<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
September 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)
<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 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 Las 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
November 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.
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: November 10, 2000 By:
------------------------ -----------------------------------
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
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<PAGE> 3
WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Condensed consolidated statement of income and retained earnings -
three- and nine-month periods ended September 30, 2000 and September 30, 1999 ... 4
Condensed consolidated balance sheet --
September 30, 2000 and December 31, 1999 ........................................ 5
Condensed consolidated statement of cash flows --
nine-month periods ended September 30, 2000 and September 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 Nine Months Ended
--------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues ................................... $ 125,210 $ 15,983 $ 309,857 $ 48,987
Insurance premiums earned .................................... 6,418 4,780 16,264 12,769
Dividend and interest income ................................. 14,441 12,917 39,629 36,413
Realized securities gains, net ............................... 653,407 -- 1,267,134 --
Other ........................................................ 771 730 2,313 2,370
----------- ----------- ----------- -----------
800,247 34,410 1,635,197 100,539
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products and services sold ........................... 41,951 12,685 107,756 38,801
Insurance losses, loss adjustment and underwriting expenses .. 6,440 2,947 15,042 6,143
Selling, general and administrative expenses ................. 66,299 3,097 161,112 9,051
Interest expense ............................................. 1,658 747 3,693 2,243
Amortization of goodwill ..................................... 1,796 196 4,539 587
----------- ----------- ----------- -----------
118,144 19,672 292,142 56,825
----------- ----------- ----------- -----------
Income before income taxes ...................................... 682,103 14,738 1,343,055 43,714
Provision for income taxes ...................................... (238,917) (3,712) (469,076) (11,002)
----------- ----------- ----------- -----------
Net income ................................................... 443,186 11,026 873,979 32,712
Retained earnings -- beginning of period ........................ 978,792 524,086 552,343 506,601
Cash dividends declared and paid ................................ (2,172) (2,100) (6,516) (6,301)
----------- ----------- ----------- -----------
Retained earnings -- end of period ........................... $ 1,419,806 $ 533,012 $ 1,419,806 $ 533,012
=========== =========== =========== ===========
Amounts per capital share based on 7,119,807 shares
outstanding throughout each period:
Net income .............................................. $ 62.24 $ 1.54 $ 122.75 $ 4.59
=========== =========== =========== ===========
Cash dividends .......................................... $ .305 $ .295 $ .915 $ .885
=========== =========== =========== ===========
</TABLE>
See notes beginning on page 7.
-4-
<PAGE> 5
WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 428,168 $ 66,331
Accounts receivable ........................................ 43,477 8,685
Investments:
Securities with fixed maturities ......................... 441,099 309,976
Marketable equity securities ............................. 805,241 2,214,883
Rental furniture ........................................... 254,051 --
Property, plant and equipment .............................. 53,125 11,414
Goodwill of acquired businesses ............................ 260,080 28,556
Other assets ............................................... 136,353 12,350
---------- ----------
$2,421,594 $2,652,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ...................... $ 34,904 $ 3,674
Insurance losses and loss adjustment expenses .............. 40,350 33,642
Deferred furniture rental income and security deposits ..... 28,253 --
Notes payable .............................................. 91,635 3,635
Income taxes payable, principally deferred ................. 304,052 707,345
Other liabilities .......................................... 16,525 8,527
---------- ----------
Total liabilities ........................................ 515,719 756,823
---------- ----------
Shareholders' equity:
Capital stock and capital in excess of par value ......... 30,439 30,439
Unrealized appreciation of investments, net of taxes ..... 455,630 1,312,590
Retained earnings ........................................ 1,419,806 552,343
---------- ----------
