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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 001-14989
WESCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1723342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
COMMERCE COURT 15219
FOUR STATION SQUARE, SUITE 700 (Zip Code)
PITTSBURGH, PENNSYLVANIA
(Address of principal executive offices)
(412) 454-2200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
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 at least the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
As of February 22, 2000, 41,366,440 shares of Common Stock, par value $.01
per share ("Common Stock") and 4,653,131 shares of Class B Common Stock, par
value $.01 per share ("Class B Common Stock") of the registrant were
outstanding. The registrant estimates that as of February 22, 2000, the
aggregate market value of the voting shares held by non-affiliates of the
registrant was approximately $152.1 million based on the closing price on the
New York Stock Exchange for such stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
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WESCO INTERNATIONAL, INC.
DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........... 10
Executive Officers............................................ 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters....................................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 20
Item 8. Financial Statements and Supplementary Data................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant............ 21
Item 11. Executive Compensation........................................ 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 21
Item 13. Certain Relationships and Related Transactions................ 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 21
Signatures.................................................... 24
Index to Financial Statements................................. 25
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PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, "WESCO" refers to WESCO International,
Inc., and its subsidiaries and its predecessors unless the context otherwise
requires. References to "we," "us," "our" and the "Company" refer to WESCO and
its subsidiaries. Our subsidiaries include WESCO Distribution, Inc. ("WESCO
Distribution") and WESCO Distribution -- Canada, Inc. ("WESCO Canada"), both of
which are wholly-owned by WESCO.
OVERVIEW
With sales of over $3.4 billion in 1999, we are a leading provider of
electrical products and other industrial MRO supplies and services in North
America. We are the second largest distributor in the $78 billion U.S.
electrical distribution industry, which has grown at a compounded annual rate of
7% over the last 15 years. We are also a provider of Integrated Supply services.
Our Integrated Supply solutions and outsourcing services fulfill all of a
customer's industrial MRO procurement needs through a highly automated,
proprietary electronic procurement and inventory replenishment system. Demand
for Integrated Supply services has increased approximately 90% annually since
1994, and the total U.S. market potential, measured as all purchases of
industrial MRO supplies and services, is estimated to be $250 billion.
We have over 340 branches and five distribution centers strategically
located in 48 states, nine Canadian provinces, Puerto Rico, Mexico, Guam, the
United Kingdom, the Balkans and Singapore. We serve over 130,000 customers
worldwide, offering over 1,000,000 products from over 23,000 suppliers. Our
diverse customer base includes a wide variety of industrial companies;
contractors for industrial, commercial and residential projects; utility
companies; and commercial, institutional and governmental customers.
We have acquired 21 companies since August 1995, representing annual sales
of approximately $1.2 billion. Combining strong internal growth with
acquisitions, our net sales and earnings before interest, taxes, depreciation
and amortization ("EBITDA") (as defined in Item 6 "Selected Financial Data")
have increased at a compounded annual growth rate of approximately 16% and 37%,
respectively, since 1994.
INDUSTRY OVERVIEW
Electrical Distribution
With 1999 net sales estimated at $78 billion, the U.S. industry is large and
growing. The industry is also stable with compounded annual growth of 7% since
1982, and it is projected to grow another 7% in 2000. The U.S. electrical
distribution industry is also highly fragmented. In 1998, the latest year for
which data is available, the four national distributors, including WESCO,
accounted for less than 16% of estimated total industry sales.
Integrated Supply
Demand for Integrated Supply services is growing rapidly, as more companies
realize they can lower costs by outsourcing their MRO procurement and related
services. Since the customer's costs of procuring high volumes of low dollar
value MRO supplies can be over 50% of the cost of the products, such
improvements can be significant. The total market for MRO industrial supplies is
approximately $250 billion. Within that market, Integrated Supply is projected
to grow from approximately $5 billion in sales from 1997 to $11 billion in 2000,
or 30% per year.
OUR BUSINESS STRATEGY
Our objective is to be the leading provider of electrical products and other
MRO supplies and services to companies in North America and selected
international markets. In achieving this leadership position, our goal is to
grow earnings at a faster rate than sales by focusing on continuous productivity
improvement. Our growth strategy leverages our existing strengths and focuses on
developing new initiatives and programs.
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ENHANCE OUR LEADERSHIP POSITION IN ELECTRICAL DISTRIBUTION. We intend to
leverage our extensive market presence and brand equity in the WESCO name to
further our leadership position in electrical distribution. We are the second
largest electrical distributor in the U.S. and, through our value-added products
and services, we believe we have become the industry leader in serving several
important and growing markets including:
o industrial customers with large, complex plant maintenance operations,
some of which require a national multi-site service solution for their
electrical distribution product needs;
o large contractors for major industrial and commercial construction
projects;
o the electric utility industry; and
o manufacturers of factory-built homes, recreational vehicles and other
modular structures.
GROW NATIONAL PROGRAMS. Since 1994, revenue from our National Accounts
program has increased in excess of 15% annually. We will continue to invest in
the expansion of this program. Through our National Accounts program, we
coordinate electrical MRO procurement and purchasing activities primarily for
large industrial and commercial companies across multiple locations. We have
well established relationships with over 300 companies, providing us with a
recurring base of revenue through multi-year agreements. Our objective is to
continue to increase revenue generated through our National Accounts program by:
o increasing sales to existing National Account customers through new
products, more services and additional locations;
o extending established National Account relationships to include
Integrated Supply;
o expanding our customer base by leveraging our existing expertise and
presence within the automotive, petrochemical, pulp and paper and
metals and mining industries; and
o entering new industries such as multi-site retail, financial,
commercial and telecommunications.
In addition, through our Major Projects Group, we are increasing our focus
on large projects such as industrial sites, water treatment plants, airport
expansions, healthcare facilities, correctional institutions and new sports
stadiums. We intend to secure new Major Projects contracts through:
o aggressive national marketing of our demonstrated project management
capabilities;
o further development of relationships with leading contractors and
engineering firms;
o close coordination with National Accounts customers on their
renovation and new plant improvement projects; and
o comprehensive materials management services, involving a
multi-commodity Integrated Supply approach to large projects.
EXTEND OUR LEADERSHIP POSITION IN INTEGRATED SUPPLY. We are the largest
provider of Integrated Supply services for MRO goods and services in the United
States. We provide a full complement of outsourcing solutions, focusing on
improving the supply chain management process for our customers' indirect
purchases. Our integrated supply programs replace the traditional multi-vendor,
resource-intensive procurement process with a single, outsourced, fully
automated process capable of managing all MRO and related service requirements.
Our solutions range from timely product delivery to assuming full responsibility
for the entire procurement function. Our customers include some of the largest
industrial companies in the United States. Competitive strengths of our
Integrated Supply business include:
o a proven and profitable business model highly adaptable to the scale
of our customers' operations;
o low operating costs;
o highly automated proprietary information systems; and
o established relationships with a large industrial customer base.
We intend to utilize these competitive strengths to increase our Integrated
Supply sales to both new and existing customers, including our existing National
Account customers.
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GAIN SHARE IN KEY LOCAL MARKETS. Significant opportunities exist to gain
local market share, since many local markets are highly fragmented. We intend to
increase our market share in key geographic markets through a combination of
increased sales and marketing efforts at existing branches, acquisitions to
expand our product and customer base and new branch openings. Furthermore, we
intend to leverage our existing relationships with preferred suppliers to
increase sales of their products in local markets through various initiatives,
including sales promotions, cooperative marketing efforts, direct participation
by suppliers in National Accounts implementation, dedicated sales forces and
product exclusivity. To promote growth, we have instituted a compensation system
for branch managers based on sales and profit increases and efficient working
capital management at the branch level. Our compensation system encourages our
branch managers to increase sales and optimize business activities in their
local markets, including managing the sales force, configuring inventories,
targeting potential customers for marketing efforts and tailoring local service
options.
ACTIVELY PURSUE STRATEGIC ACQUISITIONS. We have completed 21 acquisitions
since August 1995, which represent annual sales of over $1.2 billion. We believe
that the highly fragmented nature of the electrical and industrial MRO
distribution industry will provide us with a significant number of acquisition
opportunities. We utilize a disciplined approach toward acquisitions which
includes well-defined strategic criteria and established targets for return on
investment and earnings accretion.
EXPAND PRODUCT AND SERVICE OFFERINGS. We intend to build on our demonstrated
ability to introduce new products and services to meet customer demands and
capitalize on market opportunities. For example, we will continue expanding our
presence in the fast-growing data communications market. We have significantly
increased our focus on this market, generating sales of over $110 million in
1999, up from $52 million in 1995. By utilizing a dedicated data communications
sales team and training our existing sales force to sell data communications
products, we intend to increase sales to new and existing customers. In
addition, through a 1998 acquisition, we now have a platform to sell integrated
lighting control and power distribution equipment in a single package for
multi-site specialty retailers, restaurant chains and department stores. This is
a well-defined and attractive growth market where our marketing programs and
logistics infrastructure provide measurable benefits for renovation, new
construction and ongoing maintenance activities.
LEVERAGE OUR E-COMMERCE AND INFORMATION SYSTEM CAPABILITIES. We conduct a
significant amount of business electronically and continue to invest in
information technology to create tighter linkages with both customers and
suppliers and to lower costs and shorten cycle time in the supply chain process
for our customers and ourselves by:
o conducting business transactions electronically; we routinely process
customer orders, shipping notices, supplier purchase orders and funds
transfer electronically with our trading partners; in our Integrated
Supply business, a large percentage of all transactions are
electronic;
o creating tighter linkages to both customers and suppliers through the
use of technological advances, including an ability to order over the
Internet and through electronic catalogs, bar-coding and electronic
funds transfer;
o providing low cost, highly functional processing of a full-range of
our business operations such as customer service, inventory, logistics
management, accounting and administrative support; and
o analyzing market potential, sales performance and cost of doing
business by branch, customer, product, sales representative and
shipment type enabling us to work with customers to streamline
activities and reduce costs.
EXPAND OUR INTERNATIONAL OPERATIONS. Our international sales, the majority of
which are in Canada, accounted for 11% of sales in 1999. We believe that there
is significant additional demand for our products and services outside the U.S.
and Canada. Many of our multinational domestic customers are seeking
distribution, Integrated Supply and project management solutions globally. Our
approach to international operations is consistent with our domestic philosophy.
We follow our established customers and will only pursue business that we
believe utilizes and extends our existing capabilities. This strategy of working
through well-developed customer and supplier relationships reduces risks and
provides the opportunity to establish a profitable business. We have recently
opened offices in Aberdeen, Scotland and London, England to support our sales
efforts in Europe, Africa and the former Soviet Union, and an office in
Singapore to support our sales in Asia. We also opened two sales offices in
Mexico in 1999 to augment the selling effort of the two full service branches
opened in 1998.
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ACQUISITION AND INTEGRATION PROGRAM
Our strategic acquisition program is an important element in our objective
to be the leader in the markets we serve. Our philosophy towards growth includes
a continuous evaluation to determine whether a particular opportunity,
capability or customer need is best developed internally or purchased through a
strategic acquisition. We believe that the highly fragmented nature of the
electrical distribution industry will continue to provide us with a significant
number of acquisition opportunities. We continue to evaluate potential
acquisitions, including those in the electrical distribution industry, the
Integrated Supply market and other non-electrical distributors that would
complement our customers' overall supply needs. We have completed 21
acquisitions since August 1995, representing total annual sales of over $1.2
billion.
WESCO ACQUISITION HISTORY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ACQUISITIONS BRANCH LOCATIONS ANNUAL SALES(1)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995............................ 2 2 $ 47
1996............................ 7 67 418
1997............................ 2 9 52
1998............................ 6 21 608
1999............................ 4 5 70
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Total...................... 21 104 $1,195
</TABLE>
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(1) Represents our estimate of annual sales of acquired businesses at the
time of acquisition, based on our review of internal and/or audited
statements of the acquired business.
In February 2000, WESCO completed its acquisition of certain assets and
assumed certain liabilities of Control Corporation of America ("CCA"),
headquartered in Richmond, Virginia, for approximately $15 million. CCA, an
electrical distributor specializing in industrial automation solutions, reported
net sales of approximately $50 million in 1999. This acquisition will be
accounted for under the purchase method of accounting.
Our business development department consists of a small team of
professionals who locate, evaluate and negotiate all aspects of any acquisition,
with particular emphasis on compatibility of management philosophy and strategic
fit. Since 1995, we have considered over 270 potential acquisitions. We
initially evaluate potential acquisitions based on their ability to:
o better serve our existing customers;
o offer expansion into key growth markets;
o add new product or service capabilities;
o support new National Account customers; and
o strengthen relationships with important manufacturers.
PRODUCTS AND SERVICES
PRODUCTS. Our network of branches and distribution centers stock over
215,000 product stock keeping units ("SKUs"). Each branch tailors its inventory
to meet the needs of the customers in its local market, typically stocking
approximately 4,000 to 8,000 SKUs. Our Integrated Supply business allows our
customers to access over 1,000,000 products for direct shipment.
Representative products that we sell include:
o Supplies: Fuses, terminals, connectors, boxes, fittings, tools, lugs,
tape and other MRO supplies
o Distribution Equipment: Circuit breakers, transformers, switchboards,
panelboards and busway
o Lighting: Lamps (light bulbs), fixtures and ballasts
o Wire and Conduit: Wire, cable, metallic and non-metallic conduit
o Control, Automation and Motors: Motor control devices, drives,
programmable logic controllers, pushbuttons and operator interfaces
o Data Communications: Premise wiring, patch panels, terminals,
connectors
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We purchase products from a diverse group of over 23,000 suppliers. In 1999,
the ten largest suppliers accounted for approximately 35% of our purchases. The
largest of these was Eaton Corporation, through its Cutler-Hammer division,
accounting for approximately 13% of total purchases. No other supplier accounted
for more than 5%.
Our supplier relationships are important to us, providing access to a wide
range of products, technical training and sales and marketing support. We have
preferred supplier agreements with approximately 150 of our suppliers and
purchase approximately 60% of our stock inventory pursuant to these agreements.
Consistent with industry practice, most of our agreements with suppliers,
including both distribution agreements and preferred supplier agreements, are
terminable by either party on no more than 60 days' notice.
SERVICES. In conjunction with product sales, we offer customers a wide range
of services and procurement solutions that draw on our product and supply
management expertise and systems capabilities. These services include National
Accounts programs, Integrated Supply programs and Major Project programs. We are
responding to the needs of our customers, particularly those in processing and
manufacturing industries. To more efficiently manage the MRO process on behalf
of our customers, we offer a range of supply management services, including:
o outsourcing of the entire MRO purchasing process;
o providing manufacturing process improvements using state-of-the-art
automated solutions;
o implementing inventory optimization programs;
o participating in joint cost savings teams;
o assigning our employees as on-site support personnel;
o recommending energy-efficient product upgrades; and
o offering safety and product training for customer employees.
NATIONAL ACCOUNTS PROGRAMS. The typical National Accounts customer is a
Fortune 500 industrial company, a large utility or other major customer, in each
case with multiple locations. Our National Accounts programs provide customers
with total supply chain cost reductions by coordinating purchasing activity for
MRO supplies across multiple locations. Comprehensive implementation plans
establish jointly-managed teams at the local and national level to prioritize
activities, identify key performance measures and track progress against
objectives. We involve our preferred suppliers early in the implementation
process, where they can contribute expertise and product knowledge to accelerate
program implementation and the achievement of cost savings and process
improvements.
