<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, 2000 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
August 10, 2000.
<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.
Item 4. Submission of Matters to a Vote of Security-Holders
Following is a table showing the votes cast for, and withheld from
voting for, each nominee at the annual meeting of shareholders of Wesco held
May 3, 2000, at which meeting the shareholders reelected all of its
Directors:
<TABLE>
<CAPTION>
Favorable Votes
Name Votes Withheld
---- --------- --------
<S> <C> <C>
Charles T. Munger 6,716,762 3,954
Robert H. Bird 6,716,860 3,856
Carolyn H. Carlburg 6,717,260 3,456
Robert E. Denham 6,716,860 3,856
James N. Gamble 6,672,151 48,565
Elizabeth Caspers Peters 6,693,875 26,841
David K. Robinson 6,696,768 23,948
</TABLE>
There were no abstentions or broker non-votes. No other matters were
voted upon at the meeting.
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/A - Report dated April 28, 2000
Item reported: 7.
-2-
<PAGE> 3
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 11, 2000 By: /s/ Jeffrey L. Jacobson
------------------------------
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial officer)
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
INDEX
Page(s)
<TABLE>
<CAPTION>
<S> <C>
Condensed consolidated statement of income and retained earnings -
three- and six-month periods ended June 30, 2000 and June 30, 1999.... 4
Condensed consolidated balance sheet --
June 30, 2000 and December 31, 1999................................... 5
Condensed consolidated statement of cash flows --
six-month periods ended June 30, 2000 and June 30, 1999............... 6
Notes to condensed consolidated financial statements...................... 7-9
</TABLE>
-3-
<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 Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues .................................... $ 120,560 $ 15,956 $ 184,647 $ 33,004
Insurance premiums earned ..................................... 5,335 4,195 9,846 7,989
Dividend and interest income .................................. 13,191 11,888 25,188 23,496
Realized securities gains, net ................................ 430,322 -- 613,727 --
Other ......................................................... 794 898 1,542 1,640
--------- --------- --------- ---------
570,202 32,937 834,950 66,129
--------- --------- --------- ---------
Costs and expenses:
Cost of products and services sold ............................ 39,574 12,619 65,805 26,116
Insurance losses, loss adjustment and underwriting expenses ... 4,356 1,850 8,602 3,196
Selling, general and administrative expenses .................. 64,674 2,716 94,813 5,954
Interest expense .............................................. 1,383 748 2,035 1,496
Amortization of goodwill ...................................... 1,786 195 2,743 391
--------- --------- --------- ---------
111,773 18,128 173,998 37,153
--------- --------- --------- ---------
Income before income taxes ....................................... 458,429 14,809 660,952 28,976
Provision for income taxes ....................................... (160,348) (3,744) (230,159) (7,290)
--------- --------- --------- ---------
Net income .................................................... 298,081 11,065 430,793 21,686
Retained earnings -- beginning of period ......................... 682,883 515,121 552,343 506,601
Cash dividends declared and paid ................................. (2,172) (2,100) (4,344) (4,201)
--------- --------- --------- ---------
Retained earnings -- end of period ............................ $ 978,792 $ 524,086 $ 978,792 $ 524,086
========= ========= ========= =========
Amounts per capital share based on 7,119,807 shares outstanding
throughout each period:
Net income ............................................... $ 41.87 $ 1.56 $ 60.51 $ 3.05
========= ========= ========= =========
Cash dividends ........................................... $ .305 $ .295 $ .610 $ .590
========= ========= ========= =========
</TABLE>
See notes beginning on page 7.
