<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, 1998
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)
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
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
April 30, 1998
<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: May 14, 1998 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, 1998
INDEX
Page(s)
Condensed consolidated statement of income and
retained earnings -- three-month periods
ended March 31, 1998 and March 31, 1997.............................. 4
Condensed consolidated balance sheet --
March 31, 1998 and December 31, 1997................................. 5
Condensed consolidated statement of cash flows --
three-month periods ended
March 31, 1998
and March 31, 1997................................................... 6
Notes to condensed consolidated financial
statements........................................................... 7-8
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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,
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Sales and service revenues ................................ $ 18,017 $ 17,524
Insurance premiums earned ................................. 3,444 2,305
Dividend and interest income .............................. 9,443 9,929
Other ..................................................... 226 298
--------- ---------
31,130 30,056
--------- ---------
Costs and expenses:
Cost of products and services sold ........................ 14,274 13,751
Insurance losses, loss adjustment and underwriting expenses 1,955 203
Selling, general and administrative expenses .............. 2,761 2,768
Interest on notes payable ................................. 754 835
--------- ---------
19,744 17,557
--------- ---------
Income before income taxes .................................... 11,386 12,499
Provision for income taxes .................................... (2,519) (2,716)
--------- ---------
Net income ................................................ 8,867 9,783
Retained earnings -- beginning of period ...................... 442,914 348,936
Cash dividends declared and paid .............................. (2,029) (1,958)
--------- ---------
Retained earnings -- end of period ............................ $ 449,752 $ 356,761
========= =========
Amounts per capital share based on 7,119,807 shares
outstanding throughout each period:
Net income ............................................ $ 1.24 $ 1.37
Cash dividends ........................................ $ .285 $ .275
========= =========
</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>
March 31, Dec. 31,
1998 1997
----------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents ................................ $ 14,647 $ 10,687
Investments:
Securities with fixed maturities ...................... 276,519 279,697
Marketable equity securities .......................... 2,552,779 2,224,848
Excess of cost over net assets of acquired business ...... 29,925 30,121
Other assets ............................................. 41,053 42,759
---------- ----------
$2,914,923 $2,588,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ............ $ 40,358 $ 41,437
Income taxes payable, principally deferred ............... 847,144 733,488
Notes payable ............................................ 33,635 33,635
Other liabilities ........................................ 16,273 15,260
---------- ----------
Total liabilities ..................................... 937,410 823,820
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ....... 30,439 30,439
Unrealized appreciation of investments, net of taxes ... 1,497,322 1,290,939
Retained earnings ...................................... 449,752 442,914
---------- ----------
Total shareholders' equity ............................ 1,977,513 1,764,292
---------- ----------
$2,914,923 $2,588,112
========== ==========
</TABLE>
See notes beginning 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,
1998 1997
-------- --------
<S> <C> <C>
Net cash flows from operating activities ............... $ 7,583 $ 11,220
-------- --------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities
with fixed maturities ............................ 4,525 7,326
Purchases of securities with fixed maturities ....... (8,982) (6,957)
Other, net .......................................... 2,863 2,018
-------- --------
Net cash flows from investing activities ............... (1,594) 2,387
-------- --------
Cash flows from financing activities:
Payment of cash dividends ............................ (2,029) (1,958)
Other, net ........................................... -- (55)
-------- --------
Net cash flows from financing activities ............... (2,029) (2,013)
-------- --------
Increase in cash and cash equivalents .................. 3,960 11,594
Cash and cash equivalents -- beginning of period ....... 10,687 23,039
-------- --------
Cash and cash equivalents -- end of period ............. $ 14,647 $ 34,633
======== ========
Supplementary information:
Interest paid during period ......................... $ 88 $ 169
Income taxes paid, net, during period ............... 898 2,077
======== ========
</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 results of operations of Wesco Financial Corporation ("Wesco") and its
subsidiaries (consisting only of normal recurring accruals) are reflected in the
condensed consolidated financial statements.
NOTE 2
Reference is made to the notes to Wesco's consolidated financial statements
appearing on pages 33 through 41 of its 1997 Form 10-K Annual Report for other
information deemed generally applicable to the condensed consolidated financial
statements.
