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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from
- ---------------to
- ---------------
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 95-2109453
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 East Colorado Boulevard, Suite 300, 91101-1901
Pasadena, California (Zip Code)
(Address of Principal Executive Offices)
(626) 585-6700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Capital Stock, $1 par value American Stock Exchange
and Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
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 _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant as of March 20, 2000 was: $320,594,000.
The number of shares outstanding of the registrant's Capital Stock as of
March 20, 2000 was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
Title of Document Parts of Form 10-K
Proxy Statement for 2000 Part III, Items 10, 11, 12 and 13
Annual Meeting of Shareholders
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PART I
ITEM 1. BUSINESS
GENERAL
Wesco Financial Corporation ("Wesco") was incorporated in Delaware on March
19, 1959. Wesco, from 1994 through yearend 1999, engaged in two principal
businesses through wholly owned subsidiaries: (1) the insurance business,
through Wesco-Financial Insurance Company ("Wes-FIC"), which was incorporated in
1985 and engages in the property and casualty insurance business, and The Kansas
Bankers Surety Company ("KBS"), which was incorporated in 1909, was purchased by
Wes-FIC in mid-1996 and provides specialized insurance coverages for banks; and
(2) the steel service center business, through Precision Steel Warehouse, Inc.
("Precision Steel"), which was begun in 1940 and acquired by Wesco in 1979.
In February 2000, Wesco purchased CORT Business Services Corporation
("CORT"), 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.
CORT's national network includes 118 showrooms, 87 clearance centers and 75
warehouses in 34 states and the District of Columbia as well as three web sites
(cort1.com, relocationcentral.com and corttradeshow.com).
Wesco's operations also include, through MS Property Company ("MS
Property"), (1) the ownership and management of commercial real estate
transferred to MS Property by Wesco, and (2) the development and liquidation of
foreclosed real estate transferred to MS Property by a former savings and loan
subsidiary of Wesco. The transfers were made in late 1993, when MS Property, a
wholly owned subsidiary of Wesco, began its operations.
Since 1973, Wesco has been 80.1% owned by Blue Chip Stamps ("Blue Chip"), a
wholly owned subsidiary of Berkshire Hathaway Inc. ("Berkshire"). Wesco and its
subsidiaries are thus controlled by Blue Chip and Berkshire. All of these
companies may also be deemed to be controlled by Warren E. Buffett, who is
Berkshire's chairman and chief executive officer and owner of approximately 35%
of its stock. Charles T. Munger, the chairman of Wesco, is also vice chairman of
Berkshire, and consults with Mr. Buffett with respect to Wesco's investment
decisions and major capital allocations. Although Mr. Buffett has no active
participation in Wesco's management, he is president and a director of Wesco
Holdings Midwest, Inc. ("WHMI"), a wholly owned subsidiary of Wesco, and a
director of Wes-FIC, Precision Steel, and CORT, which are wholly owned
subsidiaries of WHMI.
Wesco's activities fall* into two business segments -- insurance and
industrial. The insurance segment consists of the operations of Wes-FIC and KBS.
The industrial segment comprises Precision Steel's steel service center
operations. Wesco is also engaged in several relatively insignificant activities
not identified with either business segment; these include (1) investment
activity unrelated to the insurance segment, (2) management of owned commercial
real estate, (3) development and liquidation of foreclosed real estate formerly
owned by a savings and loan subsidiary, and (4) parent company operations.
INSURANCE SEGMENT
Wes-FIC was incorporated in 1985 to engage in the property and casualty
insurance and reinsurance business. Its insurance operations are managed by
National Indemnity Company ("NICO"), headquartered in Omaha, Nebraska. To
simplify discussion, the term "Berkshire Insurance Group," as used in this
report, refers to NICO, General Reinsurance Corporation and certain
* In preparing this 1999 report, conditions that may exist after the
acquisition of CORT in February 2000 have generally been ignored. Thus,
statements in the present tense are made from the perspective of yearend 1999.
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other wholly owned insurance subsidiaries of Berkshire, individually or
collectively, although Berkshire also includes in its insurance group the
insurance subsidiaries 80.1%-owned through Berkshire's ownership of Wesco.
Wes-FIC's high net worth as of 1999 yearend -- $1.9 billion computed under
generally accepted accounting principles and $2.6 billion under regulatory
rules -- has enabled Berkshire to offer Wes-FIC the opportunity to participate,
from time to time, in sub-contracts with several of its wholly owned insurance
subsidiaries for the reinsurance of property and casualty risks of unaffiliated
property and casualty insurers. These arrangements have included contracts for
"super-catastrophe reinsurance," which subjects the reinsurer to especially
large amounts of losses from mega-catastrophes such as hurricanes or
earthquakes. The super-catastrophe policies have indemnified the ceding
companies for all or part of covered losses in excess of large, specified
retentions, and have been subject to aggregate limits; reinsurance of this type
is referred to as "excess-of-loss" reinsurance (as contrasted with "quota share"
reinsurance, under which a ceding company is indemnified in proportion to its
own loss). Wesco's and Wes-FIC's boards of directors have authorized automatic
acceptance of retrocessions of reinsurance offered by the Berkshire Insurance
Group provided the following guidelines and limitations are complied with: (1)
in order not to delay the acceptance process, the retrocession is to be accepted
without delay in writing in Nebraska by agents of Wes-FIC who are salaried
employees of the Berkshire Insurance Group; (2) the Berkshire Insurance Group is
to receive a ceding commission of 3% of premiums, probably less than the
Berkshire Insurance Group could get in the marketplace; (3) Wes-FIC is to assume
20% or less of the risk (before taking into account effects of the ceding
commission); (4) the Berkshire Insurance Group must retain at least 80% of the
identical risk (again, before taking into account effects of the ceding
commission); and (5) the aggregate premiums from this type of business in any
twelve-month period cannot exceed 10% of Wes-FIC's net worth.
Following is a summary of the more significant reinsurance agreements that
have been made between Wes-FIC and the Berkshire Insurance Group:
- A quota share arrangement entered into in 1985 whereby Wes-FIC
effectively reinsured -- through the Berkshire Insurance Group, as
intermediary-without-profit -- 2% of the entire book of insurance
business of a major property and casualty insurer written during a
four-year coverage period that expired in 1989. Wes-FIC will remain
liable for its share of remaining unpaid losses and loss adjustment
expenses, an estimate of which is included in insurance liabilities on
Wesco's consolidated balance sheet, and will continue to invest the
related "float" (funds set aside and invested pending payment of claims)
until all liabilities are settled, perhaps many years hence.
- During 1992 and 1993, a 50% quota share agreement related to certain
personal lines business written by another large U.S.-based property and
casualty insurer.
- Several subcontracts for super-catastrophe reinsurance beginning in 1994,
including participations to the extent of 3% in two super-catastrophe
reinsurance policies covering hurricane risks in Florida: (1) a 12-month
policy effective June 1, 1996; and (2) a three-year policy effective
January 1, 1997.
- Participation to the extent of 10% in a catastrophic excess-of-loss
contract effective for the 1999 calendar year covering property risks of
a major international reinsurer.
Effective January 1, 2000, Wes-FIC entered into a three-year arrangement
through NICO, as intermediary without profit, for a 3 1/3% participation in
certain property and casualty risk exposure of a large, unaffiliated insurance
group. Premium volume of approximately $30 million is anticipated in the first
year under this arrangement. Except as to volume, terms of this participation
are identical to those of another agreement between the same insurance group and
another member of the Berkshire Insurance Group.
Management believes that an insurer in the super-catastrophe reinsurance
business must maintain large net worth in relation to annual premiums in order
to remain solvent when called upon to
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pay claims when a super catastrophe occurs. In this regard, the Berkshire
Insurance Group and Wes-FIC are believed to operate differently from other
reinsurers in that risks they write are kept in house, while other reinsurers
may retrocede portions of the risks to other reinsurers, thereby assuming
contingent risks that such reinsurers will not remain adequately solvent if
called upon to pay off on risks reinsured.
Wes-FIC, in Nebraska, Utah and Iowa, is also licensed to write "direct"
insurance business (as distinguished from reinsurance), but the volume written
to date has been very small.
In July 1996, Wes-FIC purchased KBS for approximately $80 million in cash.
KBS provides specialized insurance coverage to more than 20% of the banks in the
United States, mostly small and medium-size banks in the Midwest. It is
regulated by insurance departments in 25 states and by the Department of the
Treasury. Its product line for financial institutions includes policies for
crime insurance, check kiting fraud indemnification, internet banking
catastrophe bonds, directors and officers liability, bank employment practices,
and professional errors and omissions indemnity, as well as deposit guaranty
bonds, which insure deposits in excess of federal deposit insurance limits. KBS,
which for many years had minimized its risks arising from large losses by ceding
almost half of its business to third party reinsurers, restructured its
reinsurance program effective January 1, 1998, with the result that in 1999 and
1998 only about 5% and 6% of its gross insurance business was ceded to third
party reinsurers (including approximately half of those percentages to a wholly
owned Berkshire subsidiary) versus about 42% ceded to unaffiliated, third party
reinsurers in 1997. Wesco's management anticipates that KBS's reinsurance
restructuring will improve operating results over the long term in return for
greater short-term volatility.
