellaneous
items. Of the total charge of $227.6 million, $174.6 million reduced operating
income (including $97.5 million in cost of products sold) and $53 million was
recorded as a loss on investments. There were no material revisions to these
actions and their related costs. A summary of the special charges included in
operating income is as follows (in millions):
Personnel................................................... $ 15.2
Facilities.................................................. 10.0
Customer terminations....................................... 38.8
Inventory................................................... 97.5
IT systems and other........................................ 13.1
------
Total.................................................. $174.6
======
We recorded a charge of $15.2 million related to personnel costs. The total
number of positions eliminated was nearly 1,200, out of the then existing
worldwide total of 14,150, or approximately 9 percent. The actual number of
employees terminated approximated original estimates. The reduction in headcount
was principally due to reduced activity levels across all functions throughout
Arrow. There was no single group of employees or business segment that was
impacted by this restructuring. Instead, it impacted both exempt and non-exempt
employees across a broad range of functions including sales and marketing,
warehouse employees, employees working in value-added centers, finance personnel
in credit/collections and accounts payable, human resources and IT. Our approach
was to reduce our headcount in the areas with
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reduced activities. Of the total positions eliminated, approximately 1,000 were
completed by December 31, 2001 and the remaining positions were eliminated by
March 31, 2002. We also consolidated or closed 15 facilities and accordingly
recorded a charge of $10 million related to vacated leases, including write-offs
of related leasehold improvements.
We also terminated certain customer programs principally related to
services not traditionally provided by us because they were not profitable. The
$38.8 million provision included charges for inventory these customers no longer
required, pricing disputes, and non-cancelable purchase commitments.
We recorded an inventory provision of $97.5 million which was included in
cost of products sold. The provision related to a substantial number of parts.
In addition to North America, provisions were recorded in Europe and the
Asia/Pacific region. The inventory charge was principally related to product
purchased for single or limited customer engagements and in certain instances
from non-traditional, non-franchised sources for which no contractual
protections such as return rights, scrap allowance, or price protection exist.
The inventory provision was principally for electronic components. The parts
were written down to estimated realizable value, in many cases to estimated
scrap value or zero. At December 31, 2002, approximately 60 percent of the
inventory for which a provision was made had been scrapped and approximately 30
percent of this inventory was sold at its reduced carrying value with minimal
impact on gross margins. The remaining inventory provision of approximately $7
million at December 31, 2002 relates to inventory which will primarily be
disposed of or scrapped by the end of 2003.
Also included in the charge was $13.1 million for IT systems and other
miscellaneous items related to logistics support and service commitments no
longer being used, hardware and software not utilized by us, professional fees
related to contractual obligations of certain customer terminations, and the
write-off of an investment in an IT-related service provider.
INTERNET INVESTMENTS WRITE-DOWN
As a result of the significant decline in the Internet sector during 2001,
we assessed the value of our investments early in the third quarter of 2001. In
order to assess the value of our investments, we selected a pool of comparable
publicly traded companies and obtained the stock price of each company at the
date of our original investment and in the third quarter of 2001. The percentage
change in the average stock price was applied to the related investment to
determine the change in the value of the investment, modified to the extent that
the entity had cash to repay the investors. We determined that certain of these
investments had experienced an other than temporary decline in their realizable
values. Accordingly, in the third quarter of 2001, we recorded a charge of $53
million to write various Internet investments down to their realizable values.
At December 31, 2002, the remaining book value of these investments was $2.3
million.
In connection with the restructuring costs and other special charges
discussed above, operating expenses declined, in part, as a result of the
reduction in workforce, cutbacks in discretionary spending, deferral of
non-strategic projects, and consolidation of facilities initiated in mid-2001 as
a result of the significant reduction in sales and related activities. The full
financial impact of these actions, commencing in the second quarter of 2002, is
reflected as a reduction in selling, general and administrative expenses. Such
cost savings are approximately $70 million for 2002. These cost savings may not
be permanent as increased activity levels resulting from, among other factors,
increased revenues may require an increase in headcount and other increased
spending. There have been no significant changes made to this charge and the
actual cost savings achieved were not materially different than those expected.
Approximately $30 million of the charge was expected to be spent in cash. Of
this amount, approximately $23.5 million was spent as of December 31, 2002.
Non-cash usage amounted to $129.2 million to date.
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INTEGRATION CHARGE
In 2001, we recorded an integration charge of $9.4 million ($5.7 million
net of related taxes) related to the acquisition of Wyle Electronics and Wyle
Systems (collectively, Wyle). In connection with the integration of Wyle,
approximately 240 positions, largely performing duplicate functions, were
eliminated. A summary of the integration charge is as follows (in millions):
Personnel................................................... $4.1
Facilities.................................................. 1.4
Leasehold improvements...................................... 1.2
IT and other................................................ 2.7
----
Total.................................................. $9.4
====
Of the expected $8.2 million to be spent in cash, approximately $7.2
million was spent as of December 31, 2002. The remaining amount to be spent in
cash will be paid from our cash flow from operations. Non-cash usage amounted to
$1.2 million.
At December 31, 2002, the remaining restructuring costs and other special
charges and various integration charges recorded in connection with the
acquisition of Wyle, as well as previous acquisitions, totaling $50.7 million,
of which $35.8 million is expected to be spent in cash, will be utilized as
follows:
- Personnel accruals of $3 million will be principally utilized to cover
the extended costs associated with the termination of international
personnel and are expected to be utilized over the next 18 months.
- Facilities accruals totaling $23.7 million relate to terminated leases
with expiration dates through 2010. Approximately $6.7 million will be
paid in 2003. The minimum lease payments for these leases are
approximately $5.8 million in 2004, $4.2 million in 2005, $3.9 million in
2006, $1 million in 2007, and $2.1 million thereafter.
- Customer terminations accruals of $5.4 million will be utilized before
the end of 2003.
- Asset and inventory write-downs of $7.4 million relate primarily to
inventory write-downs, the majority of which will be disposed of or
scrapped before the end of 2003.
- IT and Other of $11.2 million relate to leases for hardware and software,
consulting contracts for logistics services, and professional fees
related to contractual obligations for certain customer terminations with
expected utilization dates through 2005. Approximately $6.9 million will
be utilized in 2003, $2.7 million in 2004, and $1.6 million in 2005.
OPERATING INCOME
We recorded gross profit of $1.3 billion for 2002, compared with gross
profit of $1.5 billion in the prior-year period. Included in gross profit for
2001 are restructuring costs and other special charges of $97.5 million. The
decline in gross profit is principally due to the 22.1 percent decline in sales
in 2002 offset, in part, by the 2001 restructuring costs and other charges
described above. The gross profit margins for 2002 improved by approximately 140
basis points when compared with the prior-year period. The increase in gross
profit percentage is principally due to a change in the mix of sales, which in
2002 is more heavily concentrated on the businesses serving core OEM customers
that typically have higher margins, and a corresponding smaller proportion of
sales to large accounts that typically have a lower gross profit percentage. It
also reflects the computer products businesses' increasing focus on higher
margin business.
We recorded operating income of $167.5 million in 2002 as compared with
$152.7 million in 2001. Included in operating income for 2002 is the severance
charge of $5.4 million associated
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with the resignation of our chief executive officer. Included in operating
income for 2001 are $174.6 million of restructuring costs and other special
charges, the integration charge of $9.4 million associated with the acquisition
of Wyle, and goodwill amortization of $48 million. The increase in operating
income of $14.9 million for 2002 compared with the prior-year period is
principally a result of a 17.9 percent reduction in expenses offset, in part, by
the 22.1 percent decline in sales and the previously-mentioned charges.
We recorded gross profit of $1.5 billion for 2001, compared with gross
profit of $2 billion in the prior-year period. Included in gross profit for 2001
are the previously-mentioned restructuring costs and other special charges of
$97.5 million. The decline in gross profit is principally due to the decline in
sales of 21.4 percent in 2001 and the previously-mentioned restructuring costs
and other charges. Gross profit margins for 2001 decreased by approximately 90
basis points when compared with the prior-year period. The decrease in gross
profit percentage is principally due to the previously-mentioned charges offset
by 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. It also reflects the computer products businesses' increasing focus
on higher margin business.
Our operating income decreased to $152.7 million in 2001 compared with
$773.2 million in 2000. The decrease in operating income was due to the sudden
and dramatic reduction in sales that began in the latter part of the first
quarter of 2001, and accelerated thereafter as well as the previously-mentioned
charges recorded in 2001.
We recorded gross profit of $2 billion for 2000, compared with gross profit
of $1.2 billion in the prior-year period. The increase in gross profit is
principally due to the increase in sales of 44.9 percent in 2000. The gross
profit margins for 2000 improved by approximately 150 basis points when compared
with the prior-year period. The increase in gross profit percentage is driven by
margin improvements in core component businesses in North America and Europe.
Operating income increased to $773.2 million in 2000 compared with $326.2
million in 1999. Included in 1999 is an integration charge of $24.6 million
associated with the acquisition and integration of Richey Electronics, Inc.
(Richey) and the electronics distribution group of Bell Industries, Inc. (EDG).
The increase in operating income was a result of increased sales in the
electronic components businesses around the world and increased gross profit
margins, as well as the full year impact of cost savings resulting from the
integration of Richey and EDG offset, in part, by lower sales of computer
products, increased spending in our Internet business, and the
previously-mentioned integration charge. Operating expenses as a percentage of
sales were 9.3 percent, the lowest in our history.
INTEREST EXPENSE
Interest expense of $152.6 million in 2002 decreased from $210.6 million in
the prior-year period as a result of significantly lower debt balances. During
2002, free cash flow, defined as cash flow from operations less capital
expenditures, has totaled $616.1 million, thereby permitting us to reduce debt
by $385.8 million and increase cash by $137.2 million. The positive free cash
flow reflects the decline in sales coupled with improved working capital
utilization.
In 2001, interest expense increased to $210.6 million compared with $169.9
million in 2000. The increase in interest expense was the result of the full
year impact of interest on $1.2 billion of additional borrowings incurred in
2000 to fund acquisitions offset, in part, by the generation of $1.7 billion in
cash flow from operations in 2001. The increase in cash flow from operations is
due to our decreased working capital and capital expenditure requirements. The
cash generated from operations in 2001 was utilized to reduce debt by $1.1
billion and to increase cash on hand by $501.3 million.
S-21
Interest expense of $169.9 million in 2000 increased by $63 million from
1999 as a result of increases in borrowings to fund our acquisitions, working
capital requirements, capital expenditures, and investments in Internet joint
ventures.
INCOME TAXES
We recorded an income tax provision from continuing operations at an
effective tax rate of 35.1 percent in 2002, compared with a benefit for taxes at
an effective tax rate of 31.4 percent in the prior-year period. Our effective
tax rate is principally impacted by, among other factors, the statutory tax
rates in the countries in which we operate and the related level of income
generated by these operations.
In 2001, we recorded an income tax benefit at an effective tax rate of 31.4
percent, compared with a provision for taxes at an effective tax rate of 40.7
percent in 2000.
We recorded a provision for taxes at an effective tax rate of 40.7 percent
in 2000 compared with 44.8 percent in the prior-year period. The lower rate for
2000 was due to our significantly increased operating income, which lowered the
negative effect of non-deductible goodwill amortization on our effective tax
rate.
NET INCOME (LOSS)
We recorded a net loss of $610.5 million for 2002, compared with $73.8
million in the prior-year period. Included in the results for 2002 are the net
loss associated with discontinued operations, an extraordinary charge associated
with the prepayment of debt, a cumulative effect of change in accounting
principle as mandated by FASB Statement No. 142, and the severance charge
mentioned above. The net loss associated with the discontinued operations, the
extraordinary charge, and the change in accounting principle are discussed in
greater detail elsewhere in this section. Included in the results for 2001 are
restructuring costs and other special charges and an integration charge, also
previously discussed.
We recorded income from continuing operations of $12.1 million ($.12 per
share on a basic and diluted basis) in 2002, compared with losses from
continuing operations of $75.6 million in the prior-year period. As of January
1, 2003, we have adopted FASB Statement No. 145, and as a result we have
restated income from continuing operations within this prospectus supplement to
a loss of $.8 million for 2002, to include the loss on prepayment of debt of
$12.9 million, net of related taxes. Included in net loss from continuing
operations for 2001 are restructuring costs and other special charges of $227.6
million ($145.1 million net of related taxes), integration charge of $9.4
million ($5.7 million net of related taxes) and goodwill amortization of $48
million ($41.6 million net of related taxes). The decrease in income from
continuing operations for 2002 compared with the prior-year period is due to the
significant reduction in sales as well as the previously-mentioned charges and
loss on prepayment of debt offset, in part, by an increase in gross profit
margins, and a decrease in operating expenses and interest expense.
We recorded a net loss of $73.8 million in 2001 compared with net income of
$357.9 million in 2000. The decrease in net income from continuing operations
was due to lower gross profit margins, as a result of lower sales, higher levels
of interest expense, and the previously-mentioned charges.
Net income in 2000 was $357.9 million, an increase from $124.2 million in
1999. Included in the results for 1999 was an integration charge of $24.6
million associated with the acquisition and integration of Richey and EDG. The
increase in net income was a result of increased sales, improved gross profit
margins, and continued expense control offset, in part, by higher levels of
interest expense, and the previously-mentioned charges.
S-22
LIQUIDITY AND CAPITAL RESOURCES
We have historically maintained a significant investment in accounts
receivable and inventories. As a percentage of total assets, accounts receivable
and inventories were approximately 61 percent and 55 percent at March 31, 2003
and December 31, 2002, respectively. At March 31, 2003, cash and short-term
investments decreased to $341.3 million from $694.1 million at December 31, 2002
primarily as a result of $225.9 million utilized to pay for the acquisition of
IED, $70.3 million used to repurchase senior notes due in the fourth quarter of
2003, and increased working capital requirements to support higher sales. During
the first three months of 2003, free cash flow (defined as cash from operations
less capital expenditures) was a negative $55 million principally driven by the
timing of sales.
