Wesco Financial Form 10-Q 6/30/2001
Table of Contents

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, 2001    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
incorporation or organization)		   (I.R.S. Employer Identification No.)

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, 2001

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management“s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Submission of Matters to a Vote of Security-Holders
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
CONDENSED CONSOLIDATED BALANCE SHEET
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT“S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

      The condensed consolidated financial statements of Wesco Financial Corporation (“Wesco”), 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 11 through 15.

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 2, 2001, at which meeting the shareholders reelected all of its Directors:
                 
    Favorable   Votes
Name   Votes   Withheld
 
 
Charles T. Munger
     6,893,520       42,813  
Robert H. Bird
     6,893,831       37,502  
Carolyn H. Carlburg
     6,926,060       10,273  
Robert E. Denham
     6,926,721       9,582  
James N. Gamble
     6,929,606       6,727  
Elizabeth Caspers Peters
     6,924,739       11,594  
David K. Robinson
     6,926,606       9,727  

      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 — None
 
  (b)   Reports on Form 8-K — None

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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 10, 2001 By:     
 
  Jeffrey L. Jacobson
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)

WESCO FINANCIAL CORPORATION
FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2001

INDEX

         
    Page(s)
   
Condensed consolidated statement of income and retained earnings — three- and six-month periods ended June 30, 2001 and June 30, 2000     4  
Condensed consolidated balance sheet — June 30, 2001 and December 31, 2000     5  
Condensed consolidated statement of cash flows — six-month periods ended June 30, 2001 and June 30, 2000     6  
Notes to condensed consolidated financial statements     7-10  

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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Dollar amounts in thousands except for amounts per share)
(Unaudited)

                                     
        Three Months Ended   Six Months Ended
       
 
        June 30,   June 30,   June 30,   June 30,
        2001   2000   2001   2000
       
 
 
 
Revenues:
                                
 
Sales and service revenues
   $ 116,203     $ 120,560     $ 236,734     $ 184,647  
 
Insurance premiums earned
     8,900       5,335       17,577       9,846  
 
Dividend and interest income
     18,174       13,191       38,029       25,188  
 
Realized net securities gains
     —       430,322       —       613,727  
 
Other
     783       794       1,571       1,542  
 
    
     
     
     
 
 
     144,060       570,202       293,911       834,950  
 
    
     
     
     
 
Costs and expenses:
                                
 
Cost of products and services sold
     36,955       39,574       76,407       65,805  
 
Insurance losses, loss adjustment and underwriting expenses
     7,257       4,356       14,436       8,602  
 
Selling, general and administrative expenses
     73,328       64,674       142,528       94,813  
 
Interest expense
     1,447       1,383       2,713       2,035  
 
Goodwill amortization
     1,878       1,786       3,709       2,743  
 
    
     
     
     
 
 
     120,865       111,773       239,793       173,998  
 
    
     
     
     
 
Income before income taxes
     23,195       458,429       54,118       660,952  
Provision for income taxes
     (8,089 )     (160,348 )     (19,195 )     (230,159 )
 
    
     
     
     
 
 
Net income
     15,106       298,081       34,923       430,793  
Retained earnings — beginning of period
     1,483,701       682,883       1,466,126       552,343  
Cash dividends declared and paid
     (2,243 )     (2,172 )     (4,485 )     (4,344 )
 
    
     
     
     
 
 
Retained earnings — end of period
   $ 1,496,564     $ 978,792     $ 1,496,564     $ 978,792  
 
    
     
     
     
 
Amounts per capital share based on 7,119,807 shares outstanding throughout each period:
                                
   
Net income
   $ 2.12     $ 41.87     $ 4.90     $ 60.51  
 
    
     
     
     
 
   
Cash dividends
   $ .315     $ .305     $ .630     $ .610  
 
    
     
     
     
 

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Unaudited)

                         
            June 30,   Dec. 31,
            2001   2000
           
 
       
ASSETS
                
Cash and cash equivalents
   $ 289,345     $ 153,810  
Investments:
                
   
Securities with fixed maturities
     724,432       839,683  
   
Marketable equity securities
     632,613       833,937  
Rental furniture, net
     242,693       244,847  
Goodwill of acquired businesses, net
     267,265       260,037  
Other assets
     137,327       128,601  
 
    
     
 
 
   $ 2,293,675     $ 2,460,915  
 
    
     
 
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Insurance losses and loss adjustment expenses
   $ 45,600     $ 39,959  
Deferred furniture rental income and security deposits
     26,734       27,669  
Notes payable
     76,268       56,035  
Income taxes payable, principally deferred
     210,706       305,175  
Other liabilities
     57,147       55,043  
 
    
     
 
 
Total liabilities
     416,455       483,881  
 
    
     
 
Shareholders’ equity:
                
Capital stock and capital in excess of par value
     30,439       30,439  
Unrealized appreciation of investments, net of taxes
     350,217       480,469  
Retained earnings
     1,496,564       1,466,126  
 
    
     
 
 
Total shareholders’ equity
     1,877,220       1,977,034  
 
    
     
 
 
   $ 2,293,675     $ 2,460,915  
 
    
     
 

See notes beginning on page 7.

