The Company continues to pursue initiatives to expand its global product and service offerings such as high-end storage, computer telephony integration (“CTI”), networking products, and application service provider (“ASP”) offerings. Ingram Micro’s High-End Storage Group provides a dedicated and focused approach to the growing storage area networks and network attached storage markets. The Company continues its expansion of its CTI offering with solutions and products made possible by the convergence of voice and data applications through its Converging Technologies Group. Examples of such products include PC-based phone systems, unified messaging applications, and a variety of Internet telephony and voice-over Internet protocol products. Expansion areas for networking include Internet appliances, wide area networking, and wireless networking solutions. Ingram Micro is also moving forward with developing the first two-tiered ASP offering that will enable technology solution providers to become ASPs and provide ASP vendors with an effective market strategy to reach the information technology channel.

     In Europe, the Company has formed two specialized strategic business units that focus on specific market and customer segments: Ingram Micro Europe Components and Private Label division, and Ingram Micro Networking Services™ division. Both divisions have a pan-European scope and service reseller customers throughout Europe in all the countries where the Company has a presence. The Components and Private Label division offers a one-stop shopping opportunity to small- and medium-sized resellers, PC assemblers and original equipment manufacturers (“OEMs”). This division markets a wide range of components that resellers need to assemble PC systems. The networking services division is another strategic customer focused business unit and specializes in high-end networking and communication products, in addition to services such as product consulting, project management and design, sales support and training, installation, technical support and on-site customer support.

     Lead In Streamlining The Demand Chain. The information technology products and services distribution industry is changing at a rapid pace. The chain of relationships that spans across component suppliers, manufacturers, distributors, resellers and end-users is transforming from a manufacturer-push business model to one that is governed by end-user demand. The Company’s commitment to streamlining the demand chain is evident in its investment in infrastructure and programs that enable the most efficient flow of products, services, and information up and down the demand chain. Areas of service that support its business partners include end-to-end order fulfillment, product procurement, contract manufacturing and warehouse services, logistics and transportation management, marketing services, customer care, credit management services and other outsourcing services.

     Equally important to streamlining the demand chain is better information management through the development of industry-wide performance metrics and standards that enable close collaboration among demand chain partners. Ingram Micro has spearheaded this effort through its role in the formation and continuous support of RosettaNet™, an independent, self-funded, non-profit organization dedicated to promoting an industry-wide initiative to adopt common electronic business interfaces worldwide. The Company is working on several initiatives to encourage and increase industry adoption of RosettaNet’s standard transactions for electronic business.

     Exploit Information Systems Leadership And Enhance Electronic Commerce Capabilities. Ingram Micro continually invests in its information systems, which are crucial in supporting the Company’s growth and its ability to maintain high service and performance levels. The Company has a scalable, full-featured information system, IMpulse, which it believes to be critical to its ability to deliver worldwide, real-time information to both suppliers and reseller customers. IMpulse is an industry-leading information system and is used across substantially all of the Company’s markets worldwide, customized to suit local market requirements. The Company believes that it is the only full-line distributor of information technology products and services in the world with such a centralized global system to support future growth and new business ventures.

     The Company’s information systems provide the infrastructure that allows the implementation of a demand chain, customer-centric channel model. It provides the information necessary for Ingram Micro to act as the agent of commerce among suppliers, resellers, and end-users. In 2000, the Company made additional enhancements to its web site,www.ingrammicro.com, to support this prominent business-to-business tool for the technology solutions industry. The web site serves as a business center for resellers, providing them access to a myriad of information, including vendor solutions and technical information. Special features currently available in the U.S. and Canada

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include real-time pricing and availability, on-line ordering, order status, and an extensive product catalog. As of December 30, 2000, Ingram Micro had fully functional websites deployed to 29 countries. The Company’s seamless, easy-to-use, electronic commerce offering provides resellers the ability to more easily do business with Ingram Micro and end-users at a lower cost. The Company’s electronic commerce capabilities include: robust Electronic Data Interchange (EDI) capabilities, and InsideLine™, a direct communication link that furnishes resellers with real-time access to the Company’s mainframe inventory systems. InsideLine is the commerce and information engine behind successful electronic commerce sites offered by many of the Company’s customers, and is offered by the Company on a global basis. The Company is also exchanging early-stage RosettaNet-standard XML transactions with a limited number of partners within the supply chain, and expects to expand these transactions in 2001.

     In 2001, Ingram Micro’s e-commerce capabilities in the U.S. are expected to continue to support the Company’s individual programs for specialized resellers. These include VentureTech Network™ (“VTN”), which specializes in solutions for small- to medium-sized businesses, and Partnership America™, which is focused on the government and education market. The VTN site, www.venturetechnetwork.com, enables communication between solutions integrators and small to medium-sized business customers. The site will provide information and facilitate communication with customers through tools such as electronic storefronts and reseller community. The electronic storefront tools allow end-users to buy product through placing an order on-line through their reseller’s website, which, once sent transparently to Ingram Micro, is fulfilled on behalf of the reseller or solutions integrator. The Partnership America site, www.partnershipamerica.com, brings independent buyers in the public sector together with independent resellers of technology. Partnershipamerica.com also contains price comparison tools, decision-making content, product reviews, news, events, on-line presentations, and interactive communication tools for the entire demand chain. These e-commerce solutions are discussed further under the section entitled “Information Systems and Related Tools.”

     The success of the Company’s on-line capability is evidenced by the November 2000 Inter@ctive Week magazine ranking of on-line businesses which placed Ingram Micro No. 8 overall.

     Provide Superior Execution For Reseller Customers. Consistent with its overall emphasis on “winning customers for life,” Ingram Micro continually refines and integrates its systems and business processes to provide superior execution and service to resellers. The Company’s electronic commerce tools enable resellers to do business with their end-user customers quickly, easily, and at a lower cost. To ensure efficient product delivery, the Company continues to expand and upgrade its distribution network. For example, in 2000 the Company completed the construction of new distribution centers in Tilburg, The Netherlands (290,000 square feet), Daventry, United Kingdom (270,000 square feet), and Copenhagen, Denmark (130,000 square feet). In 2001, the Company plans to complete the construction of new distribution centers in Mira Loma, California (800,000 square feet), Milan, Italy (190,000 square feet), Barcelona, Spain (160,000 square feet), and Mexico City, Mexico (130,000 square feet). In addition, the Company will expand distribution centers in Lomme, France (100,000 square feet) and Vapaalantie, Finland (20,000 square feet) and replace its current distribution center in Vancouver, British Columbia (160,000 square feet).

     In 2001, the Company will continue the implementation of the next generation of operations and logistics systems, built around a client-server warehouse management system, allowing its North American distribution centers to increase operating capacity from 20 hours a day to 24 hours a day. In the area of process improvement, the Company works continuously to advance its formal systems for evaluating and tracking key performance metrics such as responsiveness to customers, processing accuracy, and order fill rate. Ingram Micro uses these metrics as well as customer satisfaction surveys to measure improvements on all key elements believed to be important to the customer. This information, when used in conjunction with Ingram Micro’s core values, allows the Company’s associates to provide a high level of customer satisfaction. The Company’s commitment to superior service has been widely recognized throughout the industry. For example, Ingram Micro ranked No. 1 in performance in more product categories than any other distributor in 2000 according to Computer Reseller News’ 16th annual Preferred Distributor Study. In February 2001, the Company’s U.S. logistics services division, IM-Logistics, was honored by Modern Materials Handling Magazine with its 11th annual Productivity Award for excellence in distribution backroom services.

     Ingram Micro strives to maximize order fill rates by maintaining optimum quantities of product in 48

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distribution centers worldwide. The Company’s advanced control systems and processes enable Ingram Micro to provide same-day shipping for any order in the United States received by 5:00 p.m., with highly accurate shipping performance. Another indication of the quality of Ingram Micro’s processes is the ISO 9002 certification of all U.S. business units including customer service, returns, consolidation, operations, configuration, distribution center, sales and purchasing. Outside the U.S, Ingram Micro is also ISO 9002 certified in various business units in the following countries: Canada, Mexico, United Kingdom, Belgium, Denmark, France, Italy, Norway, Spain, Sweden, and India.

     Deliver World-Class Outsourcing And Value-Added Programs To Suppliers And Resellers. As a global service-focused organization, Ingram Micro strives to compete on the basis of total value rather than solely on price. By understanding and anticipating customer needs, the Company continually develops innovative business solutions to provide full back-room outsourcing services to suppliers and resellers. These value-added services include end-to-end order fulfillment, product procurement, contract manufacturing and warehouse services, logistics and transportation management, marketing services, customer care, credit management services and other outsourcing services. These services are intended to link reseller customers and suppliers to Ingram Micro as a one-stop provider of information technology products and related services, while meeting demand by suppliers and resellers to outsource their non-core business activities and thereby lower their operating costs.

     Maintain Low Cost Leadership Through Continuous Improvements In Systems And Processes. Intense competition and narrow margins characterize the information technology products and services distribution industry. As a result, achieving economies of scale and controlling operating expenses are critical to achieving and maintaining profitable growth. Over the past five years, the Company has been successful in reducing SG&A expenses as a percentage of net sales, to 3.9% in 2000 from 4.7% in 1996.