The net amount of cash used by our operating activities during the first
three months of 2003 was $46.4 million, principally reflecting higher working
capital requirements as a result of higher sales. The net amount of cash used
for investing activities was $236.6 million, including $228.1 million for
consideration paid for acquired businesses and $8.6 million for various capital
expenditures. The net amount of cash used for financing activities was $77.7
million, primarily reflecting the early retirement of bonds due in the fourth
quarter of 2003 and the repayment of short-term and long-term debt.
The net amount of cash provided by our operating activities during the
first three months of 2002 was $264 million, principally reflecting lower
working capital requirements as a result of lower sales. In addition, we
improved net working capital utilization during the first three months of 2003.
The net amount of cash used for investing activities was $9.3 million, including
$6.9 million for various capital expenditures, and $2.4 million primarily for
the investment in Marubun Corporation. The net amount of cash used for financing
activities was $.4 million, primarily reflecting the repayment of short-term
debt, offset, in part, by proceeds from the exercise of stock options and an
increase in long-term debt and a credit facility.
In February 2003, we acquired substantially all of the assets of IED. The
net cost of this acquisition was $225.9 million. We expect this acquisition to
improve earnings by $.20 per share annually after the first full year following
completion of the integration.
In February 2003, we amended our three-year revolving credit facility to
make certain changes to the terms of the facility, including amendments to
covenants and a reduction in the size of the facility from $625 million to $450
million. The three-year revolving credit facility, as amended, bears interest at
the applicable eurocurrency rate plus a margin which is based on facility
utilization and other factors. At March 31, 2003 and December 31, 2002, we had
no outstanding borrowings under this facility.
In February 2003, we renewed our asset securitization program and made
certain changes to the terms of the program, including a reduction in the size
of the program from $750 million to $550 million. Under the program, we can
sell, on a revolving basis, an individual interest in a pool of certain North
American trade accounts receivable and retain a subordinated interest and
servicing rights to those receivables. At March 31, 2003 and December 31, 2002,
there were no receivables sold to and held by third parties under the program
and accordingly, we had no obligations outstanding under the program. We have
not utilized this facility since June 2001.
During the first three months of 2003, we repurchased senior notes with a
principal amount of $70.3 million, due in the fourth quarter of 2003. The
premium paid and the related deferred financing costs written-off upon the
repurchase of this debt, aggregated $2.6 million ($1.5 million net of related
taxes) and is recognized in income from continuing operations. As a result of
this transaction, net interest expense will be reduced by approximately $2.9
million from the date of the repurchase through the 2003 maturity date should
interest rates remain the same.
In April 2003, we repurchased an additional $11.8 million of our 8.20%
senior notes, due in the fourth quarter of 2003. The premium paid and the
deferred financing costs written-off upon
S-23
the repurchase of this debt, aggregated approximately $.3 million which will be
expensed in the consolidated statement of operations in the second quarter of
2003. As a result of this transaction, net interest expense will be reduced by
approximately $.4 million from the date of repurchase through the original
maturity date should interest rates remain the same.
During the first three months of 2003, we recorded a restructuring charge
of $6.7 million ($4.7 million net of related taxes, or $.05 per share on a
diluted basis) as part of our cost reduction initiatives in North America. We
took steps in order to make our organizational structure, systems, and processes
in North America more efficient. The cost savings anticipated as a result of
these actions are estimated to be approximately $40 million annually. We
anticipate an additional restructuring charge related to these actions in the
range of $5 million to $8 million, will be recorded in the second quarter of
2003.
In a limited number of instances we are contractually required to purchase
the shareholder interest held by others in our majority (but less than 100
percent) owned subsidiaries. Such payments, which are dependent upon the
occurrence of certain events and the passage of time, are to be based upon a
multiple of earnings (as defined in the relevant agreements) over a
contractually determined period and, in certain instances, capital structure. In
most instances the amount to be paid will not be less than the book value of the
shares. In the first three months of 2003, we made such payments in the amount
of $2.1 million to increase our ownership interest in Arrow Components New
Zealand Limited to 100 percent. Based upon the performance of the remaining
businesses with potential contractual payments through March 31, 2003, such
payments would be approximately $9.8 million which would principally be
capitalized as cost in excess of net assets of companies acquired offset by the
carrying value of the related minority interest. These amounts will change as
the performance of these subsidiaries change.
As of March 31, 2003, annual repayments of debt for the years 2003 through
2007, are $221.2 million (including $207 million of our 8.20% senior notes which
are expected to be repaid from the net proceeds of this offering), $.6 million,
$261.8 million, $.6 million, and $199.7 million respectively. In addition, the
zero coupon convertible debentures, ($750.1 million as of March 31, 2003) may be
put to the company in February, 2006.
We guarantee certain obligations of various subsidiaries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make significant estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, and expenses
and related disclosure of contingent assets and liabilities. We evaluate our
estimates, including those related to uncollectible receivables, inventories,
intangible assets, income taxes, restructuring and integration costs, and
contingencies and litigation, on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others,
involve the more significant judgments and estimates used in the preparation of
our consolidated financial statements:
- We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101). Under SAB 101
revenue is recognized when the title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the sales price is determinable,
and collectibility is reasonably assured.
S-24
Revenue typically is recognized at time of shipment. Sales are recorded
net of discounts, rebates, and returns.
A portion of our business involves shipments directly from our suppliers
to our customers. In these transactions, we are responsible for
negotiating price both with the supplier and customer, payment to the
supplier, establishing payment terms with the customer, product returns,
and have risk of loss if the customer does not make payment. As the
principal with the customer, we recognize revenue when we are notified by
the supplier that the product is shipped.
In addition, we have certain business with select customers and suppliers
that is accounted for on an agency basis in accordance with Emerging
Issues Task Force (EITF) No. 99-19 Reporting Revenue Gross as a Principal
versus Net as an Agent. In such cases, the terms of the transactions
govern revenue recognition.
- We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.
- Inventories are recorded at the lower of cost or market. Write-downs of
inventories to market value are based upon contractual provisions
governing price protection, stock rotation, and obsolescence, as well as
assumptions about future demand and market conditions. If assumptions
about future demand change and/or actual market conditions are less
favorable than those projected by us, additional write-downs of
inventories may be required. Because of the large number of transactions
and the complexity of managing the process around price protections and
stock rotations, estimates are made regarding adjustments to the book
cost of inventories. Actual amounts could be different from those
estimated.
- We assess our investments accounted for as available-for-sale on a
quarterly basis to determine whether declines in market value below cost
are other than temporary. When the decline is determined to be other than
temporary, the cost basis for the individual security is reduced and a
loss is realized in the period in which it occurs. We make such
determination based upon the quoted market price and operating results of
the investment. In addition, we evaluate our intent to retain the
investment over a period of time which would be sufficient to allow for
any recovery in market value.
- The carrying value of our deferred tax assets is dependent upon our
ability to generate sufficient future taxable income in certain tax
jurisdictions. Should we determine that we would not be able to realize
all or part of our deferred tax assets in the future, a valuation
allowance to the deferred tax assets would be established in the period
such determination was made.
- We use various financial instruments, including derivative financial
instruments, for purposes other than trading. Derivatives used as part of
our risk management strategy are designated at inception as hedges and
measured for effectiveness both at inception and on an ongoing basis. We
have also entered into interest rate swap transactions that convert
certain fixed rate debt to variable rate debt, effectively hedging the
change in fair value of the fixed rate debt resulting from fluctuations
in interest rates. The fair value hedges and the hedged debt are adjusted
to current market values through interest expense.
- We are subject to proceedings, lawsuits, and other claims related to
environmental, labor, product and other matters. We assess the likelihood
of an adverse judgment or outcomes for these matters, as well as the
range of potential losses. A determination of the
S-25
reserves required, if any, is made after careful analysis. The required
reserves may change in the future due to new developments.
- We have recorded special charges in connection with restructuring our
businesses, as well as the integration of acquired businesses. These
reserves principally include estimates related to employee separation
costs, the consolidation of facilities, contractual obligations, and the
valuation of certain assets including accounts receivable, inventories,
and investments. Actual amounts could be different from those estimated.
- In assessing the recoverability of our company's goodwill and other
long-lived assets, significant assumptions regarding the estimated future
cash flows and other factors to determine the fair value of the
respective assets must be made, as well as the related estimated useful
lives. If these estimates or their related assumptions change in the
future as a result of changes in strategy and/or market conditions, we
may be required to record impairment charges for these assets. On January
1, 2002, we adopted FASB Statement No. 142, Goodwill and Other Intangible
Assets, and accordingly, discontinued the amortization of goodwill.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates.
As a large international organization, we are exposed 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 our financial
results in the future. Our 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. Our policy is to hedge substantially all 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 we operate, although the percentage of natural offsets vs. offsets which
need to be hedged by foreign exchange forward contracts will vary from country
to country. We do not enter into forward contracts for trading purposes. The
risk of loss on a forward contract is the risk of nonperformance by the
counterparties, which we minimize by limiting our counterparties to major
financial institutions. The fair value of the contracts is estimated using
market quotes. The notional amount of the contracts at March 31, 2003 and
December 31, 2002 was $153.1 million and $264.8 million, respectively. The
carrying amounts, which are nominal, approximated fair value at March 31, 2003
and December 31, 2002. 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 three months of 2003 as compared with the average
rates for 2002, sales and operating income would have been approximately $68
million and $4 million lower, respectively, than the reported results for 2003.
Sales and operating income would have fluctuated by approximately $73 million
and $4 million, respectively, if average foreign exchange rates changed by ten
percent in the first three months of 2003. This amount was determined by
considering the impact of a hypothetical foreign exchange rate on the sales and
operating income of our international operations.
Our interest expense, in part, is sensitive to the general level of
interest rates in the Americas, Europe, and the Asia/Pacific region. We manage
our exposure to interest rate risk through the proportion of fixed rate and
floating rate debt in our total debt portfolio. In addition, we have from time
to time used interest rate swaps that convert certain fixed rate debt to
floating
S-26
rate debt, effectively hedging the change in fair value of the fixed rate debt
resulting from fluctuations in interest rates. During 2002, as a result of
significant generation of operating cash flow, we had paid down nearly all of
our floating rate debt. This reduction in floating rate debt was offset, in
part, by the impact of the previously mentioned swaps. As a result, at March 31,
2003, approximately 86 percent of our debt was subject to fixed rates, and 14
percent of our debt was subject to floating rates. Interest expense, net of
interest income, would have fluctuated by approximately $.6 million if average
interest rates changed by one percentage point in the first three months of
2003. This amount was determined by considering the impact of a hypothetical
interest rate on our average floating rate on investments and outstanding debt.
This analysis does not consider the effect of the level of overall economic
activity that could exist. In the event of a change in the level of economic
activity which may adversely impact interest rates, we 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 our financial
structure.
S-27
BUSINESS
We are one of the world's largest providers of electronic components and
computer products to industrial and commercial customers and a leading provider
of services, including materials planning, programming and assembly services,
inventory management, a suite of online supply chain tools, and design services,
to the electronics industry. We believe we are one of the electronics
distribution industry's leaders in operating systems, employee productivity,
value-added programs, and total quality assurance. We are a leading distributor
for over 600 suppliers.
Our global distribution network spans the world's three largest electronics
markets -- the Americas, Europe, and the Asia/Pacific region. We serve a
diversified base of original equipment manufacturers (OEMs), contract
manufacturers (CMs), and commercial customers worldwide. OEMs include
manufacturers of computer and office products, industrial equipment (including
machine tools, factory automation, and robotic equipment), telecommunications
products, aircraft and aerospace equipment, and scientific and medical devices.
Commercial customers are mainly value-added resellers (VARs) and OEMs of
computer systems. We maintain over 190 sales facilities and 21 distribution
centers in 40 countries and territories. Through this network, we believe we can
offer one of the broadest product offerings in the industry and a wide range of
value-added services to help customers reduce their time to market, lower their
total cost of ownership, and enhance their overall competitiveness.
Our Americas Components group is comprised of operations in North America,
South America, and Latin America. Our North American group is comprised of
targeted sales and marketing groups providing tailored solutions to eight
distinct customer segments. Our other operations in the Americas Components
group are in Argentina, Brazil, and Mexico.
Our North American Computer Products group (NACP) is a leading distributor
of enterprise and embedded computing systems to resellers and OEM customers in
North America. NACP is comprised of four divisions that make up Enterprise
Computing Solutions, which serves resellers, and Arrow OEM Computer Solutions,
which serves industrial OEM customers.
We believe we are one of the largest Pan-European electronic components
distributors. In the Northern European region, we serve Denmark, Estonia,
Finland, Ireland, Norway, Sweden, and the United Kingdom. In the Central
European region, we serve Austria, Belgium, the Czech Republic, Germany,
Hungary, the Netherlands, Poland, and Switzerland, and in the Southern European
region we serve France, Greece, Israel, Italy, Portugal, Slovenia, Spain, and
Turkey.
We believe we are one of the leading electronics distributors in the
Asia/Pacific region. We have facilities in Australia, Hong Kong, India,
Malaysia, New Zealand, the People's Republic of China, the Philippines,
Singapore, South Korea, Taiwan, and Thailand.
We distribute a broad range of electronic components, computer products,
and related equipment. About 58 percent of our consolidated sales are comprised
of semiconductor products. Industrial and commercial computer products,
including servers, workstations, storage products, microcomputer boards and
systems, design systems, desktop computer systems, software, monitors, printers,
flat panel displays, system chassis and enclosures, controllers, and
communication control equipment, account for about 25 percent of sales. The
remaining sales are comprised of passive, electromechanical, and interconnect
products, principally capacitors, resistors, potentiometers, power supplies,
relays, switches, and connectors.
We are engaged in the distribution of electronic components to original
equipment manufacturers (OEMs) and computer products to value-added resellers
and OEMs. As a result of our philosophy of maximizing operating efficiencies
through the centralization of certain functions, selected fixed assets and
related depreciation, as well as borrowings and goodwill amortization (prior to
2002), are not directly attributable to the individual operating segments.
