<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
[ ] For the transition period from ____________ to ___________
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
-------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2109453
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901
--------------------------------------------------------------------------
(Address of Principal Executive Offices)
626/585-6700
--------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 7,119,807 as of
November 12, 1997.
<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 -- Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESCO FINANCIAL CORPORATION
Date: November 14, 1997 By: /s/ JEFFREY L. JACOBSON
----------------- --------------------------
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial officer)
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<PAGE> 3
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
(Unaudited)
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated statement of income and
retained earnings -- nine- and three-month periods
ended September 30, 1997 and September 30, 1996..................... 4
Condensed consolidated balance sheet --
September 30, 1997 and December 31, 1996............................ 5
Condensed consolidated statement of cash flows --
nine-month periods ended September 30, 1997
and September 30, 1996.............................................. 6
Notes to condensed consolidated financial
statements.......................................................... 7
</TABLE>
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<PAGE> 4
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND RETAINED EARNINGS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues ..................... $ 17,033 $ 15,709 $ 51,532 $ 48,248
Insurance premiums earned ...................... 2,297 2,305 7,763 7,348
Dividend and interest income ................... 8,996 8,937 27,601 24,890
Gains (losses), net, on sales of securities
and foreclosed property ...................... 1,577 (192) 1,577 (152)
Other .......................................... 230 240 800 849
--------- --------- --------- ---------
30,133 26,999 89,273 81,183
--------- --------- --------- ---------
Costs and expenses:
Cost of products and services sold ............. 13,347 12,497 40,400 38,550
Insurance losses, loss adjustment
and underwriting expenses ................... 1,315 1,069 2,378 2,939
Selling, general and administrative expenses ... 1,952 2,571 7,422 7,818
Interest on notes payable ...................... 835 837 2,507 2,516
--------- --------- --------- ---------
17,449 16,974 52,707 51,823
--------- --------- --------- ---------
Income before income taxes ........................ 12,684 10,025 36,566 29,360
Provision for income taxes ........................ (3,296) (2,222) (8,659) (6,414)
--------- --------- --------- ---------
Net income ........................................ 9,388 7,803 27,907 22,946
Retained earnings -- beginning of period .......... 363,540 337,234 348,936 325,864
Cash dividends declared and paid .................. (1,958) (1,888) (5,873) (5,661)
--------- --------- --------- ---------
Retained earnings -- end of period ................ $ 370,970 $ 343,149 $ 370,970 $ 343,149
========= ========= ========= =========
Amounts per share based on 7,119,807 shares
outstanding throughout each period:
Net income ..................................... $ 1.32 $ 1.10 $ 3.92 $ 3.22
========= ========= ========= =========
Cash dividends ................................. $ .275 $ .265 $ .825 $ .795
========= ========= ========= =========
</TABLE>
See notes beginning on page 7.
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<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents ............................................... $ 10,715 $ 23,039
Investments:
Securities with fixed maturities ...................................... 280,272 176,885
Marketable equity securities .......................................... 1,873,169 1,533,009
Excess of cost over net assets of acquired business ..................... 30,316 30,903
Other assets ............................................................ 43,161 54,569
---------- ----------
$2,237,633 $1,818,405
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses........................... $ 44,315 $ 45,491
Income taxes payable, principally deferred .............................. 609,584 468,370
Notes payable ........................................................... 36,994 37,162
Other liabilities ....................................................... 16,954 16,367
---------- ----------
Total liabilities ..................................................... 707,847 567,390
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ...................... 30,439 30,439
Unrealized appreciation of investments, net of taxes .................. 1,128,377 871,640
Retained earnings ..................................................... 370,970 348,936
---------- ----------
Total shareholders' equity ............................................ 1,529,786 1,251,015
---------- ----------
$2,237,633 $1,818,405
========== ==========
</TABLE>
See notes beginning on page 7.
