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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, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
----------- ---------------
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 95-2109453
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 East Colorado Boulevard, Suite 300, 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 21, 2001 was: $377,756,000.
The number of shares outstanding of the registrant's Capital Stock as of
March 21, 2001 was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
Title of Document Parts of Form 10-K
Proxy Statement for 2001 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, through wholly owned subsidiaries, engages in three principal
businesses: (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; (2) the furniture rental
business, through CORT Business Services Corporation ("CORT"), which traces its
operations as a company with national presence to the combination of five
regional furniture rental companies in 1972; and (3) the steel service center
business, through Precision Steel Warehouse, Inc. ("Precision Steel"), which was
begun in 1940 and acquired by Wesco in 1979.
Wesco's operations also include, through MS Property Company ("MS
Property"), (1) management of owned commercial real estate in downtown Pasadena,
California, a portion of which will be redeveloped, and (2) management, pending
liquidation, of foreclosed real estate transferred to MS Property by a former
savings and loan subsidiary of Wesco 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"). Thus, Wesco
and its subsidiaries are 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 three business segments -- insurance,
furniture rental and industrial. The insurance segment consists of the
operations of Wes-FIC and KBS. The furniture rental segment consists of the
operations of CORT. The industrial segment comprises Precision Steel's steel
service center and other operations. Wesco is also engaged in several relatively
insignificant activities not identified with the three business segments; these
include (1) investment activity unrelated to the insurance segment, (2) MS
Property's real estate activities, and (3) parent company activities.
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 and certain 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 2000 yearend -- $1.9 billion computed under
generally accepted accounting principles and $2.1 billion under regulatory
rules -- has enabled Berkshire to offer Wes-FIC the opportunity to participate,
from time to time, in contracts in which Wes-FIC effectively has reinsured
certain property and casualty risks of unaffiliated property and casualty
insurers. These arrangements have included contracts for "super-catastrophe
reinsurance," which subject the reinsurer to especially large amounts of losses
from mega-catastrophes such as hurricanes or earthquakes. Super-catastrophe
policies indemnify 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
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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 no more than 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 remains 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. No liabilities remain under this agreement.
- Several contracts for super-catastrophe reinsurance beginning in 1994,
including 3% participations 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. No losses
were incurred under these contracts.
- 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. No liabilities remain under this
contract.
- A three-year arrangement entered in 2000 through NICO, as intermediary
without profit, for a small participation in certain property and
casualty exposure ceded by a large, unaffiliated insurer. The terms of
this arrangement are identical to those accepted by another member of the
Berkshire Insurance Group, except as to the amount of the participation.
Effective January 1, 2001, Wes-FIC became a 3% participant in an aviation
risk pool managed by a wholly owned subsidiary of Berkshire. Wes-FIC expects
that the net premiums written in 2001 under this arrangement will approximate $6
million. In addition, another Berkshire Insurance Group member has and will
continue to provide a portion of the reinsurance protection to the aviation risk
pool, and therefore to Wes-FIC.
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 pay claims when a super catastrophe
occurs. In this regard, Wes-FIC is 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.
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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 licensed
to write business in 25 states. KBS is also subject to regulation 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 through cessions to third party reinsurers, restructured its reinsurance
program effective January 1, 1998 in order to retain a much higher portion of
its premiums and risks of loss. 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 through exclusive, commissioned
agents, and direct to insureds in other states. Inasmuch as the number of small
midwestern banks is declining as the banking industry consolidates, 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 one-third 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 2000 amounted to 1.6% of
their combined statutory surplus, compared to an industry average of about 86%
based on figures reported for 1999.
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 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.
FURNITURE RENTAL SEGMENT
CORT, acquired in February 2000 by a subsidiary of Wesco for approximately
$386 million cash, is the largest, and only national, provider of rental
furniture, accessories and related services in the "rent-to-rent" ( as opposed
to "rent-to-own") segment of the furniture industry. It rents high quality
furniture to corporate and individual customers who desire flexibility in
meeting their temporary office, residential or tradeshow furnishing needs and
who typically do not seek to own such furniture.
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In addition, CORT sells previously rented furniture through company-owned
clearance centers, thereby enabling it to regularly renew its inventory and
update styles. CORT's national network includes 117 showrooms, 86 clearance
centers and 79 warehouses in 35 states and the District of Columbia as well as
three web sites (cort1.com, relocationcentral.com and corttradeshow.com).
The rent-to-rent business is differentiated from the rent-to-own business
primarily by the terms of the rental arrangements and the type of customer
served. Rent-to-rent customers generally desire high quality furniture to meet
temporary needs, have established credit, and pay on a monthly basis. Typically,
these customers do not seek to acquire the property rented. In the typical
rent-to-rent transaction, the customer agrees to rent merchandise for three to
six months, subject to extension by the customer on a month-to-month basis. By
contrast, rent-to-own arrangements are generally made by customers without
established credit whose objective is to acquire ownership of the property;
these arrangements are typically entered into on a month-to-month basis and
require weekly rental payments.
CORT's management believes that its size, national presence, consistently
high level of customer service, product quality and breadth of selection, depth
of management and efficient clearance centers have been key contributors to the
company's success. CORT emphasizes its ability to outfit an entire suite of
offices with high quality furniture in two business days. CORT's objective is to
build on these fundamentals and to further increase revenues by continuing to
pursue its growth strategy. The key components of this strategy are (1)
expanding its corporate customer base, (2) making selective acquisitions, (3)
initiating operations in new markets and adding showrooms and clearance centers
in existing markets, and (4) continuing to invest in the development of various
products and services. CORT believes that, as a result, over the long term,
margins will expand and operating earnings will increase.
In recent years CORT has benefited from increased demand for furniture
rental services. CORT's management believes that this increased demand has been
driven by a strong national economy as well as three favorable trends: continued
growth in management and professional employment, the increasing importance to
American business of flexibility and outsourcing, and the impact of a more
mobile and transitory population. However, since late 2000 CORT's new orders
have declined sharply; its management attributes this to reduced industry demand
caused by a weakening economy.
CORT's customer base includes Fortune 500 companies, small businesses and
professionals, and owners and operators of apartment communities. In order to
capitalize on the significant profit potential available from longer average
rental periods and the higher average monthly rent for office products, CORT's
strategy is to emphasize office furniture rentals. CORT offers a full range of
office, conference room and reception area furniture, panel systems and
accessories. In order to promote longer office lease terms, CORT offers lower
rates on leases of furniture to its corporate customers when lease terms exceed
six months.
A significant portion of CORT's residential furniture rentals are derived
from corporate relocations and temporary assignments, as new and transferred
employees of CORT's corporate customers enter into leases for residential
furniture. CORT's sales personnel maintain contact with corporate relocation
departments and present the possibility of obtaining fully furnished rental
apartments as a lower cost alternative to hotel accommodations. Thus, CORT
offers its corporate rental customers a way to reduce the costs of corporate
relocations while developing residential business with new and transferred
employees. CORT's Relocation Central website (www.relocationcentral.com)
provides useful information about major cities, such as apartment finders,
school systems, movers and local recreation. Relocation Central thus serves as a
powerful marketing tool. CORT also provides short-term rentals for trade shows
and conventions.
The rent-to-rent segment of the furniture rental industry is highly
competitive. There are several large regional as well as a number of smaller
regional and local rent-to-rent furniture companies. In addition, numerous
retailers offer residential and office furniture under rent-to-own arrangements.
Management believes that the principal competitive factors in the furniture
rental industry are product
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value, furniture condition, extent of furniture selection, terms of rental
agreement, speed of delivery, exchange privilege, option to purchase, deposit
requirements and customer service.