S-28
Computer products includes North American Computer Products together with UK
Microtronica, Nordic Microtronica, ATD (in Iberia), and Arrow Computer Products
(in France).
We have redefined certain of our reportable segments. The prior periods
have been restated for comparative purposes. Revenue and operating income, by
segment, are as follows (in millions):
ELECTRONIC COMPUTER
COMPONENTS PRODUCTS CORPORATE TOTAL
---------- -------- --------- -----
2002
Revenue from external customers........... $5,322 $2,068 $ -- $ 7,390
Operating income (loss)................... 184 59 (75)(a) 168(a)
Total assets.............................. 3,404 610 654 4,668
2001
Revenue from external customers........... $7,153 $2,334 $ -- $ 9,487
Operating income (loss)................... 416 44 (307)(b) 153(b)
Total assets.............................. 3,768 929 662 5,359
2000
Revenue from external customers........... $9,809 $2,256 $ -- $12,065
Operating income (loss)................... 893 22 (142) 773
Total assets.............................. 5,955 1,200 450 7,605
---------------
(a) Includes a severance charge of $5.4 million related to the resignation of
our former chief executive officer.
(b) Includes restructuring costs and other special charges of $174.6 million and
an integration charge of $9.4 million related to the acquisition of Wyle.
Revenues, by geographic area, for the years ended December 31 are as
follows (in millions):
2002 2001 2000
---- ---- ----
Americas................................................ $4,302 $5,642 $ 7,196
Europe.................................................. 2,430 2,975 3,475
Asia/Pacific............................................ 658 870 1,394
------ ------ -------
Total revenues.......................................... $7,390 $9,487 $12,065
====== ====== =======
Total assets, by geographic area, at December 31 are as follows (in
millions):
2002 2001 2000
---- ---- ----
Americas................................................ $2,620 $3,254 $4,840
Europe.................................................. 1,718 1,771 2,105
Asia/Pacific............................................ 330 334 660
------ ------ ------
Total assets............................................ $4,668 $5,359 $7,605
====== ====== ======
Most manufacturers of electronic components and computer products rely on
authorized distributors, such as Arrow, to augment their sales and marketing
operations. As a stocking, marketing, and financial intermediary, the
distributor relieves manufacturers of a portion of the costs and personnel
associated with stocking and selling their products (including otherwise sizable
investments in finished goods inventories, accounts receivable systems, and
distribution networks), while providing geographically dispersed selling, order
processing, and delivery capabilities. At the same time, the distributor offers
a broad range of customers the convenience
S-29
of accessing from a single source multiple products from multiple suppliers and
rapid or scheduled deliveries, as well as other value-added services such as
kitting and memory programming capabilities. The growth of the electronics
distribution industry has been fostered by the many manufacturers who recognize
their authorized distributors as essential extensions of their marketing
organizations.
Together with our affiliates we serve over 150,000 industrial and
commercial customers. Industrial customers range from major OEMs and CMs to
small engineering firms, while commercial customers include principally VARs and
OEMs. No single customer accounted for more than two percent of our 2002 sales.
Most of our customers require delivery of the products they have ordered on
schedules that are generally not available on direct purchases from
manufacturers, and frequently their orders are of insufficient size to be placed
directly with manufacturers.
The electronic components and other products offered by us are sold by
field sales representatives, who regularly call on customers in assigned market
areas, and by telephone from our selling locations, by inside sales personnel
with access to pricing and stocking data provided by computers which accept and
process orders. Each of our North American selling locations, warehouses, and
primary distribution centers is electronically linked to our central computer
system, which provides fully integrated, online, real-time data with respect to
nationwide inventory levels and facilitates control of purchasing, shipping, and
billing. Our international operations have similar online, real-time computer
systems and they can access our Worldwide Stock Check System, which provides
access to our online, real-time inventory system.
There are over 600 manufacturers whose products we sell. We do not regard
any one supplier of products to be essential to our operations and we believe
that many of the products we presently sell are available from other sources at
competitive prices. Most of our purchases are pursuant to authorized distributor
agreements which are typically cancelable by either party at any time or on
short notice.
Approximately 67 percent of our inventory consists of semiconductors. It is
the policy of most manufacturers to protect authorized distributors, such as
Arrow, against the potential write-down of such inventories due to technological
change or manufacturers' price reductions. Under the terms of the related
distributor agreements, and assuming the distributor complies with certain
conditions, such suppliers are required to credit the distributor for inventory
losses incurred through reductions in manufacturers' list prices of the items.
In addition, under the terms of many such agreements, the distributor has the
right to return to the manufacturer for credit a defined portion of those
inventory items purchased within a designated period of time.
A manufacturer who elects to terminate a distributor agreement is generally
required to purchase from the distributor the total amount of its products
carried in inventory. While these industry practices do not wholly protect us
from inventory losses, we believe that they currently provide substantial
protection from such losses.
Our business is extremely competitive, particularly with respect to prices,
franchises, and, in certain instances, product availability. We compete with
several other large multi-national, national, and numerous regional and local
distributors. As one of the world's largest electronics distributors, our
financial resources and sales are greater than most of our competitors.
Together with our affiliates, we employ over 11,700 personnel worldwide as
of December 31, 2002.
S-30
MANAGEMENT OVERVIEW
MANAGEMENT TEAM
NAME AGE POSITION
---- --- --------
Daniel W. Duval........................... 67 Chairman
William E. Mitchell....................... 59 President and Chief Executive Officer
Robert E. Klatell......................... 57 Executive Vice President
Peter S. Brown............................ 51 Senior Vice President and General Counsel
Betty Jane Scheihing...................... 55 Senior Vice President
Harriet Green............................. 41 Vice President, Worldwide Marketing
Michael J. Long........................... 44 Vice President and President of North
American Computer Products
Paul J. Reilly............................ 46 Vice President and Chief Financial Officer
Jan M. Salsgiver.......................... 47 Vice President and President of the
Americas Components
Mark F. Settle............................ 52 Vice President and Chief Information
Officer
Daniel W. Duval was appointed our Chairman in June 2002. He served as our
interim Chief Executive Officer from September 2002 to February 2003. Prior
thereto, he served as a Director since 1987. He also serves as Director of The
Manitowoc Company, Inc., Miller-Valentine Group, and Gosiger, Inc. He also
served as Vice Chairman of Robbins & Myers, Inc. from January 1999 to December
1999 and President and Chief Executive Officer and Director for more than five
years prior thereto.
William E. Mitchell was appointed our President and Chief Executive Officer
in February 2003. Prior thereto, he served as Executive Vice President of
Solectron Corporation and President of Solectron Global Services, Inc. since
March 1999 and previously served as Chairman, President and Chief Executive
Officer of Sequel, Inc. since 1995.
Robert E. Klatell has been our Executive Vice President since July 1995.
Peter S. Brown has been our Senior Vice President and General Counsel since
September 2001. Prior thereto, he served as the managing partner of the London
office of the law firm of Pillsbury Winthrop LLP (formerly, Winthrop, Stimson,
Putnam, & Roberts) for more than five years.
Betty Jane Scheihing has been our Senior Vice President since May 1996.
Harriet Green has been our Vice President, Worldwide Marketing since
October, 2002. In addition, she has been our Vice President for more than five
years.
Michael J. Long has been President and Chief Operating Officer of NACP
since July 1999. In addition, he has been our Vice President for more than five
years.
Paul J. Reilly has been our Chief Financial Officer since October 2001 and
has served as our Vice President for more than five years.
Jan M. Salsgiver has been President of the Americas Components group since
July 1999. Prior thereto, she served as President of the Arrow Supplier Services
Group since its inception in January 1998. In addition, she has been our Vice
President for more than five years.
Mark F. Settle has been our Vice President and Chief Information Officer
since November 2001. Prior thereto, he served as Executive Vice President,
Systems and Processing at Visa International since April 1999 and previously
served as Chief Information Officer at Occidental Petroleum Corporation since
February 1997.
S-31
DESCRIPTION OF THE NOTES
The notes will be issued under an indenture dated as of January 15, 1997
between us and The Bank of New York, as trustee. We have summarized the material
terms and provisions of the notes in this section, which supplements the terms
of the debt securities contained in the prospectus. In addition to the material
terms of the notes contained in this prospectus supplement, you should read the
description of the indenture contained in the prospectus for additional
information regarding your rights as a holder of the notes before you buy any of
these notes. References in this section to "us," "we" and "our" are solely to
Arrow and not to our subsidiaries. References in this section to the "indenture"
shall mean the indenture, as supplemented by the supplemental indenture relating
to the notes. In the event of any inconsistency between the terms of the notes
contained in this prospectus supplement and the provisions of the indenture
contained in the prospectus, the terms contained in this prospectus supplement
shall control with respect to the notes.
GENERAL
The notes will be unsubordinated and unsecured obligations of ours ranking
pari passu with all of our existing and future unsubordinated and unsecured
obligations. The notes are limited to an initial amount of $250,000,000. Claims
of holders of the notes will be effectively subordinated to the claims of
holders of the debt of our subsidiaries with respect to the assets of such
subsidiaries. In addition, claims of holders of the notes will be effectively
subordinated to the claims of holders of our secured debt and the secured debt
of our subsidiaries with respect to the collateral securing such claims. Our
claims as the holder of general unsecured intercompany debt will be similarly
effectively subordinated to claims of holders of secured debt of our
subsidiaries.
The notes will be issued in the form of one or more fully registered global
securities. Notes will be issued only in minimum denominations of $1,000 or
integral multiples of $1,000.
The notes will mature on , 2013 and will pay interest from
June , 2003 at % per annum, semiannually on and of each
year, commencing , to the person in whose name the note is registered at
the close of business on or , as the case may be, immediately
preceding such or . The amount of interest payable will be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any interest payment date is not a business day, the payment will be made
on the next succeeding day that is a business day, with no additional interest.
FURTHER ISSUES
We may from time to time, without notice to or the consent of the
registered holders of the notes, create and issuer further notes ranking pari
passu with the notes in all respects (or in all respects except for the payment
of interest accruing prior to the issue date of such further notes or except for
the first payment of interest following the issue date of such further notes)
and so that such further notes may be consolidated and form a single series with
the notes and have the same term as to status, redemption or otherwise as the
notes.
OPTIONAL REDEMPTION
We may redeem the notes in whole at any time or in part from time to time,
at our option, at a redemption price equal to the greater of (1) 100% of the
principal amount of the notes to be redeemed, and (2) the sum of the present
values of the remaining scheduled payments of principal and interest on the
notes to be redeemed (not including any portion of those payments of interest
accrued as of the date of redemption) discounted to the date of redemption on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the
S-32
applicable Treasury Rate plus basis points plus accrued and unpaid interest
on the principal amount being redeemed to the redemption date.
"Treasury Rate" means, with respect to any redemption date, (1) the yield,
under the heading which represents the average for the immediately preceding
week, appearing in the most recently published statistical release designated
"H.15(519)" or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded Untied States Treasury securities adjusted to constant maturity
under the caption "Treasury Constant Maturities," for the maturity corresponding
to the Comparable Treasury Issue (if no maturity is within three months before
or after the Remaining Life, yields for the two published maturities most
closely corresponding to the Comparable Treasury Issue will be determined and
the Treasury Rate will be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month) or (2) if such release (or
any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield-to-maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price of
such redemption date. The Treasury Rate will be calculated on the third Business
Day preceding the redemption date.
"Business Day" means any calendar day that is not a Saturday, Sunday or
legal holiday in New York, New York and on which commercial banks are open for
business in New York, New York.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term ("Remaining Life") of the notes to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such notes.
"Independent Investment Banker" means J.P. Morgan Securities Inc., and its
successor or, if such firm is unwilling or unable to select the Comparable
Treasury Issue, an independent investment banking institution of national
standing appointed by the Trustee after consultation with us.
"Comparable Treasury Price" means (1) the average of five Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest Reference Treasury Dealer Quotations, or (2) if the Independent
Investment Banker obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such quotations.
"Reference Treasury Dealer" means (1) each of Goldman, Sachs & Co., J.P.
Morgan Securities Inc. and Banc of America Securities LLC, and their respective
successors, provided, however, that if any of the foregoing shall cease to be a
primary U.S. government securities dealer in New York City (a "Primary Treasury
Dealer"), we will substitute for such firm another Primary Treasury Dealer, and
(2) any other Primary Treasury Dealers selected by the Independent Investment
Banker after consultation with us.
"The Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Independent Investment Banker, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Independent Investment Banker at 5:00
p.m., New York City time, on the third Business Day preceding such redemption
date.
Holders of notes to be redeemed as provided above will receive notice
thereof by first-class mail at least 30 and not more than 60 days before the
date fixed for redemption. If fewer than all of the notes of the series are to
be redeemed, the Trustee will select, not more than 60 days
S-33
before the redemption date, the particular notes or portions thereof for
redemption from the outstanding notes not previously called by such method as
the Trustee deems fair and appropriate.
PAYMENT AND PAYING AGENTS
Payments of interest and principal on the notes will be made in U.S.
dollars at the office of the trustee. At our option, however, we may make
payments by check mailed to the holder's registered address or, with respect to
global notes, by wire transfer. We will make interest payments to the person in
whose name the note is registered at the close of business on the record date
for the interest payment.
The trustee initially will be designated as our paying agent for payments
on the notes. We may at any time designate additional paying agents or rescind
the designation of any paying agent or approve a change in the office through
which any paying agent acts.
Subject to the requirements of any applicable abandoned property laws, the
trustee and paying agent shall pay to us upon written request any money held by
them for payments on the notes that remain unclaimed for two years after the
date upon which that payment has become due. After payment to us, holders
entitled to the money must look to us for payment. In that case, all liability
of the trustee or paying agent with respect to that money will cease.