Total shareholders' equity .............................. 1,905,875 1,895,372
---------- ----------
$2,421,594 $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>
Nine Months Ended
----------------------------
Sept. 30, Sept. 30,
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities, net ................................. $ (346,797) $ 25,060
----------- -----------
Cash flows from investing activities:
Proceeds from sales and maturities of investments ....................... 1,643,434 21,772
Purchases of investments ................................................ (510,140) (327,839)
Acquisition of business, net of cash and cash equivalents acquired ...... (380,460) --
Additions to rental furniture, net ...................................... (54,535) --
Other, net .............................................................. (4,149) 507
----------- -----------
Net cash flows from investing activities ............................ 694,150 (305,560)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit ......................................... 67,600 --
Repayments of line of credit borrowings ................................. (46,600) --
Payment of cash dividends ............................................... (6,516) (6,301)
----------- -----------
Net cash flows from financing activities ............................ 14,484 (6,301)
----------- -----------
Increase (decrease) in cash and cash equivalents .......................... 361,837 (286,801)
Cash and cash equivalents -- beginning of period .......................... 66,331 320,034
----------- -----------
Cash and cash equivalents -- end of period ................................ $ 428,168 $ 33,233
=========== ===========
Supplementary information:
Interest paid during period ............................................ $ 3,055 $ 1,542
=========== ===========
Income taxes paid, net, during period .................................. $ 451,906 $ 14,845
=========== ===========
</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 nine-month periods ended September 30, 2000
and September 30, 1999 as though CORT had been acquired on January 1, 1999. The
pro forma data reflect (1) elimination of estimated income that would have been
earned during the periods as if investments liquidated in 2000 to fund most of
the purchase had been liquidated at the beginning of 1999, (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 beginning January 1, 1999.
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 30, Sept. 30,
2000 1999
---------- ----------
<S> <C> <C>
Sales and service revenues ... $ 360,084 $ 313,116
Total revenues ............... 1,670,424 349,668
Income before income taxes ... 1,335,354 61,473
Net income ................... 868,513 40,748
Per capital share .......... 121.99 5.72
========== ==========
</TABLE>
-7-
<PAGE> 8
Note 4
Following is a summary of marketable equity securities (all common stocks):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------- -------------------------
Quoted Market Quoted Market
(Carrying) (Carrying)
Cost Value Cost Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Freddie Mac ................... $ 2,091 $ 45,389 $ 71,729 $1,355,400
The Coca-Cola Company ......... 40,761 397,245 40,761 419,726
The Gillette Company .......... 40,000 197,632 40,000 263,600
Other ......................... 27,020 164,975 32,038 176,157
---------- ---------- ---------- ----------
$ 109,872 $ 805,241 $ 184,528 $2,214,883
========== ========== ========== ==========
</TABLE>
Note 5
The following table sets forth Wesco's consolidated comprehensive income for the
three- and nine-month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept.30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income ............................................ $ 11,026 $ 873,979 $ 32,712 $ 443,186
Other comprehensive income --
Increase (decrease) in unrealized appreciation
of investments ................................ 91,772 (326,462) (51,124) (556,069)
Reversal of unrealized appreciation
upon inclusion of realized net
gains in net income ........................... (653,407) -- (1,267,134) --
Income tax effect of above items .................. 196,325 114,438 461,299 194,201
----------- ----------- ----------- -----------
Comprehensive income (loss) .......................... $ 77,876 $ (200,998) $ 17,020 $ (329,156)
=========== =========== =========== ===========
</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 Nine Months Ended
--------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Insurance segment:
Revenues ...................................... $ 21,543 $ 17,450 $ 56,319 $ 48,321
Net income .................................... 10,147 10,867 29,879 31,766
Assets ........................................ 1,766,869 2,584,243 1,766,869 2,584,243
=========== =========== =========== ===========
Furniture rental segment:
Revenues ...................................... $ 109,127 $ -- $ 258,500 $ --
