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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-5989

Anixter International Inc.

2301 Patriot Blvd.

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

Securities registered pursuant to Section 12(g) 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 Regulations 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.     Yes o          No þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

     The aggregate market value of the shares of Registrant’s Common Stock, $1 par value, held by nonaffiliates of Registrant was approximately $795,762,000 as of July 4, 2003.

     At March 1, 2004, 36,586,661 shares of Registrant’s Common Stock, $1 par value, were outstanding.

Documents incorporated by reference:

     Certain portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders of Anixter International Inc. are incorporated by reference into Part III. This document consists of 67 pages. Exhibit List begins on page 58.

TABLE OF CONTENTS

(i)

Table of Contents

PART I

(a) General Development of Business

      Anixter International Inc. (the “Company”), formerly known as Itel Corporation, which was incorporated in Delaware in 1967, is engaged in the distribution of communications and specialty wire and cable products and fasteners and other small parts (“C” class inventory components) through Anixter Inc. and its subsidiaries (collectively “Anixter”).

      In the third quarter of 2003, the Company purchased 100% of the stock of Walters Hexagon Group Limited (“Walters Hexagon”), a leading distributor of fasteners and other small parts to original equipment manufacturers and provider of inventory management services to a range of markets and industries. Walters Hexagon operates a network of ten service centers in the United Kingdom and France and employs approximately 290 people.

      In September 2002, the Company completed the purchase of the operations and assets of Pentacon, Inc. (“Pentacon”), also a leading distributor of fasteners and other small parts to original equipment manufacturers and provider of inventory management services, pursuant to Pentacon’s plan of reorganization filed under Chapter 11 of the United States Bankruptcy Code. See Note 3 “Acquisition of Businesses” in the Notes to the Consolidated Financial Statements for additional information on the acquisitions of Walters Hexagon and Pentacon.

      In the fourth quarter of 1998, the Company decided to exit its Integration segment and, accordingly, the Integration segment is reflected as a discontinued operation in these financial statements. The European Integration business was sold in the fourth quarter of 1998. In 1999, the Company completed the disposal of the Integration segment, with North America Integration being sold in the first quarter of 1999 followed by the sale of Asia Pacific Integration in the fourth quarter of 1999.

(b) Financial Information about Industry Segments

      The Company is engaged in the distribution of communications and specialty wire and cable products and “C” class inventory components from top suppliers to contractors and installers and to end users, including manufacturers, natural resources companies, utilities and original equipment manufacturers. The Company is organized by geographic regions, and accordingly, has identified North America (United States and Canada), Europe and Emerging Markets (Asia Pacific and Latin America) as reportable segments. The Company obtains and coordinates financing, legal, tax, information technology and other related services, certain of which are rebilled to subsidiaries. Interest expense and other non-operating items are not allocated to the segments or reviewed on a segment basis.

      In 2001, 10.3% of total sales were to Lucent Technologies and its subsidiaries. No other customer accounted for 10% or more of sales in 2003, 2002 or 2001. For certain financial information concerning the Company’s business segments, see Note 12 “Business Segments” in the Notes to the Consolidated Financial Statements.

(c) Narrative Description of Business

Overview

      The Company is a leader in the provision of advanced inventory management services including procurement, just-in-time delivery, quality assurance testing, advisory engineering services, component kit production, small component assembly and e-commerce and electronic data interchange to a broad spectrum of customers. The Company’s comprehensive supply chain management solutions are designed to reduce customer procurement and management costs and enhance overall production efficiencies. Inventory management services are frequently provided under customer contracts for some periods in excess of one year and

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      Through a combination of its service capabilities and a portfolio of products from industry leading manufacturers, Anixter is the leading global distributor of data, voice, video and security network communication products. In addition, Anixter is the largest North American distributor of specialty wire and cable products. Through its recent purchases of Walters Hexagon and Pentacon, Anixter also distributes “C” class inventory components. “C” class inventory components are incorporated into a wide variety of end use applications and include screws, bolts, nuts, washers, pins, rings, fittings, springs, electrical connectors and similar small parts, many of which are specialized or highly engineered for particular applications.

Customers

      The Company sells products to over 85,000 active customers. These customers include international, national, regional and local companies that include end users of the Company’s products, installers and resellers of the Company’s products and original equipment manufacturers who use the Company’s products as a component of their end product. Customers for the Company’s products cover all industry groups including manufacturing, telecommunications, internet service, finance, education, health care, transportation, utilities and government as well as contractors, installers, system integrators, value added resellers, architects, engineers and wholesale distributors.

Products

      Anixter sells over 225,000 products. These products include communications (voice, data, video and security) products used to connect personal computers, peripheral equipment, mainframe equipment, security equipment and various networks to each other. The products consist of an assortment of transmission media (copper and fiber optic cable), connectivity products, support and supply products, and security surveillance and access control products. These products are incorporated in enterprise networks, physical security networks, central switching offices, web hosting sites and remote transmission sites. Anixter also provides industrial wire and cable products, including electrical and electronic wire and cable, control and instrumentation cable and coaxial cable that is used in a wide variety of maintenance and repair and construction related applications. The Company also provides a wide variety of electrical and electronic wire and cable products, fasteners and other small components that are used by original equipment manufacturers in manufacturing a wide variety of products. The acquisitions of Walters Hexagon and Pentacon have increased the Company’s product portfolio in 2002 and 2003.

Suppliers

      The Company sources products from over 3,000 suppliers. However, approximately 34% of Anixter’s dollar volume purchases in 2003 were from its five largest suppliers. An important element of Anixter’s overall business strategy is to develop and maintain close relationships with its key suppliers, which include the world’s leading manufacturers of communication cabling, connectivity, support and supply products, electrical wiring systems, and fasteners. Such relationships stress joint product planning, inventory management, technical support, advertising and marketing. In support of this strategy, Anixter does not compete with its suppliers in product design or manufacturing activities.

      Significant terms of the Company’s typical distribution agreement are described as follows:

	•	A non-exclusive right to re-sell products to any customer in a geography (typically defined as a country);
	•	Usually cancelable upon 90 days notice by either party for any reason;
	•	Excludes any minimum purchase agreements, although pricing may change with volume on a prospective basis; and
	•	The right to pass through the manufacturer’s warranty to Anixter’s customers.

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Distribution and Service Platform

      Anixter cost-effectively serves its customers’ needs through its proprietary computer system, which connects most of its warehouses and sales offices throughout the world. The system is designed for sales support, order entry, inventory status, order tracking, credit review and material management. Customers may also conduct business through Anixter’s e-commerce platform, one of the most comprehensive, user-friendly and secure websites in the industry.

      Anixter operates a series of large modern hub warehouses in key distribution centers in North America, Europe, Asia and Latin America that provide for cost-effective and reliable storage and delivery of products to its customers. The hub warehouses store the bulk of Anixter’s inventory. Some smaller warehouses are also maintained to maximize transportation efficiency and to provide for the local pick-up needs of customers in certain cities. This network consists of 107 locations in the United States, 17 in Canada, 23 in the United Kingdom, 23 in Continental Europe, 11 in Latin America, 10 in Asia and 5 in Australia/ New Zealand.

      Anixter has also developed close relationships with certain freight, package delivery and courier services to minimize transit times between its facilities and customer locations. The combination of its information systems, distribution network and delivery partnerships allows Anixter to provide a high level of customer service while maintaining a reasonable level of investment in inventory and facilities.

Employees

      At January 2, 2004, the Company and its subsidiaries employed approximately 5,000 people. Less than one percent of the Company’s employees are covered by collective bargaining agreements.

Competition

      Given the Company’s role as an aggregator of many different types of products from many different sources and the fact that these products are sold to many different industry groups, there is no well defined industry group against which the company competes. The Company views the competitive environment as highly fragmented with hundreds of distributors and manufacturers that sell products directly or through multiple distribution channels to end users or other resellers. Competition is based primarily on breadth of products, quality, services, price and geographic proximity. Anixter believes that it has a significant competitive advantage due to its comprehensive product and service offerings, highly skilled workforce and global distribution network. The Company can ship 99% of orders for delivery within 24 to 48 hours to all major global markets. In addition, the Company has common systems and processes throughout most of its operations in 42 countries worldwide that provide its customers and suppliers global consistency.