INFORMATION CONCERNING THE TRUSTEE
We have appointed The Bank of New York, trustee under the indenture, as
paying agent, registrar and custodian with regard to the notes. An affiliate of
The Bank of New York participates as a lender under certain of our credit
agreements.
S-34
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement dated the
date hereof between us and the underwriters, we have agreed to sell to each
underwriter, and each underwriter has severally agreed to purchase from us, the
principal amount of notes that appears opposite its name in the table below:
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
Goldman, Sachs & Co......................................... $
J.P. Morgan Securities Inc. ................................
Banc of America Securities LLC..............................
Credit Suisse First Boston LLC..............................
Fleet Securities, Inc. .....................................
HSBC Securities (USA) Inc. .................................
Scotia Capital (USA) Inc. ..................................
Wachovia Securities, LLC....................................
============
Total.................................................. $250,000,000
============
The underwriting agreement provides that the underwriters will purchase all
of the notes if any of them are purchased.
The underwriters initially propose to offer the notes to the public at the
public offering price that appears on the cover page of this prospectus
supplement. The underwriters may offer the notes to selected dealers at the
public offering price minus a concession of up to % of the principal
amount. In addition, the underwriters may allow, and those selected dealers may
reallow, a concession of up to % of the principal amount to certain other
dealers. After the initial offering, the underwriters may change the public
offering price and any other selling terms. The underwriters may offer and sell
notes through certain of their affiliates.
In the underwriting agreement, we have agreed that:
- We will pay our expenses related to the offering, which we estimate will
be $ .
- We will indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, or contribute to payments
that the underwriters may be required to make in respect of those
liabilities.
The notes are a new issue of securities, and there is currently no
established trading market for the notes. We do not intend to apply for the
notes to be listed on any securities exchange or to arrange for the notes to be
quoted on any quotation system. The underwriters have advised us that they
intend to make a market in the notes, but they are not obligated to do so. The
underwriters may discontinue any market making in the notes at any time in their
sole discretion. Accordingly, we cannot assure you that a liquid trading market
will develop for the notes.
In connection with the offering of the notes, the underwriters may engage
in overallotment, stabilizing transactions and syndicate covering transactions.
Overallotment involves sales in excess of the offering size, which creates a
short position for the underwriters. Stabilizing transactions involve bids to
purchase the notes in the open market for the purpose of pegging, fixing or
maintaining the price of the notes. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution has been
completed in order to cover short positions. Stabilizing transactions and
syndicate covering transactions may cause the price of the notes to be higher
than it would otherwise be in the absence of those transactions. If the
underwriters engage in stabilizing or syndicate covering transactions, they may
discontinue them at any time.
S-35
Certain of the underwriters will make the notes available for distribution
on the Internet through a proprietary web site and/or a third-party system
operated by Market Axess Inc., an Internet-based communications technology
provider. Market Axess Inc. is providing the system as a conduit for
communications between such underwriters and their respective customers and is
not a party to any transactions. Market Axess Inc., a registered broker-dealer,
will receive compensation from those underwriters based on transactions those
underwriters conduct through the system. Those underwriters will make the notes
available to their respective customers through the Internet distributions,
whether made through a proprietary or third-party system, on the same terms as
distributions made through other channels.
In the ordinary course of their respective businesses, the underwriters or
their affiliates have engaged, or may in the future engage, in commercial
banking or investment banking transactions with Arrow and its affiliates.
LEGAL MATTERS
The validity of the notes offered and sold in this offering will be passed
upon for us by Milbank, Tweed, Hadley & McCloy LLP. Certain legal matters will
be passed upon for the underwriters by Davis Polk & Wardwell.
S-36
PROSPECTUS
$2,000,000,000
------------------------
Arrow Electronics, Inc.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
WARRANTS
WE MAY OFFER AND SELL THE SECURITIES FROM TIME TO TIME IN ONE OR MORE OFFERINGS.
THIS PROSPECTUS PROVIDES YOU WITH A GENERAL DESCRIPTION OF THE SECURITIES WE MAY
OFFER.
EACH TIME WE SELL SECURITIES, WE WILL PROVIDE A SUPPLEMENT TO THIS PROSPECTUS
THAT CONTAINS SPECIFIC INFORMATION ABOUT THE OFFERING AND THE TERMS OF THE
SECURITIES. THE SUPPLEMENT MAY ALSO ADD, UPDATE OR CHANGE INFORMATION CONTAINED
IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THIS PROSPECTUS AND ANY SUPPLEMENT
BEFORE YOU INVEST IN ANY OF OUR SECURITIES.
WE MAY OFFER AND SELL THE FOLLOWING SECURITIES:
- DEBT SECURITIES, IN ONE OR MORE SERIES, CONSISTING OF NOTES, DEBENTURES
OR OTHER EVIDENCES OF INDEBTEDNESS;
- PREFERRED STOCK;
- COMMON STOCK; AND
- WARRANTS.
OUR COMMON STOCK IS TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
"ARW." ANY COMMON STOCK SOLD PURSUANT TO THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT WILL BE LISTED ON THAT EXCHANGE, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE. THE PROSPECTUS SUPPLEMENT WILL STATE WHETHER ANY OTHER SECURITIES
OFFERED THEREBY WILL BE LISTED ON A SECURITIES EXCHANGE.
Neither the Securities and Exchange Commission nor any other Regulatory Body has
approved or disapproved of these Securities or passed upon the adequacy or
accuracy of this Prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is February 15, 2001.
ABOUT THIS PROSPECTUS
This prospectus is part of a "shelf" registration statement that we filed
with the United States Securities and Exchange Commission, or the "SEC." By
using a shelf registration statement, we may sell up to $2,000,000,000 in
aggregate offering price of any combination of the securities described in this
prospectus (or in the other prospectus included in the shelf registration
statement) from time to time and in one or more offerings. This prospectus only
provides you with a general description of the securities that we may offer.
Each time we sell securities, we will provide a supplement to this prospectus
that contains specific information about the terms of the securities. The
supplement may also add, update or change information contained in this
prospectus. Before purchasing any securities, you should carefully read both
this prospectus and any supplement, together with the additional information
described under the heading "Where You Can Find More Information." Unless
otherwise indicated or unless the context requires otherwise, all references in
this prospectus to "Arrow", "we", "our", "us" or similar references mean Arrow
Electronics, Inc.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus and
the supplement to this prospectus is accurate only as of the dates of their
respective covers, regardless of the time of delivery of this prospectus or any
supplement to this prospectus or of any sale of our securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the securities or possession or distribution of this
prospectus or any supplement to this prospectus in that jurisdiction. Persons
who come into possession of this prospectus or any supplement to this prospectus
in jurisdictions outside the United States are required to inform themselves
about and to observe any restrictions as to this offering and the distribution
of this prospectus or any supplement to this prospectus applicable to that
jurisdiction.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
You may read and copy any document we file at the SEC's public reference
room, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public on the SEC's Web site at
http://www.sec.gov and through the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, on which our common stock is listed.
You may obtain a copy of any of our filings with the SEC, or any of the
agreements or other documents that constitute exhibits to those filings, without
charge, by request directed to us at the following address and telephone number:
Arrow Electronics, Inc.
25 Hub Drive
Melville, New York 11747
(516) 391-1300
Attention: Secretary
The SEC allows us to "incorporate by reference" in this prospectus reports
that we file with them, which means that we can disclose important information
to you by referring you to those reports. Accordingly, we are incorporating by
reference in this prospectus the documents listed below and any future filings
we make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1999;
(2) Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2000, June 30, 2000 and September 30, 2000;
2
(3) Our Current Reports on Form 8-K dated September 1, 2000, September 19,
2000, December 22, 2000 and February 13, 2001; and
(4) The description of our common stock set forth on our registration
statement filed with the Securities and Exchange Commission pursuant to
Section 12 of the Exchange Act, including any amendments or reports
filed for the purpose of updating such description.
The information incorporated by reference is deemed to be part of this
prospectus, except for any information superseded by information contained
directly in this prospectus. Any information that we file later with the SEC
will automatically update and supersede this information.
This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the SEC under the Securities Act of 1933. This prospectus does
not contain all the information that is contained in the registration statement,
some of which we are allowed to omit in accordance with the rules and
regulations of the SEC. We refer you to the registration statement and to the
exhibits filed with the registration statement for further information with
respect to Arrow. Copies of the registration statement and the exhibits to the
registration statement are on file at the offices of the SEC and may be obtained
upon payment of the prescribed fee or may be examined without charge at the
public reference facilities of the SEC described above. Statements contained in
this prospectus concerning the provisions of documents are summaries of the
material provisions of those documents, and each of those statements is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. Since this prospectus may not contain all of the information
that you may find important, you should review the full text of these documents.
FORWARD LOOKING STATEMENTS
This prospectus includes forward-looking statements that are subject to
certain risks and uncertainties which could cause actual results or facts to
differ materially from the statements in this prospectus for a variety of
reasons, including, but not limited to: industry conditions, changes in product
supply, pricing, and customer demand, competition, other vagaries in the
electronic components and commercial computer products markets, and changes in
relationships with key suppliers. Forward-looking statements are those
statements which are not statements of historical fact. You can identify these
forward-looking statements by forward-looking words such as "expects,"
"anticipates," "intends," "plans," "may," "will," "believes," "seeks,"
"estimates," and similar expressions. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. We undertake no obligation to update publicly or revise any
of the forward-looking statements.
ARROW ELECTRONICS, INC.
We are the world's largest distributor of electronic components and
computer products to industrial and commercial customers. We believe we are one
of the global electronics distribution industry's leaders in state-of-the-art
operating systems, employee productivity, value-added programs, and total
quality assurance. We are a leading distributor for over 600 suppliers.
Our distribution network spans the world's three dominant electronics
markets: North America, Europe, and the Asia/Pacific region. Through our
business units in these vital industrialized regions, we serve a diversified
base of original equipment manufacturers and commercial customers worldwide.
Original equipment manufacturers, or OEMs, include manufacturers of computer and
office products, industrial equipment (including machine tools, factory
automation, and robotic equipment), telecommunications products, aircraft and
aerospace equipment, and scientific and medical devices. Commercial customers
are mainly value-added resellers of computer systems. Through a network of more
than 225 sales facilities and 19 distribution centers in 38 countries, we
deliver to more than 175,000 OEMs and commercial customers the products,
inventory solutions, materials management services, and design and technical
support they need when, where and how they need them.
3
USE OF PROCEEDS
Except as otherwise described in the prospectus supplement relating to an
offering of securities, the net proceeds from the sale of securities offered
pursuant to this prospectus and any prospectus supplement will be used for
general corporate purposes.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth our historical ratios of earnings to fixed
charges and our consolidated subsidiaries for the periods indicated:
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------
2000 1999 1998 1997 1996 1995
------------- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges.... 4.6 2.9(a) 4.0 5.0(b) 8.6 7.7
------------
(a) Excluding the special pre-tax charge of $25 million associated with the
acquisition and integration of Richey Electronics, Inc. and the electronics
distribution group of Bell Industries, Inc., the ratio of earnings to fixed
charges would have been 3.1.
(b) Excluding special pre-tax charges totaling $59 million associated with the
realignment of our North American components operations and the acquisition
and integration of the volume electronic component distribution businesses
of Premier Farnell plc, the ratio of earnings to fixed charges would have
been 5.7.
4
DESCRIPTION OF DEBT SECURITIES
We have described below the general terms and provisions of the debt
securities to which a prospectus supplement may relate. We will describe the
particular terms of the debt securities offered by any prospectus supplement in
the prospectus supplement relating to the offered debt securities.
We may from time to time offer and sell debt securities, consisting of
debentures, notes and/or other unsecured evidences of indebtedness. The debt
securities will be either our unsecured senior debt securities or our unsecured
subordinated debt securities.
We will issue senior debt securities under an indenture, called the "senior
indenture", between us and The Bank of New York (as successor to Bank of
Montreal Trust Company), as trustee, in such capacity, called the "senior
trustee". We may also issue subordinated debt securities under a proposed
indenture, called the "subordinated indenture", between us and a trustee to be
named in any prospectus supplement relating to the subordinated debt securities,
called the "subordinated trustee". In this prospectus, we refer to the senior
indenture and the subordinated indenture together as the "indentures", to the
senior debt securities and the subordinated debt securities together as the
"debt securities" and to the senior trustee and the subordinated trustee
together as the "trustees". Unless otherwise indicated, section references in
this prospectus or in an accompanying prospectus supplement are to the relevant
provisions of both the senior indenture and the subordinated indenture. The
following summary of important provisions of the debt securities and the
indentures does not purport to be complete. This summary is subject to the
detailed provisions of the indentures, including the definition of certain terms
used in this prospectus and those terms made a part of the indentures by
reference to the Trust Indenture Act and the debt securities. Wherever
particular sections or defined terms of the indentures are referred to, those
sections or defined terms are incorporated by reference in this prospectus as
part of the statement made, and the statement is qualified in its entirety by
such reference. Numerical references in parentheses below are to sections in the
indentures. Capitalized terms that are used and not otherwise defined in this
prospectus will have the meanings assigned to them in the indentures.