Net income .................................... 9,543 -- 22,813 --
Assets ........................................ 340,828 -- 340,828 --
=========== =========== =========== ===========
Industrial segment:
Revenues ...................................... $ 16,104 $ 16,005 $ 51,449 $ 49,076
Net income .................................... 291 523 1,553 1,800
Assets ........................................ 26,464 24,768 26,464 24,768
=========== =========== =========== ===========
Goodwill of acquired businesses:
Amortization, net of income taxes ............ $ (1,709) $ (196) $ (4,281) $ (587)
Assets ....................................... 260,080 28,752 260,080 28,752
=========== =========== =========== ===========
Realized securities gains, net:
Before taxes (included in revenues) .......... $ 653,407 $ -- $ 1,267,134 $ --
After taxes (included in net income) ......... 424,773 -- 823,695 --
=========== =========== =========== ===========
Other items unrelated to business segments:
Revenues ...................................... $ 66 $ 955 $ 1,795 $ 3,142
Net income (loss) ............................. 141 (168) 320 (267)
Identifiable assets ...................... 27,353 57,798 27,353 57,798
=========== =========== =========== ===========
Consolidated totals:
Revenues ...................................... $ 800,247 $ 34,410 $ 1,635,197 $ 100,539
Net income .................................... 443,186 11,026 873,979 32,712
Assets ........................................ 2,421,594 2,695,561 2,421,594 2,695,561
=========== =========== =========== ===========
</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 September 30, 2000 was approximately
$1.9 billion ($268 per share), about the same as at December 31, 1999. An
exceptionally large increase in retained earnings, resulting mainly from the
realization of securities gains (see page 13), was approximately offset by a
major reduction in the unrealized appreciation component of shareholders' equity
(from 69% to 24%). Unrealized appreciation, which is recorded using current,
typically fluctuating market quotations, 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 Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Insurance segment ................................. $ 10,147 $ 10,867 $ 29,879 $ 31,766
Furniture rental segment .......................... 9,543 -- 22,813 --
Industrial segment ................................ 291 523 1,553 1,800
Unrelated to business segment operations -
Goodwill amortization .......................... (1,709) (196) (4,281) (587)
Other .......................................... 141 (168) 320 (267)
--------- --------- --------- ---------
Net income before realized securities gains 18,413 11,026 50,284 32,712
Realized net securities gains .................. 424,773 -- 823,695 --
--------- --------- --------- ---------
Net income .......................... $ 443,186 $ 11,026 $ 873,979 $ 32,712
========= ========= ========= =========
</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 Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums written ..................................... $ 7,997 $ 3,614 $ 23,483 $ 13,871
======== ======== ======== ========
Premiums earned ...................................... $ 6,418 $ 4,780 $ 16,264 $ 12,769
======== ======== ======== ========
Underwriting gain (loss) ............................. $ (22) $ 1,812 $ 1,222 $ 6,605
Dividend and interest income ......................... 15,125 12,670 40,055 35,552
-------- -------- -------- --------
Income before income taxes ........................... 15,103 14,482 41,277 42,157
Income tax provision ................................. (4,956) (3,615) (11,398) (10,391)
-------- -------- -------- --------
Insurance segment net operating income ............... $ 10,147 $ 10,867 $ 29,879 $ 31,766
======== ======== ======== ========
</TABLE>
Premiums written for the first nine months of 2000 included $10.3
million attributable to Wes-FIC and $13.2 million attributable to KBS. Of those
amounts, $3.5 million and $4.5 million were written in the third quarter,
respectively. Premiums written for the first nine months of 1999 included $2.4
million attributable to Wes-FIC and $11.5 million attributable to KBS. All $3.6
million written in the third quarter of 1999 was attributable to KBS. 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 third quarter and first nine months of 2000
included $4.2 million and $12.2 million attributable to KBS, versus $3.9 million
and $11.1 million attributable to KBS for the comparable periods of 1999. The
remainder in each period was attributable to Wes-FIC.
The underwriting results typically fluctuate from period to period. The
deterioration in each period of 2000 was caused primarily by an increase in
larger losses incurred by KBS; 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. Another factor was an underwriting loss relating
to Wes-FIC's participation in the new reinsurance contract mentioned above.