NOTE 3
Effective as of the beginning of 1998, the Financial Accounting Standards Board
requires the reporting of comprehensive income, which comprises net income and
all other changes in net worth (other than additional investments by, or
distributions to, shareholders). Wesco's only type of comprehensive income other
than net income is the net change in a separate component of shareholders'
equity that reflects the unrealized appreciation of the consolidated group's
investments, less deemed applicable income taxes.
The following table sets forth the components of Wesco's consolidated
comprehensive income for the three-month periods ended March 31, 1988 and 1997.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
1998 1997
-------- ---------
<S> <C> <C>
Net income ........................................... $ 8,867 $ 9,783
Other comprehensive income --
Increase in unrealized appreciation of investments 318,417 1,458
Related income taxes ............................. (112,034) (525)
--------- ---------
Comprehensive income ................................. $ 215,250 $ 10,716
========= =========
</TABLE>
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<PAGE> 8
NOTE 4
Following is a summary of marketable equity securities (all common stocks), in
thousands of dollars:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------------- ---------------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Freddie Mac ...................................... $ 71,729 $1,366,200 $ 71,729 $1,207,814
The Coca-Cola Company ............................ 40,761 557,983 40,761 480,527
The Gillette Company ............................. 40,000 379,800 40,000 321,402
American Express Company ......................... 20,687 59,467 20,687 57,807
Wells Fargo & Company ............................ 11,351 56,094 11,351 57,480
The Travelers Group Inc. ......................... 90,771 107,052 90,771 96,124
US Airways Group, Inc. ........................... 3,000 22,958 -- --
Other ............................................ 2,914 3,225 2,914 3,694
---------- ---------- ---------- ----------
$ 281,213 $2,552,779 $ 278,213 $2,224,848
========== ========== ========== ==========
</TABLE>
-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 20
through 25 of its 1997 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
Wesco's shareholders' equity at March 31, 1998 was approximately $2.0
billion or $277.74 per share, up $.2 billion or $29.94 per share for the first
quarter of 1998. This increase was due principally to unrealized appreciation in
market value of investments, which, under accounting convention, is credited
directly to shareholders' equity without being reflected in net income. 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, which constituted 76% of shareholders'
equity at March 31, 1998, compared to 73% at December 31, 1997.
Even if market prices of all Wesco group investments dropped suddenly
to original cost, the group would still be clearly viable.
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,
1998 1997
------ ------
<S> <C> <C>
Net income from identified segments:
Insurance segment ................ $7,918 $8,715
Industrial segment ............... 856 969
Net income other than from identified
business segments ................ 93 99
------ ------
Net income -- consolidated ..... $8,867 $9,783
====== ======
</TABLE>
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<PAGE> 10
Insurance Segment
The insurance segment comprises Wesco Financial Insurance Company
("Wes-FIC" ) and The Kansas Bankers Surety Company ("KBS"). 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,
1998 1997
-------- --------
<S> <C> <C>
Premiums written .............................. $ 8,286 $ 4,114
======== ========
Premiums earned ............................... $ 3,444 $ 2,305
======== ========
Underwriting gain ............................. $ 1,293 $ 1,888
Dividend and interest income................... 8,795 9,177
-------- --------
Income before income taxes .................... 10,088 11,065
Income tax provision .......................... (2,170) (2,350)
-------- --------
Insurance segment net income .................. $ 7,918 $ 8,715
======== ========
</TABLE>
Premiums written and earned by the insurance group are reported net of
amounts ceded to reinsurers, and are credited for amounts returned by reinsurers
upon changes in contractual terms.
Premiums written for the first quarter of 1998 included $6.5 million
attributable to KBS and $1.8 million attributable to Wes-FIC. Premiums written
for the first quarter of 1997 included $2.5 million attributable to KBS and $1.6
million attributable to Wes-FIC. KBS' $4.0 million increase in premiums written
was attributable to a restructuring of its reinsurance program effective January
1,1998, whereby it canceled all reinsurance contracts in effect at that date and
entered into new contracts with other reinsurers covering a lower proportion of
the risks underwritten than previously. As a result of the reinsurance
restructuring, KBS (1) in 1998 received and credited to premiums written $2.6
million of unearned reinsurance premiums that had been deducted from premiums
written in prior years, and (2) reduced premiums ceded to reinsurers to about 5%
of gross premiums in 1998, compared to about 42% in 1997. Excluding the effects
of reinsurance transactions, premiums written by KBS for the first quarter of
1998 actually decreased about 3% from last year's comparable figure mainly as a
result of the continued consolidation of midwestern banks and the continuation
of extremely competitive market conditions.
