For an understanding of the significant factors that influenced the company’s performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this annual report.

Sales
Consolidated sales of $13 billion in 2000 were 39 percent higher than 1999 sales of $9.3 billion. This sales increase was driven by a 61 percent growth in the sales of core components and acquisitions offset, in part, by foreign exchange rate differences, fewer sales of low margin microprocessors (a product segment not considered a part of the company’s core business), and market conditions for computer products. Excluding the impact of acquisitions, foreign exchange rate differences, and lower microprocessor sales, sales increased by 34 percent over the prior year.

In 1999, consolidated sales increased to $9.3 billion. This 12 percent sales growth over 1998 was principally due to growth in the worldwide core components operations and acquisitions offset, in part, by fewer sales of low margin microprocessors and foreign exchange rate differences. Excluding the impact of acquisitions, foreign exchange rate differences, and lower microprocessor sales, consolidated revenue increased by 8 percent over the prior year and sales of core components increased by 10 percent. Sales of commercial computer products increased marginally over 1998’s level due principally to softening demand and lower average selling prices, offset by increasing unit shipments, as a result of market conditions.

Consolidated sales of $8.3 billion in 1998 were 7 percent higher than 1997 sales of $7.8 billion. This sales growth was due to an approximate $700 million increase in sales of commercial computer products. The worldwide market for electronic components continued to be characterized by product availability well in excess of demand and resultant pressure on average selling prices and gross profit margins resulting in a decline in sales.

Operating Income
Operating income increased to $784.1 million in 2000, compared to $363.2 million in 1999, excluding the integration charge of $24.6 million associated with the acquisition and integration of Richey Electronics, Inc. (“Richey”) and the electronics distribution group of Bell Industries, Inc. (“EDG”). This increase in operating income was a result of increased sales in the core components businesses around the world and increased gross profit margins, as well as the full year impact of cost savings resulting from the integration of Richey and EDG offset, in part, by lower sales of computer products and increased spending in the company’s Internet business. Operating expenses as a percentage of sales were 9.6 percent, the lowest in the company’s history.

In 1999, the company’s consolidated operating income decreased to $338.7 million from $352.5 million in 1998, principally as a result of the special charge of $24.6 million. Excluding this integration charge, operating income was $363.2 million. Operating income, excluding the integration charge, increased as a result of higher sales, improved gross profit margins in the core components operations in the latter part of 1999, and improved operating efficiencies resulting from the integration of Richey and EDG into the company offset, in part, by lower gross profit margins in the computer products operations, increased non-cash amortization expense associated with goodwill, investments made in systems, including the Internet, and personnel to support anticipated increases in business activities.

The company’s consolidated operating income decreased to $352.5 million in 1998, compared with operating income of $374.7 million in 1997, including special charges of $59.5 million. Excluding the special charges, operating income in 1997 was $434.2 million. The reduction in operating income reflected a decline in the sales of the components business in North America, a further decline in gross margins due to proportionately higher sales of lower margin commercial computer products, and competitive pricing pressures throughout the world offset, in part, by the impact of increased sales and the benefits of continuing economies of scale. Operating expenses as a percent of sales remained consistent with 1997 at 9.7 percent.

Interest Expense
Interest expense of $171.3 million in 2000 increased by $65 million from 1999 as a result of increases in borrowings to fund the company’s acquisitions, working capital requirements, capital expenditures, and investments in Internet joint ventures.

In 1999, interest expense increased to $106.3 million from $81.1 million in 1998, reflecting both increases in borrowings to fund acquisitions and investments in working capital. Interest expense of $81.1 million in 1998 increased by $14 million from the 1997 level, reflecting increases in borrowings associated with acquisitions and investments in working capital.

Income Taxes
The company recorded a provision for taxes at an effective tax rate of 40.7 percent in 2000 compared with 43 percent, excluding the integration charge, in 1999. The lower rate for 2000 is due to the company’s significantly increased operating income, which lowered the negative effect of non-deductible goodwill amortization on the company’s effective tax rate.

In 1999, the company recorded a provision for taxes at an effective tax rate of 43 percent, excluding the integration charge, compared with 42.2 percent in 1998. The increased rate for 1999 is due to the non-deductibility of goodwill amortization.

The company recorded a provision for taxes at an effective tax rate of 42.2 percent in 1998 compared with 41 percent, excluding the special charges, in 1997. The higher effective rate in 1998 is due to the non-deductibility of goodwill amortization.

Net Income
Net income in 2000 was $357.9 million, an increase from $124.2 million in 1999 ($140.6 million excluding the integration charge). The increase in net income is a result of increased sales, improved gross profit margins, and continued expense control offset, in part, by higher levels of interest expense.

In 1999, the company’s net income decreased to $124.2 million from $145.8 million in 1998. Excluding the integration charge, net income was $140.6 million. The decrease in net income, excluding the integration charge, was primarily attributable to an increase in operating income and a decrease in minority interest, offset by an increase in interest expense.

Net income in 1998 was $145.8 million, a decrease from $204.1 million, before the special charges of $59.5 million ($40.4 million after taxes), in 1997. The decrease in net income was attributable to lower operating income and an increase in interest expense.

