<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1998 or
Transition report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
|_| For the transition period from ______________ to _________________
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2109453
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901
-----------------------------------------------------------------------
(Address of Principal Executive Offices)
626/585-6700
--------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 7,119,807 as of
November 12, 1998
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Wesco
Financial Corporation, listed in the accompanying index,
are incorporated as an integral part of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
See pages 9 through 14.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESCO FINANCIAL CORPORATION
Date: November 13, 1998 By: /s/ Jeffrey L. Jacobson
----------------------------- --------------------------
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial officer)
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<PAGE> 3
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Condensed consolidated statement of income and
retained earnings -- nine- and three-month periods
ended September 30, 1998 and September 30, 1997.................................... 4
Condensed consolidated balance sheet --
September 30, 1998 and December 31, 1997........................................... 5
Condensed consolidated statement of cash flows -- nine-month periods ended
September 30, 1998 and September 30, 1997.......................................... 6
Notes to condensed consolidated financial
statements......................................................................... 7-8
</TABLE>
-3-
<PAGE> 4
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues ................................................. $ 16,253 $ 17,033 $ 51,301 $ 51,532
Insurance premiums earned ................................................. 4,331 2,297 11,646 7,763
Dividend and interest income .............................................. 11,050 8,996 31,298 27,601
Realized gains on securities and
foreclosed properties .................................................. 314 1,577 58,422 1,577
Other ..................................................................... 207 230 696 800
--------- --------- --------- ---------
32,155 30,133 153,363 89,273
--------- --------- --------- ---------
Costs and expenses:
Cost of products and services sold ........................................ 12,911 13,347 40,701 40,400
Insurance losses, loss adjustment and underwriting expenses ............... 3,354 1,315 7,623 2,378
Selling, general and administrative expenses .............................. 2,762 1,952 8,346 7,422
Interest on notes payable ................................................. 754 835 2,262 2,507
--------- --------- --------- ---------
19,781 17,449 58,932 52,707
--------- --------- --------- ---------
Income before income taxes .................................................... 12,374 12,684 94,431 36,566
Provision for income taxes .................................................... (3,016) (3,296) (28,880) (8,659)
--------- --------- --------- ---------
Net income ................................................................ 9,358 9,388 65,551 27,907
Retained earnings -- beginning of period ...................................... 495,049 363,540 442,914 348,936
Cash dividends declared and paid .............................................. (2,029) (1,958) (6,087) (5,873)
--------- --------- --------- ---------
Retained earnings -- end of period ............................................ $ 502,378 $ 370,970 $ 502,378 $ 370,970
========= ========= ========= =========
Amounts per capital share based on 7,119,807 shares outstanding throughout each
period:
Net income ............................................................. $ 1.32 $ 1.32 $ 9.21 $ 3.92
========= ========= ========= =========
Cash dividends ......................................................... $ .285 $ .275 $ .855 $ .825
========= ========= ========= =========
</TABLE>
See notes beginning on page 7.
-4-
<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
------ ------
ASSETS
<S> <C> <C>
Cash and cash equivalents ................................ $ 269,125 $ 10,687
Investments:
Securities with fixed maturities ...................... 91,180 279,697
Marketable equity securities .......................... 2,199,616 2,224,848
Excess of cost over net assets of acquired business ...... 29,534 30,121
Other assets ............................................. 37,840 42,759
---------- ----------
$2,627,295 $2,588,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ............ $ 39,279 $ 41,437
Income taxes payable, principally deferred ............... 710,487 733,488
Notes payable ............................................ 33,635 33,635
Other liabilities ........................................ 14,390 15,260
---------- ----------
Total liabilities ........................................ 797,791 823,820
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ...... 30,439 30,439
Unrealized appreciation of investments, net of taxes .. 1,296,687 1,290,939
Retained earnings ..................................... 502,378 442,914
---------- ----------
Total shareholders' equity ......................... 1,829,504 1,764,292
---------- ----------
$2,627,295 $2,588,112
========== ==========
</TABLE>
See notes beginning on page 7.