      Anixter enhances its value proposition to both key suppliers and customers through its specifications and testing facilities and numerous quality assurance certification programs such as ISO 9002 and QSO 9000. The Company uses its testing facilities in conjunction with suppliers to develop product specification and to test quality compliance. In the case of its suburban Chicago data network testing lab, the Company also works with customers to design and test various product configurations to optimize network design and performance specific to the customers’ needs.

      In addition to competitive factors, future performance could be subject to economic downturns and possible rapid changes in applicable technologies. Although relationships with its suppliers are good, the loss of a major supplier could have a temporary adverse effect on the Company’s business. However, it would not have a lasting impact since comparable products are available from alternate sources.

      Many of the Company’s competitors are privately held and, as a result, reliable competitive information is not available.

Contract Sales and Backlog

      The Company has a number of customers who purchase products under long-term (generally 3 to 5 year) contractual arrangements. In such circumstances, the relationship with the customer typically involves a high

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      Backlog orders are not material as a significant amount of orders are shipped within 24 to 48 hours of receipt.

Available Information

      The Company maintains an Internet website at http://www.anixter.com that includes links to the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Code of Ethics and all amendments to these reports. These forms are available without charge as soon as reasonably practical following the time they are filed with or furnished to the SEC. Shareholders and other interested parties may request email notifications of the posting of these documents through the Investor Relations section of the Company’s website.

(d) Financial Information about Foreign and Domestic Operations and Export Sales

      For information concerning foreign and domestic operations and export sales, see Note 9 “Income Taxes” and Note 12 “Business Segments” in the Notes to the Consolidated Financial Statements.

      The Company’s distribution network consists of 151 warehouses in 42 countries with more than 4.5 million square feet. There are 12 regional distribution centers (100,000 — 575,000 square feet), 23 local distribution centers (35,000 — 100,000 square feet) and 116 service centers. Additionally, the Company has 45 sales offices throughout the world. All these facilities are leased. No one facility is material to operations, and the Company believes there is ample supply of alternative warehousing space available on similar terms and conditions in each of its markets.

      From time to time, in the ordinary course of business, the Company and its subsidiaries become involved as plaintiffs or defendants in various legal proceedings. The claims and counterclaims in such litigation, including those for punitive damages, individually in certain cases and in the aggregate, involve amounts that may be material. However, it is the opinion of the Company’s management, based upon the advice of its counsel, that the ultimate disposition of pending litigation will not be material.

      During the fourth quarter of 2003, no matters were submitted to a vote of the security holders.

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PART II

      Anixter International Inc.’s Common Stock is traded on the New York Stock Exchange under the symbol AXE. Stock price information is set forth in Note 13 “Selected Quarterly Financial Data (Unaudited)” in the Notes to the Consolidated Financial Statements. As of March 1, 2004, the Registrant had 3,780 shareholders of record.

* In the third quarter of 2003, the Company purchased 100% of the stock of Walters Hexagon for $42.7 million, inclusive of legal and advisory fees. On September 20, 2002, the Company completed the purchase of the operations and assets of Pentacon, Inc.(“Pentacon”) for $111.4 million, including transaction-related costs. The acquisitions were accounted for as purchases and the results of operations of the acquired businesses are included in the consolidated financial statements from the date of acquisition. Walter Hexagon’s operations in 2003 and Pentacon’s operations in 2002 were not significant to the Company. In 2003, Pentacon contributed sales and operating income of $184.8 million and $4.8 million, respectively. See Note 3 “Acquisitions of Businesses” in the Notes to the Consolidated Financial Statements for further information.

Notes:

(a)	In the third quarter of 2001, the Company incurred a restructuring charge of $31.7 million associated with reducing its workforce, closing or consolidating certain facilities and exiting the Korean market. Additionally, 2001, 2000 and 1999 include goodwill amortization of $9.0 million, $8.4 million and $7.4 million, respectively.
(b)	In the fourth quarter of 2000, the Company incurred an $8.8 million charge relating to the discount on the initial non-recourse sale of accounts receivable to an unconsolidated wholly owned special purpose corporation in connection with an accounts receivable securitization program.
(c)	Prior years have been restated to reflect our adoption of Statement of Financial Accounting Standards No. 145.
(d)	In the third quarter of 1999, the Company recorded a $24.3 million tax benefit in continuing operations for the reversal of previously established tax reserves determined to be no longer necessary.
(e)	Stockholders’ equity reflects treasury stock purchases of $35.6 million, $46.9 million, $15.4 million and $91.9 million in 2003, 2001, 2000 and 1999, respectively. The Company did not purchase any treasury shares in 2002.

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      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “prospects,” “estimated,” “should,” “may” or the negative thereof or other variations thereon or comparable terminology indicating the Company’s expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, a number of which are identified in this report. Other factors also could cause actual results to differ materially from expected results included in these statements. These factors include general economic conditions, technology changes, changes in supplier or customer relationships, exchange rate fluctuations and new or changed competitors. The information contained in this financial review should be read in conjunction with the consolidated financial statements, including the notes thereto, on pages 26 to 55 of this Report.

Acquisitions of Walters Hexagon and Pentacon, Inc.

      In the third quarter of 2003, the Company purchased 100% of the stock of Walters Hexagon Group Limited (“Walters Hexagon”). Headquartered in Worcester, England, Walters Hexagon is a leading distributor of fasteners and other small parts to original equipment manufacturers and provides inventory management services to a range of markets and industries. Walters Hexagon operates a network of ten service centers in the United Kingdom and France and employs approximately 290 people. The Company believes Walters Hexagon’s business model and position as a value-added distributor complements its current business. The Company purchased Walters Hexagon for $42.7 million, inclusive of legal and financial advisory fees, acquiring tangible assets with a fair value of approximately $16.2 million. The tangible net assets primarily consist of accounts receivable, inventory, office and warehouse equipment and furnishings, accounts payable and select operating liabilities. Based upon a third party valuation, assets and liabilities have been recorded at estimated fair value based on a preliminary allocation of the purchase price. At January 2, 2004, intangible assets have also been recorded at an estimated fair value as follows:

	•	$8.3 million of intangible assets with a finite life of 10 years (customer relationships); and
	•	$18.2 million of goodwill.

      The stock purchase agreement provides for additional purchase considerations of up to a maximum of $5.8 million based on the future operating performance of Walters Hexagon. The purchase was funded with on-hand excess cash balances along with the assumption of $0.7 million of Walters Hexagon’s debt. Included in the results of the Company for 2003 are $19.0 million of sales and $0.6 million of operating income related to Walters Hexagon. Had this acquisition occurred at the beginning of the year, the impact on the Company’s operating results would not have been significant.

      On September 20, 2002, the Company completed the purchase of the operations and assets of Pentacon, Inc. (“Pentacon”) pursuant to Pentacon’s plan of reorganization filed under Chapter 11 of the United States Bankruptcy Code. Pentacon is a leading distributor of fasteners and other small parts to original equipment manufacturers and provider of inventory management services and has 21 distribution and sales facilities in the United States, along with sales offices and agents in Europe, Canada, Mexico and Australia. The Company paid a total of $111.4 million, including transaction-related costs, for tangible assets with a fair value of approximately $74.7 million. The tangible net assets primarily consist of accounts receivable, inventory, office and warehouse equipment and furnishings, accounts payable and select operating liabilities.

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	•	$1.8 million intangible asset with an indefinite life (trade name),
	•	$13.8 million of intangible assets with an average finite life of 9.3 years (customer relationships); and
	•	$21.1 million of goodwill.

