ANIXTER INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 2003 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-5989

ANIXTER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 94-1658138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4711 GOLF ROAD
SKOKIE, ILLINOIS 60076
(847) 677-2600
(Address and telephone number of principal executive offices in its charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE.

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 [X] No [ ]

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 [X] No [ ]

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

The aggregate market value of the shares of Registrant's Common Stock, $1
par value, held by nonaffiliates of Registrant was approximately $877,146,000 as
of June 28, 2002.

At March 7, 2003, 37,244,174 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 2003 Annual
Meeting of Stockholders of Anixter International Inc. are incorporated by
reference into Part III. This document consists of 55 pages.
Exhibit List begins on page 44.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS OF THE COMPANY.

(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 small parts ("C" Class inventory components) through Anixter Inc.
and its subsidiaries (collectively "Anixter").

In September 2002, the Company completed the purchase of the operations and
assets of Pentacon, Inc. ("Pentacon"), 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 4 "Acquisition and
Divestiture of Businesses" in the Notes to the Consolidated Financial Statements
for additional information on the acquisition of 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.

As of January 2, 1998, the Company owned approximately 19% of ANTEC
Corporation and its subsidiaries (collectively "ANTEC"), a broadband
communications technology company, which was reduced from 31% in February 1997,
by the issuance of additional stock by ANTEC in connection with a merger. In
1998, the Company sold its remaining 19% interest in ANTEC.

In June 1998, the Company purchased 100% of the outstanding common stock of
Pacer Electronics, Inc., a distributor of wire and cable products, along with
value added services, to original equipment manufacturers in the electronics
industry.

(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 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 accounts for 10% or more of sales in 2002, 2001
or 2000. 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

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 purchase of 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.

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The Company is an industry 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 include the interfacing of Anixter and customer information systems and
the maintenance of dedicated distribution facilities.

Customers

The Company sells products to 82,000 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. The average order size is
approximately $1,500.

Products

Anixter sells approximately 185,000 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 include an
assortment of transmission media (copper and fiber optic cable), connectivity
products and support and supply 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 OEM's in
manufacturing a wide variety of products.

Suppliers

The Company sources products from approximately 2,000 suppliers. However,
approximately 35% of Anixter's dollar volume purchases in 2002 were from the
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;

- 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 108 locations in the United States, 16 in Canada, 11 in the
United Kingdom, 24 in Continental Europe, 12 in Latin America, 12 in Asia and 4
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 3, 2003, the Company and its subsidiaries employed approximately
5,000 people. Less than 1 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 offering,
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 in 40 countries around
the world that provide its customers and suppliers global consistency.

Anixter enhances its value proposition to both key suppliers and customers
through its industry leading specifications and testing lab in suburban Chicago.
In this Underwriter Laboratories-certified lab, Anixter works with key suppliers
to develop product specifications and to test compliance. The Company uses the
same lab to design and test various product configurations for customers in
order to optimize their network performance.

In addition to competitive factors, future performance could be subject to
economic downturns, possible rapid changes in applicable technologies,
regulatory changes or liquidity problems that may be experienced by the
Company's two largest customers. 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.

Many of the Company's competitors, including the two largest 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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degree of material requirements planning and information systems interfaces and
in some cases may require the maintenance of a dedicated distribution facility
to meet the needs of the customer. Such contracts do not generally require the
customer to purchase any minimum amount of goods from the Company, but would
provide that materials acquired as a result of joint material requirements
planning between the Company and the customer would be required to be purchased
by the customer.

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 web site 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, and all amendments to those 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 notification 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.

ITEM 2. PROPERTIES.

The Company's distribution network consists of 142 warehouses in 40
countries with approximately 4 million square feet. There are 13 regional
distribution centers (100,000 - 575,000 square feet), 22 local distribution
centers (35,000 - 100,000 square feet) and 107 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.

ITEM 3. LEGAL PROCEEDINGS.

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 which 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.

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

During the fourth quarter of 2002, no matters were submitted to a vote of
the security holders.

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PART II

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

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 7, 2003, the Registrant had 4,079 shareholders
of record.

ITEM 6. SELECTED FINANCIAL DATA.

*On September 20, 2002, the Company completed the purchase of the operations
and assets of Pentacon, Inc.("Pentacon"), for $108.5 million. The acquisition
was accounted for as a purchase and the results of operations of the acquired
business are included in the consolidated financial statements from the date of
acquisition. Pentacon's operations in 2002 were not significant to the Company.
See Note 3 "Acquisitions and Divestiture of Businesses" in the Notes to the
Consolidated Financial Statements for further information.
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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, 1999 and 1998 include goodwill amortization of
$9.0 million, $8.4 million, $7.4 million and $7.1 million, respectively.

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(b) In the fourth quarter of 2000, the Company incurred an $8.8 million charge
relating to the discount on the initial sale of accounts receivable to an
unconsolidated wholly owned special purpose corporation in connection with
an accounts receivable securitization program.

(c) 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.

(d) Stockholders' equity reflects treasury stock purchases of $46.9 million,
$15.4 million, $91.9 million and $101.8 million in 2001, 2000, 1999 and
1998, respectively.

