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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-4224

Avnet, Inc.

Registrant’s telephone number, including area code (480) 643-2000

Securities registered pursuant to Section 12(b) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      The aggregate market value (approximate) of the registrant’s common equity held by non-affiliates based on the closing price of a share of the registrant’s common stock for New York Stock Exchange composite transactions on September 9, 2002 .............................  $1,705,299,279

      The number of shares of the registrant’s Common Stock (net of treasury shares) outstanding at September 9, 2002 ........................  119,418,717

DOCUMENTS INCORPORATED BY REFERENCE

      Certain portions of the registrant’s definitive proxy statement (to be filed pursuant to Reg. 14A) relating to the Annual Meeting of Shareholders anticipated to be held on November 7, 2002 are incorporated herein by reference in Part III of this Report.

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FORWARD-LOOKING STATEMENTS

      This Report contains forward-looking statements with respect to the financial condition, results of operations and business of Avnet, Inc. (“Avnet” or the “Company”). You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates” or similar expressions in this Report.

      These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include the following:

	•	Competitive pressures among distributors of electronic components and computer products may increase significantly through industry consolidation, entry of new competitors or otherwise.
	•	General economic, industry or business conditions, domestic and foreign, may be less favorable than we expected, resulting in lower sales and declining operating results which can, in turn, impact our credit ratings and debt covenant compliance.
	•	Costs or difficulties related to the integration into Avnet of newly-acquired businesses, or businesses we expect to acquire, may be greater than we expected.
	•	Avnet may lose customers or suppliers as a result of the integration into Avnet of newly acquired businesses.
	•	Legislative or regulatory changes may adversely affect the business in which Avnet is engaged.
	•	Adverse changes may occur in the securities markets.
	•	Changes in interest rates and currency fluctuations may reduce Avnet’s profit margins.
	•	Avnet may be adversely affected by the allocation of products by suppliers.

      Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by them. We caution you not to place undue reliance on these statements, which speak only as of the date of this report.

      We do not undertake any obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1.     Business*

      Avnet, Inc., incorporated in New York in 1955, together with its subsidiaries (the “Company” or “Avnet”), is one of the world’s largest industrial distributors of electronic components, enterprise network and computer equipment and embedded subsystems, with sales in 2002 of $8.92 billion.

      Avnet is a vital link in the chain that connects suppliers of semiconductors, interconnect products, passive and electromechanical devices, radio frequency (“RF”) and microwave devices, and specialty products to original equipment manufacturers (“OEMs”) and contract manufacturers that design and build the electronic equipment for end-market use, and to other industrial customers. In addition, Avnet distributes a variety of enterprise network and computer equipment and embedded subsystems and provides services to both the end user and the reseller channels. Through its electronic components distribution activities, Avnet acts as an extension of a supplier’s sales force by marketing products to a larger base of customers than individual suppliers could do economically. While many suppliers can only economically serve a few hundred of the larger OEMs and contract manufacturers, Avnet is authorized to sell products of more than 250 of the world’s leading component manufacturers to a global customer base of over 100,000. Avnet ships electronic components as received from its suppliers or with assembly or other value added. As part of its distribution activities, Avnet adds various processes that customize products to meet individual OEM customer specifications. Avnet also provides supply-chain management, engineering design, material management and logistic services.

Organizational Structure

      The Company currently consists of three operating groups, Electronics Marketing (“EM”), Computer Marketing (“CM”) and Applied Computing (“AC”). A brief summary of each group followed by a more detailed description is provided below.

	1.     EM is engaged in the global marketing, assembly and/or distribution of electronic and electromechanical components and certain computer products, principally for industrial and some commercial and military use. EM also offers an array of value-added services to its customers, such as supply-chain management, engineering design, inventory replenishment systems, kitting, connector and cable assembly and semiconductor programming.
	2.     CM is an international distributor/reseller of enterprise networking and computer equipment to value-added resellers (“VARs”) and end users focusing primarily on middle- to high-end, value-added computer products and services. CM also provides a variety of networking solutions to its customer base.
	3.     AC serves the needs of personal computer OEMs and system integrators worldwide by providing the latest computer component technologies, and also serves the needs of non-PC OEMs that require embedded systems and technical services such as product prototyping, configurations and other value-added services.

      Throughout 2002, each of the three operating groups implemented plans to further manage their businesses through the creation of new, focused business units that generally serve separate sectors, based upon product, service or geography. These business units are specifically discussed in the operating group descriptions that follow. Even as the business unit structures continue to be put in place, EM, CM and AC remain the overall segments upon which management primarily evaluates the operations of the Company and upon which it bases its operating decisions.

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      The sales, operating income (loss) and assets of EM, CM and AC, as well as Avnet’s sales and assets by geographic area, are shown in Note 16 to the consolidated financial statements appearing in Item 14 of this Report.

Electronics Marketing (“EM”)

      EM is Avnet’s largest operating group, with sales in 2002 of $4.84 billion, representing 54.3% of Avnet’s consolidated sales. EM is comprised of three regional operations: EM Americas, which had sales of $2.62 billion in 2002, or 29.4% of Avnet’s consolidated sales; EM EMEA (Europe, Middle East and Africa), which had sales of $1.60 billion in 2002, or 17.9% of Avnet’s consolidated sales; and EM Asia, which had sales of $620.6 million in 2002, or 7.0% of Avnet’s consolidated sales.

      EM’s business units provide core value services, which focus on the transactional needs of the traditional electronic components distribution market, offering one of the industry’s broadest line cards and convenient one-stop shopping with an emphasis on responsiveness, on-time delivery and quality. Certain specialty services are also provided by the support services business units. The business units located in the Americas, Europe and Asia market semiconductors; interconnect, passive and electromechanical devices (“IP&E”); RF/microwave (wireless) components; and value-added services.

      EM’s business unit structure is as follows:

	•	Avnet Cilicon, Avnet’s semiconductor division in the Americas, focuses on the semiconductor requirements of both customers and suppliers. To achieve this focus, the semiconductor division has channels focused on different customers’ needs, including dedicated channels to service small to medium customers, large customer engagements, defense and aerospace customers, emerging customers and contract manufacturers.
	•	Avnet Kent is the Americas’ IP&E division, a focused business unit created from the merger in June 2001 of Avnet EM’s and Kent’s IP&E businesses. Avnet Kent distributes electronic connectors, electronic wire and cable, and other passive and electromechanical products and interconnect assemblies used in assembling and manufacturing electronic products. Avnet Kent also provides value-added services such as cable assembly, fan assembly, taping and reeling and component modification.
	•	Avnet RF & Microwave in the Americas serves the distinct needs of both customers and suppliers by providing RF and microwave semiconductors and components from the industry’s leading suppliers. Avnet RF & Microwave provides a wide array of value-added services including hi-rel processing, parametric assembly and RF cable assembly.
	•	In EMEA, EM goes to market with seven business units: EBV and WBC, based in Germany, which specialize in demand creation for select semiconductor suppliers; Silica, based in the United Kingdom, a semiconductor marketer; Avnet Time, based in the United Kingdom, a marketer of IP&E components; BFI-Optilas, based in France, a marketer of specialty components and devices across Europe; Avnet Israel, based in Tel Aviv, one of the largest value-added electronic components distributors in Israel; and Avnet Kopp, one of South Africa’s largest distributors of electronic and electrical components. EM EMEA does business in 30 western and eastern European countries, South Africa, Turkey, Egypt and Israel.
	•	EM Asia is a value-added distributor of electronic components and services in 10 Asian countries and Australia and New Zealand. All of EM Asia’s operations have access to the products and services provided by EM globally. The 2001 acquisition of Sunrise Technology Ltd. (“Sunrise”) significantly enhanced EM’s presence in Asia, especially the Peoples’ Republic of China (“PRC”). Sunrise, with locations in Hong Kong and China, specializes in demand creation from select semiconductor suppliers. Its focus is on demand creation with a limited line card. Avnet goes to market in China with three focused business units — Sunrise, ChinaTronic and Avnet Technology.

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      Supporting the focused EM business units described above are the following support services business units:

	•	Avnet Design Services — Provides an array of engineering and technical services for customers, including turnkey logic designs, reference and product designs, and demand creation services for suppliers. Avnet Design Services has four design centers in the United States and locations in Canada, England, Germany, India, Israel, New Zealand and Singapore.
	•	Avnet Integrated Material Services — Performs industry-leading material forecasting, supply chain synchronization and warehouse services. Avnet Integrated Material Services develops and implements innovative materials management solutions for EM’s major customers and their contract manufacturers. Regional Avnet Integrated Material Services business units service the requirements of regional customers.

Also a part of EM is Avnet’s global services business unit, Avnet Supply Chain Services, which provides end-to-end sales of supply-chain services to OEMs, contract manufacturers and electronic component manufacturers.

Computer Marketing (“CM”)

      CM is an international distributor/reseller of computer products to VARs and end users focusing primarily on middle- to high-end, value-added computer products and services. CM’s 2002 sales were $2.40 billion, representing 26.9% of Avnet’s consolidated sales. CM’s 2002 global sales consisted of the following regional results: CM North America sales of $1.94 billion, or 21.7% of Avnet’s consolidated sales; CM EMEA sales of $425.9 million, or 4.8% of Avnet’s consolidated sales; and CM Asia/ Pacific sales of $32.6 million, or 0.4% of Avnet’s consolidated sales.

      CM consists of three primary operating divisions as follows:

	•	Avnet Hall-Mark concentrates on sales of mid-range enterprise computer systems and software, including servers, storage and networking solutions, exclusively to the reseller channel in North America. Avnet Hall-Mark is one of the industry’s leading value-added distributors in the mid-range computing space in support of a limited line card of the foremost mid-range manufacturers, which include BMC, EMC2, HP/ Compaq, IBM, Intel, Oracle, StorageTek and VERITAS. Avnet Hall-Mark provides those manufacturers’ products to value-added resellers, along with complementary value-added solutions. Avnet Hall-Mark also provides logistics, financial, marketing, sales and technical services, including in-house engineering support, complex systems integration and configuration services.
	•	Avnet Enterprise Solutions is an IT infrastructure architect specializing in enterprise server, storage and network solutions that power leading business applications in North America. Avnet Enterprise Solutions leverages its unique suite of technical and financial strategies and services to minimize risk, maximize flexibility and optimize the use of capital on IT infrastructures. Avnet Enterprise Solutions sells industry leading networking and storage systems, mid-range servers, and professional services to end user enterprise customers. Avnet Enterprise Solutions is a technology solutions integrator, providing hardware, software and services for corporate-wide infrastructure needs. Leveraging its array of financial, acquisition and technical services, Avnet Enterprise Solutions brings value to businesses intent on managing their total cost of technology infrastructure — from the data center, through the network, to the desktop. Avnet Enterprise Solutions has significant relationships with Cisco Systems, Computer Associates, HP/ Compaq, IBM, Oracle, Tivoli and VERITAS.
	•	Avnet Partner Solutions is an industry leading, value-added distributor of enterprise computing systems, software, storage, networking solutions and services, marketing exclusively to the value-added reseller channel. Avnet Partner Solutions has European offices in Austria, Czech Republic, Germany, Hungary, Italy, Poland, Switzerland and the United Kingdom. Avnet Partner Solutions also operates a division in Australia, serving resellers and end-users. Product lines of Avnet Partner Solutions include EMC2, HP/ Compaq, IBM, Lotus, StorageTek, SUN and VERITAS.

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Applied Computing (“AC”)

      AC was created from portions of EM (OEM Systems Product Business Group and Personal Computing Components) and CM (Hall-Mark Computer Components) in 2000. AC focuses on the unique requirements of the OEM market for computing technology. AC’s 2002 sales were approximately $1.68 billion, representing 18.8% of Avnet’s consolidated sales. AC’s 2002 global sales consisted of the following regional results: AC North America sales of $728.9 million, or 8.2% of Avnet’s consolidated sales; AC EMEA sales of $878.6 million, or 9.8% of Avnet’s consolidated sales; and AC Asia/ Pacific sales of $71.6 million, or 0.8% of Avnet’s consolidated sales.

      AC consists of seven business units focusing on key market segments:

	•	Applied Computing Components serves the needs of manufacturers of general-purpose computers by providing them with the latest technologies such as microprocessors, DRAM modules and motherboards.
	•	Applied Computing Solutions provides technical design, integration, marketing and financing to developers of application specific computer solutions in the non-PC market place. Examples of these types of customers are OEMs in the medical, telecommunications, industrial control and digital creation market segments.
	•	Applied Computer Enabling Technologies serves systems integrators focusing on the mass storage marketplace that produce applications such as NAS, SAN and Fiber storage products.
	•	Avnet FasTrac Services in the Americas offers technical service and support through a nationwide service infrastructure.
	•	Applied Computing Market Development in Europe offers a specialized range of products, including EIZO monitors, Wyse thin client PCs and network storage solutions for end users.
	•	Applied Computing System Builder provides services for networking products and server building blocks for system builders.
	•	Avnet Convergent Technologies provides mobile computing, wireless and point-of-sales ID products and services.

      AC’s coverage of Europe includes the United Kingdom, Germany, Spain, Italy, Austria (also services eastern Europe), the Nordic region, the Benelux region, France and Switzerland. During 2001, AC expanded its operations in Europe with the acquisition of RKE Systems and the EBV Microsystems Group, both acquired as part of the VEBA Group of companies. AC’s European operations accounted for over half of the operating group’s sales in 2002.

