<PAGE> 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 (Fee required)
For the fiscal year ended December 31, 1993 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)
<TABLE>
<S> <C>
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)
</TABLE>
(818) 585-6700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<S> <C>
Name of Each Exchange
Title of Each Class on Which Registered
Capital Stock, $1 par value American Stock Exchange
and Pacific Stock Exchange
</TABLE>
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. /X/
The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant as of March 22, 1994 was: $171,105,000.
The number of shares outstanding of the registrant's Capital Stock as of
March 22, 1994 was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C>
Title of Document
Proxy Statement for 1994 Annual Part III, Items 10, 11, 12
Meeting of Shareholders and 13
Parts of Form 10-K
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Wesco Financial Corporation ("Wesco") was incorporated in Delaware on March
19, 1959. The principal businesses of Wesco, conducted by wholly owned
subsidiaries, have been (1) the savings and loan business, through Mutual
Savings and Loan Association, subsequently renamed MSMLMIC ("Mutual Savings"),
which was incorporated in California in 1925 and gave up its status as a
regulated thrift institution after disposing of its savings accounts and most of
its real estate loans in October 1993, (2) the property and casualty insurance
business, through Wesco-Financial Insurance Company ("Wes-FIC"), which was
incorporated in 1985, and (3) the steel service center business, through
Precision Steel Warehouse, Inc. ("Precision Steel"), which was begun in 1940 and
acquired by Wesco in 1979.
Wesco's operations also include, through MS Property Company ("MS
Property"), the ownership and management of commercial real estate transferred
to MS Property by Wesco, and the development and liquidation of foreclosed real
estate and delinquent real estate loans transferred to MS Property by Mutual
Savings, all in December 1993, when MS Property began its operations. Wesco's
operations have also included the manufacture of electrical equipment through
New America Electrical Corporation ("New America Electric"), which was organized
in 1982, has been approximately 80%-owned by Wesco since December 1988, and sold
its business and commenced liquidation in mid-1993. Wesco also has investments
in securities.
Since 1973, Wesco has been 80.1% owned by Blue Chip Stamps (or its
predecessor by the same name), a wholly owned subsidiary of Berkshire Hathaway
Inc. ("Berkshire"). Wesco and its subsidiaries are thus controlled by Blue Chip
Stamps 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 40.7% 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, but Mr. Buffett has
no active participation in Wesco's management.
Wesco's activities fall into three business segments -- financial,
insurance, and industrial. The financial segment, through 1993 yearend, included
the savings and loan business. (Effective January 1, 1994, the remainder of the
savings and loan business -- the portion that had employed the majority of its
assets, in terms of market value, in indirect real estate lending through
ownership of 7.2 million shares of common stock of Federal Home Loan Mortgage
Corporation ("Freddie Mac") and mortgage-backed securities -- became part of the
insurance segment upon Mutual Savings' statutory merger into Wes-FIC.) Also
included in the financial segment are (a) MS Property's ownership and management
of commercial real estate as well as its development and liquidation of
foreclosed real estate and delinquent real estate loans, and (b) investments,
principally in common and preferred stocks. The insurance segment has, through
1993 yearend, comprised the property and casualty insurance business. (In 1994
it also includes the indirect real estate lending business formerly engaged in
by Mutual Savings.) The industrial segment includes steel service center
operations and, until mid-1993, also included electrical products business
activity. The amounts of revenues, operating profit and identifiable assets
attributable to each of these three business segments are included in Note 9 to
Wesco's consolidated financial statements contained in Item 8, Financial
Statements.
FINANCIAL SEGMENT
The savings and loan business has been a difficult business since the late
1970s as explained in detail in previous annual reports. Mutual Savings and
Wesco have dealt with increasing savings and loan regulations and regulatory
pressures, particularly over the past five years, with the result that
management decided as of 1992 yearend that Mutual Savings would give up its
status as a regulated savings and loan association. The decision was prompted,
in part, by regulatory insistence that Mutual
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Savings make additional changes in its business above and beyond those
previously made. Management believed such additional changes, if implemented,
would further increase operating expenses, and possibly narrow the spread
between interest income and interest expense, thereby resulting in an
unacceptable return to its owners. To achieve its objective, on October 8, 1993,
Mutual Savings consummated its previously announced agreement with CenFed Bank,
A Federal Savings Bank ("CenFed"), following receipt of regulatory approvals.
Mutual Savings transferred its savings accounts and certain other liabilities
(totaling about $220 million) to CenFed, offset by substantially all of its real
estate loans and certain other non-cash assets (about $86 million, combined) and
cash (about $134 million). Pursuant to the agreement, Wesco loaned $4 million to
CenFed's parent corporation for a three-year period, with interest initially at
prime rate. In addition, Mutual Savings and Wesco jointly agreed to indemnify
CenFed to the extent of at least 90% with respect to any losses that might be
sustained on the loans transferred. After provision for such indemnification,
the CenFed transaction resulted in an after-tax gain of $905,000, or $.13 per
Wesco share.
Following completion of the foregoing transaction, and the withdrawal by
Mutual Savings and by Wesco from savings and loan regulation, (1) Mutual Savings
transferred all of its foreclosed real estate, and the few real estate loans
that were not sold to CenFed, to MS Property, which is continuing the slow
liquidation of those assets begun by Mutual Savings; and (2) Wesco transferred
its commercial real estate property in Pasadena, California, to MS Property,
which is now managing it.
Mutual Savings retained a majority (at market value) of its former assets,
consisting mostly of stock of Freddie Mac (market approximately $359 million
versus cost of about $72 million at 1993 yearend) and indirect loans in the form
of approximately $46 million of securitized mortgages. Immediately after 1993
yearend Mutual Savings merged into Wes-FIC, which will continue to engage in the
mortgage business and make business use of the portion of Mutual Savings'
business that in recent years employed the majority of its assets. The
continuation of this business will be regulated by the Nebraska Department of
Insurance, replacing federal and California thrift regulators.
Wesco, while it seeks suitable businesses to acquire or to expand its
existing operations, invests in marketable securities, including common stocks
of unaffiliated companies held outside its insurance subsidiary. (See Note 2 to
the accompanying consolidated financial statements for a summary of all
investments, both inside and outside Wesco's insurance subsidiary. See Schedule
I accompanying such statements for further information.)
Eleven full-time employees are engaged in the financial segment activities.
INSURANCE SEGMENT
Wes-FIC was incorporated in 1985 to engage in the property and casualty
insurance and reinsurance business. Wesco has contributed approximately $103
million cash to Wes-FIC's capital since Wes-FIC's date of incorporation. On
January 1, 1994, as a result of Mutual Savings' merger into Wes-FIC, the latter
received an additional net contribution of approximately $240 million, of which
$187 million related to Freddie Mac stock (unrealized appreciation of $287
million less $100 million of income taxes deemed applicable thereto).
In 1985, Wes-FIC entered into an arrangement whereby it
reinsured -- through a Berkshire insurance subsidiary, National Indemnity
Company ("NICO"), as intermediary-without-profit -- 2% of the entire book of
insurance business of the long-established Fireman's Fund Insurance Companies
("Fireman's Fund"). Wes-FIC thus assumed the benefits and burdens of Fireman's
Fund's prices, costs and losses under a contract covering all insurance premiums
earned by Fireman's Fund during a four-year coverage period that expired on
August 31, 1989. The arrangement put Wes-FIC in virtually the same position it
would have been in if it, instead of Fireman's Fund, had directly written the
business reinsured. Differences in results under this arrangement have occurred
principally from the investment of premiums, as Wes-FIC, instead of Fireman's
Fund, has invested funds from "float" (funds set aside and invested pending
payment of claims). Wes-FIC will remain liable for its share of
15
<PAGE> 4
unpaid losses and loss expenses, which have been reflected on Wesco's balance
sheet, and will continue to invest funds offset by loss reserves until runoff is
complete, perhaps many years hence.
In 1990 and 1991, Wes-FIC reinsured 50% of the book of workers'
compensation insurance business of Cypress Insurance Company ("Cypress"), a
wholly owned subsidiary of Berkshire, under a contract patterned generally after
that with Fireman's Fund. As with the Fireman's Fund contract, Wes-FIC will
remain liable for its share of unpaid losses and loss adjustment expenses, as
well as policyholder dividends.
During 1992, Wes-FIC entered into another arrangement with NICO whereby
NICO retroceded to it 50% of certain personal lines reinsurance business NICO
had assumed. The arrangement was terminated in mid-1993, when the original
source of the reinsurance stopped making cessions to NICO.
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 is competitively well positioned, inasmuch as
its premiums written in 1993 amounted to approximately 2% of its statutory
surplus compared to an industry average of about 140% based on figures reported
for 1992.
Wes-FIC's unusual strength, following the absorption of Mutual Savings, has
enabled it to enter into the business of "super-catastrophe" reinsurance,
through five subcontracts entered into with NICO at favorable terms in February
1994. Super-catastrophe reinsurance is the insurance that insurance companies
buy from other insurance companies to protect themselves against major
catastrophic losses. An insurer in this business must have large net worth in
relation to annual premiums in order to remain solvent when called upon to pay
claims when a large super catastrophe occurs.
Berkshire has indicated that its insurance subsidiaries may from time to
time be offered super catastrophe reinsurance business that is somewhat larger
than it wishes to retain and may make a portion of the business available to
Wes-FIC, as NICO did in the case of the aforementioned five subcontracts.
Wesco's and Wes-FIC's boards of directors have authorized automatic acceptance
of future retrocessions of reinsurance offered by wholly owned subsidiaries of
Berkshire provided the following guidelines and limitations are complied with:
(1) in order not to delay the acceptance process, the retrocession will be
accepted without delay in writing in Nebraska by agents of Wes-FIC who are
salaried employees of Berkshire subsidiaries; (2) the Berkshire subsidiary will
receive a ceding commission of 3% of premiums, probably less than the Berkshire
subsidiary could get in the marketplace; (3) Wes-FIC will assume 20% or less of
the risk (before taking into account effects of the ceding commission); (4)
wholly owned Berkshire subsidiaries will 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
will not exceed 10% of Wes-FIC's net worth.
