Avnet 2000 Annual Report Download - page 22

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Management is not now aware of any commitments, contingencies or events
within the Company’s control which may significantly change its ability to
generate sufficient cash from internal or external sources to meet its needs.
ACQUISITIONS
During 2000, the Company has acquired a number of businesses which are
already having a substantial positive impact on the Company. On October
20, 1999, the Company acquired Marshall Industries, one of the world’s
largest distributors of electronic components and computer products, for a
combination of cash and Avnet stock. The total cost of the acquisition of
Marshall including estimated expenses was approximately $764.6 million,
consisting of the cost for the Marshall shares of $326.8 million in cash,
$269.3 million in Avnet stock and $7.0 million in Avnet stock options (net of
related tax benefits of $4.8 million) as well as $17.5 million for direct trans-
action cost and estimated expenses and $144.0 million for the refinancing
of Marshall net debt. The above dollar value of Avnet stock reflects the
issuance of 6,817,943 shares of Avnet stock valued at an assumed price of
$39.50 based on the average closing price of Avnet common stock for a
period commencing two trading days before and ending two trading days
after October 12, 1999, the day on which the exchange ratio for the Avnet
stock component of the purchase price was determined pursuant to the
merger agreement.
On October 14, 1999, the Company acquired 94% of the SEI Macro Group,
an electronics components distributor headquartered in the United
Kingdom, and during the second quarter of fiscal 2000 acquired 16% of
Eurotronics B.V. (which did business under the name SEI), a pan-European
electronics components distributor headquartered in the Netherlands. On
January 3, 2000, the Company completed its acquisition of the SEI Macro
Group and Eurotronics B.V. (SEI). The combined annual sales of Eurotronics
B.V. (SEI) and the SEI Macro Group were approximately $750 million.
The Company also continues to expand its CM operations through acquisi-
tions of businesses. In November 1999, the Company completed the acqui-
sition of PCD Italia S.r.l. and Matica S.p.A. Milan, both value-added techni-
cal distributors of enterprise computing systems based in Milan, Italy, and
in July, 1999, completed the acquisition of Integrand Solutions, the largest
computer solutions integrator in Australia. In addition, on July 3, 2000 the
Company acquired the Savoir Technology Group, Inc., the leading distribu-
tor of IBM mid-range server products in the Americas. In the merger, hold-
ers of Savoir common stock received 0.11452 of a share of Avnet common
stock for each share of Savoir common stock, and cash in lieu of fractional
Avnet shares. The exchange ratio, as well as the price paid for fractional
shares, was based upon an Avnet stock price capped at $68.5472. Holders
of Savoir series A preferred received 0.16098 of a share of Avnet common
stock for each share they held and cash in lieu of fractional Avnet shares.
The total cost of the acquisition of Savoir including estimated expenses was
approximately $144.6 million, consisting of the cost for the Savoir shares of
$110.8 million in Avnet stock and $0.8 million in Avnet stock options (net of
related tax benefits of $0.5 million) as well as $0.8 million for direct trans-
action expenses and $32.2 million for the refinancing of Savoir net debt. The
above dollar value of Avnet stock reflects the issuance of 1,868,477 shares
(or 3,736,954 shares as adjusted to reflect the two-for-one stock split to be
distributed on September 28, 2000) of Avnet stock valued at an assumed
price of $59.32 based on the average closing price of Avnet common stock
for a period commencing two trading days before and ending one trading day
after June 30, 2000. The acquisition will be accounted for as a purchase.
On August 7, 2000, a consortium consisting of the Company, Schroder
Ventures and another distributor entered into a share purchase agreement
to purchase the VEBA Electronics Group from Germany-based E.On AG for
approximately $2.35 billion in cash, including the assumption of debt. Under
the terms of the agreement, the Company will acquire (a) the Germany-
headquarted EBV Group, consisting of EBV Electronik and WBC, both pan-
European semiconductor distributors, and Atlas Services Europe, a logistics
provider for EBV and WBC; and (b) the Germany-based RKE Systems, a
computer products and services distributor, for approximately $740.0 mil-
lion, including the assumption of debt and subject to closing adjustments.
As part of the agreement among the consortium members, Avnet will loan
$50.0 million to Schroder Ventures, or one of its affiliated companies, to
enable Schroder Ventures to close the transaction. The Company intends to
finance the transaction through the issuance of a combination of short-term
and long-term debt; however as stated above, the Company is evaluating
its capital structure and may, if deemed appropriate, issue equity or equity-
linked securities. The Company expects to complete this acquisition during
the quarter ended December 29, 2000, provided the necessary regulatory
approvals are obtained.
To capitalize on growing world markets for electronic components and com-
puter products, the Company has pursued and expects to continue to pur-
sue strategic acquisitions to expand its business. Management believes that
the Company has the ability to generate sufficient capital resources from
internal or external sources in order to continue its expansion program. In
addition, as with past acquisitions, management does not expect that future
acquisitions will materially impact the Company’s liquidity.
MARKET RISKS
Many of the Company’s operations, primarily its international subsidiaries,
occasionally purchase and sell products in currencies other than their func-
tional currencies. This subjects the Company to the risks associated with
fluctuations of foreign currency exchange rates. The Company reduces this
risk by utilizing natural hedging (offsetting receivables and payables) as well
as by creating offsetting positions through the use of derivative financial
instruments, primarily forward foreign exchange contracts with maturities of
less than sixty days. The market risk related to the foreign exchange con-
tracts is offset by the changes in valuation of the underlying items being
hedged. The amount of risk and the use of derivative financial instruments
described above is not material to the Company’s financial position or
results of operations. As of September 15, 2000, approximately 29% of the
Company’s outstanding debt was in fixed rate instruments and 71% was
subject to variable short-term interest rates. Accordingly, the Company will
be impacted by any change in short-term interest rates. The Company does
not hedge either its investment in its foreign operations or its floating inter-
est rate exposures.
THE YEAR 2000 ISSUE
As reported in the Company’s prior filings, the Company was engaged in
modifying its computer systems and applications which used two-digit fields
to designate a year (“Year 2000 Issue”). The Company engaged outside
consulting firms and utilized its internal resources to perform a comprehen-
sive remediation of the Company’s computer systems before the Year 2000.
The Company incurred costs of approximately $17 million in these remedia-
tion efforts. As of the date of this Report, neither the Company, nor to its
knowledge, any of its major customers or suppliers, have experienced any
significant disruption of business due to Year 2000 issues.
THE EURO
Effective on January 1, 1999, a single European currency (the “Euro”) was
introduced and certain member countries of the European Union established
fixed conversion rates between their existing national currencies and the
Euro. The participating countries adopted the Euro as their common legal cur-
rency on that date, and during the transition period through January 1, 2002
either the Euro or a participating country’s national currency will be accept-
ed as legal currency. The Company is addressing the issues raised by the
introduction of the Euro including, among other things, the potential impact
on its internal systems, tax and accounting considerations, business issues
and foreign exchange rate risks. Although management is still evaluating the
impact of the Euro, management does not anticipate, based upon information
currently available, that the introduction of the Euro will have a material
adverse impact on the Company’s financial condition or results of operations.