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WESCO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)

                     
        Six Months Ended
       
        June 30,   June 30,
        2001   2000
       
 
Cash flows from operating activities, net
   $ 64,034     $ (136,717 )
 
    
     
 
Cash flows from investing activities:
                
 
Maturities of investments
     366,653       932,893  
 
Sales of investments
     —       5,505  
 
Purchases of investments
     (251,474 )     (270,309 )
 
Acquisition of businesses, net of cash and cash equivalents acquired
     (16,514 )     (380,460 )
 
Purchases of rental furniture
     (40,561 )     (48,070 )
 
Other, net
     (2,218 )     (2,172 )
 
    
     
 
   
Net cash flows from investing activities
     55,886       237,387  
 
    
     
 
Cash flows from financing activities:
                
 
Net borrowings (repayments) of notes
     20,100       13,700  
 
Payment of cash dividends
     (4,485 )     (4,344 )
 
    
     
 
   
Net cash flows from financing activities
     15,615       9,356  
 
    
     
 
Increase in cash and cash equivalents
     135,535       110,026  
Cash and cash equivalents — beginning of period
     153,810       66,331  
 
    
     
 
Cash and cash equivalents — end of period
   $ 289,345     $ 176,357  
 
    
     
 
Supplementary information:
                
 
Interest paid during period
   $ 2,559     $ 1,980  
 
    
     
 
 
Income taxes paid, net, during period
   $ 43,461     $ 220,604  
 
    
     
 

See notes beginning on page 7.

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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 consolidated results of operations (consisting only of normal recurring accruals) are reflected in such statements.

     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which changes the current accounting model that requires amortization of intangible assets, supplemented by impairment tests to determine whether such assets have become permanently impaired, to an accounting model that continues to require impairment tests to determine whether permanent impairment exists but no longer calls for amortization except for intangible assets with finite lives. The provisions of SFAS No. 142 will generally be effective for Wesco at the beginning of 2002. Although Wesco has not completed its assessment of this new accounting standard, its management believes that its implementation may have a material effect on Wesco's consolidated earnings beginning in 2002 and on the comparability of such earnings with those of prior periods.

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 34 through 41 of its 2000 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 late February 2000, a wholly owned subsidiary of Wesco acquired all of the outstanding common stock of CORT 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.

     The following unaudited table presents pro forma consolidated operating data for Wesco and its subsidiaries for the six months ended June 30, 2000 as if CORT had been acquired on January 1, 2000. It reflects (1) elimination of estimated income that would have been earned during the period if investments liquidated in 2000 to fund most of the purchase had been liquidated on January 1, 2000, (2) inclusion of interest expense throughout the period as if line-of-credit borrowings to fund a portion of the purchase had been made

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on January 1, 2000, and (3) amortization of the excess of purchase price over fair value of identified net assets acquired (goodwill) over 40 years beginning January 1, 2000.

         
    Six Months
    Ended
    June 30,
    2000
   
Sales and service revenues
   $ 234,874  
Total revenues
     874,143  
Net income
     428,523  
        Per Wesco capital share
     60.19  
 
    
 

Note 4

     Following is a summary of securities with fixed maturities:

                                 
    June 30, 2001   December 31, 2000
   
 
            Quoted Market           Quoted Market
    Amortized   (Carrying)   Amortized   (Carrying)
    Cost   Value   Cost   Value
   
 
 
 
Mortgage—backed securities
   $ 703,810     $ 716,662     $ 635,173     $ 647,210  
Other
     7,737       7,770       192,495       192,473  
 
    
     
     
     
 
 
   $ 711,547     $ 724,432     $ 827,668     $ 839,683  
 
    
     
     
     
 

     Following is a summary of marketable equity securities (all common stocks):

                                 
    June 30, 2001   December 31, 2000
   
 
            Quoted Market           Quoted Market
            (Carrying)           (Carrying)
    Cost   Value   Cost   Value
   
