<PAGE> 1
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
COMMISSION FILE NUMBER 0-255
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------------- to ------------------.
GRAYBAR ELECTRIC COMPANY, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 13-0794380
- ------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
34 North Meramec Avenue, St. Louis, Missouri 63105
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Post Office Box 7231, St. Louis, Missouri 63177
- ------------------------------------------------------------------------------
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code: (314) 512-9200
--------------------
Securities registered pursuant to Section 12(b) of the Act: None
----------
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock - Par Value $20
Common Stock - Par Value $1 Per Share with a
Stated Value of $20
Voting Trust Certificates relating to such Shares of
Common Stock of the Registrant
Common Stock outstanding at March 26, 1999 -
5,811,277 Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Paragraph 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate stated value of the Common Stock outstanding and, with
respect to rights of disposition, beneficially owned by nonaffiliates (as
defined in Rule 405 under the Securities Act of 1933) of the registrant on
March 26, 1999, was approximately $116,225,540. Pursuant to a Voting Trust
Agreement, dated as of April 1, 1997, approximately 94% of the outstanding
shares of Common Stock are held of record by five Voting Trustees who are
each directors of the registrant and who collectively exercise all voting
rights with respect to such shares. The registrant is 100% owned by its
active and retired employees, and there is no public trading market for the
registrant's Common Stock. The registrant has the option to repurchase, at
the price at which it was issued, each outstanding share of Common Stock in
the event of the owner's death, termination of employment other than by
retirement, or desire to dispose of such shares. Historically all shares of
Common Stock have been issued for $20 per share, and the registrant has
always exercised its repurchase option and expects to continue to do so.
The documents listed below have been incorporated by reference into the
indicated Part of this Annual Report on Form 10-K:
(1) Annual Report to Shareholders for the fiscal year ended December
31, 1998 -- Part II, Items 5-8.
(2) Information Statement relating to the 1999 Annual Meeting of
Shareholders -- Part III, Items 10-13.
<PAGE> 2
PART I
------
Item 1. Business
- ------- --------
Graybar Electric Company, Inc. (the "Company") is engaged
internationally in the distribution of electrical and communications products
and integrated supply services primarily to contractors, industrial plants,
telephone companies, power utilities, and commercial users. All products
sold by the Company are purchased by the Company from others.
The Company was incorporated under the laws of the State of New
York on December 11, 1925 to take over the wholesale supply department of
Western Electric Company, Incorporated. The location and telephone number of
the principal executive offices of the Company are 34 North Meramec Avenue,
St. Louis, Missouri (314) 512-9200, and the mailing address of the principal
executive offices is P.O. Box 7231, St. Louis, Missouri 63177.
Suppliers
- ---------
The Company acts as a distributor of the products of more than
1,000 manufacturers. The relationship of the Company with a number of its
principal suppliers goes back many years. It is customarily a nonexclusive
national or regional distributorship terminable upon 30 to 90 days notice by
either party.
During 1998, the Company purchased a significant portion of its
products from several major suppliers. The termination by any of these
companies, within a short period of time, of a significant number of their
agreements with the Company might have an immediate material adverse effect
on the business of the Company, but the Company believes that within a
reasonable period of time it could find alternate sources of supply adequate
to alleviate such adverse effect.
2
<PAGE> 3
Products Distributed
- --------------------
The Company distributes more than 100,000 different products and,
therefore, is able to supply its customers with a wide variety of electrical
and communications products. The products distributed by the Company consist
primarily of wire, cable, conduit, wiring devices, tools, motor controls,
transformers, lamps, lighting fixtures and hardware, power transmission
equipment, telephone station apparatus, key systems, PBXs, data products for
local area networks or wide area networks, fiber optic products, and CATV
products. These products are sold to customers such as contractors (both
industrial and residential), industrial plants, telephone companies, private
and public utilities, and commercial users.
On December 31, 1998 and 1997, the Company had orders on hand
which totaled approximately $252,052,000 and $ 232,157,000, respectively.
The Company believes that the increase from 1997 to 1998 reflects the
improvements in the market sectors of the economy in which the Company
operates. The Company expects that approximately 85% of the orders on hand
at December 31, 1998 will be filled within the twelve-month period ending
December 31, 1999. Historically, orders on hand for the Company's products
have been firm, but customers from time to time request cancellation and the
Company has historically allowed such cancellations.
Marketing
- ---------
The Company sells its products through a network of distributing
houses located in 14 geographical districts throughout the United States. In
each district the Company maintains a main distributing house and a number of
branch distributing houses, each of which carries an inventory of supply
materials and operates as a wholesale distributor for the territory in which
it is located. The main distributing house in each district carries a
substantially larger inventory than the branch houses so that the branch
houses can call upon the main distributing house for additional items of
inventory. In addition, the Company maintains four (4) zone warehouses with
special inventories so all locations can call upon them for additional items.
The Company also has subsidiary operations with distribution facilities
located in Puerto Rico, Mexico, Singapore, Canada and Chile.
3
<PAGE> 4
The distribution facilities operated by the Company are shown in
the following table:
<TABLE>
<CAPTION>
Location of Main Number of Distributing Number of
Distributing House Houses in District Distributing Houses
- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Graybar International, Inc.
---------------------------
Boston, MA 11 Puerto Rico 1
Cincinnati, OH 8
Dallas, TX 30 Graybar Electric (Ontario) Ltd.
-------------------------------
Glendale Heights, IL 16 Canada 6
Miami, FL 3
Minneapolis, MN 18 Graybar Electric Ltd.
---------------------
New York, NY 15 Canada 18
Norcross, GA 19
Phoenix, AZ 27 Graybar de Mexico, S.DE R.L. DE C.V.
------------------------------------
Pittsburgh, PA 13 Mexico City, Mexico 1
Richmond, VA 18
Seattle, WA 23 Graybar International PTE, Ltd.
-------------------------------
St. Louis, MO 16 Singapore 1
Tampa, FL 22
Graybar International de Chile Limitada
---------------------------------------
Santiago 1
<CAPTION>
Zone Distributing Houses
- ------------------------
<S> <C>
Austell, GA 1
Bethlehem, PA 1
Dallas, TX 1
Peoria, IL 1
</TABLE>
Where the specialized nature or size of a particular shipment
warrants, the Company has products shipped directly from its suppliers to the
place of use, while in other cases orders are filled from the Company's
inventory. On a dollar volume basis, over sixty percent of the orders are
filled from the Company's inventory and the remainder are shipped directly
from the supplier to the place of use. The Company generally finances its
inventory from internally generated funds and from long and short-term
borrowings.
4
<PAGE> 5
The Company distributes its products to more than 200,000
customers, which fall into six general classes. The following list shows the
estimated percentage of the Company's total sales for each of the three years
ended December 31, attributable to each of these classes:
<TABLE>
<CAPTION>
CLASS OF CUSTOMERS PERCENTAGE OF SALES
------------------ -------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Electrical Contractors 38.2% 38.3% 39.1%
Industrial Plants 25.5 29.3 29.8
Telecommunication Companies 28.7 26.1 24.4
Private and Public Power Utilities 3.9 4.6 5.0
Integrated Supply 2.4 --- ---
Miscellaneous 1.3 1.7 1.7
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
</TABLE>
At December 31, 1998, the Company employed approximately 2,900
persons in sales capacities. Approximately 1,300 of these sales personnel
were sales representatives who work in the field making sales to customers at
the work site. The remainder of the sales personnel were sales and marketing
managers, and telemarketing, advertising, quotation, counter and clerical
personnel.
Competition
- -----------
The Company believes that it is one of the three largest
distributors of electrical and comm/data products in the United States. The
field is highly competitive, and the Company estimates that the three largest
distributors account for only a small portion of the total market, with the
balance of the market being accounted for by independent distributors and
manufacturers operating on a local, state-wide or regional basis.
The Company believes that its competitive position is primarily a
result of its ability to supply its customers through a network of
conveniently located distribution facilities with a broad range of electrical
and telecommunications materials within a short period of time. Price is
also important, particularly where the Company is asked to submit bids to
contractors in connection with large construction jobs.
5
<PAGE> 6
Employees
- ---------
At December 31, 1998, the Company employed approximately 7,900
persons on a full-time basis. Approximately 160 of these persons were
covered by union contracts. The Company has not had a material work stoppage
and considers its relations with its employees to be good.
Item 2. Properties
- ------- ----------
As of December 31, 1998, the Company operated offices and
distribution facilities in 275 locations. Of these, 142 were owned by the
Company, and the balance were leased. The leases are for varying terms, the
majority having a duration of less than five years.
The Company's distribution facilities consist primarily of
warehouse space. A small portion of the space in each facility is used for
offices. Distribution facilities vary in size from approximately 5,000
square feet to 213,000 square feet, the average being approximately 29,000
square feet.
As of December 31, 1998, approximately $30.5 million in debt of
the Company was secured by mortgages on 35 buildings. Eighteen of these
facilities are subject to a first mortgage securing a 12.25% note, of which
$1.8 million in principal amount remains outstanding. Seven of these
facilities are subject to a first mortgage securing a 9.23% note, of which
$19.1 million in principal amount remains outstanding. Eight of these
facilities are subject to first mortgages securing variable rate notes, of
which $1.7 million in principal remains outstanding. A facility in Houston,
Texas is subject to a first mortgage securing a 7.75% note, of which $2.5
million in principal remains outstanding, and a facility in St. Louis,
Missouri is subject to a first mortgage securing a 7.74% note, of which $5.4
million in principal remains outstanding.
Item 3. Legal Proceedings
- ------- -----------------
There are presently no material pending legal proceedings which
are expected to have a material impact on the Company or any one of its
subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matter was submitted to a vote of shareholders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
6
<PAGE> 7
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Shareholder
- ------- ----------------------------------------------------------------
Matters
-------
The Company is wholly owned by its active and retired employees,
and there is no public trading market for its Common Stock, par value $1 per
share with a stated value of $20 per share. No shareholder may sell,
transfer or otherwise dispose of shares of Common Stock without first
offering the Company the option to purchase such shares at the price at which
they were issued. The Company also has the option to purchase the Common
Stock of any shareholder who dies or ceases to be an employee of the Company
for any cause other than retirement on a Company pension. In the past all
shares issued by the Company have been issued at $20 per share, and the
Company has always exercised its repurchase option, and expects to continue
to do so.
The information as to number of holders of Common Stock and
frequency and amount of dividends, required to be included pursuant to this
Item 5, is included under the captions "Capital Stock Data" and "Dividend
Data" on page 1 of the Company's Annual Report to Shareholders for the year
ended December 31, 1998, (the "1998 Annual Report") furnished to the
Securities and Exchange Commission (the "Commission") pursuant to Rule 14c-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and such information is incorporated herein by reference.
Item 6. Selected Financial Data
- ------- -----------------------
The selected financial data for the Company as of December 31, 1998
and for the five years then ended, which is required to be included
pursuant to this Item 6, is included under the caption "Selected Consolidated
Financial Data" on page 18 of the 1998 Annual Report and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Management's discussion and analysis required to be included
pursuant to this Item 7 is included under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 19 and 20 of the 1998 Annual Report and is incorporated herein by
reference.
7
<PAGE> 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
The Company's interest expense is sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates
affect the interest paid on its debt. To mitigate the cash flow impact of
interest rate fluctuations, the Company generally maintains a significant
portion of its debt as fixed rate in nature by borrowing on a long-term basis.
The following table provides information about financial
instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt principal
payments by expected
maturity dates, including
current portion -
Fixed rate debt 15,545 18,357 22,347 22,561 30,626 173,406 282,842
Average interest rate 7.81% 6.92% 7.03% 7.01% 6.91% 6.89%
Variable rate debt 930 891 288 200 169 725 3,203
Average interest rate 8.25% 8.27% 8.29% 8.27% 8.28% 8.27%
Notes payable to banks -
Short-term notes 43,948 --- --- --- --- --- 43,948
Average interest rate 5.78%
</TABLE>
The fair value of long-term debt is estimated by discounting cash
flows using current borrowing rates available for debt of similar
maturities. Based on the discounted cash flow analysis, the fair value of
long-term debt approximates the carrying value at December 31, 1998. Fair
value of the notes payable to banks approximates the carrying value due to
the short-term maturity of the instruments.
Foreign Exchange Rate Risk
--------------------------
The Company conducts business in several foreign countries
including Canada, Mexico, Puerto Rico, Singapore and Chile. Exposure from
foreign currency exchange rate fluctuations is not material.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The financial statements and Report of Independent Auditors
required by this Item 8 are listed in Item 14(a)(1) of this Annual Report on
Form 10-K under the caption "Index to Financial Statements."
8
<PAGE> 9
Such financial statements specifically referenced from the 1998
Annual Report in such list are incorporated herein by reference. There is no
supplementary financial information required by this item which is applicable
to the Company.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The information with respect to the directors and executive
officers of the Company required to be included pursuant to this Item 10 will
be included under the caption "Directors and Executive Officers -- Nominees
for Election as Directors" in the Company's Information Statement relating to
the 1999 Annual Meeting (the "Information Statement"), to be filed with the
Commission pursuant to Rule 14c-5 under the Exchange Act, and is incorporated
herein by reference.