INTEGRATED SUPPLY PROGRAMS. Our Integrated Supply programs offer customers a
variety of services to support their objectives for improved supply chain
management. We integrate our personnel, product and distribution expertise,
electronic technologies and service capabilities with the customer's own
internal resources to meet particular service requirements. Each Integrated
Supply program is uniquely configured to deliver a significant reduction in the
number of MRO suppliers, reduce total procurement costs, improve operating
controls and lower administrative expenses. Our solutions range from
just-in-time fulfillment to assuming full responsibility for the entire
procurement function for all indirect purchases. We believe that customers will
increasingly seek to utilize us as an "integrator," responsible for selecting
and managing the supply of a wide range of MRO and OEM products.
MAJOR PROJECTS. We have established a Major Projects Group, comprised of
our most experienced personnel, which focuses on serving the complex needs of
the top 50 U.S. electrical contractors on a multi-regional basis. These
contractors typically specialize in building industrial sites, water treatment
plants, airport expansions, healthcare facilities, correctional institutions and
new sports stadiums.
MARKETS AND CUSTOMERS
We have a large base of approximately 130,000 customers diversified across
our principal markets. While one customer accounted for approximately 3% of 1999
sales, no other customer accounted for more than 1%. We are not dependent on any
single customer.
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INDUSTRIAL CUSTOMERS. Sales to industrial customers, which include numerous
manufacturing and process industries, and original equipment manufacturers
("OEMs") accounted for approximately 45% of our sales in 1999.
MRO products are needed to maintain and upgrade the electrical and
communications networks at all industrial sites. Expenditures are greatest in
the heavy process industries, such as pulp and paper and petrochemical.
Typically, electrical MRO is the first or second ranked product category by
purchase value for total MRO requirements for an industrial site. Other MRO
product categories include, among others, lubricants; pipe, valves and fittings;
fasteners; and power transmission products.
OEM customers incorporate electrical components and assemblies into their
own products. OEMs typically require a reliable, high volume supply of a narrow
range of electrical items. Customers in this segment are particularly service
and price sensitive due to the volume and the critical nature of the product
used, and they also expect value-added services such as design and technical
support, just-in-time supply and electronic commerce.
ELECTRICAL CONTRACTORS. Sales to electrical contractors accounted for
approximately 35% of our sales in 1999. These customers range from large
contractors for major industrial and commercial projects, the customer types we
principally serve, to small residential contractors, which represent a small
portion of our sales. Electrical products purchased by electrical
sub-contractors typically account for approximately 40% to 50% of their
installed project cost, and, therefore, accurate cost estimates and competitive
material costs are critical to a contractor's success in obtaining profitable
projects.
UTILITIES. Sales to utilities accounted for approximately 14% of our sales
in 1999. This market includes large investor-owned utilities, rural electric
cooperatives and municipal power authorities. We provide our utility customers
with power line products and an extensive range of supplies to meet their MRO
and capital projects needs. Integrated Supply arrangements are also important in
this market as cost pressures and deregulation cause utility customers to
streamline procurement practices.
COMMERCIAL, INSTITUTIONAL AND GOVERNMENTAL CUSTOMERS ("CIG"). Sales to CIG
customers accounted for approximately 6% of our sales in 1999. This fragmented
market includes schools, hospitals, property management firms, retailers and
government agencies of all types. Through a recent acquisition, we now have a
platform to sell integrated lighting control and distribution equipment in a
single package for multi-site specialty retailers, restaurant chains and
department stores.
DISTRIBUTION NETWORK
BRANCH NETWORK. We have over 340 branches, of which approximately 275 are
located in the U.S., approximately 50 are located in Canada and the remainder
are located in Puerto Rico, Mexico, Guam, the United Kingdom, the Balkans and
Singapore. Over the last three years, we have opened approximately seven
branches per year, principally to service National Account customers. In
addition to consolidations in connection with acquisitions, we occasionally
close or consolidate existing branch locations to improve operating efficiency.
DISTRIBUTION CENTERS. To support our branch network, we have five
distribution centers located in the United States and Canada, serving the
Northeast and Midwest U.S.; near Reno, Nevada, serving the Western U.S.; near
Memphis, Tennessee, serving the Southeast and Central U.S.; near Montreal,
Quebec, serving Eastern and Central Canada; and near Vancouver, British
Columbia, serving Western Canada.
Our distribution centers add value for our branches and customers through
the combination of a broad and deep selection of inventory, on-line ordering,
same day shipment and central order handling and fulfillment. Our distribution
center network reduces the lead-time and improves the reliability of our supply
chain, giving us a distinct competitive advantage in customer service.
Additionally, the distribution centers reduce the time and cost of supply chain
activities through automated replenishment and warehouse management systems, and
economies of scale in purchasing, inventory management, administration and
transportation.
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SALES ORGANIZATION
GENERAL SALES FORCE. Our general sales force is based at the local branches
and comprises approximately 2,200 of our employees, almost half of whom are
outside sales representatives and the remainder are inside sales personnel.
Outside sales representatives, who have an average of more than eight years of
experience with us, are paid under a compensation structure which is heavily
weighted towards commissions. They are responsible for making direct customer
calls, performing on-site technical support, generating new customer relations
and developing existing territories. The inside sales force is a key point of
contact for responding to routine customer inquiries such as price and
availability requests and for entering and tracking orders.
NATIONAL ACCOUNTS. Our National Accounts sales force is comprised of an
experienced group of sales executives who negotiate and administer contracts,
coordinate branch participation and identify sales and service opportunities.
National Accounts managers' efforts are aligned by targeted customer industries,
including automotive, pulp and paper, petrochemical, steel, mining and food
processing.
DATA COMMUNICATIONS. Sales of data communications products are supported by
a dedicated group of outside and inside sales representatives who focus
primarily on the premise wiring systems market. This team is supported by
additional resources in the purchasing, inventory management, product training,
product management and regional sales areas. We also have an organization that
provides our general sales force and customers with product training and
industry-recognized certification in data communications product installation.
MAJOR PROJECTS. Since 1995 our group of experienced sales managers target,
on a national basis, the market for large construction projects with electrical
material valued in excess of $1 million. Through the Major Projects Group, we
can meet the needs of contractors for complex construction projects such as new
sports stadiums, industrial sites, water treatment plants, airport expansions,
healthcare facilities and correctional institutions.
E-COMMERCE. We established our initial electronic catalog on the internet
in 1996. Since that time, we have worked with a variety of large customers to
establish customized electronic catalogs for their use in internal systems.
Additionally, in 1999 we began a process of providing electronic catalogs to
multiple e-commerce service providers, trade exchanges and industry specific
electronic commerce portals. Our e-business strategy is to serve existing
customers by tailoring our catalog and internet-based procurement applications
to their internal systems or through their preferred technology and trading
exchange partnerships. Additionally, we will enter into as many as 20 e-business
partnerships with leading technology or marketing oriented e-portals that target
selected market segments. Through these niche oriented marketing arrangements,
we expect to reach thousands of new customers who were previously not served
through WESCO's sales force.
INTERNATIONAL OPERATIONS
To serve the Canadian market, we operate a network of approximately 50
branches in nine provinces. Branch operations are supported by two distribution
centers located near Montreal and Vancouver. With sales of approximately US $288
million, Canada represented 8.4% of our total sales in 1999. The Canadian market
for electrical distribution is considerably smaller than the U.S. market, with
roughly US $2.7 billion in total sales in 1999, according to industry sources.
We sell internationally through domestic export sales offices located within
North America and sales offices in international locations. We have recently
opened offices in Aberdeen, Scotland and London, England and the Balkans to
support our sales efforts in Europe, Africa and the former Soviet Union, and an
office in Singapore to support our sales in Asia. We also opened two sales
offices in Mexico in 1999 to augment the selling effort of the two full service
branches opened in 1998.
MANAGEMENT INFORMATION SYSTEMS
Our corporate information system, WESCOM, provides processing for a full
range of our business operations, such as customer service, inventory and
logistics management, accounting and administrative support. The system has been
upgraded with decision support, executive information system analysis and
retrieval capabilities to provide detailed income statement and balance sheet
variance and trend reporting at the branch level. The system also provides
activity-based costing capabilities for analyzing profitability by customer,
sales representative and
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shipment type. Sales and margin trends and variances can be analyzed by branch,
customer, product category, supplier or account representative.
The WESCOM system is fully distributed within WESCO, and every branch (other
than EESCO and certain newly acquired branches) utilizes its own computer system
to support local business activities. Telecommunication links through a central
system give each branch access to information on inventory status in our
distribution centers as well as other branches and an increasing number of
on-line suppliers. We have developed an upgraded version of the WESCOM system.
This new version, WESNET, links all branch operations through our wide area
network. EESCO operates its own system which is linked to our central system. We
intend to integrate EESCO into the WESNET system over the next eight to 10
months, which is expected to improve efficiencies and operating controls and
reduce costs associated with operating dual systems.
We routinely process customer orders, shipping notices, suppliers' purchase
orders, and funds transfer via EDI transactions with our trading partners. Our
electronic commerce strategy calls for tighter linkages to both customers and
suppliers through greater use of technological advances, including Internet and
electronic catalogs, enhanced EDI and other innovative improvements.
Our Integrated Supply services are supported by our proprietary procurement
and inventory management systems. These systems provide a fully integrated,
flexible supply chain platform that currently handles over 95% of our Integrated
Supply customers' transactions electronically. Our configuration options for a
customer range from on-line linkages to the customer's business and purchasing
systems, to total replacement of a customer's procurement and inventory
management system for MRO supplies.
Year 2000 Issue. WESCO made substantial preparations for the Year 2000
issue, which concerns the ability of computer programs and software applications
to process date-dependent calculations, processes and other information by
properly identifying the year. Based on information available to date, WESCO has
not experienced any significant events attributable to the Year 2000 issue. We
will continue to scrutinize all facets of our business and will monitor our
customers and suppliers in order to mitigate any negative impact should an issue
arise. WESCO believes that if any Year 2000 issue were to surface, there would
not be a significant impact on its operations. In 1999 and 1998, WESCO incurred
costs of $3.3 million specifically associated with modifying its systems for
Year 2000 compliance. WESCO expects to incur little or no costs in 2000 related
to this issue.
COMPETITION
WESCO operates in a highly competitive industry. We compete directly with
national, regional and local providers of electrical and other industrial MRO
supplies. Competition is primarily focused on the local service area, and is
generally based on product line breadth, product availability, service
capabilities and price. Another source of competition is buying groups formed by
smaller distributors to increase purchasing power and provide some cooperative
marketing capability. While increased buying power may improve the competitive
position of buying groups locally, we believe these groups have not been able to
compete effectively with us for National Accounts customers due to the
difficulty in coordinating a diverse ownership group. We expect that numerous
new competitors will develop over time as internet-based enterprises begin to
get established and refine their service capabilities.
EMPLOYEES
As of December 31, 1999, we had approximately 5,800 employees worldwide, of
which approximately 5,000 were located in the U.S. and approximately 800 in
Canada and our other international locations. Less than 5% of our employees are
represented by unions. We believe our labor relations are generally good.
INTELLECTUAL PROPERTY
Our trade and service mark, composed of the words "WESCO the extra effort
people(R)," together with the running man design, is registered in the U.S.
Patent and Trademark Office, the Canadian Trademark Office and the Mexican
Instituto de la Propriedad Industrial.
9
<PAGE> 11
ENVIRONMENTAL MATTERS
We believe that we are in compliance in all material respects with
applicable environmental laws. There are no significant capital expenditures for
environmental control matters either estimated in the current year or expected
in the near future.
FORWARD LOOKING INFORMATION
This Annual Report on Form 10-K contains various "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve certain unknown risks and uncertainties,
including, among others, those contained in Item 1, "Business" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." When used in this Annual Report on Form 10-K, the words
"anticipates," "plans," "believes," "estimates," "intends," "expects,"
"projects" and similar expressions may identify forward looking statements,
although not all forward looking statements contain such words. Such statements,
including, but not limited to, our statements regarding business strategy,
growth strategy, productivity and profitability enhancement, competition, new
product and service introductions and liquidity and capital resources are based
on management's beliefs, as well as on assumptions made by, and information
currently available to, management, and involve various risks and uncertainties,
some of which are beyond our control. Our actual results could differ materially
from those expressed in any forward looking statement made by or on our behalf.
In light of these risks and uncertainties, there can be no assurance that the
forward looking information will in fact prove to be accurate. We have
undertaken no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
ITEM 2. PROPERTIES.
We have over 340 branches, of which approximately 275 are located in the
U.S., approximately 50 are located in Canada and the remainder are located in
Puerto Rico, Mexico, Guam, the United Kingdom, the Balkans and Singapore.
Approximately 30% of branches are owned facilities, and the remainder are
leased.
The following table summarizes our distribution centers:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Warrendale, PA........................................ 252,700 Owned and Leased
Sparks, NV............................................ 195,800 Leased
Byhalia, MS........................................... 148,000 Owned
Dorval, QE............................................ 97,000 Leased
Burnaby, BC........................................... 34,300 Owned
</TABLE>
We also lease our 60,400 square foot headquarters in Pittsburgh,
Pennsylvania. We do not regard the real property associated with any single
branch location as material to our operations. We believe our facilities are in
good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
We are party to routine litigation incidental to our business. We do not
believe that any legal proceedings to which we are a party or to which any of
our property is subject will have a material adverse effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE> 12
EXECUTIVE OFFICERS
Our executive officers and their respective ages and positions are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------ --- ------------------------------------
<S> <C> <C>
Roy W. Haley..................... 53 Chairman and Chief Executive Officer
Steven A. Burleson............... 40 Vice President and Chief Financial Officer
William M. Goodwin............... 54 Vice President, Operations
James H. Mehta................... 44 Vice President, Business Development
Robert B. Rosenbaum.............. 42 Vice President, Operations
Patrick M. Swed.................. 56 Vice President, Operations
Donald H. Thimjon................ 56 Vice President, Operations
Ronald P. Van, Jr................ 39 Vice President, Operations
Robert E. Vanderhoff............. 44 Vice President, Operations
Daniel A. Brailer................ 42 Secretary and Treasurer
</TABLE>
Set forth below is biographical information for our executive officers and
directors listed above.
ROY W. HALEY became Chairman of the Board in August 1998. Mr. Haley has been
Chief Executive Officer and a director of WESCO since February 1994. From 1988
to 1993, Mr. Haley was an executive at American General Corporation, a
diversified financial services company, where he served as Chief Operating
Officer and as President and Director. Mr. Haley is also a director of United
Stationers, Inc. and Cambrex Corporation.
STEVEN A. BURLESON joined WESCO in January 1995 as Corporate Controller and
became Vice President and Corporate Controller in 1997. In 1998, Mr. Burleson
became Chief Financial Officer and Treasurer. From 1990 to 1995, Mr. Burleson
was Vice President and Treasurer of The Bon-Ton Stores, Inc.
WILLIAM M. GOODWIN has been Vice President, Operations of WESCO since March
1984. Since 1977, Mr. Goodwin has served as a branch, district and region
manager for WESCO in various locations and also served as Managing Director of
WESCOSA, a former Westinghouse affiliated manufacturing and distribution
business in Saudi Arabia.