      In 2003 and 2002, Pentacon contributed sales of $184.8 million and $51.5 million, respectively, and operating income of $4.8 million and $0.5 million, respectively. Goodwill increased $7.0 million in 2003, as a result of the finalization of the purchase price allocation.

      These acquisitions were accounted for as purchases and the results of operations of the acquired business are included in the consolidated financial statements from the date of acquisition. Intangible amortization expense is expected to be approximately $2.3 million per year for the next five years.

Financial Liquidity and Capital Resources

Overview

      As a distributor, the Company’s use of capital is largely for working capital to support its revenue base. Capital commitments for property, plant and equipment are limited to information technology assets, warehouse equipment and office furniture and fixtures, since the Company operates from leased facilities. Therefore, in any given reporting period, the amount of cash consumed or generated by operations will primarily be a factor of the rate of sales increase or decline, due to the corresponding change in working capital.

      In periods when sales are increasing, the expanded working capital needs will be funded first by cash from operations, secondly from additional borrowings and lastly from additional equity offerings. Also, the Company will, from time to time, issue or retire borrowings or equity in an effort to maintain a cost-effective capital structure consistent with its anticipated capital requirements.

Cash Flow

      Year ended January 2, 2004: Consolidated net cash provided by continuing operating activities was $125.1 million in 2003, compared to $165.7 million for the same period in 2002. Excluding non-cash items, primarily depreciation and amortization and the accretion of the zero coupon convertible notes, net income generated cash of $82.0 million in 2003 compared to $76.3 million in 2002. Due to the decline in sales in 2002, working capital reductions provided $87.8 million compared to only $35.5 million in 2003 when sales, excluding acquired operations, were relatively flat. The significant reduction in the 2002 working capital was primarily driven by a $81.4 million reduction in inventory compared to only $33.9 million in 2003. The Company paid $2.9 million in the current period for leases, severance and outplacement costs associated with the 2001 restructuring, compared to $10.8 million for the corresponding period in 2002. In 2003, the Company ended the year in a net prepaid income tax position of $6.8 million compared to an accrual position of $4.7 million in 2002. The cash surrender value of company life insurance policies increased $5.4 million ($2.9 million due to premiums paid) in 2003 compared to a decline of $0.6 million in 2002. There were no premiums paid in 2002.

      Consolidated net cash used in investing activities decreased to $36.8 million in 2003 versus $122.4 million for the same period in 2002. During 2003, the Company spent $42.0 million to acquire Walters Hexagon as compared to $110.4 million used to acquire Pentacon in the same period of 2002. Capital expenditures increased $9.0 million during 2003 as compared to the corresponding period in 2002. The increase is primarily the result of the Company spending $18.4 million to complete the construction of the new corporate headquarters building. In the fourth quarter of 2003, the Company recovered approximately $27.0 million of capital that had been invested in this project during 2002 and 2003 through a sale and leaseback transaction. Capital expenditures are expected to be approximately $15.0 million in 2004.

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      Consolidated net cash used in financing activities was $4.5 million in 2003 compared to $48.8 million in the corresponding 2002 period. In 2003, the Company issued $328.8 million of 3.25% zero coupon convertible senior notes due 2033. Proceeds of $143.8 million were used to purchase $35.6 million of treasury stock and $80.2 million of its 7% zero coupon convertible notes and 8% senior notes. In the same period of 2002, the Company paid $118.3 million for the repurchase of its 7% zero coupon convertible notes and 8% senior notes. Net cash used to repay borrowings under the revolving credit agreements were $33.6 million during 2003 as compared to net proceeds from borrowing under the revolving credit agreements of $62.6 million in 2002. In 2003, the Company received $6.5 million from the issuance of 0.5 million shares of common stock for the exercise of stock options, stock units and the employee stock purchase plan compared to $7.5 million in 2002 for the issuance of 0.6 million shares.

      Cash used for discontinued operations was $1.5 million in 2003 compared to $2.6 million in 2002.

      Year ended January 3, 2003: Consolidated net cash provided by continuing operating activities was $165.7 million in 2002 compared to $288.5 million in 2001. Excluding non-cash items, primarily depreciation and amortization and the accretion of the zero coupon convertible notes, net income generated cash of $76.3 million in 2002 compared to $82.9 million in 2001. Cash provided by continuing operating activities decreased primarily because the decline in working capital in 2002 was less than the decline in 2001. In 2002, cash generated by the collection of receivables was almost entirely offset by the payments made on accounts payable and accrued expenses. Inventory was further reduced in 2002 by $81.4 million associated with the decline in sales. The Company paid $10.8 million for costs related to the 2001 restructuring. In 2001, accounts receivable decreased, providing cash of $128.5 million. Inventory declined $357.1 million in 2001 as the $120.0 million specifically identified at December 29, 2000 as “inventory returnable to vendor” was returned and the remaining decline was due to reduced purchases as lower levels of inventory were needed to support the reduced sales levels. The increase in cash flow generated by the reduction in inventory was partially offset by the related decrease of $296.7 million in accounts payable and accrued expenses. In 2001, the Company incurred a $31.7 million restructuring charge, $6.6 million of which was non-cash. At January 3, 2003, $6.9 million remained to be paid.

      Consolidated net cash used in investing activities was $122.4 million in 2002 versus $20.5 million in 2001. In the third quarter of 2002, the Company completed the acquisition of certain assets and liabilities of Pentacon for $110.4 million, including transaction related costs. Also in 2002, $2.9 million was received from the sale of real estate and other fixed assets and $2.0 million from the sale of securities. Capital expenditures decreased $5.1 million from 2001 as spending was reduced due to weak economic conditions. In 2002, capital expenditures included $11.6 million for the construction of a new corporate headquarters. Capital expenditures in 2001 were primarily for the upgrades of warehouse facilities and the purchase of software and computer equipment.

      Consolidated net cash used by financing activities was $48.8 million in 2002 in comparison to $255.8 million in 2001. In 2002, cash used in financing activities included $118.3 million for the repurchase of the 7% zero coupon convertible notes and 8% senior notes. Proceeds from borrowing under the revolving credit agreements were $62.6 million in 2002. The Company received $7.5 million for the issuance of 0.6 million shares of common stock relating to the exercise of stock options, stock units and the employee stock purchase program. In 2001, cash used in financing activities included a net repayment of long-term borrowings of $142.4 million, extinguishment of the 8% senior notes of $86.5 million and $46.9 million of treasury stock purchases, partially offset by proceeds of $22.3 million received from the issuance of 1.3 million shares of common stock for the exercise of stock options and the employee stock purchase plan.

      Cash used for discontinued operations was $2.6 million in 2002 compared to $5.8 million in 2001.

Financings

Convertible Notes Due 2033

      On July 1, 2003, the Company issued $328.8 million of 3.25% zero coupon convertible senior notes due 2033 (together with the overallotment, the “Convertible Notes due 2033”). Each Convertible Note due 2033

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      In connection with the issuance of the Convertible Notes due 2033, the Company granted the initial purchasers an option to purchase up to an additional $49.3 million of Convertible Notes due 2033 to cover overallotments. On July 9, 2003, the initial purchaser exercised its option in full. Net proceeds from the additional issuance on July 9, 2003 were $18.3 million and were used for general corporate purposes. Additional issuance costs of $0.5 million related to the exercise of the overallotment are being amortized through June 2033 using the straight-line method.

      Holders of the Convertible Notes due 2033 may convert each of them into 12.8773 shares of the Company’s common stock, of which the Company has reserved 4.9 million shares based on the number of outstanding bonds, in any calendar quarter commencing after October 3, 2003 if:

	•	The sales price of our common stock reaches specified thresholds;
	•	During any period in which the credit rating assigned to the Convertible Notes due 2033 is below a specified level;
	•	The Convertible Notes due 2033 are called for redemption; or
	•	Specified corporate transactions have occurred.

