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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1994 or
----------------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-4720
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WESCO FINANCIAL CORPORATION
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(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 95-2109453
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901
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(Address of Principal Executive Offices)
(Zip Code)
818/585-6700
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
7,119,807 as of May 13, 1994
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Wesco
Financial Corporation, listed in the accompanying index, are
incorporated as an integral part of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
See pages 9 through 12.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESCO FINANCIAL CORPORATION
Date: May 13, 1994 By: /s/ Jeffrey L. Jacobson
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Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial officer)
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WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1994
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated statement of income and
retained earnings - Three-month periods
ended March 31, 1994 and March 31, 1993 . . . . . . . 4
Condensed consolidated balance sheet -
March 31, 1994 and December 31, 1993 . . . . . . . . 5
Condensed consolidated statement of cash flows -
Three-month periods ended March 31, 1994
and March 31, 1993 . . . . . . . . . . . . . . . . . 6
Notes to condensed consolidated financial
statements . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1994 1993
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<S> <C> <C>
Revenues:
Insurance premiums earned............................. $ 831 $ 3,530
Sales and service revenues............................ 16,449 17,329
Interest on loans and mortgage-backed securities...... 809 2,615
Dividends and interest on investments other than
mortgage-backed securities.......................... 6,586 7,342
Gains on sales of securities.......................... 251 1,714
Other................................................. 667 479
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25,593 33,009
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Costs and expenses:
Insurance losses, loss adjustment and underwriting
expenses.............................................. 1,036 3,827
Cost of services and products sold.................... 13,302 14,181
Interest on savings accounts.......................... -- 2,075
Selling, general and administrative expenses.......... 3,114 3,643
Interest on notes payable............................. 837 1,209
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18,289 24,935
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Income before income taxes and cumulative effect of
change in accounting for income taxes................. 7,304 8,074
Provision for income taxes.............................. (1,221) (1,673)
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Income before cumulative effect of change in
accounting for income taxes........................... 6,083 6,401
Cumulative effect of change in accounting for
income taxes (adoption of SFAS No. 109)............... -- 1,023
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Net income............................................ 6,083 7,424
Retained earnings - beginning of period................. 286,591 273,566
Cash dividends declared and paid........................ (1,744) (1,673)
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Retained earnings - end of period....................... $290,930 $279,317
======== ========
Amounts per share based on 7,119,807 shares outstanding
throughout each period:
Net income before cumulative effect of change in
accounting principle................................ $ .85 $ .90
Cumulative effect of change in accounting for
income taxes........................................ -- .14
-------- --------
Net income............................................ $ .85 $ 1.04
======= ========
Cash dividends........................................ $ .245 $ .235
======= ========
</TABLE>
See notes beginning on page 7.
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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1994 1993
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<S> <C> <C>
ASSETS
Cash and temporary cash investments................ $ 2,671 $ 5,230
Investments:
Securities with fixed maturities -
Mortgage-backed securities ................... 38,787 45,848
Other......................................... 179,540 156,278
Marketable equity securities (cost $166,755
and $166,755)................................. 639,053 639,958
Other assets....................................... 79,489 67,841
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$939,540 $915,155
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses...... $49,324 $ 53,818
Income taxes payable, principally deferred......... 185,725 180,722
Notes payable...................................... 37,812 37,896
Other liabilities.................................. 21,303 16,632
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Total liabilities.............................. 294,164 289,068
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Shareholders' equity:
Capital stock, and capital surplus arising
from stock dividends.......................... 30,439 30,439
Unrealized appreciation of investments,
net of taxes.................................. 324,007 309,057
Retained earnings............................... 290,930 286,591
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Total shareholders' equity.................... 645,376 626,087
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$939,540 $915,155
======== ========
</TABLE>
See notes beginning on page 7.
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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1994 1993
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<S> <C> <C>
Net cash provided (used) by operating activities................. $ (4,342) 5,145
-------- --------
Cash flows from investing activities -
Proceeds from maturities and redemptions of securities
with fixed maturities ....................................... 9,349 16,460
Proceeds from sales of marketable equity securities............ -- 3,534
Real estate loan originations.................................. -- (1,471)
Principal collections on real estate loans..................... 6 7,535
Other, net..................................................... (746) (1,224)
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Net cash provided by investing activities........................ 8,609 24,834
-------- --------
Cash flows from financing activities -
Net decrease in savings accounts............................... -- (13,368)
Repayment of short-term borrowings............................. (5,000) --
Payment of cash dividends...................................... (1,744) (1,673)
Other, net..................................................... (82) (79)
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Net cash used by financing activities............................ (6,826) (15,120)
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Increase (decrease) in cash, including temporary
cash investments............................................... (2,559) 14,859
Cash, including temporary cash investments -
beginning of period............................................ 5,230 123,705
-------- --------
Cash, including temporary cash investments - end of period....... $ 2,671 $138,564
======== ========
Supplementary information:
Interest paid during period..................................... $ 170 $ 2,708
======== ========
Income taxes paid during period................................. $ 5,712 $ 1,423
======== ========
</TABLE>
See notes beginning on page 7.