The majority of CORT's furniture sales revenue is from clearance center
sales. The remaining furniture sales revenue is derived primarily from lease
conversions and sales of new furniture. Sales of rental furniture allow CORT to
control inventory levels and maintain showroom quality of rental inventory. On
average, furniture is typically sold through the clearance centers three years
after its initial purchase by the company.
With respect to sales of furniture through its clearance centers, CORT
competes with numerous used and new furniture retailers, some of which are
larger than CORT. Management believes that price and value are its principal
competitive advantages in this activity.
CORT has approximately 2,700 employees, including 65 union members.
Management considers labor relations to be good.
INDUSTRIAL SEGMENT
Precision Steel, acquired in 1979 for approximately $15 million, and a
subsidiary operate steel service centers in the Chicago and Charlotte
metropolitan areas. 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 that is 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, processed metals are 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 decreased to approximately $5.8 million at December 31, 2000 from
$7.1 million at December 31, 1999.
There are 235 full-time employees 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 owned commercial
real property in Pasadena, California, a portion of which will
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be redeveloped, (3) management, pending liquidation, of real estate obtained
through foreclosure by a former savings and loan subsidiary, and (4) parent
company activities.
The Wesco group, while it seeks suitable businesses to acquire and explores
ways to expand its existing operations, also invests in marketable securities of
unaffiliated companies and in securities with fixed maturities. (See Note 3 to
the accompanying consolidated financial statements for summaries of investments,
and Note 2 for information as to the acquisition of CORT in February 2000.)
Six full-time employees are engaged in the activities of Wesco and MS
Property.
ITEM 2. PROPERTIES
MS Property owns a business block in Pasadena, California situated between
the city hall and a large shopping mall that is being substantially redeveloped
to include residential units and a multi-screen movie theatre. 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 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, until recently,
contained a row of small, blighted commercial retail buildings; MS Property has
substantially demolished 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.
CORT leases 16,200 square feet of office space in a multistory office
building in Fairfax, Virginia, which it uses as its headquarters. It has an
option to renew the lease for five years beyond its 2006 expiration.
CORT carries out its rental, sales and warehouse operations in metropolitan
areas in 35 states and the District of Columbia through 195 facilities, of which
20 were owned and the balance leased as of 2000 yearend. The leased facilities'
lease terms expire at dates ranging from 2001 to 2015. CORT has generally been
able to extend expiration dates of its leases or obtain suitable alternative
facilities on satisfactory terms. Its management seeks to locate properties in
new markets where rental, clearance and warehouse operations can be combined in
one facility. As CORT expands in a particular district, it seeks to open
free-standing showrooms and clearance centers that can be serviced from
pre-existing warehouses. CORT's showrooms generally have 4,500 square feet of
floor space. CORT regularly reviews the presentation and appearance of its
furniture showrooms and clearance centers and periodically improves or
refurbishes them to enhance their attractiveness to customers.
CORT operates a fleet of approximately 400 vans and other vehicles, most of
which display CORT's tradenames. Of these, approximately 50 are owned and the
remainder rented for five to six years under operating leases.
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.
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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 2000 and 1999, based on data
reported by the American Stock Exchange, as well as cash dividends paid by Wesco
on each outstanding share:
2000 1999
----------------------- ------------------------
SALES PRICE SALES PRICE
----------- DIVIDENDS ------------ DIVIDENDS
QUARTER ENDED HIGH LOW PAID HIGH LOW PAID
------------- ---- ---- --------- ---- ---- ---------
March 31................................ $281 $200 $0.305 $354 $322 $0.295
June 30................................. 252 200 0.305 339 305 0.295
September 30............................ 256 1/4 209 0.305 323 260 1/4 0.295
December 31............................. 294 235 1/2 0.305 290 241 1/2 0.295
------ ------
$1.220 $1.180
====== ======
There were approximately 650 shareholders of record of Wesco's capital
stock as of the close of business on March 16, 2001. It is estimated that
approximately 5,200 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 2000 consolidated
financial statements appearing elsewhere in this report. (Amounts are in
thousands except for amounts per share.)
DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Assets:
Cash and cash equivalents.... $ 153,810 $ 66,331 $ 320,034 $ 10,687 $ 23,039
Investments --
Securities with fixed
maturities.............. 839,683 309,976 66,619 279,697 176,885
Marketable equity
securities.............. 833,937 2,214,883 2,778,595 2,224,848 1,533,009
Accounts receivable.......... 38,444 8,685 7,707 7,148 7,940
Rental furniture............. 244,847 -- -- -- --
Property and equipment....... 53,833 11,414 12,193 13,229 13,297
Real estate held for sale.... 915 908 2,327 5,240 15,831
Goodwill of
acquired businesses....... 260,037 28,556 29,338 30,121 30,903
Other assets................. 35,409 11,442 11,593 17,142 17,501
---------- ---------- ---------- ---------- ----------
Total assets......... $2,460,915 $2,652,195 $3,228,406 $2,588,112 $1,818,405
========== ========== ========== ========== ==========
Liabilities:
Insurance losses and loss
adjustment expenses....... $ 39,959 $ 33,642 $ 36,731 $ 41,437 $ 45,491
Deferred furniture rental
income and security
deposits.................. 27,669 -- -- -- --
Accounts payable and accrued
expenses.................. 33,881 3,674 4,520 4,491 4,140
Notes payable................ 56,035 3,635 33,635 33,635 37,162
Income taxes payable,
principally deferred...... 305,175 707,345 920,035 733,488 468,370
Other liabilities............ 21,162 8,527 9,729 10,769 12,227
---------- ---------- ---------- ---------- ----------
Total liabilities.... $ 483,881 $ 756,823 $1,004,650 $ 823,820 $ 567,390
========== ========== ========== ========== ==========
Shareholders' equity:
Capital stock and surplus.... $ 30,439 $ 30,439 $ 30,439 $ 30,439 $ 30,439
Unrealized appreciation of
investments, net of
taxes..................... 480,469 1,312,590 1,686,716 1,290,939 871,640
Retained earnings............ 1,466,126 552,343 506,601 442,914 348,936
---------- ---------- ---------- ---------- ----------
Total shareholders'
equity............. $1,977,034 $1,895,372 $2,223,756 $1,764,292 $1,251,015
========== ========== ========== ========== ==========
Per capital
share........... $ 277.68 $ 266.21 $ 312.33 $ 247.80 $ 175.71
========== ========== ========== ========== ==========
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YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
Revenues:
Sales and service revenues.......... $ 426,096 $ 64,571 $ 66,137 $ 67,557 $ 63,654
Insurance premiums earned........... 23,783 17,655 15,923 11,507 10,060
Dividend and interest income........ 59,759 49,679 40,543 36,552 33,313
Realized net securities gains
(losses)......................... 1,311,270 11,186 51,706 100,914 (176)
Other............................... 3,056 4,600 3,921 4,498 3,021
---------- -------- -------- -------- --------
1,823,964 147,691 178,230 221,028 109,872
---------- -------- -------- -------- --------
Costs and expenses:
Cost of products and services
sold............................. 146,649 50,728 51,527 52,710 50,054
Insurance losses, loss adjustment
and underwriting expenses........ 19,392 7,366 8,174 860 4,264
Selling, general and
administrative................... 227,954 11,468 12,425 10,588 11,920
Interest expense.................... 5,235 2,549 3,016 3,320 3,352
Goodwill amortization............... 6,342 782 782 782 782
---------- -------- -------- -------- --------
405,572 72,893 75,924 68,260 70,372
---------- -------- -------- -------- --------
Income before income taxes............ 1,418,392 74,798 102,306 152,768 39,500
Provision for income taxes............ (495,922) (20,655) (30,503) (50,959) (8,881)
---------- -------- -------- -------- --------
Net income............................ $ 922,470 $ 54,143 $ 71,803 $101,809 $ 30,619
========== ======== ======== ======== ========
Amounts per capital share:
Net income.......................... $ 129.56 $ 7.60 $ 10.08 $ 14.30 $ 4.30
Cash dividends...................... 1.22 1.18 1.14 1.10 1.06
========== ======== ======== ======== ========
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, 2000 was $2.0 billion ($277.68
per share), up from $1.9 billion ($266.21 per share) at December 31, 1999. An
exceptionally large increase in retained earnings, resulting mainly from
realization of securities gains, was approximately offset by a major reduction
in unrealized appreciation of investments, a separate component of shareholders'
equity. As a result, unrealized appreciation declined from 69% to 24% of
shareholders' equity. Because unrealized appreciation is recorded using current,
typically fluctuating market quotations, the gains or losses ultimately realized
upon sale of investments could differ substantially from recorded unrealized
appreciation. (See the section on market risk analysis appearing below in this
Item 7, as well as Note 3 to the accompanying consolidated financial statements,
for additional information on investments.)