 
 
 
The Coca-Cola Company
   $ 40,761     $ 324,252     $ 40,761     $ 439,095  
The Gillette Company
     40,000       185,536       40,000       231,200  
Other
     27,020       122,825       27,020       163,642  
 
    
     
     
     
 
 
   $ 107,781     $ 632,613     $ 107,781     $ 833,937  
 
    
     
     
     
 

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Note 5

     The following table sets forth Wesco’s consolidated comprehensive income (loss) for the three- and six-month periods ended June 30, 2001 and 2000:

                                 
    Three Months Ended   Six Months Ended
   
 
    June 30,   June 30,   June 30,   June 30,
    2001   2000   2001   2000
   
 
 
 
Net income
   $ 15,106     $ 298,081     $ 34,923     $ 430,793  
Increase (decrease) in unrealized appreciation of investments, net of income tax effect of $8,996, ($12,142), $70,203 and $50,169
     (16,855 )     22,812       (130,252 )     (92,727 )
Reversal of unrealized appreciation upon inclusion of realized net gains in net income, net of income tax effect of $0, $150,613, $0 and $214,805
     —       (279,710 )     —       (398,922 )
 
    
     
     
     
 
Comprehensive income (loss)
   $ (1,749 )   $ 41,183     $ ( 95,329 )   $ ( 60,856 )
 
    
     
     
     
 

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):

                                     
        Three Months Ended   Six Months Ended
       
 
        June 30,   June 30,   June 30,   June 30,
        2001   2000   2001   2001
       
 
 
 
Insurance segment:
                                
 
Revenues
   $ 26,768     $ 18,403     $ 55,048     $ 34,776  
 
Net income
     13,270       10,325       27,549       19,732  
 
Assets at end of period
     1,649,643       1,881,982       1,649,643       1,881,982  
 
    
     
     
     
 
Furniture rental segment:
                                
 
Revenues
   $ 103,960     $ 103,323     $ 209,918     $ 149,373  
 
Net income
     3,494       9,073       10,269       13,270  
 
Assets at end of period
     331,146       329,269       331,146       329,269  
 
    
     
     
     
 
Industrial segment:
                                
 
Revenues
   $ 12,232     $ 17,271     $ 26,810     $ 35,345  
 
Net income
     (8 )     555       275       1,262  
 
Assets at end of period
     21,326       27,055       21,326       27,055  
 
    
     
     
     
 
Goodwill of acquired businesses:
                                
   
Amortization, net of income taxes
   $ (1,707 )   $ (1,658 )   $ (3,384 )   $ (2,572 )
   
Assets at end of period
     267,265       260,926       267,265       260,926  
 
    
     
     
     
 

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        Three Months Ended   Six Months Ended
       
 
        June 30,   June 30,   June 30,   June 30,
        2001   2000   2001   2001
       
 
 
 
Realized net securities gains:
                                
   
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
   $ 1,100     $ 883     $ 2,135     $ 1,729  
   
Net income
     57       76       214       179  
   
Assets at end of period
     24,295       21,011       24,295       21,011  
 
    
     
     
     
 
Consolidated totals:
                                
   
Revenues
   $ 144,060     $ 570,202     $ 293,911     $ 834,950  
   
Net income
     15,106       298,081       34,923       430,793  
   
Assets at end of period
     2,293,675       2,520,243       2,293,675       2,520,243  
 
    
     
     
     
 

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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 26 of its 2000 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 information.

FINANCIAL CONDITION

     Wesco’s shareholders’ equity at June 30, 2001 was approximately $1.9 billion ($264 per share). Of this amount, 19% represented unrealized appreciation of securities, which could differ substantially from gains ultimately realized. Wesco’s management continues to believe that the Wesco group has adequate liquidity and financial strength to minimize any downturn in its fortunes.

RESULTS OF OPERATIONS

     The following summary sets forth the contribution to Wesco’s consolidated net income of each business segment — insurance, furniture rental and industrial — as well as activities not considered related to such segments. Realized net securities gains and goodwill amortization are excluded from segment activities, consistent with the way Wesco’s management views the business operations. (Amounts are in thousands, all after income tax effect.)

