<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x]x Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
Transition report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
[ ] For the transition period from ______________ to ______________
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
-------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2109453
----------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901
------------------------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
818/585-6700
------------
(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X___ No_____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 7,119,807 as of
May 10, 1996
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Wesco Financial
Corporation, listed in the accompanying index, are incorporated as
an integral part of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
See pages 9 through 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 14, 1996 By: /s/ JEFFREY L. JACOBSON
------------------------------
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial officer)
-2-
<PAGE> 3
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated statement of income and
retained earnings -- Three-month periods
ended March 31, 1996 and March 31, 1995 . . . . . . . . . . . . . . . . . . . 4
Condensed consolidated balance sheet --
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . 5
Condensed consolidated statement of cash flows --
Three-month periods ended March 31, 1996
and March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to condensed consolidated financial
statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
-3-
<PAGE> 4
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 31, March 31,
1996 1995
------ ------
<S> <C> <C>
Revenues:
Sales and service revenues . . . . . . . . . . . . . . . . . . . $ 16,138 $ 17,659
Insurance premiums earned . . . . . . . . . . . . . . . . . . . . 5,041 8,532
Dividend and interest income . . . . . . . . . . . . . . . . . . 7,918 7,507
Gains (losses) on sales of securities
and foreclosed property . . . . . . . . . . . . . . . . . . . . 40 (22)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 566
------- -------
29,450 34,242
------- -------
Costs and expenses:
Cost of products and services sold . . . . . . . . . . . . . . . 12,929 14,061
Insurance losses, loss adjustment
and underwriting expenses . . . . . . . . . . . . . . . . . . . 1,846 2,933
Selling, general and administrative expenses . . . . . . . . . . 2,611 2,627
Interest on notes payable . . . . . . . . . . . . . . . . . . . . 840 844
------- -------
18,226 20,465
------- -------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 11,224 13,777
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . (2,654) (3,411)
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,570 10,366
Retained earnings -- beginning of period . . . . . . . . . . . . . . 325,864 298,586
Cash dividends declared and paid . . . . . . . . . . . . . . . . . . (1,887) (1,816)
------- -------
Retained earnings -- end of period . . . . . . . . . . . . . . . . . $332,547 $307,136
======= =======
Amounts per share based on 7,119,807 shares
outstanding throughout each period:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.20 $ 1.46
==== =====
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . $.265 $ .255
==== =====
</TABLE>
See notes starting on page 7.
-4-
<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and temporary cash investments . . . . . . . . . . . . . . . . . . $ 98,294 $ 87,981
Investments:
Securities with fixed maturities . . . . . . . . . . . . . . . . . . 118,330 119,575
Marketable equity securities . . . . . . . . . . . . . . . . . . . . 1,156,939 1,102,221
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,733 55,950
--------- ---------
$1,429,296 $1,365,727
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses . . . . . . . . . . . . . $ 34,969 $ 34,195
Income taxes payable, principally deferred . . . . . . . . . . . . . . 347,843 324,341
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,319 37,369
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,689 12,193
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 428,820 408,098
--------- ---------
Shareholders' equity:
Capital stock and surplus . . . . . . . . . . . . . . . . . . . . . . 30,439 30,439
Unrealized appreciation of investments,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 637,490 601,326
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 332,547 325,864
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 1,000,476 957,629
--------- ---------
$1,429,296 $1,365,727
========= =========
</TABLE>
See notes starting on page 7.
-5-
<PAGE> 6
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
------ ------
<S> <C> <C>
Net cash provided by operating activities . . . . . . . . . . . . . . $ 9,799 $ 4,553
------- -------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities
with fixed maturities . . . . . . . . . . . . . . . . . . . . . 2,275 1,526
Proceeds from sales of securities with fixed maturities . . . . . . -- 5,267
Purchases of marketable equity securities . . . . . . . . . . . . . -- (20,688)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 (413)
------- -------
Net cash provided (used) by investing activities . . . . . . . . . . 2,451 (14,308)
------- --------
Cash flows from financing activities:
Payment of cash dividends . . . . . . . . . . . . . . . . . . . . (1,887) (1,816)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) (45)
------- ------
Net cash used by financing activities . . . . . . . . . . . . . . . . (1,937) (1,861)
------- -----
Increase (decrease) in cash, including temporary
cash investments . . . . . . . . . . . . . . . . . . . . . . . . . 10,313 (11,616)
Cash, including temporary cash investments --
beginning of period . . . . . . . . . . . . . . . . . . . . . . . 87,981 15,800
------- -------
Cash, including temporary cash investments -- end of period . . . . . $ 98,294 $ 4,184
======= =======
Supplementary information:
Interest paid during period . . . . . . . . . . . . . . . . . . . . $ 174 $ 179
===== ======
Income taxes paid, net, during period . . . . . . . . . . . . . . . $1,241 $ 294
===== ======
</TABLE>
See notes starting on page 7.
-6-
<PAGE> 7
WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
In the opinion of management, all adjustments necessary to a fair statement of
the results of operations of Wesco Financial Corporation ("Wesco") and its
subsidiaries (consisting only of normal recurring accruals) are reflected in
the condensed consolidated financial statements.
NOTE 2
Reference is made to the notes to Wesco's consolidated financial statements
appearing on pages 33 through 40 of its 1995 Form 10-K Annual Report for other
information deemed generally applicable to the condensed consolidated financial
statements.
NOTE 3
Following is a summary of marketable equity securities (all common stocks), in
thousands of dollars:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------------- ----------------------------
Estimated Fair Estimated Fair
(Carrying) (Carrying)
Cost Value Cost Value
---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation . . . . . . . . . . . . . . $ 71,729 $613,800 $ 71,729 $ 601,200
The Coca-Cola Company . . . . . . . . . . . . 40,761 298,132 40,761 267,508
The Gillette Company . . . . . . . . . . . . 40,000 165,600 40,000 166,800
American Express Company . . . . . . . . . . 20,687 31,980 20,687 26,799
Wells Fargo & Company . . . . . . . . . . . . 11,351 44,240 11,351 36,577
Other . . . . . . . . . . . . . . . . . . . . 2,914 3,187 2,914 3,337
-------- ---------- -------- ----------
$187,442 $1,156,939 $187,442 $1,102,221
======== ========== ======== ==========
</TABLE>
NOTE 4
Following is a summary of the changes in unrealized appreciation of
investments, net of deemed applicable income taxes, set forth separately in
shareholders' equity on the condensed consolidated balance sheet, in thousands
of dollars:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, March 31,
1996 1995
------- --------
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . $601,326 $349,122
Net increase in unrealized appreciation . . . . . . . . . . . . . . 55,770 107,773
Increase in deemed applicable income taxes . . . . . . . . . . . . . (19,606) (37,829)
------- -------
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . $637,490 $419,066
======= =======
</TABLE>
-7-
<PAGE> 8
NOTE 5
Wesco on April 29, 1996 approved the purchase of Kansas Bankers Surety Company
of Topeka, Kansas ("KBS") by its wholly owned subsidiary, Wesco- Financial
Insurance Company ("Wes-FIC"), for approximately $75 million in cash.
Berkshire Hathaway Inc., Wesco's ultimate parent, on April 10, 1996 had
agreed to acquire the surety company with the intention of assigning all rights
acquired and obligations assumed to a subsidiary company to be determined. The
acquisition is expected to be completed early in the third quarter of 1996,
after approval by the shareholders of KBS and insurance regulators.
KBS was chartered in 1909 to provide Kansas banks with deposit insurance prior
to the creation of the Federal Deposit Insurance Corporation. Today, KBS
provides community banks throughout the Midwestern United States with a
multiplicity of insurance products, including bank deposit guaranty bonds which
insure bank deposits in excess of FDIC coverage.
-8-
<PAGE> 9
WESCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to management's discussion and analysis of Wesco's
consolidated financial condition and results of operations appearing on pages
18 through 26 of its 1995 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
At March 31, 1996, $637.5 million, or 64% of Wesco's shareholders'
equity, represented unrealized appreciation of investments. Unrealized
appreciation is credited directly to shareholders' equity, net of taxes,
without being reflected in earnings. Calculations are based on quoted market
or estimated fair values, which are subject to fluctuation, and accordingly the
net gains ultimately realized could differ substantially from recorded
unrealized appreciation.
Even if unrealized appreciation is ignored, the financial condition of
Wesco and its subsidiaries continues to be sound and liquid.
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
------------------
March 31, March 31,
1996 1995
------ ------
<S> <C> <C>
Net income from identified segments:
Insurance segment:
"Normal" net operating income . . . . . . . . . . . . . . . . . . . . . . . $7,694 $8,983
Loss on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . -- (14)
----- ------
Segment net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,694 8,969
Industrial segment net income (all "normal" net operating) . . . . . . . . . . 655 906
Net income other than from identified business
segments (all "normal" net operating) . . . . . . . . . . . . . . . . . . . . 221 491
----- -----
Net income -- consolidated . . . . . . . . . . . . . . . . . . . . . . . $8,570 $10,366
===== ======
</TABLE>
-9-
<PAGE> 10
Insurance Segment
Following is a summary of the results of underwriting and investing
activities comprising the "normal" net operating income of Wesco's wholly owned
subsidiary, Wesco-Financial Insurance Company ("Wes-FIC"), in thousands of
dollars:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
----- -----
<S> <C> <C>
Premiums written . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 5,427
====== ======
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . $ 5,041 $ 8,532
====== ======
Underwriting gain . . . . . . . . . . . . . . . . . . . . . . . $ 3,192 $ 5,599
Dividend and interest income . . . . . . . . . . . . . . . . . 6,964 6,452
----- -----
Income before income taxes . . . . . . . . . . . . . . . . . . 10,156 12,051
Provision for income taxes . . . . . . . . . . . . . . . . . . (2,462) (3,068)
----- -----
"Normal" net operating income . . . . . . . . . . . . . . . . . $ 7,694 $ 8,983
===== =====
</TABLE>
As further explained in Wesco's 1995 Form 10-K Annual Report and prior
reports, Wes-FIC entered into the super-catastrophe ("super-cat") reinsurance
business in the first quarter of 1994, when National Indemnity Company
("NICO"), an insurance company subsidiary of Berkshire Hathaway Inc.
("Berkshire"), Wesco's ultimate parent company, retroceded to Wes-FIC from 10%
to 20% of certain super-cat reinsurance contracts. 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, another
wholly owned subsidiary of Wesco, in January 1994.
Premiums written by Wes-FIC since its entry into the super-cat
reinsurance business, and premiums earned in 1995 and 1996 to date, have
related almost entirely to super-cat reinsurance. At approximately the time of
Wes-FIC's entry into that business, other insurers infused much capital into
the super-cat reinsurance business, with the result that the pricing of
super-cat reinsurance, in terms of premiums charged, became less attractive.
Berkshire's management has reported that its insurance subsidiaries will not
knowingly write business at inadequate rates. As a result, several super-cat
reinsurance contracts in which Wes-FIC participated in 1994 were not renewed
in 1995; and, of the 1995 contracts, none were renewed in the first quarter
of 1996.
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. The
decrease in premiums earned in the first quarter of 1996 from the comparable
figure for the first quarter of 1995 was attributable principally to the
decreased volume of super-cat premiums written in 1995.
The underwriting gains reported for the first quarters of 1996 and
1995 were attributable principally to the recognition of earned premiums without
offsetting losses upon the expiration of the super-cat reinsurance contracts.
