2001

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: August 1, 2001 Re: Welcoming New Partners of The Pabrai Funds. Performance Data Dear Partners: On August 1, 2001, we added additional funds from existing and new limited partners to the Pabrai Investment Fund 2 (PIF2). Between the two funds we now have over $8 Million in assets under management and have 46 limited partners. Both the number of limited partners and assets under management has quadrupled in the last two years. The diversity of investors is expanding and I am proud to be associated with this august group. I’d like to welcome the new partner from Maine. With the recent addition or Maine, we now have the following states represented in The Pabrai Funds: Arizona, California, Colorado, Florida, Illinois, Louisiana, Maine, Minnesota, New Jersey, Ohio, Vermont, Washington (12 down, 38 to go). In addition, we have 2 offshore investors. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 7/27/01 -0.9% -44.8% -16.1% +34.1% +27.1% Annualized -1.1% -53.8% -19.3% +40.1% +32.5%

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2001 decreased to $52,536,000 ($7.38 per share) from $70,087,000 ($9.84 per share) in the previous year. Consolidated net income decreased to $52,536,000 ($7.38 per share) from $922,470,000 ($129.56 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia, pur- chased in February 2000 and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2001 December 31, 2000 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Insurance businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $45,254 $6.36 $ 45,518 $ 6.39 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,076 1.84 28,988 4.

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund I, L. P. From: Mohnish Pabrai, Managing Partner Date: August 31, 2001 Re: Redemption of PIFI Units; Updated PIFI NAV Dear Partners: I had received requests from two limited partners of PIFI to redeem their units. Per PIFI partnership rules, any limited partner can request a withdrawal of their interest in the partnership during a two week window after audited results are released. Between the two, a total of 26,726.94 units were redeemed at $15.73/unit. I’m sending checks totaling $420,414.77 to the two partners. Both partners have a gain on their original investment and I’d like to take this opportunity to thank them for participating in PIFI and hope our paths cross again. As an FYI, I was forced to liquidate positions that I otherwise would not have sold at this time. We will have higher realized capital gains this year as a result of the withdrawals. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND I Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -4.7% +47.3% +4.7% +62.5% +50.1% 7/1/00 – 6/30/01 +2.2% -45.5% -15.9% -7.7% -8.3% 7/1/01 – 8/31/01 -5.1% -16.5% -7.4% +14.0% +14.2% Annualized -3.6% -18.3% -9.4% +24.9% +21.1% Cumulative -7.6% -33.0% -18.5% +70.7% +57.3%

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: June 4, 2001 Re: Welcome New Limited Partners; Performance Data Dear Partners: On June 1, 2001, we added additional funds from existing and new limited partners to the Pabrai Investment Fund 2 (PIF2). Between the two funds we’ve brought in over $6 Million in assets under management since inception and have 40 limited partners. The diversity of investors is expanding and I am proud to be associated with this august group. We now have the following states represented between the first and second partnership: Arizona, California, Colorado, Florida, Illinois, Louisiana, Minnesota, New Jersey, Ohio, Vermont, Washington (11 down, 39 to go). In addition, we have 2 offshore investors. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 5/25/01 +3.3% -38.7% -11.0% +16.0% +13.5%

Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: December 7, 2001 Re: Fifteen States Represented Dear Partners: On December 1, 2001, we added $875,000 from existing and new limited partners to the Pabrai Investment Fund 2 (PIF2). The diversity of investors is expanding and I am proud to be associated with this august group. I’d like to welcome all the new partners. We just added our first investors from the great states of New Mexico and Texas. With the recent additions, we now have the following states represented in The Pabrai Funds: Arizona, California, Colorado, Florida, Illinois, Louisiana, Maine, Minnesota, New Jersey, New Mexico, North Dakota, Ohio, Texas, Vermont, Washington (15 down, 35 to go). In addition, we have 2 offshore investors. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 9/30/01 -15.2% -59.2% -27.5% +17.6% +12.0% 10/1/01 – 11/30/01 +11.1% +28.8% +9.5% +18.5% +18.7% Annualized -5.0% -40.6% -17.2% +33.7% +28.2% Cumulative -5.8% -47.4% -20.1% +39.3% +32.9% Pabrai Investment Funds