                                       
          Three Months Ended   Six Months Ended
         
 
          June 30,   June 30,   June 30,   June 30,
          2001   2000   2001   2000
         
 
 
 
Insurance segment
   $ 13,270     $ 10,325     $ 27,549     $ 19,732  
Furniture rental segment
     3,494       9,073       10,269       13,270  
Industrial segment
     (8 )     555       275       1,262  
Unrelated to business segment operations —
                                
 
Goodwill amortization
     (1,707 )     (1,658 )     (3,384 )     (2,572 )
 
Other nonsegment items
     57       76       214       179  
 
    
     
     
     
 
   
Income before realized securities gains
     15,106       18,371       34,923       31,871  
 
Realized net securities gains
     —       279,710       —       398,922  
 
    
     
     
     
 
     
Consolidated net income
   $ 15,106     $ 298,081     $ 34,923     $ 430,793  
 
    
     
     
     
 

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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 represent essentially the combination of underwriting results with dividend and interest income (in thousands):

                                 
    Three Months Ended   Six Months Ended
   
 
    June 30,   June 30,   June 30,   June 30,
    2001   2000   2001   2000
   
 
 
 
Premiums written
   $ 9,260     $ 8,446     $ 19,892     $ 15,486  
 
    
     
     
     
 
Premiums earned
   $ 8,900     $ 5,335     $ 17,577     $ 9,846  
 
    
     
     
     
 
Underwriting gain
   $ 1,643     $ 980     $ 3,141     $ 1,244  
Dividend and interest income
     17,868       13,068       37,471       24,930  
 
    
     
     
     
 
Income before income taxes
     19,511       14,048       40,612       26,174  
Income tax provision
     (6,241 )     (3,723 )     (13,063 )     (6,442 )
 
    
     
     
     
 
Segment net income
   $ 13,270     $ 10,325     $ 27,549     $ 19,732  
 
    
     
     
     
 

     Premiums written for the first six months of 2001 included $10.6 million attributable to Wes-FIC and $9.3 million attributable to KBS. Of those amounts, $4.9 million and $4.4 million were written in the second quarter, respectively. 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. The increase in Wes-FIC’s premiums written in 2001 was attributable principally to its ongoing participation in a three-year arrangement for the reinsurance of certain property and casualty exposure ceded by a large, unaffiliated insurer.

     Earned premiums for the second quarter and first six months of 2001 included $4.5 million and $9.0 million attributable to Wes-FIC, versus $1.3 million and $1.8 million attributable to Wes-FIC for the comparable periods of 2000. The remainder in each period was attributable to KBS. The increase in Wes-FIC’s earned premiums in 2001 related mainly to the reinsurance participation described in the preceding paragraph.

     The underwriting gains reported for the 2001 and 2000 periods were attributable to the profitable underwriting results of KBS. The improvement in underwriting results in 2001 was due mainly to a decrease in losses incurred by KBS. KBS’s reinsurance program was restructured effective January 1, 1998 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 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.

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Furniture Rental Segment

     The furniture rental segment consists of CORT Business Services Corporation (“CORT”), which was acquired in late February 2000 (see Note 3 to the accompanying condensed consolidated financial statements). Following is a summary of CORT’s operating results for the second quarters of 2001 and 2000, and first six months of 2001. For comparison, we also present (1) unaudited data for the entire six-month period ended June 30, 2000, excluding items not classified as segment-related by Wesco — goodwill amortization, securities gains or losses, and income tax provisions or benefits related thereto, and (2) data included in Wesco’s consolidated results from late February to June 30, 2000. (Amounts are in thousands.)

                                             
        Three Months Ended   Six Months Ended   Late
       
 
  February to
        June 30,   June 30,   June 30,   June 30,   June 30,
        2001   2000   2001   2000   2000
       
 
 
 
 
Revenues:
                                        
 
Furniture rentals
   $ 86,902     $ 88,241     $ 175,797     $ 169,294     $ 126,684  
 
Furniture sales
     17,058       15,082       34,121       30,306       22,689  
 
    
     
     
     
     
 
   
Total revenues
   $ 103,960     $ 103,323     $ 209,918     $ 199,600     $ 149,373  
 
    
     
     
     
     
 
Income before income taxes
   $ 5,497     $ 14,806     $ 16,473     $ 28,667     $ 21,490  
Income tax provision
     (2,003 )     (5,733 )     (6,204 )     (11,129 )     (8,220 )
 
    
     
     
     
     
 
Segment net income
   $ 3,494     $ 9,073     $ 10,269     $ 17,538     $ 13,270  
 
    
     
     
     
     
 

     CORT’s furniture rental revenues for the first six months of 2001 increased 3.8% over those reported for the entire first half of 2000, but declined 1.5% for the second quarter. Excluding rental revenues from recently acquired locations, trade show operations and a significant, short-term contract in 2000 with the U. S. Bureau of the Census, core rental revenues were up 5.5% for the same first half comparison, but up only 0.4% for the second quarter. CORT’s management notes that both the number of leases outstanding and the average revenue per lease were declining by the end of 2001’s second quarter due to the continued weakness of the economy. Furniture sales revenues increased approximately 12.6% for the first six months and 13.1% for the second quarter of 2001, reflecting CORT’s ongoing efforts to control rental furniture levels while maintaining showroom quality.