-5-
<PAGE> 6
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept. 30, Sept. 30,
1998 1997
------ ------
<S> <C> <C>
Net cash flows from operating activities ........... $ (18,548) $ 25,167
--------- ---------
Cash flows from investing activities:
Proceeds from sales and maturities of investments 290,820 123,082
Purchases of investments ........................ (8,982) (167,343)
Other, net ...................................... 1,235 12,811
--------- ---------
Net cash flows from investing activities ........... 283,073 (31,450)
--------- ---------
Cash flows from financing activities:
Payment of cash dividends ....................... (6,087) (5,873)
Other, net ...................................... -- (168)
--------- ---------
Net cash flows from financing activities ........... (6,087) (6,041)
--------- ---------
Increase (decrease) in cash and cash equivalents ... 258,438 (12,324)
Cash and cash equivalents -- beginning of period ... 10,687 23,039
--------- ---------
Cash and cash equivalents -- end of period ......... $ 269,125 $ 10,715
========= =========
Supplementary information:
Interest paid during period ..................... $ 1,596 $ 1,842
========= =========
Income taxes paid, net, during period ........... $ 53,494 $ 8,725
========= =========
</TABLE>
See notes beginning on page 7.
-6-
<PAGE> 7
WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
In the opinion of management, all adjustments necessary to a fair statement of
the results of operations of Wesco Financial Corporation ("Wesco") and its
subsidiaries (consisting only of normal recurring accruals) are reflected in the
condensed consolidated financial statements.
NOTE 2
Reference is made to the notes to Wesco's consolidated financial statements
appearing on pages 33 through 41 of its 1997 Form 10-K Annual Report for other
information deemed generally applicable to the condensed consolidated financial
statements.
NOTE 3
Effective as of the beginning of 1998, the Financial Accounting Standards Board
requires the reporting of comprehensive income or loss, which comprises net
income and all other changes in net worth (other than additional investments by,
or distributions to, shareholders). Wesco's only type of comprehensive income or
loss other than net income is the net change in a separate component of
shareholders' equity that reflects the unrealized appreciation of the
consolidated group's investments, less deemed applicable income taxes.
The following table sets forth the components of Wesco's consolidated
comprehensive income (loss) for the three- and nine-month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income ....................................... $ 9,358 $ 9,388 $ 65,551 $ 27,907
--------- --------- --------- ---------
Other comprehensive income --
Increase (decrease) in unrealized appreciation
of investments ........................... (312,591) (6,265) 7,362 398,017
Applicable income taxes ...................... 110,273 664 (1,614) (141,280)
--------- --------- --------- ---------
(202,318) (5,601) 5,748 256,737
--------- --------- --------- ---------
Comprehensive income (loss) ...................... $(192,960) $ 3,787 $ 71,299 $ 284,644
========= ========= ========= =========
</TABLE>
-7-
<PAGE> 8
NOTE 4
Marketable equity securities of Wesco and its subsidiaries consist entirely of
common stocks. Following is a summary of these investments, in thousands of
dollars, with individual investments whose market values exceed ten percent of
consolidated shareholders' equity listed separately:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------ -------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Freddie Mac ......... $ 71,729 $1,429,200 $ 71,729 $1,207,814
The Coca-Cola Company 40,761 415,223 40,761 480,527
The Gillette Company 40,000 244,800 40,000 321,402
Other ............... 32,038 110,393 125,723 215,105
---------- ---------- ---------- ----------
$ 184,528 $2,199,616 $ 278,213 $2,224,848
========== ========== ========== ==========
</TABLE>
-8-
<PAGE> 9
WESCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to management's discussion and analysis of Wesco's
consolidated financial condition and results of operations appearing on pages 20
through 25 of its 1997 Form 10-K Annual Report for information deemed generally
appropriate to an understanding of the accompanying condensed consolidated
financial statements. The information set forth in the following paragraphs
updates such discussion.
FINANCIAL CONDITION
Wesco's shareholders' equity at September 30, 1998 was approximately $1.8
billion or $256.96 per share, down $.2 billion or $27.39 for the third quarter,
but up $.1 billion or $9.16 per share for the first nine months of 1998. These
changes were due principally to fluctuations in unrealized appreciation in
market value of investments, which, under accounting convention, is credited
directly to shareholders' equity without being reflected in net income. Because
unrealized appreciation is based on current market quotations, which are subject
to fluctuation, the net gains ultimately realized could differ substantially
from recorded unrealized appreciation, which constituted 71% of shareholders'
equity at September 30, 1998, compared to 73% at December 31, 1997.
Even if market prices of all Wesco group investments dropped suddenly to
original cost, the group would still be clearly viable.
