<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 March 31, 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 Executives 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 X 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, 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 8 through 11.
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: May 14, 1997 By:
--------------------- -----------------------------------
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 MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated statement of income and
retained earnings -- Three-month periods
ended March 31, 1997 and March 31, 1996.............................................. 4
Condensed consolidated balance sheet --
March 31, 1997 and December 31, 1996................................................. 5
Condensed consolidated statement of cash flows -- Three-month periods ended
March 31, 1997
and March 31, 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 except for amounts per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Sales and service revenues ................. $ 17,524 $ 16,138
Insurance premiums earned .................. 2,305 5,041
Dividend and interest income ............... 9,929 7,918
Gains on sales of securities
and foreclosed property .................. -- 40
Other ...................................... 298 313
--------- ---------
30,056 29,450
--------- ---------
Costs and expenses:
Cost of products and services sold ......... 13,751 12,929
Insurance losses, loss adjustment
and underwriting expenses ................ 203 1,846
Selling, general and administrative expenses 2,768 2,611
Interest on notes payable .................. 835 840
--------- ---------
17,557 18,226
--------- ---------
Income before income taxes ..................... 12,499 11,224
Provision for income taxes ..................... (2,716) (2,654)
--------- ---------
Net income ..................................... 9,783 8,570
Retained earnings -- beginning of period ....... 348,936 325,864
Cash dividends declared and paid ............... (1,958) (1,887)
--------- ---------
Retained earnings -- end of period ............. $ 356,761 $ 332,547
========= =========
Amounts per share based on 7,119,807 shares
outstanding throughout each period:
Net income .................................. $ 1.37 $ 1.20
========= =========
Cash dividends .............................. $ .275 $ .265
========= =========
</TABLE>
See notes on page 7.
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<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................ $ 34,633 $ 23,039
Investments:
Securities with fixed maturities .................. 176,353 176,885
Marketable equity securities ...................... 1,534,844 1,533,009
Excess of cost over net assets of acquired business .. 30,707 30,903
Other assets ......................................... 57,272 54,569
---------- ----------
$1,833,809 $1,818,405
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ........ $ 45,513 $ 45,491
Income taxes payable, principally deferred ........... 472,261 468,370
Notes payable ........................................ 37,107 37,162
Other liabilities .................................... 19,155 16,367
---------- ----------
Total liabilities ................................. 574,036 567,390
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ... 30,439 30,439
Unrealized appreciation of investments, net of taxes 872,573 871,640
Retained earnings .................................. 356,761 348,936
---------- ----------
Total shareholders' equity ........................ 1,259,773 1,251,015
---------- ----------
$1,833,809 $1,818,405
========== ==========
</TABLE>
See notes on page 7.
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<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,
1997 1996
--------- ----------
<S> <C> <C>
Net cash flows from operating activities ............... $ 11,220 $ 9,799
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities
with fixed maturities ............................ 7,326 2,275
Purchases of securities with fixed maturities ....... (6,957) --
Other, net .......................................... 2,018 176
-------- --------
Net cash flows from investing activities ............... 2,387 2,451
-------- --------
Cash flows from financing activities:
Payment of cash dividends ............................ (1,958) (1,887)
Other, net ........................................... (55) (50)
-------- --------
Net cash flows from financing activities ............... (2,013) (1,937)
-------- --------
Increase in cash and cash equivalents .................. 11,594 10,313
Cash and cash equivalents -- beginning of period ....... 23,039 87,981
-------- --------
Cash and cash equivalents -- end of period ............. $ 34,633 $ 98,294
======== ========
Supplementary information:
Interest paid during period ......................... $ 169 $ 174
======== ========
Income taxes paid, net, during period ............... $ 2,077 $ 1,241
======== ========
</TABLE>
See notes 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 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 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>
March 31, 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 $ 784,800 $ 71,729 $ 794,700
The Coca-Cola Company................................ 40,761 401,712 40,761 379,195
The Gillette Company................................. 40,000 232,400 40,000 248,800
American Express Company............................. 20,687 38,781 20,687 36,595
Wells Fargo & Company................................ 11,351 48,114 11,351 45,679
Salomon Inc ......................................... 20,000 26,250 20,000 24,803
Other................................................ 2,914 2,787 2,914 3,237
-------- ---------- -------- ----------
$207,442 $1,534,844 $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
---------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of period................................................ $871,640 $601,326
Net increase in unrealized appreciation.................................... 1,835 55,770
Increase in deemed applicable income taxes.................................. (902) (19,606)
-------- --------
Balance at end of period...................................................... $872,573 $637,490
======== ========
</TABLE>
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<PAGE> 8
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 March 31, 1996, $872.6 million, or 69.3% 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
-------------------------
March 31, March 31,
1997 1996
--------- --------
<S> <C> <C>
Net income from identified segments:
Insurance segment............................................ $8,715 $7,694
Industrial segment........................................... 969 655
Net income other than from identified
business segments ........................................... 99 221
-------- ------
Net income -- consolidated................................. $9,783 $8,570
===== =====
</TABLE>
-8-
<PAGE> 9
Insurance Segment
The insurance segment comprises Wesco Financial Insurance Company
("Wes-FIC") and, in 1997, The Kansas Bankers Surety Company ("KBS"), which
Wes-FIC acquired in mid 1996. Following is a summary of the results of segment
operations, which were all "normal" net operating income in that they
represented the combination of underwriting results with dividend and interest
income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Premiums written................................................ $ 4,114 $ --
======= ========
Premiums earned................................................. $ 2,305 $ 5,041
======= ========
Underwriting gain............................................... $ 1,888 $ 3,192
Dividend and interest income.................................... 9,177 6,964
------- --------
Income before income taxes...................................... 11,065 10,156
Income tax provision............................................ (2,350) (2,462)
------- --------
Insurance segment net income.................................... $ 8,715 $ 7,694
======= ========
</TABLE>
As explained in Wesco's 1996 Form 10-K Annual Report, premiums written
by the insurance group following Wes-FIC's entry into the super-catastrophe
reinsurance business in 1994 consisted, through mid 1996, almost entirely of
participations with wholly owned Berkshire Hathaway Inc. ("Berkshire") insurance
subsidiaries in several super-catastrophe reinsurance policies retroceded to
Wes-FIC. However, by the first quarter of 1996, the pricing of super-catastrophe
reinsurance had become unattractive. Principally as a result, no such contracts
expiring during that quarter were renewed, nor was any new business written.