     Work is in progress on a number of programs designed to continue reducing operating expenses as a percentage of net sales. Many U.S.-developed programs are slated for implementation in the Company’s international operations, while other programs are region-specific. Productivity improvement initiatives include: (i) system enhancements to automatically route orders to the most cost-efficient warehouse based on customer needs and warehouse capacity; (ii) increased utilization of most of the Company’s existing warehouse locations resulting from the expansion of operating hours from 20 to 24 hours per day; (iii) automated proof-of-delivery notifications to improve collection on past due invoices; (iv) enhancements that allow a close integration of major systems-such as logistics and material handling platforms-resulting in increased efficiencies, product traceability, and service offerings; and (v) the expansion of the Company’s electronic commerce tools, including deployment of Internet ordering capabilities in 29 countries to date, to increase the number of orders placed without the assistance of a telesales representative. See “—Information Systems” for additional details.

     The Company will, on an ongoing basis, examine its business processes and systems to determine how it can continue to improve, while simultaneously lowering costs.

     Develop Human Resources For Excellence And To Support Future Growth. Ingram Micro’s growth to date is a result of the talent, dedication, and teamwork of its associates. Future growth and success will be substantially dependent upon the retention and development of existing associates, as well as the recruitment of additional associates with superior talent.

     Transferring functional skills and implementing cross-training programs across all Ingram Micro locations have proven to be important factors in the Company’s growth and global expansion. A rigorous and systematic process is being implemented for defining, developing and delivering the highest quality training solutions in the most cost-effective way. In conjunction with these training programs, the Company is expanding its human resources systems worldwide to provide enhanced applicant tracking, hiring screens, career and succession planning, education assistance, stock ownership participation, and benefits administration. Also, the Company continues to seek top quality associates worldwide through local, professional, and college recruiting programs. Recognizing that hiring and retaining associates hinges, in part, on providing a competitive salary and benefits package, the Company has developed a global salary structure based on a comprehensive review of competitive salaries and benefits by region. Based on feedback from the Company’s annual associate surveys and leadership behavior questionnaires, Ingram Micro strives to continuously modify many aspects of its programs and processes.

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CUSTOMERS

     Ingram Micro continues to be well positioned in providing world class fulfillment and value-added services to corporate resellers, direct marketers, retailers, and Internet-based resellers. Ingram Micro’s sales organization has resources dedicated to the recruitment, development, and sales support of these marketplaces. The Company’s goal is to seamlessly manage the flow of goods and services from its vendor partners through the reseller to the end-user, providing specific solutions to a diverse customer base. Ingram Micro sells to more than 175,000 reseller customers in more than 100 countries worldwide. No single customer accounted for more than 4% of Ingram Micro’s net sales in 2000, 1999, or 1998.

     The Company conducts business with most of the leading resellers of information technology products and services around the world including, in the United States, Best Buy, Buy.com, CompuCom, CDW Computer Centers, CompUSA, Comark, Dell Computer, GE Capital, Insight, Micro Warehouse, Office Max, PC Connection, SARCOM, Staples and Unisys. The Company’s reseller customers outside the United States include Business Depot, Compugen, DSG Retail Limited, EDS Innovations, Future Shop, GE Capital, Main Bit, Media Market, Micro Warehouse, Nueva Wal Mart and Telenor. In most cases, the Company has resale contracts with its reseller customers which are generally terminable at will after a short notice period, and have no minimum purchase requirements. The Company’s business is not substantially dependent on any such contracts.

     The Company also has specific agreements in place with certain manufacturers and resellers to provide supply chain management services such as order management, logistics management, configuration management and procurement management services. Customers include ABM, Buy.com, CompUSA, GE Capital, Intertec-Mobile Direct, Microsoft, SARCOM, and Unisys in North America and GE Capital, IMS Data AB and Telenor in Europe. These agreements generally have longer terms than the Company’s resale agreements, but, in most cases, can be terminated on relatively short notice by either party without cause. The Company’s service offerings to its customers are discussed further under the section entitled “Services.”

SALES AND MARKETING

     As of the end of fiscal 2000, Ingram Micro employed approximately 4,000 sales representatives worldwide. Of these, approximately 1,200 representatives are located in the United States, 1,500 in Europe, and 1,300 in other regions. These individuals assist resellers with product specifications, system configuration, new product/service introductions, pricing, and availability.

     The sales organization is structured to focus on resellers in the following market sectors:

     The Company’s product management and marketing groups also promote Ingram Micro’s sales growth and facilitate customer contact. For example, Ingram Micro’s marketing programs are tailored to meet specific supplier and reseller customer needs. These needs are met through a wide offering of services by the Company’s in-house marketing organization, including advertising, direct mail campaigns, market research, on-line marketing, retail programs, sales promotions, training, and assistance with trade shows and other events.

     Selling Arrangements. The Company offers various credit terms to qualifying customers as well as prepay, credit card, and cash on delivery terms. The Company also offers “end-user” financing based upon the end-user’s credit worthiness and collects outstanding accounts receivable on behalf of the reseller in certain markets. The Company closely monitors reseller customers’ credit worthiness through its IMpulse information system, which contains detailed information on each customer’s payment history as well as other relevant information. In addition, the Company participates in a U.S. credit association whose members exchange customer credit rating information. In most markets, the Company utilizes various levels of credit insurance to allow sales expansion and control credit risks; for example, in Europe, a substantial portion of the Company’s sales are covered by credit insurance. The Company establishes reserves for estimated credit losses in the normal course of business. If the Company’s receivables were to experience a substantial deterioration in their collectibility or if the Company cannot obtain

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credit insurance at reasonable rates, the Company’s financial condition and results of operations may be adversely impacted.

     The Company also sells to certain customers where the transactions are financed by a third-party floor plan financing company. These transactions generally involve higher sales on limited lines of product. The fees charged by these financing companies will either be subsidized by the Company’s suppliers, paid by the Company or billed to the Company’s reseller. The Company receives payment from these financing institutions within three to thirty days from the date of sale, depending on the specific arrangement.

PRODUCTS AND SUPPLIERS

     Ingram Micro believes that it has the largest inventory of products in the industry, based on a review of its major competitors’ publicly available data. The Company distributes and markets more than 280,000 products (as measured by distinct part numbers assigned by manufacturers and other suppliers) from the industry’s premier computer hardware manufacturers, networking equipment suppliers, and software publishers worldwide. Product assortments vary by market, and the manufacturers’ relative contribution to Ingram Micro’s sales also varies from country to country. On a worldwide basis, the Company’s sales mix is more heavily weighted toward hardware products than software products. Net sales of software products have decreased as a percentage of total net sales in recent years due to a number of factors, including bundling by suppliers of software with microcomputers, increased prevalence of software licensing as compared to sales of individual software titles and declines in software prices. The Company believes that this is a trend that applies to the information technology products distribution industry as a whole, and the Company expects it to continue.

     Ingram Micro’s worldwide suppliers include leading computer hardware manufacturers, networking equipment manufacturers, and software publishers such as 3Com, Adobe, Apple Computer, APC, Cisco Systems, Compaq Computer, Computer Associates, Epson, Hewlett-Packard, IBM, Intel, InFocus, Iomega, Microsoft, NEC/Mitsubishi Electronics, Novell, Palm Inc., Quantum/Maxtor, Seagate, Sony, Sun Microsystems, Symantec, Tektronix, Toshiba, Veritas, Viewsonic, Western Digital and Xerox.

     The Company’s suppliers generally warrant the products distributed by the Company and allow returns of defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products it distributes; however, the Company does warrant the following: (1) its services with regard to products that it configures for its customers, and (2) products that it builds to order from components purchased from other sources. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Warranty expense was not material to the Company’s Consolidated Statement of Income.

     The Company has written distribution agreements with many of its suppliers; however, these agreements usually provide for nonexclusive distribution rights and often include territorial restrictions that limit the countries in which Ingram Micro is permitted to distribute the products. The agreements are also generally short term, subject to periodic renewal, and often contain provisions permitting termination by either party without cause upon relatively short notice. A supplier who elects to terminate a distribution agreement generally will repurchase its products carried in the distributor’s inventory. The Company does not believe that its business is substantially dependent on the terms of any such agreements.

     The Company’s business, like that of other distributors, is subject to the risk that the value of its inventory will be affected adversely by suppliers’ price reductions or by technological changes affecting the usefulness or desirability of the products comprising the inventory. It is the policy of most technology product suppliers to protect distributors, such as the Company, from the loss in value of inventory due to technological change or the supplier’s price reductions. Under many such agreements, the distributor is restricted to a designated period of time in which products may be returned for credit or exchange for other products or during which price protection credits may be claimed. The Company takes various actions, including monitoring its inventory levels and controlling the timing of purchases, to maximize its protection under vendor programs and reduce its inventory risk. However, no assurance can be given that current protective terms and conditions will continue or that they will adequately protect the Company against declines in inventory value, or that they will not be revised in such a manner as to adversely impact the Company’s ability to obtain price protection.

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SERVICES

     Ingram Micro offers a variety of supply chain management services to manufacturers, Internet-based resellers, brick-and-mortar resellers selling on-line and large resellers. The Company strives to provide value-added services to its customers through its offering of end-to-end order fulfillment, product procurement, contract manufacturing and warehouse services, logistics and transportation management, marketing services, customer care, credit management services and other outsourcing services.

     To complement the Company’s core competencies, increase customer satisfaction, and expand these outsourcing opportunities by providing “Best of Brand” solutions, Ingram Micro has entered into various strategic alliances in areas such as e-commerce, telemarketing, transportation, and marketing services. Some of Ingram Micro’s supply chain management customers include ABM Systems, Buy.com, CompUSA, GE Capital, Intertec-Mobile Direct, Microsoft, SARCOM, and Unisys in North America and GE Capital, IMS Data AB, and Telenor in Europe. Comparable services are provided by similar business units in other markets in which the Company operates. By providing these services, Ingram Micro benefits its customers by reducing their fixed investments while at the same time allowing them to access the Company’s latest technology and logistics services. The Company’s agreements with these customers are generally for a number of years, although either party usually may terminate the agreement after a relatively short notice period.

