<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 June 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)
<TABLE>
<S> <C>
DELAWARE 95-2109453
- ------------------------------- ------------------------------------
(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
-----------------------------------------------------------------------
(Address of Principal Executive Offices)
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 August 9,
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 4. Submission of Matters to a Vote of Security-Holders
At the annual meeting of shareholders of Wesco Financial Corporation
("Wesco") held May 21, 1997, Wesco's shareholders reelected all
Wesco's Directors. Each of the nominees -- Charles T. Munger, Robert
H. Bird, Carolyn H. Carlburg, William T. Caspers, James N. Gamble,
Elizabeth Caspers Peters and David K. Robinson -- received 6,872,361
favorable votes. There were 22,469 shares withheld from voting for
each nominee. There were no abstentions or broker non-votes. No other
matters were voted upon at the meeting.
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: August 12, 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 JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated statement of income and
retained earnings -- six- and three-month periods
ended June 30, 1997 and June 30, 1996.............................................. 4
Condensed consolidated balance sheet --
June 30, 1997 and December 31, 1996................................................ 5
Condensed consolidated statement of cash flows -- six-month periods ended June
30, 1997 and June 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 Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues .................. $ 16,975 $ 16,401 $ 34,499 $ 32,539
Insurance premiums earned .................. 3,161 2 5,466 5,043
Dividend and interest income ............... 8,676 8,035 18,605 15,953
Gains, net, on sales of securities
and foreclosed property .................. -- -- -- 40
Other ...................................... 272 296 570 609
-------- -------- -------- --------
29,084 24,734 59,140 54,184
-------- -------- -------- --------
Costs and expenses:
Cost of products and services sold ......... 13,302 13,124 27,053 26,053
Insurance losses, loss adjustment
and underwriting expenses ............... 860 24 1,063 1,870
Selling, general and administrative expenses 2,702 2,636 5,470 5,247
Interest on notes payable .................. 837 839 1,672 1,679
-------- -------- -------- --------
17,701 16,623 35,258 34,849
-------- -------- -------- --------
Income before income taxes ..................... 11,383 8,111 23,882 19,335
Provision for income taxes ..................... (2,647) (1,538) (5,363) (4,192)
-------- -------- -------- --------
Net income ..................................... 8,736 6,573 18,519 15,143
Retained earnings -- beginning of period ....... 356,761 332,547 348,936 325,864
Cash dividends declared and paid ............... (1,957) (1,886) (3,915) (3,773)
-------- -------- -------- --------
Retained earnings -- end of period ............. $363,540 $337,234 $363,540 $337,234
======== ======== ======== ========
Amounts per share based on 7,119,807 shares
outstanding throughout each period:
Net income ................................. $ 1.23 $ .92 $ 2.60 $ 2.12
======== ======== ======== ========
Cash dividends ............................. $ .275 $ .265 $ .550 $ .530
======== ======== ======== ========
</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>
June 30, Dec. 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $ 16,944 $ 23,039
Investments:
Securities with fixed maturities ...................... 208,972 176,885
Marketable equity securities .......................... 1,927,141 1,533,009
Excess of cost over net assets of acquired business ...... 30,512 30,903
Other assets ............................................. 53,016 54,569
---------- ----------
$2,236,585 $1,818,405
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ............ $ 44,977 $ 45,491
Income taxes payable, principally deferred ............... 609,460 468,370
Notes payable ............................................ 37,051 37,162
Other liabilities ........................................ 17,140 16,367
---------- ----------
Total liabilities ..................................... 708,628 567,390
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ....... 30,439 30,439
Unrealized appreciation of investments, net of taxes ... 1,133,978 871,640
Retained earnings ...................................... 363,540 348,936
---------- ----------
Total shareholders' equity ............................ 1,527,957 1,251,015
---------- ----------
$2,236,585 $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)
Six Months Ended
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Net cash flows from operating activities ................ $ 15,910 $ 9,058
-------- --------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities
with fixed maturities ............................ 20,211 6,612
Purchases of securities with fixed maturities ........ (62,046) (49,730)
Sales of securities with fixed maturities ............ 19,964 --
Other, net ........................................... 3,892 2,184
-------- --------
Net cash flows from investing activities ................ (17,979) (40,934)
-------- --------
Cash flows from financing activities:
Payment of cash dividends ............................ (3,915) (3,773)
Other, net ........................................... (111) (102)
-------- --------
Net cash flows from financing activities ................ (4,026) (3,875)
-------- --------
Decrease in cash and cash equivalents ................... (6,095) (35,751)
Cash and cash equivalents -- beginning of period ........ 23,039 87,981
-------- --------
Cash and cash equivalents -- end of period .............. $ 16,944 $ 52,230
======== ========
Supplementary information:
Interest paid during period .......................... $ 1,675 $ 1,678
======== ========
Income taxes paid, net, during period ................ $ 6,217 $ 4,993
======== ========
</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>
June 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 $1,008,000 $ 71,729 $ 794,700
The Coca-Cola Company ............. 40,761 489,981 40,761 379,195
The Gillette Company .............. 40,000 303,200 40,000 248,800
American Express Company .......... 20,687 48,254 20,687 36,595
Wells Fargo & Company ............. 11,351 45,637 11,351 45,679
Salomon Inc. ...................... 20,000 29,276 20,000 24,803
Other ............................. 2,914 2,793 2,914 3,237
---------- ---------- ---------- ----------
$ 207,442 $1,927,141 $ 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 Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
Balance at beginning of period .... $ 872,573 $637,490 $ 871,640 $601,326
Net increase in unrealized
appreciation ................ 402,447 83,944 404,282 139,714
Increase in deemed applicable
income taxes ................ (141,042 ) (29,339) (141,944) (48,945)
---------- -------- ---------- --------
Balance at end of period .......... $1,133,978 $692,095 $1,133,978 $692,095
========== ======== ========== ========
</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 June 30, 1997, $1.13 billion, or 74.2% 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 Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income from identified segments:
Insurance segment............................... $ 7,752 $ 5,716 $16,467 $13,410
Industrial segment.............................. 915 703 1,884 1,358
Net income other than from identified
business segments............................... 69 154 168 375
-------- ------ ------- -------
Net income -- consolidated........................ $ 8,736 $ 6,573 $18,519 $15,143
====== ====== ====== ======
</TABLE>
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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 Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Premiums written ..................... $ 2,054 $ 885 $ 6,168 $ 885
======= ======= ======= =======
Premiums earned ...................... $ 3,161 $ 2 $ 5,466 $ 5,043
======= ======= ======= =======
Underwriting gain (loss) ............. $ 2,106 $ (19) $ 4,013 $ 3,173
Dividend and interest income 7,959 7,093 17,117 14,057
------- ------- ------- -------
Income before income taxes ........... 10,065 7,074 21,130 17,230
Income tax provision ................. (2,313) (1,358) (4,663) (3,820)
------- ------- ------- -------
Insurance segment net income ......... $ 7,752 $ 5,716 $16,467 $13,410
======= ======= ======= =======
</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
until June 1996, at which time Wes-FIC was retroceded a 3%, twelve-month
participation in a super-catastrophe reinsurance policy covering hurricane risk
in Florida; premiums written in the first six months of 1996 related almost
entirely to that policy.