Item 11. Executive Compensation
- -------- ----------------------
The information with respect to executive compensation required to
be included pursuant to this Item 11 will be included under the captions
"Executive Compensation" and "Pension Plan" in the Information Statement and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
The information with respect to the security ownership of
beneficial owners of more than 5% of the Common Stock, the directors of the
Company and all directors and officers of the Company, which is required to
be included pursuant to this Item 12, will be included in the introductory
language and under the caption "Directors and Executive Officers -- Nominees
for Election as Directors" in the Information Statement and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information with respect to any reportable transactions,
business relationships and indebtedness between the Company and the
beneficial owners of more than 5% of the Common Stock, the directors or
nominees for director of the Company, the executive officers of the Company
or the members of the immediate families of such individuals, required to be
included pursuant to this
9
<PAGE> 10
Item 13, will be included under the caption "Directors and Executive
Officers" in the Information Statement and is incorporated herein by
reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) Documents filed as part of this report:
--------------------------------------
The following financial statements and Report of
Independent Auditors are included on the indicated pages in
the 1998 Annual Report and are incorporated by reference in
this Annual Report on Form 10-K:
1. Index to Financial Statements
-----------------------------
(i) Consolidated Statements of Income and Retained
Earnings for each of the three years ended
December 31, 1998 (page 21).
(ii) Consolidated Balance Sheets, as of December 31,
1998 and December 31, 1997 (page 22).
(iii) Consolidated Statements of Cash Flows for each
of the three years ended December 31, 1998
(page 23).
(iv) Consolidated Statements of Changes in
Shareholders' Equity for each of the three years
ended December 31, 1998 (page 24)
(v) Notes to Consolidated Financial Statements
(pages 25 to 28).
(vi) Report of Independent Auditors (page 29).
2. Index to Financial Schedule
---------------------------
The following schedule for each of the three years ended
December 31, 1998, to the financial statements is included on the indicated
page in this Annual Report on Form 10-K:
(i) Schedule II. Valuation and Qualifying Accounts
(page 14).
All schedules other than those indicated above are omitted
because of the absence of the conditions under which they are required or
because the required information is set forth in the financial statements and
the accompanying notes thereto.
3. Exhibits
--------
The following exhibits required to be filed as part of this
Annual Report on Form 10-K have been included:
(3) Articles of incorporation and by-laws
10
<PAGE> 11
(i) Restated Certificate of Incorporation, as
amended, filed as exhibit 4(i) to the Company's
Registration Statement on Form S-1 (Registration
No. 333-15761) and incorporated herein by
reference.
(ii) By-laws as amended through August 1, 1994 filed
as exhibit 3(ii) to the Company's Annual Report
on Form 10-K for the year ended December 31,
1997 (Commission File No. 0-255) and
incorporated herein by reference.
(4)and(9) Voting Trust Agreements
Voting Trust Agreement dated as of April 1,
1997, attached as Annex A to the Prospectus, dated
January 21, 1997, constituting a part of the
Company's Registration Statement on Form S-1
(Registration No. 333-15761) and incorporated
herein by reference.
The Company hereby agrees to furnish to the
Commission upon request a copy of each instrument
omitted pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K.
(10) Material contracts.
(i) Management Incentive Plan, filed as Exhibit 4(a)(1)
to the Annual Report on Form 10-K for the year
ended December 31, 1972 (Commission File No.
0-255), as amended by the Amendment effective
January 1, 1974, filed as Exhibit 13-c to the
Registration Statement on Form S-1 (Registration
No. 2-51832), the Amendment effective January 1,
1977, filed as Exhibit 13(d) to the Registration
Statement on Form S-1 (Registration
No. 2-59744), and the Amendment effective
January 1, 1980, filed as Exhibit 5(f) to the
Registration Statement on Form S-7 (Registration
No. 2-68938) and incorporated herein by
reference.
(13) Annual Report to Shareholders for 1998 (except for
those portions which are expressly incorporated by
reference in this Annual Report on Form 10-K, this
exhibit is furnished for the information of the
Commission and is not deemed to be filed as part of
this Annual Report on Form 10-K).
(21) List of subsidiaries of the Company.
(23) Independent Auditors' Consent of Ernst and Young LLP.
(27) Financial Data Schedule (submitted in EDGAR format only).
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed during the last quarter of
the Company's fiscal year ended December 31, 1998.
11
<PAGE> 12
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, as of
the 26th day of March, 1999.
GRAYBAR ELECTRIC COMPANY, INC.
By /s/ C. L. HALL
---------------------------------
(C. L. Hall, President)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the Company, in the capacities indicated, on March 26,
1999.
<TABLE>
<S> <C>
/s/ C. L. HALL Director and President
- ---------------------------------- (Principal Executive Officer
(C. L. Hall) and Principal Financial
Officer)
/s/ J. R. SEATON Director, Vice President
- ---------------------------------- and Comptroller (Principal
(J. R. Seaton) Accounting Officer)
/s/ R. A. COLE Director
------------------------------------
(R. A. Cole)
/s/ T. F. DOWD Director
------------------------------------
(T. F. Dowd)
/s/ T. S. GURGANOUS Director
------------------------------------
(T. S. Gurganous)
/s/ R. H. HANEY Director
------------------------------------
(R. H. Haney)
/s/ G. W. HARPER Director
------------------------------------
(G. W. Harper)
/s/ W. L. KING Director
------------------------------------
(W. L. King)
12
<PAGE> 13
/s/ J. C. LOFF Director
------------------------------------
(J. C. Loff)
/s/ G. J. McCREA Director
------------------------------------
(G. J. McCrea)
/s/ R. D. OFFENBACHER Director
------------------------------------
(R. D. Offenbacher)
/s/ R. A. REYNOLDS, JR. Director
------------------------------------
(R. A. Reynolds, Jr.)
/s/ C. R. UDELL Director
------------------------------------
(C. R. Udell)
/s/ J. F. VAN PELT Director
------------------------------------
(J. F. Van Pelt)
/s/ J. W. WOLF Director
------------------------------------
(J. W. Wolf)
</TABLE>
13
<PAGE> 14
<TABLE>
GRAYBAR ELECTRIC COMPANY, INC. AND SUBSIDIARIES
-----------------------------------------------
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
---------------------------------------------
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to at End
of Period Income Deductions of Period
Description --------- ---------- ---------- ---------
-----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998:
Reserve deducted from assets to
which it applies-
Allowance for doubtful accounts $3,962,000 $ 2,331,000 $ 2,158,000 <F1> $4,135,000
Allowance for cash discounts 665,000 11,855,000 11,872,000 <F2> 648,000
---------- ----------- ----------- ----------
Total $4,627,000 $14,186,000 $14,030,000 $4,783,000
========== =========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1997:
Reserve deducted from assets to
which it applies-
Allowance for doubtful accounts $3,901,000 $ 2,196,000 $ 2,135,000 <F1> $3,962,000
Allowance for cash discounts 582,000 10,557,000 10,474,000 <F2> 665,000
---------- ----------- ----------- ----------
Total $4,483,000 $12,753,000 $12,609,000 $4,627,000
========== =========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1996:
Reserve deducted from assets to
which it applies-
Allowance for doubtful accounts $4,113,000 $ 2,004,000 $ 2,216,000 <F1> $3,901,000
Allowance for cash discounts 476,000 9,743,000 9,637,000 <F2> 582,000
---------- ----------- ----------- ----------
Total $4,589,000 $11,747,000 $11,853,000 $4,483,000
========== =========== =========== ==========
<FN>
<F1> Amount of trade receivables written off against the reserve provided.
<F2> Discounts allowed to customers.
</TABLE>
14
<PAGE> 15
<TABLE>
INDEX TO EXHIBITS
-----------------
Exhibits
--------
<S> <C>
(3) Articles of incorporation and by-laws.
(i) Restated Certificate of Incorporation, as amended, filed as
exhibit 4(i) to the Company's Registration Statement on Form S-1
(Registration No. 333-15761) <F*>
(ii) By-laws as amended through August 1, 1994 filed as exhibit
3(ii) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (Commission File No. 0-255) <F*>
(4)and(9) Voting Trust Agreements
Voting Trust Agreement dated as of April 1, 1997, attached
as Annex A to the Prospectus, dated January 21, 1997,
constituting a part of the Company's Registration Statement on
Form S-1 (Registration No. 333-15761) <F*>
(10) Material contracts.
(i) Management Incentive Plan, filed as Exhibit 4(a)(1) to the
Annual Report on Form 10-K for the year ended December 31, 1972
(Commission File No. 0-255), as amended by the Amendment
effective January 1, 1974, filed as Exhibit 13-c to the
Registration Statement on Form S-1 (Registration No. 2-51832),
the Amendment effective January 1, 1977, filed as Exhibit 13(d)
to the Registration Statement on Form S-1 (Registration No.
2-59744), and the Amendment effective January 1, 1980, filed as
Exhibit 5(f) to the Registration Statement on Form S-7
(Registration No. 2-68938) <F*>
(13) Annual Report to Shareholders for 1998 (except for those portions
which are expressly incorporated by reference in this Annual
Report on Form 10-K, this exhibit is furnished for the
information of the Commission and is not deemed to be filed as
part of this Annual Report on Form 10-K)
(21) List of subsidiaries of the Company.
(23) Independent Auditors' Consent of Ernst and Young LLP.
(27) Financial Data Schedule (submitted in EDGAR format only).
--------------
<FN>
<F*>Incorporated by reference in this Annual Report on Form 10-K.
</TABLE>
15
<PAGE> 1
A N N U A L R E P O R T 1 9 9 8
- --------------------------------------
[PHOTOS]
[GRAYBAR LOGO]
- -------------------------------
100% ISO REGISTERED
100% ISO REGISTERED
100% ISO REGISTERED
100% ISO REGISTERED
100% ISO REGISTERED
100% ISO REGISTERED
100% ISO REGISTERED
<PAGE> 2
GRAYBAR DIRECTORS
- -------------------------------------------------------------------------------
[PHOTOS]
Standing (left to right):
GERARD J. MCCREA
District Vice President--Northeastern
Comm/Data District
WILLIAM L. KING
District Vice President--Boston District
Seated:
THOMAS S. GURGANOUS
District Vice President--Richmond District
JACK F. VAN PELT
Vice President--Human Resources
JOHN R. SEATON
Vice President and Comptroller
Standing (left to right):
GOLDEN W. HARPER
Vice President--Operations
CARL L. HALL
President and Chief Executive Officer
RICHARD D. OFFENBACHER
District Vice President--Southeastern
Comm/Data District
Seated:
ROBERT A. REYNOLDS, JR.
Senior Vice President, Comm/Data Business
RICHARD H. HANEY
Senior Vice President, Electrical Business
Standing (left to right):
RICHARD A. COLE
District Vice President--Chicago District
JOHN C. LOFF
District Vice President--Seattle District
CHARLES R. UDELL
Vice President--Electrical Marketing
Seated:
JOHN W. WOLF
Vice President and Treasurer
THOMAS F. DOWD
Vice President, General Counsel and Secretary
<PAGE> 3
- ---------------------------------------------------------------------------
CAPITAL STOCK DATA
<TABLE>
<CAPTION>
Number of Equity Security Holders as of
December 31, 1998:
- ---------------------------------------------------------------------------
Title of Class Number of Security Holders
- ---------------------------------------------------------------------------
<S> <C>
Preferred Stock 88
Common Stock 168
Voting Trust Certificates for Common Stock 4,204
- ---------------------------------------------------------------------------
</TABLE>
DIVIDEND DATA
Common Stock, par value $1; stated value $20.
<TABLE>
<CAPTION>
Dividends declared for year: 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ .30 $ .30 $ .30
Second Quarter .30 .30 .30
Third Quarter .30 .30 .30
Fourth Quarter $1.10 $1.10 $1.10
- ---------------------------------------------------------------------------
</TABLE>
On December 10, 1998 a five percent stock dividend was declared to
shareholders of record on January 14, 1999. Shares representing this dividend
were issued on February 1, 1999.
<TABLE>
CONTENTS
<S> <C>
Graybar Officers and Directors Inside Front Cover
President's Letter 2
Market Review 4
Operations Review 14
Financial Review 17
District Management 30
Locations 32
</TABLE>
COMPANY'S BUSINESS
Graybar Electric Company, Inc. is engaged internationally in the distribution
of electrical and communications products and integrated supply services
primarily to contractors, industrial plants, telephone companies, power
utilities, and commercial users. All products sold by the Company are
purchased by the Company from others.
MARKETS SERVED
Electrical Contractor
Commercial & Industrial
Voice & Data Communications
Power Utility
International
ON THE COVER
Left: Derrick Woodell, Supervisor Zone
Service Center, operates the Bendi forklift
at the new Atlanta Regional and National Zone.
Upper right: Lynn Anderson, Steve Becker,
Debbie Grace and Don Ludwinski, all employees
at the Information Systems facility in St. Louis,
confer over a recent report.
Lower right: Director of Training John Teipen
tries out the new high-tech training room
at Information Systems. Trainees include
(left to right) IS employees Lynn Anderson,
Cherry Bennett, Jim Shemwell, and
Carrie Johnson, Training Specialist
at Corporate Headquarters.
1
<PAGE> 4
LETTER TO SHAREHOLDERS
- ------------------------------------------------------------------------------
Supported by a strong economy, Graybar continued to outpace the industry in
1998 with record sales and profits. Revenues and net profits increased by
12% over the previous year - concurrently establishing a new record for
return on sales.
There were a number of significant changes and appointments in senior
management in 1998:
Robert L. Mygrant, District Vice President in Tampa, and a Director and
Voting Trustee, retired. Subsequently, Michael W. Fowler was appointed Tampa
District Vice President, William L. King was appointed a Director and Robert
A. Reynolds, Jr. was elected a Voting Trustee. Bob Mygrant was invaluable in
his roles as District Vice President, Director, and Voting Trustee. His
counsel will be missed.