KBS markets its products in some states by exclusive, commissioned agents,
and in others by salaried, traveling employees. Inasmuch as the number of small
midwestern banks is declining as banks are merging, KBS relies for growth on an
extraordinary level of service provided by its dedicated employees and agents,
and on new products such as deposit guaranty bonds, which were introduced in
1993 and currently account for approximately 23% of premiums written.
In recent years, financial failures in the insurance industry have received
considerable attention from news media, regulatory authorities, rating agencies
and Congress. As one result, industry participants and the public have been made
more aware of the benefits derived from dealing with insurers whose financial
resources support their promises with significant margins of safety against
adversity. In this respect Wes-FIC and KBS are competitively well positioned,
inasmuch as their net premiums written for calendar 1999 amounted to 0.7% of
their combined statutory surplus, compared to an industry average of about 90%
based on figures reported for 1998.
Standard & Poor's Corporation, in recognition of Wes-FIC's strong
competitive position as a member of Berkshire's family of wholly and
substantially owned insurance subsidiaries and its unusual capital strength, has
assigned its highest rating, AAA, to Wes-FIC's claims-paying ability. This
rating recognizes the commitment of Wes-FIC's management to a disciplined
approach to underwriting and reserving, as well as Wes-FIC's extremely strong
capital base.
Wesco's and Wes-FIC's boards are hopeful, but have no assurance, that the
businesses of Wes-FIC and KBS will grow. They welcome the opportunity to
participate in additional attractive super-catastrophe reinsurance retrocessions
and other insurance arrangements, as well as acquisitions of other insurance
companies.
Insurance companies are subject to regulation by the departments of
insurance of the various states in which they write policies as well as the
states in which they are domiciled, and, if applicable, as is the case with KBS,
by the Department of the Treasury. Regulations relate to, among other things,
capital requirements, shareholder and policyholder dividend restrictions,
reporting requirements, annual audits by independent accountants, periodic
regulatory examinations, and limitations on the size and types of investments
that can be made.
Wes-FIC, which is operated by NICO, has no employees of its own. KBS has 16
employees.
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INDUSTRIAL SEGMENT
Precision Steel, acquired in 1979 for approximately $15 million, and a
subsidiary operate steel service centers at or near Chicago, Illinois and
Charlotte, North Carolina. The service centers buy low carbon sheet and strip
steel, coated metals, spring steel, stainless steel, brass, phosphor bronze,
aluminum and other metals, cut these metals to order, and sell them to a wide
variety of customers.
The service center business is highly competitive. Precision Steel's annual
sales volume of approximately 35 thousand tons compares with the steel service
industry's annual volume of over 24 million tons. Precision Steel competes not
only with other service centers but also with mills which supply metal to the
service centers. Competition exists in the areas of price, quality, availability
of products and speed of delivery. Because it is willing to sell in relatively
small quantities, Precision Steel has been able to compete in geographic areas
distant from its service center facilities. Competitive pressure is intensified
by imports and by a tendency of domestic manufacturers to use less costly
materials in making parts.
Precision Brand Products, Inc. ("Precision Brand"), a wholly owned
subsidiary of Precision Steel, also located in the Chicago area, manufactures
shim stock and other toolroom specialty items, as well as hose and muffler
clamps, and sells them under its own brand names nationwide, generally through
industrial distributors. This business is highly competitive. Precision Brand's
share of the toolroom specialty products market is believed to approximate .5%;
statistics are not available with respect to its share of the market for hose
and muffler clamps.
Steel service raw materials are obtained principally from major domestic
steel mills, and their availability is considered good. Precision Steel's
service centers maintain extensive inventories in order to meet customer demand
for prompt deliveries. Typically, an order is filled and the processed metals
delivered to the customer within two weeks. Precision Brand normally maintains
inventories adequate to allow for off-the-shelf service to customers within 24
hours.
The industrial segment businesses are subject to economic cycles. These
businesses are not dependent on a few large customers. The backlog of steel
service orders increased to approximately $7.1 million at December 31, 1999 from
$6.5 million at December 31, 1998.
Approximately 240 full-time employees are engaged in the industrial segment
businesses, about 40% of whom are members of unions. Management considers labor
relations to be good.
ACTIVITIES NOT IDENTIFIED WITH A BUSINESS SEGMENT
Certain of Wesco's activities are not identified with any business segment.
These extraneous, relatively insignificant operations include (1) investment
activity unrelated to the insurance segment, (2) management of commercial real
estate property in Pasadena, California, (3) development and liquidation, now
virtually completed, of foreclosed real estate previously owned by a savings and
loan subsidiary, and (4) parent company activities.
Wesco, while it seeks suitable businesses to acquire and explores ways to
expand its existing operations, also, through its insurance subsidiaries,
invests in marketable securities of unaffiliated companies and in securities
with fixed maturities. (See Note 2 to the accompanying consolidated financial
statements for summaries of investments, and Note 8 for information as to the
acquisition of CORT in February 2000.)
Seven full-time employees are engaged in the activities of Wesco and MS
Property.
ITEM 2. PROPERTIES
MS Property owns a business block situated between the city hall and a
troubled indoor shopping mall in downtown Pasadena, California. The block's
principal improvements are a nine-story office building that was constructed in
1964 and has approximately 125,000 square feet of net rentable area, and a
multistory garage with space for 425 automobiles. Of the 125,000 square feet of
space in the
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office building, approximately 5,000 square feet are used by MS Property or
leased to Blue Chip or Wesco. Most of the remaining space is leased to outside
parties, including California Federal Bank, the ground floor tenant, law firms
and others, under agreements expiring at dates extending to 2008. In addition to
the office building and garage, the business block has contained a row of small,
blighted commercial retail buildings; MS Property is in process of demolishing
this portion of the block and is exploring options for redeveloping it, together
with a parcel of land it owns in the next block which it has been using as a
100-car parking lot.
MS Property also owns a small amount of real estate in Southern California
acquired by Wesco's former savings and loan subsidiary through foreclosure. This
consists of several buildings that are leased to various small businesses in a
small shopping center as well as a single-family residence.
Wes-FIC's place of business is the Omaha, Nebraska headquarters office of
NICO.
KBS leases 5,100 square feet of office space in a multistory office
building in Topeka, Kansas under a lease that expires in 2002. KBS has an option
to renew the lease for an additional five-year term.
Precision Steel and its subsidiaries own three buildings housing their
plant and office facilities, having usable area approximately as follows:
138,000 square feet in Franklin Park, Illinois; 63,000 square feet in Charlotte,
North Carolina; and 59,000 square feet in Downers Grove, Illinois.
ITEM 3. LEGAL PROCEEDINGS
Wesco and its subsidiaries are not involved in any legal proceedings that
are expected to result in material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
Wesco's capital stock is traded on the American Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth quarterly ranges of composite prices for
American Stock Exchange trading of Wesco shares for 1999 and 1998, based on data
reported by the American Stock Exchange, as well as cash dividends paid by Wesco
on each outstanding share:
1999 1998
----------------------- ------------------------
SALES PRICE SALES PRICE
----------- DIVIDENDS ------------ DIVIDENDS
QUARTER ENDED HIGH LOW PAID HIGH LOW PAID
------------- ---- ---- --------- ---- ---- ---------
March 31................................ $354 $322 0$.295.. $377 $285 $0.285
June 30................................. 339 305 0.295.. 395 346 0.285
September 30............................ 323 260 1/4 0.295.. 392 280 0.285
December 31............................. 290 241 1/2 0.295.. 365 290 0.285
------ ------
$1.180 $1.140
====== ======
There were approximately 700 shareholders of record of Wesco's capital
stock as of the close of business on March 23, 2000. It is estimated that
approximately 5,000 additional Wesco shareholders held shares of Wesco's capital
stock in street name at that date.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below and on the following page are selected consolidated
financial data for Wesco and its subsidiaries. For additional financial
information, attention is directed to Wesco's audited 1999 consolidated
financial statements appearing elsewhere in this report. (Amounts are in
thousands except for amounts per share.)