Wes-FIC also writes direct business, as distinguished from reinsurance. It
is licensed in Nebraska, Utah and Iowa, and wrote $41,000 and earned $51,000 in
direct premiums in 1993.
Wesco's and Wes-FIC's boards are hopeful, but have no assurance, that
additional reinsurance retrocessions or other insurance arrangements, including
those similar to the Fireman's Fund contract, will become available to Wes-FIC.
Insurance companies are subject to regulation by the departments of
insurance of the various states in which they operate. Regulations relate to,
among other things, capital requirements, shareholder and policyholders'
dividend restrictions, reporting requirements, periodic regulatory examinations,
and limitations on the size and types of investments that can be made.
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INDUSTRIAL SEGMENT
Precision Steel, acquired in 1979 for approximately $15 million, operates a
well-established steel service center business in two locations: one in Franklin
Park, Illinois, near Chicago; the other, operated by a wholly owned subsidiary,
in Charlotte, North Carolina. The service centers buy low carbon sheet and strip
steel, coated metals, spring steels, 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 30 thousand tons compares with the steel service
industry's annual volume of over 20 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 substitute less costly
components for parts traditionally made of steel.
Precision Brand Products, Inc. ("Precision Brand"), a wholly owned
subsidiary of Precision Steel, manufactures shim stock and other tool room
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 0.5%; 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 steel service businesses are subject to economic cycles. These
businesses are not dependent on a few large customers. Steel service backlog of
orders approximated $5.2 million as of December 31, 1993, unchanged from the
figure as of December 31, 1992.
Approximately 250 full-time employees are engaged in the steel service
business, about 40% of whom are members of unions. Management considers labor
relations to be good.
ITEM 2. PROPERTIES
MS Property owns a business block in downtown Pasadena, California, which
is improved with a nine-story office building that was constructed in 1964 and
has approximately 125,000 square feet of net rentable area, as well as three
commercial store buildings and a multistory garage with space for 425
automobiles. Of the 125,000 square feet of office space, approximately 3,000
square feet are used by Wesco and MS Property as their headquarters. Most of the
remainder is leased to outside parties, including CenFed, law firms and others,
under agreements expiring at various dates to 2008. MS Property also owns a
parking lot with space for approximately 100 automobiles across the street from
the multistory structure.
Wes-FIC uses as its place of business the Omaha, Nebraska headquarters
office of NICO.
MS Property holds real estate acquired by Mutual Savings or itself through
foreclosure. The most valuable parcel, acquired in 1966, consisted of 22 acres
of largely oceanfront land near Santa Barbara, California, where a luxury
development consisting of 20 townhomes and 12 residential lots has been under
construction, with several sales recorded to date. Other properties include
several buildings in a small shopping center in Upland, California, which are
leased to various small businesses, and several single-family residences in
Southern California, presently listed for sale.
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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 which
are expected to result in material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Wesco's shareholders subsequent to
the annual meeting held in May 1993.
PART II
ITEM 5.
Wesco's common stock is traded on the American Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth the ranges of stock prices reported in The
Wall Street Journal for Wesco's shares trading on the American Stock Exchange,
by quarter, for 1993 and 1992, as well as cash dividends paid by Wesco on each
outstanding share:
<TABLE>
<CAPTION>
1993 1992
------------------------------ ------------------------------
SALES PRICE SALES PRICE
QUARTER ------------------- DIVIDENDS QUARTER ------------------- DIVIDENDS
ENDED HIGH LOW PAID ENDED HIGH LOW PAID
- ----------------- --------- --------- --------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <S> <C> <C> <C>
March 31......... $ 89 $ 80 $ 0.235 March 31........ $71 7/8 66 3/8 $ 0.225
June 30.......... 131 108 0.235 June 30......... 71 5/8 67 1/4 0.225
September 30..... 149 3/4 124 3/4 0.235 September 30.... 71 67 0.225
December 31...... 145 127 1/4 0.235 December 31..... 83 7/8 66 3/8 $ 0.225
------- -------
$ 0.94 $ 0.90
======= =======
</TABLE>
There were approximately 900 shareholders of record of Wesco's capital
stock as of the close of business on March 9, 1994.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below and on the following page are selected consolidated
financial data for Wesco and its subsidiaries. For additional financial
information, attention is directed to Wesco's audited 1993 consolidated
financial statements appearing elsewhere in this report. (Dollar amounts are in
thousands except for amounts per share.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest on loans and mortgage-backed
securities......................... $ 7,952 $ 16,688 $ 15,196 $ 13,183 $ 12,204
Insurance premiums earned............. 12,158 19,587 5,307 2,003 37,959
Sales and service revenues............ 63,627 65,438 65,341 65,174 68,691
Interest and dividends on
investments........................ 28,152 28,186 34,477 40,008 38,232
Gains, net, on sales of securities and
foreclosed property................ 1,783 105 10,714 593 8,972
Gain on disposition of Mutual Savings'
loans and deposits................. 1,577 -- -- -- --
Other................................. 2,109 1,811 1,811 1,680 2,337
-------- -------- -------- -------- --------
117,358 131,815 132,846 122,641 168,395
-------- -------- -------- -------- --------
Costs and expenses:
Interest on savings accounts.......... 5,792 11,986 18,311 21,975 21,261
Insurance losses and expenses......... 12,894 20,779 6,685 3,759 40,702
Cost of products and services sold.... 51,570 52,491 53,462 52,286 55,567
Selling, general and administrative... 16,051 15,813 14,986 14,073 13,741
Interest on notes payable............. 4,610 4,872 4,773 4,758 3,939
Loss on sale of New America
Electric........................... 2,700 -- -- -- --
-------- -------- -------- -------- --------
93,617 105,941 98,217 96,851 135,210
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle.................. 23,741 25,874 34,629 25,790 33,185
Provision for income taxes.............. (5,046) (20,873) (5,107) (361) (2,851)
-------- -------- -------- -------- --------
18,695 5,001 29,522 25,429 30,334
-------- -------- -------- -------- --------
Cumulative effect of change in
accounting principle.................. 1,023 -- -- -- --
-------- -------- -------- -------- --------
Net income.................... $ 19,718 $ 5,001 $ 29,522 $ 25,429 $ 30,334
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Amounts per share:
Income before cumulative effect of
change in accounting principle..... $2.63 $.70 $4.15 $3.57 $4.26
Net income............................ 2.77 .70 4.15 3.57 4.26
Cash dividends........................ $.94 $.90 $.86 $.82 $.78
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and temporary cash
investments.................. $ 5,230 $ 123,705 $ 41,849 $ 84,020 $ 55,096
Investments--
Securities with fixed
maturities:
Mortgage-backed
securities.............. 45,848 68,933 129,510 23,727 34,315
Other...................... 156,278 167,580 210,479 269,943 291,097
Marketable equity
securities*................ 639,958 331,770 320,819 205,091 188,211
Real estate loans receivable.... 1,848 101,891 100,876 107,382 119,448
Total assets.................... 915,155 864,959 871,129 744,081 737,505
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Liabilities:
Savings accounts................ $ -- $ 250,612 $ 286,904 $ 286,093 $ 291,592
Insurance losses and expenses... 53,818 61,526 60,252 71,405 91,151
Income taxes payable,
principally deferred*........ 180,722 72,928 52,789 14,022 9,752
Notes payable................... 37,896 55,119 55,429 55,726 56,011
Total liabilities............... 289,068 453,245 464,766 435,103 456,009
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shareholders' equity:*
Unrealized appreciation of
marketable equity securities,
net of taxes................. $ 309,057 $ 107,709 $ 100,952 $ 26,966 $ 19,076
Total shareholders' equity...... 626,087 411,714 406,363 308,978 281,496
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per share.................... $87.94 $57.83 $57.07 $43.40 $39.54
</TABLE>
- ---------------
* Wesco elected to adopt SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", effective at 1993 yearend, with the result that
all marketable equity securities owned by Wesco and its subsidiaries at 1993
yearend are carried at market value, with the aggregate unrealized gain added
to shareholders' equity net of deemed applicable income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
The financial condition of Wesco Financial Corporation ("Wesco") continues
to be very sound. Its net worth is greater than ever due to continued successful
operations as well as continued appreciation of marketable securities. Its
liquidity in terms of cash equivalents is adequate for all operating and other
current needs. Other resources are available such as liquidation of marketable
securities and borrowings from banks and others.
Wesco's shareholders' equity (net worth) at December 31, 1993 was $626
million. Of this amount, $309 million represented unrealized appreciation of
marketable equity securities, less income taxes that would have to be paid upon
sale of the securities assuming continuation of current tax rates. At December
31, 1992, Wesco's shareholders' equity, under generally accepted accounting
principles then in effect, was $412 million. (If SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," had been available for
adoption by Wesco in 1992 instead of 1993, Wesco's shareholders' equity at
December 31, 1992 would have been stated at $582 million, of which $278 million
would have represented unrealized appreciation of marketable equal securities
less deemed applicable income taxes.)
Borrowings from banks and others have been available to Wesco and its
subsidiaries under attractive terms for a number of years. In October 1989, in
connection with a $30 million Wesco note offering, Standard and Poor's
Corporation issued a credit rating of Wesco debt of AA+. Wesco has not
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gone to the credit markets since 1989, but it hopes that any future borrowings
will elicit the highest possible credit rating, AAA.
Wesco's Mutual Savings subsidiary, prior to sale of most of its real estate
loans, did not suffer the crippling loan losses reported by much of the savings
and loan industry in recent years. Mutual Savings did, however, experience some
loan losses and some increasing deterioration of collateral value due mainly to
recessionary economic conditions and decreasing real estate values in Southern
California.