Irving Orloff, District Vice President in St. Louis and a Director, retired.
Director Anthony A. Brzoski retired as Vice President-Comm/Data Marketing.
Both Irving and Tony, in fulfilling their responsibilities as Vice Presidents
and Directors, made significant contributions to the Company. We wish them
the best in their well-earned retirement.
Thomas F. Williams was appointed District Vice President in St. Louis.
Dennis E. DeSousa was appointed Vice President-Comm/Data Marketing, and Bruce
C. Judkins was appointed Vice President-Corporate Accounts and Integrated
Supply.
[GRAPH]
Also in 1998, Kathleen M. Mazzarella was appointed Vice President-Comm/Data
National Accounts, and William R. Kuykendall was appointed Vice President-
International.
Finally, in addition to William L. King, two other Directors were elected -
Richard A. Cole, District Vice President in Chicago, and John C. Loff,
District Vice President in Seattle.
To support the Company's growth, five new locations opened, and more than 700
employees were hired in 1998. At year-end, Human Resources Managers were in
place in six districts. They are filling a vital role helping to manage our
employee recruiting and retention efforts, and we plan to have this position
filled in all districts in 1999.
To more fully meet the needs of national account customers, a centralized
customer service group was established to handle comm/data national accounts.
Those Fortune 500 customers and large national resellers now have one point
of contact for sales and customer service for their multiple locations
nationwide.
The Company continued to move forward with implementation of the new
logistics program. Zone warehouses were opened in Dallas and Atlanta while
two others are scheduled to open early in 1999. Four additional warehouses
are scheduled to open by year-end - including all of the designated national
zones. We anticipate that the logistics strategy will be totally implemented
by the end of the year 2000.
Early results from the regional zones are positive. It is apparent that
customer service and inventories have been improved in those locations served
by the zones, and we have made significant productivity gains. When the
logistics plan is implemented nationwide, we will have the ability to deliver
to 98% of our customers within 24 hours. And the zones will enable us to
increase the number of orders that are filled completely first time, one pass
- - thereby greatly reducing the number of transactions and shipments.
Further, warehouse automation will minimize selection and receiving errors -
again, reducing the number of transactions for us - and the customer. The
logistics plan is expected to support the Company's growth well into the next
century and is an integral part of our strategy to obtain increased market
share.
2
<PAGE> 5
- -------------------------------------------------------------------------------
Graybar achieved a significant milestone in 1998, as we became ISO registered
in every location. The disciplined approach afforded by ISO registration has
helped us improve both the consistency and quality of our service and also
enhances our ability to implement new procedures.
The Company continued its strong emphasis on training by providing 182
instructor-led courses in 1998 which were attended by over 3,500 employees.
In addition, Graybar employees registered for more than 60,000 courses on
Graybar's on-line "Virtual Campus." Future training plans include
development of instructor-led, on-line courses along with an expanded
curriculum including training videos.
Some time ago, we became aware of the need for increased emphasis on long-
term strategic planning. Consequently, beginning in 1997, the Board of
Directors began to meet specifically to discuss future strategy. An
outgrowth of these meetings, along with an intensive effort by a sub-
committee of the Board, was the decision to create a new function to focus
full time on strategic issues and business development. Effective
December 1, 1998, Beatty D'Alessandro was appointed to the new position of
Director of Strategic Planning and Business Development. As such, Beatty
will lead Graybar's strategic business planning process and develop, with the
Board's oversight and approval, a strategic business plan. Beatty and his
staff will analyze our existing business and evaluate potential opportunities
in an objective, disciplined fashion. The goal is to change management's
focus from year-end results to a more distant horizon. Beatty and his staff
will also be responsible for identifying and evaluating possible
acquisitions.
"Our stated ambition is to become the leading electrical and comm/data
distributor and to benumber one or two in every market that we serve."
Our stated ambition is to become the leading electrical and comm/data
distributor and to be number one or two in every market that we serve. To
achieve that ambition we must continue to gain market share, which can only
be accomplished by developing the best service offering at a competitive
price. To outpace the industry, we must have continued improvements in
productivity and our service offering. Key programs to this effort are
logistics, training and technology.
We have already touched on logistics and training. Major technological
advances in 1998 included the installation of a new mainframe computer and an
updated version of GraybarNet(R), our web-based, real time customer order
entry system. This new version provides the capabilities to gain access
through the Internet and use an electronic catalog.
In addition, all critical computer programs were tested and updated to insure
Year 2000 compliance. All system hardware was also tested and updated as
needed. We are currently reviewing all supplier and customer Year 2000
issues, which may require the development of contingency plans.
The International Group focused on national account initiatives with
multinational companies and engineering contractors in strategic markets and
finished the year profitably despite turmoil in many of the markets we serve.
In Canada, Graybar Ontario and Harris & Roome had record sales with growth
rates exceeding their local markets. We assumed 100% ownership of Graybar
Singapore, reorganized and moved to a new location. Graybar Chile opened in
May, and despite negative pressures affecting all of Latin America, finished
the year in a strong position to support our future strategic activities in
the region.
It is management's opinion that Graybar is well positioned to achieve our long-
term objectives.
/s/ C. L. Hall
St. Louis, Missouri Carl L. Hall
March 1999 President
3
<PAGE> 6
MARKET REVIEW
- -------------------------------------------------------------------------------
CONSTRUCTION MARKET
Graybar continued to increase share in the contractor market as our 1998
sales to this core customer group significantly outpaced the industry.
Growth was strong across the country with the southwest and central regions
leading the way.
Investments in programs such as on-site services, interactive quote and
project management teams enabled us to grow our direct-ship project business
at a rate three times the industry average in 1998, making construction one
of our fastest growing domestic markets. We expect this trend to continue as
we begin to implement our vision of being the "industry standard bearer" for
project management services.
Stock sales continued to grow despite a decline in copper wire pricing. Our
continuing commitment to error-free performance, emphasized by our company-
wide registration to the ISO 9002 standards, and the introduction of our
regional zone warehouses contributed substantially to this growth. The
logistics plan calls for a network of regional zone warehouses to be
completed by year-end 2000. When fully implemented, this network will enable
Graybar to deliver an expanded inventory offering-next day-to 98% of the U.S.
market, with greatly improved fill rates and fewer errors.
Employee training is a major focus at Graybar as we continue our commitment
to sales specialization and skills enhancement. New contractor sales
representatives attended contractor sales training schools, which covered
topics such as plans and specs, take-offs, negotiating skills and project
management. Four of these schools were held in 1998, and we plan four more
schools in 1999. In addition, 50 corporate-sponsored training schools were
conducted with nine key suppliers. More than 1,200 employees attended these
classes.
A total of 480 employees attended 14 lighting schools at General Electric's
Nela Park Training Institute and Graybar lighting schools at the Lithonia,
Hubbell, Lutron, and Cooper Lighting training centers.
In 1998 we conducted 16 Graybar-only, instructor-led regional training
schools with Square D. These schools provided valuable intermediate-level
product training to 320 Graybar employees. Prerequisites for most schools
included the successful completion of three Square D training courses on our
Virtual Campus.
The Company exhibited at two major contractor conventions in 1998: the
National Electrical
[PHOTO]
4
<PAGE> 7
- -------------------------------------------------------------------------------
Contractors Association (NECA) and the Independent Electrical Contractors
(IEC). At the 1998 NECA Show, we displayed our Comm/Data and Electrical
Business strengths with an appropriate theme: "Graybar, your one source for
Electrical, Communications and Data Products."
Also at the NECA Show we reintroduced the Graybar hobbyhorse campaign,
"Electrical Wiring Is NOT A Hobby." This advertising campaign discourages
the growing "do-it-yourself-electrically" trend among homeowners and others
by showing a hobbyhorse made of electrical parts engulfed in flames. Posters,
bumper stickers and other materials featuring the hobbyhorse are being
offered to electrical contractors-helping them create awareness of the
hazards associated with amateurs attempting electrical installations. A big
hit when first introduced in 1955, and again in 1965, this campaign is
expected to generate customer goodwill and increased business from
contractors.
The Graybar booth at the IEC Annual Convention in Boca Raton, Florida,
featured presentations by several major suppliers who introduced new and
labor saving products. Graybar, GE Lighting and Square D co-sponsored the
annual "Celebration `98" dinner during the convention.
Our special relationship with Square D continues to reward both companies
with growth exceeding industry averages. The opportunity to do strategic
planning together in areas such as electronic commerce, training programs and
merchandising is a valuable by-product of our single line relationship.
COMMERCIAL AND INDUSTRIAL MARKETS
As corporate America continues the pursuit of becoming either the biggest or
the best in their respective industries at the lowest overall cost, companies
in the Commercial and Industrial Markets (C&I) are looking for strategies to
help them achieve a competitive advantage. This unprecedented drive toward
cost competitiveness by our C&I customers offers us many opportunities to
apply our value-added capabilities in the form of Graybar "Real Solutions."
Our C&I national account business continued to grow at a double-digit rate in
1998. Trends such as electronic commerce, supply chain integration, and
strategic alliances are providing differentiation for Graybar and its
customers in this market.
"Investments in programs such as on-site services, interactive quote and
project management teams enabled us to grow our direct-ship project business
at a rate three times the industry average in 1998, making construction one
of our fastest growing domestic markets."
The Graybar
hobbyhorse campaign
reintroduced at the NECA [PHOTO]
Show is expected to
generate customer
goodwill and increased
business from contractors.
5
<PAGE> 8
MARKET REVIEW
- -------------------------------------------------------------------------------
This was demonstrated best in 1998 with the announcement of a new agreement
connecting IBM, Graybar, and Square D/Groupe Schneider in a supply chain that
allows IBM better control over capital expenditures and enables their
personnel to devote more time to IBM's core business. Under this alliance,
IBM has designated Square D/Groupe Schneider as the national standard for all
IBM facilities in North America. Graybar was selected to be an alliance
member due to our extensive electronic commerce capabilities and our national
inventory commitment to Square D/Groupe Schneider.
Our national account organization continues to evolve as we reinforce our
commitment to strategic customers and position Graybar as the market leader
for providing large national customers with both standard and specialized
services.
In 1998 we leased four facilities totaling 343,073 square feet to provide
specialized services to one of our key customers. When fully operational, we
will employ approximately 140 people dedicated to these four facilities. The
kit assembly and many other special services we perform assist this customer
in providing improved services to their end-user customers.
MINORITY/WOMEN-OWNED
BUSINESS ENTERPRISES (MWBE)
In 1998, as part of our continued commitment to minority and women-owned
businesses, we completed the MWBE expenditure reporting system. Reports can
now be developed on a monthly, quarterly, or yearly basis for both local and
national accounts. As part of this program, we have also developed a
resource list of more than 300 MWBE suppliers.
[PHOTO]
6
<PAGE> 9
INTEGRATED SUPPLY
Graybar continues to actively pursue Integrated Supply business. The concept
of "one stop shopping," which allows Graybar to be integrated into the
customer's systems and provide materials and services outside our normal
electrical and communications product offering, continues to grow. One of
the highlights of 1998 was a series of government contracts awarded to
Graybar to provide MRO products to military installations in Hawaii, Alaska,
southern California, the northeastern United States, Texas and Louisiana.
These contracts cover military facilities in these regions and have been
implemented at targeted sites. In addition to the standard supply products,
Graybar is providing products as diverse as barbecue pits, lawn and garden
supplies and runway chemicals. We have opened an on-base storeroom in
Hawaii and are providing all the material and staffing to support their
facilities maintenance personnel.
Also in 1998 we expanded the Integrated Supply offering with the successful
award of the Texas Instruments contract in October. The multi-year agreement
is structured for the management and operation of the facilities,
communication, and, for the first time, the manufacturing support stockrooms.
Graybar has operated twelve MRO facilities and communication stockrooms for
Texas Instruments since 1990. The four new stockrooms directly support the
raw material requirements for the production of wafers for Texas Instruments.
These stockrooms operate 24 hours a day, 365 days a year.
COMM/DATA MARKETS
Sales to Comm/Data Markets continued to grow at a record pace in 1998. This
was fueled by user demand for more bandwidth capacity to carry a constantly
increasing amount of voice and data traffic. With rapid changes in
technology and the growing use of the Internet and intranets, users are
expected to continue to upgrade their local and wide area networks for the
foreseeable future.
With our specialized sales and service teams designed around the reseller,
end-user, and public network markets, Graybar is uniquely positioned to take
advantage of opportunities in all
"The concept of "one stop shopping," which allows Graybar to be integrated
into the customer's systems and provide materials and services outside our
normal electrical and communications product offering, continues to grow."
[PHOTO]
7
<PAGE> 10
MARKET REVIEW
- -------------------------------------------------------------------------------
customer segments of the comm/data industry. This sales and service focus,
combined with the best inventory, counter service, and logistics network in
the industry, resulted in Graybar increasing share in every major market in
1998.
PRIVATE NETWORK MARKETS
Sales to the private network markets-voice interconnects, data contractors
and end-users-grew at a healthy rate in 1998, despite significant price
deflation on high performance data cabling and networking products.
Graybar solidified its preeminent market position with data contractors,
increasing sales to these customers at a higher rate than the overall growth
in the market. Data contractors recognize Graybar combines quality products,
superior service, and a nationwide presence into a package that is the best
in the industry for serving their needs. We also have a true commitment to
their success by continuing to implement a strategy of supporting the data
contractor as the primary installation and service provider for the end-user.
Sales directly to commercial and industrial end-users also increased in 1998.