GENERAL
The indentures provide for the issuance from time to time of debentures,
notes or other evidences of indebtedness by us in an unlimited amount pursuant
to a supplemental indenture, a board resolution, or an officer's certificate
pursuant to a supplemental indenture or board resolution. (Section 2.3)
Under each indenture, we may issue debt securities in one or more series
with the same or various maturities, at par, at a premium or with an original
issue discount. The applicable prospectus supplement relating to a particular
series of debt securities will describe the specific terms of the debt
securities we may offer, including:
(a) the designation of the debt securities of a particular series, which
will distinguish the debt securities of that series from the debt
securities of all other series;
(b) any limit upon the aggregate principal amount of the debt securities
of that series that may be authenticated and delivered under the
indentures and any limitation on our ability to increase the aggregate
principal amount after the initial issuance of the debt securities of
that series;
(c) the date or dates on which the principal of the debt securities of
that series is payable (which date or dates may be fixed or
extendible);
(d) the rate or rates (which may be fixed or variable) per year at which
the debt securities of that series will bear interest, if any;
(e) the date or dates from which interest will accrue, on which interest
will be payable and (in the case of registered securities (which is
defined as any debt security registered on the security register)) on
which a record will be taken for the determination of holders to whom
interest is payable and/or the method by which such rate or rates or
date or dates will be determined;
5
(f) if other than as provided in the indentures, the place or places where
(1) the principal of and any interest on debt securities will be
payable, (2) any registered securities may be surrendered for
exchange, (3) notices, demands to or upon us in respect of the debt
securities of that series or the indentures may be served and (4)
notice to holders may be published;
(g) our right, if any, to redeem debt securities of that series, in whole
or in part, at our option and the period or periods within which, the
price or prices at which and any terms and conditions upon which debt
securities of that series may be redeemed pursuant to any sinking fund
or otherwise;
(h) our obligation, if any, to redeem, purchase or repay debt securities
of that series pursuant to any mandatory redemption, sinking fund or
analogous provisions or at the option of a holder and the price or
prices at which and the period or periods within which and any of the
terms and conditions upon which debt securities of that series will be
redeemed, purchased or repaid, in whole or in part, pursuant to our
redemption obligation;
(i) if other than denominations of $1,000 and any integral multiple of
$1,000, the denominations in which debt securities of that series will
be issuable;
(j) if other than the principal amount of the debt securities, the portion
of the principal amount of debt securities of that series which will
be payable upon acceleration of the maturity of those securities;
(k) if other than the coin or currency in which the debt securities of
that series are denominated, the coin or currency in which payment of
the principal of or interest on the debt securities of that series
will be payable or if the amount of payments of principal of and/or
interest on the debt securities of that series may be determined with
reference to an index based on a coin or currency other than that in
which the debt securities of that series are denominated, the manner
in which those amounts will be determined;
(l) if other than the currency of the United States of America, the
currency or currencies, including composite currencies, in which
payment of the principal of and interest on the debt securities of
that series will be payable, and the manner in which any currencies
will be valued against other currencies in which any other debt
securities will be payable;
(m) whether the debt securities of that series or any portion thereof will
be issuable, with or without coupons, as registered securities (and if
so, whether those debt securities will be issuable as registered
global securities) or unregistered securities (which is defined as any
debt security other than a registered security), or any combination of
the foregoing, any restrictions applicable to the offer, sale or
delivery of unregistered securities or the payment of interest on
those securities and, if other than as provided in the indenture, the
terms upon which unregistered securities of any series may be
exchanged for registered securities of that series and vice versa;
(n) whether and under what circumstances we will pay additional amounts on
debt securities held by a person who is not a U.S. person in respect
of any tax, assessment or governmental charge withheld or deducted
and, if so, whether we will have the option to redeem the securities
rather than pay any additional amounts;
(o) if the debt securities of that series are to be issuable in definitive
form (whether upon original issue or upon exchange of a temporary debt
security of that series) only upon receipt of certain certificates or
other documents or satisfaction of other conditions, the form and
terms of those certificates, documents or conditions;
(p) any trustees, depositaries, authenticating or paying agents, transfer
agents or the registrar or any other agents with respect to the debt
securities of that series;
(q) provisions, if any, for the defeasance of the debt securities of that
series, including provisions permitting defeasance of less than all
the debt securities of that series, which provisions may be in
addition to, in substitution for, or in modification of (or any
combination of the foregoing) the provisions of the indentures;
6
(r) if the debt securities of that series are issuable in whole or in part
as one or more registered global securities, the identity of the
depositary (if other than The Depository Trust Company, or DTC) for
that registered global security or securities (which depositary will,
at the time of its designation as depositary and at all times while it
serves as depositary, be a clearing agency registered under the
Exchange Act and any other applicable statute or regulation);
(s) any other events of default or covenants with respect to the debt
securities of that series in addition to the events of default or
covenants set forth in the indentures;
(t) any other terms of the debt securities of that series, which terms
will not be inconsistent with the provisions of the indentures.
Neither indenture contains any restriction on the payment of dividends or
any financial covenants. Neither indenture contains provisions which would
afford you protection in the event of a transfer of assets to a subsidiary and
incurrence of unsecured debt by such subsidiary, or in the event of a decline in
our credit quality resulting from highly leveraged or other similar transactions
involving us.
The debt securities will be unsubordinated obligations of ours and the
senior debt securities will rank equal in right of payment with all of our
existing and future unsecured and unsubordinated obligations. The indebtedness
represented by the subordinated debt securities will be subordinated in right of
payment to the prior payment in full of our senior debt, as described below
under "Subordination". Claims of holders of the debt securities will be
effectively subordinated to the claims of holders of the debt of our
subsidiaries with respect to the assets of our subsidiaries. In addition, claims
of holders of the debt securities will be effectively subordinated to the claims
of holders of our secured debt and the secured debt of our subsidiaries with
respect to the collateral securing those claims. Our claims as the holder of
general unsecured intercompany debt will be similarly effectively subordinated
to claims of holders of secured debt of our subsidiaries.
SUBORDINATION
If we issue subordinated debt securities, our obligations to make any
payment of the principal of and premium, if any, and interest on, any
subordinated debt securities to be issued will be subordinate and junior in
right of payment to the prior payment in full of all of our senior indebtedness,
whether outstanding on the date of the subordinated indenture or thereafter
incurred. (Article 10 of subordinated indenture)
We may not pay the principal of or interest or premium on the subordinated
debt securities if (i) we fail to make any of such payments on any senior
indebtedness (other than trade accounts payable) which has matured by lapse of
time, acceleration or otherwise, or (ii) a default occurs on the senior
indebtedness (other than trade accounts payable) that allows the holders of the
senior indebtedness to accelerate its maturity after lapse of time, the giving
of notice or both and that default continues.
If any payment or distribution of our assets occurs upon our dissolution,
winding-up, liquidation or reorganization, we may not pay the principal of or
interest or premium on the subordinated debt securities until we have made such
payments in full to the holders of all senior indebtedness. If such dissolution,
winding-up, liquidation or reorganization occurs and the holders of the
subordinated debt securities receive a payment or distribution, then they must
turn that payment or distribution over to the holders of the senior indebtedness
or a trustee for the benefit of the senior indebtedness holders. Because of this
subordination, if an insolvency occurs, holders of the subordinated debt
securities may recover less, proportionately, than holders of senior debt and
our general unsecured creditors.
CONVERSION
The terms, if any, on which debt securities are convertible into our common
stock will be set forth in the prospectus supplement for that series of debt
securities. These terms will include:
- the conversion price,
- the conversion period,
7
- provision as to whether conversion will be at our option or at the option
of the holder,
- the events requiring an adjustment of the conversion price, and
- provisions affecting conversion in the event of the redemption of such
series of debt securities.
REGISTERED GLOBAL SECURITIES
Unless otherwise specified in the applicable prospectus supplement, DTC
will act as securities depositary for the debt securities. The debt securities
will be issued only as registered global securities registered in the name of
DTC's nominee, which we expect will be Cede & Co. We will issue one or more
registered global securities for the debt securities representing the aggregate
principal amount of that series of debt securities and will deposit the
registered global securities with DTC.
The description of book-entry procedures in this prospectus includes
summaries of certain rules and operating procedures of DTC that affect transfers
of interests in the registered global securities issued in connection with sales
of debt securities made pursuant to this prospectus. The descriptions of the
operations and procedures of DTC that follow are provided solely as a matter of
convenience. These operations and procedures are solely within the control of
the DTC settlement system and are subject to change from time to time.
We understand that DTC is a limited-purpose trust company organized under
the New York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act.
DTC holds securities that its participants (the "direct participants")
deposit with DTC. DTC also facilitates the settlement among direct participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in direct
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly (the "indirect participants," and together with the direct
participants, the "participants").
Purchases of securities within DTC's system must be made by or through
direct participants. The direct participants receive a credit for the securities
on DTC's records. The ownership interest of the actual purchaser of each
security (a "beneficial owner") is in turn recorded on the direct and indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchase. However, beneficial owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the direct or indirect participant through
which the beneficial owner entered into the transaction. Transfers of ownership
interest in the securities are to be accomplished by entries made on the books
of participants acting on behalf of beneficial owners. Beneficial owners will
not receive certificates representing their ownership interest in debt
securities except in the event that use of the book-entry system for the debt
securities is discontinued.
To facilitate subsequent transfers of the debt securities, all securities
deposited by direct participants with DTC are registered in the name of a
nominee of DTC. The deposit of debt securities with DTC and their registration
in the name of the nominee do not change the beneficial ownership of the
securities. DTC has no knowledge of the actual beneficial owners of the debt
securities. DTC's records reflect only the identity of the direct participants
to whose accounts the debt securities are credited. The participants will remain
responsible for keeping account of their holdings on behalf of their customers.
As long as DTC or its nominee is the registered holder of the registered
global security, DTC or its nominee will be considered the sole owner and holder
of the debt securities represented by the registered global security for all
purposes under the indenture and the debt securities. Except in limited
circumstances, beneficial owners will not be entitled to have any portions of
the registered global security registered in their
8
names, will not receive or be entitled to receive physical delivery of debt
securities in definitive form and will not be considered the owners or holders
of the registered global security (or any debt securities represented thereby)
under the indenture or the debt securities.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a registered global security to those persons
may be limited. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and certain banks, the ability of a
beneficial owner to pledge their interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of their
interests, may be affected by the lack of a physical certificate evidencing
their interests.
DTC will send notices and other communications to its direct participants;
direct participants will send these communications to indirect participants. The
direct participants and indirect participants will send notices and other
communications to beneficial owners pursuant to arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
We will send any redemption notices to the nominee of DTC. If less than all
of the debt securities of a particular series are being redeemed, DTC will
determine in accordance with its procedures the amount of the interest of each
direct participant in the particular series to be redeemed.
Neither DTC nor its nominee will consent or vote with respect to any debt
securities. Under its usual procedures, DTC mails an omnibus proxy to its direct
participants as soon as possible after the applicable record date. The omnibus
proxy assigns the nominee's consenting or voting rights to those direct
participants to whose accounts the applicable securities are credited on the
record date (identified in a listing attached to the omnibus proxy).
Principal, premium, if any, and interest payments on the debt securities
will be made to DTC or its nominee. We expect that DTC will credit direct
participants' accounts on the relevant payment date upon DTC's receipt of funds
in accordance with the respective holdings shown on DTC's records. We expect
that payments by participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities for the
accounts of customers in bearer form or registered in "street-name". These
payments will be the responsibility of the participant and not of DTC, any
underwriters, or us, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of distributions and other amounts to
DTC is the responsibility of the trustee. DTC is responsible for disbursing
those payments to the direct participants. The direct and indirect participants
are responsible for disbursing payments to the beneficial owners. We will not
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the registered
global security or for maintaining, supervising or reviewing any records
relating to those beneficial ownership interests.
Interests in the registered global security will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will therefore settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC may discontinue providing its services as securities depositary with
respect to the debt securities at any time by giving reasonable notice to us and
the trustee. In the event that a successor securities depositary is not
obtained, definitive debt securities certificates representing the debt
securities will be required to be printed and delivered.
We will not have any responsibility or obligation to participants or the
persons for whom they act as nominees with respect to the accuracy of the
records of DTC, its nominee or any participant with respect to any ownership
interest in the debt securities, or with respect to payments to or providing of
notice for the participants or the beneficial owners.
So long as DTC's nominee is the registered owner of the debt securities,
references herein to a holder of the debt securities means DTC or its nominee
and not the beneficial owners of the debt securities.
9
The information in this section concerning DTC and DTC's book-entry system
has been obtained from DTC. Neither we, the trustees nor the underwriters,
dealers or agents, if any, take responsibility for the accuracy or completeness
of this description.
CERTAIN COVENANTS
Except as specified below or in the applicable prospectus supplement, the
following covenants apply to all series of senior debt securities.
Restrictions on Liens. The senior indenture provides that we will not, and
will not permit any Restricted Subsidiary to, create or incur any Lien on any
shares of stock, indebtedness or other obligations of a Restricted Subsidiary or
any Principal Property of ours or of a Restricted Subsidiary, whether those
shares of stock, indebtedness or other obligations of a Restricted Subsidiary or
Principal Property are owned at the date of such indenture or acquired
afterwards, unless we secure or cause the applicable Restricted Subsidiary to
secure the outstanding debt securities equally and ratably with (or, at our
option, prior to) all indebtedness secured by the particular Lien, so long as
the indebtedness is so secured. This covenant does not apply in the case of:
(a) the creation of any Lien on any shares of stock, indebtedness or other
obligations of a Subsidiary or any Principal Property acquired after
the date of such indenture (including acquisitions by way of merger or
consolidation) by us or a Restricted Subsidiary, contemporaneously with
that acquisition, or within 180 days thereafter, to secure or provide
for the payment or financing of any part of the purchase price, or the
assumption of any Lien upon any shares of stock, indebtedness or other
obligations of a Subsidiary or any Principal Property acquired after
the date of such indenture existing at the time of the acquisition, or
the acquisition of any shares of stock, indebtedness or other
obligations of a Subsidiary or any Principal Property subject to any
Lien without the assumption of that Lien, provided that every Lien
referred to in this clause will attach only to the shares of stock,
indebtedness or other obligations of a Subsidiary or any Principal
Property so acquired and fixed improvements on that Principal Property;
(b) any Lien on any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property existing on the date of such
indenture;
(c) any Lien on any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property in favor of us or any Restricted
Subsidiary;
(d) any Lien on any Principal Property being constructed or improved
securing loans to finance the construction or improvements of that
property;
(e) any Lien on shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property incurred in connection with the
issuance of tax-exempt governmental obligations, including, without
limitation, industrial revenue bonds and similar financings;
(f) any mechanics', materialmen's, carriers' or other similar Liens
arising in the ordinary course of business with respect to obligations
that are not yet due or that are being contested in good faith;
(g) any Lien on any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property for taxes, assessments or
governmental charges or levies not yet delinquent, or already
delinquent but the validity of which is being contested in good faith;
(h) any Lien on any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property arising in connection with legal
proceedings being contested in good faith, including any judgment Lien
so long as execution on the Lien is stayed;
(i) any landlord's Lien on fixtures located on premises leased by us or a
Restricted Subsidiary in the ordinary course of business, and tenants'
rights under leases, easements and similar Liens not materially
impairing the use or value of the property involved;
10
(j) any Lien arising by reason of deposits necessary to qualify us or any
Restricted Subsidiary to conduct business, maintain self-insurance, or
obtain the benefit of, or comply with, any law;
(k) Liens on our current assets to secure loans to us that mature within
twelve months from their creation and that are made in the ordinary
course of business; and
(l) any renewal of or substitution for any Lien permitted by any of the
preceding clauses, provided, in the case of a Lien permitted under
clauses (a), (b) or (d), the indebtedness secured is not increased nor
the Lien extended to any additional assets. (Section 4.3(a) of senior
indenture)
Notwithstanding the foregoing, we or any Restricted Subsidiary may create
or assume Liens in addition to those permitted by the preceding sentence of this
paragraph, and renew, extend or replace those Liens, provided that at the time
of and after giving effect to the creation, assumption, renewal, extension or
replacement, Exempted Debt does not exceed 15 percent of Consolidated Net
Tangible Assets. (Section 4.3(b) of senior indenture)
Restrictions on Sale and Lease-Back Transactions. The senior indenture
provides that we will not, and will not permit any Restricted Subsidiary to,
sell or transfer, directly or indirectly, except to us or to a Restricted
Subsidiary, any Principal Property as an entirety, or any substantial portion of
that Principal Property, with the intention of taking back a lease of such
property, except a lease for a period of three years or less at the end of which
it is intended that the use of that property by the lessee will be discontinued.
