-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ep2KqyIztl6f4JIVe8tqr/OasQipgQbqcqE/7hWzomEttUBc6myoLDAZ2w+/rWa0 kpc8b7gQLw72V8BeGabuKg== 0000950150-00-000249.txt : 20000331 0000950150-00-000249.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950150-00-000249 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESCO FINANCIAL CORP CENTRAL INDEX KEY: 0000105729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 952109453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04720 FILM NUMBER: 586952 BUSINESS ADDRESS: STREET 1: 301 EAST COLORADO BLVD STREET 2: SUITE 300 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8184492345 MAIL ADDRESS: STREET 1: 301 EAST COLORADO BLVD STREET 2: SUITE 300 CITY: PASADENA STATE: CA ZIP: 91101-1954 10-K 1 FORM 10-K YEAR ENDED DECEMBER 31, 1999 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from - ---------------to - --------------- Commission file number 1-4720 WESCO FINANCIAL CORPORATION (Exact name of Registrant as Specified in its Charter) Delaware 95-2109453 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 301 East Colorado Boulevard, Suite 300, 91101-1901 Pasadena, California (Zip Code) (Address of Principal Executive Offices)
(626) 585-6700 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Capital Stock, $1 par value American Stock Exchange and Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock of the registrant held by non-affiliates of the registrant as of March 20, 2000 was: $320,594,000. The number of shares outstanding of the registrant's Capital Stock as of March 20, 2000 was: 7,119,807. DOCUMENTS INCORPORATED BY REFERENCE
Title of Document Parts of Form 10-K Proxy Statement for 2000 Part III, Items 10, 11, 12 and 13 Annual Meeting of Shareholders
8 2 PART I ITEM 1. BUSINESS GENERAL Wesco Financial Corporation ("Wesco") was incorporated in Delaware on March 19, 1959. Wesco, from 1994 through yearend 1999, engaged in two principal businesses through wholly owned subsidiaries: (1) the insurance business, through Wesco-Financial Insurance Company ("Wes-FIC"), which was incorporated in 1985 and engages in the property and casualty insurance business, and The Kansas Bankers Surety Company ("KBS"), which was incorporated in 1909, was purchased by Wes-FIC in mid-1996 and provides specialized insurance coverages for banks; and (2) the steel service center business, through Precision Steel Warehouse, Inc. ("Precision Steel"), which was begun in 1940 and acquired by Wesco in 1979. In February 2000, Wesco purchased CORT Business Services Corporation ("CORT"), the leading national provider of rental furniture, accessories and related services in the "rent-to-rent" segment of the furniture industry. It rents high quality furniture to corporate and individual customers who desire flexibility to meet their temporary office, residential or tradeshow furnishing needs and who typically do not seek to own such furniture. In addition, CORT sells previously rented furniture through company-owned clearance centers. CORT's national network includes 118 showrooms, 87 clearance centers and 75 warehouses in 34 states and the District of Columbia as well as three web sites (cort1.com, relocationcentral.com and corttradeshow.com). Wesco's operations also include, through MS Property Company ("MS Property"), (1) the ownership and management of commercial real estate transferred to MS Property by Wesco, and (2) the development and liquidation of foreclosed real estate transferred to MS Property by a former savings and loan subsidiary of Wesco. The transfers were made in late 1993, when MS Property, a wholly owned subsidiary of Wesco, began its operations. Since 1973, Wesco has been 80.1% owned by Blue Chip Stamps ("Blue Chip"), a wholly owned subsidiary of Berkshire Hathaway Inc. ("Berkshire"). Wesco and its subsidiaries are thus controlled by Blue Chip and Berkshire. All of these companies may also be deemed to be controlled by Warren E. Buffett, who is Berkshire's chairman and chief executive officer and owner of approximately 35% of its stock. Charles T. Munger, the chairman of Wesco, is also vice chairman of Berkshire, and consults with Mr. Buffett with respect to Wesco's investment decisions and major capital allocations. Although Mr. Buffett has no active participation in Wesco's management, he is president and a director of Wesco Holdings Midwest, Inc. ("WHMI"), a wholly owned subsidiary of Wesco, and a director of Wes-FIC, Precision Steel, and CORT, which are wholly owned subsidiaries of WHMI. Wesco's activities fall* into two business segments -- insurance and industrial. The insurance segment consists of the operations of Wes-FIC and KBS. The industrial segment comprises Precision Steel's steel service center operations. Wesco is also engaged in several relatively insignificant activities not identified with either business segment; these include (1) investment activity unrelated to the insurance segment, (2) management of owned commercial real estate, (3) development and liquidation of foreclosed real estate formerly owned by a savings and loan subsidiary, and (4) parent company operations. INSURANCE SEGMENT Wes-FIC was incorporated in 1985 to engage in the property and casualty insurance and reinsurance business. Its insurance operations are managed by National Indemnity Company ("NICO"), headquartered in Omaha, Nebraska. To simplify discussion, the term "Berkshire Insurance Group," as used in this report, refers to NICO, General Reinsurance Corporation and certain * In preparing this 1999 report, conditions that may exist after the acquisition of CORT in February 2000 have generally been ignored. Thus, statements in the present tense are made from the perspective of yearend 1999. 9 3 other wholly owned insurance subsidiaries of Berkshire, individually or collectively, although Berkshire also includes in its insurance group the insurance subsidiaries 80.1%-owned through Berkshire's ownership of Wesco. Wes-FIC's high net worth as of 1999 yearend -- $1.9 billion computed under generally accepted accounting principles and $2.6 billion under regulatory rules -- has enabled Berkshire to offer Wes-FIC the opportunity to participate, from time to time, in sub-contracts with several of its wholly owned insurance subsidiaries for the reinsurance of property and casualty risks of unaffiliated property and casualty insurers. These arrangements have included contracts for "super-catastrophe reinsurance," which subjects the reinsurer to especially large amounts of losses from mega-catastrophes such as hurricanes or earthquakes. The super-catastrophe policies have indemnified the ceding companies for all or part of covered losses in excess of large, specified retentions, and have been subject to aggregate limits; reinsurance of this type is referred to as "excess-of-loss" reinsurance (as contrasted with "quota share" reinsurance, under which a ceding company is indemnified in proportion to its own loss). Wesco's and Wes-FIC's boards of directors have authorized automatic acceptance of retrocessions of reinsurance offered by the Berkshire Insurance Group provided the following guidelines and limitations are complied with: (1) in order not to delay the acceptance process, the retrocession is to be accepted without delay in writing in Nebraska by agents of Wes-FIC who are salaried employees of the Berkshire Insurance Group; (2) the Berkshire Insurance Group is to receive a ceding commission of 3% of premiums, probably less than the Berkshire Insurance Group could get in the marketplace; (3) Wes-FIC is to assume 20% or less of the risk (before taking into account effects of the ceding commission); (4) the Berkshire Insurance Group must retain at least 80% of the identical risk (again, before taking into account effects of the ceding commission); and (5) the aggregate premiums from this type of business in any twelve-month period cannot exceed 10% of Wes-FIC's net worth. Following is a summary of the more significant reinsurance agreements that have been made between Wes-FIC and the Berkshire Insurance Group: - A quota share arrangement entered into in 1985 whereby Wes-FIC effectively reinsured -- through the Berkshire Insurance Group, as intermediary-without-profit -- 2% of the entire book of insurance business of a major property and casualty insurer written during a four-year coverage period that expired in 1989. Wes-FIC will remain liable for its share of remaining unpaid losses and loss adjustment expenses, an estimate of which is included in insurance liabilities on Wesco's consolidated balance sheet, and will continue to invest the related "float" (funds set aside and invested pending payment of claims) until all liabilities are settled, perhaps many years hence. - During 1992 and 1993, a 50% quota share agreement related to certain personal lines business written by another large U.S.-based property and casualty insurer. - Several subcontracts for super-catastrophe reinsurance beginning in 1994, including participations to the extent of 3% in two super-catastrophe reinsurance policies covering hurricane risks in Florida: (1) a 12-month policy effective June 1, 1996; and (2) a three-year policy effective January 1, 1997. - Participation to the extent of 10% in a catastrophic excess-of-loss contract effective for the 1999 calendar year covering property risks of a major international reinsurer. Effective January 1, 2000, Wes-FIC entered into a three-year arrangement through NICO, as intermediary without profit, for a 3 1/3% participation in certain property and casualty risk exposure of a large, unaffiliated insurance group. Premium volume of approximately $30 million is anticipated in the first year under this arrangement. Except as to volume, terms of this participation are identical to those of another agreement between the same insurance group and another member of the Berkshire Insurance Group. Management believes that an insurer in the super-catastrophe reinsurance business must maintain large net worth in relation to annual premiums in order to remain solvent when called upon to 10 4 pay claims when a super catastrophe occurs. In this regard, the Berkshire Insurance Group and Wes-FIC are believed to operate differently from other reinsurers in that risks they write are kept in house, while other reinsurers may retrocede portions of the risks to other reinsurers, thereby assuming contingent risks that such reinsurers will not remain adequately solvent if called upon to pay off on risks reinsured. Wes-FIC, in Nebraska, Utah and Iowa, is also licensed to write "direct" insurance business (as distinguished from reinsurance), but the volume written to date has been very small. In July 1996, Wes-FIC purchased KBS for approximately $80 million in cash. KBS provides specialized insurance coverage to more than 20% of the banks in the United States, mostly small and medium-size banks in the Midwest. It is regulated by insurance departments in 25 states and by the Department of the Treasury. Its product line for financial institutions includes policies for crime insurance, check kiting fraud indemnification, internet banking catastrophe bonds, directors and officers liability, bank employment practices, and professional errors and omissions indemnity, as well as deposit guaranty bonds, which insure deposits in excess of federal deposit insurance limits. KBS, which for many years had minimized its risks arising from large losses by ceding almost half of its business to third party reinsurers, restructured its reinsurance program effective January 1, 1998, with the result that in 1999 and 1998 only about 5% and 6% of its gross insurance business was ceded to third party reinsurers (including approximately half of those percentages to a wholly owned Berkshire subsidiary) versus about 42% ceded to unaffiliated, third party reinsurers in 1997. Wesco's management anticipates that KBS's reinsurance restructuring will improve operating results over the long term in return for greater short-term volatility. KBS markets its products in some states by exclusive, commissioned agents, and in others by salaried, traveling employees. Inasmuch as the number of small midwestern banks is declining as banks are merging, KBS relies for growth on an extraordinary level of service provided by its dedicated employees and agents, and on new products such as deposit guaranty bonds, which were introduced in 1993 and currently account for approximately 23% of premiums written. In recent years, financial failures in the insurance industry have received considerable attention from news media, regulatory authorities, rating agencies and Congress. As one result, industry participants and the public have been made more aware of the benefits derived from dealing with insurers whose financial resources support their promises with significant margins of safety against adversity. In this respect Wes-FIC and KBS are competitively well positioned, inasmuch as their net premiums written for calendar 1999 amounted to 0.7% of their combined statutory surplus, compared to an industry average of about 90% based on figures reported for 1998. Standard & Poor's Corporation, in recognition of Wes-FIC's strong competitive position as a member of Berkshire's family of wholly and substantially owned insurance subsidiaries and its unusual capital strength, has assigned its highest rating, AAA, to Wes-FIC's claims-paying ability. This rating recognizes the commitment of Wes-FIC's management to a disciplined approach to underwriting and reserving, as well as Wes-FIC's extremely strong capital base. Wesco's and Wes-FIC's boards are hopeful, but have no assurance, that the businesses of Wes-FIC and KBS will grow. They welcome the opportunity to participate in additional attractive super-catastrophe reinsurance retrocessions and other insurance arrangements, as well as acquisitions of other insurance companies. Insurance companies are subject to regulation by the departments of insurance of the various states in which they write policies as well as the states in which they are domiciled, and, if applicable, as is the case with KBS, by the Department of the Treasury. Regulations relate to, among other things, capital requirements, shareholder and policyholder dividend restrictions, reporting requirements, annual audits by independent accountants, periodic regulatory examinations, and limitations on the size and types of investments that can be made. Wes-FIC, which is operated by NICO, has no employees of its own. KBS has 16 employees. 