      Upon conversion, the Company has the right to deliver, in lieu of its common stock, cash or a combination of cash and stock. The 3.25% zero coupon convertible notes were not convertible at January 2, 2004, as none of the above conditions were met. In February 2004, the Company declared a special dividend of $1.50 per common share. As a result, the conversion rate of the convertible notes will be adjusted in March 2004, based on the stock price as provided for in the agreement.

      The Company may redeem the Convertible Notes due 2033, at any time in whole or in part, on July 7, 2011 for cash at the accreted value. Additionally, holders may require the Company to purchase all or a portion of their Convertible Notes on:

	•	July 7, 2007 at a price equal to $432.48 per Convertible Note due 2033;
	•	July 7, 2009 at a price equal to $461.29 per Convertible Note due 2033;
	•	July 7, 2011 at a price equal to $492.01 per Convertible Note due 2033;
	•	July 7, 2013 at a price equal to $524.78 per Convertible Note due 2033;
	•	July 7, 2018 at a price equal to $616.57 per Convertible Note due 2033;
	•	July 7, 2023 at a price equal to $724.42 per Convertible Note due 2033; and
	•	July 7, 2028 at a price equal to $851.13 per Convertible Note due 2033.

The Company may choose to pay the purchase price in cash or in common stock or a combination of both. See Exhibit 4.8 for the calculation of the purchase price if the Company were to choose to pay in common shares.

      The Company must pay contingent cash interest to the holders of the Convertible Notes due 2033 during any six-month period commencing July 7, 2011 if the average market price of a Convertible Note due 2033 for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the original issuance price and accrued original issue discount for such Convertible Note due 2033 as of

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      The Convertible Notes due 2033 are structurally subordinated to the indebtedness of Anixter. At January 2, 2004, the face value of the Convertible Notes due 2033 outstanding was $378.1 million with a book value of $146.1 million.

Convertible Notes Due 2020

      On June 28, 2000, the Company issued $792.0 million 7% zero coupon convertible notes due 2020 (“Convertible Notes due 2020”). Each Convertible Note due 2020 has a principal value at maturity of $1,000. The net proceeds from the issue were $193.4 million and were initially used to repay working capital borrowings under the floating rate bank line of credit. The discount associated with the issuance is being amortized through June 28, 2020, using the effective interest rate method. Issuance costs of $1.3 million are being amortized through June 2020 using the straight-line method.

      Holders of the remaining Convertible Notes due 2020 may convert at any time on or before the maturity date, unless the notes have previously been redeemed or purchased, into 7.4603 shares of the Company’s common stock for which the Company has reserved 1.4 million shares at January 2, 2004 based on the number of currently outstanding bonds. Additionally, holders may require the Company to purchase at book value, all or a portion of their Convertible Notes due 2020 on:

	•	June 28, 2005, at a price of $356.28 per Convertible Note due 2020;
	•	June 28, 2010, at a price of $502.57 per Convertible Note due 2020; and
	•	June 28, 2015, at a price of $708.92 per Convertible Note due 2020.

The Company may choose to pay the purchase price in cash or common stock or a combination of both. See Exhibit 4.2 for the calculation of the purchase price if the Company were to choose to pay in common shares.

      The Convertible Notes due 2020 are structurally subordinated to the indebtedness of Anixter. At January 2, 2004 and January 3, 2003, the remaining face value of the Convertible Notes due 2020 outstanding was $196.3 million and $413.3 million, respectively, with a book value of $63.1 million and $124.0 million, respectively.

      The Company recorded losses on the extinguishment of debt of $6.2 million and $0.3 million in its consolidated statements of operations for the years ended January 2, 2004 and January 3, 2003, respectively, for repurchases of these notes prior to their maturity and the write-off of associated debt issuance costs. No repurchase activity occurred in 2001. The repurchase activity for 2003 and 2002 is summarized below:

8% Senior Notes

      In September 1996, Anixter filed a shelf registration statement with the Securities and Exchange Commission to offer from time to time up to a $200.0 million aggregate principal amount of unsecured notes. On September 17, 1996, Anixter issued $100.0 million of these notes due September 2003. The notes, bearing

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      During 2003, the Company retired the last of the outstanding 8% senior notes at maturity of $8.0 million. The Company recorded a loss on the extinguishment of debt of $0.4 million and $5.2 million in 2002 and 2001, respectively, from repurchases of a portion of these notes prior to maturity. The repurchase activity for 2002 and 2001 is summarized below:

Revolving Lines of Credit

      On October 6, 2000, Anixter entered into a financing arrangement to support further business growth. The agreement consisted of a $500.0 million, senior unsecured, revolving credit agreement. This revolving credit line included a $390.0 million, five-year agreement, plus a $110.0 million, 364-day agreement. As a result of the economic slowdown experienced in 2001, 2002 and 2003, these facilities were scaled down to fit the Company’s revised anticipated needs through the remainder of the arrangements.

      On April 24, 2001, Anixter cancelled the $110.0 million, 364-day revolving credit line. In March 2003, Anixter cancelled $115.0 million of the five-year agreement in order to reduce costs associated with this excess availability. Accordingly, in 2003 and 2001, Anixter recorded a loss on the extinquishment of debt of approximately $0.4 million and $0.3 million, respectively, to expense the financing fees associated with this portion of the revolving credit agreement in its consolidated statements of operations. The activity related to the cancellation of credit lines and related debt issuance costs is summarized below:

      At January 2, 2004, the primary liquidity source for Anixter is the remaining $275.0 million, five-year revolving credit agreement, $30.0 million of which was outstanding and $16.3 million of which was available to pay the Company for intercompany liabilities. The borrowing rate on the revolving credit agreement is LIBOR plus 87.5 basis points and the interest rate on the $30.0 million outstanding balance was 2.1%. This revolving credit agreement requires certain covenant ratios to be maintained. The Company is in compliance with all of these covenant ratios and believes that there is adequate margin between the covenant ratios and the actual ratios given the current trends of the business. See Exhibit 4.3 for definitions of the covenant ratios. Due to the requirement of the leverage ratio, borrowings of only $139.8 million, of which $37.8 million may be used to pay dividends to the Company, of the $245.0 million available under bank revolving lines of credit at Anixter would be permitted as of January 2, 2004.

      At January 2, 2004, certain foreign subsidiaries had approximately $20.4 million available under bank revolving lines of credit, none of which was outstanding.

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Contractual Cash Obligations and Commitments

      The Company has the following contractual cash obligations as of January 2, 2004:

¹ Holders of the Company’s 7% zero coupon convertible notes, with a face value of $196.3 million, may require the Company to purchase, at a book value of $69.9 million, all or a portion of their convertible notes in June of 2005. Holders of the Company’s 3.25% zero coupon convertible notes, with a face value of $378.1 million, may require the Company to purchase, at a book value of $163.5 million, all or a portion of their convertible notes in July of 2007.

² Purchase obligations primarily consists of purchase orders for products sourced from unaffiliated third party suppliers and commitments related to various capital expenditures. Many of these obligations may be cancelled with limited or no financial penalties.

      Also, at January 2, 2004, the Company has certain other long-term obligations of approximately $54.8 million, which primarily consist of pension plan obligations, deferred compensation and restructuring charges.

      The majority of the Company’s various pension plans are non-contributory and cover substantially all full-time domestic employees and certain employees in other countries. Retirement benefits are provided based on compensation as defined in the plans. The Company’s policy is to fund these plans as required by the Employee Retirement Income Security Act, the Internal Revenue Service and local statutory law. As of January 2, 2004 and January 3, 2003, the long-term pension liability was $34.6 million and $28.0 million, respectively.

      A non-qualified deferred compensation plan was implemented on January 1, 1995. The plan permits selected employees to make pre-tax deferrals of salary and bonus. Interest is accrued quarterly on the deferred compensation balances based on the average 10-year treasury note rate for the previous three months times 1.4, and the rate is further adjusted if certain Company financial goals are achieved. The plan provides for benefit payments upon retirement, death, disability, termination or other scheduled dates determined by the participant. At January 2, 2004 and January 3, 2003, the long-term deferred compensation liability was $17.4 million and $15.1 million, respectively.