Notwithstanding the foregoing, we or any Restricted Subsidiary may sell any
Principal Property and lease it back for a longer period:
(a) if we or such applicable Restricted Subsidiary would be entitled,
pursuant to the provisions of Section 4.3(a) of the senior indenture, to
create a Lien on the property to be leased securing Funded Debt in an
amount equal to the Attributable Debt with respect to the sale and
lease-back transaction without equally and ratably securing the outstanding
debt securities; or
(b) if we promptly inform the trustee of the transaction, and we cause
an amount equal to the fair value (as determined by resolution of our board
of directors) of the property to be applied (1) to the purchase of other
property that will constitute Principal Property having a fair value at
least equal to the fair value of the property sold, or (2) to the
retirement within 120 days after receipt of the proceeds of Funded Debt
incurred or assumed by us or a Restricted Subsidiary, including the senior
debt securities;
provided, further that, in lieu of applying all of or any part of such net
proceeds to such retirement, we may, within 75 days after the sale, deliver or
cause to be delivered to the applicable trustee for cancellation either
debentures or debt securities evidencing Funded Debt of ours (which may include
the senior debt securities) or of a Restricted Subsidiary previously
authenticated and delivered by the applicable trustee, and not yet tendered for
sinking fund purposes or called for a sinking fund or otherwise applied as a
credit against an obligation to redeem or retire such debt securities or
debentures, and an officer's certificate (which will be delivered to the
trustee) stating that we elect to deliver or cause to be delivered the
debentures or debt securities in lieu of retiring Funded Debt as provided in
such indenture.
If we deliver debentures or debt securities to the trustee and we duly
deliver the officer's certificate, the amount of cash that we will be required
to apply to the retirement of Funded Debt under this provision of the senior
indenture will be reduced by an amount equal to the aggregate of the then
applicable optional redemption prices (not including any optional sinking fund
redemption prices) of the applicable debentures or debt securities, or, if there
are no such redemption prices, the principal amount of those debentures or debt
securities. If the applicable debentures or debt securities provide for an
amount less than the principal amount to be due and payable upon a declaration
of the maturity, then the amount of cash will be reduced by the amount of
principal of those debentures or debt securities that would be due and payable
as of the date of the application upon a declaration of acceleration of the
maturity pursuant to the terms of the indenture pursuant to which those
debentures or debt securities were issued. (Section 4.4(a) of senior indenture)
Notwithstanding the foregoing, we or any Restricted Subsidiary may enter
into sale and lease-back transactions in addition to those permitted by this
paragraph, without any obligation to retire any outstanding
11
debt securities or other Funded Debt, provided that at the time of entering into
and giving effect to such sale and lease-back transactions, Exempted Debt does
not exceed 15 percent of Consolidated Net Tangible Assets. (Section 4.4(b) of
senior indenture)
CERTAIN DEFINITIONS
The term "Attributable Debt" as defined in the senior indenture means when
used in connection with a sale and leaseback transaction referred to above under
"-- Certain Covenants -- Restrictions on Sale and Lease-Back Transactions," on
any date as of which the amount of Attributable Debt is to be determined, the
product of (a) the net proceeds from the sale and lease-back transaction
multiplied by (b) a fraction, the numerator of which is the number of full years
of the term of the lease relating to the property involved in the sale and
lease-back transaction (without regard to any options to renew or extend such
term) remaining on the date of the making of the computation, and the
denominator of which is the number of full years of the term of the lease
measured from the first day of the term.
The term "Consolidated Net Tangible Assets" as defined in the senior
indenture means total assets after deducting all current liabilities and
intangible assets as set forth in our most recent balance sheet and our
consolidated Subsidiaries and computed in accordance with GAAP.
The term "Exempted Debt" as defined in the senior indenture means the sum,
without duplication, of the following items outstanding as of the date Exempted
Debt is being determined:
(a) indebtedness of ours and our Restricted Subsidiaries incurred
after the date of such indenture and secured by liens created or assumed or
permitted to exist pursuant to Section 4.3(b) of such indenture described
above under "--Certain Covenants--Restrictions on Liens"; and
(b) Attributable Debt of ours and our Restricted Subsidiaries in
respect of all sale and lease-back transactions with regard to any
Principal Property entered into pursuant to Section 4.4(b) of such
indenture described above under "--Certain Covenants--Restrictions on Sales
and Lease-Back Transactions".
The term "Funded Debt" as defined in the senior indenture means all
indebtedness for money borrowed, including purchase money indebtedness, having a
maturity of more than one year from the date of its creation or having a
maturity of less than one year but by its terms being renewable or extendible at
the option of the obligor, beyond one year from the date of its creation.
The terms "Holder" or "Securityholder" as defined in the applicable
indenture mean the registered holder of any debt security with respect to
registered securities and the bearer of any unregistered security or any coupon
appertaining to it, as the case may be.
The term "Lien" as defined in the senior indenture means, with respect to
any asset, any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind, or any other type of preferential arrangement that has the
practical effect of creating a security interest in respect of such asset. For
the purposes of such indenture, we or any Subsidiary will be deemed to own,
subject to a Lien, any asset that we have acquired or hold subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
The term "Original Issue Discount Security" as defined in the applicable
indenture means any debt security that provides for an amount less than the
principal amount of a particular security to be due and payable upon a
declaration of acceleration of the maturity of that security pursuant to Section
6.2 of such indenture.
The term "Principal Property" as defined in the senior indenture means any
manufacturing or processing plant or warehouse owned at the date of such
indenture or acquired after that date by us or any of our Restricted
Subsidiaries which is located within the United States and the gross book value
of which (including related land and improvements and all machinery and
equipment without deduction of any depreciation
12
reserves) on the date as of which the determination is being made exceeds 2
percent of Consolidated Net Tangible Assets, other than:
(a) any manufacturing or processing plant or warehouse or any portion
of the same (together with the land on which it is erected and fixtures
that are a part of that land) which is financed by industrial development
bonds which are tax exempt pursuant to Section 103 of the Internal Revenue
Code (or which receive similar tax treatment under any subsequent
amendments or any successor laws or under any other similar statute of the
United States);
(b) any property which in the opinion of our board of directors is not
of material importance to the total business conducted by us as an
entirety; or
(c) any portion of a particular property which is similarly found not
to be of material importance to the use or operation of such property.
The term "Restricted Subsidiary" as defined in the applicable indenture
means a Subsidiary of ours (a) of which substantially all the property is
located, or substantially all the business is carried on, within the United
States, and (b) which owns Principal Property; provided, however, that any
Subsidiary may be declared a Restricted Subsidiary by board resolution,
effective as of the date such board resolution is adopted; provided further,
that any such declaration may be rescinded by further board resolution,
effective as of the date that further board resolution is adopted.
The term "Senior Indebtedness" as defined in the subordinated indenture
shall mean (a) the principal of, premium, if any, and interest on all
indebtedness, whether outstanding on the date of the subordinated indenture as
originally executed or thereafter created or incurred, unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such indebtedness is not superior in right of payment to the
subordinated debt securities; and (b) any amendments, modifications, deferrals,
renewals or extensions of any such Senior Indebtedness, or debentures, notes or
other evidences of indebtedness issued in exchange for any such Senior
Indebtedness; provided, however, that Senior Indebtedness shall not be deemed to
include (i) indebtedness which constitutes subordinated indebtedness and (ii)
any other debt securities issued pursuant to the subordinated indenture.
The term "Subsidiary" as defined in the applicable indenture means, with
respect to any person, any corporation, association or other business entity of
which more than 50% of the outstanding Voting Stock is owned, directly or
indirectly, by that person and one or more other Subsidiaries of that person.
RESTRICTIONS ON MERGERS AND SALES OF ASSETS
Under each indenture, we may not consolidate with, merge with or into, or
sell, convey, transfer, lease or otherwise dispose of all or substantially all
of our property and assets (in one transaction or a series of related
transactions) to, any person (other than a consolidation with or merger with or
into a Subsidiary or a sale, conveyance, transfer, lease or other disposition to
a Subsidiary) or permit any person to merge with or into us unless (a) either
(1) we will be the continuing person or (2) the person (if other than ourselves)
formed by the consolidation or into which we are merged or that acquired or
leased such property and assets of ours will be a corporation organized and
validly existing under the laws of the United States of America or any of its
jurisdictions and will expressly assume, by a supplemental indenture, executed
and delivered to the trustee, all of our obligations on all of the debt
securities under such indenture, and we will have delivered to the trustee an
opinion of counsel stating that the consolidation, merger or transfer and the
supplemental indenture complies with such indenture and that all conditions
precedent provided for in such indenture relating to the transaction have been
complied with and that the supplemental indenture constitutes a legal, valid and
binding obligation of ours or the successor enforceable against such entity in
accordance with its terms, subject to customary exceptions; and (b) an officer's
certificate to the effect that immediately after giving effect to such
transaction, no default will have occurred and be continuing and an opinion of
counsel as to the matters set forth in clause (a) will have been delivered to
the trustee. (Section 5.1)
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EVENTS OF DEFAULT
Events of default defined in the indentures with respect to the debt
securities of any series are:
(a) we default in the payment of the principal of any debt securities of a
series when the same becomes due and payable at maturity, upon
acceleration, redemption or mandatory repurchase, including as a
sinking fund installment, or otherwise;
(b) we default in the payment of interest on any debt securities of a
series when the same becomes due and payable, and that default
continues for a period of 30 days;
(c) we default in the performance of or breach any other covenant or
agreement of ours in the applicable indenture with respect to the debt
securities of a series and that default or breach continues for a
period of 30 consecutive days (or, in the case of the subordinated
indenture, 60 consecutive days) after written notice to us by the
trustee or to us and the trustee by the Holders of 25 percent or more
in aggregate principal amount of the debt securities of all series
affected thereby;
(d) an involuntary case or other proceeding is commenced against us or any
Restricted Subsidiary with respect to our debts or our Restricted
Subsidiary's debts under any bankruptcy, insolvency or other similar
law now or in the future in effect seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official
relating to us or a substantial part of our property, and the
involuntary case or other proceeding remains undismissed and unstayed
for a period of 60 days; or an order for relief is entered against us
or any Restricted Subsidiary under the federal bankruptcy laws as now
or in the future in effect;
(e) we or any Restricted Subsidiary (1) commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or in the
future in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (2) consent to the appointment of
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of us or any Restricted
Subsidiary or for all or substantially all of our property and assets
or any Restricted Subsidiary's property and assets or (3) effect any
general assignment for the benefit of creditors; and
(f) any other event of default established with respect to any series of
debt securities issued pursuant to the applicable indenture occurs.
(Section 6.1)
The indentures provide that if an event of default described in clauses (a)
or (b) above, with respect to the debt securities of any series then
outstanding, occurs and is continuing, then, and in each and every such case,
except for any series of debt securities the principal of which has already
become due and payable, either the trustee or the Holders of not less than 25
percent in aggregate principal amount of the debt securities of any such
affected series then outstanding under the applicable indenture (each series
being treated as a separate class) by notice in writing to us (and to the
trustee if given by Securityholders), may declare the entire principal (or, if
the debt securities of any such series are Original Issue Discount Securities,
the applicable portion of the principal amount as may be specified in the terms
of the particular series established pursuant to that indenture) of all debt
securities of the affected series, and the interest accrued on that series, if
any, to be due and payable immediately, and upon any such declaration the same
will become immediately due and payable.
If an event of default described clauses (c) or (f) above, with respect to
the debt securities of one or more but not all series then outstanding, or with
respect to the debt securities of all series then outstanding, occurs and is
continuing, then, and in each and every such case, except for any series of debt
securities the principal of which has already become due and payable, either the
trustee or the Holders of not less than 25 percent in aggregate principal amount
(or, if the debt securities of any such series are Original Issue Discount
Securities, the amount of which is accelerable as described in this paragraph)
of the debt securities of all the affected series then outstanding under the
applicable indenture (treated as a single class) by notice in writing to us (and
to the trustee if given by Securityholders) may declare the entire principal
(or, if the debt securities of any such series are Original Issue Discount
Securities, such portion of the principal amount as may be specified in the
terms of that series) of all debt securities of all the affected series, and the
interest
14
accrued on those series, if any, to be due and payable immediately, and upon any
such declaration the same will become immediately due and payable.