Significant Acquisitions

      To better focus on its core business and to grow Avnet’s presence in world markets for electronic components and computer products, Avnet has pursued a strategic acquisition program. During the last three years, the Company has completed sixteen acquisitions, six in North America, six in Europe, three in the Asia/ Pacific region and one in the Middle East.

      Avnet’s sole acquisition during 2002 was Gamma Optronik AB (“Gamma”) of Sweden. Gamma was a privately owned, specialty distributor covering the Nordic territory and serving the industrial and scientific optronics market. Since its acquisition, Gamma has been operated as a part of Avnet’s BFI-Optilas business unit within EM in Europe. Gamma reported approximately $7.5 million in sales for its year ended June 2001 and employed 12 people.

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      The Company completed the following fifteen acquisitions in 2001 and 2000.

(A)	Represents the acquired company’s approximate reported sales in its most recent fiscal year prior to its acquisition by Avnet.

(B)

The acquisitions of the Orange Coast Companies, Advacom, Inc. and Sabre-Data, Inc. were completed by Kent Electronics prior to its acquisition by Avnet. As the Kent Electronics acquisition was accounted for as a “pooling-of-interests” and based upon the nature of the financial statements combined for reporting purposes (see Note 2 to the Consolidated Financial Statements appearing in Item 14 of this Report), all three of these acquisitions are considered to have been completed during Avnet’s fiscal 2000.

      During 2001 and 2000, the Company acquired a number of businesses that had a substantial positive impact on the Company. Below is a discussion of the Company’s more significant acquisitions (those acquisitions wherein the acquired company had sales in excess of $150 million in its most recent fiscal year prior to acquisition) consummated in the past three years. With the exception of the acquisition of Kent Electronics Corporation (“Kent”), all of the acquisitions discussed below were accounted for using the purchase method of accounting.

      On June 8, 2001, Avnet completed its acquisition of Kent, a specialty distributor and network integrator, following approval of the Amended and Restated Merger Agreement and Plan of Merger dated as of March 21, 2001 (the “Merger Agreement”) by Avnet and Kent shareholders on June 6, 2001. Pursuant to the Merger Agreement, Kent was merged into Avnet and its separate existence ceased. Kent shareholders received 0.87 of a share of Avnet common stock for each share of Kent common stock held, with cash paid in lieu of any fractional shares based on $25.84 per Avnet share. Avnet issued approximately 25.3 million shares of its common stock to Kent shareholders and an additional 1.7 million shares were reserved for issuance upon the exercise of outstanding warrants and stock options assumed in the transaction.

      The accompanying consolidated financial statements and notes for years prior to 2002 have been restated to reflect the acquisition of Kent, which has been accounted for as a “pooling-of-interests.” The periods combined are more fully discussed in Note 2 to the consolidated financial statements appearing in Item 14 of this Report. The combination of prior periods does not give effect to the synergies that the Company has realized and expects to continue to realize from the combined operations subsequent to the acquisition. As discussed in Item 7 of this Report and in the notes to the consolidated financial statements, the Company recorded certain special charges in the fourth quarters of 2002 and 2001, a significant portion of which resulted from the Kent acquisition being accounted for as a “pooling-of-interests.” Thus, these charges were recorded

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      In May 2001, Avnet acquired Sunrise, a privately held, electronic components distribution company serving indigenous and multinational OEMs and contract manufacturers in the PRC and Hong Kong. The acquisition has substantially improved the Company’s operations in the PRC and Asia overall and provides an important strategic foothold for continued expansion into this important region of the world.

      In October 2000, the Company completed the acquisition of certain European operations of the VEBA Electronics Group consisting of (a) the Germany-headquartered EBV Group, including EBV Electronik and WBC, both pan-European semiconductor distributors, and Atlas Services Europe, a logistics provider for EBV and WBC; and (b) the Germany-based RKE Systems, a computer products and services distributor. The amount paid at closing of $740.0 million, subject to the resolution of certain purchase price contingencies, included the payoff of substantially all of the debt on the books of the companies acquired. Subsequent to the end of 2002, the Company and the seller of the VEBA Electronics Group resolved all remaining purchase price contingencies related to this acquisition, resulting in a refund to Avnet of a portion of the amount paid at closing totaling approximately $6.5 million. This refunded purchase price will be recorded in the Company’s 2003 consolidated statement of operations.

      In July 2000, the Company acquired Savoir Technology Group, Inc. (“Savoir”), a leading distributor of IBM mid-range server products in the Americas. This acquisition has had a material benefit to the Company, especially CM, by contributing substantially to making Avnet one of the largest distributors of IBM Enterprise products globally. In the Savoir merger, holders of Savoir common stock received 0.11452 of a share of Avnet common stock for each share of Savoir common stock, and cash in lieu of fractional Avnet shares. The exchange ratio and the price paid for fractional shares were based upon an Avnet stock price capped at $34.2736 per share. Holders of Savoir series A preferred shares received 0.16098 of a share of Avnet common stock for each share they held and cash in lieu of fractional Avnet shares. The total cost of the acquisition of Savoir including estimated expenses was approximately $145.8 million, consisting of the cost for the Savoir shares of $111.1 million in Avnet stock and $0.7 million in Avnet stock options (net of related tax benefits of $0.5 million) as well as $1.8 million for transaction expenses and $32.2 million for the payoff of pre-existing Savoir debt. The above dollar value of Avnet stock includes the issuance of 3,736,954 shares of Avnet stock valued at the assumed price of $29.66 per share.

      In October 1999, the Company acquired Marshall Industries (“Marshall”), then one of the world’s largest distributors of electronic components and computer products, for a combination of cash and Avnet stock. The total cost of the acquisition of Marshall, including estimated expenses, was approximately $764.6 million, consisting of the cost for the Marshall shares of $326.8 million in cash, $269.3 million in Avnet stock and $7.0 million in Avnet stock options (net of related tax benefits of $4.8 million) as well as $17.5 million for direct transaction costs and estimated expenses and $144.0 million for the refinancing of Marshall net debt. The above dollar value of Avnet stock reflects the issuance of 6,817,943 shares of Avnet stock valued at an assumed price of $39.50 per share.

      In October 1999, the Company acquired 94% of the SEI Macro Group, an electronics components distributor headquartered in the United Kingdom, and 16% of Eurotronics B.V., a pan-European electronics components distributor headquartered in the Netherlands. In January 2000, the Company completed its acquisition of the SEI Macro Group and Eurotronics B.V.