      In an effort to insure that adequate resources are available to fund the deferred compensation liability, along with certain non-qualified pension obligations, the Company has purchased a series of company-owned life insurance policies on the lives of plan participants. At January 2, 2004 and January 3, 2003, the cash surrender value of these life insurance policies was $23.9 million and $18.5 million, respectively.

      As of January 2, 2004 and January 3, 2003, the Company’s long-term restructuring liability was $1.5 million and $2.7 million, respectively. The liability is primarily related to committed lease payments, net of sublet income, associated with facilities included in the restructuring charge of $31.7 million taken in the third quarter of 2001. The committed lease payments vary based on the original terms of the various leases.

Off Balance Sheet Financing

      On October 6, 2000, the Company entered into a $275.0 million accounts receivable securitization program to support further business growth. As a result of the economic slowdown experienced in 2001 and

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      At January 2, 2004 and January 3, 2003, the outstanding balance of accounts receivable sold to ARC totaled $245.7 and $248.6 million, respectively. In order to fund the purchase of the accounts receivable from Anixter, ARC incurred long-term debt of $145.7 million and $129.7 million and has a subordinated note payable to Anixter of $56.5 million and $69.6 million at January 2, 2004 and January 3, 2003, respectively. The effective interest rate paid by ARC in 2003 and 2002 on the long-term debt was 2.1% and 2.6%, respectively. ARC’s long-term debt has not been guaranteed by Anixter or the Company and neither have an obligation, contingent or otherwise to the holders of ARC’s long-term debt. Under this program, ARC is required to maintain ratios that are consistent with other programs arranged by the Company’s financial institutions. The financial institutions used by the Company have a significant presence in this type of financing and are familiar with industry norms. ARC is in compliance with all covenant ratios and the Company believes that there is adequate margin between the covenant ratios and the actual ratios given the current trends of the business. See Exhibit 4.10 for definitions of the covenant ratios. A charge of $8.8 million, primarily relating to the discount on the initial sale of accounts receivable to ARC, was recorded at inception of the program in the fourth quarter of 2000. The Company expects to substantially recover this $8.8 million charge during the course of the program. The ongoing discount rate of 2.12% was calculated by a third party and represents a rate equivalent to those in an arms-length transaction. In “Other, net”, the Company recorded net charges of $2.8 million, $2.7 million, and $8.7 million in 2003, 2002 and 2001, respectively, primarily for the interest expense on the long-term debt incurred by ARC to fund the purchases of the accounts receivable from Anixter. Generally accepted accounting principles require that the interest expense be classified as “Other expense” as it is recorded as part of the Company’s investment adjustment related to its 100% ownership in ARC. However, it is considered to be part of the Company’s financing strategy and therefore is viewed as interest expense by the Company.

      In the fourth quarter of 2003, ARC declared and paid a $25.0 million dividend to the Company.

Share Repurchases

      In 2003, the Company repurchased 1,567,650 shares at an average cost of $22.74. Purchases were made in the open market and were financed from cash generated by operations and the net proceeds ($139.8 million) from the issuance of $378.1 million of 3.25% Convertible Notes due 2033. The Company may purchase additional shares, with the volume and timing dependent on market conditions. In 2001, the Company repurchased 2,079,000 shares at an average cost of $22.57. No shares were repurchased in 2002.

Interest Expense

      Interest expense for continuing operations was $12.8 million, $15.5 million and $30.1 million for 2003, 2002 and 2001, respectively. During the second quarter of 2001, the Company incurred $1.7 million in interest expense related to the cancellation of certain interest rate hedge agreements for which there were no longer outstanding borrowings. The decrease in interest expense in 2003 from 2002 is due to a reduction in interest rates. The decrease in the interest expense in 2002 from 2001 was due to lower debt levels as a result of lower working capital, the repurchase of high interest rate debt and overall lower interest rates. The Company has entered into interest rate agreements that effectively fix or cap, for a period of time, the interest rate on a

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Income Taxes

      Various foreign subsidiaries of the Company had aggregate cumulative net operating loss (“NOL”) carryforwards for foreign income tax purposes of approximately $148.1 million at January 2, 2004, which are subject to various provisions of each respective country. Approximately $48.2 million of this amount expires between 2004 and 2013, and $99.9 million of the amount has an indefinite life. Of the $148.1 million NOL carryforwards of foreign subsidiaries, $86.1 million relates to losses that have already provided a tax benefit in the U.S. due to rules permitting flow-through of such losses in certain circumstances. Without such losses included, the cumulative NOL carryforwards at January 2, 2004, were approximately $62.0 million, which are subject to various provisions of each respective country. Approximately $40.8 million of this amount expires between 2004 and 2013, and $21.2 million of the amount has an indefinite life. The deferred tax asset and valuation allowance has been adjusted to reflect only the carryforwards for which the Company has not taken a tax benefit in the U.S.

Liquidity Considerations and Other

      Certain debt agreements entered into by the Company’s operating subsidiaries contain various restrictions, including restrictions on payments to the Company. These restrictions have not had nor are expected to have an adverse impact on the Company’s ability to meet its cash obligations.

      In 2004, the Company estimates that it will have positive cash flow from operating activities and after capital expenditures. The Company may continue to pursue opportunities to acquire businesses and issue or retire borrowings or equity in an effort to maintain a cost-effective capital structure consistent with its anticipated capital requirements.

      In February 2004, the Company declared the payment of a special dividend of $1.50 per common share, or approximately $55.0 million, as a return of excess capital to shareholders. The dividend is payable March 31, 2004 to shareholders of record on March 16, 2004.

Results of Operations

      The Company competes with distributors and manufacturers who sell products directly or through existing distribution channels to end users or other resellers. The Company’s relationship with the manufacturers for which it distributes products could be affected by decisions made by these manufacturers as the result of changes in management or ownership as well as other factors. Although relationships with its suppliers are good, the loss of a major supplier could have a temporary adverse effect on the Company’s business, but would not have a lasting impact since comparable products are available from alternate sources. In addition to competitive factors, future performance could be subject to economic downturns and possible rapid changes in applicable technologies.

Overview

      Results of operations over the three-year period of 2003, 2002 and 2001 were significantly influenced by a general economic slowdown in most of the geographies in which the Company operates. The effects of the general economic slowdown were compounded by an even greater slowdown in information technology and telecom-related spending. As a result of these conditions, prior to including the results of acquired businesses ($203.8 million in 2003), the Company has seen its sales base decline from its all time high of $3.5 billion in 2000 to $2.4 billion in 2003.

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      As a result of this drop in sales, operating margins have declined from a high of 5.4% in 2000 to an average of approximately 3.5% in 2003 and 2002. This drop in sales volume and operating margins has led to approximately a 50% decline in operating profits since 2000. While operating profits have declined, the decline in sales has allowed the Company to substantially reduce the amount of working capital used to support the business. As a result of this, the Company has generated $35.5 million, $87.8 million and $188.9 million of cash from working capital reductions in 2003, 2002 and 2001, respectively.

      The cash generated from combined profitability and working capital reductions has allowed the Company to substantially reduce the amount of outstanding borrowings. As a result of the reduction in borrowings and a significant decline in interest rates (due to the general interest rate environment and refinancing by the Company), the Company has been able to substantially reduce its interest costs. Interest expense was $12.8 million, $15.5 million and $30.1 million in 2003, 2002 and 2001, respectively.