Mutual Savings, in connection with its sale of $81 million of real estate
loans, indemnified CenFed against any losses that might ultimately be sustained
to the extent of at least 90% of each loss. However, Wesco does not believe that
the indemnification will have a significant effect on its financial condition,
because (1) the loans are first-mortgage real estate loans mainly on owner-
occupied, single-family residences, and (2) Mutual Savings' seriously delinquent
loans were retained and thus not transferred to CenFed.
In addition to mainly delinquent loans, Mutual Savings retained properties
that it had obtained through foreclosure. The most significant of these is an
upscale oceanfront development in Montecito, near Santa Barbara, California,
which, after a $2 million writedown to estimated net realizable value, was
recorded on the books at 1993 yearend at $23 million. Other foreclosed
properties and real estate loans had an aggregate book value at 1993 yearend of
$7 million, net of reserves for loss. These assets, now owned by MS Property,
are not expected to expose Wesco to significant detrimental effect in the
realization of their values.
Wesco is not now suffering from inflation, but its insurance and industrial
segments have potential exposure. Very large unanticipated changes in the rate
of inflation could adversely impact the insurance business, because premium
rates are established well in advance of incurrence of the related costs.
Precision Steel's steel service businesses are competitive and operate on tight
gross profit margins, and thus its earnings are susceptible to bad effects from
inflationary cost increases. As a result of Mutual Savings' disposition of its
savings accounts and most of its real estate loans, the financial segment now
has relatively minor exposure to inflation.
RESULTS OF OPERATIONS
The savings and loan industry has been in considerable turmoil for many
years. In response to perceived uncertainties in that industry, Wesco in the
1970s began to diversify its operations. Mutual Savings' activities declined
both in size and in relative importance to Wesco's consolidated operations
until, finally, its savings deposits and most loans were disposed of in late
1993. Meanwhile, the portfolio of investment securities has grown, mostly inside
the savings and loan and insurance subsidiaries, and dividend and interest
income and realized and unrealized gains on securities have increased in
importance to Wesco. Steel service operations were added in 1979, property and
casualty insurance operations were added in 1985, and electrical equipment
manufacturing operations (sold in mid-1993) were added at 1988 yearend. (See
Item 1, Business, for further discussion of Wesco's operations.)
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The following summary indicates the contribution to consolidated net income
of each of Wesco's three business segments -- financial, insurance and
industrial -- and demonstrates the prevalance and effect on consolidated net
income of unusual items in recent years (amounts are in thousands of dollars,
all after income tax effect):
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Financial segment:
"Normal" net operating income of --
Mutual Savings..................................... $ 2,458 $ 3,746 $ 3,644
Other operations(1)................................ 3,514 3,776 3,960
------- ------- -------
5,972 7,522 7,604
------- ------- -------
Unusual items:
Gains, net of losses, on sales of securities and
foreclosed property.............................. -- 1 6,650
Loss on sale of interest in New America
Electric...................................... (1,617) -- --
Gain on disposition by Mutual Savings of deposits
and some loans................................... 906 -- --
Unusual income tax charges, net.................... (297)(2) (17,500)(3) --
------- ------- -------
(1,008) (17,499) 6,650
------- ------- -------
Net income (loss) -- financial........................ 4,964 (9,977) 14,254
------- ------- -------
Insurance segment:
"Normal" net operating income......................... 12,434 13,146 13,986
------- ------- -------
Unusual items:
Securities gains................................... 1,156 -- --
Unusual income tax charges, net.................... (1,011)(2) -- --
------- ------- -------
145 -- --
------- ------- -------
Net income -- insurance............................... 12,579 13,146 13,986
------- ------- -------
Industrial segment:
"Normal" net operating income......................... 1,976 1,832 1,282
Unusual income tax credit............................. 199 -- --
------- ------- -------
Net income -- industrial.............................. 2,175 1,832 1,282
------- ------- -------
Net income -- consolidated....................... $19,718 $ 5,001 $29,522
------- ------- -------
------- ------- -------
</TABLE>
- ---------------
(1) Comprises net commercial real estate rental income, plus interest and
dividend income from cash equivalents and investment securities held outside
Mutual Savings and Wes-FIC, less interest and other corporate expenses.
(2) Consists of cumulative effect of change in accounting for income taxes upon
adoption of SFAS No. 109 and effect of subsequent change in income tax rate
on deferred tax liabilities and assets. (See Note 6 to accompanying
consolidated financial statements for further information.)
(3) Consists of income tax provision required to be recorded when it was decided
to give up Mutual Savings' status as a regulated savings and loan
association due to the triggering of recapture of special bad debt tax
deductions. (See Note 6 to accompanying consolidated financial statements
for further information.)
The foregoing summary contains consolidated after-tax earnings data. The
following discussion, by business segment, should be read in conjunction with
the financial statements beginning on page 30, including in particular Note 9,
which provides information as to operating profit before taxes for each of
Wesco's business segments for the past three years.
22
<PAGE> 11
Financial Segment
Following is a summary of the components of Mutual Savings' consolidated
"normal" net operating income (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Revenues:
Interest on loans............................................. $ 4,686 $ 8,335 $ 9,231
Interest on mortgage-backed securities........................ 3,183 8,327 5,923
Interest on temporary cash investments........................ 1,546 1,223 2,967
Dividends on preferred and common stocks...................... 6,336 5,472 7,018
Interest on state and municipal bonds......................... -- 190 1,864
Other......................................................... 687 465 376
------- ------- -------
16,438 24,012 27,379
------- ------- -------
Expenses:
Interest on savings accounts.................................. 5,836 12,021 18,340
Interest on notes payable..................................... 1,662 1,475 1,475
Operating expenses............................................ 4,052 5,249 5,025
Provision for losses.......................................... 2,875 650 200
------- ------- -------
14,425 19,395 25,040
------- ------- -------
Income before income tax provision or benefit................... 2,013 4,617 2,339
Income tax (provision) benefit relating thereto................. 445 (871) 1,305
------- ------- -------
"Normal" net operating income................................... $ 2,458 $ 3,746 $ 3,644
------- ------- -------
------- ------- -------
</TABLE>
Mutual Savings' consolidated "normal" net operating income remained
relatively stable during 1991 and 1992, as shown in the foregoing table. Had it
not been for a significant increase in provision for losses on loans and real
estate held for sale in 1993 (mainly a $2 million pre-tax writedown of the
Montecito development at the end of 1993), the 1993 figure would also have been
comparable to those of the two preceding years.
Mutual Savings was operated with a view towards minimizing downside risk
and with an overriding commitment to maintaining a higher ratio of shareholders'
equity than was required under the strictest regulatory standards. As of
September 30, 1993, just prior to the CenFed transaction and Mutual Savings'
exit from thrift regulation, Mutual Savings' book net worth amounted to 18.0% of
assets, versus 15.0% as of December 31, 1992; these figures are based on assets
carried at historical cost, not market value, as would have been the case at
1993 yearend, when Wesco adopted SFAS No. 115 (see Note 1 to the accompanying
consolidated financial statements).
Mutual Savings' operations as a regulated savings and loan association
ceased as of October 8, 1993 upon the consummation of the transaction with
CenFed described in Item 1, Business. As a result, several of the items of
revenue and expense appearing in the foregoing table will wholly or partially
disappear, notably interest income on loans, interest expense on savings
accounts and operating expenses. Following Mutual Savings' merger into Wes-FIC
effective January 1, 1994, most of the other items of revenue and expense will
be included in the insurance segment.
Insurance Segment
Wesco entered into the property and casualty insurance business in
September 1985 through Wes-FIC, a newly formed subsidiary. Substantially all of
its insurance business to date has been derived through arrangements with NICO
and Cypress, wholly owned subsidiaries of Berkshire, Wesco's ultimate parent.
Under the arrangements, Wes-FIC has been ceded portions of the property and
casualty reinsurance business of NICO and has reinsured workers' compensation
business written by Cypress, in relatively short-lived arrangements.
23
<PAGE> 12
Arrangements with NICO comprised (1) reinsurance of 2% of the property and
casualty insurance business of Fireman's Fund during a four-year coverage period
that expired on August 31, 1989, and (2) reinsurance of 50% of certain personal
lines reinsurance business that NICO had assumed in an arrangement that
accounted for substantially all of Wes-FIC's earned premiums in 1992 and 1993,
and which terminated in mid-1993 when the original source of the reinsurance
stopped making cessions to NICO. The arrangement with Cypress accounted for most
of Wes-FIC's earned premiums for 1991. Wes-FIC has also written small amounts of
direct insurance business. (See Item 1, Business, for further information on
Wes-FIC, NICO, Cypress, Berkshire and Fireman's Fund.)
The "normal" net operating income of Wes-FIC (i.e., income before
securities gains and, in 1993, unusual income tax charges or credits) represents
the combination of its underwriting results with the interest and dividend
income from its investment activities. Following is a summary of such data (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Premiums written.................................... $ 6,249 $24,866 $ 5,362
------- ------- -------
------- ------- -------
Premiums earned..................................... $12,158 $19,587 $ 5,307
------- ------- -------
------- ------- -------
Underwriting loss................................... $ (783) $(1,192) $(1,380)
Interest and dividend income........................ 15,170 15,408 16,475
------- ------- -------
Income before income taxes.......................... 14,387 14,216 15,095
Income tax provision................................ (1,953) (1,070) (1,109)
------- ------- -------
"Normal" net operating income....................... $12,434 $13,146 $13,986
------- ------- -------
------- ------- -------
</TABLE>
Underwriting results in the property and casualty insurance business are
necessarily based on estimates and actuarial assumptions, and tend to be
cyclical. Results were disastrous for many insurers for several years prior to
Wes-FIC's entry into the insurance business, as price competition, inflation and
new judicial notions tended to extend insurance coverages beyond limits
contemplated when policies were issued. Several financial failures had occurred
in the industry. The result was a decrease in the industry's insuring capacity
(basically a multiple of its capital). This decreased capacity enabled insurers,
beginning in 1985, to increase prices (premium rates) significantly, as well as
to become more selective in their underwriting. When Wes-FIC entered into the
four-year Fireman's Fund reinsurance arrangement, the cycle appeared to have
become favorable for property and casualty insurers. But shortly thereafter,
price competition increased, and additional reinsurance at satisfactory prices
became unavailable.
Wes-FIC's low volume in insurance underwriting in most recent years has
been attributable mainly to management's perception that opportunity to write
more business at sensible rates has not been available to Wes-FIC, given general
industry-wide conditions. Meanwhile, Wes-FIC has been actively pursuing other
insurance and reinsurance opportunities, including insurance company
acquisitions, and in early 1994 entered the super-catastrophe reinsurance
business (see Item 1, Business).
Wes-FIC remains liable for runoff of its share of the losses and loss
expenses covered by the insurance arrangements summarized above. As claims are
paid over many future years, the liability (approximately $54 million as of
December 31, 1993) will decline, as will the funds set aside and invested
pending payment of claims ("float").
24
<PAGE> 13
Interest and dividend income has been earned by Wes-FIC (1) on insurance
premium float, (2) on capital contributed to the insurance business by Wesco
(approximately $100 million through 1993), and (3) on earnings retained and
reinvested.
The income tax provision of Wes-FIC has fluctuated as a percentage of its
pre-tax income in each of the periods presented in the table on the preceding
page. 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 expenses, and the related liabilities reflected
on Wesco's consolidated balance sheet, because they are based in large part upon
estimates, are subject to estimation error. Revisions of such estimates in
future periods could significantly affect the results of operations reported for
future periods. However, Wes-FIC has maintained a capital position strong enough
not only to absorb adverse estimation corrections but also to enable it to
accept other insurance contracts. The increase in Wes-FIC's capital resulting
from its absorption of Mutual Savings by statutory merger on January 1, 1994
enabled it to enter the super-catastrophe insurance business shortly thereafter
through five sub-contracts with NICO, as described in Item 1, Business. Although
additional reinsurance retrocessions from Berkshire subsidiaries, or other
attractive reinsurance or insurance arrangements with Berkshire subsidiaries or
other parties, would be welcome, an increase in Wes-FIC's insurance underwriting
activity, immediately or in the future, cannot be predicted.
Industrial Segment
Following is a summary of the "normal" net operating results of the
industrial segment, whose operations have included the businesses of Precision
Steel and its subsidiaries and New America Electric, until the latter sold its
electrical equipment manufacturing operations and commenced liquidation
effective July 1, 1993 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues, principally sales and services............ $ 63,959 $ 65,453 $ 65,409
-------- -------- --------
-------- -------- --------
Income before income taxes.......................... $ 3,375 $ 2,943 $ 2,168
Income tax provision................................ (1,443) (1,153) (900)
Minority interest................................... 44 42 14
-------- -------- --------
"Normal" net operating income....................... $ 1,976 $ 1,832 $ 1,282
-------- -------- --------
-------- -------- --------
</TABLE>
Revenues of the industrial segment have remained relatively unchanged in
each of the past three years notwithstanding the inclusion of only six months of
revenues from the operations of New America Electric in the 1993 figure. (New
America Electric accounted for $3.5 million, $7.4 million and $7.9 million of
revenues for 1993, 1992 and 1991.)
Income before income taxes and normal net operating income of the
industrial segment were negatively affected for each of the past three years as
a result of the inclusion of the operating results of New America Electric. Had
it not been for Wesco's equity of $213,000, $243,000 and $132,000 in 1993, 1992
and 1991 in New America Electric's after-tax operating losses, the industrial
segment would have reported normal net operating income of $2,189,000,
$2,075,000 and $1,414,000 for 1993, 1992 and 1991. The fluctuations in these
earnings figures were attributable in 1993 mainly to Precision Steel's ongoing
efforts to reduce operating expenses and, in 1992, to a lower-than-usual cost of
products sold as a percentage of steel service revenues (this percentage was
81.2%, 80.6% and 82.6% for 1993, 1992 and 1991). The cost percentage typically
fluctuates slightly from year to year as a result of changes in product mix,
price competition among suppliers and at the retail level, and availability of
favorable quantity order prices on materials purchased.
The operations of Precision Steel appear to have been less affected by
recessionary economic conditions in the past two years than previously.
25
<PAGE> 14
* * * * *
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, (2) the desire for funds for an
acquisition or repayment of debt, or (3) regulatory requirements, as was the
case in prior years when securities were sold as required by new savings and
loan laws.
Realized securities gains have been an element of Wesco's net income for a
number of years. The amounts of these gains, recorded when appreciated
securities are sold, tend to fluctuate significantly from period to period. The
varying effect upon Wesco's pre-tax income is evident on the face of the
consolidated statement of income. The amount of realized gain for any period has
no predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the existence of substantial
unrealized price appreciation in Wesco's consolidated investment portfolio.
Realized securities gains amounted to $1.2 million, $0.1 million and $5.8
million after income taxes in 1993, 1992 and 1991.
As explained in the second paragraph of this Item 7, unrealized
appreciation of all Wesco's marketable equity securities -- not just those of
its Wes-FIC insurance subsidiary, as in the past -- is included in the
consolidated balance sheet net of deemed applicable income taxes, effective as
of 1993 yearend. The Financial Accounting Standards Board required (in SFAS No.
115) that the net writeup be credited directly to shareholders' equity without
figuring in any way in the determination of net income, the same, sensible
procedure that had been followed for insurance entities. However, in another
pronouncement (SFAS No. 109) -- which required, among other things, adjusting
deferred income tax liabilities to reflect tax rate changes -- the FASB directed
that all such tax adjustments not bypass net income; thus, Wesco's 1993 net
income was penalized by $1.6 million due to an increase in the federal rate from
34% to 35% on Wes-FIC's unrealized appreciation, notwithstanding the fact that
the appreciation had never benefited net income.
Wesco's consolidated revenues include significant amounts of substantially
tax-exempt dividend income from preferred and common stocks as well as fully
tax-exempt interest on state and municipal bonds. Fluctuations in the proportion
of these components to total consolidated pre-tax income -- plus a special tax
provision of $17.5 million recorded as of 1992 yearend, and $2.1 million in 1993
to give effect to the tax rate increase applicable to deferred tax items
(including the $1.6 million discussed in the preceding paragraph) -- have
resulted in tax provisions as percentages of pre-tax income before cumulative
effect of change in accounting principle of 21.3%, 80.7% and 14.7% in 1993, 1992
and 1991. (See Note 6 to the accompanying consolidated financial statements for
further information on income taxes.)
Consolidated revenues, expenses and earnings set forth in Item 6, Selected
Financial Data, and in Wesco's consolidated statement of income, are not
necessarily indicative of future revenues, expenses and earnings, in that they
are subject to significant variations in amount and timing of securities gains
and losses and the possible occurrence of other unusual items. In addition, as
explained above, in October 1993, Mutual Savings, after transferring savings
accounts and some mortgage loans to CenFed, gave up its status as a regulated
savings and loan association. Then, on January 1, 1994, Mutual Savings merged
into Wes-FIC, which will thereafter continue to engage in the mortgage business
and make business use of the majority of its assets. It is anticipated that the
merger will not only result in elimination of nonproductive overhead needed to
maintain compliance with savings and loan laws and regulations, but will also
increase reinsurance capacity and asset-deployment options. The effects on
future operations of these changes, however, while possibly beneficial, are not
subject to estimation.
26
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS
Following is an index to financial statements and related schedules
appearing in this report:
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS NUMBER
-------------------- ------
<S> <C>
Independent auditors' report........................................ 29
Consolidated balance sheet -- December 31, 1993 and 1992............ 30
Consolidated statement of income and retained earnings -- years
ended December 31, 1993, 1992 and 1991............................ 31
Consolidated statement of cash flows -- years ended December 31,
1993, 1992 and 1991............................................... 32
Notes to consolidated financial statements.......................... 33-41
</TABLE>
The data appearing on the financial statement schedules listed below should
be read in conjunction with the consolidated financial statements and notes of
Wesco Financial Corporation 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 financial statements or notes thereto.
<TABLE>
<CAPTION>
SCHEDULE PAGE
FINANCIAL STATEMENT SCHEDULES NUMBER NUMBER
----------------------------- -------- ------
<S> <C> <C>
Marketable securities -- other investments -- December
31, 1993............................................... I 42
Condensed financial information of registrant -- December
31, 1993 and 1992 and years ended December 31, 1993,
1992 and 1991.......................................... III 43-44
</TABLE>
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 section entitled "Election of Directors"
appearing in the definitive combined notice of annual meeting and proxy
statement of Wesco Financial Corporation for its 1994 annual meeting of
shareholders (the "1994 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 1994 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the section "Voting Securities and Holders
Thereof" in the 1994 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information set forth in the sections "Election of Directors,"
"Board of Director Interlocks and Insider Participation" and "Compensation of
Directors and Executive Officers" in the 1994 Proxy Statement is incorporated
herein by reference.
27
<PAGE> 16
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:
<TABLE>
<S> <C>
3a. Articles of Incorporation and By-Laws of Wesco Financial Corporation
(incorporated by reference to Exhibit 3a to Annual Report on Form 10-K of
Wesco Financial Corporation for year ended December 31, 1989).
>4.1 Form of Indenture dated October 2, 1989 (incorporated by reference to Exhibit
4.1 to report on Form 8-K of Wesco Financial Corporation dated October 31,
1989, File No. 33-31290).
4.2 Form of Supplemental Indenture dated October 15, 1989 (incorporated by
reference to Exhibit 4.1 to report on Form 8-K of Wesco Financial Corporation
dated October 31, 1989, File No. 33-31290).
10.1 Purchase of Assets and Liability Assumption Agreement dated May 10, 1993,
among Mutual Savings and Loan Association, Wesco Financial Corporation and
CenFed Bank, A Federal Savings Bank (incorporated by reference to Wesco's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).
22. Subsidiaries.
</TABLE>
The index to financial statements and related schedules set forth in Item 8
of this report is incorporated herein by reference.