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Assets:
Cash and cash equivalents.... $ 66,331 $ 320,034 $ 10,687 $ 23,039 $ 87,981
Investments --
Securities with fixed
maturities.............. 309,976 66,619 279,697 176,885 119,575
Marketable equity
securities.............. 2,214,883 2,778,595 2,224,848 1,533,009 1,102,221
Real estate held for sale.... 908 2,327 5,240 15,831 19,021
Property and equipment....... 11,414 12,193 13,229 13,297 13,967
Goodwill of
acquired business......... 28,556 29,338 30,121 30,903 --
Other assets................. 20,127 19,300 24,290 25,441 22,962
---------- ---------- ---------- ---------- ----------
Total assets......... $2,652,195 $3,228,406 $2,588,112 $1,818,405 $1,365,727
========== ========== ========== ========== ==========
Liabilities:
Insurance losses and loss
adjustment expenses....... $ 33,642 $ 36,731 $ 41,437 $ 45,491 $ 34,195
Notes payable................ 3,635 33,635 33,635 37,162 37,369
Income taxes payable,
principally deferred...... 707,345 920,035 733,488 468,370 324,341
Other liabilities............ 12,201 14,249 15,260 16,367 12,193
---------- ---------- ---------- ---------- ----------
Total liabilities.... $ 756,823 $1,004,650 $ 823,820 $ 567,390 $ 408,098
========== ========== ========== ========== ==========
Shareholders' equity:
Capital stock and surplus.... $ 30,439 $ 30,439 $ 30,439 $ 30,439 $ 30,439
Unrealized appreciation of
investments, net of
taxes..................... 1,312,590 1,686,716 1,290,939 871,640 601,326
Retained earnings............ 552,343 506,601 442,914 348,936 325,864
---------- ---------- ---------- ---------- ----------
Total shareholders'
equity............. $1,895,372 $2,223,756 $1,764,292 $1,251,015 $ 957,629
Per capital share.... 266.21 312.33 247.80 175.71 134.50
========== ========== ========== ========== ==========
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues:
Sales and service revenues............ $ 64,571 $ 66,137 $ 67,557 $ 63,654 $ 62,271
Insurance premiums earned............. 17,655 15,923 11,507 10,060 9,294
Dividend and interest income.......... 49,679 40,543 36,552 33,313 30,273
Realized gains (losses), net, on
securities and foreclosed
property........................... 12,819 52,672 102,348 (152) 7,428
Other................................. 982 904 1,087 1,144 1,791
-------- -------- -------- -------- --------
145,706 176,179 219,051 108,019 111,057
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products and services sold.... 50,728 51,527 52,710 50,054 50,019
Insurance losses, loss adjustment and
underwriting expenses.............. 7,366 8,174 860 4,264 1,501
Selling, general and administrative... 10,265 11,156 9,393 10,849 11,142
Interest on notes payable............. 2,549 3,016 3,320 3,352 3,371
-------- -------- -------- -------- --------
70,908 73,873 66,283 68,519 66,033
-------- -------- -------- -------- --------
Income before income taxes.............. 74,798 102,306 152,768 39,500 45,024
Provision for income taxes.............. (20,655) (30,503) (50,959) (8,881) (10,483)
-------- -------- -------- -------- --------
Net income.............................. $ 54,143 $ 71,803 $101,809 $ 30,619 $ 34,541
======== ======== ======== ======== ========
Amounts per capital share:
Net income............................ $ 7.60 $ 10.08 $ 14.30 $ 4.30 $ 4.85
Cash dividends........................ 1.18 1.14 1.10 1.06 1.02
======== ======== ======== ======== ========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In reviewing this item, attention is directed to Item 6, Selected Financial
Data, and Item 1, Business.
FINANCIAL CONDITION
Wesco's shareholders' equity at December 31, 1999 was $1.9 billion or
$266.21 per share, down $.3 billion or $46.12 per share for the year. This
decrease was due to a decline in appreciation in market value of investments,
which under accounting convention is credited directly to shareholders' equity,
net of taxes, without being reflected in earnings. Because unrealized
appreciation is recorded using current market quotations, which are subject to
fluctuation, the net gains ultimately realized could differ substantially from
recorded unrealized appreciation, which constituted 69% of shareholders' equity
at December 31, 1999, compared to 76% at December 31, 1998 and 63% at December
31, 1995.
Over 93% of the Wesco group's unrealized appreciation of securities at
December 31, 1999 was concentrated in three common stocks (see Note 2 to the
consolidated financial statements appearing elsewhere herein). However, as
demonstrated in the section on market risk beginning on page 20, even if all
appreciation of the Wesco group is ignored, there has been a steady increase in
shareholders' equity over the past five years.
Wesco's management believes the group has adequate liquidity and capital
resources, including the ability to borrow, to minimize the impact of a downturn
in its fortunes. Borrowings from banks and others have been available to Wesco
and its subsidiaries under attractive terms for a number of years. Wesco's $30
million of Notes, prior to their redemption at maturity on November 1, 1999,
enjoyed Standard & Poor Corporation's highest rating, AAA, as does Wes-FIC's
claims-paying ability.
RESULTS OF OPERATIONS
The following summary sets forth the contribution to Wesco's consolidated
net income of each business segment, insurance and industrial, as well as
nonsegment activities. In each case realized gains or losses are shown
separately from "normal" net operating income. (Amounts are in thousands, all
after income tax effect.)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
Insurance segment:
"Normal " net operating income........................... $43,610 $34,654 $ 33,507
Realized securities gains................................ 7,271 33,609 32,843
------- ------- --------
Segment net income....................................... 50,881 68,263 66,350
------- ------- --------
Industrial segment net income (all "normal" net operating
income).................................................. 2,532 3,154 3,622
------- ------- --------
Other than identified business segments:
"Normal" net operating income (loss)..................... (238) (186) 1,133
Gains, net, on sales of foreclosed real estate........... 968 572 850
Realized securities gains................................ -- -- 29,854
------- ------- --------
Nonsegment net income.................................... 730 386 31,837
------- ------- --------
Consolidated net income............................. $54,143 $71,803 $101,809
======= ======= ========
In the following sections the "normal" net operating income data set forth
in the foregoing summary on an after-tax basis are broken down and discussed.
Attention is directed to Note 7 to the accompanying consolidated financial
statements for additional information.
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Insurance Segment
The "normal" net operating income of the insurance segment (i.e., Wes-FIC
and, since July 1996, KBS) represents essentially the combination of
underwriting results with dividend and interest income. Following is a summary
of such data (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Premiums written........................................ $ 18,326 $ 19,296 $ 10,654
======== ======== ========
Premiums earned......................................... $ 17,655 $ 15,923 $ 11,507
======== ======== ========
Underwriting gain....................................... $ 10,289 $ 7,748 $ 10,647
Dividend and interest income............................ 49,125 38,534 33,694
General and administrative expenses, principally
amortization of goodwill.............................. (809) (806) (779)
-------- -------- --------
Income before income taxes.............................. 58,605 45,476 43,562
Income tax provision.................................... (14,995) (10,822) (10,055)
-------- -------- --------
"Normal" net operating income........................... $ 43,610 $ 34,654 $ 33,507
======== ======== ========
Premiums written for 1999, 1998 and 1997 were comprised of $15.8 million,
$17.0 million and $8.6 million attributable to KBS. The remainder in each year
was attributable to Wes-FIC and related principally to super-catastrophe
reinsurance participations, notably a three-year Florida hurricane risk policy
that ended, without loss, at 1999 yearend. The decrease in premiums written by
KBS for 1999 and the increase for 1998 were due mainly to the restructuring of
KBS's reinsurance program effective January 1, 1998, as explained in Item 1,
Business; in this connection, KBS received and credited to premiums written in
1998 $2.6 million of unearned reinsurance premiums that had been deducted from
premiums written in prior years.
Earned premiums for 1999, 1998 and 1997 included $15.1 million, $13.7
million and $8.7 million attributable to KBS. The remainder in each year was
attributable to Wes-FIC and related principally to super-catastrophe reinsurance
participations.
The underwriting gain for 1999 included $5.9 million attributable to KBS
and $4.4 million to Wes-FIC. The underwriting gain for 1998 included $4.4
million attributable to KBS and $3.3 million to Wes-FIC. The underwriting gain
for 1997 included $5.5 million attributable to KBS and $5.1 million to Wes-FIC.
In addition to gains from other, mainly super-catastrophe reinsurance
participations, Wes-FIC's underwriting gains in 1999, 1998 and 1997 benefited by
$2.6 million each year from downward revisions of estimated liabilities for
losses and expenses with respect to a quota share reinsurance arrangement which
terminated in 1989. Underwriting gains at KBS have become more volatile since it
restructured its reinsurance program at the beginning of 1998.
Although no super-catastrophe reinsurance losses have been incurred to
date, the managements of Berkshire, Wes-FIC and Wesco believe that large
super-catastrophe reinsurance losses will inevitably occur from time to time.
While such large losses are not expected to be significant in relation to
Wes-FIC's capital base, the managements accept the prospect of increased
volatility in Wes-FIC's short-term underwriting results in order to obtain what
they believe will be better long-term results.
One area of particular concern to the insurance industry is its exposure to
claims for environmental contamination. Wes-FIC's management has reported that
it believes Wes-FIC has virtually no such liability.
Dividend and interest income has been earned by the insurance group
principally (1) on capital contributed by Wesco, including the assets
(approximately $400 million at market value) added to Wes-FIC in 1994 after
another Wesco subsidiary exited the savings and loan business and merged into
17
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Wes-FIC, (2) on earnings retained and reinvested, and (3) on float (net
liabilities due to policyholders).
The income tax provision of the insurance segment has fluctuated as a
percentage of its pre-tax income in each of the periods presented in the
foregoing table. These fluctuations have been caused by fluctuations in the
relationship of substantially tax-exempt components of income to total pre-tax
income.
Insurance losses and loss adjustment expenses, and the related liabilities
reflected on Wesco's consolidated balance sheet, because they are estimates, are
subject to estimation error. Revisions of such estimates in future periods could
significantly affect the results of operations reported for those periods.
However, Wesco's insurance subsidiaries have maintained capital positions strong
enough not only to absorb adverse estimation corrections but also to enable them
to accept other insurance contracts. As explained in Item 1, Business, Wes-FIC,
effective January 1, 2000, entered into a three-year arrangement, accepting a
3 1/3% participation in the reinsurance of certain property and casualty risks
of a large, unaffiliated insurance group. Although Wesco would welcome other
attractive reinsurance or insurance arrangements with Berkshire subsidiaries or
unaffiliated companies, or acquisitions of insurance businesses like or unlike
that of KBS, the timing and extent of any increase in insurance underwriting
activity cannot presently be predicted.