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

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
competitors. The information contained in this financial review should be read
in conjunction with the consolidated financial statements, including the notes
thereto, on pages 18 to 41 of this Report.

FINANCIAL LIQUIDITY AND CAPITAL RESOURCES

Acquisition of Pentacon, Inc.

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
$108.5 million for tangible assets with a fair value of approximately $81.7
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, intangible
assets have also been recorded at an estimated fair value as follows: $13.8
million of intangible assets with finite lives (customer relationships) and a
$1.8 million intangible asset with an indefinite life (trade name). Goodwill
resulting from the transaction totaled $14.1 million. The Company agreed to hire
the existing Pentacon employees and assume the lease obligations for certain of
its operating facilities. The acquired assets will be used in substantially the
same manner in which they were utilized by Pentacon. The Company has incurred
approximately $2.9 million of transaction-related costs that have been
capitalized as part of the acquisition. In addition, the Company agreed to pay
$1.2 million in retention bonuses, $1.0 million of which was expensed in the
fourth quarter of 2002 and $0.1 million will be expensed in each year of 2003
and 2004. The acquisition was accounted for as a purchase and the results of
operations of the acquired business are included in the consolidated financial
statements from the date of acquisition. Included in the results of the Company
for 2002 are $51.5 million of sales and $0.5 million of operating profit related
to Pentacon. Pentacon had sales of $205.3 million in 2002.

2001 Restructuring

Staff Reductions: The Company has completed all of the approximately 700
staff reductions (approximately 13% of the total workforce prior to the
announcement) that were originally anticipated in the

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restructuring charge. In 2002, the Company paid $4.5 million in severance and
termination benefits. During the second quarter of 2002, the Company recorded an
additional charge of $0.4 million for severance associated with headcount
reductions in Europe. The Company's results of operations were not impacted by
this charge, as it was offset by the reversal of excess accruals in North
America and Asia Pacific. The Company estimates that staff reductions resulted
in savings of approximately $39.6 million in 2002.

Facility Restructuring: In the fourth quarter of 2001, the Company vacated
substantially all of the 900,000 square feet of space located in 35 warehouses
and sales locations. The reduction in square feet represented approximately 18%
of the total square footage the Company occupied prior to the restructuring
initiative. In 2002, the Company paid out $6.3 million related to exit costs for
these facilities. During the second quarter, the Company recorded an additional
charge for the facility consolidation in our UK operation of $1.0 million. The
Company's consolidated results of operations were not impacted by the charge, as
it was offset by the reduction in excess accruals in North America and Asia
Pacific. The Company estimates the 2002 operating expense savings were $7.8
million.

Korea: The Company closed operations in Korea during the fourth quarter of
2001. The remaining accrued expense of $1.4 million is needed to cover the legal
proceedings against Anixter Korea.

Other Items: The remaining accrued expense of $0.3 million is needed for
legal costs associated with the restructuring.

Financings

On June 28, 2000, the Company issued $792.0 million 7% zero-coupon
convertible notes ("Convertible Notes") due 2020. 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. During 2002, the Company repurchased Convertible Notes
with a notional amount of $378.7 million and a book carrying value of $109.7
million for $107.2 million. In addition, the Company wrote-off related debt
issuance costs of $2.8 million. Accordingly, the Company recorded an
extraordinary loss on the early extinquishment of debt of $0.3 million ($0.2
million, net of tax) in its Consolidated Statement of Operations for the year
ended January 3, 2003. Holders of the remaining Convertible Notes 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 3.1 million shares. Additionally, holders may
require the Company to purchase at book value, all or a portion of their
Convertible Notes on June 28, 2005, at a price of $356.28 per Convertible Note;
on June 28, 2010, at a price of $502.57 per Convertible Note; and on June 28,
2015, at a price of $708.92 per Convertible Note. 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 are structurally subordinated to the
indebtedness of Anixter Inc. ("Anixter"). At January 3, 2003, the remaining face
value of the Convertible Notes outstanding was $413.3 million with a book value
of $124.0 million.

On October 6, 2000, the Company entered into two financing arrangements to
support further business growth. The agreements consisted of a $500.0 million,
senior unsecured, revolving credit agreement and a $275.0 million accounts
receivable securitization program which was amended and restated in October
2002. This new 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 and 2002, these facilities have been scaled down to
fit the Company's current anticipated needs through the remainder of the
arrangements. On April 24, 2001, Anixter cancelled the $110.0 million, 364-day
revolving credit line. Accordingly, the Company recorded an extraordinary loss
on the early extinquishment of debt in 2001 of $0.3 million ($0.2 million, net
of tax) to expense the financing fees associated with this portion of the
revolving credit agreement. On October 6, 2001, the Company reduced the
borrowing capacity on the accounts receivable securitization program from $275.0
million to $225.0 million. In March 2003, Anixter cancelled $115.0 million of
the five-year agreement and will record a loss on the early extinguishment of
debt of approximately $0.4 million as a nonoperating expense in its Consolidated
Statements of Operations for the 13 weeks ended April 4, 2003.