JAMES H. MEHTA has been Vice President, Business Development of WESCO since
November 1995. From 1993 to 1995, Mr. Mehta was a principal with Schroder
Ventures, a private equity investment firm based in London, England.
ROBERT B. ROSENBAUM has been Vice President, Operations of WESCO since
September 1998. Mr. Rosenbaum was the President of Bruckner Supply Company,
Inc., an integrated supply company WESCO acquired in September 1998.
PATRICK M. SWED has been Vice President, Operations of WESCO since March
1994. Mr. Swed had been Vice President of Branch Operations for WESCO from 1991
to 1994.
DONALD H. THIMJON has been Vice President, Operations of WESCO since March
1994. Mr. Thimjon served as Vice President, Utility Group for WESCO from 1991 to
1994 and as Regional Manager from 1980 to 1991.
RONALD P. VAN, JR. has been Vice President, Operations of WESCO since
October 1998. Mr. Van was a Vice President and Controller of EESCO, an
electrical distributor WESCO acquired in 1996.
ROBERT E. VANDERHOFF has been Vice President, Operations since April 1998,
and Vice President, Manufactured Structures Group since March 1994. Mr.
Vanderhoff had been Vice President of WESCO since April 1993.
DANIEL A. BRAILER joined WESCO in March 1999 as Treasurer and Director of
Investor Relations. During 1999, Mr. Brailer was also appointed to the position
of Corporate Secretary. From 1982 to 1999, Mr. Brailer held various positions at
Mellon Financial Corporation, most recently as senior vice-president.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
On May 17, 1999, WESCO completed its initial public offering of common stock
("the Offering"), which is listed on the New York Stock Exchange under the
symbol "WCC." As of February 22, 2000, there were 41,366,440 shares of common
stock and 4,653,131 shares of Class B common stock outstanding held by
approximately 3,000 holders of record. No dividends were paid on the common
stock, nor does the Company intend to pay dividends in the foreseeable future.
See "Liquidity and Capital Resources." The following table sets forth the high
and low sales price of the shares since the Offering.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
-------------------------------------------------------------
<S> <C> <C>
1999
Second (from Offering date) 21 1/4 17 1/2
Third 22 7/8 12 3/8
Fourth 14 1/2 5 1/2
</TABLE>
In connection with the Offering, the Board of Directors approved a 57.8 to
one stock split effected in the form of a stock dividend of WESCO's common
stock. The Board of Directors also reclassified the Class A common stock into
common stock, increased the authorized common stock to 210,000,000 shares and
the authorized Class B common stock to 20,000,000 shares and authorized
20,000,000 shares of $.01 par value preferred stock, all effective May 11, 1999.
In November 1999, WESCO's Board of Directors authorized a stock repurchase
program to purchase up to $25 million of WESCO common stock. WESCO's common
stock may be purchased at management's discretion, from time to time, in open
market transactions and the program may be discontinued at any time. As of March
16, 2000, the Company had purchased approximately 2.4 million shares of its
common stock for approximately $19 million.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................. $3,420.1 $3,025.4 $2,594.8 $2,274.6 $1,857.0
Gross profit.............................. 612.9 537.6 463.9 405.0 321.0
Selling, general and administrative
expenses................................ 467.5 415.0 372.5 326.0 258.0
Depreciation and amortization............. 20.4 14.8 11.3 10.8 7.3
Recapitalization costs(1)................. -- 51.8 -- -- --
-------------------------------------------------------------------------------
Income from operations.................... 125.0 56.0 80.1 68.2 55.7
Interest expense, net..................... 47.0 45.1 20.1 17.4 15.8
Other expenses(2)......................... 19.5 10.1 -- -- --
-------------------------------------------------------------------------------
Income before income taxes................ 58.5 0.8 60.0 50.8 39.9
Provision for income taxes................ 23.4 8.5(3) 23.8 18.3 14.8
-------------------------------------------------------------------------------
Income (loss) before extraordinary item... 35.1 (7.7) 36.2 32.5 25.1
Extraordinary item, net of applicable
taxes(4)............................... (10.5) -- -- -- (8.1)
-------------------------------------------------------------------------------
Net income (loss)......................... $24.6 $(7.7) $36.2 $32.5 $17.0
===============================================================================
Earnings (loss) per common share(5)
Basic before extraordinary item ....... 0.82 (0.17) 0.61 0.55 0.43
Basic.................................. 0.57 (0.17) 0.61 0.55 0.29
Diluted before extraordinary item...... 0.75 (0.17) 0.55 0.51 0.41
Diluted................................ 0.53 (0.17) 0.55 0.51 0.28
Weighted average common shares
outstanding(5)
Basic.................................. 43,057,894 45,051,632 59,030,100 58,680,756 57,842,483
Diluted................................ 47,524,539 45,051,632 66,679,063 63,670,919 60,883,283
OTHER FINANCIAL DATA:
EBITDA before recapitalization charge(6).. $145.3 $122.6 $91.4 $79.0 $63.0
Capital expenditures...................... 21.2 10.7 11.6 9.3 6.5
Net cash provided by (used for) operating
activities............................. 66.4 276.9 (12.0) 15.1 25.7
Net cash provided by (used for) investing
activities............................. (71.9) (184.1) (21.5) (110.9) (12.0)
Net cash provided by (used for) financing
activities............................. 6.3 (92.3) 41.1 87.2 (9.8)
BALANCE SHEET DATA:
Total assets.............................. $1,028.8 $ 950.5 $ 870.9 $ 773.5 $ 581.3
Total long-term debt (including current
portion)............................... 426.4 595.8 295.2 262.2 177.9
Redeemable common stock(7)................ -- 21.5 9.0 8.9 7.7
Stockholders' equity (deficit)............ 117.3 (142.6) 184.5 148.7 116.4
</TABLE>
(1) Represents a one-time charge primarily related to noncapitalized
financing expenses, professional and legal fees and management
compensation costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations
-- 1998 compared to 1997."
(2) Represents costs relating to the sale of accounts receivable pursuant to
the accounts receivable securitization program as described in Note 5 to
the Consolidated Financial Statements.
(3) Certain nondeductible recapitalization costs and other permanent
differences significantly exceeded income before income taxes and
resulted in an unusually high provision for income taxes.
(4) Represents a charge, net of taxes, relating to the write-off of
unamortized debt issuance and other costs associated with the early
extinguishment of debt and the 1999 termination of the existing accounts
receivable securitization program.
(5) Reflects a 57.8 to one stock split effected in the form of a stock
dividend of WESCO common stock effective May 11, 1999.
(6) EBITDA before recapitalization charge represents income from operations
plus depreciation, amortization and recapitalization costs. EBITDA
before recapitalization charge is presented since management believes
that such information is considered by certain investors to be an
additional basis for evaluating the Company's ability to pay interest
and repay debt. EBITDA should not be considered an alternative to
measures of operating performance as determined in accordance with
generally accepted accounting principles or as a measure of the
Company's operating results and cash flows or as a measure of the
Company's liquidity. Since EBITDA is not calculated identically by all
companies, the presentation herein may not be comparable to other
similarly titled measures of other companies.
(7) Represents redeemable common stock as described in Note 10 to
Consolidated Financial Statements.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
GENERAL
WESCO's sales can be categorized as stock, direct ship and special order.
Stock orders are filled directly from existing inventory and generally represent
40% to 45% of total sales. Approximately 40% to 50% of WESCO's total sales are
direct ship sales. Direct ship sales are typically custom-built products, large
orders or products that are too bulky to be easily handled and, as a result, are
shipped directly to the customer from the supplier. Special orders are for
products that are not ordinarily stocked in inventory and are ordered based on a
customer's specific request. Special orders represent the remainder of total
sales. Gross profit margins on stock and special order sales are approximately
50% higher than those on direct ship sales. Although direct ship gross margins
are lower, operating profit margins are often higher, since the product handling
and fulfillment costs associated with direct shipments are much lower.
WESCO has historically financed its acquisitions, new branch openings,
working capital needs and capital expenditures through internally generated cash
flow and borrowings under its credit facilities. During the initial phase of an
acquisition or new branch opening, WESCO typically incurs expenses related to
installing or converting information systems, training employees and other
initial operating activities. With some acquisitions, WESCO may incur expenses
in connection with the closure of any of its own redundant branches.
Historically, the costs associated with opening new branches, and closing
branches in connection with certain acquisitions, have not been material. WESCO
has accounted for its acquisitions under the purchase method of accounting.
WESCO is the leading consolidator in its industry, having acquired 21
companies since August 1995 representing annual sales of approximately $1.2
billion. Management distinguishes sales attributable to core operations separate
from sales of acquired businesses. The distinction between sales from core
operations and from acquired businesses is based on the Company's internal
records and on management estimates where the integration of acquired businesses
results in the closing or consolidation of branches.
1999 DEVELOPMENTS
Developments affecting the results of operations and financial position of
WESCO include the following:
Initial Public Offering. On May 17, 1999, WESCO completed its initial public
offering of 11,183,750 shares of common stock at $18.00 per share. In connection
with the Offering, certain employee rights to require WESCO to repurchase
outstanding redeemable common stock were terminated and approximately $31.5
million of convertible notes were converted into 1,747,228 shares of common
stock. Proceeds from the Offering (after deducting Offering costs) totaling
$186.8 million and borrowings of approximately $65 million were used to redeem
all of the 11 1/8% senior discount notes ($62.8 million) and to repay the
existing revolving credit and term loan facilities ($188.8 million).
Credit Refinancing. In June 1999, WESCO Distribution entered into a $400
million revolving credit facility with a consortium of financial institutions.
WESCO believes the new credit facility provides greater financial flexibility
and lower annual costs of financing than the previous credit facility. In
addition, WESCO entered into a $350 million accounts receivable securitization
program that provides for a larger amount of eligible accounts receivable and
lower costs than the previous securitization program.
In connection with these transactions, approximately $8.9 million of
deferred financing charges were written off and redemption costs of $8.3 million
were incurred. These transactions resulted in an extraordinary loss of $10.5
million, net of income tax benefits of $6.7 million.
Acquisitions. During 1999, WESCO purchased four electrical supply
distributors with annual sales of approximately $70 million for an aggregate
consideration of $25.1 million, resulting in goodwill of approximately $10.4
million. Also in 1999, $30 million was paid pursuant to the 1998 Bruckner Supply
Company purchase
14
<PAGE> 16
agreement, which provides for additional contingent consideration over the next
four years not to exceed $100 million.
RECENT DEVELOPMENTS
In February 2000, WESCO completed its acquisition of certain assets and
assumed certain liabilities of Control Corporation of America headquartered
in Richmond, Virginia for approximately $15 million. CCA, an electrical
distributor specializing in industrial automation solutions, reported net sales
of approximately $50 million in 1999. This acquisition will be accounted for
under the purchase method of accounting.
In November 1999, WESCO's Board of Directors authorized a stock repurchase
program to purchase up to $25 million of WESCO common stock. WESCO's common
stock may be purchased at management's discretion, from time to time, in open
market transactions and the program may be discontinued at any time. As of March
16, 2000, WESCO had purchased approximately 2.4 million shares of its common
stock for approximately $19 million.
Core sales for the two months ended February 29, 2000 increased
approximately 16% over the first two months of 1999. After adjusting for the
additional sales days in the first two months of 2000, the sales growth is
considered well above the Company's targeted core growth rate of 6% to 8%.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of
certain items in the Company's Consolidated Statements of Operations for the
periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Net sales....................................................... 100.0% 100.0% 100.0%
Gross profit.................................................... 17.9 17.8 17.9
Selling, general and administrative expenses.................... 13.6 13.7 14.3
Depreciation and amortization................................... 0.6 0.5 0.5
Recapitalization costs.......................................... -- 1.7 --
-------------------------------------
Income from operations..................................... 3.7 1.9 3.1
Interest expense................................................ 1.4 1.6 0.8
Other expenses.................................................. 0.6 0.3 --
-------------------------------------
Income before income taxes and extraordinary item.......... 1.7 -- 2.3
Provision for income taxes...................................... 0.7 0.3 0.9
Extraordinary item, net of tax benefits......................... (0.3) -- --
-------------------------------------
Net income (loss).......................................... 0.7% (0.3)% 1.4%
=====================================
</TABLE>
1999 Compared to 1998
Net Sales. Net sales for the year ended December 31, 1999, increased by
$394.7 million, or 13.0%, to $3.4 billion compared with $3.0 billion in the
prior year primarily due to sales attributable to acquired companies. Core
business sales increased approximately 4% over 1998. The mix of direct shipment
sales increased to approximately 46% in 1999 from 42% in 1998 principally due to
the Bruckner acquisition completed in September 1998. Substantially all of
Bruckner's sales are direct shipment.
Gross Profit. Gross profit for the year ended December 31, 1999, increased
by $75.2 million to $612.9 million from $537.6 million in 1998. Gross profit
margin was 17.9% and 17.8% in 1999 and 1998, respectively. Excluding the effects
of the Bruckner acquisition, which has a higher proportion of lower-margin
direct shipment sales, gross profit margin increased to 18.6% from 18.1% in the
prior year due to gross margin improvement initiatives.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased $52.5 million, or 12.7%, to $467.5 million. This increase was
substantially due to incremental expenses of companies acquired during 1998 and
1999 and, to a lesser extent, increased SG&A in WESCO's core business. Core
business SG&A increased 5% over 1998, due principally to increased payroll costs
and, to a lesser extent, increased transportation costs and bad debt
15
<PAGE> 17
expenses. These increases were partially offset by reductions in certain
incentive-based compensation expenses and a reduction in certain discretionary
benefits. As a percentage of sales, SG&A expenses declined slightly to 13.6%,
primarily due to the lower relative cost structure associated with the Bruckner
acquisition.
Depreciation and Amortization. Depreciation and amortization increased $5.5
million to $20.4 million in 1999 reflecting higher amortization of goodwill from
acquisitions and depreciation related to increases in property, buildings and
equipment over the prior year.
Income from Operations. Income from operations increased $69.0 million to
$125.0 million in 1999, compared with $56.0 million in 1998. Excluding the
nonrecurring recapitalization costs in 1998, operating income increased $17.2
million. The increase was primarily due to higher gross profit, partially offset
by increased operating costs as explained above.
Interest and Other Expenses. Interest expense totaled $47.0 million for
1999, an increase of $1.8 million over 1998. The increase was primarily due to
the higher levels of borrowings associated with the Recapitalization and
acquisitions, partially offset by the Offering. Other expenses totaled $19.5
million and $10.1 million in 1999 and 1998, respectively, reflecting costs
associated with the accounts receivable securitization program that commenced in
June 1998.
Income Taxes. Income tax expense totaled $23.3 million in 1999 and the
effective tax rate was 39.9%. In 1998, income tax expense totaled $8.5 million.
In 1998, WESCO recorded charges of $51.8 million associated with the
Recapitalization that resulted in $0.8 million of income before taxes. Certain
nondeductible recapitalization costs and other permanent differences
significantly exceeded the $0.8 million of income before income taxes and
resulted in an unusually high effective income tax rate.
Income Before Extraordinary Item. For 1999, income before extraordinary item
totaled $35.1 million, or $0.75 per diluted share, compared with a loss of $7.7
million, or $0.17 per share, in 1998. The increases are primarily due to
nonrecurring recapitalization costs incurred in 1998 and to improved operating
results in 1999.