If an event of default described in clauses (d) or (e) above occurs and is
continuing, then the principal amount (or, if any debt securities are Original
Issue Discount Securities, the portion of the principal as may be specified in
the terms of that series) of all the debt securities then outstanding and
interest accrued on those debt securities, if any, will be and become
immediately due and payable without any notice or other action by any Holder or
the trustee to the full extent permitted by applicable law.
Upon certain conditions such declarations may be rescinded and annulled and
past defaults may be waived by the Holders of a majority in principal of the
then outstanding debt securities of all series that have been accelerated,
voting as a single class. (Section 6.2)
TRUSTEE'S RIGHTS
The indentures contain a provision under which, subject to the duty of the
trustee during a default to act with the required standard of care:
(a) the trustee may rely and will be protected in acting or refraining from
acting upon any resolution, certificate, officer's certificate, opinion
of counsel, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence or
indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper person or persons,
and the trustee need not investigate any fact or matter stated in the
document, but the trustee, in its discretion, may make any further
inquiry or investigation into any facts or matters as it may see fit;
(b) before the trustee acts or refrains from acting, it may require an
officer's certificate and/or an opinion of counsel, which will conform
to the requirements of the applicable indenture, and the trustee will
not be liable for any action it takes or omits to take in good faith in
reliance on that certificate or opinion; subject to the terms of such
indenture, whenever in the administration of the trusts of such
indenture the trustee deems it necessary or desirable that a matter be
proved or established prior to taking or suffering or omitting any
action under such indenture, that matter (unless other evidence in
respect thereof be specifically prescribed in such indenture) may, in
the absence of negligence or bad faith on the part of the trustee, be
deemed to be conclusively proved and established by an officer's
certificate delivered to the trustee, and that certificate, in the
absence of negligence or bad faith on the part of the trustee, will be
full warrant to the trustee for any action taken, suffered or omitted
by it under the provisions of such indenture upon the faith of the
officer's certificate;
(c) the trustee may act through its attorneys and agents not regularly in
its employ and will not be responsible for the misconduct or negligence
of any agent or attorney appointed with due care by it under the
applicable indenture;
(d) any request, direction, order or demand of us mentioned in the
applicable indenture will be sufficiently evidenced by an officer's
certificate (unless other evidence is specifically prescribed in such
indenture); and any board resolution may be evidenced to the trustee by
a copy of the resolution certified by our Secretary or an Assistant
Secretary;
(e) the trustee will be under no obligation to exercise any of the rights
or powers vested in it by the applicable indenture at the request,
order or direction of any of the Holders, unless the Holders have
offered the trustee reasonable security or indemnity against the costs,
expenses and liabilities that might be incurred by it in compliance
with the request or direction;
(f) the trustee will not be liable for any action it takes or omits to take
in good faith that it believes to be authorized or within its rights or
powers or for any action it takes or omits to take in accordance with
the direction of the Holders in accordance with the applicable
indenture relating to the time, method and place of conducting any
proceeding for any remedy available to the trustee, or exercising any
trust or power conferred upon the trustee, under such indenture;
15
(g) the trustee may consult with counsel, and the written advice of its
counsel or any opinion of counsel will be full and complete
authorization and protection in respect of any action taken, suffered
or omitted by it under the applicable indenture in good faith and in
reliance on that opinion of counsel; and
(h) prior to the occurrence of an event of default under each indenture and
after the curing or waiving of all events of default, the trustee will
not be bound to make any investigation into the facts or matters stated
in any resolution, certificate, officer's certificate, opinion of
counsel, board resolution, statement, instrument, opinion, report,
notice, request, consent, order, approval, appraisal, bond, debenture,
note, coupon, security, or other paper or document, but the trustee, in
its discretion, may make any further inquiry or investigation into any
facts or matters as it may see fit and, if the trustee decides to make
such further inquiry or investigation, it will be entitled to examine,
during normal business hours and upon prior written notice, our books,
records and premises, personally or by agent or attorney. (Section 7.2)
Subject to various provisions in the indentures, the Holders of at least a
majority in principal amount (or, if the debt securities are Original Issue
Discount Securities, such portion of the principal as is then accelerable under
the applicable indenture) of the applicable outstanding debt securities of all
series affected (voting as a single class) by notice to the trustee, may waive,
on behalf of the Holders of all the debt securities of that series, an existing
default or event of default with respect to such debt securities of that series
and its consequences, except a default in the payment of principal of or
interest on any debt security as specified in clauses of the "Events of Default"
section above or in respect of a covenant or provision of such indenture which
cannot be modified or amended without the consent of the Holder of each
outstanding debt security affected by the default. Upon any waiver, the default
will cease to exist, and any event of default with respect to the debt
securities of that series will be deemed to have been cured, for every purpose
of such indenture. However, no waiver will extend to any subsequent or other
default or event of default or impair any right in relation to any subsequent or
other default or event of default. (Section 6.4)
Subject to provisions in the indentures for the indemnification of the
trustee and certain other limitations, the Holders of at least a majority in
aggregate principal amount (or, if any debt securities are Original Issue
Discount Securities, the portion of the principal as is then accelerable under
the applicable indenture) of the applicable outstanding debt securities of all
series affected (voting as a single class), may direct the time, method and
place of conducting any proceeding for any remedy available to the trustee or
exercising any trust or power conferred on the trustee with respect to the debt
securities of such series by such indenture, provided that the trustee may
refuse to follow any direction that conflicts with law or such indenture that
may involve the trustee in personal liability, or that the trustee determines in
good faith may be unduly prejudicial to the rights of Holders not joining in the
giving of such direction; and provided, further that the trustee may take any
other action it deems proper that is not inconsistent with any directions
received from such Holders of debt securities pursuant to such indenture.
(Section 6.5)
The indentures provide that no Holder of any applicable debt securities of
any series may institute any proceeding, judicial or otherwise, with respect to
the applicable indenture or the debt securities of that series, or for the
appointment of a receiver or trustee, or for any other remedy under the
indentures, unless:
(a) such Holder has previously given to the trustee written notice of a
continuing event of default with respect to the debt securities of that
series;
(b) such Holders of at least 25 percent in aggregate principal amount of
applicable outstanding debt securities of the affected series have made
written request to the trustee to institute proceedings in respect of
the event of default in its own name as trustee under such indenture;
(c) the Holder or Holders have offered to the trustee indemnity reasonably
satisfactory to the trustee against any costs, liabilities or expenses
to be incurred in compliance with the request;
(d) the trustee for 60 days after its receipt of the notice, request and
offer of indemnity has failed to institute any such proceeding; and
16
(e) during the 60-day period, the Holders of a majority in aggregate
principal amount of the applicable outstanding debt securities of the
affected series have not given the trustee a direction that is
inconsistent with such written request. A Holder may not use such
indenture to prejudice the rights of another Holder or to obtain a
preference or priority over any other Holder. (Section 6.6)
The indentures contain a covenant that we will file with the trustee,
within 15 days after we are required to file the same with the SEC, copies of
the annual reports and of the information, documents and other reports that we
may be required to file with the SEC pursuant to Section 13 or Section 15(d) of
the Exchange Act. (Section 4.6)
DISCHARGE, LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Each indenture provides with respect to each series of applicable debt
securities that, except as otherwise provided in this paragraph, we may
terminate our obligations under such debt securities of a series and the
applicable indenture with respect to debt securities of that series if:
(a) all debt securities of that series previously authenticated and
delivered, with certain exceptions, have been delivered to the trustee for
cancellation, and we have paid all sums payable by us under such indenture
with respect to that series; or
(b) (1) the debt securities of that series mature within one year or
all of them are to be called for redemption within one year under
arrangements satisfactory to the trustee for giving the notice of
redemption;
(2) we irrevocably deposit in trust with the trustee, as trust funds
solely for the benefit of the Holders of those debt securities, for that
purpose, money or U.S. Government obligations or a combination of money or
U.S. Government obligations sufficient (unless such funds consist solely of
money, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification delivered to the trustee),
without consideration of any reinvestment, to pay principal of and interest
on the debt securities of that series to maturity or redemption, as the
case may be, and to pay all other sums payable by us under such indenture;
and
(3) we deliver to the trustee an officer's certificate and an opinion
of counsel, in each case stating that all conditions precedent provided for
in such indenture relating to the satisfaction and discharge of such
indenture with respect to the debt securities of that series have been
complied with.
With respect to the foregoing clause (a), only our obligations to
compensate and indemnify the trustee will survive. With respect to the foregoing
clause (b), only our obligations to execute and deliver debt securities of that
series for authentication, to set the terms of the debt securities of that
series, to maintain an office or agency in respect of the debt securities of
that series, to have moneys held for payment in trust, to register the transfer
or exchange of debt securities of that series, to deliver debt securities of
that series for replacement or to be canceled, to compensate and indemnify the
trustee and to appoint a successor trustee, and our right to recover excess
money held by the trustee will survive until those debt securities are no longer
outstanding. Thereafter, only our obligations to compensate and indemnify the
trustee and its right to recover excess money held by the trustee will survive.
(Section 8.1)
Each indenture provides that, except as otherwise provided in this
paragraph, we:
(a) will be deemed to have paid and will be discharged from any and
all obligation, in respect of the debt securities of any series, and the
provisions of such indenture will no longer be in effect with respect to
the debt securities of that series (a "legal defeasance"); and
(b) may omit to comply with any specific covenant relating to such
series provided for in a board resolution or supplemental indenture or
officer's certificate that may by its terms be defeased pursuant to the
applicable indenture (or any term, provision or condition of the senior
indenture described above under "-- Certain Covenants", in the case of the
senior indenture) and our omission will be deemed not to be an event of
default under clauses (c) and (d) under "Events of Default" above with
respect to the outstanding debt securities of a series (a "covenant
defeasance");
17
provided that the following conditions will have been satisfied:
(a) we have irrevocably deposited in trust with the trustee as trust
funds solely for the benefit of the Holders of the debt securities of that
series, for payment of the principal of and interest on those debt
securities, money or U.S. Government obligations or a combination of the
foregoing sufficient (unless such funds consist solely of money, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the trustee)
without consideration of any reinvestment and after payment of all federal,
state and local taxes or other charges and assessments in respect of those
payments payable by the trustee, to pay and discharge the principal of and
accrued interest on the outstanding debt securities of such series to
maturity or earlier redemption (irrevocably provided for under arrangements
satisfactory to the trustee), as the case may be;
(b) our deposit will not result in a breach or violation of, or
constitute a default under, such indenture or any other material agreement
or instrument to which we are a party or by which we are bound;
(c) no default with respect to those debt securities will have
occurred and be continuing on the date of the deposit;
(d) we will have delivered to the trustee an opinion of counsel that
the Holders of the debt securities of that series have a valid security
interest in the trust funds subject to no prior liens under such Uniform
Commercial Code; and
(e) we will have delivered to the trustee an officer's certificate and
an opinion of counsel, in each case stating that all conditions precedent
provided for in such indenture relating to the defeasance contemplated have
been complied with.
In the case of a legal defeasance, we will have delivered to the trustee an
opinion of counsel (based on a change in law) or a ruling directed to the
trustee from the United States Internal Revenue Service that the Holders of the
debt securities of that series will not recognize income, gain or loss for
federal income tax purposes as a result of our exercise of our option under this
provision of the applicable indenture and will be subject to federal income tax
on the same amount and in the same manner and at the same times as could have
been the case if the deposit and defeasance had not occurred, or an instrument,
in form reasonably satisfactory to the trustee, where we, notwithstanding a
legal defeasance of our indebtedness in respect of debt securities of any
series, or any portion of the principal amount thereof, will assume the
obligation which will be absolute and unconditional) to irrevocably deposit with
the trustee any additional sums of money or additional U.S. Government
obligations or any combination of money or U.S. Government obligations, at such
time or times as necessary, together with the money and/or U.S. Government
obligations so deposited, to pay when due the principal of and premium, if any,
and interest due and to become due on the applicable debt securities; provided,
however, that the instrument may state that our obligation to make additional
deposits as aforesaid will be subject to the delivery to us by the trustee of a
notice asserting the deficiency accompanied by an opinion of an independent
public accountant of nationally recognized standing selected by the trustee,
showing the applicable calculation.
Subsequent to a legal defeasance, our obligations to execute and deliver
debt securities of that series for authentication, to set the terms of the debt
securities of that series, to maintain an office or agency in respect of the
debt securities of that series, to have moneys held for payment in trust, to
register the transfer or exchange of debt securities of that series, to deliver
debt securities of that series for replacement or to be canceled, to compensate
and indemnify the trustee and to appoint a successor trustee, and our right to
recover excess money held by the trustee will survive until those debt
securities are no longer outstanding. After those debt securities are no longer
outstanding, in the case of a legal defeasance, only our obligations to
compensate and indemnify the trustee and our right to recover excess money held
by the trustee will survive. (Sections 8.2 and 8.3)
18
MODIFICATION OF THE INDENTURE
Each indenture provides that we and the trustee may amend or supplement
such indenture or the applicable debt securities of any series without notice to
or the consent of any Holder:
(a) to cure any ambiguity, defect or inconsistency in such indenture,
provided that such amendments or supplements do not materially and
adversely affect the interests of the Holders;
(b) to comply with Article 5 (which relates to the covenant discussed
under "-- Restrictions on Mergers and Sales of Assets") of such
indenture;
(c) to comply with any requirements of the SEC in connection with the
qualification of such indenture under the Trust Indenture Act;
(d) to evidence and provide for the acceptance of appointment under such
indenture with respect to the debt securities of any or all series by
a successor trustee;
(e) to establish the form or forms or terms of debt securities of any
series or of the coupons appertaining to such debt securities as
permitted under such indenture;
(f) to provide for uncertificated or unregistered debt securities and to
make all appropriate changes for such purpose;
(g) to change or eliminate any provisions of such indenture with respect
to all or any series of the debt securities not then outstanding (and,
if the change is applicable to fewer than all those series of the
applicable debt securities, specifying the series to which the change
is applicable), and to specify the rights and remedies of the trustee
and the Holders of those debt securities; and
(h) to make any change that does not materially and adversely affect the
rights of any Holder. (Section 9.1)
Each indenture also contains provisions that allow us and the trustee,
subject to certain conditions, without prior notice to any Holders, to amend
such indenture and the outstanding debt securities of any series with the
written consent of the Holders of a majority in aggregate principal amount of
the applicable debt securities then outstanding of all series affected by such
supplemental indenture (all such series voting as one class). The Holders of a
majority in aggregate principal amount of the applicable outstanding debt
securities of all series affected (all such series voting as one class) by
written notice to the trustee may waive future compliance by us with any
provision of such indenture or the debt securities of that series.