-5-
<PAGE> 6
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months Ended
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1997 1996
--------- ---------
<S> <C> <C>
Net cash flows from operating activities ........................... $ 25,167 $ 13,848
--------- ---------
Cash flows from investing activities:
Acquisition of The Kansas Bankers Surety Company, net of cash and
cash equivalents acquired ................................... -- (77,320)
Proceeds from maturities and redemptions of securities
with fixed maturities ....................................... 58,292 46,959
Purchases of securities with fixed maturities ................... (167,343) (54,584)
Proceeds from sales of securities with fixed maturities ......... 64,790 --
Proceeds from sales of foreclosed property ...................... 14,474 2,686
Other, net ...................................................... (1,663) 3,592
--------- ---------
Net cash flows from investing activities ........................... (31,450) (78,667)
--------- ---------
Cash flows from financing activities:
Payment of cash dividends ....................................... (5,873) (5,661)
Other, net ...................................................... (168) (154)
--------- ---------
Net cash flows from financing activities ........................... (6,041) (5,815)
--------- ---------
Decrease in cash and cash equivalents .............................. (12,324) (70,634)
Cash and cash equivalents -- beginning of period ................... 23,039 87,981
--------- ---------
Cash and cash equivalents -- end of period ......................... $ 10,715 $ 17,347
========= =========
Supplementary information:
Interest paid during period ..................................... $ 1,842 $ 1,850
========= =========
Income taxes paid, net, during period ........................... $ 8,725 $ 8,101
========= =========
</TABLE>
See notes beginning on page 7.
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<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 consolidated financial position of Wesco Financial Corporation ("Wesco") and
its subsidiaries and the results of their operations and their cash flows
(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 31 through 38 of its 1996 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>
September 30, 1997 December 31, 1996
--------------------------- ---------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation ............ $ 71,729 $1,015,200 $ 71,729 $ 794,700
The Coca-Cola Company .... 40,761 439,542 40,761 379,195
The Gillette Company ..... 40,000 276,200 40,000 248,800
American Express Company . 20,687 53,030 20,687 36,595
Wells Fargo & Company .... 11,351 46,569 11,351 45,679
Salomon Inc. ............. 20,000 39,572 20,000 24,803
Other .................... 2,914 3,056 2,914 3,237
---------- ---------- ---------- ----------
$ 207,442 $1,873,169 $ 207,442 $1,533,009
========== ========== ========== ==========
</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 Nine Months Ended
-------------------------------- ------------------------------
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period . $ 1,133,978 $ 692,095 $ 871,640 $ 601,326
Net increase (decrease) in
unrealized appreciation .. (9,265) 137,398 398,017 277,112
Decrease (increase) in deemed
applicable income taxes ... 3,664 (48,129) (141,280) (97,074)
----------- ------------- ----------- -----------
Balance at end of period ....... $ 1,128,377 $ 781,364 $ 1,128,377 $ 781,364
=========== ============= =========== ===========
</TABLE>
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<PAGE> 8
NOTE 5
During 1997, the Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards: No. 128 -- "Earnings per Share,"
which establishes new standards for computing and presenting earnings per share;
No. 129 -- "Disclosure of Information About Capital Structure," which
establishes standards for disclosing information about an entity's capital
structure; No. 130 -- "Reporting Comprehensive Income," which establishes
standards for the reporting and display of so-called comprehensive income and
its components; and No. 131 -- "Disclosures about Segments of an Enterprise and
Related Information," which establishes new standards for reporting information
about operating segments in interim and annual financial statements.
Wesco plans to adopt the standards set forth in the foregoing statements when
first required: Nos. 128 and 129 at the end of 1997; and Nos. 130 and 131 at the
beginning of 1998. Adoption of these standards is not expected to have a
material effect on Wesco's consolidated financial position or results of
operations or cash flows, or on disclosures within the consolidated financial
statements.
-8-
<PAGE> 9
WESCO FINANCIAL CORPORATION
MANAGEMENTS 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 19
through 24 of its 1996 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 September 30, 1997, $1.13 billion, or 73.8% 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. Because unrealized appreciation is based on current
market quotations, which are subject to fluctuation, the net gains ultimately
realized could differ substantially from recorded unrealized appreciation.
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 (there were no realized securities
gains or losses or other nonoperating or unusual items):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Insurance segment net income:
"Normal" net operating income ......... $ 7,066 $ 7,072 $ 23,533 $ 20,482
Securities gains (losses) ............. 93 (115) 93 (115)
-------- -------- -------- --------
Segment net income .................... 7,159 6,957 23,626 20,367
-------- -------- -------- --------
Industrial segment net income (all "normal"
net operating income) ................. 910 672 2,794 2,030
-------- -------- -------- --------
Net income other than from identified
business segments:
"Normal" net operating income ........ 469 184 637 535
Gains (losses), net, on sales of
foreclosed properties ............ 850 (10) 850 14
-------- -------- -------- --------
Nonsegment net income ............... 1,319 174 1,487 549
-------- -------- -------- --------
Net income -- consolidated ............... $ 9,388 $ 7,803 $ 27,907 $ 22,946
======== ======== ======== ========
</TABLE>
-9-
<PAGE> 10
Insurance Segment
The insurance segment comprises Wesco Financial Insurance Company (
"Wes-FIC" ) and, since July 1996, The Kansas Bankers Surety Company ("KBS").