The vertical alignment of our sales, marketing, and service teams, combined
with design capabilities of the Network System Specialists, resulted in
Graybar becoming a much more significant factor in the specification of
systems and products at the end-user level. By influencing the product
selection early in the decision cycle, we strengthened our position with end-
user customers and increased sales and market presence. As we become more
proficient in addressing the complex requirements of the end-user, we expect
sales to this market to grow rapidly in the coming years.
PUBLIC NETWORK MARKETS
Sales to public network customers - Bell Operating Companies, Independent
Telcos and other companies that build and maintain wide area networks -
increased dramatically in 1998 and represented the highest growth rate of all
our Comm/Data Markets. These service providers are investing heavily in
products and services to support demand for high-speed voice and data traffic
over the public network. Our specialized public network sales, service, and
management teams have successfully positioned Graybar as a leading provider
of distribution services to this market.
Our public network customers are demanding logistics services that reduce
their material management costs in order to release capital for investing in
their network infrastructure. The services we have developed for these
customers-such as inventory management, rack and stack, customized
billing/shipping documentation-have allowed them to focus on providing
network services, while reducing their total cost of ownership
[PHOTO]
8
<PAGE> 11
- -------------------------------------------------------------------------------
of material. We expect very significant growth in sales to these customers
as we continue to gain more experience and expand our service offering.
NATIONAL COMM/DATA ACCOUNTS
Specialization and account focus were key contributors to increased sales to
comm/data national accounts in 1998 as these accounts continue to be a
significant part of our strategic sales plan. Our most significant growth
opportunity was with the Bell Operating Companies as they recognize the value
full service distributors provide.
Similar to the field, our National Account Managers are specialized to focus
on the Private and Public Network Markets. Within these markets, the
National Account team is aligned by industry (i.e., insurance,
transportation, integrators, etc.) This realignment of assignments has
created a sales team that understands the nuances of each respective vertical
market andis prepared to address the unique product and service requirements
of each industry.
In late 1998 a National Account Customer Service Team was established to
support national customers who wanted a single point of contact for order
processing and billing along with local sales coverage. This program is in
its initial implementation phase, and we expect to have more than 15 national
accounts supported by this team by year-end 1999.
POWER UTILITY MARKET
Industry deregulation, a strong stock market and increased global influences
are contributing to changes in the electric utility market. To meet
competitive challenges, utilities are putting more emphasis on outsourcing
and vendor reduction. With our
The network room at Graybar's Information Systems facility in St. Louis is
the hub for monitoring the Company's comm/data network. A team of
communications technicians, including Anna Cavanaugh and Dennis O'Leary,
ensures that any problems are resolved quickly.
"Sales to public network
customers increased
dramatically in 1998
and represented the
highest growth rate of
all our Comm/Data
Markets."
9
<PAGE> 12
MARKET REVIEW
- -------------------------------------------------------------------------------
wide variety of products and service offerings Graybar is in a strong
position to help utilities meet these challenges and reduce their cost of
doing business.
We have already seen this trend during the last five years as our sales to
utilities have remained fairly flat, reflecting the industry in general.
However, Graybar's overall sales of utility-type products have increased
significantly during this period as we sold these products to contractors and
end-users. Our sales through stock of utility products are up 22% over this
same period, reinforcing the fact that utilities are starting to purchase
more through distribution.
Distributor alliances with utilities, of which Graybar has several, have
usually been with the large, investor-owned utilities. We are now seeing
these same strategic alliances in the rural electric cooperative market. One
of the premiere alliances in the country is between New Hampshire Electric
Cooperative (NHEC) and Graybar Manchester. This alliance received national
attention in a Purchasing magazine article in 1998. The article explained
not only our ability to reduce NHEC's overall cost, but more important, our
ability to service the utility when a big ice storm hit their system earlier
in the year. NHEC credits Graybar for staying open during this period and
providing them with the necessary products and services to restore their
power system.
As deregulation continues across the country, Graybar will have opportunities
to work closely with utilities, assisting them in improving their business
processes as they strive to meet the competitive challenges of the future.
INTERNATIONAL MARKETS
Despite the financial turmoil that spread from Asia throughout most of the
international markets in 1998, our International Group, while unable to meet
targets in all markets, finished the year profitably. Our international
strategy remained focused on supporting our national account initiatives with
multinational companies and engineering contractors in strategic markets,
especially North America. This strategy, coupled with our long experience in
these markets, has enabled us to maintain the structure necessary to support
the Company's objectives.
NORTH AMERICA
While Canada faced a dramatic weakening of its dollar, Graybar Ontario and
Harris & Roome both had record years in 1998 and achieved growth rates well
in excess of their local markets.
With growth in strategic markets both Graybar de Mexico and Puerto Rico ended
the year profitably.
In Puerto Rico we completed a conversion to new computer software, while
systems in Graybar Ontario and Graybar de Mexico were also upgraded. The new
software gives us the capability to fully support our global accounts.
LATIN AMERICA/CARIBBEAN
All Latin American and Caribbean markets felt the adverse effects of natural
disasters and the global financial crisis in 1998. Miami International was
reorganized to meet the realities of today's market and ended the year
profitably, maintaining a strong presence in all strategic countries.
Our new location in Chile opened in May in a strong market but by year-end
fell victim to the same negative pressures affecting all of Latin America.
We adjusted our strategy there and local management did an excellent job
penetrating new markets. Graybar Chile ended the year in a strong position
to successfully support our future strategic activities in Latin America.
ASIA/PACIFIC
In spite of the Asian financial crisis, San Francisco International had an
excellent year due largely to our on-site Sales Representatives in Singapore
and Japan.
In 1998 the Company assumed 100% ownership of Graybar Singapore, reorganized
and moved to a new location. These changes have proven successful, and
Graybar Singapore ended the year well positioned to fully support U.S.
national accounts, engineering contractors and strategic suppliers operating
in Asia during these very difficult times.
10
<PAGE> 13
- -------------------------------------------------------------------------------
MIDDLE EAST/AFRICA
The falling price of oil had the effect of halting or delaying all projects
in the Middle East. Because of its long-standing relationships, excellent
service records and strong market presence, Houston International was able to
end the year profitably with its infrastructure not only intact but stronger
than ever.
MARKETING SUPPORT
ADVERTISING AND SALES PROMOTION
A consistent advertising campaign, rich in our service capabilities and
capitalizing on strategic relationships with electrical and comm/data
suppliers, continues to brand Graybar as the source for solutions.
More than 200 trade ad placements were positioned in major market magazines
generating more than 65,000 sales leads. Trade magazine editorial was a
major focus, and we were successful in receiving coverage of our service
capabilities in many publications. Highlighting our effort was a feature
article in the July issue of Electrical Contractor magazine that praised the
uniqueness of our relationship with Universal Systems, a large electrical
contractor.
Direct mail advertising continued to communicate the breadth of product
available from our local, regional and national inventories. Supporting the
electrical business were three issues of the Graybar Products Extra tabloid.
Featured themes were Contractor Solutions, Square D Solutions and Commercial
& Industrial Solutions.
Graybar's service to
Universal Systems,
a large electrical contractor, [PHOTO]
was featured on the
cover of the July
Electrical Contractor
magazine.
"Our international
strategy remained focused
on supporting our national
account initiatives with
multinational companies
and engineering contractors
in strategic markets,
especially North America."
11
<PAGE> 14
MARKET REVIEW
- -------------------------------------------------------------------------------
The Graybar Digest, targeting our comm/data customers, was upgraded to a new,
full-color format. Themes for the three 1998 issues were LAN/WAN Solutions,
Wire & Cable Solutions and Solutions for Voice Applications.
A new Graybar Public Network Products catalog for comm/data customers and 15
customized supplier catalogs helped keep customers aware of new products,
applications, and value-added services.
Demand for our "contractors" style job calendar continues to grow with more
than 90,000 distributed to customers in 1998. The October to September
format makes our version unique.
A new concept in counter promotions, designed to focus on value-added high
margin products, was an instant success with our branches and counter
customers. "Promotions In A Box" kits include signs and premiums designed to
fit special freestanding display fixtures. The promotions are supplier and
product specific and offer free, family-oriented premiums with the purchase
of displayed products. Branches can select two different kits each month
from a menu containing more than 40 supplier promotions.
[PHOTO]
COUNTER MARKETING
Graybar counter sales continued their strong performance in 1998. The
Counter Marketing Department designed 17 counters including three for new
locations. Suppliers continue to show strong support for counter marketing
by working with corporate to develop new plan-o-grams and packaging designs
to promote impulse sales.
Training seminars in 1998 concentrated on the counter basics. One hundred-
twenty counter personnel were tutored on merchandising, sales, product
training and margin development.
WORLD SERIES OF GOLF
In August Graybar was host to over 700 guests at the NEC World Series of Golf
at Firestone Country Club in Akron, Ohio. Under clear blue skies,
professional golfer David Duval, won the World Series of Golf Championship,
ending this series of tournaments. A new format will be unveiled in 1999 with
the NEC Invitational played at Firestone. Graybar will be a sponsor of this
prestigious tournament and will host many customers at this event.
SQUARE D CHAMPION'S CLUB
In an awards ceremony at the Hyatt Grand Cypress Hotel in Orlando, Florida,
the Graybar/Square D Champion's Club honored 26 new members in 1998 for their
exemplary sales efforts in 1997. One Graybar and one Square D Sales
Representative from each district received their awards from Carl Hall,
Graybar President and CEO, and Charley Denny, Square D Chairman. Following
the ceremony, the new Champion's Club members and their spouses were treated
to a three-day cruise to the Bahamas.
12
<PAGE> 15
- -------------------------------------------------------------------------------
NASCAR RACE
Graybar and Cooper Bussmann once again joined forces to sponsor the #12
Chevrolet Monte Carlo at the Carquest Autoparts 250 NASCAR race in the 2nd
Annual Busch Grand National Series. Driving the #12 Chevrolet, Scott Hansen
finished 16th in the race which was held October 17 at Gateway International
Raceway in Madison, Illinois. The race was nationally televised and drew a
large crowd, including over 250 Graybar/Bussmann customers.
GRAYBAR FINANCIAL SERVICES (GFS)
Our equipment leasing and financing subsidiary was completely restructured in
1998 to offer improved service and new financial products to our customers.
A joint venture, called Graybar Financial Services, LLC, was formed with
Newcourt Financial (formerly AT&T Capital).
Launched in June with a national press release, Graybar Financial Services,
LLC introduced an exciting new look and slogan- "Financing, simplified."
This fresh approach to leasing and financing emphasizes the simplified manner
in which it is delivered.
The impact of new pricing and services resulted in a significant increase in
leasing sales over 1997. GFS profit contribution to Graybar was the highest
since its inception in 1989.
The joint venture with Newcourt Financial allowed us to introduce services
over the Internet at Graybar's web site. Linked through Graybar's site to
Newcourt's web site, a customer can now submit a lease application over the
Internet and receive a credit response within one business day.
Customers can also get immediate quotes for monthly lease payments on any
size installation, compare the advantages of leasing versus buying and, if
qualified, establish a lease line of credit for fast and easy financing of
their next system upgrade.
"Linked through Graybar's
site to Newcourt's web site,
a customer can now
submit a lease application
over the internet and
receive a credit response
within one business day."
[PHOTO]
The new counter promotion
concept- Promotions in a Box-
focuses on value-added
high margin products.
13
<PAGE> 16
OPERATIONS REVIEW
- -------------------------------------------------------------------------------
CUSTOMER SERVICE
In 1998 Graybar announced a National Customer Service Award program to recognize
Customer Service Representatives who have demonstrated leadership
and exemplary customer service over the course of each one-year award period.
One candidate will be recommended from each district at the end of the award
year. An annual ceremony will be held for the presentation of the
"Excellence in Customer Service" awards.
CYCLE COUNTING OF INVENTORY
Following a successful two-year pilot, cycle counting procedures were
implemented in all locations in preparation for eliminating annual physical
inventory in 1999. The cycle count method requires assigned personnel in
each location to count a certain number of items each day, eliminating end-of-
the-year inventory. Customer service improves as a result of cycle
counting. The process allows us to maintain more accurate inventory
quantities throughout the year, and cycle counting eliminates the business
interruption associated with the annual physical inventory.
[PHOTO]
CORPORATE PURCHASING
During 1998 replenishment planning was expanded to additional company
locations, and the Dallas and Atlanta Zones were fully implemented. The
Corporate Purchasing group also absorbed the purchasing of electrical
products in the Atlanta and New York Districts. In preparation for the
opening of the Fresno Zone in early 1999, the branch locations in the Phoenix
and Seattle Districts were also added. At the end of 1998, Corporate
Purchasing was planning approximately 500,000 stockkeeping units for the St.
Louis, Dallas, Minneapolis, Atlanta, New York, Phoenix and Seattle Districts,
comm/data products nationally, and the Dallas and Atlanta Zones.
In May 1998 some members of the Corporate Purchasing group participated with
the District Purchasing Managers in a training seminar on negotiation skills.
Also, training has been developed for Graybar for an extensive five-level
certification process on the E3Trim(R) purchasing system. All corporate
purchasing buyers are working to obtain E3Trim certification.
SUPPLIER ASSISTED INVENTORY MANAGEMENT (SAIM)
Nineteen ninety-eight marked the sixth year of our involvement with SAIM with
five key suppliers. During this time, stocks have improved and returns of
non-moving items have been easier to complete. One of the important benefits
realized by distributors and manufacturers participating in SAIM is increased
awareness of business issues faced by the other party. This understanding
and openness leads to more effective problem solving on performance
improvement and cost containment initiatives. Progress review meetings are
held with all SAIM suppliers as needed, but at a minimum once per year.