-4-
<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, Dec. 31,
2000 1999
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents .......................................... $ 176,357 $ 66,331
Accounts receivable ................................................ 40,809 8,685
Investments:
Securities with fixed maturities ................................. 293,481 309,976
Marketable equity securities ..................................... 1,408,801 2,214,883
Rental furniture ................................................... 247,586 --
Property, plant and equipment ...................................... 53,247 11,414
Goodwill of acquired businesses .................................... 260,926 28,556
Other assets ....................................................... 39,036 12,350
---------- ----------
$2,520,243 $2,652,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses .............................. $ 34,278 $ 3,674
Insurance losses and loss adjustment expenses ...................... 36,400 33,642
Deferred furniture rental income and security deposits ............. 27,191 --
Notes payable ...................................................... 84,335 3,635
Income taxes payable, principally deferred ......................... 492,761 707,345
Other liabilities .................................................. 15,106 8,527
---------- ----------
Total liabilities ................................................ 690,071 756,823
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ................. 30,439 30,439
Unrealized appreciation of investments, net of taxes ............. 820,941 1,312,590
Retained earnings ................................................ 978,792 552,343
---------- ----------
Total shareholders' equity ...................................... 1,830,172 1,895,372
---------- ----------
$2,520,243 $2,652,195
========== ==========
</TABLE>
See notes beginning on page 7.
-5-
<PAGE> 6
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities, net ............................ $(136,717) $ 16,199
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investments ................................. 932,893 --
Proceeds from maturities of investments ............................ 5,505 3,799
Purchases of investments ........................................... (270,309) (327,839)
Acquisition of business, net of cash and cash equivalents acquired . (380,460) --
Additions to rental furniture ...................................... (48,070) --
Other, net ......................................................... (2,172) 318
--------- ---------
Net cash flows from investing activities ....................... 237,387 (323,722)
--------- ---------
Cash flows from financing activities:
Borrowings under line of credit .................................... 47,900 --
Repayments of line of credit borrowings ............................ (34,200) --
Payment of cash dividends .......................................... (4,344) (4,201)
--------- ---------
Net cash flows from financing activities ....................... 9,356 (4,201)
--------- ---------
Increase (decrease) in cash and cash equivalents ..................... 110,026 (311,724)
Cash and cash equivalents -- beginning of period ..................... 66,331 320,034
--------- ---------
Cash and cash equivalents -- end of period ........................... $ 176,357 $ 8,310
========= =========
Supplementary information:
Interest paid during period ....................................... $ 1,980 $ 1,471
========= =========
Income taxes paid, net, during period ............................. $ 220,604 $ 11,281
========= =========
</TABLE>
See notes beginning on page 7.
-6-
<PAGE> 7
WESCO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)
Note 1
The condensed consolidated financial statements include the accounts of Wesco
Financial Corporation ("Wesco") and its subsidiaries, including CORT Business
Services, Inc. ("CORT"), acquired in the first quarter of 2000 (see Note 3). In
the opinion of management, all adjustments necessary to a fair statement of the
results of operations of 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 following financial information deemed generally
applicable to the condensed consolidated financial statements: (1) the notes to
Wesco's consolidated financial statements appearing on pages 30 through 37 of
its 1999 Form 10-K Annual Report, and (2) the audited consolidated financial
statements of CORT, attached as Exhibit 99 to Wesco's Form 8-K/A filed April 28,
2000.
Note 3
In February 2000, a wholly owned subsidiary of Wesco acquired all of the
outstanding common stock of CORT for approximately $386 million cash pursuant to
a tender offer and merger. The acquisition has been accounted for as a purchase,
with CORT's accounts included in the condensed consolidated financial statements
as of the date of acquisition. CORT is the leading national provider of rental
furniture, accessories and related services in the "rent-to-rent" segment of the
furniture industry. It rents high quality furniture to corporate and individual
customers who desire flexibility to meet their temporary office, residential or
tradeshow furnishing needs and who typically do not seek to own such furniture.
In addition, CORT sells previously rented furniture through company-owned
clearance centers.
The following unaudited table presents pro forma consolidated operating data for
Wesco and its subsidiaries for the six-month periods ended June 30, 2000 and
June 30, 1999 as though CORT had been acquired on January 1, 1999. It reflects
(1) elimination of estimated income earned during the periods on investments
liquidated in 2000 to fund most of the purchase, (2) inclusion of interest
expense throughout the periods as if line-of-credit borrowings in 2000 to fund a
portion of the purchase had been made at the beginning of 1999, and (3)
amortization of the excess of purchase price over fair value of identified net
assets (goodwill) over 40 years.