Net Income (Loss). Net income and diluted earnings per share totaled $24.6
million and $0.53 per share, respectively, in 1999, compared with a loss of $7.7
million, or $0.17 per share, respectively, in 1998. The increase is principally
due to the recapitalization costs of $51.8 million incurred in 1998 and improved
operating results in 1999 offset, in part, by the extraordinary item of $10.5
million in 1999.
16
<PAGE> 18
1998 Compared to 1997
Net Sales. Net sales in 1998 increased $430.6 million, or 16.6%, to $3.0
billion compared with $2.6 billion for 1997. Sales from core operations
increased approximately 4% with the balance of the sales increase coming from
eight acquisitions since the beginning of 1997. The mix of direct shipment sales
increased to approximately 42% in 1998 from 39% in 1997 primarily as a result of
the Bruckner acquisition. Substantially all of Bruckner's sales are direct
shipment. Consistent with recent trends, branches with a high volume of sales to
utility customers experienced somewhat higher levels of sales growth. Also, the
Canadian branches recorded sales growth of 4% in 1998 in Canadian currency and
when translated to U.S. dollars, those sales declined 3%.
Gross Profit. Gross profit for 1998 increased $73.7 million to $537.6
million from $463.9 million for 1997. Gross profit margin declined slightly to
17.8% in 1998 from 17.9% in 1997. This decrease resulted from a higher
proportion of direct ship sales attributable to the Bruckner acquisition. Direct
ship gross margins are lower than those of other sales; however, operating
profit margins are often higher, since the product handling and fulfillment
costs associated with direct shipments are much lower. Excluding the effects of
the Bruckner acquisition, the 1998 gross profit margin increased to 18.1%. The
Company believes that this increase in gross margin is the result of numerous
gross margin improvement initiatives.
Selling, General and Administrative Expenses. SG&A expenses increased $42.5
million, or 11.4%, to $415.0 million. The majority of this increase was
associated with companies acquired during 1998; the remainder of the increase
was associated with certain expenses that are variable in nature and increase
when sales increase. As a percent of sales, SG&A expenses declined to 13.7%
compared with 14.3% a year ago, reflecting cost containment initiatives and the
effects of a lower cost structure associated with the Bruckner acquisition.
Depreciation and Amortization. Depreciation and amortization increased $3.5
million to $14.8 million primarily reflecting higher amortization of goodwill
from acquisitions.
Recapitalization Costs. During 1998, WESCO completed the Recapitalization
and incurred one-time costs associated with this transaction amounting to $51.8
million. These costs are primarily related to noncapitalized financing expenses,
professional and legal fees and management compensation costs.
Interest and Other Expense. Interest expense totaled $45.1 million, an
increase of $25.0 million over 1997. The increase was primarily due to the
higher levels of borrowings associated with acquisitions and the
Recapitalization. Other expense totaled $10.1 million in 1998 reflecting costs
associated with the accounts receivable securitization.
Income Taxes. Income tax expense totaled $8.5 million in 1998 compared with
$23.8 million in 1997. In 1998 WESCO recorded $51.8 million of costs associated
with the Recapitalization which contributed to income before taxes of $0.8
million. Certain nondeductible recapitalization costs and other permanent
differences significantly exceeded the $0.8 million of income before taxes and
resulted in an unusually high effective tax rate. The effective tax rate in 1997
was 39.6%.
Net Income (Loss). Net loss and diluted loss per share totaled $7.7 million
and $0.17 per share, respectively, for 1998, compared with net income and
diluted earnings per share of $36.2 million and $0.55 per share, respectively,
for 1997. The comparability of the results was primarily affected by the
one-time charge of $51.8 million related to the Recapitalization, the impact of
the nondeductibility of a portion of these costs on taxes and an increase in
interest expense associated with higher debt levels, as a result of the
Recapitalization and acquisitions. Excluding the Recapitalization costs of $51.8
million, net income for 1998 would have been approximately $30.6 million.
17
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Total assets were approximately $1.0 billion at December 31, 1999 and 1998.
Stockholders' equity totaled $117.3 million at December 31, 1999, compared with
a deficit of $142.6 million at December 31, 1998. The increase in stockholders'
equity was primarily due to the Offering.
The following table sets forth WESCO's outstanding indebtedness:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-----------------------
(IN MILLIONS)
<S> <C> <C>
Revolving credit facility................................. $132.0 $ 42.4
Senior subordinated notes................................. 290.3 289.2
Term loans................................................ -- 169.5
Senior discount notes..................................... -- 52.1
Other..................................................... 4.0 42.6
-----------------------
426.3 595.8
Less current portion...................................... (3.8) (16.6)
-----------------------
$422.5 $579.2
=======================
</TABLE>
Initial Public Offering
On May 17, 1999, WESCO completed its initial public offering of 11,183,750
shares of common stock at $18.00 per share. In connection with the Offering,
certain employee rights to require WESCO to repurchase outstanding redeemable
common stock were terminated and approximately $31.5 million of convertible
notes were converted into 1,747,228 shares of common stock. Proceeds from the
Offering (after deducting Offering costs) totaling $186.8 million and borrowings
of approximately $65 million were used to redeem all of the 11 1/8% senior
discount notes ($62.8 million) and to repay the revolving credit and term loan
facilities ($188.8 million).
Revolving Credit Facility
In June 1999, WESCO Distribution entered into a $400 million revolving
credit facility with a consortium of financial institutions. The revolving
credit facility, which matures in June 2004, consists of up to $365 million of
revolving loans denominated in U.S. dollars and a Canadian sublimit totaling $35
million. Borrowings under the revolving credit facility are collateralized by
substantially all the assets, excluding real property, of WESCO Distribution and
are guaranteed by WESCO International, Inc. and certain subsidiaries.
Borrowings bear rates of interest equal to various indices, at WESCO's
option plus a borrowing margin. At December 31, 1999, the interest rate on
revolving credit facility borrowings was 7.4%. A commitment fee of 30 to 50
basis points per year is due on unused portions of the revolving credit
facility.
The revolving credit facility contains various restrictive covenants that,
among other things, impose limitations on (i) dividend payments or certain other
restricted payments or investments; (ii) the incurrence of additional
indebtedness and guarantees or issuance of additional stock; (iii) creation of
liens; (iv) mergers, consolidation or sales of substantially all of WESCO's
assets; (v) certain transactions among affiliates; (vi) payments by certain
subsidiaries to WESCO; and (vii) capital expenditures. In addition, the
agreements require WESCO to meet certain leverage, working capital and interest
coverage ratios.
18
<PAGE> 20
WESCO's liquidity needs arise from seasonal working capital requirements,
capital expenditures, debt service obligations and acquisitions. As of December
31, 1999, required annual principal repayments for the next five years are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------
<S> <C>
2000..................................................... $3,831
2001..................................................... 30
2002..................................................... 30
2003..................................................... 30
2004..................................................... 132,063
</TABLE>
Accounts Receivable Securitization Program
In June 1999, WESCO and certain of its subsidiaries terminated its previous
accounts receivable securitization program and entered into a $350 million
accounts receivable securitization program ("Receivables Facility") with another
financial institution, as modified in September 1999. Under the Receivables
Facility, WESCO sells, on a continuous basis, to WESCO Receivables Corporation,
a wholly-owned special purpose company ("SPC") an undivided interest in all
eligible accounts receivable. WESCO has agreed to continue servicing the sold
receivables for the financial institution at market rates; accordingly, no
servicing asset or liability has been recorded.
An analysis of cash flows for 1999 and 1998 follows:
Operating Activities. Cash provided by operating activities totaled $66.4
million for the year ended December 31, 1999, compared to $276.9 million a year
ago. Cash provided by operations in 1999 and 1998 included proceeds of $60.0
million and $274.2 million, respectively, from the sale of accounts receivable
in connection with the accounts receivable securitization program. Excluding
these proceeds, operating activities provided $6.4 million in 1999 and $2.7
million in 1998. On this basis, the year-to-year increase in operating cash flow
was primarily due to increased income adjusted for non-cash charges, partially
offset by an increase in working capital.
Investing Activities. Net cash used in investing activities was $71.9
million in 1999, compared to $184.1 million in 1998. Cash used for investing
activities was higher in 1998 primarily due to amounts invested in business
acquisitions. Capital expenditures in 1999 were $21.2 million compared to $10.7
million in 1998 and were for computer equipment and software, branch and
distribution center facility improvements, forklifts and delivery vehicles. The
increase from the prior year was primarily due to the replacement of computer
hardware at the branch locations. Capital expenditures for 2000 are not expected
to differ significantly from 1999.
Financing Activities. Cash provided by financing activities totaled $6.3
million in 1999 primarily due to the Offering, partially offset by a reduction
in long-term debt and treasury stock purchases. In 1998, cash used by financing
activities totaled $92.3 million primarily reflecting the Recapitalization
completed in June 1998.
As of December 31, 1999, WESCO had purchased approximately 630,000 shares of
its common stock for approximately $4.8 million.
Management believes that cash generated from operations, together with
amounts available under the credit agreement and the receivables facility, will
be sufficient to meet WESCO's working capital, capital expenditures and other
cash requirements for the foreseeable future. There can be no assurance,
however, that this will be the case. Financing of acquisitions can be funded
under the existing credit agreement and may, depending on the number and size of
the acquisitions, require the issuance of additional debt and equity securities.
INFLATION
The rate of inflation, as measured by changes in the consumer price index,
did not have a material effect on the sales or operating results of the Company
during the periods presented. However, inflation in the future could affect the
Company's operating costs. Price changes from suppliers have historically been
consistent with inflation and have not had a material impact on the Company's
results of operations.
19
<PAGE> 21
SEASONALITY
The Company's operating results are affected by certain seasonal factors.
Sales are typically at their lowest during the first quarter due to a reduced
level of activity during the winter months. Sales increase during the warmer
months beginning in March and continuing through November. Sales drop again
slightly in December as the weather cools and also as a result of a reduced
level of activity during the holiday season. As a result, the Company reports
sales and earnings in the first quarter that are generally lower than that of
the remaining quarters.
YEAR 2000 ISSUE
WESCO made substantial preparations for the Year 2000 issue, which concerns
the ability of computer programs and software applications to process
date-dependent calculations, processes and other information by properly
identifying the year. Based on information available to date, WESCO has not
experienced any significant events attributable to the Year 2000 issue. We will
continue to scrutinize all facets of our business and will monitor our customers
and suppliers in order to mitigate any negative impact should an issue arise.
WESCO believes that if any Year 2000 issue were to surface, there would not be a
significant impact on its operations. In 1999 and 1998, WESCO incurred costs of
$3.3 million specifically associated with modifying its systems for Year 2000
compliance. WESCO expects to incur little or no costs in 2000 related to this
issue.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
as amended, is required to be adopted by WESCO as of January 1, 2001, although
early adoption is permitted. This statement requires the recognition of the fair
value of any derivative financial instrument on the balance sheet. Changes in
fair value of the derivative and, in certain instances, changes in the fair
value of an underlying hedged asset or liability, are recognized through either
income or as a component of other comprehensive income. Management does not
expect this statement will have a material impact on the results of operations
or financial position of WESCO.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The information required to be furnished under this item has not been
included as it is not material to the registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
Annual Report on Form 10-K and is incorporated herein by reference. Specific
financial statements and supplementary data can be found at the pages listed
below:
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
WESCO International, Inc.
Report of Independent Accountants..................................................................... 26
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................... 27
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997............ 28
Consolidated Statements of Stockholders' Equity and Redeemable Common Stock
for the years ended December 31, 1999, 1998 and 1997................................................ 29
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............ 30
Notes to Consolidated Financial Statements............................................................ 31
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
20
<PAGE> 22
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) is incorporated herein by reference to the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
May 23, 2000. The definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 1999.
Information relating to the executive officers of the Company is set forth in
Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The financial statements, financial statement schedules and exhibits listed
below are filed as part of this annual report:
(a)(1) FINANCIAL STATEMENTS
-------------------
The list of financial statements required by this item is set forth
in Item 8 "Financial Statements and Supplementary Data" and is
incorporated herein by reference.
(2) FINANCIAL STATEMENT SCHEDULES
---------------------------
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
(b) REPORTS ON FORM 8-K
--------------------
None
(c) EXHIBITS
--------
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- -------------- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C>
2.1 Recapitalization Agreement dated as of March 27, 1998 among Incorporated by reference
Thor Acquisitions L.L.C., WESCO International, Inc. (formerly to WESCO's Exhibit 2.1 to
known as CDW Holding Corporation, "WESCO") and certain the Registration Statement
securityholders of WESCO. on Form S-4 (No. 333-43225)
(the "Form S-4")
2.2 Purchase Agreement dated May 29, 1998 among WESCO, WESCO Incorporated by reference
Distribution, Inc. ("WESCO Distribution"), Chase Securities to Exhibit 2.2 to the Form S-4
Inc. and Lehman Brothers Inc.
2.3 Asset Purchase Agreement among Bruckner Supply Company, Inc. Incorporated by reference
and WESCO Distribution dated September 11, 1998, previously to Exhibit 2.01 to the
filed. Current Report on Form 8-K
dated September 11, 1998
3.1 Amended and Restated Certificate of Incorporation of WESCO. Incorporated by reference
to Exhibit 3.2 to the Form
S-1 (No. 333-73299) (the "Form S-1")
3.2 By-Laws of WESCO. Incorporated by reference
to Exhibit 3.3 to the
Registration Statement on
Form S-1
4.1 Indenture dated as of June 5, 1998 among WESCO, WESCO Incorporated by reference
Distribution and Bank One, N.A. to Exhibit 4.1 to the Form S-4
4.2 Form of 9-1/8% Senior Subordinated Note Due 2008, Series A Incorporated by reference
(included in Exhibit 4.3). to Exhibit 4.2 to the Form S-4
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- -------------- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C>
4.3 Form of 9-1/8% Senior Subordinated Note Due 2008, Series B Incorporated by reference
(included in Exhibit 4.3). to Exhibit 4.3 to the Form S-4
4.4 Exchange and Registration Rights Agreement dated as of June 5, Incorporated by reference
1998 among the Company, WESCO and The Initial Purchasers. to Exhibit 4.4 to the Form S-4
4.8 Exchange and Registration Rights Agreement dated as of June 5, Incorporated by reference
1998 among WESCO and the Initial Purchasers. to Exhibit 4.8 to the Form S-4
10.1 CDW Holding Corporation Stock Purchase Plan. Incorporated by reference
to Exhibit 10.1 to the Form S-4
10.2 Form of Stock Subscription Agreement. Incorporated by reference
to Exhibit 10.2 to the Form S-4
10.3 CDW Holding Corporation Stock Option Plan. Incorporated by reference
to Exhibit 10.3 to the Form S-4
10.4 Form of Stock Option Agreement. Incorporated by reference
to Exhibit 10.4 to the Form S-4
10.5 CDW Holding Corporation Stock Option Plan for Branch Employees. Incorporated by reference
to Exhibit 10.5 to the Form S-4
10.6 Form of Branch Stock Option Agreement. Incorporated by reference
to Exhibit 10.6 to the Form S-4
10.7 Non-Competition Agreement, dated as of February 28, 1996, Incorporated by reference
between Westinghouse, WESCO and WESCO Distribution. to Exhibit 10.8 to the Form S-4
10.8 Lease dated May 24, 1995 as amended by Amendment One dated Incorporated by reference to
June, 1995 and by Amendment Two dated December 24, 1995 by Exhibit 10.10 to the Form S-4
and between WESCO Distribution as Tenant and Opal Investors,
L.P. and Mural GEM Investors as Landlord.