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. Wes-FIC
enjoys Standard & Poor Corporation's highest rating, AAA, with respect to its
claims-paying ability. CORT has available a $150 million revolving line of
credit for use in day-to-day operations; at December 31, 2000, $52.4 million was
outstanding (see Note 6 to the accompanying consolidated financial statements
for further details).
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RESULTS OF OPERATIONS
The following summary sets forth the contribution to Wesco's consolidated
net income of each business segment -- insurance, furniture rental and
industrial -- as well as activities not considered related to such segments.
Realized net securities gains and goodwill amortization are excluded from
segment activities, consistent with the way Wesco's management views the
business operations. (Amounts are in thousands, all after income tax effect.)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Insurance segment.......................................... $ 45,518 $44,392 $35,436
Furniture rental segment................................... 28,988 -- --
Industrial segment......................................... 1,281 2,532 3,154
Unrelated to business segment operations --
Goodwill amortization.................................... (5,867) (782) (782)
Other nonsegment items................................... 167 730 386
-------- ------- -------
Income before realized securities gains............... 70,087 46,872 38,194
Realized net securities gains............................ 852,383 7,271 33,609
-------- ------- -------
Consolidated net income............................. $922,470 $54,143 $71,803
======== ======= =======
In the following sections the data set forth in the foregoing summary on an
after-tax basis are broken down and discussed. Attention is directed to Note 9
to the accompanying consolidated financial statements for additional
information.
Insurance Segment
Following is a summary of the results of operations of the insurance
segment (i.e., Wes-FIC and KBS), which represent essentially the combination of
underwriting results with dividend and interest income (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Premiums written........................................ $ 32,370 $ 18,326 $ 19,296
======== ======== ========
Premiums earned......................................... $ 23,783 $ 17,655 $ 15,923
======== ======== ========
Underwriting gain....................................... $ 4,391 $ 10,289 $ 7,749
Dividend and interest income............................ 59,241 49,098 38,509
-------- -------- --------
Income before income taxes.............................. 63,632 59,387 46,258
Income tax provision.................................... (18,114) (14,995) (10,822)
-------- -------- --------
Segment net income...................................... $ 45,518 $ 44,392 $ 35,436
======== ======== ========
Premiums written for 2000, 1999 and 1998 were comprised of $16.9 million,
$15.8 million and $17.0 million attributable to KBS, and $15.5 million, $2.5
million and $2.3 million attributable to Wes-FIC. Premiums written by Wes-FIC
for 2000 were attributable principally to its participation in the first of a
three-year arrangement for the reinsurance of 3 1/3% of certain property and
casualty risk exposure of a large, unaffiliated insurance group. Wes-FIC's
earned premiums for 1999 and 1998 related mainly to its participation in
quota-share super-catastrophe reinsurance arrangements, notably a three-year
Florida hurricane risk policy that ended, without loss, at 1999 yearend. The
decrease in premiums written by KBS for 1999 was 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.
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Earned premiums for 2000, 1999 and 1998 included $16.4 million, $15.1
million and $13.7 million attributable to KBS. The remainder in each year was
attributable to Wes-FIC and related principally to the reinsurance
participations described above.
The underwriting gain for 2000, 1999 and 1998 included $4.2 million, $5.9
million and $4.4 million attributable to KBS, and $.2 million, $4.4 million and
$3.3 million to Wes-FIC. Aggregate underwriting gain benefited by $4.1, million
$5.8 million and $7.6 million in 2000, 1999 and 1998 from downward revisions of
estimated liabilities for losses and loss adjustment expenses. Underwriting
results at KBS have become more volatile since it restructured its reinsurance
program at the beginning of 1998.
Wes-FIC participates in super-catastrophe reinsurance from time to time;
and, while no such business became available for 2000, other participations may
become available in the future. Although no super-catastrophe reinsurance losses
have been incurred to date, Wesco's management believes that large
super-catastrophe reinsurance losses will inevitably occur from time to time
during periods when Wes-FIC participates actively in such business. While such
large losses are not expected to be significant in relation to Wes-FIC's capital
base, management accepts the prospect of increased volatility in Wes-FIC's
short-term underwriting results in order to obtain what is believed will be
better long-term results.
One area of particular concern to the insurance industry is its exposure to
claims for environmental contamination. Wesco's management believes such
exposure to be minimal.
Dividend and interest income has been earned by the insurance group
principally (1) on capital contributed by Wesco, (2) on earnings retained and
reinvested, and (3) on float (funds invested pending payment of claims).
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
has reinsured various property and casualty risks, in varying amounts, of large,
unaffiliated insurance companies. Although Wesco would welcome other attractive
reinsurance or insurance arrangements, or acquisitions of insurance businesses
like or unlike that of KBS, the timing and extent of any increase in its
insurance underwriting activity cannot presently be predicted. (See Note 5 to
the accompanying consolidated financial statements for additional information on
accounting policies peculiar to the insurance segment.)
Furniture Rental Segment
Following is a summary of the operating results of CORT as included in
Wesco's year 2000 consolidated results of operations since acquisition in late
February of 2000. For comparative purposes, corresponding amounts for all of
2000 and 1999 are also presented; these unaudited figures are set forth
exclusive of items not classified as segment-related by Wesco -- goodwill
amortization,
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securities gains or losses, and income tax provisions or benefits related
thereto. (Amounts are in thousands.)
LATE
FEBRUARY TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
2000 2000 1999
------------ ---------- ----------
Revenues:
Furniture rentals................................... $305,820 $348,429 $295,232
Furniture sales..................................... 55,235 62,852 58,852
-------- -------- --------
361,055 411,281 354,084
-------- -------- --------
Cost of rentals and sales............................. 93,165 105,544 89,916
Selling, general and administrative expenses.......... 215,787 245,682 207,587
Interest expense...................................... 4,955 5,732 5,769
-------- -------- --------
313,907 356,958 303,272
-------- -------- --------
Income before income taxes............................ 47,148 54,323 50,812
Income tax provision.................................. (18,160) (20,952) (20,811)
-------- -------- --------
Segment net income.................................... $ 28,988 $ 33,371 $ 30,001
======== ======== ========
CORT's revenues for the year 2000 increased $57.2 million, or 16.2%, over
those reported for 1999, due principally to increased rental revenues. Rental
revenues before the impact of acquisitions, trade show operations and a
significant, short-term contract with the U.S. Bureau of the Census, increased
approximately 12%. CORT's management attributes this increase in core rental
revenues to the combination of growth in the number of furniture leases
outstanding and an increase in average revenue per lease. CORT has noted,
however, that the rate of growth of new orders declined sharply in the fourth
quarter of 2000, reflecting changing economic conditions. Furniture sales
revenues increased approximately 6.8% in 2000 as a result of CORT's ongoing
efforts to maintain the quality of its rental furniture.