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The accounts receivable securitization program is conducted through Anixter
Receivables Corporation ("ARC"), which is a wholly owned unconsolidated
subsidiary of the Company that is accounted for using the equity method. ARC was
established in order to take advantage of the lower borrowing costs available
under this arrangement versus the borrowing costs on the unsecured revolving
credit agreement. The program allows Anixter to sell, on an ongoing basis
without recourse, a majority of the accounts receivable originating in the
United States to ARC and consists of a series of 364-day facilities. ARC may in
turn sell an interest in these receivables to financial institutions and borrow
up to $225.0 million. Prior to the October 6, 2001 borrowing capacity reduction,
ARC could borrow up to $275.0 million. The Company reduced the capacity of the
facility in order to reduce costs associated with excess availability. Under
this arrangement, Anixter continues to service the sold receivables by
performing the collection and cash application functions in order to maintain
relationships with its customers. These services are billed by Anixter to ARC at
cost. The securitization program began in October 2000, at which time $416.8
million of gross accounts receivable were sold and removed from the balance
sheet. At January 3, 2003 and December 28, 2001, the outstanding balance of
accounts receivable sold to ARC totaled $248.6 million and $296.0 million,
respectively. In order to fund the purchase of the accounts receivable from
Anixter, ARC incurred long-term debt of $129.7 million and $143.7 million and
has a subordinated note payable to Anixter of $69.6 million and $111.4 million
at January 3, 2003 and December 28, 2001, respectively. The effective interest
rate paid by ARC in 2002 and 2001 on the long-term debt was 2.6% and 5.0%,
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 4.7 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 ongoing discount rate of 2.12% was
calculated by a third party and represents a rate equivalent to those in an
arms-length transaction. The Company expects to substantially recover this $8.8
million charge during the course of the program. In Other expenses, the Company
recorded net charges of $2.7 million, $8.7 million and $3.8 million in 2002,
2001 and 2000, respectively, primarily for the interest expense on the long-term
debt incurred by ARC to fund the purchases of the accounts receivable from
Anixter.

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,
which bear interest at 8%, contain various restrictions with respect to secured
borrowings and are unconditionally guaranteed by the Company. During 2001,
Anixter repurchased $81.3 million of the 8% senior notes for $86.5 million.
Accordingly, the Company recorded an extraordinary loss on the early
extinquishment of debt of $5.2 million ($3.1 million, net of tax) in its
Consolidated Statement of Operations for the year ended December 28, 2001.
During 2002, Anixter repurchased $10.7 million of these senior notes for $11.1
million. Accordingly, the Company recorded an extraordinary loss on the early
extinquishment of debt of $0.4 million ($0.2 million, net of tax) in its
Consolidated Statement of Operations for the year ended January 3, 2003. At
January 3, 2003, the outstanding balance of the 8% notes was $8.0 million. These
notes have a put provision that under certain circumstances is triggered by a
rating downgrade. The current outstanding balance is well under the
cross-default thresholds of Anixter and the Company's other existing
indebtedness. Therefore, Anixter and the Company are not exposed to any
potentially adverse effects from the put provision.

At January 3, 2003, $345.3 million was available under the bank revolving
lines of credit at Anixter, of which $10.8 million was available to pay the
Company for intercompany liabilities. The primary liquidity source for Anixter
is the $390.0 million revolving credit agreement, $59.5 million of which was
outstanding at January 3, 2003. The borrowing rate on the revolving credit
agreement is LIBOR plus 87.5 basis points and the interest rate on the $59.5
million outstanding balance was 2.9%. In March 2003, $115.0 million of this
facility was cancelled by the Company in order to reduce costs associated with
this excess availability. This revolving credit agreement requires certain
covenant ratios to be maintained. The Company is in compliance

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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 $135.9 million of the
$345.3 million available under bank revolving lines of credit at Anixter would
be permitted as of January 3, 2003.

In 2003, the Company estimates that it will have positive cash flow from
operating activities and after capital expenditures. On February 5, 2003,
Anixter repurchased, at book value, an additional $2.0 million of the 8% senior
notes. The Company will continue to pursue opportunities to repurchase
outstanding debt, with the volume and timing to depend on market conditions.

The Board of Directors of the Company had authorized the purchase of up to
2.8 million common shares (2.0 million was authorized in 2001 and 0.8 million
carried over from prior year authorizations), with the volume and timing to
depend on market conditions. In 2001, the Company repurchased 2,079,000 shares
at an average cost of $22.57. In February 2003, the Board of Directors of the
Company authorized the purchase of up to an additional 0.6 million shares with
the volume and timing to depend on market conditions. As of March 13, 2003,
Anixter had repurchased an additional 586,100 shares at an average cost of
$21.93. Purchases were made on the open market and were financed from cash
generated by operations.

Cash Flow

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. 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
vendors" 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 $294.5 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 includes $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. Capital expenditures are expected to be approximately $24.0 million
in 2003, $18.0 million of which is for the new corporate headquarters.

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 includes $107.2 million and $11.1 million for the repurchase of the
Convertible Notes and 8% senior notes, respectively. 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 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, extinquishment of 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.