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Sales and service revenues ............. $234,874 $207,434
Total revenues ......................... 874,143 229,547
Income before income taxes ............. 657,659 41,015
Net income ............................. 428,523 27,150
Per capital share .................... 60.19 3.81
======== ========
</TABLE>
-7-
<PAGE> 8
Note 4
Following is a summary of marketable equity securities (all common stocks):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------- -------------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Freddie Mac .................. $ 38,601 $ 627,710 $ 71,729 $1,355,400
The Coca-Cola Company ........ 40,761 413,872 40,761 419,726
The Gillette Company ......... 40,000 223,600 40,000 263,600
Other ........................ 31,840 143,619 32,038 176,157
---------- ---------- ---------- ----------
$ 151,202 $1,408,801 $ 184,528 $2,214,883
========== ========== ========== ==========
</TABLE>
Note 5
The following table sets forth Wesco's consolidated comprehensive income
for the three- and six-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income ..................................... $ 298,081 $ 11,065 $ 430,793 $ 21,686
Other comprehensive income --
Unrealized appreciation (depreciation) of
investments ............................. 34,954 (72,823) (142,896) (229,607)
Reversal of unrealized appreciation
upon inclusion of realized net
gains in net income ..................... (430,322) -- (613,727) --
Income tax effect of above items ............ 138,470 25,169 264,974 79,763
--------- --------- --------- ---------
Comprehensive income (loss) .................. $ 41,183 $ (36,589) $ (60,856) $(128,158)
========= ========= ========= =========
</TABLE>
-8-
<PAGE> 9
Note 6
Following is condensed consolidated financial information for Wesco, broken down
by business segment, including a furniture rental segment created in 2000 by the
acquisition of CORT (see Note 3):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Insurance segment:
Revenues ..................................... $ 18,403 $ 15,781 $ 34,776 $ 30,871
Net income ................................... 10,325 10,537 19,732 20,899
Assets ....................................... 1,881,982 2,900,633 1,881,982 2,900,633
=========== =========== =========== ===========
Furniture rental segment:
Revenues ..................................... $ 103,323 $-- $ 149,373 $--
Net income ................................... 9,073 -- 13,270 --
Assets ....................................... 329,269 -- 329,269 --
=========== =========== =========== ===========
Industrial segment:
Revenues ..................................... $ 17,271 $ 15,991 $ 35,345 $ 33,071
Net income ................................... 555 571 1,262 1,277
Assets ....................................... 27,055 24,800 27,055 24,800
=========== =========== =========== ===========
Goodwill of acquired businesses:
Amortization ............................... $ (1,658) $ (195) $ (2,572) $ (391)
Assets ..................................... 260,926 28,556 260,926 28,556
=========== =========== =========== ===========
Realized securities gains, net:
Before taxes (included in revenues) ........ $ 430,322 $-- $ 613,727 $--
After taxes (included in net income) ....... 279,710 -- 398,922 --
=========== =========== =========== ===========
Other items unrelated to business segments:
Revenues ..................................... $ 883 $ 1,165 $ 1,729 $ 2,187
Net income (loss) ............................ 76 152 179 (99)
Identifiable assets .......................... 21,011 58,897 21,011 58,897
=========== =========== =========== ===========
Consolidated totals:
Revenues ..................................... $ 570,202 $ 32,937 $ 834,950 $ 66,129
Net income ................................... 298,081 11,065 430,793 21,686
Assets ...................................... 2,520,243 3,012,886 2,520,243 3,012,886
=========== =========== =========== ===========
</TABLE>
-9-
<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 16
through 22 of its 1999 Form 10-K Annual Report and to Exhibit 99 to Wesco's Form
8-K/A filed April 28, 2000 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 June 30, 2000 was approximately $1.8
billion ($257 per share), compared to $1.9 billion ($266 per share) at December
31, 1999 and $2.2 billion ($312 per share) at December 31, 1998. The downward
trend has been caused mainly by changes in the unrealized appreciation
component, which constituted 45% of total shareholders' equity at June 30, 2000.