Cost of furniture rentals and sales amounted to 25.7% of related revenues
for the year 2000 versus 25.4% for 1999. The increase in the cost percentage for
2000 reflected various factors, most significantly the following: (1) an
increase in distribution costs relating to the handling of rental furniture, and
(2) an increase in depreciation expense, recorded on a declining-balance method,
reflecting an increase in the proportion of newer furniture being leased as
revenues have grown.
Selling, general and administrative expenses increased slightly in relation
to rental and sales revenues, to 59.7% for the year 2000 from 58.6% for 1999.
This was due mainly to normal increases in employee compensation and benefits.
See Note 2 to the accompanying consolidated financial statements for pro
forma consolidated operating data calculated as if Wesco had acquired CORT on
January 1, 1999, and Note 4 to such statements for information on furniture
rental segment accounting policies.
Industrial Segment
Following is a summary of the results of operations of the industrial
segment, consisting of the businesses of Precision Steel and its subsidiaries
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Revenues, principally sales and services.................... $65,119 $64,686 $66,197
======= ======= =======
Income before income taxes.................................. $ 2,188 $ 4,209 $ 5,272
Income tax provision........................................ (907) (1,677) (2,118)
------- ------- -------
Segment net income.......................................... $ 1,281 $ 2,532 $ 3,154
======= ======= =======
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Revenues of Precision Steel's businesses for 2000 increased .7% despite a
2.8% decrease in pounds of steel products sold. Revenues for 1999 decreased 2.3%
despite a 2.5% increase in pounds of steel products sold. Precision Steel's
management attributed these anomalies to a combination of factors. In 2000, (1)
increases in selling prices in response to increases in costs of its raw
materials were almost completely offset by (2) the effects of a softening demand
for Precision Steel's products caused by increasing concerns over general
economic conditions within the manufacturing segment of the economy. In 1999,
(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 were principally responsible.
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 82.2%, 78.6% and 77.9% for 2000, 1999 and 1998. 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.
Unrelated to Business Segment Operations
Set forth below is a summary of items increasing (decreasing) Wesco's
consolidated net income that are viewed by management as unrelated to the
operations of the insurance, furniture rental and industrial segments (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---------- ------- --------
Goodwill amortization, before income tax effect......... $ (6,342) $ (782) $ (782)
Income tax benefit...................................... 475 -- --
---------- ------- --------
Goodwill amortization................................. $ (5,867) $ (782)$ $ (782)
========== ======= ========
Realized net securities gains, before income tax
effect................................................ $1,311,270 $11,186 $ 51,706
Income tax provision.................................... (458,887) (3,915) (18,097)
---------- ------- --------
Realized net securities gains......................... $ 852,383 $ 7,271 $ 33,609
========== ======= ========
Other nonsegment items --
Rental income from commercial real estate............. $ 2,978 $ 2,879 $ 2,920
Dividend and interest income.......................... 518 1,145 2,132
Net gains on sales of foreclosed real estate.......... -- 1,633 966
Reduction in allowance for losses on foreclosed real
estate............................................. -- 1,350 --
Real estate and general and administrative expenses... (3,067) (3,022) (3,164)
Interest expense...................................... (79) (2,939) (2,937)
Other items, net...................................... 146 (247) (67)
---------- ------- --------
Income (loss) before income tax benefit............... 496 799 (150)
Income tax (provision) benefit........................ (329) (69) 536
---------- ------- --------
Net income from other nonsegment activities........ $ 167 $ 730 $ 386
========== ======= ========
Goodwill represents the excess of the cost over the fair value of
identified net assets of acquired businesses. In the case of the Wesco group, it
relates to the acquisition of CORT in 2000 and KBS in
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15
1996 and is being amortized mainly over 40 years. (See Note 2 to the
accompanying consolidated financial statements for additional information.)
Realized gains and losses on the Wesco group's investments have fluctuated
in amount from year to year, sometimes impacting net income significantly, as in
2000. However, the amounts and timing of these realizations have no predictive
or practical analytical value. Wesco's investments are carried at market value,
and unrealized gains or losses are reflected, net of potential income tax
effect, in the unrealized appreciation component of its shareholders' equity.
When gains or losses are realized, due to sale of securities or other triggering
event, they are credited or charged, net of tax effect, to the consolidated
statement of income; generally, in Wesco's case, there has been little effect on
total shareholders' equity -- merely a transfer from unrealized appreciation to
retained earnings.
Wesco's consolidated earnings for 2000 contained net realized securities
gains, after income taxes, of $852.4 million, compared to $7.3 million of
after-tax gains for 1999 and $33.6 million for 1998. As can be seen by referring
to the accompanying consolidated statement of changes in shareholders' equity,
these realizations were the principal reason for the reduction in the unrealized
appreciation component of shareholders' equity, over the same three-year period,
from $1.7 billion to $481 million. (See the section on market risk analysis
appearing below in this Item 7, as well as Note 3 to the accompanying
consolidated financial statements, for additional information on investments.)
Other nonsegment items include mainly (1) rental income from owned
commercial real estate, (2) dividend and interest income from marketable
securities and cash equivalents owned outside the insurance subsidiaries, and
(3) gains on sales of foreclosed real estate previously owned by a former
savings and loan subsidiary together with reductions of reserves for possible
losses on such sales, reduced by (1) real estate and general and administrative
expenses and (2) interest and other corporate expenses -- plus or minus income
taxes related to such items.
Net income or loss from other nonsegment activities typically fluctuates
from period to period but is not significant in amount. The 1999 figures
benefited to the extent of $.8 million, after tax effect, from a reduction in
reserves for possible losses on disposition of foreclosed real estate; there
were no adjustments of these reserves in 2000 or 1998. MS Property generally has
succeeded in selling foreclosed properties at prices much higher than were
anticipated when the real estate market was extremely depressed earlier in the
1990s.
Nonsegment dividend and interest income has declined sharply in recent
years mainly due to conversions of preferred stocks into lower-yielding common
stocks in 1998 and 1999 and to the contributions of certain of those investments
to the insurance segment.
The net tax provision or benefit from other nonsegment activities each year
appears 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 declining amounts of
dividend income, which is taxed at lower rates than other revenue and expense
items.
* * * * *
Wesco's effective consolidated income tax rate typically fluctuates from
period to period for various reasons, such as the inclusion in consolidated
revenues of significant, varying amounts of dividend income, which is
substantially exempt from income taxes. The respective income tax provisions,
expressed as percentages of income before income taxes, amounted to 35.0%, 27.6%
and 29.8% in 2000, 1999 and 1998. (See Note 7 to the accompanying consolidated
financial statements for further information on income taxes.)
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
23
16
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.
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 2 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 business operations have
potential exposure, particularly in the insurance and industrial segments. 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, operate on tight
gross profit margins, and carry inventories on a LIFO basis; thus their earnings
are susceptible to bad effects from inflationary cost increases.
MARKET RISK ANALYSIS
Wesco's consolidated balance sheet contains substantial amounts of
investments whose estimated fair (carrying) values are subject to market risks.
Its marketable equity securities are subject to fluctuations in their stock
market prices, and its securities with fixed maturities, if not held to
maturity, are subject to changes in interest rate levels. On the other hand,
Wesco's consolidated deferred income tax liability relates primarily to
appreciation in fair values of investments and would decline proportionately if
there were a drop in market valuation. Otherwise, the consolidated balance sheet
at December 31, 2000 did not contain significant assets or liabilities with
values subject to these or other potential market exposures such as those
relating to changes in commodity prices and foreign exchange rates. The Wesco
group does not utilize stand-alone derivatives to manage market risks.