      Excluding $9.0 million of goodwill amortization in 2001, net income has been relatively flat (ranging from $39.3 million to $43.1 million) over the past three years. The Company recorded a pre-tax loss of $6.6 million in 2003 for the early extinguishment of $67.5 million of its 7% zero coupon convertible notes and debt issuance costs associated with the cancellation of $115.0 million of its available revolving credit facility. In 2002, the Company recorded a pre-tax loss of $0.7 million for the early extinguishment of $109.7 million of its 7% zero coupon convertible notes and $10.7 million of its 8% senior notes. Due to a combination of increased economic softness and continued deterioration of market conditions in the communications products industry, the Company incurred a restructuring charge of $31.7 million ($19.0 million, net of tax) in the third quarter of 2001. The restructuring resulted in annualized expense reductions of approximately $48.0 million. In addition, in 2001, the Company recorded a pre-tax loss of $5.5 million for the early extinguishment of $81.3 million of Anixter’s 8% senior notes and debt issuance costs associated with the cancellation of a $110.0 million 364-day revolving credit agreement due 2001.

2003 versus 2002

Consolidated Results of Operations

      Net Sales: The Company’s net sales during 2003 increased 4.2% to $2.6 billion from $2.5 billion in the same period in 2002. The acquisition of Pentacon in September 2002 and Walters Hexagon in September 2003, along with favorable effects from changes in exchange rates, accounted for $228.8 million of the increase. North America sales to telecom-related original equipment manufacturers declined by $80.0 million, while Europe continued to be impacted by weak economic conditions. Finally, 2003 had 52 weeks as compared to 53 weeks in 2002.

      Gross Margins: Gross margins improved to 24.5% in 2003 from 23.7% in 2002. The improvement was a result of a lower percentage of contract sales to telecom-related original equipment manufacturers in 2003 (which have lower gross margins), the addition of higher gross margin Pentacon and Walters Hexagon sales and more price competitive U.S. dollar-sourced inventory in foreign operations.

      Operating Income: Operating margins were 3.5% for 2003, which were flat as compared to the prior year. Operating expenses increased $40.5 million in 2003 from the corresponding period in 2002. The Pentacon and Walters Hexagon acquisitions increased operating expenses by $38.6 million, while changes in exchange rates increased operating expenses by $17.2 million. Excluding the above, operating expenses declined $15.3 million primarily due to reduced sales levels and tight expense controls, including further staff reductions in 2003.

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      Interest Expense: Consolidated interest expense decreased to $12.8 million in 2003 from $15.5 million in 2002. Interest expense decreased due to a reduction in interest rates. The average long-term debt balance was $229.7 million and $209.0 million for 2003 and 2002, respectively. The average interest rate for 2003 was 5.6% compared to 7.4% in 2002.

      Other, net income (expense):

      Income Taxes: The consolidated effective tax provision increased to $31.0 million in 2003 from $28.7 million in 2002 primarily due to an increase in the income tax rate. The 2003 effective tax rate is 42.5% compared to 40.0% in 2002. The increase in the effective tax rate is primarily a result of an increase in non-deductible losses in certain foreign entities.

      Net Income: Net income for 2003 was $41.9 million compared with $43.1 million for 2002. In addition to the items described above, the Company recorded a pre-tax loss of $6.6 million in 2003 for the early extinguishment of $67.5 million of its 7% zero coupon convertible notes and debt issuance costs associated with the cancellation of $115.0 million of its available revolving credit facility. In 2002, the Company recorded a pre-tax loss of $0.7 million for the early extinguishment of $109.7 million of its 7% zero coupon convertible notes and $10.7 million of its 8% senior notes.

North America Results of Operations

      Net Sales: When compared to the corresponding period in 2002, North America net sales for the year ended January 2, 2004 increased 2.4% to over $2.0 billion. The acquisition of Pentacon on September 20, 2002 represents $133.3 million of the increase. The sales decline in the remaining business is primarily due to a decrease of $80.0 million in sales to telecom-related original equipment manufacturers. In addition, 2003 had 52 weeks compared to 53 weeks in 2002. Daily sales levels for the remainder of the business have remained steady.

      Gross Margins: Gross margins increased to 24.3% in 2003 from 23.6% for the same period in 2002. The increase is primarily due to a lower percentage of contract sales to telecom-related original equipment manufacturers in 2003, which have lower gross margins, and the addition of higher gross margin Pentacon sales. Pentacon increased the North America gross margins by 50 basis points in 2003 from 2002. Sales to telecom-related original equipment manufacturers represented 10.5% of North America sales in 2003 as compared to 14.7% in 2002.

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      Operating Income: Operating expenses increased $32.7 million in 2003 from the corresponding period in 2002, due to the acquisition of Pentacon. In addition, the 2002 operating expense includes the reversal of $0.9 million of excess restructuring accruals. The reduction in variable costs associated with the reduced sales levels more than offset higher pension, healthcare and insurance costs. The 2003 North America operating income includes $4.8 million of operating income related to Pentacon, as compared to $0.5 million in 2002. Primarily as a result of lower sales to telecom-related original equipment manufacturers, North America operating margins declined to 3.7% in 2003 from 4.2% in the same period in 2002.

Europe Results of Operations

      Net Sales: Europe net sales increased 14.0% in 2003 to $393.1 million from $344.9 million in 2002, including a $50.8 million favorable effect from changes in exchange rates and an increase of $19.0 million as a result of the acquisition of Walters Hexagon. The decrease in local currency sales reflects the continued weak economic conditions in many of the major countries. In addition, 2003 had 52 weeks as compared to 53 weeks in 2002.

      Gross Margins: Europe’s gross margins increased to 27.4% in 2003 from 26.2% in 2002. The improvement is primarily due to the weaker U.S. dollar making U.S-sourced inventory more price competitive and the addition of higher gross margin Walters Hexagon sales. Walters Hexagon added 10 basis points to Europe’s gross margins in 2003.

      Operating Income: Compared to 2002, operating expenses increased 9.7%, or $8.1 million, to $93.1 million in 2003. Included in the increase are $4.8 million of expenses related to Walters Hexagon and $13.1 million for changes in exchange rates. In 2003, Europe incurred a gain of $1.6 million from the settlement of certain pension plans. In 2002, Europe incurred $1.4 million of additional restructuring costs. Finally, corporate overhead allocation to Europe was reduced by $1.0 million in 2003. As a result of the above, operating margin for 2003 was 3.7% compared to 1.5% in 2002. Exchange rate changes had a minimal impact on operating income.

Emerging Markets Results of Operations

      Net Sales: Emerging Markets’ (Asia Pacific and Latin America) net sales were up 5.0% to $188.0 million in 2003 from $179.0 million in 2002, including a $1.8 million unfavorable impact from changes in exchange rates and one additional week in 2002 as compared to 2003. The increase reflects an overall improvement in average daily volume from new customers and sales to telecom-related original equipment manufacturers in Asia Pacific.

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      Gross Margins: For 2003, Emerging Markets’ gross margins increased to 20.4% from 19.6% in 2002. The improvement is primarily due to a reduction in inventory obsolescence provisions for Asia Pacific.

      Operating Income: Emerging Markets’ operating income increased $3.5 million from a $1.3 million loss in 2002 to $2.2 million of income in 2003. The operating loss in 2002 includes the benefit of the reversal of excess restructuring accruals of $0.5 million. The $3.5 million improvement reflects the higher sales levels, improved gross margins and tightened expense controls. Exchange rate changes had a minimal impact on operating income.

2002 versus 2001

Consolidated Results of Operations

*The year ended December 28, 2001 includes restructuring costs for North America, Europe and Asia Pacific and Latin America of $23.1 million, $2.3 million and $6.3 million, respectively. In addition, 2001 includes goodwill amortization expense of $8.4 million, $0.3 million and $0.3 million for North America, Europe and Asia Pacific, respectively.

      Net Sales: The Company’s net sales for the year ended January 3, 2003, declined 19.8% to $2.5 billion from $3.1 billion in 2001. North America net sales declined $437.3 million due to a significant decline in telecom and information technology-related spending and general overall economic softness. Europe and Emerging Markets’ net sales declined approximately $186.8 million as international markets also felt the poor economic conditions experienced in North America.

      Gross Margin: Gross margins improved to 23.7% in 2002 from 23.0% in 2001. The improvement was a result of a lower percentage of contract sales to telecom-related original equipment manufacturers in North America and a decrease in low margin service provider sales in Europe and Emerging Markets.