     Income before income taxes decreased to 5.3% of total revenues for the second quarter of 2001 from 14.3% for the second quarter of 2000. Income before income taxes decreased to 7.8% of total revenues for the first six months of 2001 from 14.4% for the first half of 2000. These decreases were due not only to reductions in gross profit resulting from the decline in rental revenues but also to unfavorable operating expense comparisons, particularly in the employee compensation category. CORT’s management has indicated that it is taking aggressive measures to reduce expenses in an effort to maintain CORT’s profitability.

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):

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    Three Months Ended   Six Months Ended
   
 
    June 30,   June 30,   June 30,   June 30,
    2001   2000   2001   2000
   
 
 
 
Revenues, principally sales and services
   $ 12,232     $ 17,271     $ 26,810     $ 35,345  
 
    
     
     
     
 
Income before income taxes
   $ 20     $ 919     $ 488     $ 2,094  
Income tax provision
     (28 )     (364 )     (213 )     (832 )
 
    
     
     
     
 
Segment net income (loss)
   $ (8 )   $ 555     $ 275     $ 1,262  
 
    
     
     
     
 

     Revenues of Precision Steel’s businesses for the second quarter and first six months of 2001 decreased $5.0 million and $8.5 million, or approximately 29% and 24%, from the corresponding 2000 figures. Pounds of steel products sold decreased by approximately 33% and 29%, respectively. Precision Steel’s management attributes the decline in sales volume principally to deteriorating activity in the manufacturing sector of the economy coupled with increasing competitive pressures.

     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 81.6% and 80.9% for the second quarters of 2001 and 2000, and 81.3% and 80.5% 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.

Unrelated to Business Segment Operations

     Set forth below is a summary of items increasing (decreasing) Wesco’s consolidated net income that are viewed by management as unrelated to the operations of the insurance, furniture rental and industrial segments (in thousands):

                                   
      Three Months Ended   Six Months Ended
     
 
      June 30,   June 30,   June 30,   June 30,
      2001   2000   2001   2000
     
 
 
 
Goodwill amortization, before income tax effect
   $ (1,878 )   $ (1,786 )   $ (3,709 )   $ (2,743 )
Income tax benefit
     171       128       325       171  
 
    
     
     
     
 
 
Goodwill amortization
   $ (1,707 )   $ (1,658 )   $ (3,384 )   $ (2,572 )
 
    
     
     
     
 
Realized net securities gains, before income tax effect
   $ —     $ 430,322     $ —     $ 613,727  
Income tax provision
     —       (150,612 )     —       (214,805 )
 
    
     
     
     
 
 
Realized net securities gains
   $ —     $ 279,710     $ —     $ 398,922  
 
    
     
     
     
 
Other nonsegment items, net, before income tax effect
   $ 43     $ 80     $ 254     $ 211  
Income tax (provision) benefit
     14       (4 )     (40 )     (32 )
 
    
     
     
     
 
 
   $ 57     $ 76     $ 214     $ 179  
 
    
     
     
     
 

     Goodwill relates to the acquisitions of CORT and KBS, as well as smaller entities acquired by CORT following its purchase by Wesco in February 2000. The increase in amortization of goodwill for the six months ended June 30, 2001 was due principally to the inclusion of a full six months’ amortization of CORT goodwill

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in 2001, versus less than five months’ in 2000.

     Realized gains and losses on the Wesco group’s investments have fluctuated in amount from period to period, sometimes impacting net income significantly. However, the amounts and timing of these realizations have no predictive or practical analytical value.

     Although there were no realized securities gains or losses in the first six months of 2001, Wesco’s consolidated earnings for the first six months of 2000 included realized net gains of $398.9 million, after income taxes, including $279.7 million realized in the second quarter. The gains realized in 2000, although material in relation to Wesco’s 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 in prior accounting periods.

     Other non-segment items 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 34.9% and 35.0% for the quarters ended June 30, 2001 and June 30, 2000, and 35.5% and 34.8% for the six-month periods then ended.

     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 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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