<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, 1999 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 May 10, 1999
<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 10 through 14.
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, 1999 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 MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Condensed consolidated statement of income -- three-month
periods ended March 31, 1999 and March 31, 1998......................................... 4
Condensed consolidated balance sheet --
March 31, 1999 and December 31, 1998..................................................... 5
Condensed consolidated statement of changes in shareholders' equity --
three-month periods ended March 31, 1999
and March 31, 1998....................................................................... 6
Condensed consolidated statement of cash flows --three-month periods ended March
31, 1999
and March 31, 1998....................................................................... 7
Notes to condensed consolidated financial
statements............................................................................... 8-9
</TABLE>
-3-
<PAGE> 4
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Sales and service revenues ................................................ $ 17,048 $ 18,017
Insurance premiums earned ................................................. 3,794 3,444
Dividend and interest income .............................................. 11,608 9,443
Other ..................................................................... 242 226
-------- --------
32,692 31,130
-------- --------
Costs and expenses:
Cost of products and services sold ........................................ 13,497 14,274
Insurance losses, loss adjustment and underwriting expenses ............... 1,346 1,955
Selling, general and administrative expenses .............................. 2,934 2,761
Interest on notes payable ................................................. 748 754
-------- --------
18,525 19,744
-------- --------
Income before income taxes .................................................... 14,167 11,386
Provision for income taxes .................................................... (3,546) (2,519)
-------- --------
Net income ................................................................ $ 10,621 $ 8,867
======== ========
Amounts per capital share based on 7,119,807 shares outstanding throughout each
period:
Net income ............................................................ $ 1.49 $ 1.24
======== ========
Cash dividends ........................................................ $ .295 $ .285
======== ========
</TABLE>
See notes beginning on page 8.
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<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $ 328,066 $ 320,034
Investments:
Securities with fixed maturities ...................... 76,738 66,619
Marketable equity securities .......................... 2,608,885 2,778,595
Excess of cost over net assets of acquired business ...... 29,142 29,338
Other assets ............................................. 39,390 33,820
---------- ----------
$3,082,221 $3,228,406
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses ............ $ 36,594 $ 36,731
Notes payable ............................................ 33,635 33,635
Income taxes payable, principally deferred ............... 864,441 920,035
Other liabilities ........................................ 17,465 14,249
---------- ----------
Total liabilities ..................................... 952,135 1,004,650
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ....... 30,439 30,439
Unrealized appreciation of investments, net of taxes ... 1,584,526 1,686,716
Retained earnings ...................................... 515,121 506,601
---------- ----------
Total shareholders' equity ............................ 2,130,086 2,223,756
---------- ----------
$3,082,221 $3,228,406
========== ==========
</TABLE>
See notes beginning on page 8.
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<PAGE> 6
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Shareholders' Equity
----------------------------------------------------------------
Capital Total
Stock and Compre-
Capital in Unrealized hensive
Excess of Appreciation Retained Income
Par Value of Investments Earnings Total (Loss)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ............ $ 30,439 $ 1,290,939 $ 442,914 $ 1,764,292
Net income ............................ 8,867 8,867
Unrealized appreciation of investments, $ 215,250
===========
net of income tax effect ............ 206,383 206,383
Cash dividends declared and paid ...... (2,029) (2,029)
----------- ----------- ----------- -----------
Balance, March 31, 1998 ............... $ 30,439 $ 1,497,322 $ 449,752 $ 1,977,513
=========== =========== =========== ===========
* * * * *
Balance, December 31, 1998 ............ $ 30,439 $ 1,686,716 $ 506,601 $ 2,223,756
Net income ............................ 10,621 10,621
Unrealized depreciation of investments, $ (91,569)
===========
net of income tax effect ............ (102,190) (102,190)
Cash dividends declared and paid ...... (2,101) (2,101)
----------- ----------- ----------- -----------
Balance, March 31, 1999 ............... $ 30,439 $ 1,584,526 $ 515,121 $ 2,130,086
=========== =========== =========== ===========
</TABLE>
See notes beginning on page 8.
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<PAGE> 7
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Net cash flows from operating activities ....... $ 6,555 $ 7,583
--------- ---------
Cash flows from investing activities:
Proceeds from maturities of investments ...... 3,852 4,525
Purchases of investments ..................... -- (8,982)
Other, net ................................... (274) 2,863
--------- ---------
Net cash flows from investing activities ....... 3,578 (1,594)
--------- ---------
Cash flows from financing activities:
Payment of cash dividends .................... (2,101) (2,029)
--------- ---------
Net cash flows from financing activities ....... (2,101) (2,029)
--------- ---------
Increase in cash and cash equivalents .......... 8,032 3,960
Cash and cash equivalents -- beginning of period 320,034 10,687
--------- ---------
Cash and cash equivalents -- end of period ..... $ 328,066 $ 14,647
========= =========
Supplementary information:
Interest paid during period ................. $ 70 $ 76
Income taxes paid, net, during period ....... 4,546 898
========= =========
</TABLE>
See notes beginning on page 8.