Unrealized appreciation, which is based on current market quotations, typically
fluctuates to some degree, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Insurance segment ..................................... $ 10,325 $ 10,537 $ 19,732 $ 20,899
Furniture rental segment .............................. 9,073 -- 13,270 --
Industrial segment .................................... 555 571 1,262 1,277
Unrelated to business segment operations -
Goodwill amortization .............................. (1,658) (195) (2,572) (391)
Other .............................................. 76 152 179 (99)
--------- --------- --------- ---------
Net income before realized securities gains ... 18,371 11,065 31,871 21,686
Realized net securities gains ...................... 279,710 -- 398,922 --
--------- --------- --------- ---------
Net income ................................ $ 298,081 $ 11,065 $ 430,793 $ 21,686
========= ========= ========= =========
</TABLE>
-10-
<PAGE> 11
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 normal segment operations, which represent 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,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums written .......................... $ 8,446 $ 3,890 $ 15,486 $ 10,257
======== ======== ======== ========
Premiums earned ........................... $ 5,335 $ 4,195 $ 9,846 $ 7,989
======== ======== ======== ========
Underwriting gain ......................... $ 980 $ 2,345 $ 1,244 $ 4,793
Dividend and interest income .............. 13,068 11,586 24,930 22,882
-------- -------- -------- --------
Income before income taxes ................ 14,048 13,931 26,174 27,675
Income tax provision ...................... (3,723) (3,394) (6,442) (6,776)
-------- -------- -------- --------
Insurance segment net operating income .... $ 10,325 $ 10,537 $ 19,732 $ 20,899
======== ======== ======== ========
</TABLE>
Premiums written for the first six months of 2000 included $6.8 million
attributable to Wes-FIC and $8.7 million attributable to KBS. Of those amounts,
$4.0 million and $4.4 million were written in the second quarter, respectively.
Premiums written for the first six months of 1999 included $2.4 million
attributable to Wes-FIC and $7.9 million attributable to KBS. Of those amounts,
$0.2 million and $3.7 million were written in the second quarter, respectively.
The increase in premiums written in 2000 was attributable principally to
Wes-FIC's participation in a new reinsurance arrangement covering certain
property and casualty risk exposure of an unrelated insurer.
Earned premiums for the second quarters and first six months of 2000
included $4.0 million and $8.0 million attributable to KBS, versus $3.7 million
and $7.2 million attributable to KBS for the comparable periods of 1999. The
remainder in each period was attributable to Wes-FIC.
The underwriting gains reported for the second quarters and first six
months of 2000 and 1999 were attributable principally to the profitable
underwriting results of KBS. These underwriting gains declined in 2000 due
mainly to an increase in losses incurred by KBS. KBS's short-term operating
results have become more volatile; in 1998 its reinsurance program was
restructured in an effort to improve operating results over the long term in
return for greater short-term volatility.
The income tax provision of the insurance segment fluctuates as a
percentage of pre-tax income mainly due to changes in the proportion of
substantially tax-exempt investment income to total pre-tax income.