      Operating Income: Operating expenses decreased $111.3 million, or 17.9%, in 2002 from 2001. The decrease is due to reduced sales levels and tightened expense controls in 2002. Operating income decreased 14.0% to $87.7 million from $102.0 million in 2001. Operating margins increased to 3.5% in 2002 from 3.2% in 2001. Due to a combination of increased economic softness and continued deterioration of market conditions in the communications products industry, the Company incurred a restructuring charge of $31.7 million ($19.0 million, net of tax) in the third quarter of 2001 associated with reducing its workforce, closing or consolidating certain facilities and exiting the Korean market. The restructuring resulted in annualized expense reductions of approximately $48.0 million. Operating income for 2001 includes $9.0 million of expense for goodwill amortization.

      Interest Expense: Consolidated interest expense decreased to $15.5 million in 2002 from $30.1 million in 2001. Interest expense decreased $14.6 million due to lower debt levels as a result of lower working capital, the repurchase of high interest rate debt and overall lower interest rates. The average long-term debt balance was $209.0 million and $370.1 million in 2002 and 2001, respectively. The average interest rate for 2002 was 7.4% compared to 8.1% in 2001. During the second quarter of 2001, the Company incurred $1.7 million in interest expense related to the cancellation of certain interest rate hedge agreements for which there were no longer outstanding borrowings.

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      Other, net income (expense):

In 2001, the Company incurred a $2.3 million foreign exchange loss resulting from the devaluation of the Argentine Peso.

      Income Taxes: The consolidated tax provision increased to $28.7 million in 2002 from $22.4 million in 2001 due to higher pre-tax earnings, partially offset by a decline in the effective income tax rate. The 2002 effective tax rate of 40.0% declined from 42.5% in 2001. The decrease in the effective tax rate resulted from no longer having non-deductible goodwill amortization, which was recorded in 2001, partially offset by greater non-deductible losses in certain foreign entities.

      Net Income: Net income was $43.1 million in 2002 compared with $30.3 million in 2001. In addition to the items described above, in 2002, the Company recorded a loss of $0.7 million for the early extinguishment of $109.7 million of the Company’s convertible notes and $10.7 million of its 8% senior notes. In 2001, the Company recorded a loss of $5.5 million for the early extinguishment of $81.3 million of Anixter’s 8% senior notes and debt issuance costs associated with the cancellation of a $110.0 million 364-day revolving credit agreement due 2001. As of 2002, the Company no longer amortized goodwill.

North America Results of Operations

*The year ended December 28, 2001 includes restructuring costs of $23.1 million and goodwill amortization expense of $8.4 million.

      Net Sales: In 2002, North America net sales declined 18.0% to $2.0 billion from $2.4 billion in 2001. The acquisition of Pentacon on September 20, 2002 added $51.5 million in net sales. Sales fell across all other customer markets. The decline reflected a significant fall in spending in the telecom industry, a reduction in information technology-related spending and general overall economic softness. In 2001, sales included $148.3 million related to service provider customers. Due to the significant fall in spending in the telecommunications industry, sales to the service provider market in 2002 were minimal.

      Gross Margins: Gross margins of 23.6% were flat in 2002 as compared to 2001. Sales to telecom-related original equipment manufacturers, which have higher gross margins, declined in 2002. The addition of higher gross margin Pentacon sales, included in the fourth quarter 2002 consolidated results of operations, offset the decline in higher gross margin sales to telecom-related original equipment manufacturers. Sales to telecom-related original equipment manufacturers represented 14.7% of North America sales in 2002 as compared to 20.5% in 2001.

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      Operating Income: In 2001, North America incurred restructuring costs of $23.1 million and goodwill amortization expense of $8.4 million, which did not occur in 2002. Excluding 2002 Pentacon operating expenses of $15.7 million, the 2001 restructuring charge and goodwill amortization, operating expenses declined $78.4 million in 2002 as compared to the same period in 2001. The decrease in 2002 is primarily due to a reduction in headcount and facility expenses resulting from the third quarter 2001 restructuring along with lower variable costs associated with the lower sales volume. Excluding Pentacon, average headcount for the year declined 28.1% from 2001. North America operating income decreased 6.5% in 2002 compared to 2001. Operating margins increased to 4.2% in 2002 from 3.7% in 2001. As a result of the restructuring costs and goodwill amortization in 2001, operating margins improved 80 basis points. As North America gross margins were flat with 2001 at 23.6%, excluding the restructuring charge and goodwill amortization in 2001, the decline in operating margin is primarily due to the decrease in sales volume.

Europe Results of Operations

*The year ended December 28, 2001 includes restructuring costs of $2.3 million and goodwill amortization expense of $0.3 million.

      Net Sales: For 2002, Europe net sales declined 31.3% when compared to 2001. Changes in exchange rates increased Europe’s reported net sales by approximately $21.0 million. All customer markets were down as international markets also felt the poor economic conditions experienced in North America. In 2001, sales in Europe included $57.0 million to the service provider market which were minimal in 2002.

      Gross Margins: Europe’s gross margins increased 370 basis points to 26.2% in 2002. The improvement is primarily due to the decrease in low margin service provider sales in 2002 as compared to 2001.

      Operating Income: While cost savings from the 2001 restructuring were achieved, operating expenses declined by only 7.2% in 2002, reflecting the minimal operating costs incurred on the 2001 service provider sales, $1.4 million of additional restructuring costs incurred in 2002 and the impact of changes in 2002 exchange rates. Europe operating income decreased 74.9% when compared to 2001. Excluding the 2001 restructuring costs of $2.3 million and goodwill amortization expense of $0.3 million, operating income decreased 77.7% in 2002, while operating margins declined by 330 basis points to 1.5%. The sharp declines in operating income and margins reflect the 31.3% decline in sales. Changes in exchange rates increased Europe’s reported operating income by $0.8 million.

Emerging Markets Results of Operations

*The year ended December 28, 2001 includes restructuring costs of $6.3 million and goodwill amortization expense of $0.3 million.

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      Net Sales: Emerging Markets’ net sales decreased 14.2% in 2002 from the same period in 2001, reflecting reduced spending in the communications customer market. The net impact of changes in exchange rates on Emerging Markets was minimal.

      Gross Margins: Emerging Markets’ gross margins increased to 19.6% in 2002 from 18.2% in 2001. The improvement is due to the decrease in low margin service provider sales in the communications customer market in 2002. In addition, Latin America’s gross margin was reduced in 2001 due to a $6.3 million write-down of inventory.

      Operating Income: Emerging Markets recorded an operating loss of $1.3 million in 2002 compared to a $8.9 million loss for 2001. In 2002, Asia Pacific and Latin America reversed net excess restructuring accruals of $0.5 million. Excluding the restructuring costs in 2002 and 2001 and goodwill amortization expense of $0.3 million in 2001, the operating loss decreased 20.5% from a $2.3 million loss in 2001 to a $1.8 million loss in 2002. In 2001, Latin America wrote-off $6.3 million of inventory. The remaining loss in 2002 is primarily due to the decline in sales. The net impact of changes in exchange rates on Emerging Markets was minimal.

Critical Accounting Policies and Estimates

      The Company believes that the following are critical areas that either require significant judgement by management or may be affected by changes in general market conditions outside the control of management. As a result, changes in estimates and general market conditions could cause actual results to differ materially from future expected results. Historically, our estimates in these critical areas have not differed materially from actual results.

      Allowance for Doubtful Accounts: Each quarter the Company segregates the doubtful receivable balances into the following major categories and determines the bad debt reserve as stated below:

	•	Customers that have refused to pay their balances are reserved based on the historical write-off percentages;
	•	Risk accounts are individually reviewed and the reserve is based on the probability of potential default; and
	•	The outstanding balance for customers who have declared bankruptcy is reserved at 100%.