10.9 Lease dated April 1, 1992 as renewed by Letter of Notice of Incorporated by reference
Intent to Renew dated December 13, 1996 by and between the to Exhibit 10.11 to the Form S-4
Company successor in interest to Westinghouse Electric
Corporation as Tenant and Utah State Retirement Fund as
Landlord.
10.10 Lease dated September 4, 1997 between WESCO Distribution as Incorporated by reference
Tenant and The Buncher Company as Landlord. to Exhibit 10.12 to the Form S-4
10.11 Lease dated March 1995 by and between WESCO Incorporated by reference
Distribution-Canada, Inc. ("WESCO Canada") as Tenant and to Exhibit 10.13 to the Form S-4
Atlantic Construction, Inc. as Landlord.
10.18 Amended and Restated Registration and Participation Agreement Incorporated by reference
dated June 5, 1998 among WESCO and certain securityholders of to Exhibit 10.19 to the Form S-4
WESCO named therein.
10.19 Employment Agreement between WESCO Distribution and Roy W. Incorporated by reference
Haley. to Exhibit 10.20 to the Form S-4
10.20 WESCO International, Inc. 1998 Stock Option Plan. Incorporated by reference
to WESCO's Exhibit 10.1 to
Quarterly Report on Form
10-Q for the quarter ended
September 30, 1998
10.21 Form of Management Stock Option Agreement. Incorporated by reference
to WESCO's Exhibit 10.1 to
Quarterly Report on Form
10-Q for the quarter ended
September 30, 1998
10.22 1999 Deferred Compensation Plan for Non-Employee Directors. Incorporated by reference
to WESCO's Exhibit 10.22 to
Annual Report on Form 10-K
for the year ended December
31, 1998
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- -------------- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C>
10.23 Credit Agreement among WESCO Distribution, Inc., WESCO Incorporated by reference
Distribution-Canada, Inc., WESCO International, Inc. and the to WESCO's Exhibit 10.1 to
Lenders identified therein, dated June 29, 1999. Quarterly Report on Form
10-Q for the period ended
June 30, 1999 (the "Second
Quarter Form 10-Q")
10.24 Receivables Purchase Agreement dated as of June 30, 1999, among Incorporated by reference
WESCO Receivables Corp., WESCO Distribution, Inc., Market to Exhibit 10.2 to the
Street Capital Corp. and PNC Bank, National Association. Second Quarter Form 10-Q
10.25 Amended and Restated Receivables Purchase Agreement, dated as Incorporated by reference
of September 28, 1999, among WESCO Receivables Corp., WESCO to WESCO's Exhibit 10.1 to
Distribution, Inc., and PNC Bank, National Association. Quarterly Report on Form
10-Q for the period ended
September 30, 1999
10.26 1999 Long-Term Incentive Plan. Incorporated by reference
to WESCO's Exhibit 10.22 to
Form S-1
21.1 Subsidiaries of WESCO. Incorporated by reference
to Exhibit 21.1 to the
Registration Statement on
Form S-1
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. Filed herewith
23.2 Consent of Anchin, Block & Anchin LLP, Independent Accountants. Filed herewith
27.1 Financial Data Schedule. Filed herewith
</TABLE>
- ---------------------
The registrant hereby agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule to any of the agreements contained
herein.
Copies of exhibits may be retrieved electronically at the
Securities and Exchange Commission's home page at www.sec.gov.
Exhibits will also be furnished without charge by writing to Steven
A. Burleson, Vice President, Chief Financial Officer, Commerce
Court, Four Station Square, Suite 700, Pittsburgh, Pennsylvania
15219. Requests may also be directed to (412) 454-2200.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESCO INTERNATIONAL, INC.
By: /s/ ROY W. HALEY
--------------------------
Name: Roy W. Haley
Title: Chairman of the Board and
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ ROY W. HALEY Chairman and Chief Executive Officer (Principal Executive March 29, 2000
- ---------------------------------- Officer)
Roy W. Haley
/s/ STEVEN A. BURLESON Vice President, Chief Financial Officer (Principal March 29, 2000
- ---------------------------------- Financial and Accounting Officer)
Steven A. Burleson
/s/ JAMES L. SINGLETON Director March 29, 2000
- ----------------------------------
James L. Singleton
/s/ JAMES A. STERN Director March 29, 2000
- ----------------------------------
James A. Stern
/s/ ANTHONY D. TUTRONE Director March 29, 2000
- ----------------------------------
Anthony D. Tutrone
/s/ MICHAEL J. CHESHIRE Director March 29, 2000
- ----------------------------------
Michael J. Cheshire
/s/ ROBERT J. TARR, JR. Director March 29, 2000
- ----------------------------------
Robert J. Tarr, Jr.
/s/ KENNETH L. WAY Director March 29, 2000
- ----------------------------------
Kenneth L. Way
</TABLE>
24
<PAGE> 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants................................................................... 26
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................ 27
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......... 28
Consolidated Statements of Stockholders' Equity and Redeemable Common Stock for the years ended
December 31, 1999, 1998 and 1997.................................................................. 29
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......... 30
Notes to Consolidated Financial Statements.......................................................... 31
</TABLE>
25
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
WESCO International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and redeemable
common stock and cash flows present fairly, in all material respects, the
financial position of WESCO International, Inc. and subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
600 Grant Street
Pittsburgh, Pennsylvania /s/ PricewaterhouseCoopers LLP
February 10, 2000
26
<PAGE> 28
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 8,819 $ 8,093
Trade accounts receivable, net of allowance for doubtful accounts of
$7,023 and $8,082 in 1999 and 1998, respectively (NOTE 5)............. 188,307 181,511
Other accounts receivable............................................... 31,829 22,265
Inventories............................................................. 397,669 343,764
Income taxes receivable................................................. 10,667 7,329
Prepaid expenses and other current assets............................... 4,930 2,892
Deferred income taxes (NOTE 11)........................................ 11,580 16,217
--------------------------------
Total current assets................................................ 653,801 582,071
Property, buildings and equipment, net (NOTE 8).............................. 116,638 109,631
Goodwill and other intangibles, net of accumulated amortization of $18,956
and $10,163 in 1999 and 1998, respectively (NOTE 6)..................... 249,240 234,049
Other assets................................................................. 9,114 24,771
--------------------------------
Total assets........................................................ $1,028,793 $ 950,522
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 406,963 $ 378,590
Accrued payroll and benefit costs....................................... 18,171 19,614
Current portion of long-term debt....................................... 3,831 16,592
Other current liabilities............................................... 25,820 51,671
--------------------------------
Total current liabilities........................................... 454,785 466,467
Long-term debt (NOTE 9)...................................................... 422,539 579,238
Other noncurrent liabilities................................................. 7,504 7,040
Deferred income taxes (NOTE 11).............................................. 26,660 18,832
--------------------------------
Total liabilities................................................... 911,488 1,071,577
Commitments and contingencies (NOTE 16)
Redeemable common stock, $.01 par value; 4,901,902 shares issued and
outstanding in 1998 (redemption value of redeemable common stock and vested
options of $130,267 in 1998) (NOTE 10)....................................... -- 21,506
STOCKHOLDERS' EQUITY (NOTES 3 AND 10):
Preferred stock, $.01 par value; 20,000,000 shares authorized, no shares
issued or outstanding................................................. -- --
Common stock, $.01 par value; 210,000,000 shares authorized, 43,291,319
and 25,209,817 shares issued in 1999 and 1998, respectively........... 433 252
Class B nonvoting convertible common stock, $.01 par value; 20,000,000
shares authorized, 4,653,131 issued in 1999 and 1998.................. 46 46
Additional capital...................................................... 565,897 326,783
Retained earnings (deficit)............................................. (443,582) (468,220)
Treasury stock, at cost; 637,259 shares in 1999......................... (4,790) --
Accumulated other comprehensive income (loss)........................... (699) (1,422)
--------------------------------
Total stockholders' equity.......................................... 117,305 (142,561)
--------------------------------
Total liabilities and stockholders' equity.......................... $1,028,793 $ 950,522
================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
27
<PAGE> 29
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................... $3,420,113 $3,025,439 $2,594,819
Cost of goods sold........................................... 2,807,240 2,487,780 2,130,900
---------------------------------------------------
Gross profit.............................................. 612,873 537,659 463,919
Selling, general and administrative expenses................. 467,530 415,028 372,532
Depreciation and amortization................................ 20,350 14,805 11,331
Recapitalization costs (NOTE 4).............................. -- 51,800 --
---------------------------------------------------
Income from operations.................................... 124,993 56,026 80,056
Interest expense, net........................................ 46,968 45,121 20,109
Other expenses (NOTE 5)...................................... 19,547 10,122 --
---------------------------------------------------
Income before income taxes and extraordinary item......... 58,478 783 59,947
Provision for income taxes (NOTE 11)......................... 23,333 8,519 23,710
---------------------------------------------------
Income (loss) before extraordinary item................... 35,145 (7,736) 36,237
Extraordinary item, net of tax benefits of $6,711 (NOTE 9)... (10,507) -- --
---------------------------------------------------
Net income (loss)......................................... $ 24,638 $ (7,736) $ 36,237
===================================================
Earnings (loss) per share (NOTE 12) Basic:
Income (loss) before extraordinary item................... $0.82 $(0.17) $0.61
Extraordinary item........................................ (0.25) -- --
---------------------------------------------------
Net income (loss)......................................... $0.57 $(0.17) $0.61
===================================================
Diluted:
Income (loss) before extraordinary item................... $0.75 $(0.17) $0.55
Extraordinary item........................................ (0.22) -- --
---------------------------------------------------
Net income (loss)......................................... $0.53 $(0.17) $0.55
===================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
28
<PAGE> 30
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND REDEEMABLE COMMON STOCK
<TABLE>
<CAPTION>
COMMON
STOCK
TO BE ACCUMULATED
CLASS B RETAINED ISSUED OTHER REDEEMABLE
COMPREHENSIVE COMMON COMMON ADDITIONAL EARNINGS UNDER TREASURY COMPREHENSIVE COMMON
INCOME STOCK STOCK CAPITAL (DEFICIT) OPTION STOCK INCOME (LOSS) STOCK
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996... $539 $-- $ 92,789 $ 53,129 $ 2,500 $ -- $ (211) $ 8,930
Exercise of common stock
options................... 171
Issuance of common stock..... 201
Repurchase of common stock... (324)
Net income................... $36,237 36,237
Translation adjustment....... (448) (448)
-----------
Comprehensive income......... $35,789
=========== ------------------ ---------- ---------- --------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1997... 539 -- 92,789 89,366 2,500 -- (659) 8,978
Recapitalization, net........ (287) 46 231,326 (549,143) (2,500) 1,271
Issuance of common stock..... 16,759
Repurchase of common stock... (707) (1,427)
Exercise of common stock
options.................... 888
Forfeiture and repurchase of
common stock options....... 1,780 (4,075)
Net loss..................... $(7,736) (7,736)
Translation adjustment....... (763) (763)
-----------
Comprehensive income......... $(8,499)
=========== ------------------ ---------- ---------- --------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1998... 252 46 326,783 (468,220) -- -- (1,422) 21,506
Issuance of common stock..... 112 186,662
Termination of redemption
rights..................... 49 21,457 (21,506)
Conversion of convertible
notes...................... 17 29,574
Repurchase of common stock... (4,756)
Exercise of common stock
options.................... 3 1,421 (34)
Net income .................. $24,638 24,638
Translation adjustment....... 723 723
-----------
Comprehensive income......... $25,361
=========== ------------------ ---------- ---------- --------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 1999... $433 $46 $565,897 $(443,582) $ -- $(4,790) $ (699) $ --
================== ========== ========== ========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
29
<PAGE> 31
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $ 24,638 $ (7,736) $ 36,237
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Extraordinary item, net of tax benefits...................... 10,507 -- --
Recapitalization costs....................................... -- 40,500 --
Depreciation and amortization................................ 20,350 14,805 11,331
Accretion of original issue and amortization of purchase
discounts.................................................. 4,441 6,300 4,856
Amortization of debt issuance and interest rate cap costs ... 1,153 1,276 418
Loss (gain) on sale of property, buildings and equipment..... 314 (1,404) (855)
Deferred income taxes........................................ 13,718 2,370 2,837
Changes in assets and liabilities, excluding the effects of
acquisitions:
Sale of trade accounts receivable.......................... 60,000 274,245 --
Trade and other receivables................................ (66,725) (23,644) (32,641)
Inventories................................................ (44,964) (5,645) (31,671)
Prepaid expenses and other current assets.................. 2,553 (2,151) (1,120)
Other assets............................................... 417 191 (3,652)
Accounts payable........................................... 41,788 (8,445) 9,690
Accrued payroll and benefit costs.......................... (1,443) (8,380) 1,594
Other current and noncurrent liabilities................... (391) (5,428) (9,001)
-------------- -------------- --------------
Net cash provided (used) by operating activities....... 66,356 276,854 (11,977)
INVESTING ACTIVITIES:
Capital expenditures............................................ (21,230) (10,694) (11,591)
Proceeds from the sale of property, buildings and equipment..... 650 2,039 3,996
Receipts from (advances to) affiliate........................... 8,667 (1,461) --
Acquisitions, net of cash acquired (NOTE 18).................... (59,983) (173,976) (13,914)
-------------- -------------- --------------
Net cash used by investing activities.................. (71,896) (184,092) (21,509)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................ 683,772 1,064,288 430,843
Repayments of long-term debt.................................... (858,072) (797,555) (389,613)
Debt issuance costs............................................. (2,160) (10,693) (172)
Proceeds from issuance of common stock, net of offering
costs, and exercise of options (NOTE 3).................. 187,482 332,795 372
Repurchase of common stock...................................... (4,756) (657,956) (324)
Recapitalization costs.......................................... -- (28,974) --
Proceeds from contributed capital............................... -- 5,806 --
-------------- -------------- --------------
Net cash provided (used) by financing activities....... 6,266 (92,289) 41,106
-------------- -------------- --------------
Net change in cash and cash equivalents......................... 726 473 7,620
Cash and cash equivalents at the beginning of period............ 8,093 7,620 --
-------------- -------------- --------------
Cash and cash equivalents at the end of period.................. $ 8,819 $ 8,093 $ 7,620
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
30
<PAGE> 32
WESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WESCO International, Inc. and its subsidiaries (collectively, "WESCO"),
headquartered in Pittsburgh, Pennsylvania, is a full-line distributor of
electrical supplies and equipment and is a provider of integrated supply
procurement services. WESCO currently operates over 340 branch locations and
five distribution centers in the United States, Canada, Mexico, Puerto Rico,
Guam, the United Kingdom, the Balkans and Singapore.
2. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of WESCO
International, Inc. and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions. These may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements. They may also affect the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from these estimates upon subsequent resolution of some matters.
Revenue Recognition
Revenues are recognized at the time products are shipped or services are
rendered.
Cash Equivalents
Cash equivalents are defined as highly liquid investments with original
maturities of 90 days or less when purchased.
Asset Securitization
WESCO accounts for the securitization of accounts receivable in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." At the time the receivables are sold the balances are removed from
the balance sheet. SFAS No. 125 also requires retained interests in the
transferred assets to be measured by allocating the previous carrying amount
between the assets sold and retained interests, if any, based on their relative
fair values at the date of transfer.