9

Year ended December 28, 2001: Consolidated net cash provided by continuing
operating activities was $288.5 million in 2001 compared to $67.5 million in
2000. Cash provided by continuing operating activities increased primarily due
to a reduction in working capital required to support the business. In 2001,
accounts receivable decreased, providing cash of $128.5 million compared to
$91.4 million in 2000. Inventory declined $357.1 million as the $120.0 million
specifically identified at December 29, 2000 as "inventory returnable to
vendors" was returned and the remaining decline was due to reduced purchases as
lower levels of inventory were needed to support the reduced sales levels. In
2000, inventory increased $329.7 million, $120.0 million of which represented
inventories returnable to vendors, to support the growth in the service provider
and integrated supply markets and a significant competitive local exchange
carrier contract. The increase in cash flow generated by the reduction in
inventory was partially offset by the related decrease of $294.5 million in
accounts payable and accrued expenses. In 2000, accounts payable and accrued
expenses increased $181.8 million. In 2001, the Company incurred a $31.7 million
restructuring charge, of which $6.6 million was non-cash. At December 28, 2001,
$17.7 million remained to be paid.

Consolidated net cash used in investing activities was $20.5 million in
2001 versus $26.3 million in 2000. Capital expenditures were $22.0 million in
2001 compared to $22.6 million in 2000. Capital expenditures in 2001 were
primarily for the upgrades of warehouse facilities and the purchase of software
and computer equipment. In the first quarter of 2000, the Company purchased
allNet Technologies Pty. Limited in Australia for $6.7 million. In the third
quarter of 2000, the Company sold the net assets of a wholly owned U.S.
subsidiary of its structured cabling business for $3.0 million in cash and $1.6
million in notes receivable.

Consolidated net cash used by financing activities was $255.8 million in
2001 in comparison to $24.4 million in 2000. In 2001, cash used in financing
activities included a net repayment of long-term borrowings of $142.4 million,
extinquishment of 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. In 2000, net repayment of long-term
borrowings was $21.5 million, while treasury stock purchases were $15.4 million.
In addition, in 2000 the Company received $34.9 million from the issuance of 2.2
million shares for the exercise of stock options and the employee stock purchase
plan. Cash used for discontinued operations was $5.8 million in 2001 compared to
$13.5 million in 2000.

Interest Expense

Interest expense for continuing operations was $15.5 million, $30.1 million
and $43.3 million for 2002, 2001 and 2000, 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 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 portion of its
floating-rate obligations. As a result, the interest rate on approximately 83%
of debt obligations at January 3, 2003, is fixed or capped. Total outstanding
debt at January 3, 2003, was $195.1 million for the Company and $129.7 million
for ARC. The impact of interest rate swaps and caps for 2002 and 2001 was an
increase to interest expense of $0.1 million and $0.3 million, respectively, and
a decrease to interest expense of $0.7 million in 2000.

Income Taxes

Various foreign subsidiaries of the Company had aggregate cumulative net
operating loss ("NOL") carryforwards for foreign income tax purposes of
approximately $144.7 million at January 3, 2003, which are subject to various
provisions of each respective country. Approximately $52.3 million of this
amount expires between 2003 and 2012 and $92.4 million of the amount has an
indefinite life. Of the $144.7 million NOL carryforwards of foreign
subsidiaries, $68.6 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 3, 2003, were approximately $76.1 million, which are
subject to various provisions of each respective country. Approximately $43.5
million of this amount expires

10

between 2003 and 2012 and $32.6 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

With the deterioration of market conditions in the communication products
industry, the Company's two largest customers have experienced significant
downturns in their business. This has resulted in each of them incurring large
losses and multiple restructuring charges. If these conditions persist for an
extended period of time, these customers may experience future liquidity
problems. The Company holds a significant amount of accounts receivable and
inventory relating to these customers. The Company believes that the inventory
and logistics services that it provides to these two customers are critical to
their on-going operations. While the Company believes the current risk is
minimal, if these customers were to default on their obligations to the Company,
the effect could be material.

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.

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. In
addition to competitive factors, future performance could be subject to economic
downturns, possible rapid changes in applicable technologies, regulatory changes
or liquidity problems that may be experienced by the Company's two largest
customers. 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.

Year ended January 3, 2003: Net income was $43.1 million in 2002 compared
with $30.3 million 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. In 2002, the Company recorded an after-tax
extraordinary loss of $0.4 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 an after-tax extraordinary loss of $3.3
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. In 2002, the Company no
longer amortized goodwill. Operating income for 2001 includes $9.0 million of
expense for goodwill amortization.

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. Net sales by major geographic market
are presented in the following table:

11

In 2002, North America sales declined 18.0% to $2.0 billion from $2.4
billion in 2001. Excluding Pentacon, sales declined 20.1%. Sales fell across all
customer markets. The decline reflects a significant fall in spending in the
telecom industry, a reduction in 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.

Europe sales declined 31.3% when compared to 2001. Excluding the effects of
changes in exchange rates, sales declined 35.5%. 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.