Equity Price Risk
Wesco's consolidated balance sheet at December 31, 2000 contained $834
million of marketable equity securities stated at market value, down from $2.2
billion one year earlier. The principal reason for the decline was the sale of
what had been the consolidated group's largest holding, common stock of Freddie
Mac ($1.4 billion at December 31, 1999). The carrying values of the remaining
securities are not only directly exposed to fluctuations in their stock market
prices (see table below); they are also indirectly exposed to risks related to
other markets. For example, the two largest holdings of the consolidated group
at December 31, 2000 ($670 million, combined) 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. Most equity investments are expected to be held for 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.
24
17
The carrying values of investments subject to equity price risks are based
on quoted market prices. Market prices are subject to fluctuation and,
consequently, the amounts realized upon 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 upon the sale of a
particular security may be adversely affected if a relatively large quantity of
the security is being sold.
The following table shows the effects as of December 31, 2000 of a
hypothetical 30% overall increase or decrease in market prices of marketable
equity securities owned by the Wesco group on total recorded market value and,
after tax effect, on Wesco's shareholders' equity (amounts in thousands):
INCREASE DECREASE
---------- ----------
Market value of marketable equity securities --
As recorded............................................... $ 833,937 $ 833,937
Hypothetical.............................................. 1,084,118 583,756
Shareholders' equity --
As recorded............................................... 1,977,034 1,977,034
Hypothetical.............................................. 2,139,652 1,814,416
========== ==========
The 30% hypothetical changes in market values assumed in preparing the table do
not reflect what could be considered best- or worst-case scenarios. Indeed,
actual results could be much worse or better due both to the nature of equity
markets and the aforementioned concentration existing in Wesco's equity
investment portfolio.
Interest Rate Risk
Wesco's consolidated balance sheet at December 31, 2000 contained $840
million of securities with fixed maturities stated at fair value, up from $310
million one year earlier. Most of the increase was in mortgage-backed securities
($647 million at December 31, 2000 versus $228 million one year earlier).
As noted in the preceding section on equity price risk, Wesco prefers to
acquire entire businesses or invest in equity securities. When unable to do so,
it may invest in bonds or other interest-rate-sensitive investments. Wesco's
strategy is to acquire securities that are attractively priced in relation to
perceived credit risk. Wesco recognizes and accepts that losses may occur.
The fair values of Wesco's fixed-maturity investments fluctuate in response
to changes in market interest rates. Increases and decreases in prevailing
interest rates generally translate into decreases and increases in fair values.
Additionally, fair values of these investments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions.
25
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The following table shows the estimated effects as of December 31, 2000 of
hypothetical increases and decreases in interest rates on the fair value of
Wesco's fixed-maturity investments and, after tax effect, on Wesco's
shareholders' equity (dollar amounts in thousands):
FAIR VALUE OF SHAREHOLDERS'
INVESTMENTS EQUITY
------------- -------------
As recorded................................................. $839,683 $1,977,034
Hypothetical change in interest rate --
1 percentage point decrease............................... 845,362 1,980,725
1 percentage point increase............................... 821,564 1,965,257
2 percentage point increase............................... 788,864 1,944,002
3 percentage point increase............................... 756,308 1,922,840
======== ==========
The hypothetical changes in market interest rates assumed in preparing the table
do not reflect what could be deemed best- or worst-case scenarios. For example,
variations in market interest rates could produce significant changes in the
timing of repayments of mortgage-backed securities due to prepayment options
available to borrowers under the mortgages. For this and other reasons, actual
results might differ from those reflected in the table.
FORWARD-LOOKING STATEMENTS
Certain written or oral representations of management stated herein or
elsewhere constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as contrasted with statements
of historical fact. Forward-looking statements include statements which are
predictive in nature, or which depend upon or refer to future events or
conditions, or which include words such as expects, anticipates, intends, plans,
believes, estimates, may, or could, or which involve hypothetical events.
Forward-looking statements are based on information currently available and are
subject to various risks and uncertainties that could cause actual events or
results to differ materially from those characterized as being likely or
possible to occur.
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................................ 29
Consolidated balance sheet -- December 31, 2000 and 1999.... 30
Consolidated statement of income -- years ended December 31,
2000, 1999 and 1998....................................... 31
Consolidated statement of changes in shareholders'
equity -- years ended December 31, 2000, 1999 and 1998.... 32
Consolidated statement of cash flows -- years ended December
31, 2000, 1999 and 1998................................... 33
Notes to consolidated financial statements.................. 34 - 41
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
26
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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 I 42 - 43
31, 2000 and 1999, and years ended December 31, 2000, 1999
and 1998..................................................
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 2, 2001 (the "2001 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 2001 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 2001 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 2001 Proxy Statement is incorporated herein by reference.
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.
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,
2000. 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,
2000.
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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 21, 2001
Chairman of the Board (principal executive officer)
By: Robert H. Bird March 21, 2001
President (principal operating officer)
By: Jeffrey L. Jacobson March 21, 2001
Vice President and Chief Financial Officer
(principal financial and accounting officer)
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 21, 2001
Director
Carolyn H. Carlburg March 21, 2001
Director
Robert E. Denham March 21, 2001
Director
James N. Gamble March 21, 2001
Director
Charles T. Munger March 21, 2001
Director
David K. Robinson March 21, 2001
Director
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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, 2000 and 1999, 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, 2000.
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, 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 5, 2001
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WESCO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
------------------------
2000 1999
---------- ----------
ASSETS
Cash and cash equivalents................................... $ 153,810 $ 66,331
Investments:
Securities with fixed maturities.......................... 839,683 309,976
Marketable equity securities.............................. 833,937 2,214,883
Accounts receivable......................................... 38,444 8,685
Rental furniture............................................ 244,847 --
Property and equipment...................................... 53,833 11,414
Goodwill of acquired businesses............................. 260,037 28,556
Other assets................................................ 36,324 12,350
---------- ----------
$2,460,915 $2,652,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance losses and loss adjustment expenses............... $ 39,959 $ 33,642
Deferred furniture rental income and security deposits...... 27,669 --
Accounts payable and accrued expenses....................... 33,881 3,674
Notes payable............................................... 56,035 3,635
Income taxes payable, principally deferred.................. 305,175 707,345
Other liabilities........................................... 21,162 8,527
---------- ----------
483,881 756,823
---------- ----------
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...... 480,469 1,312,590
Retained earnings......................................... 1,466,126 552,343
---------- ----------
Total shareholders' equity........................ 1,977,034 1,895,372
---------- ----------
$2,460,915 $2,652,195
========== ==========
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,
----------------------------------
2000 1999 1998
---------- -------- --------
Revenues:
Sales and service revenues........................... $ 426,096 $ 64,571 $ 66,137
Insurance premiums earned............................ 23,783 17,655 15,923
Dividend and interest income......................... 59,759 49,679 40,543
Realized net securities gains........................ 1,311,270 11,186 51,706
Other................................................ 3,056 4,600 3,921
---------- -------- --------
1,823,964 147,691 178,230
---------- -------- --------
Costs and expenses:
Cost of products and services sold................... 146,649 50,728 51,527
Insurance losses, loss adjustment and underwriting
expenses.......................................... 19,392 7,366 8,174
Selling, general and administrative expenses......... 227,954 11,468 12,425
Interest expense..................................... 5,235 2,549 3,016