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 Nine Months Ended
----------------------------- -----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Furniture rentals ................ $ 91,686 $ -- $ 218,370 $ --
Furniture sales .................. 17,441 -- 40,130 --
------------ ------------ ------------ ------------
Total revenues .............. $ 109,127 $ -- $ 258,500 $ --
============ ============ ============ ============
Income before income taxes ........... $ 15,510 $ -- $ 37,000 $ --
Income tax provision ................. (5,967) -- (14,187) --
------------ ------------ ------------ ------------
Furniture segment net operating income $ 9,543 $ -- $ 22,813 $ --
============ ============ ============ ============
</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 Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues, principally sales and services .... $ 16,104 $ 16,005 $ 51,449 $ 49,076
======== ======== ======== ========
Income before income taxes .................. $ 491 $ 868 $ 2,585 $ 2,989
Income tax provision ........................ (200) (345) (1,032) (1,189)
-------- -------- -------- --------
Industrial segment net operating income ..... $ 291 $ 523 $ 1,553 $ 1,800
======== ======== ======== ========
</TABLE>
Revenues of Precision Steel's businesses increased $2.4 million, or
approximately 5%, for first nine months of 2000, and $.1 million, or about 1%,
for the third quarter, from the comparable figures for the corresponding periods
of 1999. Pounds of steel products sold increased approximately 2% for the first
nine months, but decreased approximately 7% for the third quarter of the current
year. Precision Steel's management attributes the recent deterioration in
revenues and pounds sold principally to a slowdown in the manufacturing sector
of the economy.
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 82.8% and
79.4% for the third quarters of 2000 and 1999, and 81.2% and 79.2% for the
corresponding nine-month periods. The cost percentage typically fluctuates
slightly from period to
-12-
<PAGE> 13
period as a result of changes in product mix and price competition at all
levels.
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 Nine Months Ended
--------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amortization of goodwill of acquired businesses $ (1,796) $ (196) $ (4,539) $ (587)
Income tax benefit ............................ 87 -- 258 --
----------- ----------- ----------- -----------
$ (1,709) $ (196) $ (4,281) $ (587)
=========== =========== =========== ===========
Realized net securities gains ................. $ 653,407 $ -- $ 1,267,134 $ --
Income tax provision .......................... (228,634) -- (443,439) --
----------- ----------- ----------- -----------
$ 424,773 $ -- $ 823,695 $ --
=========== =========== =========== ===========
Other items, net .............................. $ 183 $ (417) $ 394 $ (845)
Income tax (provision) benefit ................ (42) 249 (74) 578
----------- ----------- ----------- -----------
$ 141 $ (168) $ 320 $ (267)
=========== =========== =========== ===========
</TABLE>
The increase in amortization of goodwill in 2000 was caused by the CORT
acquisition.
Wesco's consolidated earnings for the first nine months of 2000 included
realized net gains, after income taxes, of $823,695, including $424,773 realized
in the third quarter. There were no realized gains or losses reported in the
first nine months of 1999. The gains reported for 2000, although material in
relation to Wesco's net income, 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
25.2% for the quarters ended
-13-
<PAGE> 14
September 30, 2000 and September 30, 1999, and 34.9% and 25.2% for the
respective nine-month periods.
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 currently existing in Wesco's
consolidated investment portfolio. (Wesco's shareholders' equity at September
30, 2000 contained $456 million, or $64 per share, of unrealized appreciation of
investments, net of taxes -- about 24% 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 continue to be much more volatile than they were
several years ago -- prior to Wes-FIC's entry into the super-catastrophe
reinsurance business and, less significantly, the restructuring of KBS's
reinsurance program.
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.
-14-
<PAGE> 15
WESCO FINANCIAL CORPORATION
301 EAST COLORADO BLVD., SUITE 300
PASADENA, CALIFORNIA 91101-1901
November 13, 2000
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
September 30, 2000.
Very truly yours,
WESCO FINANCIAL CORPORATION
Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