Liquidity and Capital Resources
The company maintains a significant investment in accounts receivable and inventories. Consolidated current assets, as a percentage of total assets, were approximately 76 percent and 70 percent in 2000 and 1999, respectively.

In 2000, working capital increased by 74 percent, or $1.36 billion, compared with 1999. Excluding the impact of acquisitions, working capital increased by 28 percent, or $508 million, due to increased sales and higher working capital requirements.

The net amount of cash used for operating activities in 2000 was $336.4 million, principally resulting from increased accounts receivable and inventories offset, in part, by increased payables and earnings for the year. The net amount of cash used for investing activities was $1.4 billion, including $1.2 billion primarily for the acquisitions of Wyle Electronics and Wyle Systems (collectively, “Wyle”), the open computing alliance subsidiary of Merisel, Inc. (“MOCA”), Jakob Hatteland Electronic AS (“Hatteland”), and Tekelec Europe (“Tekelec”), and $80.2 million for various capital expenditures. The net amount of cash provided by financing activities was $1.7 billion, primarily reflecting the issuance of senior debentures, borrowings under the company’s commercial paper program, and various short-term borrowings.

In February 2001, the company entered into a 364-day $625 million credit facility which expires in February 2002 and a three-year revolving credit agreement providing up to $625 million of available credit. These credit facilities replaced the previously existing 364-day credit facility and the global multi-currency credit facility.

In addition, during the first quarter of 2001 the company completed the sale of $1.5 billion principal amount at maturity of zero coupon convertible senior debentures (the “convertible debentures”) due February 21, 2021. The convertible debentures were priced with a yield to maturity of 4% per annum and may be converted into the company’s common stock at a conversion price of $37.83 per share. The company may redeem all or part of the convertible debentures at any time on or after February 21, 2006. Holders of the convertible debentures may require the company to repurchase the debentures on February 21, 2006, 2011, or 2016. The net proceeds resulting from this transaction of approximately $672 million were used to repay short-term debt.

Working capital increased by $138 million, or 8 percent, in 1999 compared with 1998. This increase was due to increased sales, higher working capital requirements, and acquisitions.

The net amount of cash used for the company’s operating activities in 1999 was $33.5 million, principally reflecting increased customer receivables due to accelerated sales growth in the fourth quarter offset, in part, by earnings for the year. The net amount of cash used for investing activities was $543.3 million, including $459.1 million for the acquisitions of Richey, EDG, Industrade AG, interests in the Elko Group and Panamericana Comercial Importadora, S.A., the remaining interests in Spoerle Electronic and Support Net, Inc., and an additional interest in Scientific and Business Minicomputers, Inc. (“SBM”), as well as certain Internet-related investments, and $84.2 million for various capital expenditures. The net amount of cash provided by financing activities was $479.1 million, reflecting borrowings under the company’s commercial paper program, the issuance of the company’s floating rate notes, and credit facilities offset, in part, by the repayment of Richey’s 7% convertible subordinated notes and debentures, 8.29% senior debentures, and distributions to partners.

In 1998, working capital increased by 18 percent, or $262 million, compared with 1997. This increase was due to higher working capital requirements and acquisitions.

The net amount of cash provided by operations in 1998 was $43.6 million, the principal element of which was the cash flow resulting from net earnings offset, in part, by working capital usage. The net amount of cash used by the company for investing purposes was $129.6 million, including $70.6 million for various acquisitions. Cash flows provided by financing activities were $131.4 million, principally reflecting the $445.7 million of proceeds from the issuance of the company’s 67/8% senior debentures and 6.45% senior notes offset, in part, by the reduction in the company’s credit facilities, purchases of common stock, and distributions to partners.

Information Relating to Forward-Looking Statements
This report includes forward-looking statements that are subject to certain risks and uncertainties which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, changes in product supply, pricing and customer demand, competition, other vagaries in the electronic components and commercial computer products markets, and changes in relationships with key suppliers. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any forward-looking statements.

Market and Other Risks
The company is exposed to market risk from changes in foreign currency exchange rates and interest rates.

The company, as a large international organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material impact on the company’s financial results in the future. The company’s primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe, the Asia/Pacific region, and Latin and South America. At the present time, the company hedges only those currency exposures for which natural hedges do not exist. Anticipated foreign currency cash flows and earnings and investments in businesses in Europe, the Asia/Pacific region, and Latin and South America are not hedged as in many instances there are natural offsetting positions. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Had the various average foreign currency exchange rates remained the same during 2000 as compared with 1999, 2000 sales and operating income would have been $466 million and $44 million higher, respectively, than the actual results for 2000.

The company’s interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company manages its exposure to interest rate risk through the proportion of fixed rate and variable rate debt in its total debt portfolio. At December 31, 2000, approximately 48 percent of the company’s debt was subject to fixed rates and 52 percent of its debt was subject to variable rates. Interest expense would fluctuate by approximately $12 million if average interest rates had changed by one percentage point in 2000. This amount was determined by considering the impact of a hypothetical interest rate on the company’s borrowing cost. This analysis does not consider the effect of the level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company’s financial structure.