11 5 INDUSTRIAL SEGMENT Precision Steel, acquired in 1979 for approximately $15 million, and a subsidiary operate steel service centers at or near Chicago, Illinois and Charlotte, North Carolina. The service centers buy low carbon sheet and strip steel, coated metals, spring steel, stainless steel, brass, phosphor bronze, aluminum and other metals, cut these metals to order, and sell them to a wide variety of customers. The service center business is highly competitive. Precision Steel's annual sales volume of approximately 35 thousand tons compares with the steel service industry's annual volume of over 24 million tons. Precision Steel competes not only with other service centers but also with mills which supply metal to the service centers. Competition exists in the areas of price, quality, availability of products and speed of delivery. Because it is willing to sell in relatively small quantities, Precision Steel has been able to compete in geographic areas distant from its service center facilities. Competitive pressure is intensified by imports and by a tendency of domestic manufacturers to use less costly materials in making parts. Precision Brand Products, Inc. ("Precision Brand"), a wholly owned subsidiary of Precision Steel, also located in the Chicago area, manufactures shim stock and other toolroom specialty items, as well as hose and muffler clamps, and sells them under its own brand names nationwide, generally through industrial distributors. This business is highly competitive. Precision Brand's share of the toolroom specialty products market is believed to approximate .5%; statistics are not available with respect to its share of the market for hose and muffler clamps. Steel service raw materials are obtained principally from major domestic steel mills, and their availability is considered good. Precision Steel's service centers maintain extensive inventories in order to meet customer demand for prompt deliveries. Typically, an order is filled and the processed metals delivered to the customer within two weeks. Precision Brand normally maintains inventories adequate to allow for off-the-shelf service to customers within 24 hours. The industrial segment businesses are subject to economic cycles. These businesses are not dependent on a few large customers. The backlog of steel service orders increased to approximately $7.1 million at December 31, 1999 from $6.5 million at December 31, 1998. Approximately 240 full-time employees are engaged in the industrial segment businesses, about 40% of whom are members of unions. Management considers labor relations to be good. ACTIVITIES NOT IDENTIFIED WITH A BUSINESS SEGMENT Certain of Wesco's activities are not identified with any business segment. These extraneous, relatively insignificant operations include (1) investment activity unrelated to the insurance segment, (2) management of commercial real estate property in Pasadena, California, (3) development and liquidation, now virtually completed, of foreclosed real estate previously owned by a savings and loan subsidiary, and (4) parent company activities. Wesco, while it seeks suitable businesses to acquire and explores ways to expand its existing operations, also, through its insurance subsidiaries, invests in marketable securities of unaffiliated companies and in securities with fixed maturities. (See Note 2 to the accompanying consolidated financial statements for summaries of investments, and Note 8 for information as to the acquisition of CORT in February 2000.) Seven full-time employees are engaged in the activities of Wesco and MS Property. ITEM 2. PROPERTIES MS Property owns a business block situated between the city hall and a troubled indoor shopping mall in downtown Pasadena, California. The block's principal improvements are a nine-story office building that was constructed in 1964 and has approximately 125,000 square feet of net rentable area, and a multistory garage with space for 425 automobiles. Of the 125,000 square feet of space in the 12 6 office building, approximately 5,000 square feet are used by MS Property or leased to Blue Chip or Wesco. Most of the remaining space is leased to outside parties, including California Federal Bank, the ground floor tenant, law firms and others, under agreements expiring at dates extending to 2008. In addition to the office building and garage, the business block has contained a row of small, blighted commercial retail buildings; MS Property is in process of demolishing this portion of the block and is exploring options for redeveloping it, together with a parcel of land it owns in the next block which it has been using as a 100-car parking lot. MS Property also owns a small amount of real estate in Southern California acquired by Wesco's former savings and loan subsidiary through foreclosure. This consists of several buildings that are leased to various small businesses in a small shopping center as well as a single-family residence. Wes-FIC's place of business is the Omaha, Nebraska headquarters office of NICO. KBS leases 5,100 square feet of office space in a multistory office building in Topeka, Kansas under a lease that expires in 2002. KBS has an option to renew the lease for an additional five-year term. Precision Steel and its subsidiaries own three buildings housing their plant and office facilities, having usable area approximately as follows: 138,000 square feet in Franklin Park, Illinois; 63,000 square feet in Charlotte, North Carolina; and 59,000 square feet in Downers Grove, Illinois. ITEM 3. LEGAL PROCEEDINGS Wesco and its subsidiaries are not involved in any legal proceedings that are expected to result in material loss. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. Wesco's capital stock is traded on the American Stock Exchange and the Pacific Stock Exchange. The following table sets forth quarterly ranges of composite prices for American Stock Exchange trading of Wesco shares for 1999 and 1998, based on data reported by the American Stock Exchange, as well as cash dividends paid by Wesco on each outstanding share:
1999 1998 ----------------------- ------------------------ SALES PRICE SALES PRICE ----------- DIVIDENDS ------------ DIVIDENDS QUARTER ENDED HIGH LOW PAID HIGH LOW PAID ------------- ---- ---- --------- ---- ---- --------- March 31................................ $354 $322 0$.295.. $377 $285 $0.285 June 30................................. 339 305 0.295.. 395 346 0.285 September 30............................ 323 260 1/4 0.295.. 392 280 0.285 December 31............................. 290 241 1/2 0.295.. 365 290 0.285 ------ ------ $1.180 $1.140 ====== ======
There were approximately 700 shareholders of record of Wesco's capital stock as of the close of business on March 23, 2000. It is estimated that approximately 5,000 additional Wesco shareholders held shares of Wesco's capital stock in street name at that date. 13 7 ITEM 6. SELECTED FINANCIAL DATA Set forth below and on the following page are selected consolidated financial data for Wesco and its subsidiaries. For additional financial information, attention is directed to Wesco's audited 1999 consolidated financial statements appearing elsewhere in this report. (Amounts are in thousands except for amounts per share.)
DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Assets: Cash and cash equivalents.... $ 66,331 $ 320,034 $ 10,687 $ 23,039 $ 87,981 Investments -- Securities with fixed maturities.............. 309,976 66,619 279,697 176,885 119,575 Marketable equity securities.............. 2,214,883 2,778,595 2,224,848 1,533,009 1,102,221 Real estate held for sale.... 908 2,327 5,240 15,831 19,021 Property and equipment....... 11,414 12,193 13,229 13,297 13,967 Goodwill of acquired business......... 28,556 29,338 30,121 30,903 -- Other assets................. 20,127 19,300 24,290 25,441 22,962 ---------- ---------- ---------- ---------- ---------- Total assets......... $2,652,195 $3,228,406 $2,588,112 $1,818,405 $1,365,727 ========== ========== ========== ========== ========== Liabilities: Insurance losses and loss adjustment expenses....... $ 33,642 $ 36,731 $ 41,437 $ 45,491 $ 34,195 Notes payable................ 3,635 33,635 33,635 37,162 37,369 Income taxes payable, principally deferred...... 707,345 920,035 733,488 468,370 324,341 Other liabilities............ 12,201 14,249 15,260 16,367 12,193 ---------- ---------- ---------- ---------- ---------- Total liabilities.... $ 756,823 $1,004,650 $ 823,820 $ 567,390 $ 408,098 ========== ========== ========== ========== ========== Shareholders' equity: Capital stock and surplus.... $ 30,439 $ 30,439 $ 30,439 $ 30,439 $ 30,439 Unrealized appreciation of investments, net of taxes..................... 1,312,590 1,686,716 1,290,939 871,640 601,326 Retained earnings............ 552,343 506,601 442,914 348,936 325,864 ---------- ---------- ---------- ---------- ---------- Total shareholders' equity............. $1,895,372 $2,223,756 $1,764,292 $1,251,015 $ 957,629 Per capital share.... 266.21 312.33 247.80 175.71 134.50 ========== ========== ========== ========== ==========
14 8
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Revenues: Sales and service revenues............ $ 64,571 $ 66,137 $ 67,557 $ 63,654 $ 62,271 Insurance premiums earned............. 17,655 15,923 11,507 10,060 9,294 Dividend and interest income.......... 49,679 40,543 36,552 33,313 30,273 Realized gains (losses), net, on securities and foreclosed property........................... 12,819 52,672 102,348 (152) 7,428 Other................................. 982 904 1,087 1,144 1,791 -------- -------- -------- -------- -------- 145,706 176,179 219,051 108,019 111,057 -------- -------- -------- -------- -------- Costs and expenses: Cost of products and services sold.... 50,728 51,527 52,710 50,054 50,019 Insurance losses, loss adjustment and underwriting expenses.............. 7,366 8,174 860 4,264 1,501 Selling, general and administrative... 10,265 11,156 9,393 10,849 11,142 Interest on notes payable............. 2,549 3,016 3,320 3,352 3,371 -------- -------- -------- -------- -------- 70,908 73,873 66,283 68,519 66,033 -------- -------- -------- -------- -------- Income before income taxes.............. 74,798 102,306 152,768 39,500 45,024 Provision for income taxes.............. (20,655) (30,503) (50,959) (8,881) (10,483) -------- -------- -------- -------- -------- Net income.............................. $ 54,143 $ 71,803 $101,809 $ 30,619 $ 34,541 ======== ======== ======== ======== ======== Amounts per capital share: Net income............................ $ 7.60 $ 10.08 $ 14.30 $ 4.30 $ 4.85 Cash dividends........................ 1.18 1.14 1.10 1.06 1.02 ======== ======== ======== ======== ========
15 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In reviewing this item, attention is directed to Item 6, Selected Financial Data, and Item 1, Business. FINANCIAL CONDITION Wesco's shareholders' equity at December 31, 1999 was $1.9 billion or $266.21 per share, down $.3 billion or $46.12 per share for the year. This decrease was due to a decline in appreciation in market value of investments, which under accounting convention is credited directly to shareholders' equity, net of taxes, without being reflected in earnings. Because unrealized appreciation is recorded using current market quotations, which are subject to fluctuation, the net gains ultimately realized could differ substantially from recorded unrealized appreciation, which constituted 69% of shareholders' equity at December 31, 1999, compared to 76% at December 31, 1998 and 63% at December 31, 1995. Over 93% of the Wesco group's unrealized appreciation of securities at December 31, 1999 was concentrated in three common stocks (see Note 2 to the consolidated financial statements appearing elsewhere herein). However, as demonstrated in the section on market risk beginning on page 20, even if all appreciation of the Wesco group is ignored, there has been a steady increase in shareholders' equity over the past five years. Wesco's management believes the group has adequate liquidity and capital resources, including the ability to borrow, to minimize the impact of a downturn in its fortunes. Borrowings from banks and others have been available to Wesco and its subsidiaries under attractive terms for a number of years. Wesco's $30 million of Notes, prior to their redemption at maturity on November 1, 1999, enjoyed Standard & Poor Corporation's highest rating, AAA, as does Wes-FIC's claims-paying ability. RESULTS OF OPERATIONS The following summary sets forth the contribution to Wesco's consolidated net income of each business segment, insurance and industrial, as well as nonsegment activities. In each case realized gains or losses are shown separately from "normal" net operating income. (Amounts are in thousands, all after income tax effect.)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------- ------- -------- Insurance segment: "Normal " net operating income........................... $43,610 $34,654 $ 33,507 Realized securities gains................................ 7,271 33,609 32,843 ------- ------- -------- Segment net income....................................... 50,881 68,263 66,350 ------- ------- -------- Industrial segment net income (all "normal" net operating income).................................................. 2,532 3,154 3,622 ------- ------- -------- Other than identified business segments: "Normal" net operating income (loss)..................... (238) (186) 1,133 Gains, net, on sales of foreclosed real estate........... 968 572 850 Realized securities gains................................ -- -- 29,854 ------- ------- -------- Nonsegment net income.................................... 730 386 31,837 ------- ------- -------- Consolidated net income............................. $54,143 $71,803 $101,809 ======= ======= ========
In the following sections the "normal" net operating income data set forth in the foregoing summary on an after-tax basis are broken down and discussed. Attention is directed to Note 7 to the accompanying consolidated financial statements for additional information. 16 10 Insurance Segment The "normal" net operating income of the insurance segment (i.e., Wes-FIC and, since July 1996, KBS) represents essentially the combination of underwriting results with dividend and interest income. Following is a summary of such data (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Premiums written........................................ $ 18,326 $ 19,296 $ 10,654 ======== ======== ======== Premiums earned......................................... $ 17,655 $ 15,923 $ 11,507 ======== ======== ======== Underwriting gain....................................... $ 10,289 $ 7,748 $ 10,647 Dividend and interest income............................ 49,125 38,534 33,694 General and administrative expenses, principally amortization of goodwill.............................. (809) (806) (779) -------- -------- -------- Income before income taxes.............................. 58,605 45,476 43,562 Income tax provision.................................... (14,995) (10,822) (10,055) -------- -------- -------- "Normal" net operating income........................... $ 43,610 $ 34,654 $ 33,507 ======== ======== ========
Premiums written for 1999, 1998 and 1997 were comprised of $15.8 million, $17.0 million and $8.6 million attributable to KBS. The remainder in each year was attributable to Wes-FIC and related principally to super-catastrophe reinsurance participations, notably a three-year Florida hurricane risk policy that ended, without loss, at 1999 yearend. The decrease in premiums written by KBS for 1999 and the increase for 1998 were due mainly to the restructuring of KBS's reinsurance program effective January 1, 1998, as explained in Item 1, Business; in this connection, KBS received and credited to premiums written in 1998 $2.6 million of unearned reinsurance premiums that had been deducted from premiums written in prior years. Earned premiums for 1999, 1998 and 1997 included $15.1 million, $13.7 million and $8.7 million attributable to KBS. The remainder in each year was attributable to Wes-FIC and related principally to super-catastrophe reinsurance participations. The underwriting gain for 1999 included $5.9 million attributable to KBS and $4.4 million to Wes-FIC. The underwriting gain for 1998 included $4.4 million attributable to KBS and $3.3 million to Wes-FIC. The underwriting gain for 1997 included $5.5 million attributable to KBS and $5.1 million to Wes-FIC. In addition to gains from other, mainly super-catastrophe reinsurance participations, Wes-FIC's underwriting gains in 1999, 1998 and 1997 benefited by $2.6 million each year from downward revisions of estimated liabilities for losses and expenses with respect to a quota share reinsurance arrangement which terminated in 1989. Underwriting gains at KBS have become more volatile since it restructured its reinsurance program at the beginning of 1998. Although no super-catastrophe reinsurance losses have been incurred to date, the managements of Berkshire, Wes-FIC and Wesco believe that large super-catastrophe reinsurance losses will inevitably occur from time to time. While such large losses are not expected to be significant in relation to Wes-FIC's capital base, the managements accept the prospect of increased volatility in Wes-FIC's short-term underwriting results in order to obtain what they believe will be better long-term results. One area of particular concern to the insurance industry is its exposure to claims for environmental contamination. Wes-FIC's management has reported that it believes Wes-FIC has virtually no such liability. Dividend and interest income has been earned by the insurance group principally (1) on capital contributed by Wesco, including the assets (approximately $400 million at market value) added to Wes-FIC in 1994 after another Wesco subsidiary exited the savings and loan business and merged into 17 11 Wes-FIC, (2) on earnings retained and reinvested, and (3) on float (net liabilities due to policyholders). The income tax provision of the insurance segment has fluctuated as a percentage of its pre-tax income in each of the periods presented in the foregoing table. These fluctuations have been caused by fluctuations in the relationship of substantially tax-exempt components of income to total pre-tax income. Insurance losses and loss adjustment expenses, and the related liabilities reflected on Wesco's consolidated balance sheet, because they are estimates, are subject to estimation error. Revisions of such estimates in future periods could significantly affect the results of operations reported for those periods. However, Wesco's insurance subsidiaries have maintained capital positions strong enough not only to absorb adverse estimation corrections but also to enable them to accept other insurance contracts. As explained in Item 1, Business, Wes-FIC, effective January 1, 2000, entered into a three-year arrangement, accepting a 3 1/3% participation in the reinsurance of certain property and casualty risks of a large, unaffiliated insurance group. Although Wesco would welcome other attractive reinsurance or insurance arrangements with Berkshire subsidiaries or unaffiliated companies, or acquisitions of insurance businesses like or unlike that of KBS, the timing and extent of any increase in insurance underwriting activity cannot presently be predicted. Industrial Segment Following is a summary of the "normal" net operating results of the industrial segment, consisting of the businesses of Precision Steel and its subsidiaries (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Revenues, principally sales and services.................... $64,686 $66,197 $67,693 ======= ======= ======= Income before income taxes.................................. $ 4,209 $ 5,272 $ 6,042 Income tax provision........................................ (1,677) (2,118) (2,420) ------- ------- ------- "Normal" net operating income............................... $ 2,532 $ 3,154 $ 3,622 ======= ======= =======