Goodwill amortization................................ 6,342 782 782
---------- -------- --------
405,572 72,893 75,924
---------- -------- --------
Income before income taxes............................. 1,418,392 74,798 102,306
Provision for income taxes............................. (495,922) (20,655) (30,503)
---------- -------- --------
Net income........................................ $ 922,470 $ 54,143 $ 71,803
========== ======== ========
Amounts per capital share based on 7,119,807 shares
outstanding throughout each year:
Net income........................................... $ 129.56 $ 7.60 $ 10.08
Cash dividends....................................... 1.22 1.18 1.14
========== ======== ========
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, 1997........ $7,120 $23,319 $1,290,939 $ 442,914 $1,764,292
Net income........................ 71,803 71,803
Increase in 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
Decrease in unrealized
appreciation 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
Net income........................ 922,470 922,470
Increase in unrealized
appreciation of investments, net
of income tax effect of
$11,248......................... 20,262 20,262 $ 90,349
=========
Reversal of unrealized
appreciation upon inclusion of
realized net gains in net
income.......................... (852,383) (852,383)
Cash dividends declared and
paid............................ (8,687) (8,687)
------ ------- ---------- ---------- ----------
Balance, December 31, 2000........ $7,120 $23,319 $ 480,469 $1,466,126 $1,977,034
====== ======= ========== ========== ==========
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,
------------------------------------
2000 1999 1998
----------- --------- --------
Cash flows from operating activities:
Net income......................................... $ 922,470 $ 54,143 $ 71,803
Adjustments to reconcile net income with cash flows
from operating activities --
Realized securities gains, net, before taxes.... (1,311,270) (11,186) (51,706)
Provision for depreciation and amortization,
net........................................... 47,203 1,995 2,068
Increase (decrease) in liabilities for insurance
losses and loss adjustment expenses........... 6,317 (3,809) (4,706)
Increase (decrease) in income taxes payable..... 20,398 (11,297) (8,852)
Proceeds from sales of rental furniture, less
gross profit included in net income........... 34,252 -- --
Other, net...................................... 9,124 (6,422) 4,576
----------- --------- --------
Net cash flows from operating activities... (271,506) 23,424 13,183
----------- --------- --------
Cash flows from investing activities:
Purchases of securities with fixed maturities...... (1,204,104) (413,659) (19,066)
Maturities and redemptions of securities with fixed
maturities...................................... 20,385 21,772 5,587
Sales of marketable equity securities.............. 1,396,997 58,900 177,266
Sales of securities with fixed maturities.......... 674,660 90,788 126,128
Acquisition of businesses, net of cash and cash
equivalents acquired............................ (394,523) -- --
Purchases of rental furniture...................... (103,693) -- --
Other, net......................................... (7,450) 3,473 14,365
----------- --------- --------
Net cash flows from investing activities... 382,272 (238,726) 304,280
----------- --------- --------
Cash flows from financing activities:
Repayments of notes, net........................ (14,600) (30,000) --
Payment of cash dividends....................... (8,687) (8,401) (8,116)
----------- --------- --------
Net cash flows from financing activities... (23,287) (38,401) (8,116)
----------- --------- --------
Increase (decrease) in cash and cash equivalents..... 87,479 (253,703) 309,347
Cash and cash equivalents -- beginning of year....... 66,331 320,034 10,687
----------- --------- --------
Cash and cash equivalents -- end of year............. $ 153,810 $ 66,331 $320,034
=========== ========= ========
Supplementary disclosures:
Interest paid during year.......................... $ 4,818 $ 2,953 $ 3,016
Income taxes paid, net, during year................ 491,288 31,952 56,695
=========== ========= ========
See accompanying notes to consolidated financial statements.
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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"), CORT Business Services Corporation
("CORT"), Precision Steel Warehouse, Inc. ("Precision Steel"), and MS Property
Company ("MS Property"). Intercompany balances and transactions have been
eliminated in the preparation of the consolidated statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") 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. In addition,
Wesco's management does not expect that changes in GAAP not yet required to be
reflected in financial statements under statements of the Financial Accounting
Standards Board will have any effect on its consolidated financial statements.
NOTE 2. ACQUISITIONS AND GOODWILL
In late February 2000, a wholly owned subsidiary of Wesco acquired all of
the outstanding common stock of CORT for approximately $386 million cash
pursuant to a tender offer and merger. The acquisition has been accounted for as
a purchase, with CORT's accounts included in the consolidated financial
statements as of the date of acquisition. CORT is the largest, and only
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 in
meeting their temporary office, residential or tradeshow furnishing needs and
who typically do not seek to own such furniture. In addition, CORT sells
previously rented furniture through company-owned clearance centers.
The following unaudited table presents pro forma consolidated operating
data for Wesco and its subsidiaries for each of the last two full years as if
CORT had been acquired on January 1, 1999. The pro forma data for those years
reflect (1) elimination of the estimated income that would have been earned if
investments liquidated in 2000 to fund most of the purchase had been liquidated
at the beginning of 1999, (2) inclusion of interest expense as if line-of-credit
borrowings arranged in 2000 to fund a portion of the purchase had been made at
the beginning of 1999, and (3) amortization of the
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excess of purchase price over fair value of the identified net assets acquired
("goodwill") beginning January 1, 1999.
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
----------- ---------
Sales and service revenues.................................. $ 476,322 $418,655
Total revenues.............................................. 1,871,690 479,790
Net income.................................................. 923,367 63,159
Per capital share......................................... 129.69 8.87
========== ========
At December 31, 2000, the unamortized balance of goodwill carried as an
asset on Wesco's consolidated balance sheet was $260,037, of which $232,263
related to CORT and the balance to KBS, acquired in 1996. Amortization is being
provided on a straight-line basis, principally over 40 years. 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.
NOTE 3. 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, trading, and, when
neither of those classifications is applicable, available-for-sale. Wesco
classifies all of its equity and fixed-maturity investments as
available-for-sale; they are carried at fair value, with unrealized gains and
losses, net of deemed applicable income taxes, reported as a separate component
of shareholders' equity.
The unrealized appreciation component declined in proportion to total
shareholders' equity from 69% at 1999 yearend to 24% at 2000 yearend, mainly due
to the realization of gains on sale of marketable equity securities. Because
unrealized appreciation is recorded using current, typically fluctuating market
quotations, the gains or losses ultimately realized upon sale of investments
could differ substantially from recorded unrealized appreciation.
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.
Following is a summary of securities with fixed maturities:
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
ESTIMATED FAIR ESTIMATED FAIR
AMORTIZED (CARRYING) AMORTIZED (CARRYING)
COST VALUE COST VALUE
--------- -------------- --------- --------------
Obligations of U. S. government and its
agencies................................. $188,194 $188,189 $ 84,060 $ 77,930
State and municipal bonds.................. 4,284 4,265 4,340 4,329
Other...................................... 17 19 -- --
-------- -------- -------- --------
192,495 192,473 88,400 82,259
Mortgage-backed securities................. 635,173 647,210 233,998 227,717
-------- -------- -------- --------
$827,668 $839,683 $322,398 $309,976
======== ======== ======== ========
Dollar amounts in thousands except for amounts per share
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At 2000 yearend, the estimated fair values of securities with fixed
maturities contained $12,069 of unrealized gains and $54 of unrealized losses,
compared with $27 of unrealized gains and $12,449 of unrealized losses at 1999
yearend.
Fixed-maturity investments other than mortgage-backed securities at 2000
yearend are expected to mature as follows:
AMORTIZED CARRYING
COST VALUE
--------- --------
In one year or less......................................... $188,896 $188,879
After one year through five years........................... 3,599 3,594
-------- --------
$192,495 $192,473
======== ========
Following is a summary of marketable equity securities (all common stocks):
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
QUOTED QUOTED
MARKET MARKET
NUMBER OF (CARRYING) (CARRYING)
SHARES COST VALUE COST VALUE
--------- -------- ---------- -------- ----------
Freddie Mac.................. $ -- $ -- $ 71,729 $1,355,400
The Coca-Cola Company........ 7,205,600 40,761 439,095 40,761 419,726
The Gillette Company......... 6,400,000 40,000 231,200 40,000 263,600
Other........................ 27,020 163,642 32,038 176,157
-------- -------- -------- ----------
$107,781 $833,937 $184,528 $2,214,883
======== ======== ======== ==========
The market values of marketable equity securities contained no unrealized
losses at 2000 or 1999 yearends.