RESULTS OF OPERATIONS
Following is a breakdown of Wesco's consolidated net (after-tax) income by
business segment, in thousands of dollars:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Insurance segment --
"Normal" net operating income .............................. $ 8,593 $ 7,066 $ 25,383 $ 23,533
Realized securities gains .................................. -- 93 37,770 93
-------- -------- -------- --------
Segment net income ......................................... 8,593 7,159 63,153 23,626
-------- -------- -------- --------
Industrial segment net income (all "normal"
net operating income) ...................................... 632 910 2,223 2,794
-------- -------- -------- --------
Net income (loss) other than from identified
business segments:
"Normal" net operating income (loss) .................... (54) 469 (12) 637
Gains, net, on sales of foreclosed properties ......... 187 850 187 850
-------- -------- -------- --------
Nonsegment net income .................................. 133 1,319 175 1,487
-------- -------- -------- --------
Consolidated net income ....................................... $ 9,358 $ 9,388 $ 65,551 $ 27,907
======== ======== ======== ========
</TABLE>
-9-
<PAGE> 10
Insurance Segment
The insurance segment comprises Wesco Financial Insurance Company (
"Wes-FIC" ) and The Kansas Bankers Surety Company ("KBS"). Following is a
summary of the "normal" net operating income of the insurance segment, which
represents the combination of underwriting results with dividend and interest
income, less related income taxes (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ----- ------ -----
<S> <C> <C> <C> <C>
Premiums written .............................. $ 3,360 $ 2,027 $ 15,055 $ 8,195
======== ======== ======== ========
Premiums earned ............................... $ 4,331 $ 2,297 $ 11,646 $ 7,763
======== ======== ======== ========
Underwriting gain ............................. $ 758 $ 785 $ 3,413 $ 4,798
Dividend and interest income .................. 10,554 8,226 29,605 25,344
-------- -------- -------- --------
11,312 9,011 33,018 30,142
Income tax provision .......................... (2,719) (1,945) (7,635) (6,609)
-------- -------- -------- --------
Insurance segment "normal" net operating income $ 8,593 $ 7,066 $ 25,383 $ 23,533
======== ======== ======== ========
</TABLE>
Premiums written and earned by the insurance group are reported net of
amounts ceded to reinsurers, and are credited for amounts returned by reinsurers
upon changes in contractual terms.
Premiums written for the first nine months of 1998 included $13.0 million
attributable to KBS and $2.1 million attributable to Wes-FIC. Of those amounts,
$3.3 million and $0.1 million were written in the third quarter. Premiums
written for the first nine months of 1997 included $6.4 million attributable to
KBS and $1.8 million attributable to Wes-FIC. Of those amounts, $1.9 million was
attributable to KBS and $0.1 million to Wes-FIC for the third quarter. The
increases in premiums written by KBS in 1998 were attributable to a
restructuring of KBS' reinsurance program effective January 1,1998, whereby it
canceled all reinsurance contracts in effect at that date and entered into new
contracts with other reinsurers covering a lower proportion of the risks
underwritten than previously. As a result of the reinsurance restructuring, KBS
(1) received and credited to premiums written in the first quarter of 1998 $2.6
million of unearned reinsurance premiums that had been deducted from premiums
written in prior years, and (2) reduced premiums ceded to reinsurers to about 5%
of gross premiums in 1998, compared to about 42% in 1997. Excluding the effects
of reinsurance transactions, premiums written by KBS in 1998 reporting periods
actually decreased slightly from last year's comparable figures mainly as a
result of the continued consolidation of midwestern banks and the continuation
of extremely competitive market conditions.
Premiums earned by the insurance segment for the 1998 nine- and three-month
periods increased over those of the corresponding prior year periods due mainly
to KBS's restructuring of its reinsurance program, discussed above. The
restructuring drove KBS's premiums earned upward to $10.1 million for the first
nine months of 1998, compared to $6.6 million for the first nine months of 1997;
in each case KBS generated approximately one third in the third quarter.
-10-
<PAGE> 11
The underwriting gains reported for the three- and nine-month periods ended
September 30, 1998 and 1997 were attributable principally to the profitable
underwriting results of KBS, and are shown net of goodwill amortization of $.2
million for each quarter. The underwriting gain for the third quarter of 1998
was essentially unchanged from that of the 1997 third quarter. The decrease in
underwriting gain for the nine-month period ended September 30,1998 from the
corresponding 1997 figure was attributable mainly to (1) an increase in losses
incurred by KBS in 1998 due mainly to the restructuring of its reinsurance
program discussed above, (2) KBS's return of approximately $.6 million of ceding
commissions to reinsurers early in 1998 upon such restructuring, and (3) a
reduction in super-catastrophe reinsurance activity on the part of Wes-FIC.
Dividend and interest income earned by the insurance segment for the third
quarter and first nine months of 1998 increased over the comparable prior year
figures due primarily to an increase in interest income resulting mainly from
the presence of larger balances of interest-bearing investments in each of the
1998 periods than in those of 1997.
The income tax provision of the insurance segment generally fluctuates
somewhat as a percentage of its pre-tax income. These fluctuations have been
caused mainly by fluctuations in the relationship of substantially tax-exempt
components of income to total pre-tax income.