Major Products

      One of Avnet’s competitive strengths is the breadth and quality of the suppliers whose products it distributes. IBM represents the only supplier from which product sales exceed 10% of the Company’s consolidated sales. During 2002, IBM products accounted for approximately 16% of the Company’s sales. Listed below are the major product categories and the approximate sales in 2002, the percentage of the

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	•	Semiconductors: Sales of semiconductors in 2002 were approximately $4.430 billion, or 49.7%, of consolidated sales (including microprocessor sales of approximately $2.655 billion, or 29.8%, of consolidated sales). The Company’s major suppliers of semiconductors are Advanced Micro Devices, Agilent Technologies, Analog Devices, Hitachi, Integrated Device Technology, Intel, Intersil, LSI Logic, Micron Semiconductors, Motorola, National Semiconductor, ON Semiconductor, Philips, Texas Instruments and Xilinx.
	•	Computer Products: Sales of computer products in 2002 from all of the Company’s business units were approximately $3.475 billion, or 39.0%, of consolidated sales (including disk drive sales of approximately $766.3 million, or 8.6%, of consolidated sales). The Company’s major suppliers of computer products are IBM, Computer Associates, Hewlett-Packard/ Compaq, Intel, Oracle and Wyse Technology.
	•	Connectors: Sales of connector products in 2002 were approximately $385.0 million, or 4.3%, of consolidated sales. The Company’s major suppliers of connectors are AMP, Amphenol, AVX, ITT Cannon, Molex, T&B and 3M.
	•	Passives, Electromechanical and Other: Sales of passives, electromechanical and other products in 2002 were approximately $629.6 million, or 7.0%, of consolidated sales. The Company’s major suppliers of these products are Aromat, Artesyn Technologies, AVX, Bourns, ITT/C&K, Kemet, Murata, Pulse and Vishay.

      Most of the Company’s product lines are covered by non-exclusive distributor agreements with suppliers, cancelable upon 30 to 180 days notice. Most of these agreements provide for the periodic return to the supplier of obsolete inventory and the return of standard inventory upon termination of the contract.

      The combined sales for the Company by major product class for the last three years are as follows:

      As of June 28, 2002, the Company had over 300 locations worldwide, many of which contain sales, warehousing and administrative functions for multiple business units and including a small number of stores in customers’ facilities. Avnet sells to customers in over 60 countries.

Competition & Markets

      The Company is currently the world’s largest industrial distributor (based on sales) of electronic components and computer products according to Electronic News, a prominent industry publication, which ranks the top distributors. The Company’s major competitors are Arrow Electronics, Inc., Future Electronics, Memec PLC and Pioneer-Standard Electronics, Inc.

      All of the Company’s operations are in highly competitive markets. With regard to many of its product lines, the Company is in competition not only with other distributors but also with its suppliers. A key competitive factor in the distribution industry as a whole is the carrying of a significant amount of inventory to meet rapid delivery requirements of customers. In addition, the Company enhances its competitive position by offering a variety of value-added services which entail the performance of services and/or processes tailored to

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Number of Employees

      At August 23, 2002, Avnet had approximately 11,000 employees.

Item 2.     Properties

      Currently, the Company owns and leases approximately 1,265,236 and 4,344,963 square feet of space, respectively, of which approximately 56% is located in the United States. EM’s principal facilities for warehousing and value-added operations are located in Chandler, AZ, Poing, Germany, Tongeren, Belgium, Oxford, NC, and Grapevine, TX, where EM has approximately 395,000, 230,000, 217,000, 201,000 and 181,000 square feet of space, respectively. CM’s principal facilities for warehousing and value-added operations are located in Chandler, AZ where CM has approximately 196,000 square feet of space. CM also utilizes a portion of the Tongeren, Belgium facility discussed above for warehousing and value added operations. CM leases a 132,000 square foot building in Tempe, AZ for use as the CM headquarters and EM and CM share leased office facilities of approximately 48,000 square feet in Diegem, Belgium as the administrative headquarters for their respective European operations. AC’s principal facilities for integration and warehousing are located in Phoenix, AZ and Nettetal, Germany, where AC has approximately 87,000 and 146,000 square feet of space, respectively. AC leases approximately 35,000 square feet of space in Phoenix, AZ for use as the AC headquarters. The Company leases a 176,000 square foot building in Phoenix, AZ for use as the EM headquarters as well as the Company’s corporate headquarters.

Item 3.     Legal Proceedings

      The Company and/or its subsidiaries are parties to various legal proceedings arising in the normal course of business. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flow or overall results of operations. The following is a description of certain proceedings:

      The Company and the former owners of a Company-owned site in Oxford, North Carolina have entered into a Consent Decree and Court Order with the Environmental Protection Agency (the “EPA”) for the environmental clean-up of the site, the cost of which, according to the EPA’s remedial investigation and feasibility study, was estimated to be approximately $6.3 million, exclusive of the $1.5 million in past costs paid to the EPA by the potentially responsible parties (“PRPs”). Pursuant to a Consent Decree and Court order entered into between the Company and the former owners of the site, the former owners have agreed to bear at least 70% of the clean-up costs of the site, and the Company will be responsible for not more than 30% of those costs.

      Sterling Electronics Corp., (“Sterling”) a subsidiary of the Company acquired as a part of the Marshall Industries acquisition, has entered into a Settlement Agreement and Release with Westbase, Inc. Sterling once owned 92.46% of the capital stock of Phaostron, Inc. (“Phaostron”). In August 1995, Sterling sold the interest in Phaostron to Westbase, Inc. At the time of the sale, Sterling and Westbase entered into several agreements, including a promissory note, and an agreement related to environmental costs resulting from alleged contamination at a facility leased by Phaostron that is a part of the San Gabriel Valley Superfund Site. The environmental agreement provided that Sterling may be required to pay up to $800,000 for environmental costs associated with the site. A dispute arose, however, between Westbase and Sterling regarding the amount Westbase owed to Sterling pursuant to the promissory note, as well as the amount of any reimbursements Sterling owed to Westbase pursuant to the environmental agreement. Sterling commenced arbitration proceedings to resolve the dispute. As of June 30, 2002, the parties entered into the Settlement Agreement and Release resolving the dispute. Pursuant to the Settlement Agreement and Release, each party released the other from current and future claims regarding the arbitrated matters and Westbase paid a settlement amount to Sterling.

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      In early May 2002, the Company and the current owner of property in Huguenot, New York were named as PRPs by the New York State Department of Environmental Conservation (“NYSDEC”) regarding an environmental clean-up site. The estimated cost of the environmental clean-up of the site, based on NYSDEC’s remedial investigation and feasibility study, is approximately $2.4 million. In its Record of Decision, NYSDEC declined to apportion liability among the Company and the current owner of the property, leaving such determination to be made in a lawsuit brought against the Company in the United States District Court for the Southern District of New York by the current owner of the property seeking contribution for the costs of the clean-up and reimbursement of certain other costs. The Company has also filed a third-party complaint against the former owners of the property seeking contribution for the costs of the environmental clean up. The apportionment of the costs to clean up this site amongst the PRPs and the former owner are not determined at this time. However, the Company does not anticipate its ultimate liability in the matter will be material to its financial position, cash flow or results of operations.

      Based on the information known to date, management believes that the Company has appropriately accrued in its financial statements for its share of the costs with respect to these environmental clean-up sites.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.