     Additionally, Ingram Micro offers channel assembly (bringing together individual OEM components into a manufacturer-authorized computer) and reconfiguration services (opening brand named finished product and upgrading it with features such as memory, components, accessories, and third-party software) within several regions in which the Company operates. Reconfiguration services are provided in the U.S. at two dedicated configuration facilities. In Europe, system assembly work is performed at the Company’s highly automated manufacturing facility in The Netherlands.

INFORMATION SYSTEMS AND RELATED TOOLS

     Ingram Micro’s systems are primarily mainframe based and provide the high level of scalability and performance required to manage such a large and complex business operation. IMpulse, Ingram Micro’s enterprise wide system, is a single, standardized, real-time information system and operating environment, used across substantially all of the Company’s worldwide operations. It has been customized as necessary for use in all countries in which the Company operates and has the capability to handle multiple languages and currencies. On a daily basis, the Company’s systems typically handle 50 million on-line transactions, compared to 12 million on-line transactions handled on a daily basis by IMpulse in 1996. The Company has designed IMpulse as a scalable system that has the capability to support increased transaction volume. IMpulse supports over 45,000 mainframe connections (terminals, printers, PCs, and radio frequency hand held terminals) worldwide with an internal response time of less than one second.

     Worldwide, Ingram Micro’s centralized processing system supports more than 40 operational functions including customer management, inventory management, order management, warehouse management, and accounting. At the core of the IMpulse system is on-line, real-time distribution software to which considerable enhancements and modifications have been made to support the Company’s low cost business model and its growth. The Company makes extensive use of advanced telecommunications technologies with customer service enhancing features, such as Automatic Call Distribution to route customer calls to the telesales representatives. The Telesales Department uses its Sales Wizard system for on-line, real-time tracking of all customer calls, for proactive outbound calling, and for status reports on sales statistics such as number of customer calls, customer call intentions, and total sales generated. IMpulse allows the Company’s telesales representatives to deliver real-time information on product pricing, inventory availability, and order status to reseller customers. The pricing functionality with IMpulse enables telesales representatives to make informed pricing decisions through access to specific product and order and fulfillment related costs for each sales opportunity. The Company has also invested in developing segmentation accounting tools which enable various levels of sales and product management to analyze and report sales activity with increased visibility into Ingram Micro’s customer, vendor, and product mix to establish pricing guidelines.

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     In the United States, the Company uses CTI technology, which provides the telesales representatives with Automatic Number Identification capability and advanced telecommunications features such as on-screen call waiting and automatic call return, thereby reducing the time required to process customer orders.

     In order for Ingram Micro to act as the agent of commerce among suppliers, resellers, and end-users, the Company continued to improve its web site, www.ingrammicro.com, during 2000. The web site communicates with IMpulse through the use of InsideLine, a direct communication link that furnishes resellers with real-time access to the Company’s mainframe inventory systems, and creates a strong base from which to roll out additional customer focused solutions. The Company is rapidly enhancing and deploying other seamless, easy-to-use electronic commerce solutions that provide resellers with the ability to do business with Ingram Micro and with end-users at lower cost. This includes VentureTech Network, which specializes in solutions for small- to medium-sized businesses, and Partnership America, which is focused on the government and education market. The VTN site,www.venturetechnetwork.com, enables communication between solutions integrators and small- to medium-sized business customers. The site, developed and maintained by Ingram Micro, provides information and facilitates communication with customers through tools such as electronic storefronts. The electronic storefront tools allow end-users to buy product through placing an order on-line, which, once sent transparently to Ingram Micro, is fulfilled on behalf of the reseller or solutions integrator. The Partnership America site,www.partnershipamerica.com, brings independent buyers in the public sector together with independent resellers of technology. Partnershipamerica.com also contains price comparison tools, decision-making content, product reviews, news, events, on-line presentations, and interactive communication tools for the government/education demand chain.

     To complement Ingram Micro’s telesales, customer service, and technical support capabilities, IMpulse offers a number of different electronic products and services through which customers can conduct business with the Company. These products and services include the Customer Automated Purchasing System, Electronic Data Interchange, the Bulletin Board Service, Internet-based Electronic Catalog, TechNotes, and Auction Block. The Electronic Catalog provides reseller customers with access to product pricing and availability, with the capability to search by product category, name, or manufacturer. TechNotes is a comprehensive multi-manufacturer database which customers can deploy on their own web sites that contains timely and accurate product, sales, and technical information. TechNotes information is updated regularly by the Company’s manufacturer partners. Auction Block is a real-time, on-line bidding service that allows reseller customers to competitively bid on unopened products that are not returnable to suppliers (e.g., discontinued products, products with cosmetic damage to their packaging, returned products not conforming to the supplier’s return policies).

     The Company’s warehouse operations use extensive bar-coding technology and radio frequency technology for receiving and shipping, and real-time links to United Parcel Service and Federal Express for freight processing and shipment tracking. The customer service department uses the POWER System for on-line documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company’s buyers depend on the purchasing system to track inventory on a continual basis. Many other features of IMpulse help to expedite the order processing cycle and reduce operating costs for the Company as well as its reseller customers and suppliers.

     The Company employs various security measures and backup systems designed to protect against unauthorized use or failure of its information systems. Access to the Company’s information systems is controlled through the use of passwords and additional security measures are taken with respect to sensitive information. The Company has a contract with IBM Business Continuity & Recovery Services for disaster recovery. In addition, the Company has backup power sources for emergency power. The Company has not experienced any material failures or downtime of IMpulse or any of its other information systems, but any such failure or material downtime could prevent it from taking customer orders, printing product pick-lists and/or shipping product, and could also prevent the Company’s customers from accessing price and product availability information.

     The Company believes that in order to remain competitive, it will be necessary to continuously upgrade its information systems. The Company’s mainframe computer systems were upgraded during 2000 to allow for continued growth and to allow further and faster integration of new web-based technology with the legacy systems. The Company is currently exploring options to enhance the openness and flexibility of its systems, and to structure business logic so that it is modular and re-usable. The Company believes that this new information system

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architecture will also address the Company’s need for a distributed computing environment. Doing so will provide for improved and simpler connectivity to vendors and customers 24 hours a day/7 days a week and will increase system scalability and fault tolerance.

NON-U.S. OPERATIONS AND EXPORT SALES

     Operations Outside the United States. The Company has subsidiaries or offices outside the U.S. in 29 countries and sales representatives in another seven countries, including Australia, China, India, Indonesia, Malaysia, New Zealand, Singapore, Thailand, Canada, Austria, Belgium, Denmark, Finland, France, Germany, Hungary, Italy, The Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, the United Kingdom, Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Peru, Puerto Rico, and Venezuela. In 2000, 1999, and 1998, 40%, 40%, and 35%, respectively, of the Company’s net sales were derived from operations outside of the United States. The Company expects its net sales from operations outside the United States to increase as a percentage of total net sales in the future due primarily to organic growth and, to a lesser extent, acquisitions.

     The Company’s financial transactions from operations outside the United States are primarily denominated in currencies other than the U.S. dollar. Accordingly, the Company’s operations outside the United States impose risks upon its business as a result of exchange rate fluctuations. Additionally, the Company’s financial transactions from operations outside the United States expose the business to financial risks from interest rate fluctuations in foreign markets. The Company mitigates most of this risk primarily through matching the currencies of its non-U.S. costs and revenues, borrowing in foreign currencies, and utilizing derivative financial instruments such as forward exchange contracts and interest rate swaps. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. – Quantitative and Qualitative Disclosures About Market Risk.”

     Export Markets. The Company continues to serve markets where it does not have a stand-alone, in-country presence through its general telesales operations in Santa Ana, California and Buffalo, New York and in Export offices in Miami, Florida and The Netherlands. In addition, the Export office in Miami, Florida also has field sales representatives based in the following Latin American locations: Colombia, Costa Rica, Venezuela, Ecuador, Puerto Rico, and Brazil.

COMPETITION

     The Company operates in a highly competitive environment, both in the United States and internationally. The information technology products and services distribution industry is characterized by intense competition, based primarily on price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and service, and availability of technical and product information. The Company believes it competes favorably with respect to each of these factors.

     Ingram Micro competes in the U.S. against full-line distributors such as Tech Data and Synnex Information Technologies, as well as specialty distributors such as Gates/Arrow (desktop and enterprise products), Daisytek (consumables), GE Access (enterprise products) and Avnet (industrial and enterprise products). The U.S. competitive landscape has undergone a tremendous transformation over the past year. Bankruptcies were filed by two competitors: MicroAge and Inacom. Merisel sold its Merisel Open Computing Alliance business (Sun Microsystems products) to Arrow Electronics in 2000, and recently announced its intention to focus solely on software licensing in the U.S.

     Ingram Micro competes internationally with a variety of national and regional distributors. In the European market, competitors include international distributors such as Tech Data, Actebis/Peacock, and IT Europa. Other European regional and local competitors include Scribona (Nordic Region), Northamber (UK), OpenGate (Italy), and Quadram (Netherlands). In Canada, Ingram Micro competes with Merisel, Tech Data, Hartco, and Supercom, as well as a number of smaller distributors. In Latin America, Ingram Micro competes with international distributors such as Tech Data, and several regional and local distributors including MPS, Bell Micro, Officer, Deltron, Unisel, and the divested Latin American operations of CHS Electronics. In the Asia Pacific market, Ingram Micro faces both regional and local competitors, of whom the largest are Tech Pacific, a broadline distributor, and SiS

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Distribution Ltd., a Hong Kong-based distributor of microcomputer products. Ingram Micro also faces local competition from Legend, Arrow, and PCI in China; Redington in India; and Express Data in Australia.