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<PAGE> 8
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 32 through 38 of its 1998 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, 1999 December 31, 1998
-------------------------- --------------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Freddie Mac ......... $ 71,729 $1,650,600 $ 71,729 $1,855,800
The Coca-Cola Company 40,761 442,244 40,761 482,775
The Gillette Company 40,000 380,400 40,000 306,000
Other ............... 32,038 135,641 32,038 134,020
---------- ---------- ---------- ----------
$ 184,528 $2,608,885 $ 184,528 $2,778,595
========== ========== ========== ==========
</TABLE>
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<PAGE> 9
Note 4
Following is certain condensed consolidated financial information, broken down
as to Wesco's business segments, in thousands of dollars:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Insurance segment:
Total revenues ......................... $ 15,090 $ 12,239
Net income ............................. 10,166 7,918
======== ========
Industrial segment:
Total revenues ......................... $ 17,080 $ 18,043
Net income ............................. 706 856
======== ========
Not identified with a business segment:
Total revenues ......................... $ 522 $ 848
Net income (loss) ...................... (251) 93
======== ========
</TABLE>
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<PAGE> 10
WESCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to management's discussion and analysis of Wesco's
consolidated financial condition and results of operations appearing on pages 18
through 25 of its 1998 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, 1999 was approximately $2.1
billion ($299 per share), compared to $2.2 billion ($312 per share) at December
31, 1998 and $1.8 billion ($257 per share) at September 30, 1998. These
fluctuations were caused mainly by changes in the unrealized appreciation
component, which represented 74%, 76% and 71%, respectively, of total
shareholders' equity. Unrealized appreciation, which is based on current market
quotations, is expected to continue to fluctuate, and the amount recorded at any
date could differ substantially from net gains ultimately realized.
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,
1999 1998
-------- --------
<S> <C> <C>
Net income from identified segments:
Insurance segment ......................... $ 10,166 $ 7,918
Industrial segment ........................ 706 856
Net income (loss) other than from
identified business segments .............. (251) 93
-------- --------
Net income -- consolidated .............. $ 10,621 $ 8,867
======== ========
</TABLE>
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,
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<PAGE> 11
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,
1999 1998
-------- --------
<S> <C> <C>
Premiums written ..................... $ 6,367 $ 8,286
======== ========
Premiums earned ...................... $ 3,794 $ 3,444
======== ========
Underwriting gain .................... $ 2,252 $ 1,293
Dividend and interest income ......... 11,296 8,795
-------- --------
Income before income taxes ........... 13,548 10,088
Income tax provision ................. (3,382) (2,170)
-------- --------
Insurance segment net income ......... $ 10,166 $ 7,918
======== ========
</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 1999 included $2.2 million
attributable to Wes-FIC and $4.1 million attributable to KBS. Premiums written
for the first quarter of 1998 included $1.8 million attributable to Wes-FIC and
$6.5 million attributable to KBS. The KBS figure for the first quarter of 1998
included $2.6 million in unearned premiums returned to it by reinsurers upon
KBS's restructuring of its reinsurance program effective as of January 1, 1998.
Excluding that amount, premiums written by KBS for the first quarter of 1999
actually increased approximately 5% over the comparable figure for the first
quarter of 1998. The increase was attributed by KBS management principally to
premiums on new products, such as bank lender liability insurance, which more
than offset the declining premium volume on other product lines resulting from
competitive market conditions and the ongoing decline in KBS's customer base as
small midwestern banks have continued to merge.
Earned premiums for the first quarters of 1999 and 1998 included $3.5
million and $3.3 million attributable to KBS. The remainder in each period was
attributable to Wes-FIC.
The underwriting gains reported for the quarters ended March 31, 1999
and 1998 were attributable to the profitable underwriting results of KBS, and
are net of goodwill amortization of $.2 million for each quarter. The
improvement in underwriting gain for the first quarter of 1999 from the
comparable 1998 figure resulted mainly from a decrease in losses incurred by
KBS.
Dividend and interest income earned by the insurance segment increased
in the first quarter of 1999 over the comparable figure for the first quarter of
1998 due principally to an increase in interest-bearing investments.
The income tax provision of the insurance segment generally fluctuates
somewhat as a percentage of its pre-tax income mainly due to fluctuations in the
relationship of substantially tax-exempt components of income to total pre-tax
income.