Item 4A.     Directors and Executive Officers of the Company

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      The current executive officers of the Company are:

      Mr. Vallee joined the Company in February 1977 and has been Chairman of the Board and Chief Executive Officer since June 1998. Prior thereto, he was Vice Chairman of the Board since November 1992, and also President and Chief Operating Officer since March 1992.

      Mr. Birk became Avnet’s Secretary in July 1997 and has been Senior Vice President of Avnet since November 1992. Mr. Birk was elected Vice President and General Counsel in September 1989.

      Mr. Bryant has been Senior Vice President of Avnet since November 1999 and has served as President of EM since January 2002. Mr. Bryant served as a Vice President of Avnet since November 1996. He previously served as President of CM since June 1999, and prior thereto served as President of Hall-Mark Computer Division since July 1998. Mr. Bryant was President of the Avnet Computer Division from September 1996 to June 1998.

      Mr. Kamins has been Senior Vice President of Avnet since November 2000 and has served as President of AC since October 1999. Mr. Kamins served as a Vice President of Avnet since November 1999. He previously served as Senior Vice President for Avnet CM since July 1996.

      Mr. Sadowski has been Senior Vice President of Avnet since November 1992 and Chief Financial Officer since February 1993.

      Mr. Hamada has been Vice President of Avnet since December 1999 and has served as President of CM since January 2002. He previously served as President of Avnet Hall-Mark, North America since May 1999. Prior thereto, Mr. Hamada served as Executive Vice President of Avnet Computer (now Avnet Enterprise Solutions) from July 1998 to May 1999 and was Senior Vice President of Sales and Marketing from July 1997 to July 1998.

      Mr. Cole has been Avnet’s Controller since February 1993.

      Officers of the Company are generally elected each year at the meeting of the Board of Directors following the annual meeting of shareholders and hold office until the next such annual meeting or until their earlier death, resignation or removal.

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PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Market price per share.*

      The Company’s common stock is listed on the New York Stock Exchange and the Pacific Exchange. Quarterly market prices (as reported for the New York Stock Exchange composite transactions) for the last two fiscal years were:

Record Holders

      As of September 9, 2002 there were approximately 5,650 holders of record of Avnet’s common stock.

Dividends*

      The cash dividend paid on the common stock was 7.5 cents per share during the first two quarters in fiscal 2002 and each quarter in fiscal 2001. Avnet announced on August 15, 2001 that it would look to more effectively deploy its cash to fuel future earnings growth and deliver increased shareholder value by discontinuing the payment of its cash dividend effective after its dividend payment for the second quarter of 2002, made on January 2, 2002.

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Item 6.     Selected Financial Data*

*	Income amounts are from continuing operations and net assets from discontinued operations have been classified as current assets. All amounts prior to 2002 have been restated for the acquisition of Kent, which has been accounted for using the “pooling-of-interests” method.
(a)	Includes the net negative impact of $14.9 pre-tax and $12.5 after-tax ($0.12 per share on a diluted basis) for (i) the gain on the sale of Channel Master of $33.8 pre-tax and $17.2 after-tax, (ii) costs relating to the divestiture of Avnet Industrial, the closure of the Company’s corporate headquarters in Great Neck, New York, and the anticipated loss on the sale of Company-owned real estate, amounting to $13.3 pre-tax and $8.5 after-tax, and (iii) incremental special charges associated with the reorganization of EM, amounting to $35.4 pre-tax and $21.2 after-tax.
(b)	Includes the net gain on exiting the printed catalog business recorded in the fourth quarter of 1999 offset by special charges recorded in the first quarter associated with the reorganization of EM. The net positive effect on 1999 operating income, net income and diluted earnings per share were $183.0, $64.0 and $0.64, respectively.
(c)	Includes special charges associated with: (i) the integration of Marshall Industries, Eurotronics B.V. and the SEI Macro Group into EM, (ii) the integration of JBA Computer Solutions into CM North America, (iii) the reorganization of EM Asia, (iv) the reorganization of EM’s European operations including costs related to the consolidation of EM’s European warehousing operations and (v) costs

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	incurred in connection with certain litigation brought by the Company. The total special charges for 2000 amounted to $49.0 pre-tax, $30.4 after-tax and $0.28 per share on a diluted basis.
(d)	Includes the impact of incremental special charges related to the acquisition and integration of Kent, which was accounted for as a “pooling-of-interests,” and other integration, reorganization and cost cutting initiatives taken in response to business conditions. The special charges amounted to $327.5 pre-tax ($80.6 included in cost of sales and $246.9 included in operating expenses) and $236.7 after-tax, or $1.99 per share on a diluted basis for the year ($2.01 per share for the fourth quarter).
(e)	Includes the impact of incremental special charges related to the write-down of certain assets acquired in the 2001 acquisition of Kent, net of certain recoveries of previous write-downs and reserves, and other charges taken in response to business conditions, including an impairment charge to write-down certain investments in unconsolidated Internet-related businesses to their fair value and severance charges for workforce reductions announced during the fourth quarter of 2002. The net special charges amounted to $79.6 pre-tax ($21.6 included in cost of sales and $58.0 included in operating expenses) and $62.1 after-tax, or $0.52 per share on a diluted basis.

(f)

The 2002 summary financial data excludes the impact of the Company’s adoption of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” on June 30, 2001, the first day of the Company’s fiscal year 2002. SFAS 142, which requires that ratable amortization of goodwill be replaced with periodic tests for goodwill impairment, resulted in a transition impairment charge recorded by the Company of $580.5, or $4.90 per share on a diluted basis for the first quarter and the fiscal year. This charge is reflected as cumulative change in accounting principle in the consolidated statements of operations.

(g)	All per share data have been restated to reflect a two-for-one split of the Company’s common stock approved by the Board of Directors on August 31, 2000. These shares were distributed on September 28, 2000 to shareholders of record on September 18, 2000.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      For an understanding of the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements, including the related notes, and other information appearing elsewhere in this Report. The fiscal 2001 acquisition of Kent, which has been accounted for as a “pooling-of-interests” and is more fully described in Item 1 of this Report, materially impacts the nature of the reported results for the years prior to 2002 presented herein. In addition, the severe economic downturn in the technology markets in which the Company competes is also a material contributor to the financial results discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).

      Since the Company’s second quarter of fiscal 2001, technology markets have been severely impacted by a global economic and industry downturn. This downturn in the technology markets is primarily a consequence of several economic and geopolitical forces: weakened financial markets following the collapse within the dot com industry and other recent significant business failures; weak global demand for IT capital equipment following on the heels of the Y2K and dot com infrastructure buildup; a severe oversupply of electronic components (specifically semiconductors — the worldwide semiconductor industry experienced its worst performance in annual revenue trends in calendar 2001, registering a 32% decline in revenues according to the Semiconductor Industry Association); and an uncertain geopolitical climate precipitated by the events of September 11, 2001. These events have impacted, to varying degrees, all facets of the technology markets in which the Company competes.