Industrial Segment
Following is a summary of the "normal" net operating results of the
industrial segment, consisting of the businesses of Precision Steel and its
subsidiaries (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Revenues, principally sales and services.................... $64,686 $66,197 $67,693
======= ======= =======
Income before income taxes.................................. $ 4,209 $ 5,272 $ 6,042
Income tax provision........................................ (1,677) (2,118) (2,420)
------- ------- -------
"Normal" net operating income............................... $ 2,532 $ 3,154 $ 3,622
======= ======= =======
Revenues of Precision Steel's businesses declined in 1999 and 1998. The
decline in revenue for the past two years occurred despite increases of 2.5% and
5.2% in pounds of steel products sold in 1999 and 1998, and was attributed by
Precision Steel's management to a combination of factors, including (1) a shift
in mix of products sold toward lower-priced products, and (2) a decline in
selling prices of higher-margin items following price decreases by mills and
other suppliers.
Income before income taxes and normal net operating 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 78.6%, 77.9% and 78.0% for 1999, 1998 and 1997. The cost percentage
typically fluctuates slightly from year to year as a result of changes in
product mix and price competition at all levels. Precision Steel's cost of
products sold percentage is very sensitive to current changes in the cost of
materials purchased, because it carries its inventories at the lower of last-in,
first-out cost or market; under this method, the most recent costs are reflected
in cost of goods sold. Precision Steel's costs for 1999 and 1998 also included
$.4 million and $.6 million, respectively, before income taxes ($.2 million and
$.4 million after taxes), for the upgrading of computer systems to ensure that
its order-taking and other information technology systems would continue to
function properly beyond December 31, 1999.
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Other Than Identified Business Segments
Set forth below is a summary of "normal" net operating income for items not
identified with either business segment, insurance or industrial (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Dividend and interest income................................ $ 1,145 $ 2,132 $ 3,148
Rental income, net, from commercial real estate............. 850 842 879
Interest expense............................................ (2,939) (2,937) (3,408)
General and administrative expenses......................... (993) (1,086) (1,010)
Reduction in allowance for losses on foreclosed real estate
and other assets.......................................... 1,350 -- 1,800
Other items, net............................................ (248) (67) (594)
------- ------- -------
Income (loss) before income tax benefit..................... (835) (1,116) 815
Income tax benefit.......................................... 597 930 318
------- ------- -------
"Normal" net operating income (loss)........................ $ (238) $ (186) $ 1,133
======= ======= =======
"Normal" net operating income or loss other than from identified business
segments includes mainly (1) dividend and interest income from marketable
securities and cash equivalents owned outside the insurance subsidiaries and (2)
net rental income from owned commercial real estate, reduced by (1) interest and
other corporate expenses and (2) costs and expenses associated with the
development and liquidation of foreclosed real estate previously owned by a
former savings and loan subsidiary, including adjustments of reserves for
possible losses on sales of foreclosed real estate -- plus or minus income taxes
related to such "normal" nonsegment items.
"Normal" net operating income or loss other than from identified business
segments typically fluctuates from period to period but is not significant in
amount. The 1999 and 1997 figures benefited to the extent of $.8 million and
$1.1 million, after tax effect, from reductions in reserves for possible losses
on disposition of foreclosed real estate and other assets inherited from the
savings and loan subsidiary; there were no adjustments of these reserves in
1998. MS Property has had success in selling various foreclosed properties at
prices higher than were anticipated when the real estate market was extremely
depressed.
Nonsegment dividend and interest income has declined sharply in recent
years due to conversions of preferred stocks into lower-yielding common stocks.
Wesco's nonsegment tax benefits appear at first glance to be anomalous
compared to pre-tax income or loss. This is caused by the inclusion in pre-tax
income or loss of large (but declining) amounts of dividend income, which is
highly tax-favored. All other revenues and expense items are fully taxable or
deductible.
* * * * *
Management's long-term goal is to maximize gain in Wesco's intrinsic
business value per share, with little regard to earnings recorded in any given
year. There is no particular strategy as to the timing of sales of investments
or the realization of securities gains. Securities may be sold for a variety of
reasons, including (1) the belief that prospects for future appreciation of a
particular investment are less attractive than the prospects for reinvestment of
the after-tax proceeds from its sale, or (2) the desire for funds for an
acquisition or repayment of debt.
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
given 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 existing
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in Wesco's consolidated investment portfolio. (Wesco's shareholders' equity at
December 31, 1999 contained $1.3 billion, or $184.36 per share, of unrealized
appreciation of investments, net of taxes -- about 69% of shareholders' equity.)
Wesco's consolidated earnings for 1999 contained securities gains, after
income taxes, of $7.3 million, compared to $33.6 million of after-tax gains for
1998 and $62.7 million for 1997. These gains, although material in relation to
Wesco's net income, had only a minor impact on Wesco's total 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 its
shareholders' equity prior to their realization.
Wesco's effective consolidated income tax rate typically fluctuates from
period to period for various reasons, such as the inclusion in consolidated
revenues of significant, varying amounts of dividend income from preferred and
common stocks, which is substantially exempt from income taxes. The respective
provisions, expressed as percentages of income before income taxes, amounted to
27.6%, 29.8% and 33.4% in 1999, 1998 and 1997. (See Note 5 to the accompanying
consolidated financial statements for further information on income taxes.)
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 8 to the accompanying
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 at the beginning of 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 earnings.
Wesco is not now suffering from inflation, but its insurance and industrial
segments have potential exposure. Large unanticipated changes in the rate of
inflation could adversely impact the insurance business, because premium rates
are often established well in advance of expenditures. Precision Steel's
businesses are competitive and operate on tight gross profit margins, and thus
its earnings are susceptible to bad effects from inflationary cost increases.
MARKET RISK ANALYSIS
Wesco's consolidated balance sheet at December 31, 1999 contained $2.2
billion of marketable equity securities stated at market value. The carrying
values of these securities are not only directly exposed to fluctuations in
their stock market prices (see below); they are also indirectly exposed to risks
related to other markets. For example, the largest holding of the consolidated
group ($1.4 billion as of December 31, 1999) was in common stock of Freddie Mac,
whose principal assets are mortgages and mortgage securities, which are subject
to interest rate risk. The second and third largest holdings ($683 million,
combined, at December 31, 1999) were in common stocks of The Coca-Cola Company
and The Gillette Company, both of which have global operations and thus are
subject to changes in foreign currency exchange rates. These and other market
risks such as commodity price fluctuations, where material, are required to be
reported upon in their filings with the Securities and Exchange Commission,
which are available to the public.
Strategically, Wesco strives to invest in businesses that possess excellent
economics, with able and honest management, at sensible prices. Wesco's
management prefers to invest a meaningful amount in each investee, resulting in
concentration, as noted above. Most equity investments are expected to be held
for very long periods of time; thus, Wesco's management is not necessarily
troubled by short-term price volatility with respect to its investments provided
that the underlying business, economic and management characteristics of the
investees remain favorable.
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The carrying values of investments subject to equity price risks are based
on quoted market prices or, in the absence of such, management's estimates of
fair value. Market prices are subject to fluctuation and, consequently, the
amounts realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments,
or general market conditions. Furthermore, amounts realized in the sale of a
particular security may be adversely affected if a relatively large quantity of
the security is being sold.
The table below shows the effects as of December 31, 1999 of a hypothetical
30% overall increase or decrease in market prices of marketable equity
securities owned by the Wesco group. These changes result in a pro forma 22.8%
increase or decrease in shareholders' equity (amounts in thousands):
INCREASE DECREASE
---------- ----------
Market value of marketable equity securities:
As recorded............................................... $2,214,883 $2,214,883
Hypothetical (assuming 30% change)........................ 2,879,348 1,550,418
Shareholders' equity:
As recorded............................................... 1,895,372 1,895,372
Pro forma (results in 22.8% change)....................... 2,327,275 1,463,470
========== ==========
The foregoing hypothetical changes in market values do not reflect what
could be considered the best- or worst-case scenarios. Indeed, results could be
far worse due both to the nature of equity markets and the concentration
existing in Wesco's consolidated investment portfolio. However, Wesco has
substantial shareholders' equity, providing a margin of safety against a
significant decline in portfolio values. This can be seen by glancing at the
following balance sheet totals, which result from removing all unrealized
appreciation and related deferred taxes from balance sheet totals shown in the
first table in Item 6 (in thousands except for amounts per share):
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Total assets.................... $634,262 $634,954 $603,178 $478,863 $442,439
======== ======== ======== ======== ========
Total liabilities............... $ 51,480 $ 97,914 $129,825 $ 99,488 $ 86,136
======== ======== ======== ======== ========
Total shareholder's equity...... $582,782 $537,040 $473,353 $379,375 $356,303
Per capital share............. 81.85 75.43 66.48 53.28 50.04
======== ======== ======== ======== ========
Wesco's consolidated balance sheet at December 31, 1999 did not contain
significant assets or liabilities with values subject to interest rate,
commodity price, or foreign exchange rate risks. The Wesco group does not
utilize stand-alone derivatives to manage these or other market risks.