Inventories
Inventories primarily consist of merchandise purchased for resale and are
stated at the lower of cost or market. Cost is determined principally under the
average cost method.
31
<PAGE> 33
Property, Buildings and Equipment
Property, buildings and equipment are recorded at cost. Depreciation expense
is determined using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over either their respective
lease terms or their estimated lives, whichever is shorter. Expenditures for new
facilities and improvements that extend the useful life of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred. When
property is retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any related gains or
losses are recorded.
Intangible Assets
Goodwill and other intangible assets arising from acquisitions are amortized
on a straight-line basis over periods not exceeding 35 years. The carrying
values of individual components of intangible assets are regularly reviewed by
evaluating the estimated future undiscounted cash flows to determine
recoverability of the assets. Any decrease in value is recognized on a current
basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances, if any, are provided when a portion
or all of a deferred tax asset may not be realized.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding during the respective periods. Diluted
earnings per share are computed by dividing net income by the weighted average
common shares and common share equivalents outstanding during the period. The
dilutive effect of common share equivalents is considered in the diluted
earnings per share computation using the treasury stock method.
Foreign Currency Translation
The local currency is the functional currency for all of WESCO's operations
outside the United States. Assets and liabilities of these operations are
translated to U.S. dollars at the exchange rate in effect at the end of each
period. Income statement accounts are translated at the average exchange rate
prevailing during the period. Translation adjustments arising from the use of
differing exchange rates from period to period are included as a component of
stockholders' equity. Gains and losses from foreign currency transactions are
included in net income for the period.
Treasury Stock
Common stock purchased for treasury is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the weighted average cost basis.
Financial Instruments
Periodically, WESCO enters into interest rate cap, floor and collar
agreements to mitigate the exposure that changes in interest rates have on
variable-rate borrowings. If the requirements for hedge accounting are met,
amounts paid or received under these agreements are recognized over the life of
the agreements as adjustments to interest expense. Otherwise, the instruments
are marked to market and the gains and losses from changes in the market value
of the contracts are recorded in the current period. These financial instruments
did not have a material impact on WESCO's consolidated financial statements for
any of the three years ended December 31, 1999.
32
<PAGE> 34
Environmental Expenditures
WESCO has facilities and operations which distribute certain products that
must comply with environmental regulations and laws. Expenditures for current
operations are expensed or capitalized, as appropriate. Expenditures relating to
existing conditions caused by past operations, and which do not contribute to
future revenue, are expensed. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated.
Reclassifications
Certain prior year amounts have been reclassified in order to conform with
the current presentations.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
as amended, is required to be adopted by WESCO as of January 1, 2001, although
early adoption is permitted. This statement requires the recognition of the fair
value of any derivative financial instrument on the balance sheet. Changes in
fair value of the derivative and, in certain instances, changes in the fair
value of an underlying hedged asset or liability, are recognized through either
income or as a component of other comprehensive income. Management does not
expect this statement will have a material impact on the results of operations
or financial position of WESCO.
3. INITIAL PUBLIC OFFERING
On May 17, 1999, WESCO completed its initial public offering of 11,183,750
shares of common stock ("Offering") at $18.00 per share. In connection with the
Offering, certain employee rights to require WESCO to repurchase outstanding
redeemable common stock were terminated and approximately $31.5 million of
convertible notes were converted into 1,747,228 shares of common stock. Proceeds
from the Offering (after deducting Offering costs of $14.5 million) totaling
$186.8 million and borrowings of approximately $65 million were used to redeem
all of the 11 1/8% senior discount notes ($62.8 million) and to repay the
existing revolving credit and term loan facilities ($188.8 million).
In connection with the Offering, the Board of Directors approved a 57.8 to
one stock split effected in the form of a stock dividend of WESCO's common
stock. The Board of Directors also reclassified the Class A common stock into
common stock, increased the authorized common stock to 210,000,000 shares and
the authorized Class B common stock to 20,000,000 shares and authorized
20,000,000 shares of $.01 par value preferred stock, all effective May 11, 1999.
In this report, all share and per share data have been restated to reflect the
stock split.
4. RECAPITALIZATION
On June 5, 1998, WESCO repurchased and retired all of the common stock of
WESCO held by Clayton, Dubilier & Rice ("CD&R") (48,163,584 shares), the former
Westinghouse Electric Corporation ("Westinghouse") (11,560,000 shares), and
certain other management and nonmanagement stockholders (2,138,484 shares). All
shares were issued and repurchased at $10.75 per share for net consideration of
approximately $653.5 million ("Equity Consideration"). In addition, WESCO repaid
approximately $379.1 million of then outstanding indebtedness, and sold
29,604,351 shares of common stock to an investor group led by affiliates of the
Cypress Group LLC ("Cypress") representing approximately 88.7% of WESCO at that
time for an aggregate cash consideration of $318.1 million ("Cash Equity
Contribution") (collectively, "Recapitalization"). Existing management retained
approximately an 11.3% interest in WESCO immediately following the
Recapitalization. WESCO funded the Equity Consideration and the repayment of
indebtedness from proceeds of the Cash Equity Contribution, issuance of
approximately $351 million of senior subordinated and senior discount notes, a
$170 million credit facility and the sale of approximately $250 million of
accounts receivable. Given the 11.3% retained ownership, the transaction was
treated as a recapitalization for financial reporting purposes and, accordingly,
the historical bases of WESCO's assets and liabilities were not affected.
33
<PAGE> 35
In connection with the Recapitalization, WESCO recorded a one-time charge of
$51.8 million related to investment banking fees of $13.8 million, compensation
charges of $11.3 million associated with one-time bonuses paid to certain
members of management, transaction fees of $9.5 million paid to Cypress,
compensation charges of $6.2 million associated with the cash settlement of
certain stock options, compensation charges of $4.1 million associated with the
acceleration of vesting of one former executive's stock options issued at a
discount and other non-capitalized transaction fees and expenses amounting to
$6.9 million.
5. ACCOUNTS RECEIVABLE SECURITIZATION
In June 1999, WESCO and certain of its subsidiaries terminated its previous
accounts receivable securitization program and entered into a new $350 million
accounts receivable securitization program ("Receivables Facility"). Under the
Receivables Facility, WESCO sells, on a continuous basis, to WESCO Receivables
Corporation, a wholly-owned, special purpose company ("SPC"), an undivided
interest in all eligible accounts receivable. The SPC sells to a third-party
conduit all the receivables while maintaining a subordinated interest, in the
form of overcollateralization, in a portion of the receivables. WESCO has agreed
to continue servicing the sold receivables for the financial institution at
market rates; accordingly, no servicing asset or liability has been recorded.
As of December 31, 1999 and 1998, securitized accounts receivable totaled
$390.5 million and $360.1 million, respectively, of which the subordinated
retained interest was $52.9 million and $84.1 million, respectively.
Accordingly, $337.6 million and $276.0 million of accounts receivable balances
were removed from the consolidated balance sheets at December 31, 1999 and 1998.
Net proceeds from the transactions totaled $60.0 million and $274.2 million in
1999 and 1998, respectively. Costs associated with the Receivables Facility
totaled $19.5 million and $10.1 million in 1999 and 1998, respectively. These
amounts are recorded as other expenses in the consolidated statement of
operations and are primarily related to the discount and loss on the sale of
accounts receivables, partially offset by related servicing revenue.
6. ACQUISITIONS
On September 11, 1998, WESCO acquired substantially all the assets and
assumed substantially all liabilities and obligations relating to the operations
of Bruckner Supply Company, Inc. ("Bruckner"), a privately owned company
headquartered in Port Washington, New York. Bruckner is a provider of integrated
supply procurement and outsourcing activities for large industrial companies.
Net sales totaled approximately $222 million in 1997.
The Bruckner purchase price at closing was $99.1 million, consisting of
$72.5 million in cash and a non-interest bearing convertible note discounted to
a value of $26.6 million for financial reporting purposes, resulting in goodwill
of $88.0 million. In connection with the Offering, the note was converted into
WESCO common stock.
The Bruckner purchase agreement provided for certain post-closing
adjustments, which were paid in December 1998 and totaled $6.0 million. The
agreement also provides for additional contingent consideration, not to exceed
$130 million, of which $30 million was paid in 1999. Additional contingent
consideration, if any, is to be paid based on a multiple of increases in
earnings before interest, taxes, depreciation and amortization of Bruckner with
respect to calendar years 2000 through 2004. Up to 50% of the additional future
contingent consideration, if any, may be converted at the election of the holder
into common stock at the then market value.
In January 1998, WESCO acquired the electrical distribution businesses of
Avon Electric Supplies, Inc. and its affiliates ("Avon"). Net sales totaled
approximately $85 million in 1997.
34
<PAGE> 36
The following unaudited pro forma information assumes that the Bruckner and
Avon acquisitions had occurred at the beginning of each period presented.
Adjustments to arrive at the pro forma information include, among others, those
related to acquisition financing, amortization of goodwill and the related tax
effects of such adjustments at an assumed rate of 39%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997
--------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Net sales............................................. $3,205,333 $2,901,725
Net income (loss)..................................... (3,102) 41,551
Basic earnings (loss) per share....................... (0.07) 0.61
Diluted earnings (loss) per share..................... (0.07) 0.52
</TABLE>
The pro forma financial information does not purport to present what WESCO's
results of operations would have been if the Bruckner and Avon acquisitions had
actually occurred at the beginning of each period presented, or to project
WESCO's results of operations for any future period.
In addition to the Bruckner and Avon acquisitions, WESCO acquired four other
distributors in 1998, the largest of which were Brown Wholesale Electric Company
(acquired January 1998) and Reily Electric Supply, Inc. (acquired May 1998). In
1999 and 1997, WESCO acquired four and two electrical distributors,
respectively. A summary of certain information with respect to all acquisitions
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Aggregate purchase price, including contingent consideration............. $40,076 $250,218 $16,164
Recorded goodwill........................................................ 25,455 162,743 5,913
</TABLE>
All of the acquisitions were accounted for under the purchase method of
accounting for business combinations. The results of operations of these
companies are included in the consolidated financial statements prospectively
from the acquisition dates. Pro forma results of these acquisitions, excluding
Bruckner and Avon, assuming they had been made at the beginning of each year
presented, would not be materially different from the consolidated results
reported herein.
7. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT SUPPLIERS
WESCO distributes its products and services and extends credit to a large
number of customers in the industrial, construction, utility and manufactured
structures markets. In addition, one supplier accounted for approximately 13%,
15% and 18% of WESCO's purchases for each of the three years, 1999, 1998 and
1997, respectively.
35
<PAGE> 37
8. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth the components of property, buildings and
equipment:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................................... $ 19,210 $ 17,613
Buildings and leasehold improvements...................................... 59,485 59,619
Furniture, fixtures and equipment......................................... 51,680 43,734
Software costs............................................................ 14,409 7,866
-----------------------
144,784 128,832
Accumulated depreciation and amortization................................. (42,714) (32,738)
-----------------------
102,070 96,094
Construction in progress.................................................. 14,568 13,537
-----------------------
$116,638 $109,631
=======================
</TABLE>
9. LONG TERM DEBT
The following table sets forth WESCO's outstanding indebtedness:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility................................................. $132,033 $ --
Senior subordinated notes (1)............................................. 290,342 289,194
Term loans................................................................ -- 169,500
Prior revolving facility.................................................. -- 42,450
Senior discount notes (2)................................................. -- 52,071
Other..................................................................... 3,995 42,615
-----------------------
426,370 595,830
Less current portion...................................................... (3,831) (16,592)
-----------------------
$422,539 $579,238
=======================
</TABLE>
- ---------------------
(1) Net of original issue discount of $820 and $918 and purchase discount of
$8,838 and $9,888, respectively.
(2) Net of original issue discount of $33,266 and purchase discount of $1,664.
During the second quarter of 1999, WESCO completed the Offering and
refinanced the majority of its long-term debt facilities. The proceeds of the
Offering of $186.8 million and additional borrowings of $65 million were used to
redeem all of the 11 1/8% senior discount notes of $62.8 million and repay the
existing revolving credit and term loan facilities of $188.8 million. In
conjunction with these transactions and the termination of its previous accounts
receivable securitization program (see Note 5), approximately $8.9 million of
deferred financing and other related charges were written off and redemption
costs of $8.3 million were incurred which resulted in an extraordinary loss of
$10.5 million, net of income tax benefits of $6.7 million. Additionally, $31.5
million of convertible notes were converted into 1,747,228 shares of WESCO
common stock.
The term loans and previous revolving credit facility borrowings were made
pursuant to a credit agreement entered into by WESCO Distribution, Inc., a
wholly-owned subsidiary of WESCO and certain financial institutions. This credit
agreement provided for term loan facilities in an aggregate principal amount of
$270 million and a $100 million revolving credit facility. This facility
provided variable-rate borrowings equal to market indices plus applicable
borrowing margins.
The senior discount notes with an aggregate principal amount of $87 million
and a stated rate of 11 1/8% were issued with an original issue discount ("OID")
of $36.5 million that was being accreted over the period ending June 1, 2003.
36
<PAGE> 38
Revolving Credit Facility
In June 1999, WESCO Distribution, Inc. entered into a $400 million revolving
credit facility with certain financial institutions. The revolving credit
facility, which matures in June 2004, consists of up to $365 million of
revolving loans denominated in U.S. dollars and a Canadian sublimit totaling $35
million. Borrowings under the revolving credit facility are collateralized by
substantially all the assets, excluding real property, of WESCO Distribution,
Inc. and are guaranteed by WESCO International, Inc. and certain subsidiaries.
Borrowings bear rates of interest equal to various indices, at WESCO's
option, such as LIBOR, Prime Rate or the Federal Funds Rate, plus a borrowing
margin based on WESCO's financial performance. At December 31, 1999, the
interest rate on revolving credit facility borrowings was 7.4%. A commitment fee
of 30 to 50 basis points per year is due on unused portions of the revolving
credit facility.
At December 31, 1999, WESCO had three interest rate cap and two interest
rate collar agreements with aggregate notional amounts of $125 million that
expire in February 2000. The aggregate cost of these agreements of $0.2 million
is being amortized to interest expense on a straight-line basis over the period
of the agreements. The agreements effectively provide a ceiling for LIBOR at
7.0% and, with respect to $50 million notional value of interest rate collars, a
floor of 4.5%. The market value of the interest rate caps and collars
approximated the carrying value at December 31, 1999.
Senior Subordinated Notes
The senior subordinated notes in an aggregate principal amount of $300
million were issued by WESCO Distribution, Inc. The notes are unsecured
obligations and are fully and unconditionally guaranteed by WESCO International,
Inc. The senior subordinated notes bear interest at 9 1/8% payable semiannually
on June 1 and December 1 through June 1, 2008. The senior subordinated notes are
redeemable by WESCO Distribution, Inc. at any time prior to June 1, 2001, up to
a maximum of 35% of the original aggregate principal amount of the senior
subordinated notes, with proceeds of an equity offering at a redemption price
equal to 109.125% of the principal amount provided plus accrued and unpaid
interest.