     The Company believes that as manufacturer and reseller customers move their back-room operations to distribution partners, outsourcing and value-added capabilities will become more important competitive factors. Examples of value-added capabilities include configuration, innovative financing programs, and order fulfillment programs. Many of the Company’s manufacturers and reseller customers are looking to outsourcing partners to perform back-room operations. To better meet these expanding opportunities, Ingram Micro created IM-Logistics, a U.S. division which offers fee-based end-to-end logistics services to manufacturers, Internet-based resellers and brick-and-mortar retailers selling on-line. There has been an accelerated movement among transportation and logistics companies to provide many of these fulfillment and e-commerce supply chain services. Within this arena, the Company faces competition from major transportation and logistics suppliers such as United Parcel Service, Federal Express, and express logistics companies such as PFSWeb, SubmitOrder.com, and SameDay.com.

     The Company is constantly seeking to expand its business into areas closely related to its core information technology products and services distribution business. As the Company enters new business areas, including value-added services, it may encounter increased competition from current competitors and/or from new competitors, some of which may be current customers of the Company. As electronic purchases of software become more prevalent in the industry, electronic software distributors may become competitors of the Company. ASPs constitute a fairly new channel for vendors to remotely deliver software applications to end-users. To the extent that these companies choose to by-pass the distribution channel and attain significant revenue growth, they could potentially become competitors for the Company’s software sales.

     Ingram Micro also competes with hardware manufacturers and software publishers that sell directly to reseller customers and end-users. Electronic commerce companies could potentially compete with the Company by purchasing product directly from manufacturers and selling to reseller or end-user customers.

ASSET MANAGEMENT

     The Company seeks to maintain sufficient quantities of product inventories to achieve optimum order fill rates. The Company believes that the risks associated with slow moving and obsolete inventory are partially mitigated by price protection and stock return privileges provided by suppliers. In the event of a supplier price reduction, the Company generally receives a credit for products based upon the terms and conditions with that supplier. In addition, the Company has the right to return a certain percentage of purchases, subject to certain limitations. The Company is exposed to inventory risk to the extent that vendor protections are not available on all products or quantities and are subject to time restrictions. In addition, vendors may become insolvent and unable to fulfill protection obligations to the Company. The Company manages this risk through continuous monitoring of existing inventory levels relative to customer demand. To the extent necessary, the Company has established and continues to accrue for excess and obsolete inventory reserves based upon current requirements.

     Historically, price protection, stock return privileges, and inventory management procedures have helped to reduce the risk of decline in the value of inventory. However, major PC suppliers have stated that it is their intention to control the amount of inventory in the channel, particularly in light of the growth of vendor direct and build-to-order strategies. Many suppliers have changed the terms and conditions of their price protection plans from “full coverage” to “past shipment coverage.” This results in an exposure for the distribution partner. The shorter time periods during which distributors may receive credit for decreases in manufacturer prices on unsold inventory have made it more difficult for the Company to match its inventory levels with the price protection periods. Consequently, the Company’s risk of loss has increased due to declines in value of inventory held by the Company after such price protection periods have passed.

     Inventory levels may vary from period to period, due in part to the addition of new suppliers or new lines with current suppliers and large cash purchases of inventory due to advantageous terms offered by suppliers. In addition, payment terms with inventory suppliers may vary from time to time, and could result in less inventory being financed by vendors and a greater amount of inventory being financed by the Company’s capital.

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EMPLOYEES

     As of December 30, 2000, the Company employed approximately 16,500 associates located in the following regions: United States – approximately 8,200, Europe – approximately 4,800, and all other regions – approximately 3,500. Ingram Micro’s success depends on the skill and dedication of its associates. The Company strives to attract, develop, and retain outstanding personnel. Certain of the Company’s operations in Europe are subject to collective bargaining or similar arrangements. The Company has a process for continuously measuring the status of associate relations and responding to associate priorities.

EXECUTIVE OFFICERS AND/OR REGIONAL PRESIDENTS OF THE COMPANY

     On March 6, 2000, the Company named Kent B. Foster chief executive officer and president. He was also elected to Ingram Micro’s board of directors. In May 2000, Mr. Foster succeeded Jerre L. Stead as chairman of the board.

     On January 4, 2001, the Company named Michael J. Grainger president and chief operating officer. Mr. Grainger will retain the responsibilities of chief financial officer until a replacement is named.

     The following table sets forth certain information with respect to each person who is an executive officer and/or regional president of the Company as of March 1, 2001:

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TRADEMARKS AND SERVICE MARKS

     The Company owns or is the licensee of various trademarks and service marks, including, among others, “Ingram Micro,” “IMpulse,” the Ingram Micro logo, “Partnership America,” “Leading the Way in Worldwide Distribution,” “Affiniti,” “VentureTech Network,” and “eSolutions.” Certain of these marks are registered, or are in the process of being registered, in the United States and various other countries. Even though the Company’s marks may not be registered in every country where the Company conducts business, in many cases the Company has acquired rights in those marks because of its continued use of them. Management believes that the value of the

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Company’s marks is increasing with the development of its business, but the business of the Company as a whole is not materially dependent on such marks.

SAFE HARBOR FOR FORWARD-LOOKING INFORMATION

     The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for “forward-looking statements” to encourage companies to provide prospective information, so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Except for historical information, certain statements contained in this Annual Report on Form 10-K may be “forward-looking statements” within the meaning of the Act. In order to take advantage of the “safe harbor” provisions of the Act, the Company identifies the following important factors which could affect the Company’s actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed by the Company in forward-looking statements made by or on behalf of the Company:

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     Reference is made to Exhibit 99.01 hereto for additional discussion of the foregoing factors, as well as additional factors which may affect the Company’s actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements.

ITEM 2. PROPERTIES

     Ingram Micro’s worldwide executive headquarters, as well as its West Coast sales and support offices, are located in a three-building office complex in Santa Ana, California. The Company also maintains an East Coast operations center in Williamsville (Buffalo), New York.

     As of December 30, 2000, the Company operated eight distribution centers throughout the continental United States. The Company also operated 40 distribution centers outside of the U.S. in Argentina, Australia, Brazil, Canada, Chile, China, India, Hong Kong, Malaysia, Mexico, New Zealand, Norway, Peru, Singapore, Switzerland, Thailand, and most countries of the European Union.

     As of December 30, 2000, the Company operated two integration centers located in Memphis, Tennessee and Rosmalen, The Netherlands. As of the same date, the Company operated three return centers, located in Santa Ana, California; Fullerton, California; and Toronto, Canada.

     As of December 30, 2000, all of the Company’s facilities were leased, with the exception of the combination office and distribution facility in Buenos Aires, Argentina; the combination office and distribution facility in Santiago, Chile; the combination office and distribution facility in Singapore; two combination office and distribution facilities in Straubing, Germany; and the distribution facility in Millington, Tennessee. These leases have varying terms. The Company does not anticipate any material difficulty in renewing any of its leases as they expire or securing replacement facilities, in each case on commercially reasonable terms. In addition, the Company owns two undeveloped properties in Santa Ana, California totaling approximately 16.27 acres, and has options on approximately 60 acres in Millington, Tennessee.

ITEM 3. LEGAL PROCEEDINGS

     There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject.

     As a result of an internal review by the Company of export shipments made from its United States distribution facilities, the Company has determined that certain of these shipments and related documentation were not in compliance with U.S. export regulations. The Company has notified the appropriate federal government agencies pursuant to applicable voluntary self-disclosure procedures (the “Disclosure”). The reported shipments consisted of modems and other telecommunications products and shrink-wrapped, commercial software readily available through normal retail outlets that contained encryption features controlled under export regulations. These shipments had a total value of approximately $673,240. Violations of export laws and regulations are subject to both civil and criminal penalties, including inappropriate circumstances suspension or loss of export privileges. Since the Disclosure, a representative of the Department of Commerce has requested additional documents relating to the Disclosure, which the Company provided in January 1999. The Department has not communicated with the Company since then. The Company does not know what position the Department will take upon further review of the Disclosure. The Company is not able to estimate at this time the amount or nature of penalties, if any, that might

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be sought against the Company as a result of the reported violations; however, penalties to which the Company potentially may be subject could be material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report, through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     As of March 28, 2001, there were 639 holders of record of the Class A Common Stock and 123 holders of record of the Class B Common Stock. The Company believes that there are approximately 28,000 beneficial holders of the Class A Common Stock.

     Information as to the Company’s quarterly stock prices is included on the inside back cover of the Company’s 2000 Annual Report to Shareowners, which is included as part of Exhibit 13.01 and is incorporated in this Annual Report on Form 10-K.

     Information as to the principal market on which the Class A Common Stock is traded is included on the inside back cover of the Company’s 2000 Annual Report to Shareowners, which is included as part of Exhibit 13.01 and is incorporated in this Annual Report on Form 10-K.