YEAR 2000 EXPOSURE
Prior to January 1, 2000, there was widespread concern that many computer
systems in use were not designed to process data correctly after December 31,
1999 because only two digits were used to indicate the year in a date. Other
systems and equipment were designed with similar limitations, often due to the
circuitry of computer chips embedded therein. Wesco and its subsidiaries (1)
assessed these potential "Year 2000" problems as they related to their
businesses, including their electronic and other interactions with banks,
vendors, customers and others, and (2) undertook the development and
implementation of solutions. In addition, Wesco attempted to satisfy itself that
significant non-subsidiary equity investees appeared to be proceeding in like
manner.
To date, Wesco and its subsidiaries have not experienced significant Year
2000 failures or disruptions. In addition, no significant adverse consequences
due to Year 2000 problems have, to the
21
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knowledge of Wesco's management, been reported by significant customers,
suppliers, equity investees or financial markets to Wesco or its subsidiaries.
Wesco's management believes, however, that, although the risks and uncertainties
from Year 2000 issues have greatly diminished since December 31, 1999, Wesco and
its subsidiaries may still be exposed to undesirable effects from as yet
undetected Year 2000 matters, especially losses that might be incurred under
property and casualty insurance and reinsurance contracts entered into by
Wesco's subsidiaries. While such consequences could conceivably have a
materially adverse effect on Wesco's consolidated net income, Wesco's management
does not believe that the total worst-case effect, which cannot be estimated,
would be material in relation to its shareholders' equity.
Wesco and its subsidiaries have incurred and charged against earnings
approximately $1.0 million in identification, remediation and testing of Year
2000 issues, including $.4 million in 1999 and $.6 million in 1998 ($.2 million
and $.4 million, after income taxes, respectively). Wesco does not believe that
any significant information technology projects were delayed due to Year 2000
efforts.
FORWARD-LOOKING STATEMENTS
Certain written or oral representations of management stated herein or
elsewhere constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as contrasted with statements
of historical fact. Forward-looking statements include statements which are
predictive in nature, or which depend upon or refer to future events or
conditions, or which include words such as expects, anticipates, intends, plans,
believes, estimates, may, or could, or which involve hypothetical events. For
example, the preceding section on Year 2000 exposure contains forward-looking
statements. Forward-looking statements are based on information currently
available and are subject to various risks and uncertainties that could cause
actual events or results to differ materially from those characterized as being
likely or possible to occur.
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ITEM 8. FINANCIAL STATEMENTS
Following is an index to financial statements and related schedules of
Wesco appearing in this report:
PAGE
FINANCIAL STATEMENTS NUMBER(S)
-------------------- ---------
Independent auditors' report................................ 25
Consolidated balance sheet -- December 31, 1999 and 1998.... 26
Consolidated statement of income -- years ended December 31,
1999, 1998 and 1997....................................... 27
Consolidated statement of changes in shareholders'
equity -- years ended December 31, 1999, 1998 and 1997.... 28
Consolidated statement of cash flows -- years ended December
31, 1999, 1998 and 1997................................... 29
Notes to consolidated financial statements.................. 30 - 37
Listed below are financial statement schedules required by the Securities
and Exchange Commission to be included in this report. The data appearing
therein should be read in conjunction with the consolidated financial statements
and notes of Wesco and the independent auditors' report referred to above.
Schedules not included with these financial statement schedules have been
omitted because they are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
SCHEDULE PAGE
FINANCIAL STATEMENT SCHEDULES NUMBER NUMBER(S)
----------------------------- -------- ---------
Condensed financial information of Registrant -- December
31, 1999 and 1998, and years ended December 31, 1999, 1998
and 1997.................................................. I 38 - 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable, as there were no such changes or disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the sections entitled "Election of Directors"
and "Executive Officers" appearing in the definitive combined notice of annual
meeting and proxy statement of Wesco Financial Corporation for its annual
meeting of shareholders scheduled to be held May 3, 2000 (the "2000 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the section "Compensation of Directors and
Executive Officers" in the 2000 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the sections "Voting Securities and Holders
Thereof" and "Requirements for Reporting Securities Ownership" in the 2000 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information set forth in the sections "Election of Directors,"
"Voting Securities and Holders Thereof," "Compensation of Directors and
Executive Officers" and "Board of Director Interlocks and Insider Participation"
in the 2000 Proxy Statement is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following exhibits (listed by numbers corresponding to Table 1 of Item
601 of Regulation S-K) are filed as part of this Annual Report on Form 10-K or
are incorporated herein by reference:
3a. Articles of Incorporation and By-Laws of Wesco Financial
Corporation
21. List of Subsidiaries.
27. Financial Data Schedule.
Instruments defining the rights of holders of long-term debt of registrant
and its subsidiaries are not being filed since the total amount of securities
authorized by all such instruments does not exceed 10% of the total assets of
the Registrant and its subsidiaries on a consolidated basis as of December 31,
1999. The Registrant hereby agrees to furnish to the Commission upon request a
copy of any such debt instrument to which it is a party.
The index to financial statements and related schedules set forth in Item 8
of this report is incorporated herein by reference.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
SIGNATURES
Pursuant to the requirements of Section 13 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
By: Charles T. Munger March 22, 2000
Chairman of the Board (principal executive officer)
By: Robert H. Bird March 22, 2000
President (principal operating officer)
By: Jeffrey L. Jacobson March 22, 2000
Vice President and Chief Financial Officer
(principal financial and accounting officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Robert H. Bird March 22, 2000
Director
Carolyn H. Carlburg March 22, 2000
Director
James N. Gamble March 22, 2000
Director
Charles T. Munger March 22, 2000
Director
David K. Robinson March 22, 2000
Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Wesco Financial Corporation
We have audited the accompanying consolidated balance sheets of Wesco
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedule listed in the index at
Item 8. These financial statements and the financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Wesco Financial Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
March 3, 2000
25
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WESCO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
ASSETS
Cash and cash equivalents................................... $ 66,331 $ 320,034
Investments:
Securities with fixed maturities.......................... 309,976 66,619
Marketable equity securities.............................. 2,214,883 2,778,595
Property and equipment...................................... 11,414 12,193
Goodwill of acquired business............................... 28,556 29,338
Other assets................................................ 21,035 21,627
---------- ----------
$2,652,195 $3,228,406
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses............... $ 33,642 $ 36,731
Notes payable............................................... 3,635 33,635
Income taxes payable, principally deferred.................. 707,345 920,035
Other liabilities........................................... 12,201 14,249
---------- ----------
756,823 1,004,650
---------- ----------
Shareholders' equity:
Capital stock, $1 par value -- authorized, 7,500,000
shares; issued and outstanding, 7,119,807 shares....... 7,120 7,120
Capital in excess of par value............................ 23,319 23,319
Unrealized appreciation of investments, net of taxes...... 1,312,590 1,686,716
Retained earnings......................................... 552,343 506,601
---------- ----------
Total shareholders' equity........................ 1,895,372 2,223,756
---------- ----------
$2,652,195 $3,228,406
========== ==========
See accompanying notes to consolidated financial statements.
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WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Sales and service revenues............................. $ 64,571 $ 66,137 $ 67,557
Insurance premiums earned.............................. 17,655 15,923 11,507
Dividend and interest income........................... 49,679 40,543 36,552
Realized gains, net, on securities and foreclosed
property............................................ 12,819 52,672 102,348
Other.................................................. 982 904 1,087
-------- -------- --------
145,706 176,179 219,051
-------- -------- --------
Costs and expenses:
Cost of products and services sold..................... 50,728 51,527 52,710
Insurance losses, loss adjustment and underwriting
expenses............................................ 7,366 8,174 860
Selling, general and administrative expenses........... 10,265 11,156 9,393
Interest on notes payable.............................. 2,549 3,016 3,320
-------- -------- --------
70,908 73,873 66,283
-------- -------- --------
Income before income taxes............................... 74,798 102,306 152,768
Provision for income taxes............................... (20,655) (30,503) (50,959)
-------- -------- --------
Net income.......................................... $ 54,143 $ 71,803 $101,809
======== ======== ========
Amounts per capital share based on 7,119,807 shares
outstanding throughout each year:
Net income............................................. $ 7.60 $ 10.08 $ 14.30
Cash dividends......................................... 1.18 1.14 1.10
======== ======== ========
See accompanying notes to consolidated financial statements.