Premiums earned in the first quarters of 1998 and 1997 were
attributable to KBS, and the increase in 1998 was due mainly to KBS'
restructuring of its reinsurance program, discussed above.
The underwriting gains reported for the quarters ended March 31, 1998
and 1997 were attributable to the profitable underwriting results of KBS, and
are net of goodwill amortization of $.2 million for each quarter. The decrease
in underwriting gain for the first quarter of 1998 from the comparable 1997
figure resulted mainly
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<PAGE> 11
from the return by KBS of approximately $.6 million of ceding commissions to the
reinsurers in connection with the restructuring of its reinsurance program, and
an increase in losses incurred by KBS in the current quarter.
Dividend and interest income earned by the insurance segment decreased
in the first quarter of 1998 from the comparable figure for the first quarter of
1997 due principally to two factors: (1) the 1997 figure included approximately
$1.3 million of the balance of dividend arrearages owed Wes-FIC by US Airways
Group, Inc. on its preferred stock, versus no comparable figure for the current
quarter; and (2) in the fourth quarter of 1997 $10 million par value of
preferred stock of Salomon Inc was converted to lower yielding common stock.
The income tax provision of the insurance segment generally fluctuates
somewhat as a percentage of its pre-tax income. These fluctuations have been
caused mainly by fluctuations in the relationship of substantially tax-exempt
components of income to total pre-tax income.
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,
1998 1997
-------- --------
<S> <C> <C>
Revenues, principally sales
and services ............................ $ 18,043 $ 17,556
======== ========
Income before income taxes ................. $ 1,398 $ 1,607
Income tax provision ....................... (542) (638)
-------- --------
Industrial segment net income .............. $ 856 $ 969
======== ========
</TABLE>
Revenues of Precision Steel's businesses for the first quarter of 1998
increased $.5 million, or approximately 3 percent, over those reported for the
first quarter of 1997. Pounds of steel products sold increased about 10 percent.
Precision Steel's management attributes these increases generally to improvement
in the industrial sector of the economy. The much lower relative increase in
revenues than in pounds of steel sold is attributed to an increase in the
proportion of sales of lower-priced products.
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 79.2% for the first quarter of 1998, versus 78.5% for the first
quarter of 1997. The cost percentage typically fluctuates slightly from period
to period as a result of changes in product mix and price competition at all
levels.
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<PAGE> 12
Other Than Identified Business Segments
In the absence of nonoperating or unusual items such as securities
gains or losses, net income other than from identified business segments
includes 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 related to such "normal"
nonsegment items. "Normal" net income other than from identified business
segments typically fluctuates from period to period, although the change from
the first quarter of 1997 to the first quarter of 1998 was minor.
* * * * *
Realized gains and losses -- which impact net income 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, 1998 contained $1.5 billion, or $210.30 per
share, of unrealized appreciation of investments, net of taxes -- about 76% of
shareholders' equity, compared to 73% at December 31, 1997.)
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 22.1% and 21.7% for the quarters ended March 31, 1998 and March 31,
1997.
Consolidated revenues, expenses and net income reported for any
period are not necessarily indicative of future revenues, expenses and net
income 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. In addition, consolidated revenues, expenses and net income 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 net income.
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000105729
<NAME> WESCO FINANCIAL CORPORATION
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 14,647
<SECURITIES> 2,829,298
<RECEIVABLES> 11,230
<ALLOWANCES> (88)
<INVENTORY> 10,412
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<BONDS> 33,635
0
0
<COMMON> 7,120
<OTHER-SE> 1,970,393
<TOTAL-LIABILITY-AND-EQUITY> 2,914,923
<SALES> 18,017
<TOTAL-REVENUES> 31,130
<CGS> 14,274
<TOTAL-COSTS> 16,229
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