In addition, the senior subordinated notes are redeemable at the option of
WESCO Distribution, Inc. in whole or in part, at any time after June 1, 2003 at
the following prices:
<TABLE>
<CAPTION>
Redemption Price
----------------
<S> <C>
2003....................................................... 104.563%
2004....................................................... 103.042
2005....................................................... 101.521
2006 and thereafter........................................ 100.000
</TABLE>
At any time prior to June 1, 2003, the senior subordinated notes may be
redeemed, in whole but not in part, at the option of the Company at any time
within 180 days after a change of control, at a redemption price equal to the
principal amount thereof plus accrued and unpaid interest and the then
applicable premium. In addition, the noteholders have the right to require
WESCO, upon a change of control, to repurchase all or any part of the senior
subordinated notes at a redemption price equal to 101% of the principal amount
provided plus accrued and unpaid interest.
Other
At December 31, 1999 and 1998, other borrowings primarily consisted of
notes issued to sellers in connection with acquisitions, of which $31.5 million
was converted into WESCO common stock in connection with the Offering.
37
<PAGE> 39
The following table sets forth the aggregate principal repayment
requirements for all indebtedness for the next five years:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------
<S> <C>
2000....................................................... $ 3,831
2001....................................................... 30
2002....................................................... 30
2003....................................................... 30
2004....................................................... 132,063
</TABLE>
The credit agreements contain various restrictive covenants that, among
other things, impose limitations on (i) dividend payments or certain other
restricted payments or investments; (ii) the incurrence of additional
indebtedness and guarantees or issuance of additional stock; (iii) creation of
liens; (iv) mergers, consolidation or sales of substantially all of WESCO's
assets; (v) certain transactions among affiliates; (vi) payments by certain
subsidiaries to WESCO; and (vii) capital expenditures. In addition, the
agreements require WESCO to meet certain leverage, working capital and interest
coverage ratios.
WESCO is permitted to pay dividends under certain limited circumstances. At
December 31, 1999 and 1998, no retained earnings were available for dividend
payments.
Based on current market interest rates and discounted cash flow analyses,
the fair value of WESCO's long-term debt approximates its carrying value at
December 31, 1999, with the exception of the senior subordinated notes. At
December 31, 1999, the carrying amount of the senior subordinated notes was
$290.3 million compared to an approximate fair value of $280.5 million. Fair
value of the senior subordinated notes was derived from quoted market prices.
WESCO had $4.2 million and $4.5 million of outstanding letters of credit at
December 31, 1999 and 1998, respectively. These letters of credit are used as
collateral for performance and bid bonds. The fair value of the letters of
credit approximates the contract value.
10. CAPITAL STOCK
Preferred Stock
There are 20,000,000 shares of preferred stock authorized at a par value of
$.01 per share. The Board of Directors has the authority, without further action
by the stockholders, to issue all authorized preferred shares in one or more
series and to fix the number of shares, designations, voting powers,
preferences, optional and other special rights and the restrictions or
qualifications thereof. The rights, preferences, privileges and powers of each
series of preferred stock may differ with respect to dividend rates, liquidation
values, voting rights, conversion rights, redemption provisions and other
matters.
Common Stock
There are 210,000,000 shares of common stock and 20,000,000 shares of Class
B common stock authorized at a par value of $.01 per share. The Class B common
stock is identical to the common stock, except for voting and conversion rights.
The holders of Class B common stock have no voting rights. With certain
exceptions, Class B common stock may be converted, at the option of the holder,
into the same number of shares of common stock.
Redeemable Common Stock
Prior to the Offering, certain employees and key management of WESCO held
common stock and options that required WESCO to repurchase, under certain
conditions, death, disability or termination without cause during the term of
employment, all of the shares and the exercisable portion of the options held.
In connection with these redemption features, WESCO had classified outside of
permanent equity, an amount representing the initial fair value of the
redeemable shares. These shares and exercisable options were not marked to
market since the events of
38
<PAGE> 40
redemption were considered remote. This repurchase right terminated upon the
consummation of the Offering and as a result, the redeemable shares were
reclassified to stockholders' equity.
The following table sets forth capital stock share activity:
<TABLE>
<CAPTION>
CLASS B REDEEMABLE
COMMON STOCK TREASURY STOCK COMMON STOCK COMMON STOCK
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996.................. 53,943,584 -- -- 5,091,140
Options exercised.................. -- -- -- 99,069
Shares issued...................... -- -- -- 46,240
Shares repurchased................. -- -- -- (74,562)
----------------------------------------------------------------------------
December 31, 1997.................. 53,943,584 -- -- 5,161,887
Recapitalization, net.............. (28,816,421) -- 4,653,131 (1,621,059)
Shares issued...................... -- -- -- 1,559,675
Shares repurchased................. -- -- -- (556,961)
Options exercised.................. 82,654 -- -- 358,360
----------------------------------------------------------------------------
December 31, 1998.................. 25,209,817 -- 4,653,131 4,901,902
Shares issued...................... 11,183,750 -- -- --
Termination of redemption rights 4,901,902 -- -- (4,901,902)
Conversion of convertible notes.... 1,747,228 -- -- --
Treasury shares purchased.......... -- (632,700) -- --
Options exercised.................. 248,622 (4,559) -- --
----------------------------------------------------------------------------
December 31, 1999.................. 43,291,319 (637,259) 4,653,131 --
============================================================================
</TABLE>
In November 1999, WESCO's Board of Directors authorized a stock repurchase
program to purchase up to $25 million of WESCO common stock. WESCO's common
stock may be purchased at management's discretion, from time to time, in open
market transactions and the program may be discontinued at any time. As of
December 31, 1999, WESCO had purchased 632,700 shares for approximately $4.8
million under this program.
11. INCOME TAXES
The following table sets forth the components of the provision for income
taxes before extraordinary items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal........................................................... $ 8,850 $4,843 $16,689
State............................................................. (311) 1,229 3,067
Foreign........................................................... 1,076 77 1,117
----------------------------------------
Total current................................................... 9,615 6,149 20,873
Deferred taxes:
Federal........................................................... 10,767 1,926 2,727
State............................................................. 2,779 431 (183)
Foreign........................................................... 172 13 293
----------------------------------------
Total deferred.................................................. 13,718 2,370 2,837
----------------------------------------
$23,333 $8,519 $23,710
========================================
</TABLE>
39
<PAGE> 41
The following table sets forth the components of income before income taxes
and extraordinary item by jurisdiction:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States...................................................... $54,070 $ 71 $56,741
Foreign............................................................ 4,408 712 3,206
----------------------------------------
$58,478 $783 $59,947
========================================
</TABLE>
The following table sets forth the reconciliation between the federal
statutory income tax rate and the effective rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Federal statutory rate................................................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit................................ 2.7 137.8 3.3
Nondeductible expenses................................................. 2.9 206.2 2.6
Recapitalization costs................................................. -- 657.8 --
Foreign taxes.......................................................... (0.3) (51.1) 0.3
Other(1)............................................................... (0.4) 102.3 (1.6)
---------------------------------------
39.9% 1,088.0% 39.6%
=======================================
</TABLE>
- ---------------------
(1) Includes the impact of adjustments for certain tax liabilities and the
effect of differences between the recorded provision and the final filed tax
return for the prior year.
The following table sets forth deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable................................................................ $ 5,185 $ 6,330
Inventory.......................................................................... 5,591 5,325
Other.............................................................................. 804 4,562
-------------------------
Deferred tax assets........................................................... 11,580 16,217
-------------------------
Intangibles........................................................................ (11,874) (4,792)
Property, buildings and equipment.................................................. (6,203) (4,173)
Other.............................................................................. (8,583) (9,867)
-------------------------
Deferred tax liabilities...................................................... (26,660) (18,832)
-------------------------
$(15,080) $ (2,615)
=========================
</TABLE>
40
<PAGE> 42
12. PER SHARE
The following table sets forth the details of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Income (loss) before extraordinary item................ $35,145 $(7,736) $36,237
Interest on convertible debt........................... 595 -- 125
---------------------------------------------------
Earnings (loss) used in diluted earnings (loss) per share..... $35,740 $(7,736) $36,362
Weighted average common shares outstanding used in
computing basic earnings (loss) per share........... 43,057,894 45,051,632 59,030,100
Common shares issuable upon exercise of dilutive stock
options ............................................ 3,516,733 -- 7,267,136
Assumed conversion of convertible debt................. 949,912 -- 381,827
---------------------------------------------------
Weighted average common shares outstanding and common
share equivalents used in computing diluted
earnings (loss) per share........................... 47,524,539 45,051,632 66,679,063
===================================================
Earnings (loss) per share before extraordinary item
Basic............................................... $0.82 $(0.17) $0.61
Diluted............................................. 0.75 (0.17) 0.55
</TABLE>
Interest on convertible debt of $1.3 million and common share equivalents
outstanding in 1998 of 6,630,180 were anti-dilutive and, accordingly, were not
considered in the computation of diluted loss per share for the year ended
December 31, 1998.
13. EMPLOYEE BENEFIT PLANS
A majority of WESCO's employees are covered by defined contribution
retirement savings plans for their service rendered subsequent to WESCO's
formation. Westinghouse retained certain retiree pension and health benefits for
service rendered prior to the formation. U.S. employee contributions of not more
than 6% of eligible compensation are matched 50% by WESCO. WESCO's contributions
for Canadian employees range from 1% to 6% of eligible compensation based on
years of service.
In addition, employer contributions may be made at the discretion of the
Board of Directors and can be based on WESCO's current year performance.
Employees are credited for service with Westinghouse in determining the vesting
of WESCO's contributions. For the years ended December 31, 1999, 1998 and 1997,
WESCO contributed $6.0 million, $14.1 million and $12.5 million, respectively,
which was charged to expense.
14. STOCK INCENTIVE PLANS
Stock Purchase Plans
In connection with the Recapitalization, WESCO established a stock purchase
plan ("1998 Stock Purchase Plan") under which certain employees may be granted
an opportunity to purchase WESCO's common stock. The maximum number of shares
available for purchase may not exceed 427,720. The purchase price per share is
determined by the Board of Directors to represent fair market value, as defined
by the Stock Subscription Agreement. During 1998, 291,890 shares were issued at
a weighted average share price of $10.75. There were no shares issued under this
plan in 1999.
41
<PAGE> 43
In 1994, WESCO established a stock purchase plan ("1994 Stock Purchase
Plan") under which certain employees were granted an opportunity to purchase
WESCO's common stock. Future purchases of shares under the 1994 Stock Purchase
Plan were terminated in conjunction with the establishment of the 1998 Stock
Purchase Plan. During 1998 and 1997, 132,478 and 46,240 shares were issued at a
weighted average share price of $10.75 and $4.34, respectively.
Other Stock Purchases
In addition, certain key management employees of WESCO, nonemployee
directors and other investors may be granted an opportunity to purchase WESCO's
common stock. The purchase price per share is determined by the Board of
Directors to represent the fair market value, as defined by the Stock
Subscription Agreement. At December 31, 1998, and 1999, 4,265,178 shares had
been purchased. During 1998, 1,135,308 shares were purchased at a weighted
average share price of $10.75. There were no shares purchased in 1999 or 1997.
Stock Option Plans
WESCO has sponsored four stock option plans, the 1999 Long-Term Incentive
Plan ("LTIP"), the 1998 Stock Option Plan, the Stock Option Plan for Branch
Employees and the 1994 Stock Option Plan. The LTIP was designed to be the
successor plan to all prior plans. Outstanding options under prior plans will
continue to be governed by their existing terms, which are substantially similar
to the LTIP. Any remaining shares reserved for future issuance under the prior
plans are available for issuance under the LTIP.
An initial reserve of 6,936,000 shares of common stock has been authorized
for issuance under the LTIP. This reserve automatically increases by (i) the
number of shares of common stock covered by unexercised options granted under
prior plans that are canceled or terminated after the effective date of the LTIP
and (ii) the number of shares of common stock surrendered by employees to pay
the exercise price and/or minimum withholding taxes in connection with the
exercise of stock options granted under our prior plans.
The Compensation Committee of the Board of Directors will administer the
LTIP. The exercise price per share is determined by the Compensation Committee
to represent the fair market value, as defined by the LTIP. Should the exercise
price of the option be less than the fair market value of the stock at the grant
date, such excess will be recorded as compensation expense in the consolidated
statements of operations.
Options granted vest and become exercisable over periods ranging from four
to five years or earlier based on WESCO achieving certain financial performance
criteria. All options vest immediately in the event of a change in control. Each
option terminates on the tenth anniversary of its grant date unless terminated
sooner under certain conditions.
In connection with the Recapitalization, all options granted under the 1994
Stock Option Plan became fully vested.
The following sets forth shares of common stock reserved for future issuance
at December 31, 1999:
Stock Purchase Plan................................................... 135,830
LTIP..................................................................8,601,881
42
<PAGE> 44
The following table sets forth a summary of stock option activity and
related information for the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year................... 9,527,290 $ 5.34 6,926,983 $2.20 5,713,067 $1.85
Granted (1)....................... 14,675 18.00 4,121,140 9.76 1,510,892 3.42
Exercised.......................... (248,622) 2.31 (1,134,383) 2.68 (99,069) 1.73
Canceled.......................... (38,573) 3.38 (386,450) 3.83 (197,907) 1.77
----------- ------------ ----------
End of year......................... 9,254,770 5.44 9,527,290 5.34 6,926,983 2.20
=========== ============ ==========
Exercisable at end of year.......... 6,193,150 $3.33 5,133,912 $2.05 1,956,414 $1.78
</TABLE>
- ---------------------
(1) Options granted in 1998 include 635,800 options that were issued at a
discount, resulting in approximately $4.1 million of compensation expense.
Of these options, 358,360 were subsequently exercised. The remaining
277,440 were canceled and the associated costs were classified as
additional capital.
The following table sets forth exercise prices for options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS REMAINING CONTRACTUAL LIFE
------------------------------------------------------------------------------------------
<S> <C> <C>
$1.73 3,488,171 4.6
1.98 718,512 6.0
3.38 1,487,960 7.0
4.34 82,654 8.3
10.75 3,462,798 8.6
18.00 14,675 9.6
-----------
9,254,770
</TABLE>
In connection with the implementation of SFAS No. 123, "Accounting for
Stock-Based Compensation," WESCO has elected to continue to account for
stock-based compensation arrangements under the provisions of Accounting
Principles Board (APB) Opinion No. 25.
If compensation costs had been determined based on the fair value at the
grant dates according to SFAS No. 123, WESCO's net income and earnings per share
would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported......................................................... $24,638 $(7,736) $36,237
Pro forma........................................................... 22,912 (8,629) 36,144
Basic earnings (loss) per share
As reported......................................................... $0.57 $(0.17) $0.61
Pro forma........................................................... 0.53 (0.19) 0.61
Diluted earnings (loss) per share
As reported......................................................... $0.53 $(0.17) $0.55
Pro forma........................................................... 0.49 (0.19) 0.54
</TABLE>
The weighted average fair value per option granted was $8.00, $3.86 and
$0.58, for the years ended December 31, 1999, 1998 and 1997, respectively.
43
<PAGE> 45
For purposes of presenting pro forma results, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model and the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Risk-free interest rate....................................... 6.0% 5.0% 6.5%
Expected life (years)......................................... 7 7 7
Stock price volatility........................................ 30.0% -- --
</TABLE>
15. RELATED PARTIES
Prior to the Recapitalization, Westinghouse was considered a related party.