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WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
SHAREHOLDERS' EQUITY TOTAL
------------------------------------------------------------- COMPRE-
CAPITAL IN UNREALIZED HENSIVE
CAPITAL EXCESS OF APPRECIATION RETAINED INCOME
STOCK PAR VALUE OF INVESTMENTS EARNINGS TOTAL (LOSS)
------- ---------- -------------- -------- ---------- ---------
Balance, December 31, 1996....... $7,120 $23,319 $ 871,640 $348,936 $1,251,015
Net income....................... 101,809 101,809
Unrealized appreciation of
investments, net of income tax
effect of $264,310............. 481,996 481,996 $ 521,108
=========
Reversal of unrealized
appreciation upon inclusion of
realized net gains in net
income......................... (62,697) (62,697)
Cash dividends declared and
paid........................... (7,831) (7,831)
------ ------- ---------- -------- ----------
Balance, December 31, 1997....... 7,120 23,319 1,290,939 442,914 1,764,292
Net income....................... 71,803 71,803
Unrealized appreciation of
investments, net of income tax
effect of $230,837............. 429,386 429,386 $ 467,580
=========
Reversal of unrealized
appreciation upon inclusion of
realized net gains in net
income......................... (33,609) (33,609)
Cash dividends declared and
paid........................... (8,116) (8,116)
------ ------- ---------- -------- ----------
Balance, December 31, 1998....... 7,120 23,319 1,686,716 506,601 2,223,756
Net income....................... 54,143 54,143
Unrealized depreciation of
investments, net of income tax
effect of $197,478............. (366,855) (366,855) $(319,983)
=========
Reversal of unrealized
appreciation upon inclusion of
realized net gains in net
income......................... (7,271) (7,271)
Cash dividends declared and
paid........................... (8,401) (8,401)
------ ------- ---------- -------- ----------
Balance, December 31, 1999....... $7,120 $23,319 $1,312,590 $552,343 $1,895,372
====== ======= ========== ======== ==========
See accompanying notes to consolidated financial statements.
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WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
Cash flows from operating activities:
Net income.......................................... $ 54,143 $ 71,803 $ 101,809
Adjustments to reconcile net income with cash flows
from operating activities --
Realized gains, net, on securities and foreclosed
property, before taxes......................... (12,819) (52,672) (102,348)
Provision for depreciation and amortization,
net............................................ 1,995 2,068 2,056
Decrease in allowance for losses on real estate
held for sale and other assets................. (1,350) -- (1,800)
Decrease in liabilities for insurance losses and
loss adjustment expenses....................... (3,089) (4,706) (4,054)
Increase (decrease) in income taxes payable...... (11,297) (8,852) 40,589
Other, net....................................... (4,159) 5,542 (1,377)
--------- -------- ---------
Net cash flows from operating activities.... 23,424 13,183 34,875
--------- -------- ---------
Cash flows from investing activities:
Purchases of securities with fixed maturities....... (413,659) (19,066) (176,235)
Maturities and redemptions of securities with fixed
maturities....................................... 21,772 5,587 35,215
Sales of marketable equity securities............... 58,900 177,266 --
Sales of securities with fixed maturities........... 90,788 126,128 95,122
Other, net.......................................... 3,473 14,365 10,029
--------- -------- ---------
Net cash flows from investing activities.... (238,726) 304,280 (35,869)
--------- -------- ---------
Cash flows from financing activities:
Repayments of notes.............................. (30,000) -- (3,527)
Payment of cash dividends........................ (8,401) (8,116) (7,831)
--------- -------- ---------
Net cash flows from financing activities.... (38,401) (8,116) (11,358)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents...... (253,703) 309,347 (12,352)
Cash and cash equivalents -- beginning of year........ 320,034 10,687 23,039
--------- -------- ---------
Cash and cash equivalents -- end of year.............. $ 66,331 $320,034 $ 10,687
========= ======== =========
Supplementary disclosures:
Interest paid during year........................... $ 2,953 $ 3,016 $ 3,320
Income taxes paid, net, during year................. 31,952 56,695 11,934
Noncash investing activities --
Fair value of investments exchanged.............. -- -- 180,772
========= ======== =========
See accompanying notes to consolidated financial statements.
29
23
WESCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE)
NOTE 1. PRESENTATION
Wesco Financial Corporation ("Wesco") is 80.1%-owned by Blue Chip Stamps
("Blue Chip"), which in turn is wholly owned by Berkshire Hathaway Inc.
("Berkshire").
Wesco's consolidated financial statements include the accounts of Wesco and
its subsidiaries, which are all either directly or indirectly wholly owned. The
principal subsidiaries are Wesco-Financial Insurance Company ("Wes-FIC"), The
Kansas Bankers Surety Company ("KBS"), Precision Steel Warehouse, Inc.
("Precision Steel"), and MS Property Company ("MS Property").
The outstanding stock of KBS was purchased by Wes-FIC in 1996 for
approximately $80,000. The excess of purchase cost over the fair value of the
identified net assets acquired ("goodwill"), approximately $31,300, is being
amortized on a straight-line basis over 40 years. The net unamortized balance is
carried as an asset on the consolidated balance sheet. If management, in its
periodic review of recoverability of goodwill, determines that it appears to
have become impaired, the unamortized balance will be reduced and/or the
amortization period shortened as appropriate.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The estimates and assumptions are based on management's evaluation
of the relevant facts and circumstances using information available at the time
such estimates and assumptions are made. Although the amounts of such assets,
liabilities, revenues and expenses included in the consolidated financial
statements may differ from those that might result from use of estimates and
assumptions based on facts and circumstances not yet available, Wesco's
management does not believe such differences, if any, would have a material
adverse effect on reported shareholders' equity.
All material intercompany balances and transactions have been eliminated in
the preparation of the consolidated financial statements.
In February 2000, a wholly owned subsidiary of Wesco, by means of a
successful tender offer and merger, acquired CORT Business Services Corporation
("CORT"), for approximately $384,000 cash. As a result, CORT's accounts will be
included in Wesco's consolidated financial statements effective in the first
quarter of 2000. See Note 8 for additional information regarding CORT.
NOTE 2. INVESTMENTS
Cash equivalents consist of funds invested in money-market accounts and in
other investments maturing in less than three months from date acquired.
Management determines the appropriate classifications of investments in
securities with fixed maturities and marketable equity securities at the time of
purchase and reevaluates such designations as of each balance sheet date. There
are three permissible classifications: held-to-maturity; available-for-sale; and
trading (of which there have been none). Securities are deemed to be
held-to-maturity securities when both the ability and the positive intent to
hold them to maturity are present; they are carried on the consolidated balance
sheet at amortized cost and adjusted for any accretion of discount or
amortization of premium using a method that produces approximately level yield.
Available-for-sale securities are carried at quoted market value or, if market
quotations are not available, at estimated fair value, with unrealized gains and
losses, net of deemed applicable income taxes, reported as a separate component
of shareholders' equity; there is no effect on net income, except to reflect
changes in income tax rates relating to such unrealized gains and losses.
30
24
Realized gains and losses on sales of investments, determined on a specific
identification basis, are included in the consolidated statement of income, as
are provisions for other-than-temporary declines in market or estimated fair
value. Once the carrying value of an investment has been written down to reflect
an other-than-temporary decline, any subsequent increase in market or fair value
is credited, net of taxes, to shareholders' equity, without affecting net income
until realized.
Investments in marketable equity securities and securities with fixed
maturities at December 31, 1999 and 1998 were deemed to be available-for-sale
and, accordingly, carried at quoted market or estimated fair value, with the net
unrealized gain shown as a separate component of shareholders' equity.
Unrealized appreciation constitutes a high proportion of Wesco's shareholders'
equity (69% and 76% at December 31, 1999 and 1998). As a result, shareholders'
equity is sensitive to fluctuations in underlying market quotations, and gains
or losses ultimately realized upon sale of the investments, less taxes, could
differ very significantly from recorded unrealized appreciation.
Following is a summary of securities with fixed maturities:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ESTIMATED FAIR ESTIMATED FAIR
AMORTIZED (CARRYING) AMORTIZED (CARRYING)
COST VALUE COST VALUE
--------- -------------- --------- --------------
Obligations of U. S. government and its
agencies.................................. $ 84,060 $ 77,930 $16,025 $16,358
State and municipal bonds................... 4,340 4,329 5,526 5,578
Convertible preferred stocks................ -- -- 45,000 44,000
Mortgage-backed securities.................. 233,998 227,717 683 683
-------- -------- ------- -------
$322,398 $309,976 $67,234 $66,619
======== ======== ======= =======
At 1999 yearend, the estimated fair values of securities with fixed
maturities contained $27 of unrealized gains and $12,449 of unrealized losses,
compared with $390 of unrealized gains and $1,005 of unrealized losses at 1998
yearend.
Investments in securities with fixed maturities at 1999 yearend are
expected to mature as follows:
AMORTIZED MARKET
COST VALUE
--------- --------
In one year or less......................................... $ 10,492 $ 10,502
After one year through five years........................... 26,593 26,363
After five years through ten years.......................... 129 129
After ten years............................................. 51,186 45,265
-------- --------
88,400 82,259
Mortgage-backed securities.................................. 233,998 227,717
-------- --------
$322,398 $309,976
======== ========
Following is a summary of marketable equity securities (all common stocks):
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- ----------------------
QUOTED QUOTED
MARKET MARKET
NUMBER OF (CARRYING) (CARRYING)
SHARES COST VALUE COST VALUE
---------- -------- ---------- -------- ----------
Freddie Mac................ 28,800,000 $ 71,729 $1,355,400 $ 71,729 $1,855,800
The Coca-Cola Company...... 7,205,600 40,761 419,726 40,761 482,775
The Gillette Company....... 6,400,000 40,000 263,600 40,000 306,000
Other...................... 32,038 176,157 32,038 134,020
-------- ---------- -------- ----------
$184,528 $2,214,883 $184,528 $2,778,595
======== ========== ======== ==========
Dollar amounts in thousands except for amounts per share
31
25
The market values of marketable equity securities contained no unrealized
losses at 1999 or 1998 yearends.