Premiums written by the insurance group in the first six months of 1997
included approximately $1.6 million recorded by Wes-FIC in the first quarter
attributable to a 3% participation in a larger super-catastrophe reinsurance
policy covering hurricane risk in Florida for a three-year term beginning
January 1, 1997. Other premiums written by the insurance segment in the
six-month period ended June 30, 1997, approximately $4.5 million, were
attributable almost entirely to KBS.
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 six months of 1997 included
approximately $1.0 million earned by Wes-FIC on expiration of the
super-catastrophe reinsurance policy entered into in mid-1996; the balance of
approximately $4.4 million was attributable mainly to KBS. Premiums earned in
the 1996 periods were attributable principally to the expiration of several
super-catastrophe reinsurance participations entered into by Wes-FIC in 1995.
The underwriting gain reported for the first six months of 1997 included
approximately $1.0 million earned
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<PAGE> 10
by Wes-FIC in the second quarter on expiring super-catastrophe reinsurance
business discussed above. The remaining six months' gain of approximately $3.0
million was attributable principally to KBS, stated after deduction of goodwill
amortization of $0.2 million per calendar quarter. The underwriting gain for the
six-month period ended June 30, 1996 was attributable principally to the
recognition of earned premiums without offsetting losses on super-catastrophe
reinsurance business written a year earlier.
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 the regular quarterly dividends paid Wes-FIC
by US Airways Group, Inc. on its preferred stock. Dividends received on the
preferred stock totaled $2.0 million in the first six months of 1997, including
$0.3 million received in the second quarter, versus none in the first six months
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 Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues, principally sales
and services ....................... $ 17,030 $ 16,426 $ 34,586 $ 32,582
======== ======== ======== ========
Income before income taxes ............. $ 1,522 $ 1,169 $ 3,129 $ 2,256
Income tax provision ................... (607) (466) (1,245) (898)
-------- -------- -------- --------
Industrial segment net income $ 915 $ 703 $ 1,884 $ 1,358
======== ======== ======== ========
</TABLE>
Industrial segment revenues for the second quarter of 1997 increased $0.6
million, or approximately 4%, from those reported for the second quarter of
1996; for the first six months of 1997 the increase was $2.0 million, or
approximately 6%, over those reported for the comparable 1996 period. Pounds of
steel products sold increased about 15.3% and 18.9%, 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 80.0% for the second quarters of 1997 and 1996, and 78.4% and 80.1%
for the comparable six-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
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<PAGE> 11
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 decreases in such earnings for the second quarter and
first six months of 1997 from the corresponding prior year figures were 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
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 June 30,
1997 contained $1.13 billion, or $159.27 per share, of unrealized appreciation
of investments, net of taxes -- about 74.2% 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 23.3% and 22.4% for the second quarter and six months ended June 30,
1997, versus 19.0% and 21.7% 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.
* * * * *
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<PAGE> 12
WESCO FINANCIAL CORPORATION
301 EAST COLORADO BLVD., SUITE 300
PASADENA, CALIFORNIA 91101-1901
August 12, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: File No. 1-4720
Gentlemen:
Enclosed is an electronic version of our Form 10-Q for the quarter ended June
30, 1997.
Very truly yours,
WESCO FINANCIAL CORPORATION
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
JLJ:br
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000105729
<NAME> WESCO FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,944
<SECURITIES> 2,136,113
<RECEIVABLES> 12,163
<ALLOWANCES> (93)
<INVENTORY> 11,129
<CURRENT-ASSETS> 0
<PP&E> 30,237
<DEPRECIATION> (17,171)
<TOTAL-ASSETS> 2,236,585
<CURRENT-LIABILITIES> 0
<BONDS> 37,051
0
0
<COMMON> 7,120
<OTHER-SE> 1,520,837
<TOTAL-LIABILITY-AND-EQUITY> 2,236,585
<SALES> 34,499
<TOTAL-REVENUES> 59,140
<CGS> 27,053
<TOTAL-COSTS> 28,116
<OTHER-EXPENSES> 5,470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,672
<INCOME-PRETAX> 23,882
<INCOME-TAX> (5,363)
<INCOME-CONTINUING> 18,519
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,519
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 2.60
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