Monthly charts and graphs supplied by Graybar help track progress.
14
<PAGE> 17
- -------------------------------------------------------------------------------
PRICE COST SERVICES
An automated process was implemented to update costs and supplier catalog
information, eliminating manual verification and data entry. This electronic
cost update process has been in development for several years. The Richmond,
Cincinnati, Pittsburgh, New York, Seattle, and Phoenix Districts are now
receiving transmissions from one of Graybar's major suppliers. Another major
supplier has begun transmitting EDI transactions for the entire Graybar
branch network. Automation eliminates discrepancies, redundant data entry
and invoice deductions due to cost errors. Other benefits include more
timely and accurate cost and item updates. Our pricing files remain in
agreement with supplier files, and Graybar maintains audit control over the
files. We plan to expand electronic price and cost updates with other
suppliers.
WAREHOUSE MANAGEMENT SYSTEM
During 1998 the communications interface was developed for the transfer of
information from the Graybar computer system to the Warehouse Management
System (WMS). WMS utilizes a comprehensive software package to direct the
flow of material within the warehouse. Additional resources have been added
to the Installation Team to prepare for conversion at the zone facilities.
Implementation will be coordinated by the Logistics Group and is scheduled to
begin in June 1999 with a pilot at the Atlanta Zone.
SAFETY
Due to increased safety awareness, the Company's OSHA Incident Rate compares
favorably to the industry average. The vehicle accident rate decreased by
9.3%, and lost workdays due to work-related injuries decreased by more than
16% from the previous year. The Cincinnati District earned the President's
Safety Award for the lowest OSHA Incident Rate. New safety training
requirements for all forklift operators were introduced to comply with the
new OSHA requirements. Graybar has incorporated safety as a measurement in
each location's Branch Review process.
An on-line database of Material Safety Data Sheets was developed in 1998.
All hazardous materials were coded in the computer system to identify
Department of Transportation hazardous classifications on shipping documents.
"Cycle counting
procedures were
implemented in all
locations in preparation
for eliminating annual
physical inventory
in 1999."
15
<PAGE> 18
OPERATIONS REVIEW
- -------------------------------------------------------------------------------
GENERAL OPERATIONS
During 1998 a new department was created within Operations to separate
administrative functions from customer service. District Administrative
Managers and Supervisors, Administration were appointed to assume
responsibility for all Branch Administrators and the transaction processing
they perform-transaction approvals and office services such as telephone
services, mailroom and other clerical functions. The Managers of Customer
Service, who previously had these responsibilities, will now focus totally on
customer relations and improved service, personnel development, training and
profitability in their respective locations.
NEW LOCATIONS OPENED IN 1998
Erie, Pennsylvania
Williston, Vermont (Burlington)
Fairbanks, Alaska
Dallas, Texas (Regional Zone)
Austell, Georgia (National Zone)
[PHOTO]
INFORMATION SYSTEMS
Many significant infrastructure changes were completed during the year,
including a new mainframe computer system which was installed in the St.
Louis data center in March. The new system provides increased capacity to
support the Company's continued growth. Also, voice and data networks were
improved with the addition of T1 access at 120 locations. More than 5,000
PCs were upgraded to Windows(R) 95 and checked for Year 2000 compliance. To
address Year 2000 requirements, new high-speed network switches were
installed, which significantly improved network speed.
GraybarNet,(R) our customer dial-in offering, was redesigned to accommodate
Internet access. Customers can now access our system directly or via the
World Wide Web if desired. GraybarNet will also provide access to our
electronic catalog.
Year 2000 compliance efforts required substantial IS attention as everything
from customer and supplier critical applications to the payroll and pension
systems were reviewed and tested. We are currently reviewing all supplier
and customer Year 2000 issues, which may require the development of
contingency plans.
Graybar's e-mail system has become an integral part of our business. Daily
messages now exceed 30,000 company-wide, with 20% delivered via the Internet.
Several large projects were started in 1998 including Central Accounts
Payable, Warehouse Management, Logistics, General Ledger and Fixed Assets.
These projects will require major efforts in 1999.
Graybar's 212,000 square foot
Regional and National Zone
located in Austell, Georgia,
opened in August.
16
<PAGE> 19
FINANCIAL REVIEW
-------------------------------------------------------------
<TABLE>
TABLE OF CONTENTS
<S> <C>
Selected Consolidated Financial Data 18
Management's Discussion and Analysis
of Financial Condition and Results of Operations 19
Consolidated Financial Statements 21
Report of Independent Auditors 29
</TABLE>
17
<PAGE> 20
<TABLE>
FINANCIAL REVIEW
- --------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
(Stated in thousands except for per share data)
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES $3,744,075 $3,348,496 $3,001,049 $2,774,368 $2,364,461
Less--Cash discounts (11,872) (10,474) (9,637) (9,578) (8,839)
- --------------------------------------------------------------------------------------------------------------------
NET SALES 3,732,203 3,338,022 2,991,412 2,764,790 2,355,622
- --------------------------------------------------------------------------------------------------------------------
COST OF MERCHANDISE SOLD (3,042,176) (2,726,147) (2,453,962) (2,267,186) (1,934,925)
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE (23,998) (19,713) (16,687) (16,577) (12,003)
- --------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
Current (37,167) (29,750) (28,599) (23,426) (15,225)
Deferred (4,919) (6,820) (1,722) (2,408) 1,251
- --------------------------------------------------------------------------------------------------------------------
Total provision for income taxes (42,086) (36,570) (30,321) (25,834) (13,974)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME 59,544 52,963 44,533 36,718 18,702
- --------------------------------------------------------------------------------------------------------------------
INCOME APPLICABLE TO
COMMON STOCK 59,539 52,957 44,526 36,710 18,694
- --------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES
OUTSTANDING <FA> 5,305 5,549 5,714 5,486 5,628
- --------------------------------------------------------------------------------------------------------------------
INCOME PER SHARE OF
COMMON STOCK <FA> 11.22 9.54 7.79 6.69 3.32
- --------------------------------------------------------------------------------------------------------------------
Cash dividends per share 2.00 2.00 2.00 2.00 2.00
- --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 149,226 115,218 84,801 57,081 52,486
Add--Net income 59,544 52,963 44,533 36,718 18,702
- --------------------------------------------------------------------------------------------------------------------
208,770 168,181 129,334 93,799 71,188
- --------------------------------------------------------------------------------------------------------------------
Less dividends
Preferred ($1.00 per share) (5) (6) (7) (8) (8)
Common (in cash) (10,031) (9,576) (9,480) (8,990) (8,729)
Common (in stock) (4,896) (9,373) (4,629) -- (5,370)
- --------------------------------------------------------------------------------------------------------------------
(14,932) (18,955) (14,116) (8,998) (14,107)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 193,838 149,226 115,218 84,801 57,081
Proceeds on stock subscriptions,
shares unissued -- 37 52 -- 39
STOCK OUTSTANDING
Preferred 108 119 143 150 164
Common 103,690 103,749 98,321 89,206 91,859
- --------------------------------------------------------------------------------------------------------------------
297,636 253,131 213,734 174,157 149,143
- --------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (836) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 296,800 253,131 213,734 174,157 149,143
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,167,847 1,051,821 881,636 823,280 719,786
LONG-TERM DEBT $ 269,570 $ 139,748 $ 151,659 $ 91,257 $ 90,212
- --------------------------------------------------------------------------------------------------------------------
<FN>
<FA> Adjusted for the declaration of 5%, 10%, 5% and 6.25% stock dividends in
1998, 1997, 1996 and 1994, respectively. Prior to adjusting for the stock
dividends, the average common shares outstanding for 1997, 1996, 1995 and
1994 were 4,805,4,712, 4,524 and 4,368, respectively.
</TABLE>
This summary should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this annual
report.
18
<PAGE> 21
FINANCIAL REVIEW
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in thousands except for share and per share data)
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net sales in 1998 were 11.8% higher than in 1997. The higher net sales
resulted from improvements in the market sectors of the economy in which the
Company operates. The impact of inflation on sales and cost of sales was not
significant in 1998.
Gross margin in 1998 increased $78,152 (12.8%) compared to 1997
primarily due to the increased sales in the electrical and communications
markets.
The increase in selling, general and administrative expenses in 1998
compared to 1997 occurred largely because of adjustments in personnel
complement and adjustments in compensation and related expenses.
Interest expense increased in 1998 compared to 1997 primarily due to
increased levels of borrowing incurred to finance higher aggregate levels of
inventory and receivables. Interest rates on 1998 short-term borrowings were
slightly lower than for the same period in 1997.
Other income includes gains on sale of property of $808 and $2,280 in
1998 and 1997, respectively.
The combined effect of the increases in gross margin and other income,
together with the increases in selling, general and administrative expenses,
interest expense and depreciation and amortization, resulted in an increase
in income before provision for income taxes of $12,097 in 1998 compared to
1997.
1997 COMPARED TO 1996
Net sales in 1997 were 11.6% higher than in 1996. The higher net sales
resulted from improvements in the market sectors of the economy in which the
Company operates. The impact of inflation on sales and cost of sales was not
significant in 1997.
Gross margin in 1997 increased $74,425 (13.8%) compared to 1996
primarily due to the increased sales in the electrical and communications
markets.
The increase in selling, general and administrative expenses in 1997
compared to 1996 occurred largely because of adjustments in personnel
complement and adjustments in compensation and related expenses.
Interest expense increased in 1997 compared to 1996 primarily due to
increased levels of borrowing incurred to finance higher aggregate levels of
inventory and receivables. Interest rates on 1997 short-term borrowings were
slightly higher than for the same period in 1996.
Other income includes gains on sale of property of $2,280 and $7,313 in
1997 and 1996, respectively.
The combined effect of the increase in gross margin and the decrease in
other income, together with the increases in selling, general and
administrative expenses, interest expense and depreciation and amortization,
resulted in an increase in income before provision for income taxes of
$14,679 in 1997 compared to 1996.
1996 COMPARED TO 1995
Net sales in 1996 were 8.2% higher than in 1995. The higher net sales
resulted from improvements in the market sectors of the economy in which the
Company operates. The impact of inflation on sales and cost of sales was not
significant in 1996.
Gross margin in 1996 increased $39,846 (8.0%) compared to 1995
primarily due to the increased sales in the electrical and communications
markets.
The increase in selling, general and administrative expenses in 1996
compared to 1995 occurred largely because of adjustments in personnel
complement and adjustments in compensation and related expenses.
Interest expense increased slightly in 1996 compared to 1995 primarily
due to increased levels of borrowing incurred to finance higher aggregate
levels of inventory and receivables. Interest rates on 1996 short-term
borrowings were generally lower than for the same period in 1995.
Other income includes gains on sale of property of $7,313 and $2,055 in
1996 and 1995, respectively.
The combined effect of the increases in gross margin and other income,
together with the increases in selling, general and administrative expenses,
interest expense and depreciation and amortization, resulted in an increase
in income before provision for income taxes of $12,302 in 1996 compared to
1995.
FINANCIAL CONDITION AND LIQUIDITY
The financial condition of the Company continues to be strong. At
December 31, 1998 current assets exceeded current liabilities by $400,850, up
$169,227 from December 31, 1997. The current assets at December 31, 1998
were sufficient to meet the cash needs required to pay current liabilities.
The substantial increases in accounts receivable and merchandise inventory
resulted primarily from the growth in sales experienced by the Company.
While the average number of days of sales in accounts receivable has remained
relatively stable during 1998 and 1997, inventory turnover has decreased
slightly during that same period. The decrease in inventory turnover is due
largely to a company-wide customer service and logistics project to redeploy
inventory into a system of national zones, regional zones and branch
locations. Although the project objective is to provide better customer
service and reduce overall costs, management expected some temporary
inventory increase, unrelated to sales volume, during the transition to the
new system. This transition to the new customer service and logistics system
is planned to be complete by the end of the year 2000. This temporary
increase in inventory investment is partially offset by a corresponding
increase in trade accounts payable. The Company does not have any other
plans or commitments that would require significant amounts of additional
working capital.
At December 31, 1998 the Company had available to it unused lines of
credit amounting to $280,000. These lines are available to meet short-term
cash requirements of the Company. Bank borrowings outstanding during 1998
and 1997 varied from a minimum of $19,000 and $65,000 to a maximum of
$211,655 and $181,000, respectively.
19
<PAGE> 22
FINANCIAL REVIEW
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in thousands except for share and per share data)
Included in the Company's unused lines of credit is a $125,000
Revolving Credit Loan Agreement with a group of banks at an interest rate
based on the London Interbank Offered Rate. The credit agreement expires in
May 2003. The Company intends to utilize this credit line primarily as a
secondary source of borrowing for short-term financing requirements. There
have been no borrowings against this credit line through December 31, 1998.
The Company has funded its capital requirements from operations, stock
issuances to its employees and long-term debt. In January 1998 the Company
received the proceeds from a seven-year note for $25,000 at a fixed interest
rate of 6.44% with principal payable in quarterly installments beginning in
April 1998. In April 1998 the Company received the proceeds from a fifteen-
year note for $75,000 at a fixed interest rate of 6.59% with principal
payable in semiannual installments beginning in October 2003. In June 1998
the Company received the proceeds from a fifteen-year note for $40,000 at a
fixed interest rate of 6.65% with principal payable in annual installments
beginning in June 2003.
The Revolving Credit Loan Agreement and certain other note agreements
have various covenants which limit the Company's ability to make investments,
pay dividends, incur debt, dispose of property, and issue equity securities.