      Please note that unless otherwise specifically indicated, references herein to any particular year or quarter generally are to the Company’s fiscal year periods. The Company’s fiscal year ends on the Friday closest to June 30.

Fiscal Year Organizational Developments

      Brian Hilton, president of EM, retired from the Company effective June 28, 2002 in conjunction with the close of the fiscal year. Andrew Bryant, a 22-year Avnet employee and prior president of CM, was appointed the new global president of EM. Richard Hamada, a 20-year Avnet employee, was promoted to president of CM worldwide. Mr. Hamada was the president of CM’s largest division prior to assuming his new responsibilities. The change in responsibilities for Messrs. Bryant and Hamada took place in January 2002 in order to ensure a smooth transition prior to Mr. Hilton’s retirement.

Critical Accounting Policies

      The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. These estimates and assumptions are based upon the Company’s continuous evaluation of historical results and anticipated future events. Actual results may differ from these estimates under different assumptions or conditions.

      The Securities and Exchange Commission defines critical accounting polices as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and those that require significant judgments and estimates. The Company does not consider revenue recognition to be a critical accounting policy due to the nature of its business in which revenues are generally recognized upon the actual shipment of product. Accordingly, other than for estimates related to possible returns of products from customers, discounts or rebates, the recording of revenue does not require significant judgments or estimates. Furthermore, revenues and anticipated profits from long-term contracts, which are recorded on a percentage of completion basis, are not material to the consolidated results of operations of the Company.

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      Management believes the Company’s most critical accounting policies relate to:

      Valuation of Receivables: The Company maintains an allowance for doubtful accounts for estimated losses resulting from customer defaults. Bad debt reserves are recorded based upon historic default averages as well as through the creation of reserves established for specific customers deemed marginal in their ability to pay based upon contemporaneous factors. In general, if the financial condition of a customer were to deteriorate, resulting in an impairment of that customer’s ability to make payments to the Company, additional reserves may be required.

      Valuation of Inventories: Inventories are recorded at the lower of cost (first in — first out) or estimated market value. The Company’s inventories include high-technology components, embedded systems and computing technologies sold into rapidly changing, cyclical and competitive markets whereby such inventories may be subject to early technological obsolescence.

      The Company evaluates inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account the Company’s contractual provisions with its suppliers governing price protection, stock rotation and return privileges relating to obsolescence. Because of the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount of inventories. Additionally, assumptions about future demand, market conditions and decisions to discontinue certain product lines can impact the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.

      Accounting for Income Taxes: Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of the Company’s net foreign operating loss carry-forwards is dependent upon its ability to generate sufficient future taxable income in certain tax jurisdictions. In addition, the Company considers historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should the Company determine that it is not able to realize all or part of its deferred tax assets in the future, a valuation allowance is recorded against the deferred tax assets with a corresponding charge to income in the period such determination is made.

      Special and Acquisition-Related Charges: The Company has been subject to the financial impact of integrating acquired businesses and charges related to business reorganizations. In connection with such events, management is required to make estimates about the financial impact of such matters that are inherently uncertain. Accrued liabilities and reserves are established to cover the cost of severance, facility consolidation and closure, lease termination fees, inventory adjustments based upon acquisition-related termination of supplier agreements and/or the re-evaluation of the acquired working capital assets (inventory and accounts receivable), change-in-control expenses, and write-down of other acquired assets including goodwill. Actual amounts incurred could be different from those estimated.

      Additionally, in assessing the Company’s goodwill for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” the Company is required to make significant assumptions about the future cash flows and overall performance of its reporting units. Should these assumptions or the structure of the reporting units change in the future based upon market conditions or changes in business strategy, the Company may be required to record additional impairment charges to its remaining goodwill. See Note 6 to the consolidated financial statements located at Item 14 of this Report for further discussion of SFAS 142 and the Company’s transitional and annual impairment tests.

      Contingencies and Litigation: The Company is involved in various legal proceedings and other claims related to environmental, labor, product and other matters, all of which arise in the normal course of business. The Company is required to assess the likelihood of any adverse judgment or outcome to these matters, as well

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Recently Issued Accounting Pronouncements

      In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” SFAS No. 143 became effective for the Company beginning on June 29, 2002 (the first day of fiscal 2003) and provides new criteria for the measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The adoption of SFAS 143 will not have a material effect on the Company’s consolidated financial statements.

      In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 became effective for the Company beginning on June 29, 2002. SFAS No. 144 amends and supersedes SFAS No. 121 (“SFAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, SFAS 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also amends and supercedes previous guidance on reporting for discontinued operations. The adoption of SFAS 144 will not have a material effect on the Company’s consolidated financial statements.

      In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 supercedes former guidance addressing the financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured when the liability is incurred (as opposed to upon the date of an entity’s commitment to a plan as provided for under previous guidance). The provisions of SFAS 146 will be effective for any exit or disposal activities that are initiated by the Company after December 31, 2002.

Acquisitions and Investments

      For an overview of the Company’s acquisitions over the past three years, see Item 1, “Business,” and see Note 2 to the consolidated financial statements appearing in Item 14 of this Report. Management currently does not anticipate making any material acquisitions in the near term.

      The acquisitions accounted for as purchases, certain of which are material to the Company, have an impact on the comparability of the Company’s period-to-period results discussed in “Results of Operations” in this MD&A. See Note 2 to the consolidated financial statements for further discussion of the impact of certain material acquisitions on the financial results of the Company.

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Results from Operations

      The tables below provide a year-over-year summary of the results from operations for the Company and its operating units.

THREE-YEAR OPERATING UNIT ANALYSIS: SALES AND OPERATING INCOME (LOSS)

      The results of operations for 2002 reflected dramatically different results from the prior year across nearly every category of operational performance. Similarly, the first half of 2001 was substantially different than the second half as the significant decline in market conditions referenced previously began in the December 2000 quarter (the second quarter of fiscal 2001). The results for the first half of 2001 reflected a strong electronic component distribution industry where the Company posted both record revenues and earnings. The results for the second half of 2001 and all of 2002 were then negatively affected by an abrupt and severe downturn in the electronic components industry, compounded by a general slowdown in the global economic environment. Company results reflect these factors as, despite revenue growth and operating income growth before special items over the course of both 2000 and 2001, the Company experienced declines in revenues, gross profit margins, operating income margins, net income margins, and for the first time in over four decades, recorded a net loss from continuing operations in 2002.

      Most significantly impacted was EM, which showed significant deterioration in both sales and operating income (before special charges) in 2002 as compared with 2001 and 2000. The dramatic drop in sales in 2002 is directly related to the sharp decline in semiconductor sales on a global level. This may also be indicative of a technology industry shift in revenue mix away from the Americas, which declined year-over-year, partly toward the Asia region where Avnet’s 2002 operations were also bolstered by the acquisition of Sunrise late in 2001.