The following report on Form 8-K was filed during the quarter ended
December 31, 1993:
Report dated October 25, 1993
Items reported: 2 and 7.
Financial statements filed:
Pro forma consolidated balance sheet as of June 30, 1993
Pro forma statements of income for the year ended December 31, 1992
and six-month period ended June 30, 1993.
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 31, 1994
Chairman of the Board (principal executive officer)
By: Robert H. Bird March 31, 1994
President (principal operating officer)
By: Jeffrey L. Jacobson March 31, 1994
Vice President and Chief Financial Officer (principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Robert H. Bird March 31, 1994
Director
Carolyn H. Carlburg March 31, 1994
Director
James N. Gamble March 31, 1994
Director
Charles T. Munger March 31, 1994
Director
David K. Robinson March 31, 1994
Director
28
<PAGE> 17
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, 1993 and 1992, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended December 31, 1993. Our audits
also included financial statement schedules listed in the index at Item 8. These
financial statements and financial statement schedules are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1993
the Company changed its methods of accounting for income taxes and investments
to conform with recent pronouncements of the Financial Accounting Standards
Board.
/s/ Deloitte & Touche
Los Angeles, California
March 11, 1994
29
<PAGE> 18
WESCO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1993 1992
-------- --------
<CAPTION>
ASSETS
<S> <C> <C>
Cash and temporary cash investments.................................. $ 5,230 $123,705
Investments:
Securities with fixed maturities --
Mortgage-backed securities...................................... 45,848 68,933
Other........................................................... 156,278 167,580
Marketable equity securities....................................... 639,958 331,770
Accounts receivable.................................................. 6,962 14,145
Real estate loans receivable......................................... 1,848 101,891
Real estate held for sale............................................ 29,935 23,159
Property and equipment............................................... 13,907 14,354
Other assets......................................................... 15,189 19,422
-------- --------
$915,155 $864,959
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings accounts..................................................... $ -- $250,612
Insurance losses and loss adjustment expenses........................ 53,818 61,526
Income taxes payable, principally deferred........................... 180,722 72,928
Notes payable........................................................ 37,896 55,119
Other liabilities.................................................... 16,632 13,060
-------- --------
Total liabilities.......................................... 289,068 453,245
-------- --------
Shareholders' equity:
Capital stock, $1 par value -- authorized, 7,500,000 shares;
issued and outstanding, 7,119,807 shares........................ 7,120 7,120
Capital surplus arising from stock dividends....................... 23,319 23,319
Unrealized appreciation of marketable equity securities, net of
taxes........................................................... 309,057 107,709
Retained earnings.................................................. 286,591 273,566
-------- --------
Total shareholders' equity................................. 626,087 411,714
-------- --------
$915,155 $864,959
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 19
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
AND RETAINED EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Interest on loans and mortgage-backed securities...... $ 7,952 $ 16,688 $ 15,196
Insurance premiums earned............................. 12,158 19,587 5,307
Sales and service revenues............................ 63,627 65,438 65,341
Interest and dividends on investments other than
mortgage-backed securities......................... 28,152 28,186 34,477
Gain on disposition of Mutual Savings' loans and
deposits........................................... 1,577 -- --
Gains, net, on sales of securities and foreclosed
property........................................... 1,783 105 10,714
Other................................................. 2,109 1,811 1,811
-------- -------- --------
117,358 131,815 132,846
-------- -------- --------
Costs and expenses:
Interest on savings accounts.......................... 5,792 11,986 18,311
Insurance losses, loss adjustment and underwriting
expenses........................................... 12,894 20,779 6,685
Cost of services and products sold.................... 51,570 52,491 53,462
Selling, general and administrative expenses.......... 16,051 15,813 14,986
Interest on notes payable............................. 4,610 4,872 4,773
Loss on sale of New America Electric.................. 2,700 -- --
-------- -------- --------
93,617 105,941 98,217
-------- -------- --------
Income before income taxes and cumulative effect of
change in accounting principle........................ 23,741 25,874 34,629
Provision for income taxes.............................. (5,046) (20,873) (5,107)
-------- -------- --------
Income before cumulative effect of change in accounting
principle............................................. 18,695 5,001 29,522
Cumulative effect of change in accounting principle..... 1,023 -- --
-------- -------- --------
Net income.............................................. 19,718 5,001 29,522
Retained earnings -- beginning of year.................. 273,566 274,972 251,573
Cash dividends declared and paid........................ (6,693) (6,407) (6,123)
-------- -------- --------
Retained earnings -- end of year........................ $286,591 $273,566 $274,972
-------- -------- --------
-------- -------- --------
Amounts per share based on 7,119,807 shares outstanding
throughout each year:
Net income before cumulative effect of change in
accounting principle............................... $2.63 $.70 $4.15
Cumulative effect of change in accounting principle... .14 -- --
----- ---- -----
Net income............................................ $2.77 $.70 $4.15
===== ==== =====
Cash dividends........................................ $ .94 $.90 $ .86
===== ==== =====
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 20
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 19,718 $ 5,001 $ 29,522
Adjustments to reconcile net income with net cash, including
temporary cash investments, provided by operating
activities --
Gains, net, on sales of securities and foreclosed property,
deposits and loans of Mutual Savings, and interest in
New America Electric, before taxes...................... (660) (105) (10,714)
Provision for depreciation and amortization................ 1,774 1,864 2,113
Net increase (decrease) in liabilities for losses and loss
adjustment expenses of insurance business............... (7,708) 2,234 (11,153)
Increase (decrease) in income taxes payable currently...... 127 (841) 653
Increase in deferred income taxes payable associated with
recapture of Mutual Savings' special bad debt
deductions.............................................. -- 17,500 --
Cumulative effect of change in accounting for income
taxes................................................... (1,023) -- --
Other, net................................................. 189 (708) 2,804
--------- -------- ---------
Net cash provided by operating activities............... 12,417 24,945 13,225
--------- -------- ---------
Cash flows from investing activities:
Real estate loan originations................................ (1,471) (16,879) (12,785)
Principal collections on real estate loans................... 15,629 14,861 17,010
Purchases of securities with fixed maturities................ (10,395) -- (200,882)
Proceeds from sales of securities with fixed maturities...... -- -- 80,445
Proceeds from maturities and redemptions of securities with
fixed maturities........................................... 44,426 103,233 33,144
Proceeds from sales of marketable equity securities.......... 6,624 -- 46,356
Purchases of marketable equity securities.................... (3,091) (714) (479)
Payment to savings institution for its assumption of Mutual
Savings' savings accounts and certain other liabilities
(totaling $219,604), less its acquisition of loans and
certain other liabilities (totaling $84,997)............... (134,607) -- --
Other, net................................................... (3,183) (581) (12,596)
--------- -------- ---------
Net cash provided (used) in investing activities........ (86,068) 99,920 (49,787)
--------- -------- ---------
Cash flows from financing activities:
Net increase (decrease) in passbook and money-market-rate
savings accounts and interest-bearing checking accounts.... (21,471) 6,404 4,187
Net decrease in certificate accounts......................... (9,537) (42,696) (3,376)
Short-term borrowings from affiliates........................ 84,500 -- --
Repayments of notes and short-term borrowings................ (91,623) (310) (297)
Payment of cash dividends.................................... (6,693) (6,407) (6,123)
--------- -------- ---------
Net cash used by financing activities................... (44,824) (43,009) (5,609)
--------- -------- ---------
Increase (decrease) in cash, including temporary cash
investments.................................................. (118,475) 81,856 (42,171)
Cash, including temporary cash investments -- beginning of
year......................................................... 123,705 41,849 84,020
--------- -------- ---------
Cash, including temporary cash investments -- end of year...... $ 5,230 $123,705 $ 41,849
--------- -------- ---------
--------- -------- ---------
Supplementary disclosures:
Interest paid during year.................................... $ 10,963 $ 17,698 $ 23,112
Income taxes paid, net, during year.......................... 4,980 4,213 4,454
Real estate acquired through foreclosure during year......... 5,514 1,267 1,185
Loans made in connection with sales of real estate........... -- 5,140 1,100
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 21
WESCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR AMOUNTS PER SHARE)
NOTE 1. PRESENTATION AND CONSOLIDATION
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").
The consolidated financial statements of Wesco include the accounts of
Wesco and its subsidiaries, which are all either directly or indirectly wholly
owned. These subsidiaries -- most importantly Mutual Savings and Loan
Association ("Mutual Savings"), newly formed MS Property Company ("MS
Property"), Wesco-Financial Insurance Company ("Wes-FIC") and Precision Steel
Warehouse, Inc. ("Precision Steel") -- are engaged in several diverse
businesses. Another Wesco subsidiary (approximately 80%-owned), New America
Electrical Corporation ("New America Electric"), on July 1, 1993 sold its
business assets and commenced liquidation; Wesco realized an after-tax loss of
$1,617 ($.23 per share) on the sale. See Note 9 for Wesco's consolidated
financial information classified by business segment.
On October 8, 1993, Mutual Savings consummated its previously announced
agreement with CenFed Bank, A Federal Savings Bank ("CenFed"), following receipt
of regulatory approvals. Mutual Savings transferred its savings accounts and
certain other liabilities (totaling about $220,000) to CenFed, offset by (1)
substantially all of its real estate loans and certain other non-cash assets
(about $85,000, combined) and cash (about $135,000). Pursuant to the Agreement,
Wesco loaned $4 million to CenFed's parent corporation for a three-year period,
with interest initially at the prime rate. In addition, Mutual Savings and Wesco
jointly agreed to indemnify CenFed to the extent of at least 90% with respect to
any losses that might be sustained on the loans transferred. After provision for
indemnification for any such losses, the CenFed transaction resulted in an
after-tax gain of $906, or $.13 per Wesco share.
Following completion of the foregoing transaction, (1) Mutual Savings
transferred certain assets, consisting principally of Mutual Savings' foreclosed
real estate and the small number of real estate loans that were not sold to
CenFed, to MS Property, which will conduct a slow liquidation of those assets,
and (2) Wesco transferred to MS Property its commercial real estate property in
Pasadena, California.
Mutual Savings retained a majority (at market value) of its former assets,
consisting mostly of stock of Federal Home Loan Mortgage Corporation ("Freddie
Mac") and indirect loans in the form of securitized mortgages. Immediately after
1993 yearend Mutual Savings merged into Wes-FIC, which will continue to engage
in the portion of Mutual Savings' business that in recent years employed the
majority of its assets. The continuation of this business, including investment
in mortgages, will be regulated by the Nebraska Department of Insurance.
Late in 1993, Mutual Savings gave up its regulatory savings and loan
status. The decision to do so, which had been made late in 1992, subjected to
income taxes $47,314 of earnings that had been previously sheltered due to the
availability of special tax-basis bad debt deductions. As a result, Wesco's 1992
net income was negatively impacted by an unusual increase in income tax expense
amounting to $17,500, or $2.46 per Wesco share (see Note 6).
Effective January 1, 1993, Wesco adopted SFAS No. 109, "Accounting for
Income Taxes." One result was a $1,023 ($.14 per share) credit set forth
separately on the statement of income and retained earnings as the cumulative
effect of a change in accounting principle. Adoption of SFAS No. 109 resulted
also in increases in the provision for income taxes, and reductions in net
income, totaling $2,132 or $.30 per share (see Note 6).
33
<PAGE> 22
Another new accounting pronouncement, SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," had a very significant impact on
Wesco's consolidated balance sheet when adopted at 1993 yearend. Marketable
equity securities of all Wesco entities -- not just its Wes-FIC insurance
subsidiary, as in the past -- were written up to market value rather than stated
at the lower of aggregate cost or market. The unrealized appreciation recorded
by the non-insurance entities, less deemed applicable income taxes, was credited
directly to shareholders' equity, which thereby increased $188,780 or $26.51 per
share (see Note 2).
All material intercompany balances and transactions have been eliminated in
the preparation of the accompanying consolidated financial statements.
NOTE 2. INVESTMENTS
Temporary cash investments consist of funds invested in money-market
accounts and other highly liquid 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. 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 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 market
value, with unrealized gains and losses, net of deemed applicable income taxes,
reported in 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 (see Note 6 re recording of rate changes in 1993).
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statement of income and
retained earnings.
As of December 31, 1993, all investments in securities with fixed
maturities were classified as held-to-maturity, and all marketable equity
securities were classified as available-for-sale. No investments were held for
trading purposes at that date.
Following is a summary of temporary cash investments and securities with
fixed maturities, at yearend:
<TABLE>
<CAPTION>
1993
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Temporary cash investments:
Corporate obligations...................... $ 1,679 $ -- $ -- $ 1,679
Other...................................... 3,024 -- -- 3,024
-------- ------- ------- --------
$ 4,703 $ -- $ -- $ 4,703
-------- ------- ------- --------
-------- ------- ------- --------
Securities with fixed maturities:
Mortgage-backed securities................. $ 45,848 $ 511 $ -- $ 46,359
Preferred stocks --
Salomon Inc, 9%......................... 100,000 25,000 -- 125,000
Other................................... 35,000 1,150 (3,000) 33,150
State and municipal bonds.................. 21,278 1,027 -- 22,305
-------- ------- ------- --------
$202,126 $27,688 $(3,000) $226,814
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
Dollar amounts in thousands except for amounts per share
34
<PAGE> 23
<TABLE>
<CAPTION>
1992
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Temporary cash investments:
Obligations of the Federal Home Loan Bank.. $ 60,856 $ -- $ -- $ 60,856
Corporate obligations...................... 51,316 181 -- 51,497
Other...................................... 4,386 -- -- 4,386
-------- ------- ------- --------
$116,558 $ 181 $ -- $116,739
-------- ------- ------- --------
-------- ------- ------- --------
Securities with fixed maturities:
Mortgage-backed securities................. $ 68,933 $ 1,151 $ -- $ 70,084
Preferred stocks --
Salomon Inc, 9%......................... 100,000 8,000 -- 108,000
Other................................... 35,000 690 (3,000) 32,690
State and municipal bonds.................. 32,580 2,199 -- 34,779
-------- ------- ------- --------
$236,513 $12,040 $(3,000) $245,553
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
The preferred stocks were acquired in conjunction with purchases made by
other subsidiaries of Berkshire, and are all convertible into common stock and
subject to various contractual terms and conditions. Salomon Inc must redeem 20%
of its preferred stock on October 31 each year commencing in 1995, to the extent
still outstanding.
As of 1993 yearend, estimated maturities, including prepayments, of
mortgage-backed securities, are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
In one year or less.................................... $17,287 $17,529
After one year through five years...................... 28,486 28,746
After five years....................................... 75 84
------- -------
$45,848 $46,359
------- -------
------- -------
</TABLE>
State and municipal bonds as of 1993 yearend are expected to mature as
follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
In one year or less.................................... $ 6,656 $ 6,741
After one year through five years...................... 10,210 10,908
After five years....................................... 4,412 4,656
------- -------
$21,278 $22,305
------- -------
------- -------
</TABLE>
Dollar amounts in thousands except for amounts per share
35
<PAGE> 24
Following is a summary of marketable equity securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------------- --------------------------------
CARRYING CARRYING
COST MARKET VALUE COST MARKET VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Freddie Mac common
stock........... $ 71,729 $359,100 $359,100 $ 71,729 $348,300 $ 71,729
The Coca-Cola
Company common
stock........... 40,761 160,775 160,775 40,761 150,867 150,867
The Gillette
Company common
stock........... 40,000 95,400 95,400 40,000 91,000 91,000
Other............. 14,265 24,683 24,683 16,085 19,353 18,174
-------- -------- -------- -------- -------- --------
$166,755 $639,958 $639,958 $168,575 $609,520 $331,770
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Wesco adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective December 31, 1993. As a result, marketable equity
securities held by all Wesco entities at that date are stated at market value.
At prior yearends, only those held by Wes-FIC, Wesco's insurance subsidiary,
were stated at market value; all other marketable equity securities were stated
at the lower of aggregate cost or market. Adoption of SFAS No. 115 resulted in
an increase in Wesco's shareholders' equity of $188,780, or $26.51 per share.
At 1993 yearend, the market value of marketable equity securities contained
$139 of unrealized losses. There were no unrealized losses at 1992 yearend.
NOTE 3. REAL ESTATE LOANS RECEIVABLE
In October 1993, Mutual Savings sold substantially all of its real estate
loans to CenFed, subject to indemnification for most losses that CenFed might
sustain on their realization (see Note 1). Following is a summary of real estate
loans receivable by type of collateral, at yearend:
<TABLE>
<CAPTION>
1993 1992
------ --------
<S> <C> <C>
Residential property of one to four units...................... $1,848 $ 99,662
Other.......................................................... -- 2,229
------ --------
$1,848 $101,891
------ --------
------ --------
Average interest rate.......................................... 5.43% 6.83%
------ --------
------ --------
</TABLE>
Of the above loans, all of which were originated by Mutual Savings in
Southern California, $1,782 and $71,166 at 1993 and 1992 yearends bore
adjustable rates of interest. Estimated fair market values of the real estate
loan portfolios as of 1993 and 1992 yearends, based on market factors, were
approximately equal to their cost. Loans receivable are stated in the
accompanying consolidated balance sheet at unpaid principal balance, less any
writedowns and valuation allowances.
Mutual Savings has indemnified CenFed against most losses that it might
sustain on the realization of the loans (see Note 1).
NOTE 4. REAL ESTATE HELD FOR SALE
Real estate held for sale consists principally of Mutual Savings' cost of
developing a 22-acre parcel of largely oceanfront foreclosed land in Santa
Barbara, California, which it transferred to MS Property Company late in 1993.
The increase in net book value of the project from $20,604 at 1992 yearend to
$23,238 one year later reflects mainly continued construction of townhouses on a
large portion of the development, less a $2,000 writedown of the development to
estimated net realizable value.
Dollar amounts in thousands except for amounts per share
36
<PAGE> 25
The remaining $6,697 of real estate held for sale as of 1993 yearend
represents principally six houses obtained by Mutual Savings through foreclosure
and four delinquent real estate loans that were subsequently foreclosed upon or
are likely to result in foreclosure.
Real estate held for sale is stated in the accompanying consolidated
balance sheet at cost, less any writedowns and valuation allowances.
NOTE 5. SAVINGS ACCOUNTS
In October 1993, Mutual Savings transferred all of its remaining savings
account liabilities aggregating $219,761 to CenFed (see Note 1). The savings
account liabilities comprised time certificates of deposit, and
money-market-rate, passbook and interest-bearing checking accounts. The
aggregate balances of $250,612 at 1992 yearend bore a weighted average annual
interest rate of 3.88%.
Estimated 1992 yearend fair market value of the savings accounts, based on
market factors, was approximately equal to their book value.
NOTE 6. TAXES ON INCOME
Following is a breakdown of income taxes payable at 1993 and 1992 yearends:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Current (payable within one year)........................... $ 7,715 $ 1,524
Deferred (payable subsequently)............................. 173,007 71,404
-------- --------
Income taxes payable.............................. $180,722 $ 72,928
-------- --------
-------- --------
</TABLE>
Effective January 1, 1993, Wesco adopted SFAS No. 109, "Accounting for
Income Taxes." This statement requires that income taxes be calculated under the
asset and liability method, rather than the deferred method used in prior years.
Under the deferred method, differences between financial reporting and
tax-return reporting in the timing of revenues and expenses were multiplied by
tax rates then in effect, and the resulting taxes or benefits were deferred on
the financial statements as income taxes payable or prepaid income taxes; the
financial statements were not adjusted subsequently to reflect changes in tax
rates. Under the asset and liability method, balances of revenue and expense
timing differences at a balance sheet date (i.e., amounts of these temporary
differences that will disappear in the future) are multiplied by the tax rates
in effect at the balance sheet date, with the results deferred on the financial
statements as net deferred tax liabilities or assets; thus, under this method
the financial statements are automatically adjusted for changes in tax rates
when they occur.
The cumulative effect of adopting SFAS No. 109 on Wesco's consolidated
financial statements caused a reduction in the liability for deferred income
taxes and an increase in after-tax income of $1,023 ($.14 per share) as of
January 1, 1993. This amount is reported on the accompanying consolidated
statement of income and retained earnings as the cumulative effect of a change
in accounting principle. Prior year financial statements have not been restated.
In August 1993, the federal corporate tax rate was raised from 34% to 35%
retroactive to January 1, 1993. SFAS No. 109 requires that the entire effect of
a change in tax rate be recognized in the determination of net income in the
period enacted. Accordingly, Wesco's tax provision and, thus, net income for the
current year include not only the relatively minor effect of the one-percentage-
point increase in the federal rate on 1993 pre-tax income, but also charges for
the effect of the rate increase on two deferred tax liabilities that originated
in prior years: (1) $1,632 associated with unrealized appreciation of marketable
equity securities of Wes-FIC (notwithstanding that the gains, themselves, have
not yet figured in the determination of consolidated net income); and (2) $500
associated with the recapture of Mutual Savings' special bad debt tax deductions
(see below).
Dollar amounts in thousands except for amounts per share
37
<PAGE> 26
The consolidated statement of income contains a provision for income taxes
(before the $1,023 cumulative effect of change in accounting for income taxes)
as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- ------
<S> <C> <C> <C>
Federal.............................................. $ 4,245 $18,018 $2,402
State................................................ 801 2,855 2,705
------- ------- ------
$ 5,046 $20,873 $5,107
------- ------- ------
------- ------- ------
Current.............................................. $ 9,450 $ 3,615 $5,932
Deferred............................................. (4,404) 17,258 (825)
------- ------- ------
Provision for income taxes................. $ 5,046 $20,873 $5,107
------- ------- ------
------- ------- ------
</TABLE>
SFAS No. 109 requires changes in disclosures relating to deferred taxes
effective with its adoption. The next table is mandated commencing with the year
of adoption of SFAS No. 109 (1993), and the table following that, as in the
past, is required for information of prior years (1992 and 1991).
Following is a summary of the tax effects of temporary differences that
give rise to significant portions of deferred tax liabilities and deferred tax
assets as of 1993 yearend:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Deferred tax liabilities, relating to --
Unrealized appreciation of marketable equity
securities..................................... $164,146
Recapture of Mutual Savings' special bad debt tax
deductions..................................... 12,139
Other items....................................... 1,733
--------
178,018
Deferred tax assets................................. (5,011)
--------
Net deferred tax liability................ $173,007
--------
--------
</TABLE>
Following is a summary of the tax effects of timing differences for the
years 1992 and 1991:
<TABLE>
<CAPTION>
1992 1991
------- -----
<S> <C> <C>
State income taxes deducted under different methods.............. $ 107 $(572)
Deferred insurance premium acquisition costs..................... 736 (5)
Amortization of unearned insurance premiums...................... (749) (336)
Recapture of Mutual Savings' special bad debt tax deductions..... 17,500 --
Discounting of losses and loss adjustment expense reserves of
insurance business............................................. (283) 353
Loan fees recognized under different methods..................... (315) (235)
Other, net....................................................... 262 (30)
------- -----
Deferred portion of income tax provision (benefit)..... $17,258 $(825)
------- -----
------- -----
</TABLE>
Wesco's 1992 net income was negatively impacted by an unusual $17,500
increase in income tax expense resulting from Mutual Savings' decision in late
1992 to give up its status as a regulated savings and loan association. The tax
provision related to $47,314 of undistributed retained earnings of Mutual
Savings that had not been taxed due to the availability of special bad debt tax
deductions to savings and loan associations. These deductions were not related
to amounts of losses actually anticipated and were not charged against income
for financial reporting purposes; if the association ceased to qualify as a
regulated savings and loan association, such action would necessitate accrual
and payment of income taxes. The tax liability is expected to be paid over
several future years beginning with 1994.
Dollar amounts in thousands except for amounts per share
38
<PAGE> 27
Following is a reconciliation of the statutory federal income tax rate with
the effective income tax rate resulting in the provision for income taxes
(before the $1,023 cumulative effect of change in accounting for income taxes)
appearing on the accompanying consolidated statement of income:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 35.0% 34.0% 34.0%
Increase (decrease) resulting from:
Recapture of Mutual Savings' special bad debt tax
deductions............................................ -- 67.6 --
Tax-exempt interest income............................... (3.1) (5.0) (7.0)
Exclusion from taxable income of a significant portion of
dividend income....................................... (23.2) (20.0) (15.3)
Tax rate increase on net deferred tax liabilities........ 8.9 -- --
State income taxes, less federal tax benefit............. 1.2 3.0 3.5
Other differences, net................................... 2.5 1.1 (0.5)
----- ----- -----
Effective income tax provision rate........................ 21.3% 80.7% 14.7%
----- ----- -----
----- ----- -----
</TABLE>
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 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. A previously reported disagreement with the
California Franchise Tax Board with respect to state issues affecting years 1980
through 1987 is expected to be settled shortly without significant effect on
Wesco's consolidated financial statements.
NOTE 7. NOTES PAYABLE
Following is a list of notes payable, at yearend:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
<S> <C> <C>
Notes due November 1999, bearing interest at 8 7/8%
payable semiannually.................................. $30,000 $30,000
Notes payable, collateralized by land, buildings and
assignment of leases, due in monthly installments
through February 2007 of $45 including interest at
9 1/4%................................................ 4,094 4,251
Industrial revenue bonds due December 2014, bearing
interest at 7.75% payable semiannually................ 2,600 2,600
Industrial revenue bonds, due in quarterly installments
through December 1994 of $42 plus interest at
6 1/2%................................................ 167 333
Note payable, due December 1998, bearing interest at 10%
payable monthly....................................... 1,035 1,035
Federal Home Loan Bank notes, collateralized by mortgage
loans, mortgage-backed securities and FHLB stock,
bearing interest at 8.73% payable monthly............. -- 16,900
------- -------
$37,896 $55,119
------- -------
------- -------
</TABLE>
Notes payable at 1993 yearend mature as follows: 1994, $336; 1995, $187;
1996, $205; 1997, $225; 1998, $247; thereafter, $36,696.
Dollar amounts in thousands except for amounts per share
39
<PAGE> 28
Agreements relating to the 8 7/8% notes contain covenants, among others,
enabling the lenders to require Wesco to redeem the notes at par in the event
Wesco ceases to be controlled by Berkshire. Wesco is in compliance with all of
the covenants.
Estimated fair market values of the foregoing notes payable at December 31,
1993 and 1992, were approximately $43,200 and $59,200, respectively. These
figures were computed using discounted cash flow computations based upon
estimates as to prevailing interest rates on comparable borrowings.
NOTE 8. QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information for 1993 and 1992 follows:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1993 1993 1993 1993
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Total revenues........................... $ 25,759 $27,861 $30,729 $33,009
-------- ------- ------- -------
-------- ------- ------- -------
Net income excluding unusual items and
cumulative effect of accounting
change................................. $ 4,700 $ 5,174 $ 5,238 $ 5,270
Per share.............................. .66 .73 .74 .74
Unusual items, net of any applicable
income tax effect...................... 906(1) (2,107)(2) (1,617)(3) 1,131(4)
Per share.............................. .13 (.30) (.23) .16
-------- ------- ------- -------
Income before cumulative effect of change
in accounting principle................ 5,606 3,067 3,621 6,401
Per share.............................. .79 .43 .51 .90
Cumulative effect of change in accounting
principle.............................. -- -- -- 1,023(5)
Per share.............................. -- -- -- .14
-------- ------- ------- -------
Net income............................... $ 5,606 $ 3,067 $ 3,621 $ 7,424
Per share.............................. .79 .43 .51 1.04
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1992 1992 1992 1992
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Total revenues........................... $ 29,615 $32,705 $39,872 $29,623
-------- ------- ------- -------
-------- ------- ------- -------
Net income excluding unusual items....... $ 5,921 $ 5,230 $ 5,640 $ 5,709
Per share.............................. .83 .73 .79 .80
Unusual items, net of any applicable
income tax effect...................... (17,500)(6) -- 357(4) (356)(4)
Per share.............................. (2.46) -- .05 (.05)
-------- ------- ------- -------
Net income (loss)........................ $(11,579) $ 5,230 $ 5,997 $ 5,353
Per share.............................. (1.62) .73 .84 .75
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
- ---------------
(1) Gain on disposition by Mutual Savings of savings deposits and some loans
(see Note 1).
(2) Mainly, effect of change in income tax rate on net deferred tax liabilities
(see Note 6).
(3) Loss on disposition of interest in New America Electric (see Note 1).
(4) Gains (losses) on sales of marketable securities and foreclosed properties.
(5) Cumulative effect of adopting SFAS No. 109 (see Note 6).
(6) Deferred tax provision re recapture of Mutual Savings' special bad debt tax
deductions (Note 6).
Dollar amounts in thousands except for amounts per share
40
<PAGE> 29
NOTE 9. BUSINESS SEGMENT DATA
Consolidated financial information for each of the three most recent years
is presented below, broken down as to Wesco's three business
segments -- financial, insurance and industrial.
The financial segment includes the accounts of Wesco and Mutual Savings; it
also includes temporary cash investments and other investments of Precision
Steel and its subsidiaries and, prior to July 1, 1993, of New America Electric,
together with related interest and dividend income and gain or loss on related
sales. The insurance segment includes the accounts of Wes-FIC. The industrial
segment includes the operating accounts of Precision Steel and its subsidiaries
and, prior to July 1, 1993, of New America Electric.
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Financial..................................... $ 24,292 $ 31,336 $ 45,615
Insurance..................................... 29,107 35,027 21,822
Industrial.................................... 63,959 65,452 65,409
-------- -------- --------
$117,358 $131,815 $132,846
-------- -------- --------
-------- -------- --------
Operating profit before taxes:
Financial..................................... $ 8,975 $ 13,532 $ 22,249
Insurance..................................... 16,166 14,216 15,095
Industrial.................................... 3,604 3,298 2,373
Corporate expenses............................ (394) (300) (315)
Interest expense on notes payable............. (4,610) (4,872) (4,773)
-------- -------- --------
$ 23,741 $ 25,874 $ 34,629
-------- -------- --------
-------- -------- --------
</TABLE>
The above revenue and operating profit data include net gains on sales of
securities and foreclosed property, before taxes, as follows:
<TABLE>
<S> <C> <C> <C>
Financial....................................... $ -- $ 105 $ 10,714
Insurance....................................... 1,783 -- --
-------- -------- --------
$ 1,783 $ 105 $ 10,714
-------- -------- --------
-------- -------- --------
</TABLE>
Additional business segment data follow:
<TABLE>
<S> <C> <C> <C>
Capital expenditures:
Financial..................................... $ 232 $ 939 $ 2,255
Industrial.................................... 1,762 398 4,681
-------- -------- --------
$ 1,994 $ 1,337 $ 6,936
-------- -------- --------
-------- -------- --------
Depreciation and amortization of tangible
assets:
Financial..................................... $ 350 $ 328 $ 271
Industrial.................................... 966 965 824
-------- -------- --------
$ 1,316 $ 1,293 $ 1,095
-------- -------- --------
-------- -------- --------
Identifiable assets at yearend:
Financial..................................... $441,361 $407,033 $445,073
Insurance..................................... 444,250 425,868 396,095
Industrial.................................... 29,544 32,058 29,961
-------- -------- --------
$915,155 $864,959 $871,129
-------- -------- --------
-------- -------- --------
</TABLE>
Dollar amounts in thousands except for amounts per share
41
<PAGE> 30
WESCO FINANCIAL CORPORATION
SCHEDULE I -- MARKETABLE SECURITIES -- OTHER INVESTMENTS
DECEMBER 31, 1993
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES BALANCE
OF STOCK OR SHEET
NAME OF ISSUER PRINCIPAL AMOUNT MARKET CARRYING
AND TITLE OF EACH ISSUE OF NOTES COST VALUE VALUE
----------------------- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED
Securities with fixed maturities:
Mortgage-backed securities guaranteed
mainly by Freddie Mac, Federal
National Mortgage Association and
Government National Mortgage
Association........................... $45,252 $ 45,848 $ 46,359 $ 45,848
Convertible preferred stocks* --
Salomon Inc........................... 100,000 shares 100,000 125,000 100,000
Other................................. ** 35,000 33,150 35,000
State and municipal bonds................ $22,950 21,278 22,305 21,278
-------- -------- --------
$202,126 $226,814 $202,126
-------- -------- --------
-------- -------- --------
Marketable equity securities (common
stocks):
Freddie Mac.............................. 7,200,000 shares $ 71,729 $359,100 $359,100
The Coca-Cola Company.................... 3,602,800 shares 40,761 160,775 160,775
The Gillette Company..................... 1,600,000 shares 40,000 95,400 95,400
Wells Fargo & Company.................... 169,340 shares 11,351 21,908 21,908
Other.................................... ** 2,914 2,775 2,775
-------- -------- --------
$166,755 $639,958 $639,958
-------- -------- --------
-------- -------- --------
REGISTRANT ONLY
Convertible preferred stocks* --
Salomon Inc.............................. 50,000 shares $ 50,000 $ 62,500 $ 50,000
Other.................................... ** 8,000 8,400 8,000
-------- -------- --------
$ 58,000 $ 70,900 $ 58,000
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
* Market quotations are not available. Charles T. Munger, Chairman of the Board
and President of Wesco, acting on behalf of the board of directors of Wesco,
in consultation with Warren E. Buffett, Chairman of the Board and Chief
Executive Officer of Berkshire Hathaway Inc., Wesco's ultimate parent, has
determined the fair values of the convertible preferred stocks.
** Not meaningful.
42
<PAGE> 31
WESCO FINANCIAL CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1993 1992
-------- --------
<S> <C> <C>
Cash and temporary cash investments.................................. $ 33 $ 1,321
Convertible preferred stocks......................................... 58,000 58,000
Investment in subsidiaries, at equity:
Mutual Savings..................................................... 240,350 50,492
MS Property Company................................................ 27,631 --
Precision Steel.................................................... 31,970 27,199
Wes-FIC............................................................ 328,752 303,604
New America Electric............................................... 194 8,183
Other.............................................................. 148 135
Property and equipment............................................... -- 5,246
Income taxes recoverable............................................. 735 24
Other assets......................................................... 8,490 791
-------- --------
$696,303 $454,995
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and advances payable........................................... $ 69,679 $ 37,786
Accounts payable, accrued expenses and other liabilities............. 537 5,495
-------- --------
Total liabilities.................................................... 70,216 43,281
Shareholders' equity (see consolidated balance sheet)................ 626,087 411,714
-------- --------
$696,303 $454,995
-------- --------
-------- --------
</TABLE>
STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Dividends on preferred stocks............................. $ 5,240 $ 5,240 $ 5,240
Rental of office, store and garage premises, less
expenses............................................... 1,905 2,208 2,092
Other..................................................... 158 92 108
-------- -------- --------
7,303 7,540 7,440
-------- -------- --------
Expenses:
Interest on notes payable................................. 3,332 3,189 3,262
General and administrative................................ 934 933 777
Loss on sale of New America Electric...................... 2,700 -- --
-------- -------- --------
6,966 4,122 4,039
-------- -------- --------
Income before items shown below............................. 337 3,418 3,401
Income tax (provision) benefit.............................. 1,097 (123) (114)
Equity in undistributed earnings of subsidiaries............ 18,284 1,706 26,235
-------- -------- --------
Net income................................................ 19,718 5,001 29,522
Retained earnings -- beginning of year...................... 273,566 274,972 251,573
Cash dividends declared and paid............................ (6,693) (6,407) (6,123)
-------- -------- --------
Retained earnings -- end of year............................ $286,591 $273,566 $274,972
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 32
WESCO FINANCIAL CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $19,718 $ 5,001 $29,522
Adjustments to reconcile net income with net cash, including
temporary cash investments, provided by operating
activities --
Increase in income taxes recoverable....................... (711) (661) 199
Loss on sale of New America Electric....................... 2,700 -- --
Equity in undistributed earnings of subsidiaries........... (18,284) (1,706) (24,235)
Other, net................................................. (3,742) 596 (1,792)
------- ------- -------
Net cash provided (used) by operating activities...... (319) 3,230 3,694
------- ------- -------
Cash flows from investing activities:
Cash receipts from sale of New America Electric............... 4,052 -- --
Other, net.................................................... (239) (400) (249)
------- ------- -------
Net cash provided (used) by investing activities...... 3,813 (400) (249)
------- ------- -------
Cash flows from financing activities:
Advances from subsidiaries, net............................... 1,481 2,500 --
Collection of advances to subsidiaries........................ -- -- 4,200
Payment of cash dividends..................................... (6,693) (6,407) (6,123)
Other, net.................................................... 430 (143) (130)
------- ------- -------
Net cash used by financing activities................. (4,782) (4,050) (2,053)
------- ------- -------
Increase (decrease) in cash, including temporary cash
investments................................................... (1,288) (1,220) 1,392
Cash, including temporary cash investments -- beginning of
year.......................................................... 1,321 2,541 1,149
------- ------- -------
Cash, including temporary cash investments -- end of year....... $ 33 $ 1,321 $ 2,541
------- ------- -------
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 33
WESCO FINANCIAL CORPORATION
COMMISSION FILE NUMBER 1-4720
EXHIBITS TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
<TABLE>
<Captions>
Incorporated
- ---------------------------------------Description---------------------------------------- Filed By Reference
<S> <C> <C>
3a. Articles of Incorporation and By-Laws of Wesco Financial Corporation (incorporated
by referrence to Exhibit 3a to Annual Report on Form 10-K of Wesco Financial
Corporation for year ended December 31, 1989). X
4.1 Form of Indenture dated October 2, 1989 (incorporated by reference to Exhibit 4.1
to Report on Form 8-K of Wesco Financial Corporation dated October 31, 1989,
File No. 33-31290). X
4.2 Form of Supplemental Indenture dated October 15, 1989 (incorporated by reference
to Exhibit 4.1 to report on Form 8-K of Wesco Financial Corporation dated October
31, 1989, File No. 33-31290). X
10.1 Purchase of Assets and Liability Assumption Agreement dated May 10, 1993, among
Mutual Savings and Loan Association, Wesco Financial Corporation and CenFed Bank,
A Federal Savings Bank, incorporated by reference to Wesco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993. X
22. List of subsidiaries X
</TABLE>
<PAGE> 1
Exhibit 22 to Form 10-K
Wesco Financial Corporation
For year Ended
December 31, 1993
WESCO FINANCIAL CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
Owned by State of
Name of Subsidiary Registrant Incorporation
- ------------------ ---------- -------------
<S> <C> <C>
MSMLMIC (formerly named Mutual Savings and
Loan Association) 100% California
Wesco Holdings Midwest, Inc. 100% Nebraska
Precision Steel Warehouse, Inc. 100% California
Precision Steel Warehouse, Inc.,
Charlotte Service Center 100% Delaware
Precision Brand Products 100% Delaware
Wesco-Financial Insurance Company 100% Nebraska
MS Property Company 100% California
Montecito Sea Meadow Homeowners'
Association, Inc. 71.9% California
Montecito Sea Meadow Mutual
Water Company, Inc. 71.9% California
New America Electrical Corporation 79.9% California
WSC Insurance Agency 100% California
</TABLE>