The Company is also required to maintain certain financial ratios as defined
in the agreements.
Cash provided by operations during 1998 amounted to $3,585 compared to
$10,809 cash provided by operations in 1997. Cash provided from the sale of
common stock and proceeds received on stock subscriptions amounted to $300
and $875 in 1998 and 1997, respectively. Additional cash of approximately
$14,320 will be provided in 1999 as a result of payments to be made for stock
subscribed to by employees under the 1998 Common Stock Purchase Plan.
Capital expenditures for property were $28,977, $27,342 and $44,865 for
the years ended December 31, 1998, 1997 and 1996, respectively. Purchases of
treasury stock were $5,303, $4,859 and $3,471 for the years ended December
31, 1998, 1997 and 1996, respectively. Dividends paid were $9,802, $9,550 and
$9,188 for the years ended December 31, 1998, 1997 and 1996, respectively.
IMPACT OF YEAR 2000
In early 1996 the Company began its review and analysis of the Year
2000 issues and the potential risks to our operations. Modifications to our
existing internal software began in 1996 and continue to be made. A full-
time senior manager of the Company was appointed in January 1998 to oversee
all of the analytical and remedial projects connected with the Year 2000.
The Company has also used independent consultants to assist the Company with
its Year 2000 readiness efforts.
The Company believes that with modifications to existing internal
software and conversions to new software, the Year 2000 will not pose
significant problems for all of its systems, including its accounting,
management information, warehouse and administrative systems. However, if
such modifications and conversions are not completed in a timely manner, the
Year 2000 could have a material impact on the operations of the Company.
Communications have been initiated by the Company with over 600
suppliers of products and large customers to determine the extent to which
the interface between their systems and the Company's systems are vulnerable
to those parties' failures to remediate their own Year 2000 issues. Most
responses relating to products indicated Year 2000 compliance for the
specific product. A significant number of the responses indicated that Year
2000 analytical studies were in process for both internal systems and some
products. The Company's total Year 2000 project schedule and cost estimates
to complete include the estimated costs and time associated with the impact
of supplier and customer Year 2000 issues based on currently available
information. However, there can be no guarantee that the systems of these
companies on which the Company's systems rely will be modified in a timely
manner so there will not be an adverse impact on the Company's business.
Contingency plans will be developed on a case-by-case basis for suppliers or
customers where a problem is identified that cannot be remedied in time.
Contingency plans may involve alternate means of communications for
electronic data interchange suppliers and customers or an alternate source of
supply in the case of a supplier or a specific product.
The Company has and will continue to utilize both internal and external
resources to reprogram, or replace, and test the software for Year 2000
modifications. Communications will continue with customers and suppliers to
identify any potential problems requiring contingency plans. The Company
anticipates completing the Year 2000 project by September 30, 1999, although
some additional testing will continue after that date. The Year 2000
projects will be funded through operating cash flows and expensed as
incurred. The project costs have not had and are not expected to have a
material impact on the results of operations.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
20
<PAGE> 23
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Stated in thousands except for share and per share data)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES, NET OF RETURNS AND ALLOWANCES $ 3,744,075 $ 3,348,496 $ 3,001,049
Less--Cash discounts (11,872) (10,474) (9,637)
- -----------------------------------------------------------------------------------------------
Net Sales 3,732,203 3,338,022 2,991,412
- -----------------------------------------------------------------------------------------------
COST OF MERCHANDISE SOLD (3,042,176) (2,726,147) (2,453,962)
- -----------------------------------------------------------------------------------------------
Gross Margin 690,027 611,875 537,450
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (513,193) (456,686) (409,259)
TAXES, OTHER THAN INCOME TAXES (32,415) (29,523) (26,922)
DEPRECIATION AND AMORTIZATION (25,809) (22,285) (19,862)
- -----------------------------------------------------------------------------------------------
Income from operations 118,610 103,381 81,407
OTHER INCOME, NET 7,018 5,865 10,134
INTEREST EXPENSE (23,998) (19,713) (16,687)
- -----------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 101,630 89,533 74,854
- -----------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
Current (37,167) (29,750) (28,599)
Deferred (4,919) (6,820) (1,722)
- -----------------------------------------------------------------------------------------------
Total provision for income taxes (42,086) (36,570) (30,321)
- -----------------------------------------------------------------------------------------------
NET INCOME 59,544 52,963 44,533
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF YEAR 149,226 115,218 84,801
Cash dividends-
Preferred, $1.00 per share each year (5) (6) (7)
Common, $2.00 per share each year (10,031) (9,576) (9,480)
Common Stock dividend (4,896) (9,373) (4,629)
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 193,838 $ 149,226 $ 115,218
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE OF COMMON STOCK $ 11.22 $ 9.54 $ 7.79
- -----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
21
<PAGE> 24
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
(Stated in thousands except for share and per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 20,252 $ 18,523
Trade receivables (less allowances of
$4,783 and $4,627, respectively) 460,016 402,455
Merchandise inventory 440,406 389,314
Other current assets 3,945 2,973
- --------------------------------------------------------------------------------------------------------------
Total current assets 924,619 813,265
- --------------------------------------------------------------------------------------------------------------
PROPERTY, AT COST
Land 21,550 22,868
Buildings 174,736 167,654
Furniture and fixtures 123,044 113,854
Capital equipment leases 26,682 26,138
- --------------------------------------------------------------------------------------------------------------
346,012 330,514
Less--Accumulated depreciation and amortization 142,934 136,485
- --------------------------------------------------------------------------------------------------------------
203,078 194,029
- --------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 8,105 9,639
- --------------------------------------------------------------------------------------------------------------
OTHER ASSETS 32,045 34,888
- --------------------------------------------------------------------------------------------------------------
$1,167,847 $1,051,821
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable to banks $ 43,948 $ 136,925
Current portion of long-term debt 16,475 15,059
Trade accounts payable 344,869 326,969
Accrued payroll and benefit costs 44,466 41,924
Other accrued taxes 12,439 10,663
Dividends payable 5,479 5,246
Other payables and accruals 56,093 44,856
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 523,769 581,642
- --------------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS LIABILITY 77,708 77,300
- --------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 269,570 139,748
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares at December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY
Capital stock-
Preferred, par value $20 per share,
authorized 300,000 shares--
Issued to shareholders 5,386 6,009
In treasury, at cost -- (58)
- --------------------------------------------------------------------------------------------------------------
Outstanding 5,386 5,951 108 119
- --------------------------------------------------------------------------------------------------------------
Common, stated value $20 per share,
Authorized 7,500,000 7,500,000
Issued to voting trustees 4,883,638 4,883,162
Issued to shareholders 326,586 323,434
In treasury, at cost (25,706) (19,124)
- --------------------------------------------------------------------------------------------------------------
Outstanding 5,184,518 5,187,472 103,690 103,749
- --------------------------------------------------------------------------------------------------------------
Common shares subscribed 15,564 493
Retained earnings 193,838 149,226
Accumulated other comprehensive income (836) --
- --------------------------------------------------------------------------------------------------------------
312,364 253,587
Less--Subscriptions receivable 15,564 456
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 296,800 253,131
- --------------------------------------------------------------------------------------------------------------
$1,167,847 $1,051,821
- --------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
22
<PAGE> 25
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net Income $ 59,544 $ 52,963 $ 44,533
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to cash provided by operations -
Depreciation and amortization 25,809 22,285 19,862
Deferred income taxes 4,919 6,820 1,722
Gain on sale of property (808) (2,280) (7,313)
Changes in assets and liabilities:
Trade receivables (57,561) (50,117) 1,909
Merchandise inventory (51,092) (80,186) (42,053)
Other current assets (972) 3,224 476
Other assets (6,728) (4,232) (2,143)
Trade accounts payable 17,900 48,832 (3,851)
Accrued payroll and benefit costs 2,542 6,001 (1,427)
Other accrued liabilities 10,032 7,499 24,871
- --------------------------------------------------------------------------------------------------------------
(55,959) (42,154) (7,947)
- --------------------------------------------------------------------------------------------------------------
Net cash flow provided by operations 3,585 10,809 36,586
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property 4,892 5,364 10,497
Capital expenditures for property (28,977) (27,342) (44,865)
Investment in joint venture 9,571 (14,134) --
Other -- (2,275) --
- --------------------------------------------------------------------------------------------------------------
Net cash flow used by investing activities (14,514) (38,387) (34,368)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in notes payable to banks (92,977) 61,966 (62,272)
Proceeds from long-term debt 140,000 -- 72,000
Repayment of long-term debt (14,664) (11,748) (10,387)
Principal payments under capital equipment leases (4,060) (4,403) (4,115)
Sale of common stock 300 875 8,002
Purchases of treasury stock (5,303) (4,859) (3,471)
Dividends paid (9,802) (9,550) (9,188)
- --------------------------------------------------------------------------------------------------------------
Net cash flow provided (used) by financing activities 13,494 32,281 (9,431)
- --------------------------------------------------------------------------------------------------------------
Effect of currency translation adjustments on cash (836) -- --
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,729 4,703 (7,213)
- --------------------------------------------------------------------------------------------------------------
CASH, BEGINNING OF YEAR 18,523 13,820 21,033
- --------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 20,252 $ 18,523 $ 13,820
- --------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
23
<PAGE> 26
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Stated in thousands except for share and per share data)
<CAPTION>
COMMON ACCUMULATED
STOCK OTHER
COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK STOCK UNISSUED EARNINGS INCOME TOTAL
------ --------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 $ 89,206 $ 150 $ $ 84,801 $ $174,157
--------
Net income and
comprehensive income 44,533 44,533
Stock issued 7,950 7,950
Stock redeemed (3,464) (7) (3,471)
Advance payments 52 52
Dividends declared 4,629 (14,116) (9,487)
-------- ------- --------- -------- -------- --------
December 31, 1996 $ 98,321 $ 143 $ 52 $115,218 $ $213,734
======== ======= ========= ======== ======== ========
Net income and
comprehensive income 52,963 52,963
Stock issued 890 890
Stock redeemed (4,835) (24) (4,859)
Advance payments (15) (15)
Dividends declared 9,373 (18,955) (9,582)
-------- ------- --------- -------- -------- --------
December 31, 1997 $103,749 $ 119 $ 37 $149,226 $ $253,131
======== ======= ========= ======== ======== ========
Net income 59,544 59,544
Currency translation adjustments (836) (836)
--------
Comprehensive income 58,708
--------
Stock issued 337 337
Stock redeemed (5,292) (11) (5,303)
Advance payments (37) (37)
Dividends declared 4,896 (14,932) (10,036)
-------- ------- --------- -------- -------- --------
DECEMBER 31, 1998 $103,690 $ 108 $ 0 $193,838 $ (836) $296,800
======== ======= ========= ======== ======== ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
24
<PAGE> 27
CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Stated in thousands except for share and per share data)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Graybar
Electric Company, Inc. and its subsidiary companies. All significant
intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon
shipment to the customer. Costs of the products are recorded as cost of
merchandise sold when the related revenue is recognized.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
MERCHANDISE INVENTORY
Inventory is stated at the lower of cost (determined using the last-in,
first-out (LIFO) cost method) or market. LIFO accounting is generally a
conservative method of accounting that, compared with other inventory
accounting methods, provides better matching of current costs with current
revenues. Had the first-in, first-out (FIFO) method been used, inventory
would have been approximately $17,490 and $28,993 greater than reported under
the LIFO method at December 31, 1998 and 1997, respectively.
PROPERTY AND DEPRECIATION
The Company provides for depreciation and amortization using the
straight-line method over the following estimated useful lives of the assets:
- ----------------------------------------------------------------------------
Buildings 42 years
- ----------------------------------------------------------------------------
Permanent fixtures-- Over the lives of the
leased property respective leases
- ----------------------------------------------------------------------------
Furniture, fixtures and equipment 4 to 14 years
- ----------------------------------------------------------------------------
Capital equipment Over the lives of the
leases respective leases
- ----------------------------------------------------------------------------
At the time property is retired, or otherwise disposed of, the asset
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is credited or charged to other income.
Equipment under capital leases is recorded in property with the
corresponding obligations carried in long-term debt. The amount capitalized
is the present value at the beginning of the lease term of the aggregate
future minimum lease payments.
Maintenance and repairs are expensed as incurred. Major renewals and
betterments that extend the life of the property are capitalized.
The Company capitalizes interest expense on major construction and
development projects while in progress.
DESCRIPTION OF BUSINESS AND CREDIT RISK
Graybar Electric Company, Inc. is engaged internationally in the
distribution of electrical and communications products and integrated supply
services primarily to contractors, industrial plants, telephone companies,
power utilities, and commercial users. All products sold by the Company are
purchased by the Company from others.
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's business activity is primarily with customers in the United
States; however, the Company has limited sales activity in several
international locations. The Company performs ongoing credit evaluations of
its customers, and a significant portion of trade receivables is secured by
lien or bond rights. The Company maintains allowances for potential credit
losses, and such losses historically have been within management's
expectations.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income is reported in the Consolidated Statements of Changes in
Shareholders' Equity.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1998 the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company plans
to adopt the SOP on January 1, 1999. The SOP requires capitalization of
certain internal and external costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The
Company currently expenses internal costs as incurred. The Company is
evaluating the impact of adoption of the SOP, but does not expect the effect
to be material to its results.