A summary of purchases from and sales to Westinghouse follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1998 1997
--------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchases from Westinghouse............................................ $2,765 $15,498
Sales to Westinghouse.......................................... ....... 727 21,666
</TABLE>
In connection with WESCO's formation, WESCO granted Westinghouse an option
to purchase 5,780,000 shares of common stock at $1.73 per share. The fair value
of this option of $2.5 million was included in the consolidated balance sheets
as common stock to be issued under option. This option was exercised and the
associated shares were repurchased in connection with the Recapitalization.
In connection with the Recapitalization, WESCO paid Cypress $9.5 million
related to transaction fees and WESCO received from CD&R $5.8 million as
contributed capital. Prior to the Recapitalization, WESCO paid CD&R an annual
financial advisory and management fee of $0.4 million.
16. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases, primarily
for real property that have noncancelable lease terms in excess of one year as
of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------
<S> <C>
2000...................................................... $20,716
2001...................................................... 17,554
2002...................................................... 12,805
2003...................................................... 7,893
2004...................................................... 5,593
Thereafter................................................ 9,358
</TABLE>
Rental expense for the years ended December 31, 1999, 1998 and 1997, was
$33.3 million, $29.1 million and $26.4 million, respectively.
WESCO has litigation arising from time to time in the normal course of
business. In management's opinion, any present litigation WESCO is aware of will
not materially affect WESCO's consolidated financial position, results of
operations or cash flows.
Westinghouse agreed to indemnify WESCO for certain environmental liabilities
that existed at the time of WESCO's formation. WESCO has made a claim under this
indemnity amounting to $1.5 million. The ultimate resolution of this
environmental compliance issue is not expected to materially impact WESCO's
consolidated financial position, results of operations or cash flows.
At December 31, 1999, WESCO has guaranteed $4.4 million of loans to certain
stockholders.
44
<PAGE> 46
17. SEGMENTS AND RELATED INFORMATION
WESCO is engaged principally in one line of business -- the sale of
electrical products and maintenance repair and operating supplies -- which
represents more than 90% of the consolidated net sales, income from operations
and assets, for 1999, 1998 and 1997. There were no material amounts of sales or
transfers among geographic areas and no material amounts of export sales.
The following table sets forth information about WESCO by geographic area:
<TABLE>
<CAPTION>
NET SALES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31 DECEMBER 31
-------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------- ----------------------------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
United States.................... $3,056,391 $2,713,213 $2,292,121 $357,696 $344,481 $161,250
Canada........................... 287,972 272,463 280,812 11,157 10,483 11,962
Other Foreign.................... 75,750 39,763 21,886 1,881 1,889 810
-------------------------------------- ----------------------------------------
$3,420,113 $3,025,439 $2,594,819 $370,734 $356,853 $174,022
====================================== ========================================
</TABLE>
18. SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Details of acquisitions:
Fair value of assets acquired..................................... $47,425 $307,056 $21,498
Deferred acquisition payment...................................... 30,000 -- --
Liabilities assumed............................................... (7,349) (56,838) (5,334)
Notes issued to seller............................................ (1,500) (46,242) (2,250)
Deferred acquisition payable...................................... (8,593) (30,000) --
------------------------------------------
Cash paid for acquisitions........................................ $59,983 $173,976 $13,914
==========================================
Cash paid for interest............................................... $42,817 $ 35,093 $15,377
Cash paid for income taxes........................................... 5,249 9,470 27,523
</TABLE>
Noncash financing activities not reflected in the consolidated statement of
cash flows for 1999 consisted of the conversion of $31.5 million of notes
payable to common stock. Noncash investing and financing activities not
reflected in the consolidated statement of cash flows for 1998 consisted of the
$5.8 million use of restricted cash to reduce long-term debt, $5.2 million of
capital expenditures included in accounts payable and the conversion of $1.6
million of notes payable to redeemable common stock.
45
<PAGE> 47
19. OTHER FINANCIAL INFORMATION
In June 1998, WESCO Distribution, Inc. issued $300 million of 9 1/8% senior
subordinated notes. The senior subordinated notes are fully and unconditionally
guaranteed by WESCO International, Inc. on a subordinated basis to all existing
and future senior indebtedness of WESCO International, Inc. Summarized financial
information for WESCO Distribution, Inc. is as follows:
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
Current assets....................................................... $653,801 $582,071
Noncurrent assets.................................................... 374,992 368,451
Current liabilities.................................................. 454,785 466,467
Long-term debt....................................................... 422,539 527,167
Other noncurrent liabilities......................................... 34,164 25,872
Total liabilities and stockholders' equity........................... 1,028,793 950,522
</TABLE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................................ $3,420,113 $3,025,439
Gross profit......................................................... 612,873 537,659
Income from operations............................................... 124,993 56,026
Net income (loss).................................................... 27,040 (4,377)
</TABLE>
Prior to the June 1998 issuance of the senior discount notes, WESCO
Distribution, Inc. financial information was identical to that of WESCO's
presented herein.
46
<PAGE> 48
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1),(2) QUARTER QUARTER
---------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
1999
Net sales............................................ $777,415 $864,151 $903,216 $875,331
Gross profit......................................... 138,793 157,001 156,356 160,723
Income from operations............................... 23,914 36,527 38,240 26,312
Income before income taxes and extraordinary item... 4,841 19,262 22,865 11,510
Income before extraordinary item..................... 2,917 11,548 13,757 6,923
Net income .......................................... 2,917 1,041 13,757 6,923
Basic earnings per share before extraordinary item... 0.08 0.28 0.29 0.14
Diluted earnings per share before extraordinary
item.............................................. 0.08 0.25 0.27 0.14
Basic earnings per share............................. 0.08 0.03 0.29 0.14
Diluted earnings per share........................... 0.08 0.03 0.27 0.14
1998
Net sales............................................ $693,448 $748,307 $777,701 $805,983
Gross profit......................................... 126,694 133,292 137,854 139,819
Income (loss) from operations........................ 20,174 (23,423) 28,306 30,969
Income (loss) before income taxes.................... 13,972 (36,271) 11,513 11,569
Net income (loss).................................... 8,523 (18,129) 26,438 (24,568)
Basic earnings (loss) per share...................... 0.14 (0.35) 0.77 (0.71)
Diluted earnings (loss) per share.................... 0.13 (0.35) 0.65 (0.71)
</TABLE>
- ---------------------
(1) The second quarter of 1999 includes an extraordinary charge of $10.5
million, net of tax, in connection with the early extinguishment of certain
debt and refinancing of its credit agreement (see Note 9).
(2) The second quarter of 1998 includes a one-time charge of $51.8 million
related to the Recapitalization (see Note 4).
47
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of WESCO
International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 10, 2000, appearing on page 26 of the 1999 Annual Report on Form
10-K of WESCO International, Inc. also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
February 10, 2000
S-1
<PAGE> 50
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1999.... 8,082 2,465 604 a (4,128) 7,023
Year ended December 31, 1998.... 10,814 2,325 3,423 a (8,480) b 8,082
Year ended December 31, 1997.... 10,075 3,274 594 (3,129) 10,814
</TABLE>
- ---------------------
a Represents allowance for doubtful accounts in connection with certain
acquisitions.
b Includes $3,464 which represents a reduction in the allowance for doubtful
accounts related to the sale of receivables at fair market value in
connection with the Receivables Facility.
S-2
<PAGE> 51
INDEX TO EXHIBITS
The registrant hereby agrees to furnish supplementally to the Commission,
upon request, a copy of any omitted schedule to any of the agreements contained
herein.
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- -------------- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C>
2.1 Recapitalization Agreement dated as of March 27, 1998 among Incorporated by reference
Thor Acquisitions L.L.C., WESCO International, Inc. (formerly to WESCO's Exhibit 2.1 to
known as CDW Holding Corporation, "WESCO") and certain the Registration Statement
securityholders of WESCO. on Form S-4 (No. 333-43225)
(the "Form S-4")
2.2 Purchase Agreement dated May 29, 1998 among WESCO, WESCO Incorporated by reference
Distribution, Inc. ("WESCO Distribution"), Chase Securities to Exhibit 2.2 to the Form S-4
2.3 Asset Purchase Agreement among Bruckner Supply Company, Inc. Incorporated by reference
and WESCO Distribution dated September 11, 1998, previously to Exhibit 2.01 to the
filed. Current Report on Form 8-K
dated September 11, 1998
3.1 Amended and Restated Certificate of Incorporation of WESCO. Incorporated by reference
to Exhibit 3.2 to the Form
S-1 (No. 333-73299) (the
"Form S-1")
3.2 By-Laws of WESCO. Incorporated by reference
to Exhibit 3.3 to the
Registration Statement on
Form S-1
4.1 Indenture dated as of June 5, 1998 among WESCO, WESCO Incorporated by reference
Distribution and Bank One, N.A. to Exhibit 4.1 to the Form S-4
4.2 Form of 9-1/8% Senior Subordinated Note Due 2008, Series A Incorporated by reference
(included in Exhibit 4.3). to Exhibit 4.2 to the Form S-4
4.3 Form of 9-1/8% Senior Subordinated Note Due 2008, Series B Incorporated by reference
(included in Exhibit 4.3). to Exhibit 4.3 to the Form S-4
4.4 Exchange and Registration Rights Agreement dated as of June 5, Incorporated by reference
1998 among the Company, WESCO and The Initial Purchasers. to Exhibit 4.4 to the Form S-4
4.8 Exchange and Registration Rights Agreement dated as of June 5, Incorporated by reference
1998 among WESCO and the Initial Purchasers. to Exhibit 4.8 to the Form S-4
10.1 CDW Holding Corporation Stock Purchase Plan. Incorporated by reference
to Exhibit 10.1 to the Form S-4
10.2 Form of Stock Subscription Agreement. Incorporated by reference
to Exhibit 10.2 to the Form S-4
10.3 CDW Holding Corporation Stock Option Plan. Incorporated by reference
to Exhibit 10.3 to the Form S-4
10.4 Form of Stock Option Agreement. Incorporated by reference
to Exhibit 10.4 to the Form S-4
10.5 CDW Holding Corporation Stock Option Plan for Branch Employees. Incorporated by reference
to Exhibit 10.5 to the Form S-4
10.6 Form of Branch Stock Option Agreement. Incorporated by reference
to Exhibit 10.6 to the Form S-4
10.7 Non-Competition Agreement dated as of February 28, 1996, Incorporated by reference
between Westinghouse, WESCO and WESCO Distribution. to Exhibit 10.8 to the Form S-4
10.8 Lease dated May 24, 1995 as amended by Amendment One dated June
Incorporated by reference 1995 and by Amendment Two dated
December 24, 1995 by and to Exhibit 10.10 to the between WESCO
Distribution as Tenant and Opal Investors, L.P. Form S-4 and
Mural GEM Investors as Landlord.
10.9 Lease dated April 1, 1992 as renewed by Letter of Notice of Incorporated by reference
Intent to Renew dated December 13, 1996 by and between the to Exhibit 10.11 to the Form S-4
Company successor in interest to Westinghouse Electric
Corporation as Tenant and Utah State Retirement Fund as
Landlord.
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- -------------- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C>
10.10 Lease dated September 4, 1997 between WESCO Distribution as Incorporated by reference
Tenant and The Buncher Company as Landlord. to Exhibit 10.12 to the Form S-4
10.11 Lease dated March 1995 by and between WESCO Incorporated by reference
Distribution-Canada, Inc. ("WESCO Canada") as Tenant and to Exhibit 10.13 to the Form S-4
Atlantic Construction, Inc. as Landlord.
10.18 Amended and Restated Registration and Participation Agreement Incorporated by reference
dated June 5, 1998 among WESCO and certain securityholders of to Exhibit 10.19 to the For S-4
WESCO named therein.
10.19 Employment Agreement between WESCO Distribution and Roy W. Incorporated by reference
Haley. to Exhibit 10.20 to the Form S-4
10.20 WESCO International, Inc. 1998 Stock Option Plan. Incorporated by reference
to WESCO's Exhibit 10.1 to
Quarterly Report on Form
10-Q for the quarter ended
September 30, 1998
10.21 Form of Management Stock Option Agreement. Incorporated by reference
to WESCO's Exhibit 10.1 to
Quarterly Report on Form
10-Q for the quarter ended
September 30, 1998
10.22 1999 Deferred Compensation Plan for Non-Employee Directors. Incorporated by reference
to WESCO's Exhibit 10.22 to
Annual Report on Form 10-K
for the year ended December
31, 1998
10.23 Credit Agreement among WESCO Distribution, Inc., WESCO Incorporated by reference
Distribution-Canada, Inc., WESCO International, Inc. and the to WESCO's Exhibit 10.1 to
Lenders identified therein, dated June 29, 1999. Quarterly Report on Form
10-Q for the period ended
June 30, 1999 (the "Second
Quarter Form 10-Q")
10.24 Receivables Purchase Agreement dated as of June 30, 1999, among Incorporated by reference
WESCO Receivables Corp., WESCO Distribution, Inc., Market to Exhibit 10.2 to the
Street Capital Corp. and PNC Bank, National Association. Second Quarter Form 10-Q
10.25 Amended and Restated Receivables Purchase Agreement, dated as Incorporated by reference
of September 28, 1999, among WESCO Receivables Corp., WESCO to WESCO's Exhibit 10.1 to
Distribution, Inc., and PNC Bank, National Association. Quarterly Report on Form
10-Q for the period ended
September 30, 1999
10.26 1999 Long-Term Incentive Plan. Incorporated by reference
to WESCO's Exhibit 10.22 to Form S-1
21.1 Subsidiaries of WESCO. Incorporated by reference
to Exhibit 21.1 to the
Registration Statement on Form S-1
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. Filed herewith
23.2 Consent of Anchin, Block & Anchin LLP, Independent Accountants. Filed herewith
27.1 Financial Data Schedule. Filed herewith
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-81857, 333-81847, 333-81845 and 333-81841) of
WESCO International, Inc. of our reports dated February 10, 2000 relating to
the financial statements and financial statement schedule, which appears in
this Form 10-K.
600 Grant Street
Pittsburgh, Pennsylvania
March 29, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-81857, 333-81847, 333-81845 and 333-81841) of
WESCO International, Inc of our report dated February 23, 1998 relating to the
financial statements of Bruckner Supply Company, Inc., which appears in this
Form 10-K.
/s/ Anchin, Block & Anchin
New York, New York
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WESCO INTERNATIONAL, INC. AND SUBSIDIARIES FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999, AS PRESENTED IN THE WESCO INTERNATIONAL
FORM 10-K FOR SUCH PERIOD, AND IS INCORPORATED BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,819
<SECURITIES> 0
<RECEIVABLES> 195,330
<ALLOWANCES> 7,023
<INVENTORY> 397,669
<CURRENT-ASSETS> 653,801
<PP&E> 116,638
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,028,793
<CURRENT-LIABILITIES> 454,785
<BONDS> 422,539
0
0
<COMMON> 479
<OTHER-SE> 116,826
<TOTAL-LIABILITY-AND-EQUITY> 1,028,793
<SALES> 3,420,113
<TOTAL-REVENUES> 3,420,113
<CGS> 2,807,240
<TOTAL-COSTS> 3,295,120
<OTHER-EXPENSES> 19,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,968
<INCOME-PRETAX> 58,478
<INCOME-TAX> 23,333
<INCOME-CONTINUING> 35,145
<DISCONTINUED> 0
<EXTRAORDINARY> (10,507)
<CHANGES> 0
<NET-INCOME> 24,638
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.53
</TABLE>