-10-
<PAGE> 11
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, whose operations comprise those of wholly owned Precision Steel
Warehouse, Inc. and its subsidiaries ("Precision Steel"), in thousands of
dollars:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1996 1995
------ ------
<S> <C> <C>
Revenues, principally sales
and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,156 $17,699
====== ======
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 1,087 $ 1,507
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . (432) (601)
------- ------
Industrial segment net income . . . . . . . . . . . . . . . . . . . . . . $ 655 $ 906
====== ======
</TABLE>
Industrial segment revenues for the first quarter of 1996 decreased
$1.5 million (approximately 9 percent) from those reported for the first
quarter of 1995. Pounds of steel products sold decreased 15 percent.
Management of Precision Steel attributes these declines generally to the
continuing sluggishness in the industrial sector of the economy.
Income before income taxes and net income of Precision Steel's
industrial operations for the first quarter of the current year decreased from
the comparable figures reported for the first quarter last year due mainly to
the steel service revenue decline as well as a decline in gross profit
percentage from 20.4% of steel service revenues for the first quarter of 1995
to 19.9% for the first quarter of 1996. The cost percentage typically
fluctuates slightly from period to period as a result of changes in product
mix, price competition among suppliers and at the retail level, and
availability of favorable quantity order prices on materials purchased.
Other Than Identified Business Segments
Earnings other than from identified business segments include mainly
(1) dividend and interest income from marketable securities and cash
equivalents owned outside the insurance subsidiary, and (2) rental income from
owned commercial real estate, reduced by (1) the costs associated with the
development and liquidation of foreclosed real estate and delinquent loans
formerly owned by the savings and loan subsidiary, (2) interest and other
corporate expenses, and (3) income taxes.
Earnings other than from identified business segments typically
fluctuate from period to period. The decrease in the figure for the first
quarter of 1996 from the corresponding prior year figure was due principally
to a reduction in tax-favored dividend income following the redemption in the
fourth quarter last year of 20% of Wesco's investment in cumulative convertible
preferred stock of Salomon Inc.
-11-
<PAGE> 12
* * * * *
Realized gains and losses -- recorded when securities are sold or when
a decline in market value of an investment is considered to be other than
temporary -- tend to fluctuate, sometimes significantly, from period to period.
The amount of realized gain or loss has no predictive value, and variations in
amount from period to period have no practical analytical value, particularly
in view of the existence of substantial unrealized price appreciation in
Wesco's consolidated investment portfolio.
Wesco's effective consolidated income tax rate typically fluctuates
from period to period for various reasons, such as the inclusion in
consolidated revenues of significant, varying amounts of dividend income from
preferred and common stocks, which is substantially exempt from income taxes.
The respective income tax provisions, expressed as percentages of income before
income taxes, amounted to 23.6% and 24.8% for the quarters ended March 31, 1996
and March 31, 1995.
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
securities gains and losses and the possible occurrence of other unusual items.
Shareholders' equity will be impacted not only to the extent such unusual items
affect earnings, but also to reflect changes in unrealized appreciation of
investments, which is not reflected in earnings (see Financial Condition
above).
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 98,294
<SECURITIES> 1,275,269
<RECEIVABLES> 11,418
<ALLOWANCES> (87)
<INVENTORY> 8,092
<CURRENT-ASSETS> 0
<PP&E> 29,911
<DEPRECIATION> (16,184)
<TOTAL-ASSETS> 1,429,296
<CURRENT-LIABILITIES> 0
<BONDS> 37,319
0
0
<COMMON> 7,120
<OTHER-SE> 993,356
<TOTAL-LIABILITY-AND-EQUITY> 1,429,296
<SALES> 16,138
<TOTAL-REVENUES> 29,450
<CGS> 12,929
<TOTAL-COSTS> 14,775
<OTHER-EXPENSES> 2,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 840
<INCOME-PRETAX> 11,224
<INCOME-TAX> (2,654)
<INCOME-CONTINUING> 8,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,570
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