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      Enterprise-wide operations were impacted by the economic downturn in a number of areas. Revenues continued to be depressed compared with prior year levels due primarily to excess inventory in the supply chain combined with widespread weak demand across the technology segments served by the Company. This impact has been compounded by pricing pressures within the supply chain, common to the industry in a down cycle, which have also kept profits at suppressed levels. The combination of these factors led to substantially reduced gross profit dollars in 2002. The rapid decline in gross profit dollars occurred at a rate greater than operating expenses could be removed from the business and, as a result, each operating group experienced significant declines in operating income in 2002 as compared with 2001. In addition, operating losses occurred within EM in the first and second quarters of 2002 and within AC during the fourth quarter of 2002.

Sales

      On a year-over-year basis, the Company completed 2002 with sales of $8.92 billion, down 30.4%, or $3.89 billion, from the record sales of $12.81 billion recorded in 2001. As discussed above, the decrease in consolidated sales was due primarily to the confluence of global and domestic economic forces that caused the severe downturn in the technology markets the Company serves. EM sales of $4.84 billion and CM sales of $2.40 billion which, combined, represented over 80% of the Company’s consolidated revenues in 2002, were down from 2001 levels by 41.6% and 16.0%, respectively. AC sales of $1.68 billion in 2002 increased marginally by 0.4% from 2001 due primarily to growth in its European operations (affected, in part, by a full year of operations of RKE Systems in 2002, acquired as part of the VEBA Group acquisition discussed in Item 1 of this Report) as well as marginally positive growth in Asia.

      Consolidated sales for 2001 of $12.81 billion were up $2.90 billion, or 29.2%, as compared with 2000. A significant portion of the increase in sales was primarily due to the robust market conditions that existed through the December 2000 timeframe, especially in the telecommunications sectors being fueled by the dot com infrastructure buildup, and the impact of acquisitions. EM sales represented 64.7% of Avnet’s consolidated sales in 2001, down from 71.7% in 2000. However, revenue dollars at EM year-over-year grew to record levels of $8.29 billion in 2001, an increase of $1.18 billion, or 16.6%, over sales of $7.11 billion in 2000. This continued increase in sales was due primarily to the impact of acquisitions (the VEBA Group of companies and the first full year of operations of Marshall and SEI) and the strengthening of business conditions in the electronics component distribution market. CM achieved a $716.2 million, or 33.5%, increase in sales from $2.14 billion in 2000 to $2.86 billion in 2001. The continued growth rate was primarily impacted by the acquisition of Savoir and by growth in sales of enterprise IT equipment and services that accompanied the dot com infrastructure buildup in larger companies in the industry that comprise a significant portion of the CM customer base. EM and CM sales for 2000 include $368 million of AC sales recorded prior to the period when AC was separated into its own operating group, making AC global sales approximately $1.038 billion on a pro forma basis for 2000.

Special Charges

      The Company recorded a number of special charges during the last three fiscal years. These charges relate primarily to three items: (1) the change in accounting principle further discussed in “Change in Accounting Principle — Goodwill” in this MD&A and in Note 6 to the consolidated financial statements appearing in Item 14 of this Report; (2) charges stemming from acquisition and integration of newly acquired businesses; and (3) the reorganization of operations in each of the three major regions of the world in which the Company operates and other non-recurring items, generally taken in response to business conditions at the time of the charge. Management believes that the Company’s future results of operations will continue to benefit from the cost savings resulting from its acquisitions and integrations of new businesses and

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SUMMARY OF SPECIAL CHARGES

      See also Note 17 to the consolidated financial statements appearing in Item 14 of this Report for a detail of activity within the special charge accounts during the past three years.

      In the fourth quarter of 2002, the Company recorded a special charge representing a write-down in value of certain assets acquired in the 2001 acquisition of Kent and certain other charges taken in response to business conditions. The special charge totaled $79.6 million pre-tax ($21.6 million included in cost of sales and $58.0 million included in operating expenses) and $62.1 million after tax, or $0.52 per share on a diluted basis for the fourth quarter and the year.

      The Kent-related items resulted from the acquisition of Kent being accounted for using the “pooling-of-interests” method of accounting. Under this method, items that normally would have been reflected as adjustments to goodwill as opening balance sheet adjustments if the purchase method of accounting could have been used were instead recorded to the Company’s consolidated statement of operations. These items amounted to $29.7 million pre-tax and relate primarily to write-downs to the value of receivables considered uncollectible ($8.2 million), excess and obsolete inventory ($21.6 million) and property, plant and equipment and non-cancelable lease obligations ($15.9 million) acquired in the Kent acquisition, net of approximately $16.0 million pre-tax in cash recoveries of certain charges recorded as part of the special charges taken in the fourth quarter of 2001. The write-downs of Kent-related assets were recorded at the earliest date that management had sufficient information to evaluate the recoverability of the assets in order to conclude that a write-down was necessary to record the assets at their net realizable value.

      The remaining pre-tax special charge recorded in the fourth quarter of 2002, amounting to $49.9 million, includes an impairment charge of $36.2 million pre-tax to write-down certain of the Company’s investments in unconsolidated Internet-related businesses to their fair market value and $13.7 million pre-tax for severance charges taken for workforce reductions of approximately 850 personnel announced during the fourth quarter.

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      Of the special charge of $79.6 million pre-tax recorded in the fourth quarter of 2002, $77.9 million did not require the use of cash and $1.7 million required the use of cash (net of the $16.0 million in recoveries discussed above), of which $8.6 million remains unexpended at June 28, 2002 related primarily to remaining payments for severance, substantially all of which is scheduled to be utilized during 2003, and for contractual lease commitments, substantially all of which are expected to be utilized by the end of 2007.

      In the fourth quarter of 2001, the Company recorded a special charge in connection with the acquisition and integration of Kent and for costs related to actions taken in response to business conditions and other restructuring activity. The charge amounted to $327.5 million pre-tax ($80.6 million included in cost of sales and $246.9 million included in operating expenses) and $236.7 million after-tax, or $2.01 per share on a diluted basis for the fourth quarter ($1.99 per share for the year). Of the total charge of $327.5 million, approximately $143.5 million required an outflow of cash, of which approximately $122.7 million had been utilized at June 28, 2002. The unutilized portion relates primarily to remaining contractual lease commitments, substantially all of which are expected to be utilized by the end of 2006. The unusually large impact on income taxes related to the special charge is due primarily to the non-deductibility of certain acquisition-related costs and the impact of tax rates in foreign jurisdictions.