     Dividend Policy. The Company has not declared or paid any dividends on its Class A or Class B Common Stock in the preceding two fiscal years. The Company currently intends to retain its future earnings to finance the growth and development of its business and, therefore, does not anticipate declaring or paying cash dividends on its Class A or Class B Common Stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of the Board of Directors and will be dependent upon the Company’s financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deems relevant. In addition, certain of the Company’s debt facilities contain restrictions on the declaration and payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA

     The selected financial information of Ingram Micro for the five year period ended December 30, 2000 is included on page 18 of the Company’s 2000 Annual Report to Shareowners, which is included as part of Exhibit 13.01 and is incorporated in this Annual Report on Form 10-K. It should be read in conjunction with the consolidated financial statements included on pages 30 through 50 of the Company’s 2000 Annual Report to Shareowners which are also included as part of Exhibit 13.01 and incorporated in this Annual Report on Form 10-K and the financial statement schedule below in Item 14 of this Annual Report on Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is included on pages 19 through 29 of the Company’s 2000 Annual Report to Shareowners, which are also included as part of Exhibit 13.01 and are incorporated in this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The required disclosure is included on page 28 through 29 of the Company’s 2000 Annual Report to Shareowners, which is also included as part of Exhibit 13.01 and incorporated in this Annual Report on Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company’s consolidated financial statements are included on pages 30 through 50 of the Company’s 2000 Annual Report to Shareowners, which are also included as part of Exhibit 13.01 and incorporated in this Annual Report on Form 10-K. Reference is made to the Index to the Financial Statements in Item 14 below.

     A financial statement schedule for the Company, and report thereon, are included on pages 25 and 26, respectively, of this Annual Report on Form 10-K. Reference is made to the Index to Financial Statements in Item 14 below.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     There have been no changes in the Company’s independent accountants or disagreements with such accountants on accounting principles or practices or financial statement disclosures.

PART III

     Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company will not furnish such information in its definitive Proxy Statement prepared in accordance with Schedule 14A.

     The Notice and Proxy Statement for the 2001 Annual Meeting of Shareowners, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, which is incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, will provide the remaining information required under Part III (Items 10, 11, 12, and 13).

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) 1. Financial Statements:

     The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated February 28, 2001, all appearing on pages 30 through 51 in the 2000 Annual Report to Shareowners, are incorporated in this Annual Report on Form 10-K. With the exception of the aforementioned information and the information incorporated in Items 5, 6, 7, 7A and 8, the 2000 Annual Report to Shareowners is not deemed filed as part of this Annual Report on Form 10-K.

     Pages 18 through 52 and the inside back cover page of the 2000 Annual Report to Shareowners of Ingram Micro Inc. include the Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and related notes thereto, the Independent Accountants’ Report, Shareholder Information and Quarterly Stock Prices. These pages are filed with the Securities and Exchange Commission as Exhibit 13.01 to this Annual Report on Form 10-K.

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     2. Financial Statement Schedules:

     Schedule II — Valuation and Qualifying Accounts.

     3. List of Exhibits:

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21

22

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     (b) Reports on Form 8-K

     On October 26, 2000, the Company filed a Current Report on Form 8-K which incorporated under Items 7 and 9 a copy of a press release announcing its financial results for the third quarter and thirty-nine weeks ended September 30, 2000.

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INGRAM MICRO INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

25

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Ingram Micro Inc.

Our audits of the consolidated financial statements referred to in our report dated February 28, 2001 appearing in the 2000 Annual Report to Shareowners of Ingram Micro Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Orange County, California
February 28, 2001

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SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

March 30, 2001

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

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28

29

30

31

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EXHIBIT 13.01

INDEX TO
FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data of Ingram Micro Inc. (“Ingram Micro” or the “Company”). The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and notes thereto, included elsewhere in this Annual Report to Shareowners.

The fiscal year of the Company is a 52- or 53-week period ending on the Saturday nearest to December 31. References below to 1996, 1997, 1998, 1999 and 2000 represent the fiscal years ended December 28, 1996 (52 weeks), January 3, 1998 (53 weeks), January 2, 1999 (52 weeks), January 1, 2000 (52 weeks), and December 30, 2000 (52 weeks), respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In evaluating the business of Ingram Micro, readers should carefully consider the important factors discussed in Exhibit 99.01 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 “Cautionary Statements for the Purpose of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995.”

Overview

Ingram Micro is the leading distributor of information technology products and services worldwide. The Company’s net sales grew to $30.7 billion in 2000 from $12.0 billion in 1996. The growth reflects substantial expansion of the Company’s existing operations, resulting from the integration of numerous acquisitions worldwide, growth in the information technology products and services distribution industry in general, the addition of new customers, increased sales to the existing customer base, as well as the addition of new product categories and suppliers.

The information technology products and services distribution industry in which the Company operates is characterized by narrow gross margins and narrow income from operations as a percentage of net sales (“operating margin”) that have declined industry-wide in recent years. Prior to 2000, the Company’s gross profit as a percentage of net sales (“gross margin”) declined to 4.8% in 1999 from 6.8% in 1996 with sequential declines in gross margin each of these years. Initially, the margin decline was caused by intense price competition; later however, changes in vendor terms and conditions, including, but not limited to, significant reductions in vendor rebates and incentives, tighter restrictions on the Company’s ability to return inventory to vendors, and reduced time periods qualifying for price protection, exacerbated the decline and constrained gross margin improvements. The Company expects these competitive pricing pressures and the more restrictive vendor terms and conditions to continue in the foreseeable future. The Company has implemented and continues to refine changes to its pricing strategies, inventory management processes, and administration of vendor subsidized programs. In addition, the Company continues to change certain of the terms and conditions offered to its customers to reflect those being imposed by its vendors. In fiscal year 2000, the Company recorded its first sequential improvement in gross margin in the five-year period from 1996 to 2000, reaching 5.1% as compared to 4.8% in 1999, primarily as a result of these initiatives.

To partially offset the decline in gross margins, the Company has continually instituted operational and expense controls that have reduced selling, general, and administrative expenses as a percentage of net sales (“SG&A”) to 3.9% in 2000 from 4.7% in 1996, reflecting more effective cost control measures, streamlined processes, and the benefit of greater economies of scale. However, these reductions have not fully offset past declines in gross margin and, if any future reductions in gross margins were to occur, there can be no assurance that the Company will be able to reduce SG&A commensurately.

In December 1998, the Company purchased 2,972,400 shares of common stock of SOFTBANK Corp. (“Softbank”), Japan’s largest distributor of software, peripherals and networking products, for approximately $50.3 million. During December 1999, the Company sold 1,040,400 shares or approximately 35% of its original investment in Softbank common stock for approximately $230.1 million resulting in a pre-tax gain of approximately $201.3 million, net of related expenses. In January 2000, the Company sold an additional 445,800 shares or approximately 15% of its original holdings in Softbank common stock for approximately $119.2 million, net of expenses, resulting in a pre-tax gain of approximately $111.5 million. The Company used the proceeds from this sale to repay existing indebtedness. During April 2000, Softbank effected a 3 for 1 stock split. All Softbank share information has been adjusted to give retroactive effect to Softbank’s stock split.

The information technology products and services distribution business is capital-intensive. The Company’s business requires significant levels of working capital to finance accounts receivable and product inventory that are not financed by trade creditors. The Company has relied heavily on debt financing for its increasing working capital needs resulting from organic growth and acquisitions. In March 2000, the Company completed a new 5-year accounts receivable securitization program in the U.S., which provides for the issuance of up to $700 million in commercial paper. This new program adds to the Company’s existing accounts receivable facilities, which provide additional financing capacity of approximately $310 million. As of December 30, 2000, approximately $910 million of accounts receivable were sold under these programs. The Company also has revolving credit facilities of approximately $1.65 billion, as well as additional facilities of approximately $750 million. As of December 30, 2000, borrowings

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Management’s Discussion and Analysis continued

of $325.6 million were outstanding under the revolving credit and additional facilities. In addition, on June 9, 1998, the Company sold $1.33 billion aggregate principal amount at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a private placement. The Company subsequently registered the resale of these debentures with the Securities and Exchange Commission (the “SEC”) and they are now generally saleable under Rule 144. Gross proceeds from this offering were $460.4 million. In 2000 and 1999, the Company repurchased Zero Coupon Convertible Senior Debentures with a total carrying value of $235.2 million and $56.5 million, respectively, as of their repurchase dates for approximately $231.3 million and $50.3 million in cash, respectively. The debenture repurchases resulted in an extraordinary gain, net of income taxes, of $2.4 million and $3.8 million in 2000 and 1999, respectively. The Company’s interest expense for a substantial portion of its existing, as well as any future, indebtedness will be subject to fluctuations in interest rates which may cause fluctuations in the Company’s net income.

Results of Operations

The following table sets forth the Company’s net sales by geographic region (excluding intercompany sales), and the percentage of total net sales represented thereby, for each of the periods indicated.

The following table sets forth certain items from the Company’s consolidated statement of income as a percentage of net sales, for each of the periods indicated.

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Management’s Discussion and Analysis continued

2000 Compared to 1999

Consolidated net sales increased 9.4% to $30.7 billion in 2000 from $28.1 billion in 1999. The increase in worldwide net sales was primarily attributable to growth in overall demand for technology products, the addition of new customers, increased sales to the existing customer base, and expansion of the Company’s product and service offerings.