Realized investment gains (losses), before income taxes, from sales and
redemptions of investments are summarized below for each of the past three
years:
2000 1999 1998
---------- ------- -------
Securities with fixed maturities --
Gross realized gains................................... $ 3,012 $ 7,504 $16,126
Gross realized losses.................................. (8,644) (2,714) --
Marketable equity securities --
Gross realized gains................................... 1,318,060 6,396 43,611
Gross realized losses.................................. (1,158) -- (8,031)
---------- ------- -------
$1,311,270 $11,186 $51,706
========== ======= =======
NOTE 4. FURNITURE RENTAL BUSINESS ACCOUNTING
Effective with the acquisition of CORT in February 2000 (see Note 2),
Wesco's principal source of sales and service revenues is from rental and sale
of furniture. Rentals are recognized as revenue in the month due; rentals
received in advance are deferred in the liability section of the consolidated
balance sheet. Related costs comprise the main element of cost of products sold
on the consolidated income statement and include depreciation expense, repairs
and maintenance, inventory losses and cost of furniture sold.
Rental furniture consists principally of residential and office furniture
which is available for rental or, if no longer up to rental standards, for sale.
It is carried on the consolidated balance sheet at cost ($258,677 at 2000
yearend), less accumulated depreciation ($13,830 at that date) calculated
primarily on a declining-balance basis over 3 to 5 years using estimated salvage
values of 25 to 40 percent of original cost.
Dollar amounts in thousands except for amounts per share
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NOTE 5. INSURANCE BUSINESS ACCOUNTING
Insurance premiums are generally recognized as earned revenues pro rata
over the term of each contract. Unearned insurance premiums of $17,006 and
$8,420 at December 31, 2000 and 1999 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.
Following is a summary of liabilities for unpaid losses and loss adjustment
expenses for each of the past three years:
2000 1999 1998
------- ------- -------
Balance at beginning of year................................ $33,642 $36,731 $41,437
Less ceded liabilities...................................... -- -- (1,340)
------- ------- -------
Net balance at beginning of year............................ 33,642 36,731 40,097
------- ------- -------
Incurred losses recorded during year --
For current year.......................................... 16,195 8,556 11,604
For all prior years*...................................... (4,099) (5,819) (7,646)
------- ------- -------
Total incurred losses............................. 12,096 2,737 3,958
------- ------- -------
Payments made during year --
For current year.......................................... 2,421 2,175 4,673
For all prior years....................................... 3,358 3,651 2,651
------- ------- -------
Total payments.................................... 5,779 5,826 7,324
------- ------- -------
Balance at end of year...................................... $39,959 $33,642 $36,731
======= ======= =======
- ---------------
* Primarily represents adjustments of estimated losses.
Payment of dividends by insurance subsidiaries is restricted by insurance
statutes and regulations. In 2001, without prior regulatory approval, Wesco can
receive dividends from its insurance subsidiaries up to approximately $117,250.
The combined shareholders' equity of Wesco's insurance subsidiaries at
December 31, 2000 determined pursuant to regulatory accounting rules was
approximately $2,110,000, approximately $220,000 higher than shareholders'
equity determined in accordance with GAAP. The difference represents mainly the
deduction of deferred income taxes associated with unrealized appreciation of
investments in calculating the GAAP figure. Under new regulatory rules that
became effective January 1, 2001, insurance companies will be required, among
other things, to recognize deferred income tax liabilities; as a result, the
regulatory-basis combined shareholders' equity of Wesco's insurance subsidiaries
is expected to approximate their shareholders' equity determined under GAAP.
Dollar amounts in thousands except for amounts per share
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NOTE 6. NOTES PAYABLE
Following is a list of notes payable, at yearend:
DECEMBER 31,
-----------------
2000 1999
------- ------
Revolving line of credit.................................... $52,400 $ --
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
------- ------
$56,035 $3,635
======= ======
The line of credit, used in the furniture rental business, totals $150,000
and is unsecured. The weighted average rate of interest on amounts outstanding
at December 31, 2000 was 7.2%.
Estimated fair market values of the foregoing notes payable at December 31,
2000 and December 31, 1999 were approximately $56,132 and $3,725. These figures
were calculated using discounted cash flow computations based upon estimates as
to interest rates prevailing on those dates for comparable borrowings.
NOTE 7. INCOME TAXES
Following is a breakdown of income taxes payable at 2000 and 1999 yearends:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Deferred tax liabilities, relating to --
Appreciation of investments, principally unrealized....... $257,789 $705,343
Other items............................................... 40,617 5,622
-------- --------
298,406 710,965
Deferred tax assets......................................... (19,027) (5,429)
-------- --------
Net deferred tax liabilities.............................. 279,379 705,536
Taxes currently payable..................................... 25,796 1,809
-------- --------
Income taxes payable........................................ $305,175 $707,345
======== ========
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 GAAP, 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:
2000 1999 1998
-------- ------- --------
Federal................................................... $493,859 $20,316 $ 30,148
State..................................................... 2,063 339 355
-------- ------- --------
Provision for income taxes.............................. $495,922 $20,655 $ 30,503
======== ======= ========
Current................................................... $495,145 $23,818 $ 65,039
Deferred provision (benefit).............................. 777 (3,163) (34,536)
-------- ------- --------
Provision for income taxes.............................. $495,922 $20,655 $ 30,503
======== ======= ========
Dollar amounts in thousands except for amounts per share
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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:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate......................... 35.0% 35.0% 35.0%
Increase (decrease) resulting from --
Dividends received deduction............................ (0.3) (8.1) (6.3)
Exempt interest income.................................. (0.0) (0.1) (0.2)
State income taxes, less federal tax benefit............ 0.1 0.3 0.3
Other differences, net.................................. 0.2 0.5 1.0
-------- ------- --------
Effective income tax provision rate....................... 35.0% 27.6% 29.8%
======== ======= ========
Wesco and its subsidiaries join with other Berkshire entities 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 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 8. QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information for 2000 and 1999 follows:
QUARTER ENDED
------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
------------ ------------- -------- ---------
Operating revenues...................... $144,631 $146,840 $139,880 $ 81,343
Realized net securities gains........... 44,136 653,407 430,322 183,405
-------- -------- -------- --------
Total revenues.......................... $188,767 $800,247 $570,202 $264,748
======== ======== ======== ========
Net income excluding securities gains... $ 19,803 $ 18,413 $ 18,371 $ 13,500
Per capital share..................... 2.78 2.58 2.58 1.90
Realized net securities gains, less
related income taxes.................. 28,688 424,773 279,710 119,212
Per capital share..................... 4.03 59.66 39.29 16.74
-------- -------- -------- --------
Net income.............................. $ 48,491 $443,186 $298,081 $132,712
Per capital share..................... 6.81 62.24 41.87 18.64
======== ======== ======== ========
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- -------- ---------
Operating revenues...................... $ 35,966 $ 34,410 $ 32,937 $ 33,192
Realized net securities gains........... 11,186 -- -- --
-------- -------- -------- --------
Total revenues.......................... $ 47,152 $ 34,410 $ 32,937 $ 33,192
======== ======== ======== ========
Net income excluding securities gains... $ 14,160 $ 11,026 $ 11,065 $ 10,621
Per capital share..................... 1.99 1.54 1.56 1.49
Realized net securities gains, less
related income taxes.................. 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
======== ======== ======== ========
Dollar amounts in thousands except for amounts per share
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NOTE 9. BUSINESS SEGMENT DATA
Consolidated financial information for each of the past three years is
presented in the table on the next page. It is broken down as to Wesco's three
business segments, including the furniture rental segment, which was created in
February 2000 upon the acquisition of CORT (see Note 2).