Asia Pacific and Latin America net sales decreased 14.2% from the same
period in 2001, reflecting reduced spending in the communications customer
market. Excluding the effect of changes in exchange rates, Asia Pacific and
Latin America net sales decreased 13.6%.

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.
Excluding the 2001 restructuring charge of $31.7 million and $9.0 million of
goodwill amortization expense, operating income declined 38.5% from 2001 to
2002. Gross margins improved to 24.0% in 2002 from 23.4% in 2001. Operating
income (loss) by major market is presented in the following table:

*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.

North America operating income decreased 6.5% in 2002 compared to 2001.
Excluding 2001 restructuring costs of $23.1 million and goodwill amortization
expense of $8.4 million, operating income declined 31.6%. Operating margins
increased to 4.2% in 2002 from 3.7% in 2001. Excluding restructuring costs and
goodwill amortization in 2001, operating margins declined 80 basis points. As
North America gross margins were flat with 2001 at 23.9%, the decline in
operating margin is primarily due to the decrease in sales volume. Excluding
Pentacon, operating expenses declined 17.6% 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.

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%, 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. Europe's gross margins increased 360
basis points to 26.7%, as 2001 included $57.0 million of low margin service
provider sales. While cost savings from the 2001 restructuring were achieved,
operating expenses declined by only 7.5% 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 exchange
rates. Excluding the effect of exchange rates, restructuring costs and goodwill
amortization expense, operating expenses decreased 11.6% and operating income
declined 75.3%.

Asia Pacific and Latin America 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 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,

12

Latin America wrote-off $6.3 million of inventory. The remaining loss in 2002 is
primarily due to the decline in sales. Excluding restructuring costs, goodwill
amortization expense and changes in exchange rates, the operating loss was
reduced by 18.7% compared to 2001.

Consolidated interest expense and other expenses decreased to $15.2 million
in 2002 from $43.8 million in 2001. Interest expense decreased $14.6 million to
$15.5 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. 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.

In 2001, the Company incurred a $2.3 million foreign exchange loss
resulting from the devaluation of the Argentine Peso. Other, net income
(expense) includes the following:

The consolidated tax provision increased to $29.0 million in 2002 from
$24.6 million in 2001 due to higher pre-tax earnings, partially offset by a
decline in the income tax rate. The 2002 effective tax rate of 40.0% declined
from 42.2% 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.

Year ended December 28, 2001: Net income was $30.3 million in 2001
compared with $78.7 million in 2000. 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. In addition, the Company recorded an after-tax extraordinary
loss of $3.3 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. In 2000, the Company
incurred an initial after-tax charge of $5.3 million for the receivables
securitization program, which the Company expects to substantially recover
during the course of the program.

The Company's net sales for the year ended December 28, 2001, declined
10.5% to $3.1 billion from $3.5 billion in 2000. Net sales by major geographic
market are presented in the following table:

In 2001, North America sales declined 11.2% to $2.4 billion from $2.7
billion in 2000. With the exception of integrated supply, all customer markets
in North America declined from 2000. Enterprise network communications product
sales declined 10.6%, due to a worldwide reduction in technology-related
spending.

13

The electrical wire and cable market declined 4.3% as the result of general
economic softness. Due to the significant fall in spending in the telecom
industry, sales in the service provider market were down 67.7%. The integrated
supply market improved significantly, as sales increased 65.1% primarily due to
contracts added in late 2000.

Europe sales decreased 14.5% when compared to 2000. Increased sales in the
integrated supply market partially offset declines across all other customer
markets as international markets were also feeling the general economic softness
being experienced in the United States. Excluding the effect in changes in
exchange rates, Europe sales declined 10.9%.

Asia Pacific and Latin America net sales increased 11.0% from the same
period in 2000, reflecting strong growth in Latin America associated with
expanded product lines. Excluding the effect of changes in exchange rates, Asia
Pacific and Latin America net sales increased 13.8%.

In 2001, operating income decreased 46.2% to $102.0 million from $189.8
million in 2000. Operating margins declined to 3.2% in 2001 from 5.4% in 2000.
Excluding the one-time restructuring charge of $31.7 million previously
discussed, operating profit declined 29.5% to $133.7 million, representing a
4.3% operating margin compared to 5.4% in 2000. Gross margins were flat at
23.4%. Operating income (loss) by major market is presented in the following
table:

*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. 2001 includes goodwill amortization
expense of $8.4 million, $0.3 million, and $0.3 million for North America,
Europe, and Asia Pacific. 2000 includes goodwill amortization expense of $7.8
million, $0.3 million and $0.3 million for North America, Europe, and Asia
Pacific.

North America operating income decreased 45.4% in 2001 compared to 2000.
Excluding restructuring costs of $23.1 million and the non-recurring fulfillment
sales impact on operating income of $6.9 million during 2000, operating profit
declined 28.3%. Operating margins decreased to 3.7% in 2001 from 6.0% in 2000.
Excluding restructuring costs, operating margins were 4.6%, a decline of 140
basis points when compared to 2000. Operating results were negatively affected,
particularly in the second half of the year, as sales declined more rapidly than
the Company was able to reduce operating expenses. This more than offset a
slight improvement in gross margins of 23.7% in 2000 to 23.9% in 2001, resulting
primarily from the change in sales mix caused by the decline in sales to the
lower margin service provider market.