Net sales from U.S. operations increased 9.7% to $18.5 billion in 2000 from $16.8 billion in 1999 primarily due to growth in demand for technology products and expansion of the Company’s product and service offerings. The sales growth in U.S. operations, however, was moderated, especially in the second quarter of 2000, compared to historical sales growth primarily due to pricing policy changes implemented in the same quarter and the Company’s decision to eliminate certain vendor programs. Both decisions were geared towards the improvement of gross margin. In addition, towards the end of 2000, the demand for information technology products and services softened in the U.S. consistent with the slowing of the U.S. economy. This softness in U.S. sales has continued to date and may continue and/or worsen for the next several quarters. Net sales from European operations grew approximately 16.1% in local currencies in 2000, but when converted to U.S. dollars, net sales only increased by 1.7% to $7.5 billion in 2000 from $7.3 billion in 1999 as a result of weaker European currencies compared to the U.S. dollar. The sales growth, in local currency, reflects overall growth in European operations, but was negatively affected by the softness in demand for technology products and services. For geographic regions outside the U.S. and Europe (“Other International”), net sales increased 22.5% to $4.8 billion in 2000 from $3.9 billion in 1999 primarily due to the growth in the Company’s Asia Pacific and Latin American operations. The Company’s Canadian operations, however, experienced only moderate sales growth in 2000 as compared to the Asia Pacific and Latin American operations primarily due to the overall softness in demand for technology products and services in the Canadian market in the first half of the year, and lower than anticipated purchases by the Canadian government in the first quarter of 2000. The Canadian government purchases are generally strong in the first quarter of each year as this coincides with the Canadian government’s fiscal year-end.

Gross margin increased to 5.1% in 2000 from 4.8% in 1999. The improvement in the gross margin percentage was primarily due to pricing policy changes initiated during the second quarter of 2000 to more appropriately reflect the value and related costs of services provided to the Company’s customers, partially offset by the impact of changes in vendor terms and conditions including, but not limited to, significant reductions in vendor rebates and incentives, tighter restrictions on the Company’s ability to return inventory to vendors, and reduced time periods qualifying for price protection. The Company has implemented and continues to refine changes to its pricing strategies, inventory management processes, and administration of vendor subsidized programs. In addition, the Company continues to change certain of the terms and conditions offered to its customers to reflect those being imposed by its vendors. Management believes gross margins in early 2001 may decline sequentially from the seasonally high fourth quarter of 2000; however, it expects actions taken in 2000 as well as its continued focus on gross margin improvement will result in moderate year-over-year improvements overall in 2001. As the Company continues to seek profitable growth through its pricing policy changes made to date, and through future pricing policy changes, if any, it may experience moderated sales growth in the near term. Additionally, no assurances can be given that the Company will be successful in its efforts to maintain and improve gross margin.

Total SG&A expenses increased 7.8% to $1.2 billion in 2000 from $1.1 billion in 1999, but decreased as a percentage of net sales to 3.9% in 2000 from 4.0% in 1999. The increase in SG&A spending was attributable to increased expenses required to support the growth of the Company’s business. Expenses related to expansion consist of incremental personnel and support costs, lease expenses related to new operating facilities, and the expenses associated with the development and maintenance of information systems. The overall decrease in SG&A expenses as a percentage of net sales is attributable to economies of scale from greater sales volume, and continued cost-control measures. As noted above, demand for information technology products and services in the U.S. has recently softened, which may lead to tempered and/or negative sales growth in the U.S. for the next several quarters and a resulting increase in SG&A expenses as a percentage of net sales in the near term. The Company continues to pursue and implement process improvements and organizational changes to create sustainable cost reductions without sacrificing customer service over the long-term.

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Management’s Discussion and Analysis continued

In 1999, the Company recorded a charge of $20.3 million related to reorganization efforts primarily in the Company’s U.S. and European operations. The Company did not incur any reorganization charges in 2000.

Income from operations, excluding reorganization costs, increased as a percentage of net sales to 1.2% in 2000 from 0.8% in 1999. The increase in income from operations, excluding reorganization costs, as a percentage of net sales is primarily due to the increase in gross margin as described above. U.S. income from operations, excluding reorganization costs, as a percentage of net sales increased to 1.5% in 2000 from 0.9% in 1999, primarily as a result of gross margin improvements. European income from operations, excluding reorganization costs, as a percentage of net sales increased to 0.7% in 2000 compared to 0.3% in 1999 also as a result of gross margin improvements. Other International income from operations, excluding reorganization costs, as a percentage of net sales decreased to 0.5% in 2000 from 1.0% in 1999. The decrease in income from operations as a percentage of net sales for Other International was primarily related to the Asia Pacific operations, which experienced a loss from operations as the Company continues to invest in infrastructure and refine its business processes in this developing market.

Other (income) expense consisted primarily of interest, foreign currency exchange losses, gains on sales of available-for-sale securities, and fees associated with the Company’s accounts receivable facilities. In 2000, the Company recorded net other income of $9.1 million, compared to $90.5 million in 1999. The decrease in other income is primarily attributable to the lower gain realized on the sale of Softbank common stock in 2000 compared to 1999. In December 1999, the Company sold 1,040,400 shares or approximately 35% of its original investment in Softbank common stock for a pre-tax gain of approximately $201.3 million, net of related costs. In January 2000, the Company sold an additional 445,800 shares or approximately 15% of its original holdings in Softbank common stock for a pre-tax gain of approximately $111.5 million, net of related costs. The decrease in interest expense was due to the decrease in the average borrowings outstanding in 2000 compared to 1999 resulting from improved working capital management, the use of proceeds received from the sale of Softbank common stock in December 1999 and January 2000 to repay existing indebtedness, and an increase in the utilization of the Company’s accounts receivable facilities, partially offset by an increase in interest rates for the same period. The increase in other expenses was attributable to the increase in fees related to increased capacity and utilization of the Company’s accounts receivable facilities. Management continues to focus on improving utilization of working capital to reduce or moderate debt levels in relation to revenue growth. Despite these efforts, a substantial portion of the Company’s existing credit facilities have variable interest rate terms and therefore net interest expense in future periods may fluctuate.

The provision for income taxes, excluding extraordinary items, increased 25.2% to $138.8 million in 2000 from $110.9 million in 1999, reflecting the 24.8% increase in the Company’s income before income taxes. The Company’s effective tax rate remained relatively consistent at 38.3% in 2000 compared to 38.2% in 1999.

In 2000 and 1999, the Company repurchased Zero Coupon Convertible Senior Debentures with a total carrying value of $235.2 and $56.5 million, respectively, as of their repurchase dates for approximately $231.3 million and $50.3 million in cash, respectively. The debentures repurchased resulted in an extraordinary gain of $2.4 million and $3.8 million in 2000 and 1999, respectively, net of $1.5 million and $2.4 million in income taxes, respectively.

1999 Compared to 1998

Consolidated net sales increased 27.4% to $28.1 billion in 1999 from $22.0 billion in 1998. The increase in worldwide net sales was primarily attributable to overall growth in the demand for technology products, the addition of new customers, increased sales to the existing customer base, and the expansion of the Company’s product and service offerings. Net sales also increased as a result of the January 1999 acquisition of Electronic Resources, Ltd. (“ERL”) in the Asia Pacific region and the July 1998 acquisition of Munich, Germany-based Macrotron AG (“Macrotron”).

Net sales from U.S. operations increased 16.8% to $16.8 billion in 1999 from $14.4 billion in 1998 primarily due to growth of its current business. Net sales from European operations increased 30.6% to $7.3 billion in 1999 from $5.6 billion in 1998 due to the overall growth in the Company’s existing European operations and the acquisition of Macrotron in July 1998. Other International net sales increased 93.9% to $3.9 billion in 1999 from $2.0 billion in 1998 due to the acquisition of ERL and growth in the Company’s Canadian and Latin American operations.

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Management’s Discussion and Analysis continued

Gross margin decreased to 4.8% in 1999 from 6.3% in 1998. The significant decline in the margin was primarily due to reduced vendor rebates and incentives and intense price competition in the U.S. and in the larger countries in Europe. The decline was exacerbated by excess capacity in the information technology products and services distribution industry. In addition, during 1999, the Company recorded substantially higher expenses totaling approximately $94.8 million related to excess and obsolete inventory as compared to $26.1 million for 1998. The higher excess and obsolete inventory provisions primarily resulted from the rapid changes experienced in the technology marketplace and the significant changes in vendor terms and conditions during 1999. Also, in the fourth quarter of 1999, the Company recorded additional expenses to cost of sales totaling approximately $53.6 million related to estimated losses from vendor incentive and subsidy programs. The estimated losses on vendor incentive and subsidy programs primarily originated from recent dramatic changes in the terms and conditions for reimbursements of customer rebates and competitive price programs by the Company’s major personal computer suppliers. The majority of these higher provisions related to inventory and vendor programs in the U.S. region with some in the European region. In response to these issues, the Company has implemented changes to and continually refines its pricing strategies, terms and conditions offered to its customers, inventory management processes, and administration of vendor subsidized programs.

Total SG&A expenses increased 23.4% to $1.1 billion in 1999 from $0.9 billion in 1998, but decreased as a percentage of net sales to 4.0% in 1999 from 4.1% in 1998. The increase in SG&A spending was attributable in part to the acquisition of ERL in January 1999, and the full-year impact of the acquisition of Macrotron in July 1998. In addition, during fiscal year 1999, the Company recorded significantly higher bad debt expense of approximately $75.8 million or 0.27% as a percentage of net sales as compared to fiscal year 1998 expense of approximately $32.5 million or 0.15% as a percentage of net sales. The larger bad debt provision was primarily the result of negotiations with several large customers principally in the area of unauthorized product returns. SG&A also increased to support the expansion of the Company’s business. Expenses related to expansion consisted of incremental personnel and support costs, lease expenses related to new operating facilities, and expenses associated with the development and maintenance of information systems. The overall decrease in SG&A expenses as a percentage of sales is attributable to economies of scale from greater sales volume and continued cost-control measures, but was moderated by the higher bad debt expenses.