      If circumstances change (i.e., higher (lower) than expected defaults or an unexpected material change in a major customer’s ability to meet its financial obligations to the Company), the Company’s estimates of the recoverability of amounts due to the Company could be reduced (increased) by a material amount.

      Inventory Obsolescence: At January 2, 2004, and January 3, 2003, the Company reported inventory of $499.1 million and $498.8 million, respectively. Each quarter the Company reviews the excess inventory and makes an assessment of the realizable value. There are many factors that management considers in determining whether or not a reserve should be established. These factors include the following:

	•	Return or rotation privileges with vendors;
	•	Price protection from vendors;
	•	Expected usage during the next twenty-four months;
	•	Whether or not a customer is obligated by contract to purchase the inventory;
	•	Current market pricing; and
	•	Risk of obsolescence.

      If circumstances change (i.e., unexpected shift in market demand, pricing or customer defaults), there could be a material impact on the net realizable value of the inventory.

      Deferred Tax Assets: The Company applies a three-year cumulative taxable income test for foreign subsidiaries whose results are not included in the U.S. tax return in determining whether to recognize an

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      Life Insurance Policies: Anixter implemented a nonqualified deferred compensation plan on January 1, 1995. The plan permits selected employees to make pre-tax deferrals of salary and bonus. The plan provides for benefit payments upon retirement, death, disability, termination or other scheduled dates determined by the participant. Concurrent with the implementation of the deferred compensation plan, Anixter purchased variable, separate account life insurance policies on the lives of the participants. To fund additional liabilities, Anixter purchased fixed, general account “increasing whole life” insurance policies on the lives of certain participants in both the deferred compensation plan and an executive excess defined benefit plan. Anixter owns all of the above policies and pays level annual premiums on them. Policy proceeds are payable to Anixter upon the insured participant’s death. The cash surrender values on those policies are updated quarterly.

      As of January 2, 2004 and January 3, 2003, the cash surrender value of $23.9 million and $18.5 million, respectively, was recorded under this program and reflected in “Other assets” on the consolidated balance sheets at market value. The Company’s investment in the cash surrender value program is liquid and redeemable in whole or part by “surrendering” the underlying life insurance policies. As the life insurance policies are recorded at market value, changes in the market value of the underlying securities can have a significant impact on the Company’s results of operations.

      Pension Expense: The Company accounts for its defined benefit pension plans in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis. A substantial portion of the Company’s pension benefit cost relates to its defined benefit plan in the United States. In 2003, the Company made a $5.0 million contribution to the plan. SFAS No. 87 and the policies used by the Company generally reduce the volatility of the net benefit cost from changes in pension liability discount rates and the performance of the pension plan’s assets, as significant actuarial gains/losses are amortized over the service lives of the plan participants.

      A significant element in determining the Company’s net periodic benefit cost in accordance with SFAS No. 87 is the expected return on plan assets. The Company has assumed that the weighted-average expected long-term rate of return on plan assets will be 8.42%. Over the long term, the Company’s pension plan assets have earned in excess of 8.42%; therefore, the Company believes that its assumption of future returns of 8.42% is reasonable. This expected return on plan assets is included in the net periodic benefit cost. The plan assets actually produced a return of approximately 20.0% in 2003. If significant, the difference between this expected return and the actual return on plan assets is amortized over the service lives of the plan participants. As a sensitivity measure, the effect of a 50 basis point decline in the return-on-assets assumption is an increase in our 2004 pension expense of approximately $0.6 million.

      At the end of each year, the Company determines the discount rate to be used to discount the plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high quality, fixed-income investments that receive one of the two highest ratings given by a recognized ratings agency. At January 2, 2004, the Company determined this rate to be 6.04%.

      As of January 2, 2004, the Company’s consolidated pension liability was $34.6 million, up from $28.0 million at the end of 2002. For the year ended January 2, 2004, the Company recognized a consolidated pre-tax net periodic cost of $9.1 million, up from $7.1 million in 2002. As a result of the decline in the assumed rate of return on the pension plan assets, a reduced discount rate and other actuarial gains and losses, the Company estimates its 2004 net periodic cost to increase by 10% to 15%. As a sensitivity measure, the effect of a 50 basis point decline in the discount rate assumption is an increase in the 2004 pension expense of approximately $2.4 million and an increase in the projected benefit obligations at January 2, 2004 of $17.2 million.

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      Tax Contingencies: The Company believes it has a reasonable basis in the tax law for all of the positions it takes on the various tax returns it files. However, in recognition of the fact that various taxing authorities may take opposing views on some issues, that the costs and hazards of litigation in maintaining the positions that the Company has taken on various returns might be significant and that the taxing authorities may prevail in their attempts to overturn such positions, the Company maintains tax reserves. The amounts of such reserves, the potential issues they are intended to cover and their adequacy to do so are topics of frequent review internally and with outside tax professionals. Where necessary, periodic adjustments are made to such reserves to reflect the lapsing of statutes of limitations, closings of ongoing examinations or the commencement of new examinations.

      The Company is exposed to the impact of interest rate changes and fluctuations in foreign currencies, as well as changes in the market value of its financial instruments. The Company periodically enters into derivatives in order to minimize these risks, but not for trading purposes. The Company’s strategy is to negotiate terms for its derivatives and other financial instruments to be perfectly effective, such that the change in the value of the derivative perfectly offsets the impact of the underlying hedged item. Any resulting gains or losses from hedge ineffectiveness are reflected directly in income. See Note 1 “Interest rate agreements” and “Foreign currency forward contracts” and Note 7 “Debt” to the consolidated financial statements for further detail on interest agreements and outstanding debt obligations. Approximately 28% of the Company’s sales were denominated in foreign currency in 2003 and approximately 27% in 2002 and 2001.

      As of January 2, 2004, the Company had a significant amount of short-term assets and liabilities that are denominated in currencies other than the functional currency of the reporting entity. The absolute value of these short-term assets and liabilities at January 2, 2004 were approximately $157.2 million. The Company has purchased approximately $84.3 million of short-term foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. If there was a 10 percent adverse change in the exchange rates, the Company would record a foreign exchange loss of approximately $7.3 million.

      The Company has entered into interest rate agreements that effectively fix or cap, for a period of time, the London Interbank Offered Rate (“LIBOR”) component of the interest rate on a portion of its floating rate obligations. As a result, the interest rate on 100% and 83% of debt obligations at January 2, 2004 and January 3, 2003, respectively, was fixed or capped.

      The Company prepared sensitivity analyses of its derivatives and other financial instruments assuming a one-percentage point adverse change in interest rates and a 10 percent adverse change in the foreign currency contracts outstanding. Holding all other variables constant, the hypothetical adverse changes would have increased interest expense by $0.3 million and $0.1 million in 2003 and 2002, respectively, and decreased the value of foreign currency forward contracts by $8.4 million and $6.1 million in 2003 and 2002, respectively. The estimated fair market value of the Company’s outstanding fixed rate debt at January 2, 2004 and January 3, 2003 was $229.1 and $138.2 million, respectively. If interest rates were to increase or decrease by 1%, the fair market value of the fixed rate debt would decrease by 2.8% or increase by 3.0%, respectively, for 2003. Changes in the market value of the Company’s debt do not affect the reported results of operations unless the Company is retiring such obligations prior to their maturity. These analyses did not consider the effects of a changed level of economic activity that could exist in such an environment and certain other factors. Further, in the event of a change of this magnitude, management would likely take actions to further mitigate its exposure to possible changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analyses assume no changes in the Company’s financial structure.

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Anixter International Inc. as of January 2, 2004 and January 3, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended January 2, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anixter International Inc. at January 2, 2004 and January 3, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 2, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

      As described in Note 1 to the consolidated financial statements, effective December 29, 2001, the Company changed its method of accounting for goodwill and other intangible assets to conform with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

ERNST & YOUNG LLP

Chicago, Illinois

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ANIXTER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to the consolidated financial statements.

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ANIXTER INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS