1、 Bowne Integrated Typesetting System 28-MAR-00 07:01 Style: STYLE013.BST;118 BLA0001424 Fmt:V5.21:LAM31203/8 Vjust Seq:3 Free lead 0D*points, Next lead: 280D C:100 WESCO FINANCIAL CORP BOWNE OF LOS ANGELES (213) 627-2200 LAM_CPS BL/SM CURRENT 7-APR-2000 14:06 NEXT PCN: 004.00.00.00 - Page is valid,
2、no graphics JB: A60558 PN: 003.00.00.00 SN: 4X *A60558/003/4*WESCO FINANCIAL CORPORATIONLETTER TO SHAREHOLDERSTo Our Shareholders:Consolidated “normal net operating income (i.e., before irregularly occurringitems shown in the table below) for the calendar year 1999 increased to $45,904,000($6.44 per
3、 share) from $37,622,000 ($5.28 per share) in the previous year.Consolidated net income (i.e., after irregularly occurring items shown in thetable below) decreased to $54,143,000 ($7.60 per share) from $71,803,000($10.08 per share) in the previous year.Wesco had three major subsidiaries at yearend 1
4、999: (1) Wesco-FinancialInsurance Company (“Wes-FIC), headquartered in Omaha and engaged princi-pally in the reinsurance business, (2) The Kansas Bankers Surety Company (“KBS),owned by Wes-FIC and specializing in insurance products tailored to midwesternbanks, and (3) Precision Steel, headquartered
5、in Chicago and engaged in the steelwarehousing and specialty metal products businesses. Consolidated net income forthe two years just ended breaks down as follows (in 000s except for per-shareamounts)(1):Year EndedDecember 31, 1999 December 31, 1998Per PerWesco WescoAmount Share(2)Amount Share(2)“No
6、rmal net operating income of:Wes-FIC and KBS insurance businesses $43,610 $6.12 $34,654 $ 4.87Precision Steel businesses 2,532 .35 3,154 .44All other “normal net operating income (loss)(3)(238) (.03) (186) (.03)45,904 6.44 37,622 5.28Realized net securities gains 7,271 1.02 33,609 4.72Gain on sales
7、of foreclosed properties 968 .14 572 .08Wesco consolidated net income $54,143 $7.60 $71,803 $10.08(1) All gures are net of income taxes.(2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents.(3) After deduction of interest and other corporate
8、 expenses, and costs and expenses associated with foreclosed real estatepreviously charged against Wescos former Mutual Savings and Loan Association subsidiary. Income was from ownershipof the Wesco headquarters o ce building, primarily leased to outside tenants, interest and dividend income from ca
9、shequivalents and marketable securities owned outside the insurance subsidiaries, and, in 1999, the reduction of lossreserves provided in prior years against possible losses on sales of loans and foreclosed real estate.This supplementary breakdown of earnings di ers somewhat from that used inaudited
10、 nancial statements which follow standard accounting convention. Thesupplementary breakdown is furnished because it is considered useful toshareholders.Wesco-Financial Insurance Company (“Wes-FIC)Wes-FICs normal net income for 1999 was $43,610,000, versus $34,654,000 for1998. The gures include $6,41
11、5,000 in 1999 and $4,987,000 in 1998 contributed by1Bowne Integrated Typesetting System 29-MAR-00 09:38 Style: STYLE013.BST;118 BLA0001866 Fmt:V5.21:LAM31156/8 Vjust J1:1Seq:1 Free lead 120D*points, Next lead: 140D C:100 WESCO FINANCIAL CORP BOWNE OF LOS ANGELES (213) 627-2200 LAM_CPS BL/SM CURRENT
12、7-APR-2000 14:06 NEXT PCN: 005.00.00.00 - Page is valid, no graphics JB: A60558 PN: 004.00.00.00 SN: 5X *A60558/004/5*The Kansas Bankers Surety Company (“KBS), owned by Wes-FIC since 1996. KBSis discussed in the section, “The Kansas Bankers Surety Company, below.At the end of 1999 Wes-FIC retained a
13、bout $21 million in invested assets, o setby claims reserves, from its former reinsurance arrangement with Firemans FundGroup. This arrangement was terminated August 31, 1989. However, it will take along time before all claims are settled, and, meanwhile, Wes-FIC is being helpedover many years by pr
14、oceeds from investing “ oat.In addition, Wes-FIC has been engaged for several years in super-cat reinsur-ance, described in great detail in our pre-1999 annual reports, which Wescoshareholders should re-read each year. Wes-FIC also engages in other reinsurancebusiness, including large and small quot
15、a share arrangements similar and dissimilar toour previous reinsurance contract with Firemans Fund Group.In all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent,Berkshire Hathaway, sold four times as much reinsurance to the same customers onthe same terms, except that such
16、subsidiaries usually take from us a 3%-of-premiumsceding commission on premium volume passed through them to Wes-FIC. Exceptingthis ceding commission, Wes-FIC has virtually no insurance-acquisition or insuranceadministration costs.Early in the current year (2000) Wes-FIC made an intracompany loan th