In February 1999, the Company initiated a plan, primarily in the U.S., but also in Europe, to streamline operations and reorganize resources to increase flexibility and service and maximize cost savings and operational efficiencies. This reorganization plan included several organizational and structural changes, including the closing of the Company’s California-based consolidation center and certain other redundant locations; realignment of the Company’s sales force and the creation of a product management organization that integrates purchasing, vendor services, and product marketing functions; as well as a realignment of administrative functions and processes throughout the U.S. organization. In addition, during the fourth quarter of 1999, further organizational and strategic changes were implemented in the Company’s assembly and custom-configuration operations, including the selection of an outsource partner to produce unbranded systems and the reallocation of resources to support the Company’s custom-configuration services capabilities.

In connection with these reorganization efforts, the Company recorded a charge of $20.3 million for the fiscal year ended January 1, 2000. The reorganization charge included $12.3 million in employee termination benefits for approximately 597 employees, $6.4 million for the write-off of software used in the production of unbranded systems, $1.3 million for closing and consolidation of redundant facilities relating primarily to excess lease costs net of estimated sublease income, and $0.3 million for other costs associated with the reorganization. These initiatives were substantially complete as of January 1, 2000.

Income from operations, excluding reorganization costs, decreased as a percentage of net sales to 0.8% in 1999 from 2.2% in 1998. The decrease in income from operations, excluding reorganization costs, as a percentage of net sales is primarily due to the significant decrease in gross profit as a percentage of net sales as described above. U.S. income from operations, excluding reorganization costs, decreased as a percentage of net sales to 0.9% in 1999 from 2.8% in 1998. European income from operations, excluding reorganization costs, decreased as a percentage of net sales to 0.3% in 1999 from 1.1% in 1998. For Other International, income from operations, excluding reorganization costs, decreased as a percentage of net sales to 1.0% in 1999 from 1.4% in 1998.

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Management’s Discussion and Analysis continued

Other (income) expense consisted primarily of interest, foreign currency exchange losses, gains on sales of securities and miscellaneous non-operating (income) expenses. During 1999, the Company recorded net other income of $90.5 million, or 0.3% as a percentage of net sales, as compared to net other expense of $79.7 million, or 0.4% as a percentage of net sales in 1998. The increase in other income over 1998 is primarily attributable to the gain realized on the sale of Softbank common stock, partially offset by an increase in interest expense. In December 1999, the Company sold 1,040,400 shares or 35% of its original holdings in Softbank common stock for a pre-tax gain of approximately $201.3 million, net of related costs. Interest expense increased primarily due to increased borrowings to finance the January 1999 ERL acquisition; the fourth quarter 1998 investment in Softbank; the July 1998 acquisition of Macrotron; changing vendor terms and conditions associated with floor plan financing arrangements; and the growth of the Company’s ongoing operations. This increase was partially offset by a decrease in average interest rates in fiscal 1999 compared to fiscal 1998.

The provision for income taxes, excluding extraordinary items, decreased 31.4% to $110.9 million in 1999 from $161.7 million in 1998, primarily reflecting the 28.6% decrease in the Company’s income before income taxes. The Company’s effective tax rate was 38.2% in 1999 compared to 39.7% in 1998. The decrease in the effective tax rate was primarily due to tax planning in certain countries.

In March 1999, the Company repurchased Zero Coupon Convertible Senior Debentures with a carrying value of $56.5 million as of the repurchase date for approximately $50.3 million in cash. The debenture repurchase resulted in an extraordinary gain of $3.8 million (net of $2.4 million in income taxes).

Quarterly Data; Seasonality

The Company’s quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of seasonal variations in the demand for the products and services offered by the Company; changing competitive conditions including pricing; variation in the amount of provisions for excess and obsolete inventory, vendor sponsored programs, and doubtful accounts resulting from technological changes or other changes in the market or economy as a whole; changes in the level of operating expenses to support seasonal changes in demand; the impact of acquisitions; the introduction by suppliers of new hardware and software products and services which may result in the obsolescence of existing products and/or affect the mix of products sold or overall demand; the loss or consolidation of a significant supplier or customer; product supply constraints; interest rate fluctuations; currency fluctuations; and general economic conditions. The Company’s narrow operating margins may magnify the impact of these factors on the Company’s operating results. Specific historical seasonal variations in the Company’s operating results have included a reduction of demand in Europe during the summer months, increased Canadian government purchasing in the first quarter (except in the first quarter of 2000, as explained above), and worldwide pre-holiday stocking in the retail channel during the September-to-November period.

The following table sets forth certain unaudited quarterly historical financial data for each of the eight quarters in the period ended December 30, 2000. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Company’s opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report to Shareowners. The operating results for any quarter shown are not necessarily indicative of results for any future period.

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Management’s Discussion and Analysis continued

Consolidated Quarterly Information

As indicated in the table above, the Company’s net sales in the fourth quarter of each fiscal year have generally been higher than those in the other three quarters in the same fiscal year. The trend of higher fourth quarter net sales is attributable to calendar year-end business purchases and holiday period purchases made by customers.

Liquidity and Capital Resources

Cash Flows

The Company has financed its growth and cash needs largely through income from operations, borrowings, sales of accounts receivable through established accounts receivable facilities, trade and supplier credit, its initial public stock offering in November 1996, the sale of Zero Coupon Convertible Senior Debentures in June 1998, and the sale of Softbank common stock in December 1999 and January 2000.

In 2000 and 1999, one of the Company’s objectives has been to improve the utilization of working capital and put assets to work through increasing inventory turns and steady management of vendor payables and customer receivables. The Company’s success in this regard can be best demonstrated by the Company’s ability to repurchase convertible debentures and reduce overall debt levels, thereby lowering its debt-to-capitalization ratio, including off-balance sheet debt, to 43.7% and 45.0% at December 30, 2000 and January 1, 2000, respectively, compared to 56.5% at January 2, 1999. Although the Company has realized improvements in working capital management and debt reduction in 2000 and 1999, and will continue to strive for further improvements for the foreseeable future, no assurance can be made that the Company will be able to maintain its current debt levels. The following is a detailed discussion of the Company’s cash flows for 2000, 1999 and 1998:

Net cash provided by operating activities was $836.4 million in 2000 and $573.0 million in 1999 compared to cash used of $278.5 million in 1998. The significant increase in cash provided by operating activities in 2000 compared to 1999 was primarily

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Management’s Discussion and Analysis continued

attributable to higher operating income and an increase in the amount of accounts receivable sold under the Company’s accounts receivable facilities offset by a decrease in trade creditor financing of product inventory. The significant increase in cash provided by operating activities in 1999 compared to cash used in 1998 was primarily attributable to the increase in trade creditor financing of product inventory (through an increase in accounts payable) and a reduction in the growth rate of accounts receivable over 1998.

Net cash used by investing activities was $19.5 million, $138.4 million, and $218.6 million in 2000, 1999, and 1998, respectively. These uses of cash were due in part to capital expenditures for the Company’s expansion of warehouses and other facilities, the development of information systems and the Company’s commitment to growth through acquisitions and strategic alliances. In 2000, the Company used approximately $146.1 million in cash for capital expenditures, which was partially offset by the proceeds from the sale of Softbank common stock totaling approximately $119.2 million. In 1999, the Company used approximately $241.9 million in cash for acquisitions, net of cash acquired, and $135.3 million for capital expenditures, which were partially offset by the proceeds from the sale of Softbank common stock totaling approximately $230.1 million. In 1998, the Company used approximately $96.6 million in cash for acquisitions, net of cash acquired, approximately $143.2 million for capital expenditures, and approximately $50.3 million for the purchase of Softbank common stock. Mitigating the uses of cash in 1998 was approximately $75.3 million in cash proceeds from a sale-leaseback agreement entered into by the Company for the sale of its Santa Ana, California facility and a portion of its Buffalo, New York facility to a third party.

Net cash used by financing activities was $802.6 million in 2000 and $413.8 million in 1999 compared to cash provided of $497.1 million in 1998. Net cash used by financing activities in 2000 was primarily due to the repurchase of the convertible debentures, the net repayment of borrowings under the revolving credit facilities, and the repayment of other debt through the use of cash provided by operations and the continued focus on working capital management, as well as the proceeds received from the sale of Softbank common stock in 2000. Net cash used by financing activities in 1999 was primarily due to the repurchase of the convertible debentures and the net repayment of borrowings under the revolving credit facilities through the use of the proceeds received from the sale of Softbank common stock, as well as the continued focus on working capital management. Net cash provided by financing activities in 1998 was primarily due to the proceeds from the convertible debentures and stock option exercises, which were partially offset by the net repayment of other debt.

Acquisitions

The Company had no significant acquisitions in 2000.

Capital Resources

The Company has three revolving credit facilities with bank syndicates providing an aggregate credit availability of $1.65 billion. Under these credit facilities, the Company is required to comply with certain financial covenants, including minimum tangible net worth, restrictions on funded debt and interest coverage. The credit facilities also restrict the amount of dividends the Company can pay as well as the amount of common stock that the Company can repurchase annually. Borrowings are subject to the satisfaction of customary conditions, including the absence of any material adverse change in the Company’s business or financial condition. Two of these credit facilities, representing approximately $1.15 billion in credit availability, mature in October 2001 while the remaining credit facility matures in October 2002. At December 30, 2000 and January 1, 2000, the Company had $75.5 million and $503.5 million, respectively, in outstanding borrowings under the credit facilities.

The Company has an arrangement pursuant to which certain U.S. trade accounts receivable of the Company are transferred to a trust, which in turn has sold certificates representing undivided interests in the total pool of trade receivables without recourse. The trust has issued fixed-rate, medium-term certificates and has the ability to support a commercial paper program. Sales of receivables under these programs result in a reduction of total accounts receivable on the Company’s consolidated balance sheet. In March 2000, the Company completed a new 5-year accounts receivable securitization program, which provides for the issuance of up to $700 million in commercial paper. At December 30, 2000 and January 1, 2000, the amount of medium-term certificates outstanding totaled $50 million and $75 million, respectively, and the amount of commercial paper outstanding under the new program totaled $650 million and $0, respectively. The Company believes that available funding under this new program provides

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Management’s Discussion and Analysis continued

increased flexibility for the Company to make incremental investments in strategic growth initiatives and to manage working capital requirements.

The Company also has certain other facilities relating to accounts receivable in Europe and Canada which provide up to approximately $260 million of additional financing capacity. Under these programs, the Company had sold approximately $210 million and $188 million of trade accounts receivable in the aggregate at December 30, 2000 and January 1, 2000, respectively, resulting in a further reduction of total trade accounts receivable on the Company’s consolidated balance sheet.

The aggregate amount of trade accounts receivable sold as of December 30, 2000 and January 1, 2000 totaled approximately $910 million and $263 million, respectively. Proceeds from these accounts receivable facilities are generally used to repay existing indebtedness. The Company believes that there are sufficient trade accounts receivable to support the U.S., European and Canadian accounts receivable facilities.

On June 9, 1998, the Company sold $1.33 billion aggregate principal amount at maturity of its Zero Coupon Convertible Senior Debentures due 2018 in a private placement. The Company subsequently registered the resale of these debentures with the SEC and they are now generally saleable under Rule 144. Gross proceeds from this offering were $460.4 million. The debentures were sold at an issue price of $346.18 per $1,000 principal amount at maturity (representing a yield to maturity of 5.375% per annum), and are convertible into shares of the Company’s Class A Common Stock at a rate of 5.495 shares per $1,000 principal amount at maturity, subject to adjustment under certain circumstances.

In 2000 and 1999, the Company repurchased outstanding Zero Coupon Convertible Senior Debentures with a total carrying value of $235.2 million and $56.5 million, respectively, as of their repurchase dates for approximately $231.3 million and $50.3 million in cash, respectively. The debenture repurchases resulted in extraordinary gains of $2.4 million and $3.8 million in 2000 and 1999, respectively, net of $1.5 million and $2.4 million in income taxes, respectively.

At December 30, 2000, there were $220.0 million of Zero Coupon Convertible Debentures outstanding that were convertible into approximately 3.1 million shares of the Company’s Class A Common Stock. The debentures are redeemable at the option of the Company on or after June 9, 2003, at the issue price plus accrued original issue discount to the date of the redemption. Each debenture is subject to repurchase at the option of the holder as of June 9, 2001, June 9, 2003, June 9, 2008, or June 9, 2013, or if there is a Fundamental Change (as defined), at the issue price plus accrued original issue discount to the date of the redemption. In the event of a repurchase at the option of the holder (other than upon a Fundamental Change), the Company may, at its option, satisfy the redemption in cash or Class A Common Stock, or any combination thereof. In the case of any such repurchase as of June 9, 2001, the Company may elect, in lieu of the payment of cash or Class A Common Stock, to satisfy the redemption in new Zero Coupon Convertible Senior Debentures due 2018.

The Company and its foreign subsidiaries have additional lines of credit, commercial paper, short-term overdraft facilities and other credit facilities with various financial institutions worldwide, which provide for borrowings aggregating approximately $750 million at December 30, 2000. Most of these arrangements are on an uncommitted basis and are reviewed periodically for renewal. At December 30, 2000, the Company had $250.1 million outstanding under these facilities.

The proceeds from stock option exercises provide an additional source of cash to the Company. In 2000, 1999, and 1998, respectively, cash proceeds from the exercise of stock options, including applicable tax benefits, totaled $13.1 million, $20.8 million, and $93.9 million, respectively.

The Company believes that existing cash resources and cash provided by operating activities, supplemented as necessary with funds available under credit arrangements will provide sufficient resources to meet its present and future working capital and cash requirements for at least the next 12 months.

Capital Expenditures

The Company presently expects to spend approximately $145 million in fiscal 2001 for capital expenditures due to continued expansion of its business.

New Accounting Standards

Refer to Note 2 of the Company’s consolidated financial statements for the discussion of new accounting standards.

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Management’s Discussion and Analysis continued

Market Risk

The Company is exposed to the impact of foreign currency fluctuations and interest rate changes due to its international sales and global funding. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in the value of foreign currencies and interest rates using a variety of financial instruments. It is the Company’s policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. It is the Company’s policy not to enter into foreign currency or interest rate transactions for speculative purposes.

In addition to product sales and costs, the Company has foreign currency risk related to debt that is denominated in currencies other than the dollar and cross-currency swaps hedging intercompany debt. The Company’s foreign currency risk management objective is to protect its earnings and cash flows resulting from sales, purchases and other transactions from the adverse impact of exchange rate movements. Foreign exchange risk is managed by using forward and option contracts to hedge receivables and payables. By policy, the Company maintains hedge coverage between minimum and maximum percentages. Cross-currency swaps are used to hedge foreign currency denominated payments related to intercompany and third-party loans. During 2000, hedged transactions were denominated primarily in euros, Canadian dollars, Australian dollars, Danish kroner, Swedish krona, Swiss francs, Norwegian kroner, Indian rupees and Mexican pesos.

The Company is exposed to changes in interest rates primarily as a result of its long-term debt used to maintain liquidity and finance inventory, capital expenditures and business expansion. Interest rate risk is also present in the cross-currency swaps hedging intercompany and third-party loans. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company uses a combination of fixed- and variable-rate debt. As of December 30, 2000 and January 1, 2000, approximately 40% and 34%, respectively, of the Company’s outstanding debt had fixed interest rates.

Market Risk Management

Foreign exchange and interest rate risk and related derivatives use is monitored using a variety of techniques including a review of market value, sensitivity analysis and Value-at-Risk (“VaR”). The VaR model determines the maximum potential loss in the fair value of foreign exchange rate-sensitive financial instruments assuming a one-day holding period. The VaR model estimates were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. The Company’s computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships were determined by observing foreign currency market changes and interest rate changes over the preceding 90 days. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. The potential loss in option value was adjusted for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. The model includes all of the Company’s forwards, options, cross-currency swaps and nonfunctional currency denominated debt (i.e., the Company’s market-sensitive derivative and other financial instruments as defined by the SEC). The accounts receivable and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model.

The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will likely differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

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The following table sets forth the estimated maximum potential one-day loss in fair value, calculated using the VaR model (in millions). The increase in VaR from interest rate sensitive financial instruments reflects an increase in the notional value of such instruments from January 1, 2000 to December 30, 2000. The Company believes that the hypothetical loss in fair value of its derivatives would be offset by gains in the value of the underlying transactions being hedged.

Management’s Discussion and Analysis continued

Euro Conversion

On January 1, 1999, a single currency called the euro was introduced in Europe. Twelve of the 15 member countries of the European Union have adopted the euro as their common legal currency. Fixed conversion rates between these participating countries’ existing currencies (the “legacy currencies”) and the euro have been established. The legacy currencies are scheduled to remain legal tender as denominations of the euro until at least January 1, 2002 (but not later than July 1, 2002). During this transition period, parties may settle transactions using either the euro or a participating country’s legacy currency. Beginning in January 2002, new euro-denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Company has implemented plans to address the issues raised by the euro currency conversion. These plans include, among others, the need to adapt computer information systems and business processes and equipment to accommodate euro-denominated transactions; the need to analyze the legal and contractual implications on contracts; and the ability of the Company’s customers and vendors to accommodate euro-denominated transactions on a timely basis. Since the implementation of the euro on January 1, 1999, the Company has experienced improved efficiencies in its cash management program in Europe as all intracompany transactions within participating countries are conducted in euros. In addition, the Company has reduced hedging activities in Europe for transactions conducted between euro participating countries. Since the Company’s information systems and processes generally accommodate multiple currencies, the Company anticipates that modifications to its information systems, equipment and processes will be made on a timely basis and does not expect any failures which would have a material adverse effect on the Company’s financial position or results of operations or that the costs of such modifications will have a material effect on the Company’s financial position or results of operations.

Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

The matters in this Annual Report that are forward-looking statements are based on current management expectations that involve certain risks, including without limitation: intense competition; continued pricing and margin pressures; failure to adjust costs in response to a sudden decrease in demand; the potential for continued restrictive vendor terms and conditions; the potential decline as well as seasonal variations in demand for the Company’s products and services; unavailability of adequate capital; management of growth; reliability of information systems; interest rate and foreign currency fluctuations; impact of governmental controls and political or economic instability on foreign operations; changes in local, regional, and global economic conditions and practices; dependency on key individuals; product supply shortages; the potential termination of a supply agreement with a major supplier; acquisitions; rapid product improvement and technological change, and resulting obsolescence risks; risk of credit loss; dependency on independent shipping companies; and the changes in terms of subsidized floor plan financing.

The Company has instituted and continues to institute changes to its strategies, operations and processes to address these risk factors and to mitigate their impact on the Company’s results of operations and financial condition. However, no assurances can be given that the Company will be successful in these efforts. For a further discussion of these and other significant factors to consider in connection with forward-looking statements concerning the Company, reference is made to Exhibit 99.01 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000; other risks or uncertainties may be detailed from time to time in the Company’s future SEC filings.

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