Following is a summary of the segment's "normal" net operating income, which
represents the combination of underwriting results with dividend and interest
income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums written ............ $ 2,027 $ 2,113 $ 8,195 $ 2,998
======== ======== ======== ========
Premiums earned ............. $ 2,297 $ 2,305 $ 7,763 $ 7,348
======== ======== ======== ========
Underwriting gain ........... $ 785 $ 1,236 $ 4,798 $ 4,409
Dividend and interest income 8,226 7,957 25,344 22,014
-------- -------- -------- --------
Income before income taxes .. 9,011 9,193 30,142 26,423
Income tax provision ........ (1,945) (2,121) (6,609) (5,941)
-------- -------- -------- --------
"Normal" net operating income $ 7,066 $ 7,072 $ 23,533 $ 20,482
======== ======== ======== ========
</TABLE>
Since KBS's acquisition at the beginning of the third quarter of 1996, most
premiums written by the insurance group have been generated by KBS. Wes-FIC's
only premiums written resulted from participation in two super-catastrophe
policies covering hurricane risk in Florida: $1.6 million in the first quarter
of 1997; and $1.0 million in 1997's second quarter.
Insurance premiums are recognized as earned revenues by the insurance group
pro rata over the term of the contract on all forms of insurance except for
super-catastrophe reinsurance. Premiums on super- catastrophe reinsurance are
not recognized as earned until the earlier of a loss occurrence or policy
expiration. Most premiums earned since the beginning of 1996's third quarter are
attributable to KBS. Premiums earned by Wes-FIC during the periods shown above
practically all relate to expiration of super- catastrophe reinsurance policies
entered into twelve months earlier; these amounted to $5.0 million in the first
quarter of 1996 and $1.0 million in the second quarter of 1997.
The underwriting gain relating to Wes-FIC's expiring super-catastrophe
reinsurance policies mentioned above was $3.2 million in the first quarter of
1996 and $1.0 million in the second quarter of 1997. All other underwriting gain
in the periods shown above related to KBS business. KBS's management notes that
claims historically have varied in both frequency and size, causing underwriting
gain to fluctuate somewhat; the 1996 third quarter gain was well above the
normal range.
Dividend and interest income earned by the insurance segment increased in
each 1997 period for several reasons, notably Wes-FIC's receipt in 1997 of the
balance of dividend arrearages plus regular quarterly dividends paid Wes-FIC by
US Airways Group, Inc. on its preferred stock. Dividends received on the
preferred stock totaled $2.1 million in the first nine months of 1997, including
$0.1 million received in the third quarter, versus $0.9 million received in the
first nine months of 1997, all of which was received in the third quarter.
Dividend and interest income tends to fluctuate for various reasons including
changes in investment components.
-10-
<PAGE> 11
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, which consists of the businesses of Precision Steel Warehouse, Inc. and
its subsidiaries (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues, principally sales
and services ............ $ 17,064 $ 15,739 $ 51,650 $ 48,321
======== ======== ======== ========
Income before income taxes .. $ 1,510 $ 1,111 $ 4,639 $ 3,367
Income tax provision ........ (600) (439) (1,845) (1,337)
-------- -------- -------- --------
Industrial segment net income $ 910 $ 672 $ 2,794 $ 2,030
======== ======== ======== ========
</TABLE>
Industrial segment revenues for the third quarter of 1997 increased $1.3
million, or approximately 8%, from those reported for the third quarter of 1996;
for the first nine months of 1997 the increase was $3.3 million, or
approximately 7%, over those reported for the comparable 1996 period. Pounds of
steel products sold increased about 17.7% and 18.5%, respectively. The increases
were attributed generally to improvement in the industrial sector of the
economy.
Income before income taxes and net income of Precision Steel's industrial
operations are dependent not only on revenues, but also on operating expenses
and the cost of products sold. The latter, as a percentage of revenues, amounted
to 78.4% and 79.5% for the third quarters of 1997 and 1996, and 78.4% and 79.9%
for the comparable nine-month periods. The cost percentage typically fluctuates
slightly from period to period as a result of changes in product mix and price
competition at the wholesale and retail levels.