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, consisting of the businesses of Precision Steel Warehouse, Inc. and its
subsidiaries (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues, principally sales
and services ............ $ 16,259 $ 17,064 $ 51,370 $ 51,650
======== ======== ======== ========
Income before income taxes .. $ 1,050 $ 1,510 $ 3,692 $ 4,639
Income tax provision ........ (418) (600) (1,469) (1,845)
-------- -------- -------- --------
Industrial segment net income $ 632 $ 910 $ 2,223 $ 2,794
======== ======== ======== ========
</TABLE>
Revenues of Precision Steel's businesses decreased $.8 million or 4.6% for
the third quarter of 1998 as compared with those of the third quarter of 1997,
and $.3 million, or 0.5%, for the first nine months of 1998 from those reported
for the first nine months of 1997. However, unit sales of steel products (i.e.,
pounds) increased 1.5% for the third quarter and 6.8% for the first nine months.
Precision Steel's management attributes this anomaly to several factors,
including a shift in demand from higher- to lower-priced items.
Income before income taxes and net income of Precision Steel's industrial
operations are dependent not only on revenues, but also on the cost of products
sold and operating expenses. The former, as a percentage of revenues, amounted
to 79.4% and 78.4% for the third quarters of 1998 and 1997, and 79.3% and 78.4%
for the corresponding nine-month periods. The cost percentage
-11-
<PAGE> 12
typically fluctuates slightly from period to period as a result of changes in
product mix and price competition at the wholesale and retail levels. Operating
expenses in 1998 periods included Year 2000 expenses (see page 14).
Other Than Identified Business Segments
In the absence of nonoperating or unusual items such as securities gains
or losses, net income or loss other than from identified business segments
includes mainly (1) dividend and interest income from marketable securities and
cash equivalents owned outside the insurance segment and (2) rental income from
owned commercial real estate, reduced by (1) the costs associated with the
development and liquidation of foreclosed real estate and delinquent loans
formerly owned by a savings and loan subsidiary and (2) interest and other
corporate expenses -- plus or minus income taxes related to such "normal"
nonsegment items. "Normal" net operating income or loss other than from
identified business segments typically fluctuates from period to period but is
not significant in amount.
* * * * *
Realized gains and losses -- which affect net income when securities are
sold or when a decline in market value of an investment is considered to be
other than temporary -- tend to fluctuate from period to period, sometimes
impacting reported net income significantly. The amount of realized gain or loss
has no predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the existence of substantial
unrealized price appreciation in Wesco's consolidated investment portfolio.
(Wesco's shareholders' equity at September 30, 1998 contained $1.3 billion, or
$182.12 per share, of unrealized appreciation of investments, net of taxes --
about 71% of shareholders' equity, compared to about 74% of shareholders' equity
at June 30, 1998 and 73% at December 31, 1997.)
Wesco's consolidated earnings for the first nine months of 1998 included
realized securities gains of $37.8 million, after income taxes, all realized in
the second quarter. Realized securities gains reported in the first nine months
of 1997 amounted to $0.1 million, after income taxes, all realized in the third
quarter. The gains reported for 1998, although material in relation to Wesco's
1998 earnings, had only a minor impact on Wesco's total shareholders' equity:
Wesco's investments are carried at market value, and most of the gains had
already been reflected in the unrealized appreciation component of its
shareholders' equity.
Wesco's effective consolidated income tax rate typically fluctuates from
period to period for various reasons, such as the inclusion in consolidated
revenues of significant, varying amounts of dividend income from preferred and
common stocks, which is substantially exempt from income taxes. The respective
income tax provisions, expressed as percentages of income before income taxes,
amounted to 24.4% and 26.0% for the quarters ended September 30, 1998 and
September 30, 1997, and 30.6% and 23.7% for the nine-month periods then ended.
Consolidated revenues, expenses and net income reported for any period are
not necessarily indicative of future revenues, expenses and net income in that
they are subject to significant variations in amount and timing of securities
gains and losses and the possible occurrence of other unusual nonoperating
items. In addition, consolidated revenues, expenses and net income from
operations are
-12-
<PAGE> 13
expected to be much more volatile than they were prior to Wes-FIC's entry into
the super-catastrophe reinsurance business several years ago and, to a lesser
degree, the recent restructuring of KBS's reinsurance program.
Shareholders' equity is impacted not only to the extent unusual items
affect earnings, but also to reflect changes in unrealized appreciation of
investments, which are not reflected in net income.
* * * * *
Many computer systems used today were not designed to interpret data
correctly after December 31, 1999 because only two digits were used to indicate
the year in a date. Other systems and equipment were designed with similar
limitations, often due to the circuitry of computer chips embedded therein.