25
<PAGE> 28
CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
2. INCOME TAXES
The provisions for income taxes recorded in the Consolidated Statements
of Income and Retained Earnings are as follows:
<TABLE>
<CAPTION>
Years Ended December 31: 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
Current $32,442 $26,248 $25,057
Deferred 4,212 5,669 1,543
State income tax
Current 4,725 3,502 3,542
Deferred 707 1,151 179
- ------------------------------------------------------------------------
Financial statement
income tax provision $42,086 $36,570 $30,321
- ------------------------------------------------------------------------
</TABLE>
Deferred income taxes are provided based upon differences between the
financial statement and tax bases of assets and liabilities. The following
deferred tax assets (liabilities) are recorded at December 31:
<TABLE>
<CAPTION>
Assets/(Liabilities) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Postretirement benefits $ 30,734 $ 30,572
Payroll accruals 6,929 6,416
Bad debt reserves 1,909 2,605
Other deferred tax assets 7,957 6,828
Inventory (2,591) (1,387)
Prepaid pension (7,061) (5,124)
Fixed asset depreciation (12,861) (13,209)
Fixed asset gains (6,287) (6,052)
Accounts receivable (2,169) (2,892)
Other deferred tax liabilities (14,348) (10,622)
- -----------------------------------------------------------------
$ 2,212 $ 7,135
- -----------------------------------------------------------------
</TABLE>
Deferred tax liabilities included in Other Payables and Accruals were
$5,893 and $2,504 in 1998 and 1997, respectively.
A reconciliation between the "statutory" federal income tax rate and
the effective tax rate in the Consolidated Statements of Income and Retained
Earnings is as follows:
<TABLE>
<CAPTION>
Years Ended December 31: 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
"Statutory" tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit 3.4 3.4 3.3
Other, net 3.0 2.4 2.2
- -----------------------------------------------------------------------
Effective tax rate 41.4% 40.8% 40.5%
- -----------------------------------------------------------------------
</TABLE>
3. CAPITAL STOCK
The Company's capital stock is owned by its employees and retirees.
Neither common nor preferred stock may be sold by the holder thereof, except
by first offering it to the Company. The Company may buy any common shares
so offered at the price at which they were issued ($20) with appropriate
adjustments for current dividends or may call all or part of the preferred
stock at par plus accrued dividends.
During 1998 the Company offered to eligible employees the right to
subscribe to 1,000,000 shares of common stock at $20 per share in accordance
with the provisions of the Company's Common Stock Purchase Plan dated October
12, 1998. This resulted in the subscription of 778,202 shares ($15,564).
Subscribers under the Plan elected to make payments under one of the
following options: (i) all shares subscribed for prior to January 22, 1999;
(ii) a portion of such shares prior to January 22, 1999, and the balance in
monthly installments through payroll deductions (or in certain cases where a
subscriber is no longer on the Company's payroll, through pension deductions
or direct monthly payments) over a 34-month period; or (iii) all shares
pursuant to the installment method. Shares were issued and Voting Trust
Certificates were delivered to subscribers as of January 22, 1999, in the
case of shares paid for prior to January 22, 1999. Shares will be issued and
Voting Trust Certificates will be delivered to subscribers on a quarterly
basis, as of the tenth day of March, June, September and December to the
extent full payments of shares are made in the case of subscriptions under
the installment method.
Shown below is a summary of shares reacquired and retired by the
Company in the three years ended December 31:
<TABLE>
<CAPTION>
PREFERRED COMMON
REACQUIRED RETIRED REACQUIRED RETIRED
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 565 623 264,580 257,998
1997 1,190 1,132 241,764 242,675
1996 363 363 173,173 165,569
- ---------------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
LONG-TERM DEBT WAS COMPOSED OF: 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
6.59% note, unsecured, due in
semiannual installments of $3,750
beginning in October 2003 through
April 2013 $ 75,000 $ 0
7.36% note, unsecured, maturing
May 2011, installments of $3,095
due semiannually in each of the
years 2001 through 2010 with
final payment of $3,094 due in 2011 65,000 65,000
6.65% note, unsecured, due in annual
installments of $3,636 in each of the
years 2003 through 2013 40,000 0
6.25% note, unsecured, maturing
June 2004, installments of $7,000
due annually in each of the years
2000 through 2004 35,000 35,000
6.44% note, unsecured, due in
quarterly installments of $893
through January 2005 18,750 0
9.23% note secured by a first
mortgage on various properties,
maturing May 2005, installments
of $2,725 due annually in each
of the years 1995 through 2004
with final payment of $2,750 due
in 2005 16,375 19,100
4.78% to 7.93% capital equipment
leases, various maturities 8,448 3,929
7.74% note, secured by facility, due
in quarterly installments through
August 2006 4,725 5,425
7.75% note, secured by facility,
due in quarterly installments
through March 2005 2,100 2,500
7.67% note, unsecured, maturing
April 2000, installments of
$2,000 due annually in each of
the years 1996 through 2000 2,000 4,000
Variable rate mortgages, secured by
facilities, various maturities 1,649 1,914
Variable rate banker's acceptances,
unsecured, various maturities 523 1,119
12.25% note secured by a first
mortgage on various properties, due in
monthly installments through June 1999 0 1,761
- -----------------------------------------------------------------------------
$269,570 $139,748
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM DEBT MATURES AS FOLLOWS:
- -----------------------------------------------------------------------------
<S> <C>
2000 $ 19,248
2001 22,635
2002 22,761
2003 30,795
2004-2013 174,131
- -----------------------------------------------------------------------------
$269,570
- -----------------------------------------------------------------------------
</TABLE>
The present value of future minimum lease payments under capital leases
as of December 31, 1998 was $12,959, of which $8,448 is included in long-term
debt. The net book value of property securing various long-term debt
instruments was $27,443 at December 31, 1998.
Bank borrowings varied from a minimum of $19,000 and $65,000 to a
maximum of $211,655 and $181,000 in 1998 and 1997, respectively. The average
amount of bank borrowings outstanding during 1998 and 1997 amounted to
approximately $98,000 and $122,000 at weighted average interest rates of
5.67% and 5.72%, respectively. The averages are based on the daily amounts
outstanding during each year.
In January 1998 the Company received the proceeds from a seven-year
note for $25,000 at a fixed interest rate of 6.44% with principal payable in
quarterly installments beginning in April 1998. In April 1998 the Company
received the proceeds from a fifteen-year note for $75,000 at a fixed
interest rate of 6.59% with principal payable in semiannual installments
beginning in October 2003. In June 1998 the Company received the proceeds
from a fifteen-year note for $40,000 at a fixed interest rate of 6.65% with
principal payable in annual installments beginning in June 2003.
The Company had unused lines of credit of approximately $280,000 as
of December 31, 1998. Certain lines require maintenance of compensating
balances of up to 5% of the available lines of credit or quarterly fees of up
to twenty-five basis points of the committed lines of credit. Included in
these unused lines of credit is a $125,000 Revolving Credit Loan Agreement
with a group of banks at an interest rate based on the London Interbank
Offered Rate. The credit agreement expires in May 2003. There have been no
borrowings against this credit line through December 31, 1998.
The Revolving Credit Loan Agreement and certain other note agreements
have various covenants which limit the Company's ability to make investments,
pay dividends, incur debt, dispose of property, and issue equity securities.
The Company is also required to maintain certain financial ratios as defined
in the agreements.
The carrying amounts of the Company's outstanding long-term debt and
notes payable to banks approximate their fair values at December 31, 1998.
5. PENSION AND OTHER
POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. The plan provides retirement benefits
based on an employee's final average earnings and years of service.
Employees become 100% vested after five years of service, regardless of age.
The Company's funding policy is to contribute the net periodic pension cost
accrued each year, provided that the contribution will not be less than the
ERISA minimum or greater than the maximum tax deductible amount.
27
<PAGE> 30
CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Company and its subsidiaries provide certain health care and life
insurance benefits for retired employees through the Retiree Welfare Plan
(the Plan). Substantially all of the Company's employees may become eligible
to participate in the Plan if they reach normal retirement age while working
for the Company. Benefits are provided through insurance coverage with
premiums based on the benefits paid during the year. The Company funds the
Plan on a pay-as-you-go basis, and accordingly, the Plan has no assets at
December 31, 1998 or 1997.
The following table sets forth information regarding the Company's
pension and other postretirement benefits as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
---------------------- -------------------
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated
benefit
obligation $116,000 $101,500 $ 90,000 $ 87,800
-------- -------- -------- --------
Projected benefit
obligation 151,300 135,000 -- --
Fair value of
plan assets 122,133 110,251 -- --
-------- -------- -------- --------
Funded status (29,167) (24,749) (90,000) (87,800)
-------- -------- -------- --------
Prepaid (accrued)
benefit cost
recognized in
the balance
sheet $ 17,705 $ 10,635 $(77,708) $(77,300)
</TABLE>
Weighted average assumptions as of December 31 are:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
-------------------- -----------------
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return
on plan assets 9.50% 9.50% -- --
Rate of
compensation
increase 4.00% 4.25% -- --
Health care cost
trend on
covered charges -- -- 6.00% 6.50%
</TABLE>
The following presents information regarding the plans for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
---------------------- ------------------
1998 1997 1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Employer
contributions $ 13,953 $ 9,492 $ 7,211 $ 6,521
Participant
contributions -- -- 180 146
Benefits paid $(10,723) $(9,165) $(7,391) $(6,667)
-------- ------- ------- -------
</TABLE>
The net periodic cost recognized for the defined benefit pension plan
was $6,883, $6,112 and $5,981 for each of the three years ended December 31,
1998, 1997 and 1996, respectively.
The net periodic cost recognized for the postretirement benefit plan
was $6,811, $6,817 and $6,763 for each of the three years ended December 31,
1998, 1997 and 1996, respectively.
For measurement of the net periodic postretirement benefit cost, a 6.5%
annual rate of increase in per capita cost of covered health care benefits
was assumed for 1998 with the rate assumed to remain at that level.
The Company also provides a defined contribution profit sharing and
savings plan covering substantially all of its full-time employees. Annual
contributions by the Company to the plan are at the discretion of management
and are generally determined based on the profitability of the Company.
Employees may also contribute to the plan subject to limitations imposed by
federal tax law and ERISA.
6. NET INCOME PER SHARE
OF COMMON STOCK
The computation of net income per share of common stock is based on the
weighted average number of common shares outstanding during each year. The
average numbers of shares used in computing net income per share of common
stock were 5,304,646, 5,549,325 and 5,714,458 in 1998, 1997 and 1996,
respectively, adjusted for the declaration of 5%, 10% and 5% stock dividends
in 1998, 1997 and 1996, respectively.
7. COMMITMENTS
Rental expense was $16,372, $12,673 and $10,119 in 1998, 1997 and 1996,
respectively.
Future minimum rental payments required under operating leases that
have either initial or remaining noncancellable lease terms in excess of one
year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- ---------------------------------------------------------------------------
<S> <C>
1999 $18,003
2000 13,700
2001 9,823
2002 6,270
2003 4,502
Subsequent to 2003 16,432
- ---------------------------------------------------------------------------
</TABLE>
8. STATEMENTS OF CASH FLOWS
During 1998, 1997 and 1996 income taxes paid totaled $36,602, $26,773
and $31,468; interest paid totaled $22,349, $19,834 and $16,252; and
liabilities assumed in connection with capitalized leases totaled $9,962, $0
and $4,500, respectively.
The 1997 statement of cash flows includes the effect of the Company's
majority ownership position in Harris & Roome Supply Limited as a result of
additional shares purchased in May 1997.
28
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------------
[LOGO] ERNST & YOUNG LLP Gateway One Phone: 314-259-1000
Suite 1400
701 Market Street
St. Louis, Missouri 63101
Report of Independent Auditors
To the Shareholders and
the Board of Directors
Graybar Electric Company, Inc.