Other Than Identified Business Segments
In the absence of nonoperating or unusual items such as securities gains or
losses, earnings other than from identified business segments include mainly (1)
dividend and interest income from marketable securities and cash equivalents
owned outside the insurance segment and (2) rental income from owned commercial
real estate, reduced by (1) costs associated with the development and
liquidation of foreclosed real estate and delinquent loans formerly owned by a
savings and loan subsidiary, including adjustments of loss reserves, and (2)
interest and other corporate expenses -- plus or minus income taxes other than
those associated with activities of the identified segments.
Earnings other than from identified business segments typically fluctuate
from period to period. The increases in such earnings for the third quarter and
first nine months of 1997 over the corresponding prior year figures were due
principally to a gain realized on sale of a single-family residence acquired
through foreclosure and subsequently remodeled, coupled with a $1 million
pre-tax reduction in the valuation allowance for future real estate losses
provided in past years; these were partially offset by a reduction in
tax-favored dividend income following the conversion to common
-11-
<PAGE> 12
stock in the fourth quarter of 1996 of $10 million principal amount of preferred
stock of Salomon Inc, owned by Wesco at the parent company level. (Wes-FIC also
converted $10 million principal amount of Salomon Inc preferred, with the same
effect on dividend income of the insurance segment.)
* * * * *
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 substantial unrealized price appreciation now existing in Wesco's
consolidated investment portfolio. (Wesco's shareholders' equity at September
30, 1997 contained $1.1 billion, or $158.48 per share, of unrealized
appreciation of investments, net of taxes -- about 74% of shareholders' equity,
compared to 70% at December 31, 1996.)
During the fourth quarter of 1997, the recently announced merger of Salomon
Inc ("Salomon") with a subsidiary of Traveler's Group Inc. ("Traveler's") is
expected to be completed. On the merger date, Wesco and its subsidiaries will
receive shares of common and preferred stock of Traveler's in exchange for the
common and preferred shares of Salomon currently held. If the merger is
completed as scheduled, Wesco will recognize a gain in its statement of income
in the fourth quarter; based upon a recent market price for Traveler's common
stock, the gain would be $85.9 million, or $53.4 million after income tax
effect. It should be borne in mind, however, that most of this gain has already
been reflected in Wesco's consolidated shareholders' equity at September 30,
1997 as a component of unrealized appreciation of investments, net of taxes.
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, which is
substantially exempt from income taxes. The respective income tax provisions,
expressed as percentages of income before income taxes, amounted to 26.0% and
23.7% for the third quarter and nine months ended September 30, 1997, versus
22.2% and 21.8% for the comparable periods of 1996.
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. For example, as
indicated elsewhere herein, Wesco's consolidated financial statements reflect
the acquisition of KBS in mid 1996. In addition to exposure to large
fluctuations due to realization of securities gains and losses and the
occurrence of other unusual items, Wesco's consolidated revenues, expenses and
earnings from operations are expected to be much more volatile than they were
prior to Wes-FIC's entry into the super- catastrophe reinsurance business.
Shareholders' equity is impacted not only to the extent unusual items affect
earnings, but also to reflect changes in unrealized appreciation of investments,
which are not reflected in earnings.
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000105729
<NAME> WESCO FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,715
<SECURITIES> 2,153,441
<RECEIVABLES> 10,678
<ALLOWANCES> (102)
<INVENTORY> 10,486
<CURRENT-ASSETS> 0
<PP&E> 30,841
<DEPRECIATION> (17,510)
<TOTAL-ASSETS> 2,237,633
<CURRENT-LIABILITIES> 0
<BONDS> 36,994
0
0
<COMMON> 7,120
<OTHER-SE> 1,522,666
<TOTAL-LIABILITY-AND-EQUITY> 2,237,633
<SALES> 51,532
<TOTAL-REVENUES> 89,273
<CGS> 40,400
<TOTAL-COSTS> 42,778
<OTHER-EXPENSES> 7,422
<LOSS-PROVISION> (1,000)
<INTEREST-EXPENSE> 2,507
<INCOME-PRETAX> 36,566
<INCOME-TAX> (8,659)
<INCOME-CONTINUING> 27,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,907
<EPS-PRIMARY> 3.92
<EPS-DILUTED> 3.92
</TABLE>