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 reinsurance arrangements with wholly owned
insurance subsidiaries of Berkshire with respect to specific reinsurance
contracts of theirs 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 mainly 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 before
payment of related claims and expenses) as well as cash invested or retained in
the business by its owners.
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.
Wesco's consolidated realized net securities gains -- most of which have
resulted from sale of investments held by its insurance subsidiaries -- and
goodwill of acquired businesses and related amortization, are shown separately
as nonsegment items, consistent with the way Wesco's management evaluates the
performance of its operating segments. Other items considered unrelated to
Wesco's three business segments include principally (1) investments other than
those of Wes-FIC and KBS, together with related dividend and interest income,
(2) commercial real estate, together with related revenues and expenses, (3)
real estate obtained by foreclosure by a former savings and loan subsidiary,
together with related revenues and expenses, (4) the assets, revenues and
expenses of the parent company, and (5) related income taxes.
Dollar amounts in thousands except for amounts per share
40
33
2000 1999 1998
---------- ---------- ----------
Insurance segment:
Premiums earned.................................. $ 23,783 $ 17,655 $ 15,923
Dividend and interest income..................... 59,241 49,098 38,509
Provision for income taxes....................... (18,114) (14,995) (10,822)
Net income....................................... 45,518 44,392 35,436
Depreciation and amortization other than of
discounts and premiums of investments......... 44 826 887
Capital expenditures............................. 39 79 29
Assets at yearend................................ 1,820,244 2,611,194 3,128,000
========== ========== ==========
Furniture rental segment:
Revenues......................................... $ 361,055 $ -- $ --
Provision for income taxes....................... (18,160) -- --
Net income....................................... 28,988 -- --
Depreciation and amortization other than of
discounts and premiums of investments......... 48,657 -- --
Capital expenditures............................. 6,967 -- --
Assets at yearend................................ 325,048 -- --
========== ========== ==========
Industrial segment:
Sales, service and other revenues................ $ 65,119 $ 64,686 $ 66,197
Provision for income taxes....................... (907) (1,677) (2,118)
Net income....................................... 1,281 2,532 3,154
Depreciation and amortization.................... 780 797 852
Capital expenditures............................. 303 214 274
Assets at yearend................................ 22,537 23,252 22,965
========== ========== ==========
Goodwill of acquired businesses:
Amortization, net of income taxes................ $ (5,867) $ (782) $ (782)
Assets at yearend................................ 260,037 28,556 29,338
========== ========== ==========
Realized net securities gains:
Before taxes (included in revenues).............. $1,311,270 $ 11,186 $ 51,706
After taxes (included in net income)............. 852,383 7,271 33,609
========== ========== ==========
Other items unrelated to business segments:
Dividend and interest income..................... $ 518 $ 1,145 $ 2,132
Other revenues................................... 2,978 4,512 3,886
Income tax (provision) benefit................... (329) (69) 536
Net income....................................... 167 730 386
Depreciation and amortization.................... 367 372 394
Capital expenditures............................. 197 112 1
Assets at yearend................................ 33,049 26,013 49,660
========== ========== ==========
Reconciliations:
Total revenues set forth above................... $1,823,964 $ 148,282 $ 178,353
Less intersegment interest....................... -- (591) (123)
---------- ---------- ----------
Total consolidated revenues.............. $1,823,964 $ 147,691 $ 178,230
========== ========== ==========
Total assets set forth above..................... $2,460,915 $2,689,015 $3,229,963
Less intersegment advances....................... -- (36,820) (1,557)
---------- ---------- ----------
Total consolidated assets................ $2,460,915 $2,652,195 $3,228,406
========== ========== ==========
Dollar amounts in thousands except for amounts per share
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WESCO FINANCIAL CORPORATION
SCHEDULE I -- CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Assets:
Cash and cash equivalents................................. $ 26 $ 23
Investment in subsidiaries, at cost plus equity in
subsidiaries' undistributed earnings and unrealized
appreciation:
Wesco Holdings Midwest, Inc. and its wholly owned
subsidiaries,
Wes-FIC, KBS, CORT and Precision Steel............... 2,047,140 1,954,893
MS Property............................................ 15,933 15,600
Other assets.............................................. 23 14
---------- ----------
$2,063,122 $1,970,530
========== ==========
Liabilities and shareholders' equity:
Advances from subsidiaries................................ $ 83,140 $ 72,185
Notes payable............................................. 1,035 1,035
Income taxes payable, principally deferred................ 1,888 1,912
Other liabilities......................................... 25 26
---------- ----------
Total liabilities................................. 86,088 75,158
Shareholders' equity (see consolidated balance sheet and
statement of changes in shareholders' equity).......... 1,977,034 1,895,372
---------- ----------
$2,063,122 $1,970,530
========== ==========
STATEMENT OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Revenues:
Dividend and interest income............................. $ 1 $ 675 $ 1,687
Other.................................................... -- 46 40
-------- ------- -------
1 721 1,727
-------- ------- -------
Expenses:
Interest................................................. 2,868 2,939 2,937
General and administrative............................... 483 437 475
-------- ------- -------
3,351 3,376 3,412
-------- ------- -------
Loss before items shown below.............................. (3,350) (2,655) (1,685)
Income tax benefit......................................... 1,119 1,247 1,100
Equity in undistributed earnings of subsidiaries........... 924,701 55,551 72,388
-------- ------- -------
Net income....................................... $922,470 $54,143 $71,803
======== ======= =======
See notes to accompanying consolidated financial statements
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35
WESCO FINANCIAL CORPORATION
SCHEDULE I -- CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
Cash flows from operating activities:
Net income........................................... $ 922,470 $ 54,143 $ 71,803
Adjustments to reconcile net income with cash flows
from operating activities --
Decrease in income taxes payable currently........ (411) (347) (951)
Equity in undistributed earnings of
subsidiaries.................................... (924,701) (55,551) (72,388)
Other, net........................................ -- (302) 58
--------- -------- --------
Net cash flows from operating activities..... (2,642) (2,057) (1,478)
--------- -------- --------
Cash flows from investing activities:
Principal collections on loans, and other items...... 377 475 75
--------- -------- --------
Net cash flows from investing activities..... 377 475 75
--------- -------- --------
Cash flows from financing activities:
Advances from subsidiaries, net...................... 10,955 39,983 9,529
Repayment of Notes due November 1, 1999.............. -- (30,000) --
Payment of cash dividends............................ (8,687) (8,401) (8,116)
--------- -------- --------
Net cash flows from financing activities..... 2,268 1,582 1,413
--------- -------- --------
Increase in cash and cash equivalents.................. 3 -- 10
Cash and cash equivalents -- beginning of year......... 23 23 13
--------- -------- --------
Cash and cash equivalents -- end of year............... $ 26 $ 23 $ 23
========= ======== ========
Supplementary disclosures:
Noncash investing activities --
Investments contributed to subsidiary............. $ -- $ 28,895 $ 54,627
========= ======== ========
See notes to accompanying consolidated financial statements
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36
44
37
WESCO FINANCIAL CORPORATION
COMMISSION FILE NUMBER 1-4720
EXHIBITS TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
INCORPORATED
DESCRIPTION FILED BY REFERENCE
----------- ----- ------------
3a. Articles of Incorporation and By-Laws of Wesco Financial X
Corporation
21. List of Subsidiaries X