Notwithstanding the foregoing provisions, without the consent of each applicable
Holder affected, an amendment or waiver, including a waiver pursuant to Section
6.4 of such indenture, may not:
(a) extend the stated maturity of the principal of, or any sinking fund
obligation or any installment of interest on, the Holder's debt
security or reduce the principal amount or the rate of interest of that
debt security (including any amount in respect of original issue
discount), or any premium payable with respect to that debt security,
or adversely affect the rights of that Holder under any mandatory
redemption or repurchase provision or any right of redemption or
repurchase at the option of that Holder, or reduce the amount of the
principal of an Original Issue Discount Security that would be due and
payable upon the acceleration of the maturity of that debt security or
any amount provable in bankruptcy, or change any place of payment
where, or the currency in which, any debt security or any premium or
the interest on that debt security is payable, or impair the right to
institute suit for the enforcement of any payment on or after the due
date of that payment;
(b) reduce the percentage in principal amount of outstanding debt
securities of the relevant series the consent of whose Holders is
required for any supplemental indenture or for any waiver of compliance
with certain provisions of such indenture or certain defaults and their
consequences provided for therein;
(c) waive a default in the payment of principal of or interest on any
applicable debt security of a Holder; or
19
(d) modify any of the provisions of such indenture governing supplemental
indentures with the consent of Securityholders, except to increase the
percentage or to provide that certain other provisions of such
indenture cannot be modified or waived without the consent of the
Holder of each outstanding debt security affected by the modification.
A supplemental indenture which changes or eliminates any covenant or other
provision of the applicable indenture which has expressly been included solely
for the benefit of one or more particular series of debt securities, or which
modifies the rights of Holders of applicable debt securities of that series with
respect to that covenant or provision, will be deemed not to affect the rights
under such indenture of the Holders of debt securities of any other series or of
the coupons appertaining to those debt securities. It will not be necessary for
the consent of any Holder under such indenture to approve the particular form of
any proposed amendment, supplement or waiver, but it will be sufficient if the
consent approves the substance of the amendment, supplement or waiver. After an
amendment, supplement or waiver under such indenture becomes effective, we or,
at our request, the trustee will give to the affected Holders a notice briefly
describing the amendment, supplement or waiver. We or, at our request, the
trustee will mail supplemental indentures to Holders upon request. Any failure
of us to mail such notice, or any defect in the notice, will not, however, in
any way impair or affect the validity of any supplemental indenture or waiver.
(Section 9.2)
INFORMATION CONCERNING THE TRUSTEE
An affiliate of The Bank of New York participates as a lender under certain
of our credit agreements.
20
DESCRIPTION OF CAPITAL STOCK
We have authority to issue 160,000,000 shares of common stock, par value
$1.00 per share and 2,000,000 shares of preferred stock, par value $1.00 per
share. As of September 30, 2000, we had outstanding 103,741,595 shares of common
stock and no shares of preferred stock. Our board of directors has authority,
without action by our shareholders, to issue authorized and unissued shares of
preferred stock in one or more series and, within certain limitations, to
determine the voting rights (including the right to vote as a series on
particular matters), preference as to dividends and in liquidation, conversion,
redemption and other rights of each series.
The following is a brief summary of the voting, dividend, liquidation and
certain other rights of the holders of the capital stock as set forth in our
by-laws and Restated Certificate of Incorporation, copies of which are filed
with the Commission.
COMMON STOCK
Voting Rights-Noncumulative Voting. The holders of common stock are
entitled to one vote per share on all matters to be voted on by shareholders,
including the election of directors. Shareholders are not entitled to cumulative
voting rights, and, accordingly, the holders of a majority of the shares voting
for the election of directors can elect the entire board of directors if they
choose to do so and, in that event, the holders of the remaining shares will not
be able to elect any person to the board of directors.
Our Restated Certificate of Incorporation requires the affirmative vote of
90% of our outstanding shares of common stock to authorize certain mergers,
sales of assets, corporate reorganizations and other transactions in the event
that any person or entity acquires 30% or more of our outstanding common stock.
Dividends; Restriction on Payment of Dividends. The holders of common
stock are entitled to receive such dividends, if any, as may be declared from
time to time by our board of directors, in its discretion, from funds legally
available for the purpose and subject to prior dividend rights of holders of any
shares of preferred stock which may be outstanding. Upon liquidation or
dissolution of Arrow, subject to prior liquidation rights of the holders of
preferred stock, the holders of common stock are entitled to receive on a pro
rata basis the remaining assets of Arrow available for distribution. Holders of
common stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to our
common stock.
In addition, the terms of our second amended and restated credit agreement,
as amended, and our amended and restated 364-day credit agreement require that
consolidated total debt, consolidated net worth, and the ratio of earnings to
cash interest expense be maintained at certain designated levels.
All outstanding shares of common stock are fully paid and not liable to
further calls or assessment by us.
PREFERRED STOCK
Our board of directors is authorized, without further vote or action by the
holders of our common stock, to issue by resolution an aggregate of 2,000,000
shares of preferred stock. These shares of preferred stock may be issued in one
or more series as established from time to time by our board of directors. Our
board also is authorized to fix the number of shares and the designation or
title of each series of preferred stock prior to the issuance of any shares of
that series. Regarding each class or series of preferred stock, our board will
fix the voting powers which may be full or limited, or there may be no voting
powers. Our board will also determine the preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions, of each series of preferred stock. Our board is further
authorized to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
the class or series then outstanding.
No shares of preferred stock are presently outstanding and we have no plans
to issue a new series of preferred stock. It is not possible to state the effect
of the authorization and issuance of any series of preferred stock upon the
rights of the holders of common stock until our board of directors determines
the specific
21
terms, rights and preferences of a series of preferred stock. However, possible
effects might include restricting dividends on the common stock, diluting the
voting power of the common stock or impairing the liquidation rights of the
common stock without further action by holders of common stock. In addition,
under some circumstances, the issuance of preferred stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of our securities or the
removal of incumbent management, which could thereby depress the market price of
our common stock.
RIGHTS AGREEMENT
In March 1988, we paid a dividend of one preferred share purchase right on
each outstanding share of common stock pursuant to a rights agreement. Each
right entitles the holder to purchase from us one one-hundredth of a share of
participating stock, $1.00 par value, for a price of $50, subject to adjustment.
Although the rights are not intended to prevent a takeover of Arrow at a full
and fair price, they may have certain anti-takeover effects. They may deter an
attempt to acquire Arrow in a manner which seeks to deprive our shareholders of
the full and fair value of their investment and may deter attempts by
significant shareholders to take advantage of Arrow and its shareholders through
certain self-dealing transactions. The rights may cause substantial dilution to
a person or group that acquires or attempts to acquire Arrow without the rights
being redeemed by the board of directors. Accordingly, the rights should
encourage any potential acquirer to negotiate with our board of directors.
Unless approval is first obtained from our board of directors, the rights may
deter transactions, including tender offers, which the majority of shareholders
may believe are beneficial to them.
22
DESCRIPTION OF WARRANTS
We have described below the general terms and provisions of the debt
warrants and equity warrants to which a prospectus supplement may relate. We
will describe the particular terms of any debt warrants and equity warrants
offered by any prospectus supplement in the prospectus supplement relating to
such debt warrants or equity warrants.
GENERAL
We may issue debt warrants and equity warrants, evidenced by warrant
certificates under a warrant agreement, independently or together with any debt
securities, preferred stock or common stock. The warrants may be transferable
with or separate from such securities. If we offer debt warrants, the applicable
prospectus supplement will describe the terms of the debt warrants, including
the following: (i) the offering price, if any, including the currency, or
currency unit in which such price will be payable; (ii) the designation,
aggregate principal amount and terms of the offered debt securities with which
the debt warrants are issued and the number of debt warrants issued with each
such offered debt security; (iii) if applicable, the date on or after which the
debt warrants and the related offered debt securities will be separately
transferable; (iv) the designation, aggregate principal amount and terms of debt
securities purchasable upon exercise of one debt warrant and the price or prices
at which, and the currency, or currency unit in which such principal amount of
debt securities may be purchased upon exercise; (v) the date on which the right
to exercise the debt warrants commences and the date on which such right
expires; (vi) any U.S. Federal income tax consequences; (vii) whether the debt
warrants represented by the warrant certificates will be issued in registered or
bearer form or both; and (viii) any other material terms of the debt warrants.
If we offer equity warrants, the applicable prospectus supplement will describe
the terms of the equity warrants, including the following: (i) the offering
price, if any, including the currency or currency unit in which such price will
be payable; (ii) the designation of any series of preferred stock purchasable
upon exercise of the equity warrants; (iii) the number of shares of preferred
stock or common stock purchasable upon exercise of one equity warrant, and the
price or prices at which, and the currency, or currency unit in which such
shares may be purchased upon exercise; (iv) the date on which the right to
exercise the equity warrants and the date on which such right expires; (v) any
U.S. Federal income tax consequences; (vi) whether the equity warrants
represented by the warrant certificate will be issued in registered or bearer
form or both; (vii) whether the equity warrants or the underlying preferred
stock or common stock will be listed on any national securities exchange; and
(viii) any other material terms of the equity warrants. In addition, if we sell
any debt warrants or equity warrants for any foreign currency or currency units,
the restrictions, elections, tax consequences, specific terms and other
information with respect to such issue will be specified in the applicable
prospectus supplement.
Warrant certificates, if any, may be exchanged for new warrant certificates
of different denominations and may (if in registered form) be presented for
registration of transfer at the corporate trust office of the warrant agent,
which will be listed in the applicable prospectus supplement, or at such other
office as may be set forth therein. Warrantholders do not have any of the rights
of holders of debt securities (except to the extent that the consent of
warrantholders may be required for certain modifications of the terms of the
indenture under which the series of offered debt securities issuable upon
exercise of the warrants to be issued) or preferred or common stockholders and
are not entitled to payments of principal and interest, if any, on debt
securities or to dividends or other distributions made with respect to preferred
stock or common stock.
Warrants may be exercised by surrendering the warrant certificate, if any,
at the corporate trust office or other designated office of the warrant agent,
with (i) the form of election to purchase on the reverse side of the warrant
certificate, if any, properly completed and executed, and (ii) payment in full
of the exercise price, as set forth in the applicable prospectus supplement.
Upon exercise of warrants, the warrant agent will, as soon as practicable,
deliver the debt securities, preferred stock or common stock issuable upon the
exercise of the warrants in authorized denominations in accordance with the
instructions of the exercise warrantholder and at the sole cost and risk of such
holder. If less than all of the warrants evidenced by the warrant certificate
are exercised, a new warrant certificate will be issued for the remaining amount
of unexercised warrants, if sufficient time exists prior to the expiration date.
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PLAN OF DISTRIBUTION
GENERAL
Any of the securities offered hereby may be sold in any one or more of the
following ways from time to time:
- to or through underwriters;
- through dealers;
- directly to other purchasers; or
- through agents.
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of securities, underwriters may receive
compensation from us or purchasers of securities for whom they may act as
agents, in the form of discounts, concessions or commissions. Underwriters,
dealers and agents that participate in the distribution of securities may be
deemed to be underwriters, and any discounts or commissions received by them
from us and any profit on the resale of securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any person who
may be deemed to be an underwriter will be identified, and the compensation
received from us will be described, in the prospectus supplement.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters may also impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers for the securities sold for their
account may be reclaimed by the syndicate if those securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the securities,
which may be higher than the price that might otherwise prevail in the open
market, and, if commenced, may be discontinued at any time.
Except for our common stock, all securities, when first issued, will have
no established trading market. Any underwriters or agents to or through whom
securities are sold by us for public offering and sale may make a market in
those securities, but the underwriters or agents will not be obligated to do so
and may discontinue any market making at any time without notice. We cannot
assure you as to the liquidity of the trading market for any of our securities.
Under agreements which we may enter into, underwriters, dealers and agents
who participate in the distribution of securities may be entitled to
indemnification by us against or contribution toward certain liabilities,
including liabilities under the Securities Act.
DELAYED DELIVERY ARRANGEMENTS
If so indicated in the prospectus supplement, we will authorize
underwriters or other persons acting as our agents to solicit offers by certain
institutions to purchase debt securities from us pursuant to contracts providing
for payment and delivery on a future date. Institutions with which those types
of contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases will be subject to our approval. The
obligations of any purchaser under any of those types of contracts will be
subject to the condition that the purchase of the securities will not at the
time of delivery be prohibited under the laws of any jurisdiction to which the
purchaser is subject. The underwriters and agents will not have any
responsibility in respect of the validity or performance of those contracts.
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VALIDITY OF SECURITIES
The validity of the securities offered by this prospectus will be passed
upon for us by Milbank, Tweed, Hadley & McCloy LLP, New York, New York.
EXPERTS
The consolidated financial statements at December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, appearing in
our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and
incorporated by reference herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report dated February 16, 2000
incorporated in this prospectus by reference and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The audited historical financial statements of the Wyle Electronics Group
incorporated in this prospectus by reference to Arrow Electronics, Inc's Form
8-K dated September 1, 2000 have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
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