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WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
In the opinion of management, all adjustments necessary to a fair statement of
the results of operations of Wesco Financial Corporation ("Wesco") and its
subsidiaries (consisting only of normal recurring accruals) are reflected in
the condensed consolidated financial statements.
NOTE 2
Reference is made to the notes to Wesco's consolidated financial statements
appearing on pages 33 through 41 of its 1993 Form 10-K Annual Report for other
information deemed generally applicable to the condensed consolidated financial
statements.
NOTE 3
Following is a summary of investments in securities with fixed maturities, in
thousands of dollars:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
------------------------------------ -------------------------------------
Estimated Estimated
Amortized Market Carrying Amortized Market Carrying
Cost Value Value Cost Value Value
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities............... $ 39,112 $ 38,787 $ 38,787 $ 45,848 $ 46,359 $ 45,848
Preferred stocks........... 135,000 159,690 159,690 135,000 158,150 135,000
State and
municipal bonds.......... 18,857 19,850 19,850 21,278 22,305 21,278
-------- -------- -------- -------- -------- --------
$192,969 $218,327 $218,327 $202,126 $226,814 $202,126
======== ======== ======== ======== ======== ========
</TABLE>
As of March 31, 1994, investments in securities with fixed maturities were
classified as "available for sale", and accordingly were carried at fair value,
with the net unrealized gain or loss reported as a component of shareholders'
equity. At December 31, 1993, such investments were classified as "held to
maturity" and thus carried at amortized cost. The change in classification of
these investments, which was not material in relation to Wesco's reported
financial condition at either December 31, 1993 or March 31, 1994, conforms
Wesco's financial reporting for such investments to its reporting for
marketable equity securities.
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NOTE 4
Following is a summary of the changes in unrealized appreciation of
investments, net of deemed applicable income taxes, included in shareholders'
equity on the accompanying condensed consolidated balance sheet, in thousands
of dollars:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1994 1993
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<S> <C> <C>
Balance at December 31, 1993 and December 31, 1992......... $309,057 $107,709
Net increase in unrealized appreciation.................... 24,454 10,986
Increase in deemed applicable income taxes................. (9,504) (3,736)
-------- --------
Balance at March 31, 1994 and March 31, 1993............... $324,007 $114,959
======== ========
</TABLE>
Of the $194.1 million apparent increase in after-tax appreciation
between March 31, 1993 and December 31, 1993, approximately $188.8 million
resulted from Wesco's adoption of a new accounting pronouncement, SFAS No.
115, as of 1993 yearend. Under SFAS No. 115, marketable equity securities of
all Wesco entities - not just its insurance subsidiary, as in the past -- were
written up to market value rather than stated at the lower of aggregate cost
or market. (See Notes 1 and 2 to Wesco's consolidated financial statements
appearing in its 1993 Form 10-K Annual Report for additional information.)
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WESCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to management's discussion and
analysis of Wesco's consolidated financial condition and results of operations
appearing on pages 20 through 26 of its 1993 Form 10-K Annual Report for
information deemed generally appropriate to an understanding of the
accompanying condensed consolidated financial statements. The information set
forth in the following paragraphs updates such discussion.
FINANCIAL CONDITION
The financial condition of Wesco and its subsidiaries
continues to be sound and liquid.
In May 1994, Standard and Poor's Corporation raised
its credit rating on Wesco's $30 million of Notes due November 1999 from AA+ to
AAA, its highest rating, and also assigned its AAA claims-paying-ability rating
to Wesco's insurance subsidiary.
RESULTS OF OPERATIONS
Following is a breakdown of Wesco's consolidated net
(after-tax) income by business segment, in thousands of dollars:
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1994 1993
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Identified segments:
Insurance........................................ $4,911 $4,230
Industrial....................................... 672 446
Financial........................................ -- 836
Other than identified business segments.............. 500 889
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Income before cumulative effect of change
in accounting for income taxes................... 6,083 6,401
Cumulative effect of change in accounting for
income taxes (adoption of SFAS No. 109).......... -- 1,023
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Net income - consolidated............................ $6,083 $7,424
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</TABLE>
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Insurance Segment
Following is a summary of the results of underwriting
and investing activities of wholly owned Wesco- Financial Insurance Company
("Wes-FIC"), in thousands of dollars:
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1994 1993
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<S> <C> <C>
Premiums written................... $7,744 $3,190
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Premiums earned.................... $ 831 $3,530
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Underwriting loss.................. $ (204) $ (300)
Dividend and interest income....... 5,887 3,868
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Income before income taxes......... 5,683 3,568
Provision for income taxes......... (935) (469)
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Income before securities gains..... 4,748 3,099
Securities gains................... 163 1,131
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Insurance segment net income....... $4,911 $4,230
====== ======
</TABLE>
The increase in premiums written in the first quarter of
1994 over the corresponding figure for the first quarter last year was
attributable principally to Wes-FIC's entry into the super-catastrophe
("super-cat") reinsurance business. In February 1994 an insurance company
subsidiary of Berkshire Hathaway Inc., Wesco's ultimate parent company,
retroceded to Wes-FIC from 10% to 20% of certain super-cat reinsurance business
(see Wesco's 1993 Form 10-K Annual Report for further details). Wes-FIC's
entry into the business of super-cat reinsurance followed a large increase in
net worth due to its absorption through merger of Mutual Savings and Loan
Association ("Mutual Savings"), another wholly owned subsidiary of Wesco, in
January 1994 (see financial segment below).
Insurance premiums are recognized as earned revenues by
Wes-FIC pro rata over the term of the contract on all forms of insurance except
for super-cat reinsurance. Premiums on super-cat reinsurance are not
recognized as earned until the earlier of a loss occurrence or policy
expiration, in order to avoid premature recognition of underwriting profits.
Wes-FIC's net income for the first quarter of 1994
benefited from its absorption of Mutual Savings, inasmuch as dividend and
interest income previously reported as revenue of Wesco's financial segment is
now included in Wes-FIC's revenues.
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Industrial Segment
Following is a summary of the results of operations of
the industrial segment, whose operations have included those of wholly owned
Precision Steel Warehouse, Inc. and its subsidiaries ("Precision Steel") and,
until its business assets were sold on July 1, 1993, approximately 80%-owned
New America Electrical Corporation ("New America Electric"), in thousands of
dollars:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1994 1993
--------- ---------
<S> <C> <C>
Revenues, principally sales
and services............................. $16,482 $17,354
======= =======
Income before income taxes................. $ 1,111 $ 702
Provision for income taxes................. (439) (296)
Minority interest in operating
loss of New America Electric............. -- 40
------- -------
Industrial segment net income.............. $ 672 $ 446
======= =======
</TABLE>
Revenues of the industrial segment included $1,487,000
attributable to New America Electric in the first quarter of 1993 versus none
in the first quarter of 1994. Had 1993 revenues not included those of New
America Electric, first quarter revenues of the industrial segment would have
increased approximately $600,000.
Income before income taxes and net income were
negatively impacted in 1993 as a result of the inclusion of the operating
results of New America Electric. Had it not been for Wesco's equity of
$180,000 in New America Electric's operating loss in the first quarter of 1993,
the industrial segment would have reported net income of $626,000 for the first
quarter last year.
The operations of Precision Steel appear to have been
less affected by recessionary economic conditions in the first quarter of 1994
than in the same quarter of 1993.
Financial Segment
Prior to 1994, the financial segment included revenues
and expenses of Mutual Savings as well as revenues and expenses of other Wesco
entities that, although not directly connected with an identified business
segment, were more closely associated with the savings and loan business than
any of Wesco's other businesses.
In October 1993, Mutual Savings discontinued as a
regulated savings and loan association, and, effective January 1, 1994, it
merged into Wes-FIC (see Wesco's 1993 Form 10-K Annual Report for further
details). As a result, (1) several traditional items of revenue and expense -
notably interest income on
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loans and interest expense on savings accounts - have partially or wholly
disappeared, with the remaining items transferred to the insurance segment, and
(2) the expenses of other Wesco entities previously included in the financial
segment, which have become relatively insignificant, are now classified
separately (i.e., not included in a business segment).
In conjunction with its discontinuance as a regulated
savings and loan association, Mutual Savings disposed of its savings deposits
and most of its real estate loans (see Wesco's 1993 Form 10-K Annual Report for
further details). Although the disposition has affected several items of
revenue and expense, as noted above, it has not had a significant effect on
Wesco's consolidated revenues and earnings.
Other Than Identified Business Segments
Earnings other than from identified business segments
are derived mainly from ownership of the Wesco headquarters office building,
primarily leased to outside tenants, interest and dividend income from cash
equivalents, and marketable securities owned outside the insurance subsidiary,
less interest and other corporate expenses.
* * * * *
Realized securities gains, recorded when appreciated
securities are sold, tend to fluctuate significantly from period to period.
The amount of realized gain for any period has no predictive value, and
variations in amount from period to period have no practical analytical value,
given the traditional existence of substantial unrealized price appreciation in
Wesco's consolidated investment portfolio. Realized securities gains, after
taxes, amounted to $251,000 and $1,131,000 in the first quarters of 1994 and
1993.
Wesco's effective consolidated income tax rate typically
fluctuates from period to period for various reasons, such as the inclusion in
consolidated revenues of significant, varying amounts of dividend income from
preferred and common stocks, which is substantially exempt from income taxes,
and, beginning in 1993, the effects of changes in income tax rates as described
in Note 6 to the consolidated financial statements appearing in Wesco's 1993
Form 10-K Annual Report. The respective income tax provisions, expressed as a
percentage of income before income taxes and cumulative effect of change in
accounting for income taxes amounted to 16.7% and 20.7% for the quarters ended
March 31, 1994 and March 31, 1993.
Consolidated revenues, expenses and earnings reported in
any period are not necessarily indicative of future revenues, expenses and
earnings, in that they are subject to significant variations in amount and
timing of gains and losses from disposition of securities, foreclosed
properties and other assets and liabilities, the possible occurrence of other
unusual items, the effects of changes in rates of income taxes, and the effects
of changes in the nature of Wesco's operations.
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