      Approximately $157.3 million of the pre-tax charge resulted from the acquisition of Kent having been accounted for using the “pooling-of-interests” method as described above. These items consist of costs incurred in completing the acquisition, including significant change-in-control and other executive benefit-related payments made as a result of the acquisition ($68.3 million), professional fees for investment banking, legal and accounting services rendered to both Avnet and Kent ($12.7 million), as well as adjustments to the assets acquired and liabilities assumed ($76.3 million). The adjustments to the assets acquired and liabilities assumed include accruals for severance ($4.6 million), write-downs of receivables considered uncollectible ($8.0 million), inventory reserves related to termination of non-strategic product lines ($20.5 million), write-downs associated with the disposal of fixed assets ($25.1 million), lease terminations ($8.5 million) and other items ($9.6 million).

      The balance of the charge recorded in the fourth quarter of 2001, amounting to approximately $170.2 million, related to a number of actions taken to cope with market conditions and to strengthen Avnet’s operations. These actions included cost reductions associated with the reorganization of the Company’s businesses, the integration of the recent acquisitions, as well as important cost-cutting actions taken in response to business conditions. These special charges fall into a number of categories including severance ($28.5 million), inventory reserves related to terminations of non-strategic product lines ($9.4 million), inventory valuation adjustments for special inventory purchases to meet customer requirements which were in excess of what was anticipated to be sold or returned ($50.7 million), write-downs associated with the disposal of fixed assets ($15.2 million), lease terminations ($21.1 million), adjustments to the book value of investments in unconsolidated entities ($42.9 million) and other items ($2.4 million).

      During 2000, the Company recorded $49.0 million pre-tax ($37.2 million included in operating expenses and $11.8 million included in cost of sales), $30.4 million after-tax and $0.28 per share on a diluted basis of incremental special charges associated with (1) the integration of acquired businesses into the Company as described below ($31.7 million), (2) the reorganization of EM’s European operations ($9.2 million), consisting primarily of costs related to the centralization of warehousing operations, (3) the reorganization of EM Asian operations ($5.4 million) and (4) costs incurred in the second quarter in connection with its

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      The charges in 2000 associated with the integration of acquired businesses included the integration of Marshall Industries into the Company’s North American EM and AC operations ($18.4 million), the integration of JBA Computer Solutions into CM North America ($3.2 million) and the integration of Eurotronics B.V. and the SEI Macro Group into EM EMEA ($10.1 million). The charges related to the reorganization of EM Asia are comprised of severance, inventory reserves required related to supplier terminations, real property lease terminations, employee and facility relocation costs, write-downs associated with the disposal of fixed assets, special incentive payments and other items.

      The charges related to the reorganization of EM’s European operations consisted primarily of costs related to the centralization of warehousing operations into the Company’s new facility in Tongeren, Belgium. These charges were for severance, adjustment of the carrying value of fixed assets, real property lease terminations, duplicate employee and property related costs and other items.

      The costs incurred pertaining to the Wyle lawsuit, in which the Company was the plaintiff, related to legal and professional fees associated with the trial of the case, which commenced in September 1999. On February 4, 2000, a jury in Tampa, Florida returned a verdict in the case absolving the defendants of any liability. Subsequently, the parties agreed to settle the case by dismissing all claims and appeals with prejudice and with each side bearing its own costs and expenses.

      The Company continues to explore potential cost cutting measures including potential reorganizations of certain lines of business. Efforts in this regard may result in future special charges. Such charges will be recorded if and when management makes the necessary decisions and approvals regarding any reorganization plans and liabilities are incurred.

Operating Income (Loss)

      The following table compares consolidated gross profit margins, operating expenses as a percent of sales and operating profit margins for the three years ending June 28, 2002:

AVNET CONSOLIDATED MARGIN ANALYSIS

      Consolidated gross profit margins, before special charges, were 14.0% in 2002 as compared with 15.2% and 14.7% in 2001 and 2000, respectively. The decline in gross profit margin in 2002 from the prior year illustrated the difficult market environment and pressure on average selling prices across the operating groups. The downward trend also included the effect of business mix: increased sales of computer products (including microprocessors, DRAMS, disk drives, etc.) that generally have lower gross profit margins than other products in the Company’s product lines. The strong gross profit margin performance during 2001 was due in part to a mix of business that included a lower percentage of sales during that year to large customers who are typically granted better pricing due to their significant sales volume. This effect partially offset the impact of pricing

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      Operating expenses, before special charges, as a percentage of sales increased substantially to 13.1% during 2002 due to the dramatic decline in revenues discussed earlier. Operating expenses in the fourth quarter of 2002 reflected an annualized reduction of over $300 million as compared with operating expenses in the December 2000 quarter. This annualized reduction includes a pro forma adjustment to the actual reported expenses in the second quarter of 2001 to account for the impact of the operations of the VEBA Group of companies which were acquired partway through that quarter. However, the revenue declines during that period occurred at an unprecedented rate and faster than management could reasonably remove expense from the business. Operating expenses before special charges, as a percentage of sales, were fairly consistent at 10.7% and 10.5% during 2001 and 2000, respectively. The Company’s operating expenses before special charges, as a percentage of sales, for the entire 2000 year reached a record low of 10.5% due in part to the Company’s highly successful integration of Marshall Industries into its EM Americas operations. The impact of the synergy benefits was more evident in the first and second quarters of 2001 and the fourth quarter of 2000 as operating expenses as a percentage of sales fell to a record low of 9.7% in those quarters.

      Operating income, before special charges, declined to $76.6 million in 2002, or 0.9% of sales, from 2001 levels of $581.2 million, or 4.5% of sales. This represented a percentage decline of 86.8% year over year. Operating profit margins before special charges in 2002 deteriorated substantially from 2001 and 2000 levels. However, management believes that the combination of cost savings derived from synergies realized from the Company’s recent acquisitions as well as restructured operations and additional operating expense reductions over the past year, have situated the Company with considerable operating leverage when market conditions improve. Management believes that its current operations are well poised for a market upturn, and any material improvement in revenues brought about by more favorable economic and industry conditions should generate operating income growth at a faster rate than both revenue and gross profit dollar growth.

      Each of the Company’s operating groups experienced deep year-over-year declines in operating income. EM’s 2002 operating income, excluding special charges, was $22.7 million, down 95.7% from 2001 levels of $532.3 million. CM and AC also experienced declines in operating income, excluding special charges, from $86.4 million and $63.9 million in 2001, respectively, to 2002 levels of $63.0 million and $42.8 million, respectively. Including special charges and the results of operations of corporate, the Company recorded an operating loss of $3.0 million. This compares to consolidated operating income, including special charges, of $253.7 million and $368.0 million in 2001 and 2000, respectively.

      Management’s actions to improve gross profit margins as well as implement careful expense reductions through the year have created increased operating leverage in the business model. As a result, excluding special items, the Company experienced three consecutive quarterly improvements in operating profit margins through the end of 2002. From a low of 0.16% in the first quarter, operating profit margins improved by 106

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QUARTERLY OPERATING PROFIT (LOSS) MARGIN ANALYSIS