Revenues of Precision Steel's businesses declined in 1999 and 1998. The decline in revenue for the past two years occurred despite increases of 2.5% and 5.2% in pounds of steel products sold in 1999 and 1998, and was attributed by Precision Steel's management to a combination of factors, including (1) a shift in mix of products sold toward lower-priced products, and (2) a decline in selling prices of higher-margin items following price decreases by mills and other suppliers. Income before income taxes and normal net operating income of the industrial segment are dependent not only on revenues, but also on operating expenses and the cost of products sold. The latter, as a percentage of revenues, amounted to 78.6%, 77.9% and 78.0% for 1999, 1998 and 1997. The cost percentage typically fluctuates slightly from year to year as a result of changes in product mix and price competition at all levels. Precision Steel's cost of products sold percentage is very sensitive to current changes in the cost of materials purchased, because it carries its inventories at the lower of last-in, first-out cost or market; under this method, the most recent costs are reflected in cost of goods sold. Precision Steel's costs for 1999 and 1998 also included $.4 million and $.6 million, respectively, before income taxes ($.2 million and $.4 million after taxes), for the upgrading of computer systems to ensure that its order-taking and other information technology systems would continue to function properly beyond December 31, 1999. 18 12 Other Than Identified Business Segments Set forth below is a summary of "normal" net operating income for items not identified with either business segment, insurance or industrial (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Dividend and interest income................................ $ 1,145 $ 2,132 $ 3,148 Rental income, net, from commercial real estate............. 850 842 879 Interest expense............................................ (2,939) (2,937) (3,408) General and administrative expenses......................... (993) (1,086) (1,010) Reduction in allowance for losses on foreclosed real estate and other assets.......................................... 1,350 -- 1,800 Other items, net............................................ (248) (67) (594) ------- ------- ------- Income (loss) before income tax benefit..................... (835) (1,116) 815 Income tax benefit.......................................... 597 930 318 ------- ------- ------- "Normal" net operating income (loss)........................ $ (238) $ (186) $ 1,133 ======= ======= =======
"Normal" net operating income or loss other than from identified business segments includes mainly (1) dividend and interest income from marketable securities and cash equivalents owned outside the insurance subsidiaries and (2) net rental income from owned commercial real estate, reduced by (1) interest and other corporate expenses and (2) costs and expenses associated with the development and liquidation of foreclosed real estate previously owned by a former savings and loan subsidiary, including adjustments of reserves for possible losses on sales of foreclosed real estate -- plus or minus income taxes related to such "normal" nonsegment items. "Normal" net operating income or loss other than from identified business segments typically fluctuates from period to period but is not significant in amount. The 1999 and 1997 figures benefited to the extent of $.8 million and $1.1 million, after tax effect, from reductions in reserves for possible losses on disposition of foreclosed real estate and other assets inherited from the savings and loan subsidiary; there were no adjustments of these reserves in 1998. MS Property has had success in selling various foreclosed properties at prices higher than were anticipated when the real estate market was extremely depressed. Nonsegment dividend and interest income has declined sharply in recent years due to conversions of preferred stocks into lower-yielding common stocks. Wesco's nonsegment tax benefits appear at first glance to be anomalous compared to pre-tax income or loss. This is caused by the inclusion in pre-tax income or loss of large (but declining) amounts of dividend income, which is highly tax-favored. All other revenues and expense items are fully taxable or deductible. * * * * * Management's long-term goal is to maximize gain in Wesco's intrinsic business value per share, with little regard to earnings recorded in any given year. There is no particular strategy as to the timing of sales of investments or the realization of securities gains. Securities may be sold for a variety of reasons, including (1) the belief that prospects for future appreciation of a particular investment are less attractive than the prospects for reinvestment of the after-tax proceeds from its sale, or (2) the desire for funds for an acquisition or repayment of debt. Realized gains and losses on investments -- reflected on the consolidated statement of income when securities are sold, or when required by other events -- tend to fluctuate in amount from period to period, sometimes impacting net income significantly. However, the amount of realized gain or loss for any given period has no predictive value, and variations in amount from period to period have no practical analytical value, particularly in view of the substantial unrealized price appreciation existing 19 13 in Wesco's consolidated investment portfolio. (Wesco's shareholders' equity at December 31, 1999 contained $1.3 billion, or $184.36 per share, of unrealized appreciation of investments, net of taxes -- about 69% of shareholders' equity.) Wesco's consolidated earnings for 1999 contained securities gains, after income taxes, of $7.3 million, compared to $33.6 million of after-tax gains for 1998 and $62.7 million for 1997. These gains, although material in relation to Wesco's net income, had only a minor impact on Wesco's total shareholders' equity: Wesco's investments are carried at market value, and most of the gains had already been reflected in the unrealized appreciation component of its shareholders' equity prior to their realization. Wesco's effective consolidated income tax rate typically fluctuates from period to period for various reasons, such as the inclusion in consolidated revenues of significant, varying amounts of dividend income from preferred and common stocks, which is substantially exempt from income taxes. The respective provisions, expressed as percentages of income before income taxes, amounted to 27.6%, 29.8% and 33.4% in 1999, 1998 and 1997. (See Note 5 to the accompanying consolidated financial statements for further information on income taxes.) Consolidated revenues, expenses and net income reported for any period are not necessarily indicative of future revenues, expenses and net income in that they are subject to significant variations in amount and timing of securities gains and losses and the possible occurrence of other unusual nonoperating items such as the acquisition of CORT in February 2000 (see Note 8 to the accompanying consolidated financial statements). In addition, consolidated revenues, expenses and net income from operations are expected to be much more volatile than they were prior to Wes-FIC's entry into the super-catastrophe reinsurance business several years ago and, to a lesser degree, the restructuring of KBS's reinsurance program at the beginning of 1998. Shareholders' equity is impacted not only to the extent that unusual items affect earnings, but also to reflect changes in unrealized appreciation of investments, which are not reflected in earnings. Wesco is not now suffering from inflation, but its insurance and industrial segments have potential exposure. Large unanticipated changes in the rate of inflation could adversely impact the insurance business, because premium rates are often established well in advance of expenditures. Precision Steel's businesses are competitive and operate on tight gross profit margins, and thus its earnings are susceptible to bad effects from inflationary cost increases. MARKET RISK ANALYSIS Wesco's consolidated balance sheet at December 31, 1999 contained $2.2 billion of marketable equity securities stated at market value. The carrying values of these securities are not only directly exposed to fluctuations in their stock market prices (see below); they are also indirectly exposed to risks related to other markets. For example, the largest holding of the consolidated group ($1.4 billion as of December 31, 1999) was in common stock of Freddie Mac, whose principal assets are mortgages and mortgage securities, which are subject to interest rate risk. The second and third largest holdings ($683 million, combined, at December 31, 1999) were in common stocks of The Coca-Cola Company and The Gillette Company, both of which have global operations and thus are subject to changes in foreign currency exchange rates. These and other market risks such as commodity price fluctuations, where material, are required to be reported upon in their filings with the Securities and Exchange Commission, which are available to the public. Strategically, Wesco strives to invest in businesses that possess excellent economics, with able and honest management, at sensible prices. Wesco's management prefers to invest a meaningful amount in each investee, resulting in concentration, as noted above. Most equity investments are expected to be held for very long periods of time; thus, Wesco's management is not necessarily troubled by short-term price volatility with respect to its investments provided that the underlying business, economic and management characteristics of the investees remain favorable. 20 14 The carrying values of investments subject to equity price risks are based on quoted market prices or, in the absence of such, management's estimates of fair value. Market prices are subject to fluctuation and, consequently, the amounts realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, or general market conditions. Furthermore, amounts realized in the sale of a particular security may be adversely affected if a relatively large quantity of the security is being sold. The table below shows the effects as of December 31, 1999 of a hypothetical 30% overall increase or decrease in market prices of marketable equity securities owned by the Wesco group. These changes result in a pro forma 22.8% increase or decrease in shareholders' equity (amounts in thousands):
INCREASE DECREASE ---------- ---------- Market value of marketable equity securities: As recorded............................................... $2,214,883 $2,214,883 Hypothetical (assuming 30% change)........................ 2,879,348 1,550,418 Shareholders' equity: As recorded............................................... 1,895,372 1,895,372 Pro forma (results in 22.8% change)....................... 2,327,275 1,463,470 ========== ==========
The foregoing hypothetical changes in market values do not reflect what could be considered the best- or worst-case scenarios. Indeed, results could be far worse due both to the nature of equity markets and the concentration existing in Wesco's consolidated investment portfolio. However, Wesco has substantial shareholders' equity, providing a margin of safety against a significant decline in portfolio values. This can be seen by glancing at the following balance sheet totals, which result from removing all unrealized appreciation and related deferred taxes from balance sheet totals shown in the first table in Item 6 (in thousands except for amounts per share):
DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Total assets.................... $634,262 $634,954 $603,178 $478,863 $442,439 ======== ======== ======== ======== ======== Total liabilities............... $ 51,480 $ 97,914 $129,825 $ 99,488 $ 86,136 ======== ======== ======== ======== ======== Total shareholder's equity...... $582,782 $537,040 $473,353 $379,375 $356,303 Per capital share............. 81.85 75.43 66.48 53.28 50.04 ======== ======== ======== ======== ========
Wesco's consolidated balance sheet at December 31, 1999 did not contain significant assets or liabilities with values subject to interest rate, commodity price, or foreign exchange rate risks. The Wesco group does not utilize stand-alone derivatives to manage these or other market risks. YEAR 2000 EXPOSURE Prior to January 1, 2000, there was widespread concern that many computer systems in use were not designed to process data correctly after December 31, 1999 because only two digits were used to indicate the year in a date. Other systems and equipment were designed with similar limitations, often due to the circuitry of computer chips embedded therein. Wesco and its subsidiaries (1) assessed these potential "Year 2000" problems as they related to their businesses, including their electronic and other interactions with banks, vendors, customers and others, and (2) undertook the development and implementation of solutions. In addition, Wesco attempted to satisfy itself that significant non-subsidiary equity investees appeared to be proceeding in like manner. To date, Wesco and its subsidiaries have not experienced significant Year 2000 failures or disruptions. In addition, no significant adverse consequences due to Year 2000 problems have, to the 21 15 knowledge of Wesco's management, been reported by significant customers, suppliers, equity investees or financial markets to Wesco or its subsidiaries. Wesco's management believes, however, that, although the risks and uncertainties from Year 2000 issues have greatly diminished since December 31, 1999, Wesco and its subsidiaries may still be exposed to undesirable effects from as yet undetected Year 2000 matters, especially losses that might be incurred under property and casualty insurance and reinsurance contracts entered into by Wesco's subsidiaries. While such consequences could conceivably have a materially adverse effect on Wesco's consolidated net income, Wesco's management does not believe that the total worst-case effect, which cannot be estimated, would be material in relation to its shareholders' equity. Wesco and its subsidiaries have incurred and charged against earnings approximately $1.0 million in identification, remediation and testing of Year 2000 issues, including $.4 million in 1999 and $.6 million in 1998 ($.2 million and $.4 million, after income taxes, respectively). Wesco does not believe that any significant information technology projects were delayed due to Year 2000 efforts. FORWARD-LOOKING STATEMENTS Certain written or oral representations of management stated herein or elsewhere constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, as contrasted with statements of historical fact. Forward-looking statements include statements which are predictive in nature, or which depend upon or refer to future events or conditions, or which include words such as expects, anticipates, intends, plans, believes, estimates, may, or could, or which involve hypothetical events. For example, the preceding section on Year 2000 exposure contains forward-looking statements. Forward-looking statements are based on information currently available and are subject to various risks and uncertainties that could cause actual events or results to differ materially from those characterized as being likely or possible to occur. 22 16 ITEM 8. FINANCIAL STATEMENTS Following is an index to financial statements and related schedules of Wesco appearing in this report:
PAGE FINANCIAL STATEMENTS NUMBER(S) -------------------- --------- Independent auditors' report................................ 25 Consolidated balance sheet -- December 31, 1999 and 1998.... 26 Consolidated statement of income -- years ended December 31, 1999, 1998 and 1997....................................... 27 Consolidated statement of changes in shareholders' equity -- years ended December 31, 1999, 1998 and 1997.... 28 Consolidated statement of cash flows -- years ended December 31, 1999, 1998 and 1997................................... 29 Notes to consolidated financial statements.................. 30 - 37
Listed below are financial statement schedules required by the Securities and Exchange Commission to be included in this report. The data appearing therein should be read in conjunction with the consolidated financial statements and notes of Wesco and the independent auditors' report referred to above. Schedules not included with these financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
SCHEDULE PAGE FINANCIAL STATEMENT SCHEDULES NUMBER NUMBER(S) ----------------------------- -------- --------- Condensed financial information of Registrant -- December 31, 1999 and 1998, and years ended December 31, 1999, 1998 and 1997.................................................. I 38 - 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable, as there were no such changes or disagreements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth in the sections entitled "Election of Directors" and "Executive Officers" appearing in the definitive combined notice of annual meeting and proxy statement of Wesco Financial Corporation for its annual meeting of shareholders scheduled to be held May 3, 2000 (the "2000 Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth in the section "Compensation of Directors and Executive Officers" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the sections "Voting Securities and Holders Thereof" and "Requirements for Reporting Securities Ownership" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain information set forth in the sections "Election of Directors," "Voting Securities and Holders Thereof," "Compensation of Directors and Executive Officers" and "Board of Director Interlocks and Insider Participation" in the 2000 Proxy Statement is incorporated herein by reference. 23 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following exhibits (listed by numbers corresponding to Table 1 of Item 601 of Regulation S-K) are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference: 3a. Articles of Incorporation and By-Laws of Wesco Financial Corporation 21. List of Subsidiaries. 27. Financial Data Schedule.
Instruments defining the rights of holders of long-term debt of registrant and its subsidiaries are not being filed since the total amount of securities authorized by all such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis as of December 31, 1999. The Registrant hereby agrees to furnish to the Commission upon request a copy of any such debt instrument to which it is a party. The index to financial statements and related schedules set forth in Item 8 of this report is incorporated herein by reference. No reports on Form 8-K were filed during the quarter ended December 31, 1999. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESCO FINANCIAL CORPORATION By: Charles T. Munger March 22, 2000 Chairman of the Board (principal executive officer) By: Robert H. Bird March 22, 2000 President (principal operating officer) By: Jeffrey L. Jacobson March 22, 2000 Vice President and Chief Financial Officer (principal financial and accounting officer)
24 18 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Robert H. Bird March 22, 2000 Director Carolyn H. Carlburg March 22, 2000 Director James N. Gamble March 22, 2000 Director Charles T. Munger March 22, 2000 Director David K. Robinson March 22, 2000 Director
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Wesco Financial Corporation We have audited the accompanying consolidated balance sheets of Wesco Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 8. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Wesco Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Omaha, Nebraska March 3, 2000 25 19 WESCO FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- ASSETS Cash and cash equivalents................................... $ 66,331 $ 320,034 Investments: Securities with fixed maturities.......................... 309,976 66,619 Marketable equity securities.............................. 2,214,883 2,778,595 Property and equipment...................................... 11,414 12,193 Goodwill of acquired business............................... 28,556 29,338 Other assets................................................ 21,035 21,627 ---------- ---------- $2,652,195 $3,228,406 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Insurance losses and loss adjustment expenses............... $ 33,642 $ 36,731 Notes payable............................................... 3,635 33,635 Income taxes payable, principally deferred.................. 707,345 920,035 Other liabilities........................................... 12,201 14,249 ---------- ---------- 756,823 1,004,650 ---------- ---------- Shareholders' equity: Capital stock, $1 par value -- authorized, 7,500,000 shares; issued and outstanding, 7,119,807 shares....... 7,120 7,120 Capital in excess of par value............................ 23,319 23,319 Unrealized appreciation of investments, net of taxes...... 1,312,590 1,686,716 Retained earnings......................................... 552,343 506,601 ---------- ---------- Total shareholders' equity........................ 1,895,372 2,223,756 ---------- ---------- $2,652,195 $3,228,406 ========== ==========
See accompanying notes to consolidated financial statements. 26 20 WESCO FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE)
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Revenues: Sales and service revenues............................. $ 64,571 $ 66,137 $ 67,557 Insurance premiums earned.............................. 17,655 15,923 11,507 Dividend and interest income........................... 49,679 40,543 36,552 Realized gains, net, on securities and foreclosed property............................................ 12,819 52,672 102,348 Other.................................................. 982 904 1,087 -------- -------- -------- 145,706 176,179 219,051 -------- -------- -------- Costs and expenses: Cost of products and services sold..................... 50,728 51,527 52,710 Insurance losses, loss adjustment and underwriting expenses............................................ 7,366 8,174 860 Selling, general and administrative expenses........... 10,265 11,156 9,393 Interest on notes payable.............................. 2,549 3,016 3,320 -------- -------- -------- 70,908 73,873 66,283 -------- -------- -------- Income before income taxes............................... 74,798 102,306 152,768 Provision for income taxes............................... (20,655) (30,503) (50,959) -------- -------- -------- Net income.......................................... $ 54,143 $ 71,803 $101,809 ======== ======== ======== Amounts per capital share based on 7,119,807 shares outstanding throughout each year: Net income............................................. $ 7.60 $ 10.08 $ 14.30 Cash dividends......................................... 1.18 1.14 1.10 ======== ======== ========
See accompanying notes to consolidated financial statements. 27 21 WESCO FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
SHAREHOLDERS' EQUITY TOTAL ------------------------------------------------------------- COMPRE- CAPITAL IN UNREALIZED HENSIVE CAPITAL EXCESS OF APPRECIATION RETAINED INCOME STOCK PAR VALUE OF INVESTMENTS EARNINGS TOTAL (LOSS) ------- ---------- -------------- -------- ---------- --------- Balance, December 31, 1996....... $7,120 $23,319 $ 871,640 $348,936 $1,251,015 Net income....................... 101,809 101,809 Unrealized appreciation of investments, net of income tax effect of $264,310............. 481,996 481,996 $ 521,108 ========= Reversal of unrealized appreciation upon inclusion of realized net gains in net income......................... (62,697) (62,697) Cash dividends declared and paid........................... (7,831) (7,831) ------ ------- ---------- -------- ---------- Balance, December 31, 1997....... 7,120 23,319 1,290,939 442,914 1,764,292 Net income....................... 71,803 71,803 Unrealized appreciation of investments, net of income tax effect of $230,837............. 429,386 429,386 $ 467,580 ========= Reversal of unrealized appreciation upon inclusion of realized net gains in net income......................... (33,609) (33,609) Cash dividends declared and paid........................... (8,116) (8,116) ------ ------- ---------- -------- ---------- Balance, December 31, 1998....... 7,120 23,319 1,686,716 506,601 2,223,756 Net income....................... 54,143 54,143 Unrealized depreciation of investments, net of income tax effect of $197,478............. (366,855) (366,855) $(319,983) ========= Reversal of unrealized appreciation upon inclusion of realized net gains in net income......................... (7,271) (7,271) Cash dividends declared and paid........................... (8,401) (8,401) ------ ------- ---------- -------- ---------- Balance, December 31, 1999....... $7,120 $23,319 $1,312,590 $552,343 $1,895,372 ====== ======= ========== ======== ==========
See accompanying notes to consolidated financial statements. 28 22 WESCO FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 --------- -------- --------- Cash flows from operating activities: Net income.......................................... $ 54,143 $ 71,803 $ 101,809 Adjustments to reconcile net income with cash flows from operating activities -- Realized gains, net, on securities and foreclosed property, before taxes......................... (12,819) (52,672) (102,348) Provision for depreciation and amortization, net............................................ 1,995 2,068 2,056 Decrease in allowance for losses on real estate held for sale and other assets................. (1,350) -- (1,800) Decrease in liabilities for insurance losses and loss adjustment expenses....................... (3,089) (4,706) (4,054) Increase (decrease) in income taxes payable...... (11,297) (8,852) 40,589 Other, net....................................... (4,159) 5,542 (1,377) --------- -------- --------- Net cash flows from operating activities.... 23,424 13,183 34,875 --------- -------- --------- Cash flows from investing activities: Purchases of securities with fixed maturities....... (413,659) (19,066) (176,235) Maturities and redemptions of securities with fixed maturities....................................... 21,772 5,587 35,215 Sales of marketable equity securities............... 58,900 177,266 -- Sales of securities with fixed maturities........... 90,788 126,128 95,122 Other, net.......................................... 3,473 14,365 10,029 --------- -------- --------- Net cash flows from investing activities.... (238,726) 304,280 (35,869) --------- -------- --------- Cash flows from financing activities: Repayments of notes.............................. (30,000) -- (3,527) Payment of cash dividends........................ (8,401) (8,116) (7,831) --------- -------- --------- Net cash flows from financing activities.... (38,401) (8,116) (11,358) --------- -------- --------- Increase (decrease) in cash and cash equivalents...... (253,703) 309,347 (12,352) Cash and cash equivalents -- beginning of year........ 320,034 10,687 23,039 --------- -------- --------- Cash and cash equivalents -- end of year.............. $ 66,331 $320,034 $ 10,687 ========= ======== ========= Supplementary disclosures: Interest paid during year........................... $ 2,953 $ 3,016 $ 3,320 Income taxes paid, net, during year................. 31,952 56,695 11,934 Noncash investing activities -- Fair value of investments exchanged.............. -- -- 180,772 ========= ======== =========
See accompanying notes to consolidated financial statements. 29 23 WESCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE) NOTE 1. PRESENTATION Wesco Financial Corporation ("Wesco") is 80.1%-owned by Blue Chip Stamps ("Blue Chip"), which in turn is wholly owned by Berkshire Hathaway Inc. ("Berkshire"). Wesco's consolidated financial statements include the accounts of Wesco and its subsidiaries, which are all either directly or indirectly wholly owned. The principal subsidiaries are Wesco-Financial Insurance Company ("Wes-FIC"), The Kansas Bankers Surety Company ("KBS"), Precision Steel Warehouse, Inc. ("Precision Steel"), and MS Property Company ("MS Property"). The outstanding stock of KBS was purchased by Wes-FIC in 1996 for approximately $80,000. The excess of purchase cost over the fair value of the identified net assets acquired ("goodwill"), approximately $31,300, is being amortized on a straight-line basis over 40 years. The net unamortized balance is carried as an asset on the consolidated balance sheet. If management, in its periodic review of recoverability of goodwill, determines that it appears to have become impaired, the unamortized balance will be reduced and/or the amortization period shortened as appropriate. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The estimates and assumptions are based on management's evaluation of the relevant facts and circumstances using information available at the time such estimates and assumptions are made. Although the amounts of such assets, liabilities, revenues and expenses included in the consolidated financial statements may differ from those that might result from use of estimates and assumptions based on facts and circumstances not yet available, Wesco's management does not believe such differences, if any, would have a material adverse effect on reported shareholders' equity. All material intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements. In February 2000, a wholly owned subsidiary of Wesco, by means of a successful tender offer and merger, acquired CORT Business Services Corporation ("CORT"), for approximately $384,000 cash. As a result, CORT's accounts will be included in Wesco's consolidated financial statements effective in the first quarter of 2000. See Note 8 for additional information regarding CORT. NOTE 2. INVESTMENTS Cash equivalents consist of funds invested in money-market accounts and in other investments maturing in less than three months from date acquired. Management determines the appropriate classifications of investments in securities with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. There are three permissible classifications: held-to-maturity; available-for-sale; and trading (of which there have been none). Securities are deemed to be held-to-maturity securities when both the ability and the positive intent to hold them to maturity are present; they are carried on the consolidated balance sheet at amortized cost and adjusted for any accretion of discount or amortization of premium using a method that produces approximately level yield. Available-for-sale securities are carried at quoted market value or, if market quotations are not available, at estimated fair value, with unrealized gains and losses, net of deemed applicable income taxes, reported as a separate component of shareholders' equity; there is no effect on net income, except to reflect changes in income tax rates relating to such unrealized gains and losses. 30 24 Realized gains and losses on sales of investments, determined on a specific identification basis, are included in the consolidated statement of income, as are provisions for other-than-temporary declines in market or estimated fair value. Once the carrying value of an investment has been written down to reflect an other-than-temporary decline, any subsequent increase in market or fair value is credited, net of taxes, to shareholders' equity, without affecting net income until realized. Investments in marketable equity securities and securities with fixed maturities at December 31, 1999 and 1998 were deemed to be available-for-sale and, accordingly, carried at quoted market or estimated fair value, with the net unrealized gain shown as a separate component of shareholders' equity. Unrealized appreciation constitutes a high proportion of Wesco's shareholders' equity (69% and 76% at December 31, 1999 and 1998). As a result, shareholders' equity is sensitive to fluctuations in underlying market quotations, and gains or losses ultimately realized upon sale of the investments, less taxes, could differ very significantly from recorded unrealized appreciation. Following is a summary of securities with fixed maturities:
DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------------- -------------------------- ESTIMATED FAIR ESTIMATED FAIR AMORTIZED (CARRYING) AMORTIZED (CARRYING) COST VALUE COST VALUE --------- -------------- --------- -------------- Obligations of U. S. government and its agencies.................................. $ 84,060 $ 77,930 $16,025 $16,358 State and municipal bonds................... 4,340 4,329 5,526 5,578 Convertible preferred stocks................ -- -- 45,000 44,000 Mortgage-backed securities.................. 233,998 227,717 683 683 -------- -------- ------- ------- $322,398 $309,976 $67,234 $66,619 ======== ======== ======= =======
At 1999 yearend, the estimated fair values of securities with fixed maturities contained $27 of unrealized gains and $12,449 of unrealized losses, compared with $390 of unrealized gains and $1,005 of unrealized losses at 1998 yearend. Investments in securities with fixed maturities at 1999 yearend are expected to mature as follows:
AMORTIZED MARKET COST VALUE --------- -------- In one year or less......................................... $ 10,492 $ 10,502 After one year through five years........................... 26,593 26,363 After five years through ten years.......................... 129 129 After ten years............................................. 51,186 45,265 -------- -------- 88,400 82,259 Mortgage-backed securities.................................. 233,998 227,717 -------- -------- $322,398 $309,976 ======== ========
Following is a summary of marketable equity securities (all common stocks):
DECEMBER 31, 1999 DECEMBER 31, 1998 ---------------------- ---------------------- QUOTED QUOTED MARKET MARKET NUMBER OF (CARRYING) (CARRYING) SHARES COST VALUE COST VALUE ---------- -------- ---------- -------- ---------- Freddie Mac................ 28,800,000 $ 71,729 $1,355,400 $ 71,729 $1,855,800 The Coca-Cola Company...... 7,205,600 40,761 419,726 40,761 482,775 The Gillette Company....... 6,400,000 40,000 263,600 40,000 306,000 Other...................... 32,038 176,157 32,038 134,020 -------- ---------- -------- ---------- $184,528 $2,214,883 $184,528 $2,778,595 ======== ========== ======== ==========
Dollar amounts in thousands except for amounts per share 31 25 The market values of marketable equity securities contained no unrealized losses at 1999 or 1998 yearends. Realized investment gains (losses), before income taxes, from sales and redemptions of investments are summarized below for each of the past three years:
1999 1998 1997 ------- ------- -------- Securities with fixed maturities -- Gross realized gains..................................... $ 7,504 $16,126 $ 50,143 Gross realized losses.................................... (2,714) -- -- Marketable equity securities -- Gross realized gains..................................... 6,396 43,611 50,771 Gross realized losses.................................... -- (8,031) -- ------- ------- -------- $11,186 $51,706 $100,914 ======= ======= ========
NOTE 3. INSURANCE Wes-FIC's insurance business consists mainly of the sale, through KBS, of various insurance products geared towards small and medium-sized banks located primarily in the midwestern United States. These products include bank deposit insurance in excess of FDIC coverage, directors and officers liability insurance, employment practice insurance, internet banking catastrophe and fidelity bond coverage. In addition, Wes-FIC participates in property and casualty reinsurance contracts with wholly owned insurance subsidiaries of Berkshire. Insurance premiums are generally recognized as earned revenues pro rata over the term of each contract. Unearned insurance premiums of $8,420 and $7,749 at December 31, 1999 and 1998 are included in other liabilities on the consolidated balance sheet. Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement costs. The liabilities are based upon estimates of ultimate claim costs associated with claim occurrences as of the balance sheet date, and are determined from (1) individual case amounts, (2) incurred but not reported losses, based on past experience, and (3) reports from ceding insurers. As further data become available, the liabilities are reevaluated and adjusted as appropriate. Provisions for losses and loss adjustment expenses are reported in the consolidated statement of income after deducting estimates of amounts that will be recoverable under reinsurance contracts. Reinsurance contracts do not relieve the ceding companies of their obligations to indemnify policyholders with respect to the underlying insurance contracts. Losses and loss adjustment expenses recoverable at yearend under reinsurance contracts are included in accounts receivable on the consolidated balance sheet. Dollar amounts in thousands except for amounts per share 32 26 Following is a summary of liabilities for unpaid losses and loss adjustment expenses for each of the past three years:
1999 1998 1997 ------- ------- ------- Balance at beginning of year................................ $36,731 $41,437 $45,491 Less ceded liabilities...................................... -- (1,340) (840) ------- ------- ------- Net balance at beginning of year............................ 36,731 40,097 44,651 ------- ------- ------- Incurred losses recorded during year -- For current year.......................................... 8,556 11,604 6,563 For all prior years*...................................... (5,819) (7,646) (7,453) ------- ------- ------- Total incurred losses............................. 2,737 3,958 (890) ------- ------- ------- Payments made during year -- For current year.......................................... 2,175 4,673 1,579 For all prior years....................................... 3,651 2,651 2,085 ------- ------- ------- Total payments.................................... 5,826 7,324 3,664 ------- ------- ------- Net balance at end of year.................................. 33,642 36,731 40,097 Plus ceded liabilities...................................... -- -- 1,340 ------- ------- ------- Balance at end of year...................................... $33,642 $36,731 $41,437 ======= ======= =======
- --------------- * Primarily represents adjustments of estimated losses. Payment of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior regulatory approval in 2000, Wesco can receive up to approximately $260,000 as dividends from its insurance subsidiaries. The combined shareholders' equity of Wesco's insurance subsidiaries at yearend 1999 determined pursuant to regulatory accounting rules was approximately $2,600,000, approximately $700,000 higher than shareholders' equity determined in accordance with generally accepted accounting principles ("GAAP"). The difference represents mainly the deduction of deferred income taxes associated with unrealized appreciation of investments in calculating the GAAP figure. NOTE 4. NOTES PAYABLE Following is a list of notes payable, at yearend:
DECEMBER 31, ----------------- 1999 1998 ------ ------- Note due January 2002, bearing interest at 7 5/8% payable monthly................................................... $1,035 $ 1,035 Industrial revenue bonds due December 2014, bearing interest at 7 3/4% payable semiannually............................ 2,600 2,600 Notes due November 1, 1999, bearing interest at 8 7/8% payable semiannually...................................... -- 30,000 ------ ------- $3,635 $33,635 ====== =======
Wesco redeemed its 8 7/8% Notes at par upon maturity. Estimated fair market values of the foregoing notes payable at December 31, 1999 and December 31, 1998 were approximately $3,725 and $34,700. These figures were calculated using discounted cash flow computations based upon estimates as to interest rates prevailing on those dates for comparable borrowings. Dollar amounts in thousands except for amounts per share 33 27 NOTE 5. INCOME TAXES Following is a breakdown of income taxes payable at 1999 and 1998 yearends:
DECEMBER 31, -------------------- 1999 1998 -------- -------- Deferred tax liabilities, relating to -- Appreciation of investments, principally unrealized....... $705,343 $906,736 Other items............................................... 5,622 14,380 -------- -------- 710,965 921,116 Deferred tax assets......................................... (5,429) (6,450) -------- -------- Net deferred tax liabilities.............................. 705,536 914,666 Taxes currently payable..................................... 1,809 5,369 -------- -------- Income taxes payable........................................ $707,345 $920,035 ======== ========
Income taxes are accounted for using the asset and liability method. Under this method, temporary differences between financial statement and tax return bases of assets and liabilities at each balance sheet date are multiplied by the tax rates in effect at that date, with the results reported on the balance sheet as net deferred tax liabilities or assets. The effect of a change in tax rate on such deferred items is required, under generally accepted accounting principles, to be reflected when enacted in the consolidated statement of income even though the original charge or credit for income taxes has been charged or credited to shareholders' equity, as in the case of unrealized appreciation of investments. As the temporary differences reverse in future periods, the taxes become currently payable or recoverable. The consolidated statement of income contains a provision for income taxes, as follows:
1999 1998 1997 ------- -------- ------- Federal.................................................... $20,316 $ 30,148 $45,781 State...................................................... 339 355 5,178 ------- -------- ------- Provision for income taxes............................... $20,655 $ 30,503 $50,959 ======= ======== ======= Current.................................................... $23,818 $ 65,039 $13,021 Deferred provision (benefit)............................... (3,163) (34,536) 37,938 ------- -------- ------- Provision for income taxes............................... $20,655 $ 30,503 $50,959 ======= ======== =======
Following is a reconciliation of the statutory federal income tax rate with the effective income tax rate resulting in the provision for income taxes appearing on the consolidated statement of income:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate.......................... 35.0% 35.0% 35.0% Increase (decrease) resulting from -- Exclusion from taxable income of a significant portion of dividend income....................................... (8.1) (6.3) (3.8) Exclusion from taxable income of a significant portion of interest income on state and municipal bonds.......... (0.1) (0.2) (0.2) State income taxes, less federal tax benefit............. 0.3 0.3 2.2 Other differences, net................................... 0.5 1.0 0.2 ------- -------- ------- Effective income tax provision rate........................ 27.6% 29.8% 33.4% ======= ======== =======
Wesco and its subsidiaries join with other Berkshire subsidiaries in the filing of consolidated federal income tax returns for the Berkshire group. The consolidated federal tax liability is apportioned among group members pursuant to methods that result in each member of the group paying or Dollar amounts in thousands except for amounts per share 34 28 receiving an amount that approximates the increase or decrease in consolidated taxes attributable to that member. Federal income tax returns through 1988 have been examined by and settled with the Internal Revenue Service. California franchise tax returns through 1994 have been examined by and settled with the California Franchise Tax Board. NOTE 6. QUARTERLY FINANCIAL INFORMATION Unaudited quarterly financial information for 1999 and 1998 follows:
QUARTER ENDED ------------------------------------------------------ DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1999 1999 1999 1999 ------------ ------------- -------- --------- Total revenues............................ $46,672 $33,917 $32,425 $32,692 ======= ======= ======= ======= Net income excluding securities gains and losses.................................. $14,160 $11,026 $11,065 $10,621 Per capital share....................... 1.99 1.54 1.56 1.49 Realized securities gains (losses) net of income tax effect....................... 7,271 -- -- -- Per capital share....................... 1.02 -- -- -- ------- ------- ------- ------- Net income................................ $21,431 $11,026 $11,065 $10,621 Per capital share....................... 3.01 1.54 1.56 1.49 ======= ======= ======= =======
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1998 1998 1998 1998 ------------ ------------- -------- --------- Total revenues............................ $22,816 $32,155 $90,078 $31,130 ======= ======= ======= ======= Net income excluding securities gains and losses.................................. $10,413 $ 9,358 $ 9,556 $ 8,867 Per capital share....................... 1.46 1.32 1.34 1.24 Realized securities gains (losses) net of income tax effect....................... (4,161) -- 37,770 -- Per capital share....................... (.59) -- 5.31 -- ------- ------- ------- ------- Net income................................ $ 6,252 $ 9,358 $47,326 $ 8,867 Per capital share....................... .87 1.32 6.65 1.24 ======= ======= ======= =======
NOTE 7. BUSINESS SEGMENT DATA Consolidated financial information for each of the past three years is presented in the table on the next page, broken down as to Wesco's business segments. The insurance segment includes the accounts of Wes-FIC and its subsidiary, KBS. Wes-FIC is engaged in the property and casualty insurance and reinsurance business. Its business has included contractual arrangements with wholly owned insurance subsidiaries of Berkshire under which Wes-FIC has participated in reinsurance arrangements that the Berkshire subsidiaries have had with unaffiliated insurance companies. KBS provides specialized insurance coverage to more than 20% of the banks in the United States, mostly small and medium-sized banks in the Midwest. In addition to generating insurance premiums, Wesco's insurance segment has derived dividend and interest income from the investment of float (premiums received in advance of the time related claims and expenses are paid) as well as cash invested or retained in the business by its owners, and has realized gains on sales of investments. The insurance companies are subject to regulation by applicable state insurance departments and also, in KBS's case, the Department of the Treasury. Dollar amounts in thousands except for amounts per share 35 29 The industrial segment includes the operating accounts of Precision Steel and its subsidiaries. The Precision Steel group operates two service centers, which buy steel and other metals in the form of sheets or strips, cut these to order and sell them directly to a wide variety of industrial customers throughout the United States. The Precision Steel group also manufactures shim stock and other toolroom specialty items, as well as hose and muffler clamps, and sells them nationwide, generally through distributors. Items not identified with either business segment include principally (1) investments other than those of Wes-FIC and KBS, together with related dividend and interest income and securities gains and losses, (2) commercial real estate properties, together with related revenues and expenses, (3) foreclosed real estate formerly owned by a savings and loan subsidiary, together with associated costs and expenses of development and liquidation, (4) the assets, revenues and expenses of the parent company, and (5) related income taxes.