17、at fundsa large majority of the purchase price of CORT Business Services Corporation,discussed below.Wes-FIC remains a very strong insurance company, with very low costs, and,one way or another, in the future as in the past, we expect to continue to nd andseize at least a few sensible insurance oppo
18、rtunities.On super-cat reinsurance accepted by Wes-FIC to date (March 3, 2000) therehas been no loss whatsoever that we know of, but some “no-claims contingentcommissions have been paid to original cessors of business (i.e., cessors notincluding Berkshire Hathaway). Super-cat underwriting pro t of $
19、1.4 million a year,before taxes, bene ted earnings in 1999 and 1998. The balance of pre-tax underwrit-ing pro t amounted to $3.0 million for 1999 and $1.9 million for 1998. These gurescame mostly from favorable revision of loss reserves on the old Firemans Fundcontract.Wesco shareholders should cont
20、inue to realize that recent marvelous underwrit-ing results are sure to be followed, sometime, by one or more horrible underwritinglosses from super-cat or other insurance written by Wes-FIC.The Kansas Bankers Surety Company (“KBS)KBS, purchased by Wes-FIC in 1996 for approximately $80 million in ca
21、sh,contributed $6,415,000 to the normal net operating income of the insurancebusinesses in 1999 and $4,987,000 in 1998, after reductions for goodwill amortiza-tion under consolidated accounting convention of $782,000 each year. The results of2Bowne Integrated Typesetting System 29-MAR-00 18:41 Style
22、: STYLE013.BST;118 BLA0000027 Fmt:V5.21:LAM30075T/8 Vjust S2:1Seq:1 Free lead 460DMpoints, Next lead: 0D C:100 WESCO FINANCIAL CORP BOWNE OF LOS ANGELES (213) 627-2200 LAM_CPS BL/SM CURRENT 7-APR-2000 14:06 NEXT PCN: 006.00.00.00 - Page is valid, no graphics JB: A60558 PN: 005.00.00.00 SN: 6X *A6055
23、8/005/6*KBS have been combined with those of Wes-FIC, and are included in the foregoingtable in the category, “ normal net operating income of Wes-FIC and KBS insurancebusinesses.KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Itso ces are in Topeka, Kansas. Over the year
24、s its service has continued to adapt to thechanging needs of the banking industry. Today its customer base, consisting mostlyof small and medium-sized community banks, is spread throughout 25 mainlymidwestern states. In addition to bank deposit guaranty bonds which insure depositsin excess of FDIC c
25、overage, KBS also o ers directors and o cers indemnity policies,bank employment practices policies, bank annuity and mutual funds indemnitypolicies and bank insurance agents professional errors and omissions indemnitypolicies.A signi cant change in KBSs operations occurred in 1998 and consisted of a
26、large reduction in insurance premiums ceded to reinsurers. The increased volume ofbusiness retained (95% in 1999 and 94% in 1998 compares with 58% in 1997)accompanied slightly higher underwriting income for 1999 after a reduction in theamount for 1998. KBSs combined ratio remained much better than a
27、verage forinsurers, at 59.4% for 1999 and 62.2% for 1998, versus 37.2% for 1997, and weexpect volatile but favorable long-term e ects from increased insurance retained.Part of KBSs continuing insurance volume is now ceded through reinsurance toother Berkshire subsidiaries under reinsurance arrangeme
28、nts whereunder such otherBerkshire subsidiaries take 50% and unrelated reinsurers take the other 50%.KBS is run by Donald Towle, President, assisted by 15 dedicated o cers andemployees.CORT Business Services Corporation (“CORT)In February 2000, Wesco purchased 100% of CORT Business Services Corpora-
29、tion (“CORT) for $384 million in cash. In addition, CORT retains about $45 millionof previously existing debt.CORT is a very long established company that is the countrys leader in rentalsof furniture that lessees have no intention of buying. In the trade, people call CORTsactivity “rent-to-rent to
30、distinguish it from “lease-to-purchase businesses that are,in essence, installment sellers of furniture.However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements,must be skilled in selling used cars, CORT must be and is skilled in selling usedfurniture.In 1999, CORT had total
31、revenues of $354 million. Of this, $295 million wasfurniture rental revenue and $59 million was furniture sales revenue. CORTs pre-taxearnings in 1999 were $46 million.3Bowne Integrated Typesetting System 29-MAR-00 18:42 Style: STYLE013.BST;118 BLA0000029 Fmt:V5.21:LAM30075T/8 Vjust RSeq:1 Free lead
32、 440DMpoints, Next lead: 0D C:100 WESCO FINANCIAL CORP BOWNE OF LOS ANGELES (213) 627-2200 LAM_CPS BL/SM CURRENT 7-APR-2000 14:06 NEXT PCN: 007.00.00.00 - Page is valid, no graphics JB: A60558 PN: 006.00.00.00 SN: 8X *A60558/006/8*Thus, in essence, Wesco paid $384 million for $46 million in pre-tax
33、earnings.About 60% of the purchase price was attributable to goodwill, an intangible balancesheet asset.After the transaction, Wescos consolidated balance sheet will contain about$260 million in goodwill (including $29 million from Wescos 1996 purchase ofKansas Bankers Surety). On a full year basis,