-11-
<PAGE> 12
Furniture Rental Segment
Wesco acquired all of the outstanding common stock of CORT Business
Services Corporation ("CORT") as follows: 98% on February 18, 2000 pursuant to a
cash tender offer; 2% on March 3, 2000 pursuant to a merger (see Note 3 to the
accompanying condensed consolidated financial statements). Following is a
summary of the results of CORT's normal operations since acquisition, which
exclude, notably, goodwill amortization (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Furniture rentals ..................... $ 88,241 $-- $ 126,684 $--
Furniture sales ....................... 15,082 -- 22,689 --
--------- ---- --------- ----
Total revenues ................... $ 103,323 $-- $ 149,373 $--
========= ==== ========= ====
Income before income taxes ................ $ 14,806 $-- $ 21,490 $--
Income tax provision ...................... (5,733) -- (8,220) --
--------- ---- --------- ----
Furniture segment net operating income .... $ 9,073 $-- $ 13,270 $--
========= ==== ========= ====
</TABLE>
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,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues, principally sales and services .... $ 17,271 $ 15,991 $ 35,345 $ 33,071
======== ======== ======== ========
Income before income taxes .................. $ 919 $ 948 $ 2,094 $ 2,121
Income tax provision ........................ (364) (377) (832) (844)
-------- -------- -------- --------
Industrial segment net operating income ..... $ 555 $ 571 $ 1,262 $ 1,277
======== ======== ======== ========
</TABLE>
Revenues of Precision Steel's businesses for the second quarter and
first six months of 2000 increased $1.3 million and $2.3 million, or
approximately 8% and 7%, from the comparable figures of the corresponding
periods of 1999. Pounds of steel products sold increased by approximately 6% in
each of the 2000 periods. Precision Steel's management attributes the
improvement in volume in the current year mainly to improved economic
conditions.
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, amounted to 80.9% and
79.1% for the second quarters of 2000 and 1999, and 80.5% and 79.1% for the
corresponding 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 all levels.
-12-
<PAGE> 13
Unrelated to Business Segment Operations
Set forth below is a summary of items increasing (decreasing) Wesco's
consolidated earnings that are viewed by management as unrelated to the normal
operations of the insurance, furniture rental and industrial segments (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Amortization of goodwill of acquired businesses ..... $ (1,786) $ (195) $ (2,743) $ (391)
Income tax benefit .................................. 128 -- 171 --
--------- --------- --------- ---------
$ (1,658) $ (195) $ (2,572) $ (391)
========= ========= ========= =========
Realized net securities gains ....................... $ 430,322 $-- $ 613,727 $--
Income tax provision ................................ (150,612) -- (214,805) --
--------- --------- --------- ---------
$ 279,710 $-- $ 398,922 $--
========= ========= ========= =========
Other items, net .................................... $ 80 $ 125 $ 211 $ (428)
Income tax (provision) benefit ...................... (4) 27 (32) 329
--------- --------- --------- ---------
$ 76 $ 152 $ 179 $ (99)
========= ========= ========= =========
</TABLE>
The increase in amortization of goodwill in 2000 was caused mainly by
the CORT acquisition.
Wesco's consolidated earnings for the first six months of 2000 included
realized net gains of $398,922, after income taxes, including $279,710 realized
in the second quarter. There were no realized gains or losses reported in the
first six months of 1999. The gains reported for 2000, although material in
relation to Wesco's quarterly earnings, had only a minor impact on its
shareholders' equity: Wesco's investments are carried at market value, and most
of the gains had already been reflected in the unrealized appreciation component
of shareholders' equity.
Other items unrelated to identified business segment operations, netted
above, typically fluctuate from period to period but are usually not significant
individually or in total. They comprise mainly rental income from owned
commercial real estate and dividend and interest income from investments owned
outside the insurance segment, reduced by interest and other expenses.
* * * * *
Wesco's effective consolidated income tax rate typically fluctuates from
period to period for various reasons, such as the inclusion in consolidated
revenues of significant, varying amounts of dividend income, which is
substantially exempt from income taxes. The respective income tax provisions,
expressed as percentages of income before income taxes, amounted to 35.0% and
25.3% for the quarters ended June 30, 2000 and June 30, 1999, and 34.8% and
25.2% for the respective six-month periods.
-13-
<PAGE> 14
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 June 30, 2000 contained
$.8 billion, or $115 per share, of unrealized appreciation of investments, net
of taxes -- about 45% of shareholders' equity.)
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 transactions or events such as the acquisition of CORT in February
2000 (see Note 3 to the accompanying condensed consolidated financial
statements). 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 several years
ago 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.
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.
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.
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