Realized investment gains (losses), before income taxes, from sales and
redemptions of investments are summarized below for each of the past three
years:
1999 1998 1997
------- ------- --------
Securities with fixed maturities --
Gross realized gains..................................... $ 7,504 $16,126 $ 50,143
Gross realized losses.................................... (2,714) -- --
Marketable equity securities --
Gross realized gains..................................... 6,396 43,611 50,771
Gross realized losses.................................... -- (8,031) --
------- ------- --------
$11,186 $51,706 $100,914
======= ======= ========
NOTE 3. INSURANCE
Wes-FIC's insurance business consists mainly of the sale, through KBS, of
various insurance products geared towards small and medium-sized banks located
primarily in the midwestern United States. These products include bank deposit
insurance in excess of FDIC coverage, directors and officers liability
insurance, employment practice insurance, internet banking catastrophe and
fidelity bond coverage. In addition, Wes-FIC participates in property and
casualty reinsurance contracts with wholly owned insurance subsidiaries of
Berkshire.
Insurance premiums are generally recognized as earned revenues pro rata
over the term of each contract. Unearned insurance premiums of $8,420 and $7,749
at December 31, 1999 and 1998 are included in other liabilities on the
consolidated balance sheet.
Liabilities for unpaid losses and loss adjustment expenses represent
estimated claim and claim settlement costs. The liabilities are based upon
estimates of ultimate claim costs associated with claim occurrences as of the
balance sheet date, and are determined from (1) individual case amounts, (2)
incurred but not reported losses, based on past experience, and (3) reports from
ceding insurers. As further data become available, the liabilities are
reevaluated and adjusted as appropriate.
Provisions for losses and loss adjustment expenses are reported in the
consolidated statement of income after deducting estimates of amounts that will
be recoverable under reinsurance contracts. Reinsurance contracts do not relieve
the ceding companies of their obligations to indemnify policyholders with
respect to the underlying insurance contracts. Losses and loss adjustment
expenses recoverable at yearend under reinsurance contracts are included in
accounts receivable on the consolidated balance sheet.
Dollar amounts in thousands except for amounts per share
32
26
Following is a summary of liabilities for unpaid losses and loss adjustment
expenses for each of the past three years:
1999 1998 1997
------- ------- -------
Balance at beginning of year................................ $36,731 $41,437 $45,491
Less ceded liabilities...................................... -- (1,340) (840)
------- ------- -------
Net balance at beginning of year............................ 36,731 40,097 44,651
------- ------- -------
Incurred losses recorded during year --
For current year.......................................... 8,556 11,604 6,563
For all prior years*...................................... (5,819) (7,646) (7,453)
------- ------- -------
Total incurred losses............................. 2,737 3,958 (890)
------- ------- -------
Payments made during year --
For current year.......................................... 2,175 4,673 1,579
For all prior years....................................... 3,651 2,651 2,085
------- ------- -------
Total payments.................................... 5,826 7,324 3,664
------- ------- -------
Net balance at end of year.................................. 33,642 36,731 40,097
Plus ceded liabilities...................................... -- -- 1,340
------- ------- -------
Balance at end of year...................................... $33,642 $36,731 $41,437
======= ======= =======
- ---------------
* Primarily represents adjustments of estimated losses.
Payment of dividends by insurance subsidiaries are restricted by insurance
statutes and regulations. Without prior regulatory approval in 2000, Wesco can
receive up to approximately $260,000 as dividends from its insurance
subsidiaries.
The combined shareholders' equity of Wesco's insurance subsidiaries at
yearend 1999 determined pursuant to regulatory accounting rules was
approximately $2,600,000, approximately $700,000 higher than shareholders'
equity determined in accordance with generally accepted accounting principles
("GAAP"). The difference represents mainly the deduction of deferred income
taxes associated with unrealized appreciation of investments in calculating the
GAAP figure.
NOTE 4. NOTES PAYABLE
Following is a list of notes payable, at yearend:
DECEMBER 31,
-----------------
1999 1998
------ -------
Note due January 2002, bearing interest at 7 5/8% payable
monthly................................................... $1,035 $ 1,035
Industrial revenue bonds due December 2014, bearing interest
at 7 3/4% payable semiannually............................ 2,600 2,600
Notes due November 1, 1999, bearing interest at 8 7/8%
payable semiannually...................................... -- 30,000
------ -------
$3,635 $33,635
====== =======
Wesco redeemed its 8 7/8% Notes at par upon maturity.
Estimated fair market values of the foregoing notes payable at December 31,
1999 and December 31, 1998 were approximately $3,725 and $34,700. These figures
were calculated using discounted cash flow computations based upon estimates as
to interest rates prevailing on those dates for comparable borrowings.
Dollar amounts in thousands except for amounts per share
33
27
NOTE 5. INCOME TAXES
Following is a breakdown of income taxes payable at 1999 and 1998 yearends:
DECEMBER 31,
--------------------
1999 1998
-------- --------
Deferred tax liabilities, relating to --
Appreciation of investments, principally unrealized....... $705,343 $906,736
Other items............................................... 5,622 14,380
-------- --------
710,965 921,116
Deferred tax assets......................................... (5,429) (6,450)
-------- --------
Net deferred tax liabilities.............................. 705,536 914,666
Taxes currently payable..................................... 1,809 5,369
-------- --------
Income taxes payable........................................ $707,345 $920,035
======== ========
Income taxes are accounted for using the asset and liability method. Under
this method, temporary differences between financial statement and tax return
bases of assets and liabilities at each balance sheet date are multiplied by the
tax rates in effect at that date, with the results reported on the balance sheet
as net deferred tax liabilities or assets. The effect of a change in tax rate on
such deferred items is required, under generally accepted accounting principles,
to be reflected when enacted in the consolidated statement of income even though
the original charge or credit for income taxes has been charged or credited to
shareholders' equity, as in the case of unrealized appreciation of investments.
As the temporary differences reverse in future periods, the taxes become
currently payable or recoverable.
The consolidated statement of income contains a provision for income taxes,
as follows:
1999 1998 1997
------- -------- -------
Federal.................................................... $20,316 $ 30,148 $45,781
State...................................................... 339 355 5,178
------- -------- -------
Provision for income taxes............................... $20,655 $ 30,503 $50,959
======= ======== =======
Current.................................................... $23,818 $ 65,039 $13,021
Deferred provision (benefit)............................... (3,163) (34,536) 37,938
------- -------- -------
Provision for income taxes............................... $20,655 $ 30,503 $50,959
======= ======== =======
Following is a reconciliation of the statutory federal income tax rate with
the effective income tax rate resulting in the provision for income taxes
appearing on the consolidated statement of income:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate.......................... 35.0% 35.0% 35.0%
Increase (decrease) resulting from --
Exclusion from taxable income of a significant portion of
dividend income....................................... (8.1) (6.3) (3.8)
Exclusion from taxable income of a significant portion of
interest income on state and municipal bonds.......... (0.1) (0.2) (0.2)
State income taxes, less federal tax benefit............. 0.3 0.3 2.2
Other differences, net................................... 0.5 1.0 0.2
------- -------- -------
Effective income tax provision rate........................ 27.6% 29.8% 33.4%
======= ======== =======
Wesco and its subsidiaries join with other Berkshire subsidiaries in the
filing of consolidated federal income tax returns for the Berkshire group. The
consolidated federal tax liability is apportioned among group members pursuant
to methods that result in each member of the group paying or
Dollar amounts in thousands except for amounts per share
34
28
receiving an amount that approximates the increase or decrease in consolidated
taxes attributable to that member.
Federal income tax returns through 1988 have been examined by and settled
with the Internal Revenue Service. California franchise tax returns through 1994
have been examined by and settled with the California Franchise Tax Board.
NOTE 6. QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information for 1999 and 1998 follows:
QUARTER ENDED
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- -------- ---------
Total revenues............................ $46,672 $33,917 $32,425 $32,692
======= ======= ======= =======
Net income excluding securities gains and
losses.................................. $14,160 $11,026 $11,065 $10,621
Per capital share....................... 1.99 1.54 1.56 1.49
Realized securities gains (losses) net of
income tax effect....................... 7,271 -- -- --
Per capital share....................... 1.02 -- -- --
------- ------- ------- -------
Net income................................ $21,431 $11,026 $11,065 $10,621
Per capital share....................... 3.01 1.54 1.56 1.49
======= ======= ======= =======
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
------------ ------------- -------- ---------
Total revenues............................ $22,816 $32,155 $90,078 $31,130
======= ======= ======= =======
Net income excluding securities gains and
losses.................................. $10,413 $ 9,358 $ 9,556 $ 8,867
Per capital share....................... 1.46 1.32 1.34 1.24
Realized securities gains (losses) net of
income tax effect....................... (4,161) -- 37,770 --
Per capital share....................... (.59) -- 5.31 --
------- ------- ------- -------
Net income................................ $ 6,252 $ 9,358 $47,326 $ 8,867
Per capital share....................... .87 1.32 6.65 1.24
======= ======= ======= =======
NOTE 7. BUSINESS SEGMENT DATA
Consolidated financial information for each of the past three years is
presented in the table on the next page, broken down as to Wesco's business
segments.