Europe operating income decreased 13.6% when compared to 2000. Excluding
restructuring costs of $2.3 million, operating profit decreased 4.2%, while
operating margins improved by 50 basis points to 4.7%. Excluding the effect of
changes in exchange rates and the restructuring charge, Europe operating income
remained flat. Operating income and margins benefited from a significant
reduction in operating expenses, reflecting organizational changes and refocused
market efforts that offset the 14.5% decline in sales. In addition, Europe's
gross margins improved to 22.3% from 21.7% in 2000, reflecting reduced sales of
lower margin networking products.

Asia Pacific and Latin America recorded an operating loss of $8.9 million
in 2001 compared to operating income of $1.0 million for 2000. Excluding
restructuring costs of $6.3 million, the operating loss was $2.6 million and the
operating margin was 180 basis points below 2000. The operating loss was
negatively impacted by $6.3 million in inventory write-offs in Latin America
recorded in 2001. Changes in exchange rates had a minimal effect on operating
income.

14

Consolidated interest expense and other expenses decreased to $43.8 million
in 2001 from $55.2 million in 2000. Interest expense decreased $13.2 million to
$30.1 million due to lower debt levels, resulting from the accounts receivable
securitization program implemented in the fourth quarter of 2000, lower working
capital levels and a reduction in interest rates. 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.

In 2001, the Company incurred a $2.3 million foreign exchange loss
resulting from the deterioration of the Argentine Peso. In 2000, the $12.6
million expense from the accounts receivable securitization includes $8.8
million for the initial discounting fee. Other, net income (expense) includes
the following:

The consolidated tax provision decreased to $24.6 million in 2001 from
$55.9 million in 2000 due to lower pre-tax earnings, partially offset by a small
increase in the income tax rate. The 2001 effective tax rate of 42.2% is based
on pre-tax book income adjusted primarily for amortization of nondeductible
goodwill and losses of foreign operations that are not currently deductible. The
increase from 41.6% in 2000 is due to nondeductible goodwill being a higher
percentage of the total, offset by a lower state tax rate.

Impact of Inflation: Inflation is currently not an important determinant
of the Company's results of operations due to the low rate of inflation and, in
part, to rapid inventory turnover.

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.

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;

- 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 3, 2003, the Company reported inventory
of $498.8 million. 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;

15

- Expected usage during the next twenty-four months;

- Whether or not a customer is obligated by contract to purchase the
inventory;

- Current market pricing;

- 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 income tax benefit for their
respective foreign NOL carryforwards, with a resultant adjustment to the
valuation allowance. Qualitative factors surrounding a particular subsidiary are
also examined, and in certain circumstances (e.g., projections of further losses
for that subsidiary in the short term), an income tax benefit may not be
recorded (and therefore, the valuation allowance not adjusted) even when the
three-year cumulative taxable income is positive for a given subsidiary.

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.

At January 3, 2003 and December 28, 2001, the cash surrender value of $18.5
million and $19.1 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. The Company has not made
contributions to the U.S. pension plan since 1995. 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 8.43%. Over the long term, the Company's pension plan
assets have earned in excess of 8.43%; therefore, the Company believes that its
assumption of future returns of 8.43% is reasonable. This expected return on
plan assets is included in the net periodic benefit cost. The plan assets
actually incurred a loss of $10.7 million in 2002. 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.

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 3, 2003, the Company determined
this rate to be 6.45%.

16

At January 3, 2003, the Company's consolidated pension liability was $27.1
million, up from $21.5 million at the end of 2001. For the year ended January 3,
2003, the Company recognized a consolidated pre-tax net periodic cost of $7.1
million, up from $5.8 million in 2001. As a result of the decline in the fair
value of the pension plan assets, a reduced discount rate and other actuarial
gains and losses, the Company estimates its 2003 net periodic cost to increase
by 55% to 65%.

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operations, 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 27% of the Company's sales were
denominated in foreign currency in 2002, 2001 and 2000.

At January 3, 2003, the Company has net assets and liabilities that were
denominated in currencies other than the functional currency of the reporting
entity. If there was a 10 percent adverse change in exchange rates, the Company
would record a foreign exchange loss of approximately $3.2 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 approximately 83% of debt obligations at January
3, 2003 was fixed or capped. There were no interest rate agreements outstanding
at December 28, 2001, as a result of the Company canceling two hedge agreements
and one interest rate collar agreement in 2001 for which there were no longer
outstanding borrowings.

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 $0.1 million and $0.8 million
and decreased the value of foreign currency forward contracts by $6.1 million
and $3.2 million in 2002 and 2001, respectively. The estimated fair market value
of the Company's outstanding fixed rate debt at January 3, 2003 and December 28,
2001, was $138.2 million and $245.2 million, respectively. If interest rates
were to increase or decrease by 1%, the fair market value of the fixed rate debt
would decrease or increase by 2.3% and 3.2% for 2002 and 2001, respectively.
Changes in the market value of the Company's debt does 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.

17

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

18

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Anixter International Inc.

We have audited the accompanying consolidated balance sheets of Anixter
International Inc. as of January 3, 2003, and December 28, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 3, 2003. Our audits also
included the financial statement schedules listed in the Index at Item 15(a).
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 3, 2003 and December 28, 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 3, 2003, 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 2 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
February 3, 2003

19

ANIXTER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to the consolidated financial statements.

20

ANIXTER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.

21

ANIXTER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the consolidated financial statements.

22

ANIXTER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to the consolidated financial statements.

23

ANIXTER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION: Anixter International Inc., 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, fasteners
and small parts through Anixter Inc. and its subsidiaries (collectively
"Anixter").

BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Anixter International Inc. and its majority-owned subsidiaries,
excluding Anixter Receivables Corporation (collectively "the Company"), after
elimination of intercompany transactions. The Company's fiscal year ends on the
Friday nearest December 31 and included 53 weeks in 2002 and 52 weeks in 2001
and 2000.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Certain amounts for prior years have been reclassified to conform to the
current year presentation.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company carries its
accounts receivable at their face amounts less an allowance for doubtful
accounts. On a regular basis, the Company evaluates its accounts receivable and
establishes the allowance for doubtful accounts based on a combination of
specific customer circumstances, as well as credit conditions and based on a
history of write-offs and collections. A receivable is considered past due if
payments have not been received within agreed upon invoice terms.

NOTE RECEIVABLE: At January 3, 2003 and December 28, 2001, the Company's
note receivable of $69.6 million and $111.4 million, respectively, represents
the amount due to Anixter from Anixter Receivables Corporation ("ARC") primarily
for the sale of accounts receivable and is subordinated to ARC's repayment of
ARC long-term debt.

INVENTORIES: Inventories, consisting primarily of finished goods, are
stated at the lower of cost or market. Cost is determined using the average-cost
method. The Company has agreements with some of its vendors that provide a right
to return products. This right is typically limited to a small percentage of the
Company's total purchases from that vendor. The Company can return slow moving
product and the vendor will replace it with faster moving product chosen by the
Company. Some vendor agreements contain price protection provisions that require
the manufacturer to issue a credit in an amount sufficient to reduce the
Company's current inventory carrying cost down to the manufacturer's current
price. The Company considers these agreements in determining its reserve for
obsolescence.

PROPERTY AND EQUIPMENT: Capital expenditures are primarily for equipment,
leasehold improvements, computer software and the construction of a new
corporate headquarters in 2002 to be completed in 2003. Equipment and computer
software are recorded at cost and depreciated by applying the straight-line
method over their estimated useful lives, which range from 3 to 10 years.
Leasehold improvements are depreciated over the term of the related lease. Upon
sale or retirement, the cost and related depreciation are removed from the
respective accounts, and any gain or loss is included in income. Maintenance and
repair costs are expensed as incurred. Depreciation expense charged to
operations was $19.1 million, $18.7 million and $17.1 million in 2002, 2001 and
2000, respectively.

GOODWILL: Goodwill is the excess of cost over the fair value of the net
assets of businesses acquired. The Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," as of December 29, 2001. SFAS No. 142 required that goodwill
and other intangible assets with an indefinite useful life no longer be
amortized. Retroactive restatement for all prior periods presented was not
required. Goodwill is reviewed annually for impairment. The Company performs its
impairment tests utilizing the two step process outlined in SFAS No. 142. If the
carrying amount of a reporting unit's goodwill exceeds the implied fair value of
that goodwill, an impairment loss would be

24

ANIXTER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized in an amount equal to that excess, not to exceed the carrying amount
of the goodwill. The Company currently expects the carrying amount to be fully
recoverable.

INTANGIBLE ASSETS: Intangible assets primarily consist of customer
relationships that are being amortized on a straight-line basis over periods
ranging from 8 to 10 years. The Company continually evaluates whether events or
circumstances have occurred that would indicate the remaining estimated useful
lives of its intangible assets warrant revision or that the remaining balance of
such assets may not be recoverable. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the asset in measuring
whether the asset is recoverable.

INTEREST RATE AGREEMENTS: The Company utilized 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. There were no interest rate agreements outstanding at December 28,
2001 because the Company had minimal floating rate obligations outstanding. At
January 3, 2003, as a result of this type of interest rate agreement, the
interest rate on approximately 83% of debt obligations, was fixed or capped. In
June 2001, the Company cancelled hedge agreements for which there were no longer
outstanding borrowings and incurred $1.7 million in interest expense related to
the cancellation. At January 3, 2003, the Company had interest rate swap
agreements outstanding with a notional amount of $30.0 million. These swap
agreements obligate the Company to pay a fixed rate of approximately 3.5%
through October 2007. At January 3, 2003, the fair market value of outstanding
interest rate agreements, which is the estimated amount that the Company would
have received or paid to enter into similar interest rate agreements at the
current interest rate, was a liability of $0.1 million. The impact of interest
rate agreements was to increase interest expense by $0.1 million and $0.3
million in 2002 and 2001, respectively, and decrease interest expense by $0.7
million in 2000. The Company does not enter into interest rate transactions for
speculative purposes.

FOREIGN CURRENCY FORWARD CONTRACTS: The Company uses foreign currency
forward contracts to reduce its exposure to adverse fluctuations in foreign
exchange rates. When entered into, these financial instruments are designated as
hedges of underlying exposures. The Company does not enter into derivative
financial instruments for trading purposes.

The Company purchased foreign currency forward contracts to minimize the
effect of fluctuating foreign currency denominated payables (cash flow hedge) on
its reported income. The forward contracts were revalued at current foreign
exchange rates, with the changes in valuation reflected directly in income
offsetting the transaction gain/loss recorded on the foreign currency
denominated payable. The net impact of these foreign currency forward contracts
on the income statement was insignificant in 2002, 2001 and 2000. At January 3,
2003 and December 28, 2001, the face amount of the foreign currency forward
contracts outstanding was approximately $55.9 million and $28.1 million,
respectively. The Company recognized the difference between the face amount and
the fair value of its forward contracts and recorded an asset of $0.2 million
and a liability of $0.1 million at January 3, 2003 and December 28, 2001,
respectively.

The Company previously purchased a foreign exchange forward contract to
hedge the exposure related to a foreign currency denominated intercompany loan
(cash flow hedge). The contract was revalued at current foreign exchange rates,
with the changes in valuation initially recorded in Accumulated Other
Comprehensive Income. The intercompany loan was settled during the first quarter
of 2002. No net gain or loss has been recognized in the statements of
operations. At December 28, 2001, the face amount of the foreign currency
forward contract was approximately $45.9 million. At December 28, 2001, the
amount by which the fair value exceeded the face amount of the foreign exchange
contract was $8.5 million and was included in Other assets on the Consolidated
Balance Sheet.

FOREIGN CURRENCY TRANSLATION: The results of operations for foreign
subsidiaries where the functional currency is not the U.S. dollar are translated
into U.S. dollars using the average exchange rates during the year, while the
assets and liabilities are translated using period-end exchange rates. The
related translation

25

ANIXTER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

adjustments are recorded in a separate component of Stockholders' equity,
Foreign currency translation. Gains and losses from foreign currency
transactions are included in Other, net in the Consolidated Statements of
Operations. The Company recognized $0.1 million, $5.3 million and $0.9 million
in net foreign exchange losses in 2002, 2001 and 2000, respectively.

REVENUE RECOGNITION: Sales to customers, resellers and distributors and
related cost of sales are recognized upon transfer of title, which occurs upon
shipment of products. Services, such as design and testing of product
configurations for customers and contractual supply chain management are not
billed separately and are included in the sales price of the product.

In those cases where the Company does not have goods in stock and delivery
times are critical, product is purchased from the manufacturer and drop shipped
to the customer. The Company takes title to the goods when shipped by the
manufacturer and then bills the customer for the product upon transfer of the
title.

ADVERTISING AND SALES PROMOTION: Advertising and sales promotion costs are
expensed as incurred. Advertising and promotion costs were $6.3 million, $10.9
million and $11.3 million in 2002, 2001 and 2000, respectively.

SHIPPING AND HANDLING FEES AND COSTS: The Company incurred shipping and
handling costs totaling $60.8 million, $76.5 million and $90.6 million for the
years ended 2002, 2001 and 2000, respectively. These costs are included in
Operating expenses in the Consolidated Statements of Operations.

INCOME TAXES: Using the liability method, provisions for income taxes
include deferred taxes resulting from temporary differences in determining
income for financial and tax purposes. Such temporary differences result
primarily from differences in the carrying value of assets and liabilities.

STOCK BASED COMPENSATION: In accordance with the Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees," compensation cost
of stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the option exercise price
and is charged to operations over the vesting period. Income tax benefits
attributable to stock options exercised totaled $2.5 million, $5.3 million and
$11.2 million in 2002, 2001 and 2000, respectively, and were credited to Capital
surplus.

The Company accounted for compensation expense under the intrinsic value
method and applied the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock Based Compensation." Accordingly, no compensation expense has been
recognized in the Consolidated Statements of Operations for the stock option
plans. The Black-Scholes option pricing model was developed for estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's stock options. Had compensation costs for the plans been
determined based on the fair value at the grant date using

26

ANIXTER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Black-Scholes option pricing model and amortized over the respective vesting
period, the Company's net income would have been reduced to the pro forma
amounts indicated below:

The weighted average fair value of the Company's stock options (which was
$14.74 per share in 2002, $14.92 per share in 2001 and $11.74 per share in 2000)
was estimated at the date of grant using the Black-Scholes option pricing model
with the following assumptions for 2002, 2001 and 2000, respectively: expected
stock price volatility of 46%, 52% and 45%; expected dividend yield of zero each
year; risk-free interest rate of 4.7%, 5.2% and 6.5%; and an average expected
life of 8 years for 2002 and 7 years for 2001 and 2000.

ACCOUNTS RECEIVABLE PROGRAM: On October 6, 2000, the Company entered into
an accounts receivable securitization program. The underlying agreements for
this program were amended and rest