-11-
<PAGE> 12
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,
1999 1998
-------- --------
<S> <C> <C>
Revenues, principally sales
and services .................. $ 17,080 $ 18,043
======== ========
Income before income taxes ....... $ 1,173 $ 1,398
Income tax provision ............. (467) (542)
-------- --------
Industrial segment net income .... $ 706 $ 856
======== ========
</TABLE>
Revenues of Precision Steel's businesses for the first quarter of 1999
decreased $1.0 million, or approximately 5 percent, from those reported for the
first quarter of 1998. However, pounds of steel products sold increased about 2
percent. Precision Steel's management attributes this anomaly to a change in the
mix of products sold toward lower-priced items, and a decline in selling prices
of higher-margin items following price decreases by mills and other suppliers.
Income before income taxes and net income of the industrial segment
are dependent not only on revenues, but also on operating expenses and the cost
of products sold. The latter, as a percentage of revenues, by coincidence,
amounted to 79.2% for the first quarter of each year. The cost percentage
typically fluctuates slightly from period to period (e.g., the cost percentage
for the fourth quarter of 1998 was 73.0%) as a result of changes in product mix
and price competition at all levels.
Other Than Identified Business Segments
In the absence of nonoperating or unusual items such as securities
gains or losses, net income or loss other than from identified business segments
typically fluctuates from period to period but is usually not significant in
amount. It 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
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. The change in net income or loss other than from identified
business segments from the first quarter of 1998 to the first quarter of 1999
was attributable principally to a reduction in dividend income at the parent
company level.
* * * * *
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<PAGE> 13
Realized gains and losses on investments -- reflected on the
consolidated statement of income when securities are sold, or when required by
other events -- tend to fluctuate in amount from period to period, sometimes
impacting net income significantly. However, the amount of realized gain or loss
for any period 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 March 31, 1999 contained
$1.6 billion, or $223 per share, of unrealized appreciation of investments, net
of taxes -- about 74% of shareholders' equity.)
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 25.0% and 22.1% for the quarters ended March 31, 1999 and March 31,
1998.
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
nonoperating 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 and, to a lesser
degree, the restructuring of KBS's reinsurance program in 1998.
Shareholders' equity is impacted not only to the extent that unusual
items affect earnings, but also to reflect changes in unrealized appreciation of
investments, which are not reflected in net income.
MARKET RISK ANALYSIS
The analysis of market risks presented on pages 22 and 23 of Wesco's
1998 Form 10-K Annual Report is not updated here inasmuch as there do not appear
to have been any significant changes in such exposures in relation to Wesco's
shareholders' equity.
YEAR 2000 EXPOSURE
Reference is made to Wesco's explanation of its potential exposures
that could result from the failure of Wesco, or of its affiliates,
non-subsidiary investees, customers or suppliers, or of governmental bodies, to
prepare for so-called Year 2000 problems as discussed on page 24 of its 1998
Form 10-K Annual Report. Wesco's management believes the explanation of
potential exposures continues to be appropriate.
Wesco and its subsidiaries are continuing their ongoing efforts to
identify, remediate and test their systems, monitor the disclosures of their
significant investees, and consider contingency plans to deal with certain Year
2000 issues in the event remediation efforts by themselves or others prove
unsuccessful. Thus far, Wesco and its subsidiaries have incurred approximately
$.8 million, before tax benefit, in Year 2000-related costs, including $.2
million, before taxes, charged to expense in the first quarter of 1999. Future
outlays are not expected to be significant.
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<PAGE> 14
FORWARD-LOOKING STATEMENTS
Certain written or oral representations of management stated herein or
elsewhere constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as contrasted with statements
of historical fact. Forward-looking statements include statements which are
predictive in nature, or which depend upon or refer to future events or
conditions, or which include words such as expects, anticipates, intends, plans,
believes, estimates, may, or could, or which involve hypothetical events. For
example, the preceding section on Year 2000 exposure contains several
forward-looking statements. Forward-looking statements are based on information
currently available and are subject to various risks and uncertainties that
could cause actual events or results to differ materially from those
characterized as being likely or possible to occur.
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 328,066
<SECURITIES> 2,685,623
<RECEIVABLES> 12,922
<ALLOWANCES> (89)
<INVENTORY> 11,108
<CURRENT-ASSETS> 0
<PP&E> 29,801
<DEPRECIATION> (17,713)
<TOTAL-ASSETS> 3,082,221
<CURRENT-LIABILITIES> 0
<BONDS> 33,635
0
0
<COMMON> 7,120
<OTHER-SE> 2,122,966
<TOTAL-LIABILITY-AND-EQUITY> 3,082,221
<SALES> 17,048
<TOTAL-REVENUES> 32,692
<CGS> 13,497
<TOTAL-COSTS> 14,843
<OTHER-EXPENSES> 2,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 748
<INCOME-PRETAX> 14,167
<INCOME-TAX> (3,546)
<INCOME-CONTINUING> 10,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,621
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
</TABLE>