Premiums written by the insurance group for the first quarter of 1997
include $2.5 million attributable to KBS and $1.6 million attributable to
Wes-FIC. The latter relates to Wes-FIC's participation with a wholly owned
Berkshire insurance subsidiary in certain super-catastrophe reinsurance
business.
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. Premiums earned in the first quarter of 1997 were attributable
almost entirely to KBS, while premiums earned in the first quarter of 1996 were
attributable to the expiration of several super-catastrophe reinsurance
contracts.
The underwriting gain reported for the first quarter of 1997 was
attributable to the profitable underwriting results of KBS, after deduction of
goodwill amortization of $.2 million for the first quarter. The exceptional
underwriting gain for the first quarter of 1996 was attributable principally to
the recognition of earned premiums without offsetting losses on expiring
super-catastrophe reinsurance business.
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<PAGE> 10
Dividend and interest income earned by the insurance segment increased
in the first quarter of 1997 over the comparable figure for the first quarter of
1996 due principally to the receipt in 1997 of the balance of dividend
arrearages plus the regular dividend owed Wes-FIC by US Airways Group, Inc. on
its preferred stock. Dividends received on such preferred stock amounted to $1.6
million in the current quarter, versus none in the first quarter of 1996.
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, consisting of the businesses of Precision Steel Warehouse, Inc. and its
subsidiaries ( in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1997 1996
-------- ---------
<S> <C> <C>
Revenues, principally sales
and services ........................ $ 17,556 $ 16,156
======== ========
Income before income taxes ............. $ 1,607 $ 1,087
Income tax provision ................... (638) (432)
-------- --------
Industrial segment net income .......... $ 969 $ 655
======== ========
</TABLE>
Industrial segment revenues for the first quarter of 1997 increased
$1.4 million, or approximately 9 percent, from those reported for the first
quarter of 1996. Pounds of steel products sold increased about 23 percent. These
increases are 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 78.5% for the first quarter of 1997, versus 80.1% for the first
quarter of 1996. 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) the costs associated with the development
and liquidation of foreclosed real estate and delinquent loans formerly owned by
a savings and loan subsidiary and (2) interest and other corporate expenses --
plus or minus income taxes other than those associated with activities of the
identified segments.
Earnings other than from identified business segments typically
fluctuate from period to period. The decrease in the figure for the first
quarter of 1997 from the corresponding prior year figure was due principally to
a reduction in tax-favored dividend income following the conversion to common
stock in the fourth quarter of 1996 of $10 million principal amount of preferred
stock of Salomon Inc, owned by Wesco at the parent
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<PAGE> 11
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 existence of substantial unrealized price appreciation in Wesco's
consolidated investment portfolio. (Wesco's shareholders' equity at March 31,
1997 contained $872.6 million, or $122.56 per share, of unrealized appreciation
of investments, net of taxes -- about 69.3% of shareholders' equity, compared to
69.7 % at December 31, 1996.)
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 21.7% and 23.6% for the quarters ended March 31, 1997 and March 31,
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.
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 34,633
<SECURITIES> 1,711,197
<RECEIVABLES> 13,758
<ALLOWANCES> (88)
<INVENTORY> 10,356
<CURRENT-ASSETS> 0
<PP&E> 30,753
<DEPRECIATION> (17,490)
<TOTAL-ASSETS> 1,833,809
<CURRENT-LIABILITIES> 0
<BONDS> 37,107
0
0
<COMMON> 7,120
<OTHER-SE> 1,252,653
<TOTAL-LIABILITY-AND-EQUITY> 1,833,809
<SALES> 17,524
<TOTAL-REVENUES> 30,056
<CGS> 13,751
<TOTAL-COSTS> 13,954
<OTHER-EXPENSES> 2,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835
<INCOME-PRETAX> 12,499
<INCOME-TAX> (2,716)
<INCOME-CONTINUING> 9,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,783
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