We have audited the accompanying consolidated balance sheets of Graybar
Electric Company, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income and retained earnings, changes in
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Graybar
Electric Company, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
February 19, 1999
29
<PAGE> 32
DISTRICT MANAGEMENT AS OF JANUARY 1, 1999
- ------------------------------------------------------------------------------
- ---------------------------------------
NEW YORK DISTRICT
- ---------------------------------------
Frank Mossa
Vice President
[PHOTO]
Keith E. Davis
Operating Manager
James (Chip) Bateman
Financial Manager
- ---------------------------------------
BOSTON DISTRICT
- ---------------------------------------
William L. King
Vice President
[PHOTO]
Donald M. Block
Sales Manager
Gerald G. Pollick
Operating Manager
Joseph P. Peduto
Financial Manager
- ---------------------------------------
PITTSBURGH DISTRICT
- ---------------------------------------
Steven M. Schooley
Vice President
[PHOTO]
Wade V. Leidecker
Sales Manager
C. Robert Smith
Operating Manager
Peter M. Wingrove
Financial Manager
- ---------------------------------------
CINCINNATI DISTRICT
- ---------------------------------------
Kenneth L. Netherton
Vice President
[PHOTO]
James D. Hooper
Sales Manager
J. William Grindle
Operating Manager
Stephen C. Beckmann
Financial Manager
- ---------------------------------------
ATLANTA DISTRICT
- ---------------------------------------
D. Steven Smith
Vice President
[PHOTO]
Bertie M. Wilson
Operating Manager
Darrel D. Schilling
Financial Manager
- ---------------------------------------
RICHMOND DISTRICT
- ---------------------------------------
Thomas S. Gurganous
Vice President
[PHOTO]
J. Wayne Andrews
Sales Manager
Wallace H. Hancock
Sales Manager
T. N. (Nick) Fleming
Operating Manager
David E. Metz
Financial Manager
- ---------------------------------------
TAMPA DISTRICT
- ---------------------------------------
Michael W. Fowler
Vice President
[PHOTO]
Robert C. Lyons
Sales Manager
Robert D. Wombacher
Operating Manager
Richard C. Hird
Financial Manager
- ---------------------------------------
CHICAGO DISTRICT
- ---------------------------------------
Richard A. Cole
Vice President
[PHOTO]
Thomas E. Walsh
Sales Manager
John C. Fischer
Operating Manager
Martin J. Beagen
Financial Manager
- ---------------------------------------
MINNEAPOLIS DISTRICT
- ---------------------------------------
Robert L. Nowak
Vice President
[PHOTO]
Terrence J. Innes
Sales Manager
Christopher O. Olsen
Operating Manager
Thomas E. Kinate
Financial Manager
30
<PAGE> 33
- ------------------------------------------------------------------------------
- ---------------------------------------
ST. LOUIS DISTRICT
- ---------------------------------------
Thomas F. Williams
Vice President
[PHOTO]
John P. Mills
Operating Manager
Reiders L. Abel
Financial Manager
- ---------------------------------------
DALLAS DISTRICT
- ---------------------------------------
Lawrence R. Giglio
Vice President
[PHOTO]
Peter J. Roettinger
Sales Manager
Francis B. Roderick
Sales Manager
Thomas T. Townsend
Operating Manager
George D. Zackey
Financial Manager
- ---------------------------------------
SEATTLE DISTRICT
- ---------------------------------------
John C. Loff
Vice President
[PHOTO]
Larry T. Christensen
Sales Manager
T. Peter Girard, Jr.
Operating Manager
Randall R. Harwood
Financial Manager
- ---------------------------------------
PHOENIX DISTRICT
- ---------------------------------------
Gary D. Hodges
Vice President
[PHOTO]
Richard A. Mitchell
Sales Manager
Michael D. Gaines
Operating Manager
Ronald J. Grabar
Financial Manager
- ---------------------------------------
NORTHEASTERN COMM/DATA DISTRICT
- ---------------------------------------
Gerard J. McCrea
Vice President
[PHOTO]
- ---------------------------------------
SOUTHEASTERN COMM/DATA DISTRICT
- ---------------------------------------
Richard D. Offenbacher
Vice President
[PHOTO]
- ---------------------------------------
CENTRAL COMM/DATA DISTRICT
- ---------------------------------------
Alan L. Eddings
Vice President
[PHOTO]
- ---------------------------------------
WESTERN COMM/DATA DISTRICT
- ---------------------------------------
Kenneth B. Sparks
Vice President
[PHOTO]
31
<PAGE> 34
LOCATIONS AS OF JANUARY 1, 1999
- ------------------------------------------------------------------------------
CORPORATE OFFICE
34 North Meramec Avenue
St. Louis, Missouri 63105
314 512-9200
- ---------------------------------------
NEW YORK DISTRICT
- ---------------------------------------
21-15 Queens Plaza North
Long Island City,
New York 11101
718 392-2000
BRANCHES
New York: Manhattan,
Rochester, Albany, Syracuse,
Hauppauge, Buffalo, Jericho
New Jersey: Newark,
North Brunswick, Teterboro,
Hackettstown, Parsippany,
Wanamassa, Hamilton
INFORMATION SYSTEMS
11828 Lackland Road
St. Louis, Missouri 63146
314 569-0006
- ---------------------------------------
PITTSBURGH DISTRICT
- ---------------------------------------
900 Ridge Avenue
Pittsburgh, Pennsylvania
15212
412 323-5200
BRANCHES
Ohio: Youngstown, Cleveland,
Akron, Canton, Mansfield
Pennsylvania: Greensburg,
Harrisburg, Allentown,
Philadelphia, Erie
West Virginia: Wheeling
Delaware: New Castle
MID-ATLANTIC ZONE
SERVICE CENTER
2124 Avenue "C"
Bethlehem, Pennsylvania 18017
610 266-0220
- ---------------------------------------
ATLANTA DISTRICT
- ---------------------------------------
2050 Nancy Hanks Drive
Norcross, Georgia 30071
770 441-5580
BRANCHES
Georgia: Atlanta
Midtown, Marietta,
Fayetteville, Savannah,
Cartersville
Alabama: Birmingham,
Huntsville, Mobile
South Carolina: Columbia,
Greenville, Spartanburg,
Hilton Head, Beaufort
Tennessee: Knoxville,
Chattanooga
Florida: Pensacola
Mississippi: Jackson
MIDWEST ZONE
SERVICE CENTER
2424 A North Main Street
East Peoria, Illinois 61611
309 694-2341
- ---------------------------------------
TAMPA DISTRICT
- ---------------------------------------
801 North Rome Avenue
Tampa, Florida 33606
813 253-8881
BRANCHES
Florida: Sarasota, Lakeland,
Orlando, Pinellas, Melbourne,
North Tampa, Tallahassee,
Jacksonville,
South Jacksonville,
Daytona Beach, Perrine,
Miami, West Palm Beach,
Florida City, Fort Myers,
Fort Pierce, Naples,
Pompano Beach, Gainesville
- ---------------------------------------
BOSTON DISTRICT
- ---------------------------------------
345 Harrison Avenue
Boston, Massachusetts 02118
617 482-9320
BRANCHES
Rhode Island: Cranston
Massachusetts: Worcester,
Springfield, Somerville,
Lucent Merrimack Valley
Maine: Portland
New Hampshire: Manchester
Vermont: Rutland, Williston
Connecticut: Hamden
- ---------------------------------------
CINCINNATI DISTRICT
- ---------------------------------------
1022 West Eighth Street
Cincinnati, Ohio 45203
513 621-0600
BRANCHES
West Virginia: Charleston
Ohio: Columbus, Dayton,
Lima
Kentucky: Lexington,
Louisville
Tennessee: Nashville
- ---------------------------------------
RICHMOND DISTRICT
- ---------------------------------------
1510 Tomlynn Street
Richmond, Virginia 23230
804 354-1300
BRANCHES
Virginia: Norfolk, Roanoke,
Hampton, Chantilly
North Carolina: Asheville,
Raleigh, Winston-Salem,
Charlotte, Greensboro,
Wilmington
South Carolina: Rock Hill
Tennessee: Bristol, Johnson City
Maryland: Baltimore, Lanham
- ---------------------------------------
CHICAGO DISTRICT
- ---------------------------------------
900 Regency Drive
Glendale Heights, Illinois
60139
630 893-3600
BRANCHES
Illinois: Naperville, Chicago
Downtown, Morton Grove
Indiana: Fort Wayne,
South Bend, Hammond,
Indianapolis
Michigan: Flint, Lansing,
Grand Rapids, Kalamazoo,
Auburn Hills, Kentwood,
Livonia
Ohio: Toledo
32
<PAGE> 35
- ------------------------------------------------------------------------------
- ---------------------------------------
NORTHEASTERN
COMM/DATA DISTRICT
- ---------------------------------------
1550 South Warfield Street
Philadelphia, Pennsylvania 19146
215 336-2211
- ---------------------------------------
MINNEAPOLIS DISTRICT
- ---------------------------------------
2300 East 25th Street
Minneapolis, Minnesota 55406
612 721-3545
BRANCHES
Minnesota: St. Paul, Duluth,
Brooklyn Park, Burnsville,
Plymouth, Rochester, Mankato
Montana: Billings
North Dakota: Fargo
South Dakota: Sioux Falls,
Brookings
Wisconsin: Green Bay,
West Allis, Marinette,
Manitowoc, Madison,
Neenah
- ---------------------------------------
SOUTHEASTERN
COMM/DATA DISTRICT
- ---------------------------------------
2050 Nancy Hanks Drive
Norcross, Georgia 30071
770 441-5580
- ---------------------------------------
DALLAS DISTRICT
- ---------------------------------------
4601 Cambridge Road
Ft. Worth, Texas 76155
817 213-1200
BRANCHES
Texas: San Antonio,
Fort Worth Counter, Amarillo,
Austin, Abilene, Cypress,
Beaumont, Corpus Christi,
Houston, Houston (Counter),
North Dallas, Sherman, Lubbock,
Kilgore, LaMarque, Dallas (Royal
Lane Counter),
Texas Instruments,
Houston Distribution Center,
Houston (Tellepsen), Dallas
Major Metro
Oklahoma: Oklahoma City,
Lucent Oklahoma City, Tulsa
Arkansas: Little Rock, Conway,
Springdale
Louisiana: Shreveport,
Baton Rouge, Lake Charles,
Harahan
- ---------------------------------------
CENTRAL
COMM/DATA DISTRICT
- ---------------------------------------
8170 Lackland Road
Bel Ridge, Missouri 63114
314 512-0100
- ---------------------------------------
PHOENIX DISTRICT
- ---------------------------------------
3350 West Earll Drive
Phoenix, Arizona 85017
602 269-2131
BRANCHES
Arizona: Mesa, Tucson,
Scottsdale
Colorado: Colorado Springs,
Denver, Englewood
New Mexico: Albuquerque
Texas: El Paso
Nevada: Las Vegas, Henderson
Utah: Salt Lake City, Orem
California: Los Angeles,
Anaheim, Costa Mesa,
Long Beach, San Bernardino,
San Diego, Santa Barbara,
Van Nuys, Bakersfield,
San Marcos, Santa Maria,
San Diego (Downtown),
Los Angeles Distribution
Center
- ---------------------------------------
WESTERN
COMM/DATA DISTRICT
- ---------------------------------------
1600 132nd Avenue, Northeast
Bellevue, Washington 98005
425 468-5548
REGIONAL ZONES
- ---------------------------------------
DALLAS REGIONAL ZONE
- ---------------------------------------
4601 Cambridge Road
Fort Worth, Texas 76155
817 213-1450
- ---------------------------------------
ATLANTA REGIONAL
AND NATIONAL ZONE
- ---------------------------------------
Woodlands Business Park
Building 100
8180 Troon Circle
Austell, Georgia 30168
678 945-9970
- ---------------------------------------
ST. LOUIS DISTRICT
- ---------------------------------------
8170 Lackland Road
Bel Ridge, Missouri 63114
314 512-0100
BRANCHES
Iowa: Davenport,
Des Moines,
Cedar Rapids
Illinois: East Peoria,
Springfield
Missouri: Jefferson City,
Kansas City, Springfield,
St. Louis (Counter)
Indiana: Evansville
Kansas: Olathe, Wichita
Nebraska: Omaha
Tennessee: Memphis, Jackson
- ---------------------------------------
SEATTLE DISTRICT
- ---------------------------------------
1919 Sixth Avenue South
Seattle, Washington 98134
206 292-4848
BRANCHES
Washington: Spokane,
Tacoma, Everett, Bellevue
Oregon: Portland, Beaverton,
Eugene
Idaho: Boise
Alaska: Anchorage, Fairbanks
California: Oakland Counter,
Fresno, Modesto,
Sacramento, San Jose,
Martinez, Hayward,
San Francisco Downtown,
Visalia, San Carlos
(Counter)
Nevada: Sparks
Hawaii: Aiea
- ---------------------------------------
INTERNATIONAL
- ---------------------------------------
34 North Meramec Avenue
St. Louis, Missouri 63105
314 512-9211
Miami International
10500 Southwest 186th St.
Perrine, Florida 33157
305 252-0400
San Francisco International
2368 Lincoln Avenue
Hayward, California 94545
510 259-0122
Houston International
6161 Bingle Road
Houston, Texas 77092
713 970-9450
LOCATIONS
San Juan, Puerto Rico
Singapore
Mexico City, Mexico
Santiago, Chile
Kitchener, Ontario
Hamilton, Ontario
Guelph, Ontario
Mississauga, Ontario
Niagara Falls, Ontario
Windsor, Ontario
Halifax, Nova Scotia
Dartmouth, Nova Scotia
Bridgewater, Nova Scotia
Kentville, Nova Scotia
New Glasgow, Nova Scotia
Sydney, Nova Scotia
Truro, Nova Scotia
Yarmouth, Nova Scotia
Charlottetown, Prince
Edward Island
Bathurst, New Brunswick
Florenceville, New Brunswick
Fredericton, New Brunswick
Moncton, New Brunswick
Saint John, New Brunswick
Corner Brook, Newfoundland
Grand Falls-Windsor,
Newfoundland
St. John's, Newfoundland
Wabush, Newfoundland
<PAGE> 36
Graybar Electric Company, Inc.
34 North Meramec Avenue
St. Louis, Missouri 63105
www.graybar.com
<PAGE> 1
EXHIBIT 21
GRAYBAR ELECTRIC COMPANY, INC.
LIST OF SUBSIDIARIES
--------------------
Graybar Foreign Sales Corporation, a Barbados corporation.
Graybar International, Inc., a Missouri corporation.
Graybar Financial Services, Inc., a Missouri corporation.
Graybar Electric de Mexico, S. DE R.L. DE C.V., a Mexican corporation.
Graybar Electric Limited, a Nova Scotia corporation.
Graybar Foundation, Inc., a Missouri corporation.
Graybar Services, Inc., an Illinois corporation.
Distribution Associates, Inc., a Missouri corporation.
Graybar Electric (Ontario) Limited, an Ontario corporation.
Graybar International PTE LTD, a Singapore corporation.
Graybar Business Services, Inc., a Missouri corporation.
Graybar International de Chile Limitada, a Chile limited liability
partnership.
<PAGE> 1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Graybar Electric Company, Inc. of our report dated February 19, 1999,
included in the 1998 Annual Report to Shareholders of Graybar Electric
Company, Inc.
Our audits also included the financial statement schedule of Graybar Electric
Company, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
St. Louis, Missouri
February 19, 1999
/s/ Ernst & Young LLP
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