1999 1998 1997 ---------- ---------- ---------- Insurance: Premiums earned.................................. $ 17,655 $ 15,923 $ 11,507 Dividend and interest income..................... 49,125 38,534 33,694 Realized securities gains, net................... 11,186 51,706 50,528 Provision for income taxes....................... (18,909) (28,919) (27,741) Net income....................................... 50,881 68,263 66,350 Depreciation and amortization other than of discounts and premiums of investments......... 826 887 897 Capital expenditures............................. 79 29 68 Identifiable assets.............................. 2,639,750 3,157,338 2,440,141 ========== ========== ========== Industrial: Sales, service and other revenues................ $ 64,686 $ 66,197 $ 67,693 Provision for income taxes....................... (1,677) (2,118) (2,420) Net income....................................... 2,532 3,154 3,622 Depreciation and amortization.................... 797 852 849 Capital expenditures............................. 214 274 614 Identifiable assets.............................. 23,252 22,965 23,084 ========== ========== ========== Not identified with a business segment: Dividend and interest income..................... $ 1,145 $ 2,132 $ 3,148 Other revenues................................... 867 844 951 Realized gains on securities and foreclosed properties, net............................... 1,633 966 51,820 Income tax (provision) benefit................... (69) 534 (20,798) Net income....................................... 730 386 31,837 Depreciation and amortization.................... 372 394 388 Capital expenditures............................. 112 1 495 Identifiable assets.............................. 26,013 49,660 126,450 ========== ========== ========== Reconciliations: Total revenues set forth above................... $ 146,297 $ 176,302 $ 219,341 Less intersegment interest....................... (591) (123) (290) ---------- ---------- ---------- Total consolidated revenues.............. $ 145,706 $ 176,179 $ 219,051 ========== ========== ========== Total assets set forth above..................... $2,689,015 $3,229,963 $2,589,675 Less intersegment advances....................... (36,820) (1,557) (1,563) ---------- ---------- ---------- Total consolidated assets................ $2,652,195 $3,228,406 $2,588,112 ========== ========== ==========
Dollar amounts in thousands except for amounts per share 36 30 NOTE 8. SUBSEQUENT EVENT In February 2000, a wholly owned subsidiary of Wesco acquired all of the outstanding common stock of CORT for approximately $384 million pursuant to a tender offer and merger. The acquisition will be accounted for as a purchase, and CORT's accounts will be consolidated with Wesco's beginning as of the date of purchase. The cash purchase was funded, to the extent of $353 million, through sales of investments and use of available cash, supplemented by $31 million of short-term line-of-credit borrowings. CORT is the leading national provider of rental furniture, accessories and related services in the "rent-to-rent" segment of the furniture industry. It rents high quality furniture to corporate and individual customers who desire flexibility to meet their temporary office, residential or tradeshow furnishing needs and who typically do not seek to own such furniture. In addition, CORT sells previously rented furniture through company-owned clearance centers. CORT's national network includes 118 showrooms, 87 clearance centers and 75 warehouses in 34 states and the District of Columbia as well as three web sites (cort1.com, relocationcentral.com and corttradeshow.com). The following unaudited table presents pro forma combined operating data provided by Wesco and CORT for 1999 and 1998 as though CORT had been acquired on January 1, 1998. It reflects (1) elimination of the estimated income earned during 1999 and 1998 on investments liquidated in 2000 to fund the purchase, (2) inclusion of interest expense throughout 1999 and 1998 as if the line-of-credit borrowings had been made at the beginning of 1998, and (3) amortization of the excess of purchase price over recorded net assets assuming such excess was all goodwill to be amortized over 40 years.
YEAR -------------------- 1999 1998 -------- -------- Sales and service revenues.................................. $418,655 $385,101 Total revenues.............................................. 479,790 475,143 Income before extraordinary item............................ 63,159 79,514 Net income.................................................. 63,159 77,006 Per capital share......................................... 8.87 10.82 ======== ========
Dollar amounts in thousands except for amounts per share 37 31 WESCO FINANCIAL CORPORATION SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- Assets: Cash and cash equivalents................................. $ 23 $ 23 Convertible preferred stocks.............................. -- 22,000 Investment in subsidiaries, at cost plus equity in subsidiaries' undistributed earnings and unrealized appreciation: Wes-FIC and KBS........................................ 1,900,204 2,205,874 Precision Steel........................................ 54,575 51,579 MS Property............................................ 15,600 13,806 Other assets.............................................. 128 548 ---------- ---------- $1,970,530 $2,293,830 ========== ========== Liabilities and shareholders' equity: Advances from subsidiaries................................ $ 72,185 $ 32,202 Notes payable............................................. 1,035 31,035 Income taxes payable, principally deferred................ 1,912 6,367 Other liabilities......................................... 26 470 ---------- ---------- Total liabilities................................. 75,158 70,074 ---------- ---------- Shareholders' equity (see consolidated balance sheet and statement of changes in shareholders' equity).......... 1,895,372 2,223,756 ---------- ---------- $1,970,530 $2,293,830 ========== ==========
STATEMENT OF INCOME (DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------- ------- -------- Revenues: Dividend income.......................................... $ 675 $ 1,687 $ 2,692 Realized securities gain................................. -- -- 50,386 Other.................................................... 46 40 118 ------- ------- -------- 721 1,727 53,196 ------- ------- -------- Expenses: Interest on notes payable................................ 2,939 2,937 3,104 General and administrative............................... 437 475 414 ------- ------- -------- 3,376 3,412 3,518 ------- ------- -------- Income (loss) before items shown below..................... (2,655) (1,685) 49,678 Income tax (provision) benefit............................. 1,247 1,100 (19,654) Equity in undistributed earnings of subsidiaries........... 55,551 72,388 71,785 ------- ------- -------- Net income.......................................... $54,143 $71,803 $101,809 ======= ======= ========
See notes to consolidated financial statements 38 32 WESCO FINANCIAL CORPORATION SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 -------- --------- -------- Cash flows from operating activities: Net income............................................ $ 54,143 $ 71,803 $101,809 Adjustments to reconcile net income with cash flows from operating activities -- Realized securities gain........................... -- -- (50,386) Deferred income taxes on realized securities gain............................................. -- -- 20,532 Increase (decrease) in income taxes payable currently........................................ (347) (951) 836 Equity in undistributed earnings of subsidiaries... (55,551) (72,388) (59,034) Other, net......................................... (302) 58 (20) -------- --------- -------- Net cash flows from operating activities...... ( 2,057) ( 1,478) 13,737 -------- --------- -------- Cash flows from investing activities: Principal collections on loans........................ 475 75 75 -------- --------- -------- Net cash flows from investing activities...... 475 75 75 -------- --------- -------- Cash flows from financing activities: Advances from (repayments to) subsidiaries, net....... 39,983 9,529 (5,985) Repayment of Notes due November 1, 1999............... (30,000) -- -- Payment of cash dividends............................. (8,401) (8,116) (7,831) -------- --------- -------- Net cash flows from financing activities...... 1,582 1,413 (13,816) -------- --------- -------- Increase (decrease) in cash and cash equivalents........ -- 10 (4) Cash and cash equivalents -- beginning of year.......... 23 13 17 -------- --------- -------- Cash and cash equivalents -- end of year................ $ 23 $ 23 $ 13 ======== ========= ======== Supplementary disclosures: Noncash investing activities -- Investments contributed to subsidiary.............. $ 28,895 $ 54,627 $ -- ======== ========= ========
See notes to consolidated financial statements 39 33 WESCO FINANCIAL CORPORATION COMMISSION FILE NUMBER 1-4720 EXHIBITS TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
INCORPORATED DESCRIPTION FILED BY REFERENCE 3a. Articles of Incorporation and By-Laws of Wesco Financial X Corporation 21. List of Subsidiaries X 27. Financial Data Schedule X
EX-3.(A) 2 BY-LAWS 1 EXHIBIT 3(a) CERTIFICATE OF INCORPORATION OF WESCO FINANCIAL CORPORATION THE UNDERSIGNED DO HEREBY CERTIFY AS FOLLOWS: FIRST: The name of the corporation is WESCO FINANCIAL CORPORATION. SECOND: The principal office of the corporation in the State of Delaware is located at 129 South State Street, in the City of Dover, County of Kent. The name and address of its resident agent is United States Corporation Company, 129 South State Street, in the City of Dover, County of Kent, State of Delaware. THIRD: The nature of the business of the corporation and the objects and purposes proposed to be transacted, promoted or carried on by it are: 1. To underwrite, subscribe for, purchase, invest in, or re-invest, acquire, hold, pledge, hypothecate, exchange, sell, deal in and dispose of, alone or in syndicates or otherwise in conjunction with others, stocks, bonds, debentures, mortgages and other evidences of indebtedness and obligations of any corporation, association, partnership, syndicate, entity, person or governmental, municipal or public authority, domestic or foreign, including any savings and loan association, and evidences of any interest, in respect of any such stocks, bonds and other evidences of indebtedness and obligations, to issue in exchange therefor its own stocks, bonds or other obligations, and, while the owner or holder of any such, to exercise all the rights, powers and privileges of ownership in respect thereof; to make any guaranty with respect to the stocks, bonds or other securities of any person, firm, association or corporation, including any savings and loan association; to aid in any manner any person, firm, association or corporation, including any savings and loan association whose stocks, bonds or other securities are held or in any manner guaranteed by the corporation, or in which the corporation is any way interested; to do any other act or thing for the preservation, protection, improvement or enhancement of the value of any such stocks, bonds or other securities. 2 2. To carry on the general business of insurance in all of its ramifications and including all lines appertaining thereto, specifically including but not limited to the business of: (a) life insurance, including insurance upon the lives of persons or appertaining thereto, and the granting, purchasing or disposing of annuities; (b) disability insurance, including insurance appertaining to injury, disablement or death resulting to the insured from accidents, and appertaining to disablement resulting to the insured from sickness; (c) fire insurance including insurance against loss by fire, lightning, windstorm, tornado, or earthquakes; insurance against loss of, or destruction of, or damage to property when such insurance includes loss thereof by fire; and insurance by means of an all risk policy against any and all kinds of loss of, or damage to, or loss of use of any personal property. 3. To carry on a general insurance agency and brokerage business, and to act as agents, brokers, or attorneys in fact for any persons, firms or corporations in connection with insurance of any kind or nature whatsoever. 4. To conduct a general escrow business, including acting as escrow agent and doing a general escrow business for purchasers, sellers, lessors, lessees, trustees, beneficiaries, mortgagors, mortgagees, optionors, optionees and any and all persons, firms, associations or corporations interested in real or personal property, or any of them or in any transaction or transactions, and holding monies, grants, receipts, papers, securities and other property or evidences of property in escrow, and otherwise doing any act or performing any service necessary in the conduct of an escrow business. 5. To conduct a general real estate agency and brokerage business, and to act as agents, brokers or attorneys in fact for any persons, firms or corporations in buying, selling, and dealing in real property and any and every estate or interest therein. 6. To engage in any manufacturing, productive, extractive, development, investment, mercantile, trading or service business of any kind or character whatsoever. 7. To render management, supervisor, accounting, technical or other services or advice for any person, firm, association or corporation, domestic or foreign, by contract or otherwise, and to receive therefor fixed or contingent compensation, or compensation in the form of commissions, 2 3 management fees, shares in gross or net receipts or profits, or in any other manner, or upon any other terms whatsoever, or so to act without direct compensation. 8. To acquire, construct, hold, use, develop, lease, encumber, sell, transfer or otherwise deal with, turn to account or dispose of any real, personal or mixed property or any powers, rights privileges, immunities, franchises, licenses, guaranties, grants or concessions. 9. To borrow money and to make, accept, endorse or issue notes, bonds, debentures or any other evidences of indebtedness, without limit as to amount, and to secure the same by mortgage, pledge or otherwise. 10. To adopt, file, acquire, hold, use, develop, license, lease, encumber, sell, transfer or otherwise deal with, turn to account or dispose of copy rights, trademarks, trade names, brands, designs, labels, letters patent, registrations of or applications for any of the foregoing, license rights, inventions, improvements, formulae or processes, under both the laws of the United States and the laws of any other government. 11. To acquire, and to pay for in cash, stocks, bonds or any other securities of this corporation or otherwise, the whole or any part of the good will, business, assets and property, and to assume the whole or any part of the obligations and liabilities, of any person, firm, association or corporation. 12. To enter into, make, perform and carry out contracts of any kind whatsoever, including contracts of guaranty, with any person, firm, association or corporation, public or private, or with any government or public authority. 13. To manage, improve, develop, lease, encumber, sell, transfer or otherwise deal with, turn to account or dispose of the whole or any part of the property and assets of the corporation, and from time to time to vary any investment or employment of capital of the corporation. The corporation may do everything necessary, convenient or proper for the accomplishment or attainment of, and may do everything incidental or appurtenant to or growing out of or connected with, any power, object or purpose herein set forth or which the corporation may otherwise have or be permitted by law, as principal, factor, agent, contractor or otherwise and either alone or in association with others. The business of the corporation is from time to time to do any one or more of the acts and things herein set forth, and it shall have power to carry on its business, or any part thereof, to have offices and places of business and to exercise any or all of its corporate powers and rights both in the State of Delaware 3 4 and the rest of the United States and in any and all places outside the United States. The objects and purposes of the corporation set forth herein shall be construed as powers as well as objects and purposes and their enumeration herein shall not be deemed to exclude, by inference or otherwise, any power, object or purpose which the corporation may have or be permitted, whether expressly or impliedly, under the laws of the State of Delaware now or hereafter in effect. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Seven Million Five Hundred Thousand (7,500,000) shares of par value of One Dollar ($1.00) per share. (By amendment January 18, 1977). FIFTH: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars ($1,000). SIXTH: The names and places of residence of each of the incorporators are:
NAME RESIDENCE ---- --------- M. P. Gorsuch.......................... 129 South State Street Dover, Delaware M. R. Hall............................. 129 South State Street Dover, Delaware E. E. Boyles........................... 129 South State Street Dover, Delaware
SEVENTH: The corporation is to have perpetual existence. EIGHTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. NINTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the corporation: 1. In furtherance, and not in limitation, of the powers conferred by statute, the Board of Directors is expressly authorized: (a) to make, alter, amend or repeal the by-laws of the corporation, unless otherwise provided in the by-laws; (b) to set apart out of any of the funds of the corporation available for dividends a reserve or such 4 5 reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; (c) to fix and determine and to vary the amount of the working capital of the corporation, to determine the use and disposition of the working capital and of any surplus or net profits over and above the capital of the corporation determined as provided by law and to pay dividends at such times and in such manner as they may determine; (d) to authorize and cause to be executed mortgages and liens, without limit as to amount, upon the real and personal property of the corporation; (e) to determine from time to time whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the corporation (other than the stock ledger), or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account, book or document of the corporation except as conferred by statute, unless authorized by the directors or by resolution of the stockholders; (f) to make donations for the public welfare or for charitable, scientific or educational purposes; (g) to authorize payment of fixed fees and other compensation to directors for their services as directors, including, without limitation, services as members of committees of directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor; (h) to provide for and carry out and to recall, abolish, revise, amend, alter or change, a plan or plans for the participation by all or any of the employees, including directors and officers of the corporation or of any corporation in which or in the welfare of which, the corporation has any interest, and those actively engaged in the conduct of the corporation's business, in the profits of the corporation or of any branch or division thereof, as part of the corporations legitimate expenses, and for the furnishing to said employees and persons or any of them, at the corporation's expense, of medical services, insurance against accident, sickness, or death, pensions during old age, disability or unemployment, education, housing, social services, recreation or other similar aids for their relief or general welfare, in such manner and upon such terms and conditions as may be determined by the Board of Directors. 5 6 In general, the Board of Directors may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by this Certificate of Incorporation or by the by-laws directed or required to be exercised or done by the stockholders. 2. The number of directors of the corporation, which shall never be less than three, shall be fixed from time to time by the by-laws and may be altered from time to time by amendment of the by-laws. 3. Election of directors need not be by ballot, unless the by-laws shall so require. 4. No contract, transaction or act of the corporation shall be affected or invalidated by the fact that any of the directors of the corporation are in any wise interested in or connected with any other party to such contract, transaction or act or are themselves interested in or parties to such contract, transaction or act, provided that such interest shall be fully disclosed or otherwise known to those of the Board of Directors who act upon the matter at the time such contract, transaction or act is authorized, ratified or confirmed, and any such director may be counted in determining the existence of a quorum at any meeting at which such contract, transaction or act is authorized, ratified or confirmed, and may vote thereat in connection with such authorization, ratification or confirmation with like force and effect as if he were not so interested or connected or was not a party to such contract, transaction or act. 5. The Board of Directors in its discretion may submit for approval, ratification or confirmation by the stockholders at any meeting thereof any contract, transaction or act of the Board or of any officer, agent or employee of the corporation, and any such contract, transaction or act which shall have been so approved, ratified or confirmed by the holders of a majority of the issued and outstanding stock entitled to vote shall be as valid and binding upon the corporation and upon the stockholders thereof as though it had been approved and ratified by each and every stockholder of the corporation. 6. The corporation may indemnify or insure or both indemnify and insure any person who is or was a director, officer, employee or agent of the corporation or, at its request, of another corporation, partnership, joint venture, trust or other enterprise, to the full extent provided or permitted by its by-laws, as from time to time mended, and to the full extent to which those indemnified may now or hereafter be entitled under any law. agreement, vote of stockholders or disinterested directors or otherwise. 6 7 7. No director of this Corporation shall have personal liability to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director. The foregoing provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. 8. In the event that the General Corporation Law of the State of Delaware is amended after approval of this Article by the stockholders so as to authorize corporate action further eliminating or limiting the liability of directors, the liability of a director of this Corporation shall thereupon be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article. 9. Nothing contained in this Certificate of Incorporation shall be deemed to restrict the power of the directors or members of any committee to take any action, required or permitted to be taken by them, without a meeting, in accordance with applicable provisions of law. TENTH: No stockholder shall have any pre-emptive or preferential right to subscribe for or purchase any shares of any class of stock of the corporation, whether now or hereafter authorized and whether unissued or in the treasury, or any obligations or securities convertible into or carrying options or warrants to purchase shares of any class of stock of the corporation, at any time issued or sold, whether for cash or other consideration, or any right to subscribe to or purchase any thereof. ELEVENTH: Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock held by such stockholder, and at any election of directors every stockholder may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are entitled or distribute his votes on the same principle among as many candidates as he thinks fit. TWELFTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or any amendment hereof in the 7 8 manner now or hereafter prescribed by law, and all rights of the stockholders are subject to this reservation. IN WITNESS WHEREOF, we have made, signed and sealed this Certificate of Incorporation this 18th day of March, 1959. M. P. GORSUCH (L.S.) ------------------------------------ M. R. HALL (L.S.) ------------------------------------ E. E. BOYLES (L.S.) ------------------------------------ 8 9 BY-LAWS OF WESCO FINANCIAL CORPORATION ARTICLE I OFFICES The corporation may have offices and places of business, and the books and records of the corporation may be kept (except as otherwise provided by law), either within or without the State of Delaware. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. -- The annual meeting of stockholders shall be held in Pasadena, California, at the place therein determined by the directors and set forth in the notice thereof, but other meetings of the stockholders may be held at such place or places (within or without the State of Delaware) as shall be fixed by the directors and stated in the notice of the meeting. SECTION 2. ANNUAL ELECTION OF DIRECTORS. -- The annual meeting of stockholders for the election of directors and the transaction of other business shall be held, commencing in 2000, on the first Wednesday of May, at 3:30 p.m., Pacific Time. (By amendment 12-8-99) If this date shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as may be properly brought before the meeting. No change of the time or place of a meeting for the election of directors, as fixed by the by-laws. shall be made within sixty days next before the day on which such election is to be held. In case of any change in such time or place for such election of directors, notice thereof shall be given to each stockholder entitled to vote, in person, or by letter mailed to his last known post office address, twenty days before the election is held. SECTION 3. VOTING. -- Each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation and 9 10 in accordance with the provisions of these by-laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after one year from its date. (By Amendment 3-19-63). After the first election of directors, except where the transfer books of the corporation shall have been closed or a date shall have been fixed as the record date for the determination of its stockholders entitled to vote, no share of stock shall be voted on at any election for directors which shall have been transferred on the books of the corporation within twenty days next preceding such election. Upon the demand of any stockholder, the vote for directors and the vote upon any question before the meeting, shall be by ballot. Every stockholder entitled to vote in any election for directors of this corporation may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are entitled, or distribute his votes on the same principle among as many candidates as he thinks fit. The candidates for directors receiving the highest number of votes up to the number of directors to be elected are elected. On all questions other than the questions of election of directors a majority vote shall decide the question except as otherwise provided by the Certificate of Incorporation or the laws of the state of Delaware. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every election of directors, a complete list of the stockholders entitled to vote at said election arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to examination of any stockholder during ordinary business hours, for a period of at least ten days prior to the election, either at a place within the city, town or village where the election is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. SECTION 4. QUORUM. -- Except as otherwise required by law, by the Certificate of Incorporation or by these by-laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the 10 11 requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 5. SPECIAL MEETINGS. -- Special meetings of the stockholders for any purpose or purposes may be called by the President. and shall be called upon a requisition in writing therefor, stating the purpose or purposes thereof, delivered to the President or Secretary, signed by a majority of the directors or by a majority in amount of the entire capital stock of the corporation entitled to vote, or by resolution of the directors. SECTION 6. NOTICE OF MEETINGS. -- Written or printed notice stating the place and time of the meeting shall be given by the Secretary to each stockholder entitled to vote thereat, at his post office address as appearing on the books of the corporation, at least ten days before the meeting in the case of annual meetings, and five days before the meeting in the case of a special meeting, and in the case of a special meeting, the notice shall also state the general nature of the business to be considered at said special meeting. SECTION 7. ACTION TO BE TAKEN AT MEETING. -- In the case of special meetings no business shall be transacted thereat except that business which is referred to in the notice of meeting without the unanimous consent of all the stockholders entitled to vote thereat. SECTION 8. ACTION WITHOUT MEETING. -- Any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken. shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (By amendment 1-18-77) ARTICLE III DIRECTORS SECTION 1. NUMBER AND TERM. -- The number of directors shall be seven. (By Amendment 3-22-00) The directors shall be elected at the annual meeting of the stockholders and each 11 12 director shall be elected to serve until his successor shall be elected and shall qualify. Directors need not be stockholders. SECTION 2. RESIGNATIONS. -- Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. -- If the office of any director, member of a committee or other officer becomes vacant the remaining directors in office, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 4. REMOVAL. -- Any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for the purpose. SECTION 5. INCREASE OF NUMBER. -- The number of directors may be increased by amendment of these by-laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. SECTION 6. POWERS. -- The Board of Directors shall exercise all of the powers of the corporation except such as are by law, or by the Certificate of Incorporation of the corporation, or by these by-laws conferred upon or reserved to the stockholders. SECTION 7. COMMITTEES. -- The Board of Directors may by resolution or resolutions, passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation, which, to the extent provided in said resolution or resolutions or in these by-laws, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may have power to authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in these by-laws or as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the board when required. 