The insurance segment includes the accounts of Wes-FIC and its subsidiary,
KBS. Wes-FIC is engaged in the property and casualty insurance and reinsurance
business. Its business has included contractual arrangements with wholly owned
insurance subsidiaries of Berkshire under which Wes-FIC has participated in
reinsurance arrangements that the Berkshire subsidiaries have had with
unaffiliated insurance companies. KBS provides specialized insurance coverage to
more than 20% of the banks in the United States, mostly small and medium-sized
banks in the Midwest.
In addition to generating insurance premiums, Wesco's insurance segment has
derived dividend and interest income from the investment of float (premiums
received in advance of the time related claims and expenses are paid) as well as
cash invested or retained in the business by its owners, and has realized gains
on sales of investments.
The insurance companies are subject to regulation by applicable state
insurance departments and also, in KBS's case, the Department of the Treasury.
Dollar amounts in thousands except for amounts per share
35
29
The industrial segment includes the operating accounts of Precision Steel
and its subsidiaries. The Precision Steel group operates two service centers,
which buy steel and other metals in the form of sheets or strips, cut these to
order and sell them directly to a wide variety of industrial customers
throughout the United States. The Precision Steel group also manufactures shim
stock and other toolroom specialty items, as well as hose and muffler clamps,
and sells them nationwide, generally through distributors.
Items not identified with either business segment include principally (1)
investments other than those of Wes-FIC and KBS, together with related dividend
and interest income and securities gains and losses, (2) commercial real estate
properties, together with related revenues and expenses, (3) foreclosed real
estate formerly owned by a savings and loan subsidiary, together with associated
costs and expenses of development and liquidation, (4) the assets, revenues and
expenses of the parent company, and (5) related income taxes.
1999 1998 1997
---------- ---------- ----------
Insurance:
Premiums earned.................................. $ 17,655 $ 15,923 $ 11,507
Dividend and interest income..................... 49,125 38,534 33,694
Realized securities gains, net................... 11,186 51,706 50,528
Provision for income taxes....................... (18,909) (28,919) (27,741)
Net income....................................... 50,881 68,263 66,350
Depreciation and amortization other than of
discounts and premiums of investments......... 826 887 897
Capital expenditures............................. 79 29 68
Identifiable assets.............................. 2,639,750 3,157,338 2,440,141
========== ========== ==========
Industrial:
Sales, service and other revenues................ $ 64,686 $ 66,197 $ 67,693
Provision for income taxes....................... (1,677) (2,118) (2,420)
Net income....................................... 2,532 3,154 3,622
Depreciation and amortization.................... 797 852 849
Capital expenditures............................. 214 274 614
Identifiable assets.............................. 23,252 22,965 23,084
========== ========== ==========
Not identified with a business segment:
Dividend and interest income..................... $ 1,145 $ 2,132 $ 3,148
Other revenues................................... 867 844 951
Realized gains on securities and foreclosed
properties, net............................... 1,633 966 51,820
Income tax (provision) benefit................... (69) 534 (20,798)
Net income....................................... 730 386 31,837
Depreciation and amortization.................... 372 394 388
Capital expenditures............................. 112 1 495
Identifiable assets.............................. 26,013 49,660 126,450
========== ========== ==========
Reconciliations:
Total revenues set forth above................... $ 146,297 $ 176,302 $ 219,341
Less intersegment interest....................... (591) (123) (290)
---------- ---------- ----------
Total consolidated revenues.............. $ 145,706 $ 176,179 $ 219,051
========== ========== ==========
Total assets set forth above..................... $2,689,015 $3,229,963 $2,589,675
Less intersegment advances....................... (36,820) (1,557) (1,563)
---------- ---------- ----------
Total consolidated assets................ $2,652,195 $3,228,406 $2,588,112
========== ========== ==========
Dollar amounts in thousands except for amounts per share
36
30
NOTE 8. SUBSEQUENT EVENT
In February 2000, a wholly owned subsidiary of Wesco acquired all of the
outstanding common stock of CORT for approximately $384 million pursuant to a
tender offer and merger. The acquisition will be accounted for as a purchase,
and CORT's accounts will be consolidated with Wesco's beginning as of the date
of purchase. The cash purchase was funded, to the extent of $353 million,
through sales of investments and use of available cash, supplemented by $31
million of short-term line-of-credit borrowings.
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.
CORT's national network includes 118 showrooms, 87 clearance centers and 75
warehouses in 34 states and the District of Columbia as well as three web sites
(cort1.com, relocationcentral.com and corttradeshow.com).
The following unaudited table presents pro forma combined operating data
provided by Wesco and CORT for 1999 and 1998 as though CORT had been acquired on
January 1, 1998. It reflects (1) elimination of the estimated income earned
during 1999 and 1998 on investments liquidated in 2000 to fund the purchase, (2)
inclusion of interest expense throughout 1999 and 1998 as if the line-of-credit
borrowings had been made at the beginning of 1998, and (3) amortization of the
excess of purchase price over recorded net assets assuming such excess was all
goodwill to be amortized over 40 years.
YEAR
--------------------
1999 1998
-------- --------
Sales and service revenues.................................. $418,655 $385,101
Total revenues.............................................. 479,790 475,143
Income before extraordinary item............................ 63,159 79,514
Net income.................................................. 63,159 77,006
Per capital share......................................... 8.87 10.82
======== ========
Dollar amounts in thousands except for amounts per share
37
31
WESCO FINANCIAL CORPORATION
SCHEDULE I -- CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
Assets:
Cash and cash equivalents................................. $ 23 $ 23
Convertible preferred stocks.............................. -- 22,000
Investment in subsidiaries, at cost plus equity in
subsidiaries' undistributed earnings and unrealized
appreciation:
Wes-FIC and KBS........................................ 1,900,204 2,205,874
Precision Steel........................................ 54,575 51,579
MS Property............................................ 15,600 13,806
Other assets.............................................. 128 548
---------- ----------
$1,970,530 $2,293,830
========== ==========
Liabilities and shareholders' equity:
Advances from subsidiaries................................ $ 72,185 $ 32,202
Notes payable............................................. 1,035 31,035
Income taxes payable, principally deferred................ 1,912 6,367
Other liabilities......................................... 26 470
---------- ----------
Total liabilities................................. 75,158 70,074
---------- ----------
Shareholders' equity (see consolidated balance sheet and
statement of changes in shareholders' equity).......... 1,895,372 2,223,756
---------- ----------
$1,970,530 $2,293,830
========== ==========
STATEMENT OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
Revenues:
Dividend income.......................................... $ 675 $ 1,687 $ 2,692
Realized securities gain................................. -- -- 50,386
Other.................................................... 46 40 118
------- ------- --------
721 1,727 53,196
------- ------- --------
Expenses:
Interest on notes payable................................ 2,939 2,937 3,104
General and administrative............................... 437 475 414
------- ------- --------
3,376 3,412 3,518
------- ------- --------
Income (loss) before items shown below..................... (2,655) (1,685) 49,678
Income tax (provision) benefit............................. 1,247 1,100 (19,654)
Equity in undistributed earnings of subsidiaries........... 55,551 72,388 71,785
------- ------- --------
Net income.......................................... $54,143 $71,803 $101,809
======= ======= ========
See notes to consolidated financial statements
38
32
WESCO FINANCIAL CORPORATION
SCHEDULE I -- CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
Cash flows from operating activities:
Net income............................................ $ 54,143 $ 71,803 $101,809
Adjustments to reconcile net income with cash flows
from operating activities --
Realized securities gain........................... -- -- (50,386)
Deferred income taxes on realized securities
gain............................................. -- -- 20,532
Increase (decrease) in income taxes payable
currently........................................ (347) (951) 836
Equity in undistributed earnings of subsidiaries... (55,551) (72,388) (59,034)
Other, net......................................... (302) 58 (20)
-------- --------- --------
Net cash flows from operating activities...... ( 2,057) ( 1,478) 13,737
-------- --------- --------
Cash flows from investing activities:
Principal collections on loans........................ 475 75 75
-------- --------- --------
Net cash flows from investing activities...... 475 75 75
-------- --------- --------
Cash flows from financing activities:
Advances from (repayments to) subsidiaries, net....... 39,983 9,529 (5,985)
Repayment of Notes due November 1, 1999............... (30,000) -- --
Payment of cash dividends............................. (8,401) (8,116) (7,831)
-------- --------- --------
Net cash flows from financing activities...... 1,582 1,413 (13,816)
-------- --------- --------
Increase (decrease) in cash and cash equivalents........ -- 10 (4)
Cash and cash equivalents -- beginning of year.......... 23 13 17
-------- --------- --------
Cash and cash equivalents -- end of year................ $ 23 $ 23 $ 13
======== ========= ========
Supplementary disclosures:
Noncash investing activities --
Investments contributed to subsidiary.............. $ 28,895 $ 54,627 $ --
======== ========= ========
See notes to consolidated financial statements
39
33
WESCO FINANCIAL CORPORATION
COMMISSION FILE NUMBER 1-4720
EXHIBITS TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INCORPORATED
DESCRIPTION FILED BY REFERENCE
3a. Articles of Incorporation and By-Laws of Wesco Financial X
Corporation
21. List of Subsidiaries X
27. Financial Data Schedule X