34、 Wescos future reported earnings willbe reduced by about $6 million on account of mostly-non-tax-deductible amortiza-tion of goodwill. We do not believe, however, that this accounting deduction re ectsany real deterioration in earnings-driving goodwill in place.More details with respect to the CORT
35、transaction are contained in Note 8 tothe accompanying nancial statements, and on the last page of this annual report, towhich careful attention is directed.CORT has long been headed by Paul Arnold, age 53, who is a star executive as isconvincingly demonstrated by his long record as CEO of CORT. Pau
36、l will continue asCEO of CORT, with no interference from Wesco headquarters. We would be crazyto second-guess a man with his record in business. We are absolutely delighted tohave Paul and CORT within Wesco and hope to see a considerable expansion ofCORTs business and earnings in future years.Precis
37、ion SteelThe businesses of Wescos Precision Steel subsidiary, headquartered in theoutskirts of Chicago at Franklin Park, Illinois, contributed $2,532,000 to normal netoperating income in 1999, compared with $3,154,000 in 1998. The $622,000decrease in 1999 net income occurred despite a 2.5% increase
38、in pounds of productsold, and re ects mainly the pounding which competition gave to prices as costs ofprincipal raw materials declined. Fewer dollars of gross pro t were available toabsorb operating expenses. Precision Steels operations for 1999 and 1998 alsore ect after-tax expenditures of approxim
39、ately $225,000 and $350,000, respectively,necessitated to upgrade computers and computer systems to ensure that PrecisionSteels order-taking and other data processing systems continue to function accu-rately beyond December 31, 1999.It is with mixed emotions that we report that David Hillstrom, Pres
40、ident andChief Executive o cer of Precision Steel for more than twenty years, retired in thelatter part of 1999 and that Terry Piper was elected to replace him. Terry is a veryable man and is no stranger to Precision Steel. He joined it as a salesman approxi-mately forty years ago, steadily advanced
41、, and served as President and GeneralManager of Precision Steels Precision Brand Products subsidiary for the last thirteenyears. Terry now has the responsibility of carrying on the leadership of his predeces-sor; and, under their combined skills, Precision Steels businesses in 1999 continuedto provi
42、de an excellent return on resources employed.4Bowne Integrated Typesetting System 29-MAR-00 09:38 Style: STYLE013.BST;118 BLA0001866 Fmt:V5.21:LAM31156/8 Vjust J1:1Seq:4 Free lead 180D*points, Next lead: 600D C:100 WESCO FINANCIAL CORP BOWNE OF LOS ANGELES (213) 627-2200 LAM_CPS BL/SM CURRENT 7-APR-
43、2000 14:06 NEXT PCN: 008.00.00.00 - Page is valid, no graphics JB: A60558 PN: 007.00.00.00 SN: 7X *A60558/007/7*Tag Ends from Savings and Loan DaysAll that now remains outside Wes-FIC but within Wesco as a consequence ofWescos former involvement with Mutual Savings, Wescos long-held savings andloan
44、subsidiary, is a small real estate subsidiary, MS Property Company, that holds tagends of assets and liabilities with a net book value of about $15 million. MS PropertyCompanys results of operations, immaterial versus Wescos present size, are in-cluded in the foregoing breakdown of earnings within “
45、all other normal netoperating income (loss).Of course, the main tag end from Wescos savings and loan days is aninvestment in Freddie Mac common stock, purchased by Mutual Savings for $72 mil-lion at a time when Freddie Mac shares could be lawfully owned only by a savingsand loan association. The 28,
46、800,000 shares owned by Wes-FIC at yearend 1999 hada market value of $1.4 billion.All Other “Normal Net Operating Income or LossAll other “normal net operating income or loss, net of interest paid and generalcorporate expenses, amounted to after-tax losses of $238,000 in 1999 and $186,000in 1998. So
47、urces were (1) rents ($2,862,000 gross in 1999) from Wescos Pasadenao ce property (leased almost entirely to outsiders, including California Federal Bankas the ground oor tenant), and (2) interest and dividends from cash equivalentsand marketable securities held outside the insurance subsidiaries, l
48、ess (3) costs andexpenses of liquidating tag-end foreclosed real estate. The loss widened in 1999because fewer dividends were received during the year after forced conversion ofpreferred stock of Citigroup Inc. (“Citigroup) into lower-dividend-paying commonstock. The “other normal net operating income or loss gures for 1999 and 1998also include intercompany charges for interest expense ($353,000 and $102,000after taxes, respectively) on borrowings from Wes-FIC. This intercompany interestexpense does not a ect Wescos consolidated net income inasmuch as the sameamount is include