12 13 SECTION 8. MEETINGS. -- The newly elected directors shall hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent in writing of all the directors. The Board of Directors of the corporation may hold their meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the board may be called by the President or by the Secretary on written request of any two directors on at least two days' notice, either personally or by mail or telegram, cable or radiogram, to each director and shall be held at such place or places as may be determined by the directors, or as shall be stated in the call of the meeting. SECTION 9. QUORUM. -- A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. SECTION 10. COMPENSATION. -- Directors may be paid for their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as a director. No such payments shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special and standing committees may be allowed like compensation for attending committee meetings. SECTION 11. ACTION WITHOUT MEETING. -- Unless otherwise restricted by the Certificate of Incorporation or these by-laws any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if, prior to such action, a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of the proceeding of the Board of Directors or of the committee. 13 14 ARTICLE IV OFFICERS SECTION 1. OFFICERS. -- The officers of the corporation shall be a President, one or more Vice Presidents, a Treasurer, and a Secretary, and such Assistant Treasurers and Assistant Secretaries as the Board of Directors may deem proper. In addition, the Board of Directors may elect a Chairman and Vice Chairman of the Board of Directors. (By amendment 12-21-89) All of such officers shall be elected by the Board of Directors. None of the officers, except the Chairman and Vice Chairman of the Board of Directors and the President, need be directors. (By amendment 12-21-89) The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. Any two offices, other than those of President and Vice President, may be held by the same person. More than two offices, other than those of President and Secretary, may be held by the same person. The officers of the corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board may be removed at any time by an affirmative vote of the majority of the Board. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. SECTION 2. OTHER OFFICERS AND AGENTS. -- The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. CHAIRMAN AND VICE CHAIRMAN. (By Amendment 12-21-89) -- The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the Board of Directors and Stockholders and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors or the Executive Committee. The Vice Chairman shall preside at all meetings of the Board of Directors and of the Stockholders at which the Chairman is not present and shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors or the Executive Committee. (By Amendment 12-21-89) SECTION 4. PRESIDENT. -- The President shall be the chief executive officer of the corporation and shall have the general powers and duties of supervision and management usually vested in the office of President of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors, and shall have general supervision, direction and control of the business of the corporation. Except as the Board of Directors shall authorize the execution thereof in some other manner, he shall execute bonds, mortgages and other contracts in behalf of the 14 15 corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed, the seal shall be attested by the signature of the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer. SECTION 5. VICE PRESIDENT. -- Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Directors. SECTION 6. TREASURER. -- The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall deposit all moneys and other valuables in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the board shall prescribe. SECTION 7. SECRETARY. -- The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these by-laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors, or stockholders, upon whose requisition the meeting is called as provided in these by-laws. He shall record all the proceedings of the meetings of the corporation and of the directors in a book to be kept for that purpose and shall perform such other duties as may be assigned to him by the directors or the President. He shall have the custody of the seal of the corporation and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. -- Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. SECTION 9. COMPENSATION. -- Compensation of officers, agents or employees shall be fixed from time to time by the Board of Directors or by such committee or committees, or person or 15 16 persons, if any, to whom such power shall have been delegated by the Board of Directors. 16 17 ARTICLE V MISCELLANEOUS SECTION 1. CERTIFICATES OF STOCK. -- Certificates of stock, numbered and with the seal of the corporation affixed, signed by the President or Vice President, and the Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary, shall be issued to each stockholder certifying the number of shares owned by him in the corporation. When such certificates are signed by a transfer agent or an assistant transfer agent or by a transfer clerk acting on behalf of the corporation and a registrar, the signatures of such officers may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates, shall cease to be such officer or officers of this corporation, whether because of death, resignation or otherwise, before said certificate or certificates have been delivered by this corporation, such certificate or certificates may nevertheless be adopted by this corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures have been used thereon, had not ceased to be such officer or officers of this corporation. SECTION 2. LOST CERTIFICATES. -- A new certificate of stock may be issued in the place of any certificate theretofore issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. SECTION 3. TRANSFER OF SHARES. -- The shares of stock of the corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and a duplicate thereof mailed to the Delaware office, and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. 17 18 SECTION 4. CLOSING OF TRANSFER BOOKS. -- The Board of Directors shall have power to close the stock transfer books of the corporation for a period not exceeding sixty days (By Amendment 1-18-77) preceding the date of any meeting of stockholders or date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect, or for a period of not exceeding sixty days (By Amendment 1-18-77) in connection with obtaining the consent of stockholders for any purpose. Provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding sixty days (By Amendment 1-18-77) preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividends or to any such allotment of rights or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders only as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights or give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. SECTION 5. DIVIDENDS. -- Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the corporation. SECTION 6. SEAL. -- The corporate seal shall be circular in form and shall contain the name of the corporation, the year of its creation and the words, "CORPORATE SEAL DELAWARE". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 7. CHECKS. -- All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in 18 19 such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 8. ADDRESSES OF STOCKHOLDERS. -- It shall be the duty of every stockholder to notify the corporation of his post office address and of any change therein. The latest address furnished by each stockholder shall be entered on the original stock ledger of the corporation and the latest address appearing thereon shall be deemed conclusively to be the post office address and the last-known post office address of such stockholder. If any stockholder shall fail to notify the corporation of his post office address, it shall be sufficient to send corporate notices to such stockholder at the address, if any, understood by the Secretary to be his post office address, or in the absence of such address, to such stockholder at the General Post Office in the city, town or place in the State of Delaware where the principal office of the corporation is located. SECTION 9. NOTICES AND WAIVERS THEREOF. -- Whenever any notice whatever is required by these by-laws or by the Certificate of Incorporation, as amended, or by any law to be given to any stockholder, director or officer, such notice, except as otherwise provided by law, may be given personally or be given by telegram, cable or radiogram, addressed to such stockholder at the address set forth as provided in Section 8 of Article V, or to such director or officer at his place of business with the corporation, if any, or at such address as appears on the books of the corporation, or the notice may be given in writing by mail, in a sealed wrapper, postage prepaid, addressed to such stockholder at the address set forth in Section 8 of Article V, or to such director or officer at his place of business with the corporation, if any, or such address as appears on the books of the corporation; and any notice given by telegram, cable or radiogram shall be deemed to have been given when it shall have been deposited in a post office, in a regularly maintained letter box or with a postal carrier. A waiver of any such notice in writing, signed by the person entitled to such notice or, in the case of a stockholder, by his duly authorized attorney, whether before or after the time of the action for which such notice is required, shall be deemed the equivalent thereof; and the presence at any meeting of any person entitled to notice thereof or, in the case of a stockholder, his duly authorized attorney, shall be deemed a waiver of such notice as to such person. SECTION 10. VOTING UPON STOCKS. -- The Board of Directors (whose authorization in this connection shall be necessary in all cases) may from time to time appoint an attorney or attorneys or agent or agents of the corporation, or may at any time or from time to time authorize the President, any Vice President, the Treasurer or the Secretary to appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of 19 20 the corporation to cast the votes which the corporation may be entitled to cast as a stockholder or otherwise in any other corporation or association, any of the stock or securities of which may be held by the corporation, and to cumulate the voting in elections for directors, at meetings of the holders of the stock or other securities of such other corporation or association, or to consent in writing to any action by any such other corporation or association and the person or persons so appointed may be instructed as to the manner of casting such votes or giving such consent, and may be authorized to execute and deliver, on behalf of the corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers or other instruments as may be deemed necessary or proper in the premises. ARTICLE VI AMENDMENTS These by-laws may be altered or repealed and by-laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice of the proposed alteration or repeal or by-law or by-laws to be made be contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or by-law or by-laws to be made, be contained in the Notice of such Special Meeting. ARTICLE VII ANNUAL REPORT An Annual Report will be sent to the stockholders not later than 90 days after the close of the fiscal or calendar year, whichever year is adopted by the corporation. (BY AMENDMENT 3-19-63) ARTICLE VIII INDEMNIFICATION SECTION 1. RIGHT TO INDEMNIFICATION. -- Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, whether the basis of such 20 21 proceeding is alleged action in an official capacity or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the corporation to the fullest extent permitted by the laws of Delaware, as the same exist or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all costs, charges, expenses, liabilities and losses (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided however, that except for any proceeding seeking to enforce or obtain payment under any right to indemnification by the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if the corporation has joined in or consented to the initiation of such proceeding (or part thereof). The corporation may, by action of its Board of Directors, either on a general basis or as designated by the board of directors, provide indemnification to employees and agents of the corporation, or to any person serving at the request of the corporation as a director, officer,employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, and with the same scope and effect as the foregoing indemnification of directors and officers. Notwithstanding anything in this Article VIII to the contrary, no person shall be entitled to indemnification pursuant to this Article VIII on account of any suit in which judgment is rendered against such person for an accounting of profits made from the purchase and sale by such person of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934. SECTION 2. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Each person who is or becomes a director or officer of the corporation, or, if designated for indemnification by the Board of Directors, serves as an employee or agent of the corporation or serves at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be deemed 21 22 to have served or to have continued to serve in such capacity in reliance upon the indemnity provided in this Article VIII. SECTION 3. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware. SECTION 4. EXPENSES AS A WITNESS. To the extent that any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs and expenses actually and reasonably incurred by him or her or on his or her behalf in connection therewith. SECTION 5. INDEMNITY AGREEMENTS. The corporation may enter into indemnity agreements with the persons who are members of its board of directors from time to time, and with such officers, employees and agents of the corporation and with such officers, directors, employees and agents of subsidiaries as the board may designate, such indemnity agreements to provide in substance that the corporation will indemnify such persons as contemplated by this Article VIII, and to include any other substantive or procedural provisions regarding indemnification as are not inconsistent with the General Corporation Law of Delaware. The provisions of such indemnity agreements shall prevail to the extent that they limit or condition or differ from the provisions of this Article VIII. SECTION 6. DEFINITION OF CORPORATION. For purposes of this Article VIII reference to "the corporation" includes all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director or officer of such a constituent corporation shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. 22 EX-21 3 SUBSIDIARIES 1 EXHIBIT 21 WESCO FINANCIAL CORPORATION SUBSIDIARIES
PERCENTAGE OWNED BY STATE OF NAME OF SUBSIDIARY REGISTRANT INCORPORATION ------------------ ---------- ------------- Wesco Holdings Midwest, Inc............................. 100% Nebraska Precision Steel Warehouse, Inc........................ 100% Illinois Precision Steel Warehouse, Inc., Charlotte Service Center........................ 100% Delaware Precision Brand Products........................... 100% Delaware Wesco-Financial Insurance Company..................... 100% Nebraska Kansas Bankers Surety Company...................... 100% Kansas MS Property Company .................................. 100% California
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 66,331 2,524,859 8,768 (83) 10,429 0 29,840 (18,427) 2,652,195 0 3,635 0 0 7,120 1,888,252 2,652,195 64,571 145,706 50,728 58,094 11,615 (1,350) 2,549 74,798 (20,655) 54,143 0 0 0 54,143 7.60 7.60
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