Wesco and its subsidiaries have been engaged in (1) assessing these potential
"Year 2000" problems as they relate to their businesses, including their
electronic and other interactions with banks, vendors, customers and others, and
(2) developing and implementing solutions. In addition, Wesco has been
attempting to satisfy itself that non-subsidiary companies in which it has
material investments are proceeding in like manner.
Wesco and affiliated companies have been working on Year 2000 readiness
issues in varying degrees for several years. Managements of the operating units
have reported that the process of identifying Year 2000 problems and determining
remedial action is nearly complete. It appears all critical systems will be Year
2000 compliant by approximately mid-1999. Testing of systems believed to be Year
2000 compliant has begun and will continue over the remainder of 1998 and
throughout 1999. A number of customers and suppliers, including banks and
providers of payroll services, have been contacted regarding their own progress
on Year 2000 issues. While no significant customer or supplier has expressed
doubt that it will resolve its Year 2000 issues in a timely manner, Wesco can
provide no assurance that significant Year 2000 noncompliance by one or more
unrelated parties will not ultimately occur, resulting in the inability of a
Wesco operating unit to obtain or deliver products or services, or the
incurrence by a Wesco insurance subsidiary of losses under property and casualty
insurance and reinsurance contracts. While such noncompliance by an unrelated
party could conceivably have a materially adverse effect on Wesco's consolidated
net income, Wesco's management does not believe that the total worst-case
effect, which cannot be estimated, would be material in relation to its
shareholders' equity.
Insofar as non-subsidiary investees are concerned, Wesco's assessment of
its Year 2000 exposure has been limited to review of SEC-mandated disclosures in
published reports, augmented by contact with representatives of Freddie Mac,
which accounts for over half of the market value of consolidated marketable
equity securities. In each case the outside entity has indicated it is aware of
the Year 2000 issue and is in process of assessing the situation and developing
and implementing solutions in a timely manner. Wesco will continue to monitor
its investees' progress, because if one or more of them were not adequately
prepared at the start of 2000, or if capital markets were severely disrupted due
to the failure of governmental bodies or private entities to address Year 2000
issues in a timely and effective manner, Wesco could suffer material adverse
effects. Although the financial impact of such effects cannot be estimated, in
the extremely unlikely event the overall market value of Wesco's investments
dropped to original cost, in the opinion of Wesco's management, Wesco and its
operating units would still be clearly viable.
Wesco and its subsidiaries have begun consideration of contingency plans
to deal with certain Year
-13-
<PAGE> 14
2000 issues in the event that remediation efforts by themselves or others prove
unsuccessful. Such plans will be more fully developed throughout the next year
to address specific areas of need.
Wesco expects to ultimately incur approximately $1 million in
identification, remediation and testing of Year 2000 issues. Approximately half
of this amount had been incurred and charged against earnings as of September
30, 1998. Wesco does not believe that any significant information technology
projects have been delayed due to Year 2000 efforts.
* * * * *
Certain representations of management set forth in the foregoing
discussion and analysis beginning on page 9 constitute forward-looking
statements as contrasted with statements of historical fact. Forward-looking
statements include statements which are predictive in nature, or which depend
upon or refer to future events or conditions, or which include words such as
expects, anticipates, intends, plans, believes, estimates, may, or could, or
which involve hypothetical events. For example, the preceding paragraphs on Year
2000 exposure contain several forward-going statements. Forward-going statements
are based on information currently available and are subject to various risks
and uncertainties that could cause actual events or results to differ materially
from those characterized as being likely or possible to occur.
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 269,125
<SECURITIES> 2,290,796
<RECEIVABLES> 10,818
<ALLOWANCES> (99)
<INVENTORY> 10,287
<CURRENT-ASSETS> 0
<PP&E> 29,691
<DEPRECIATION> (17,138)
<TOTAL-ASSETS> 2,627,295
<CURRENT-LIABILITIES> 0
<BONDS> 33,635
0
0
<COMMON> 7,120
<OTHER-SE> 1,822,384
<TOTAL-LIABILITY-AND-EQUITY> 2,627,295
<SALES> 51,301
<TOTAL-REVENUES> 153,363
<CGS> 40,701
<TOTAL-COSTS> 48,324
<OTHER-EXPENSES> 8,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,262
<INCOME-PRETAX> 94,431
<INCOME-TAX> (28,880)
<INCOME-CONTINUING> 65,551
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,551
<EPS-PRIMARY> 9.21<F1>
<EPS-DILUTED> 9.21
<FN>
<F1>FOR THE PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