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: July 5, 2001 Re: 2nd Anniversary of The Pabrai Funds. Performance Data Dear Partners: On June 30, 2001, The Pabrai Funds turned two years old. The last two years, while being traumatic for the general market, have been fairly good to The Pabrai Funds. Since the fiscal year end for the funds is June 30, our auditors are busy preparing their audit report for both funds that I hope to share with you on or before August 15, 2001. In the interim, I’m providing UNAUDITED results for both funds through June 30, 2001. There is bound to be some variance between these figures and the audited numbers particularly as they relate to accrued expenses, deferred taxes etc. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND I Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -4.7% +47.3% +4.7% +62.5% +50.1% 7/1/00 – 6/30/01 +2.2% -45.5% -15.9% -7.7% -8.3% Annualized -1.3% -10.4% -6.2% +22.5% +17.5% Cumulative -2.6% -20.8% -12.0% +49.7% +38.0%

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: October 5, 2001 Re: Welcoming New Partners of The Pabrai Funds. Performance Data Dear Partners: On October 1, 2001, we added a record $1,075,000 from existing and new limited partners to the Pabrai Investment Fund 2 (PIF2). I believe this represents the single largest addition to either fund since inception. Given the tragic events of Sept. 11 and the state of the markets, I was pleasantly surprised to see a strong showing from existing and new investors. Usually the sentiment of investors is to be bullish and add $$$ to their equity positions when the Dow is at, say, 15000. On the other hand a Dow 7000 tends to lead investors to put it all under the mattress. Needless to say this not the sort of investor behavior encouraged by the likes of Peter Lynch or Warren Buffett. It was wonderful to see that my smart partners “get it” and added to PIF2 at what is probably the best investment window since inception of the fund. The diversity of investors is expanding and I am proud to be associated with this august group. I’d like to welcome the new partner from North Dakota. With the recent addition or North Dakota, we now have the following states represented in The Pabrai Funds: Arizona, California, Colorado, Florida, Illinois, Louisiana, Maine, Minnesota, New Jersey, North Dakota, Ohio, Vermont, Washington (13 down, 37 to go).

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: April 2, 2001 Re: Welcome New Limited Partners; Performance Data Dear Partners: On April 1, 2001, we added additional funds from existing and new limited partners to the Pabrai Investment Fund 2 (PIF2). Between the two funds we’ve brought in $5.5 Million in assets under management since inception and have 38 limited partners. The diversity of investors is expanding and I am proud to be associated with this august group. We now have the following states represented between the first and second partnership: Arizona, California, Colorado, Florida, Illinois, Minnesota, New Jersey, Ohio, Vermont, Washington (10 down, 40 to go). Internationally, we have one limited partner based in Italy and another in Barbados. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 3/31/01 -7.3% -49.9% -19.3% -3.3% -5.3%

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: February 3, 2001 Re: Welcome New Limited Partners; Performance Data Dear Partners: On February 1, 2000, we added an additional $800,000 and 7 new limited partners to the Pabrai Investment Fund 2 (PIF2). Between the two funds we’ve brought in $5.3 Million in assets under management since inception and have 37 limited partners. The diversity of investors is expanding and am proud to be associated with this august group. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 1/26/01 0.1% -24.3% -5.7% 13.8% 10.6% For completeness of the track record, I am also giving all the published performance data on the first fund, PIFI. PABRAI INVESTMENT FUND I Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -6.2% +47.3% +4.7% +62.5% +50.05% 7/1/00 – 8/30/00 +7.14% +1.9% +3.4% +14.09% +11.08% Cumulative +0.5% +50.1% +8.3% +85.4% +66.8% (7/1/99 – 8/30/00)

To simplify, if you invested $100,000 on 10/1/00 into PIF2, your investment after all fees and expenses is now worth $110,600. If you invested $100,000 on 12/1/00, your investment is now worth $115,208. Over the next few weeks, I am planning to send all investors of PIFI and PIF2 a summary of the partnership units held and the prices and times they were bought at etc., so you can simply look at the current value/unit and derive your investment performance etc. If there is any other information or data you’d like included, please let me know. I plan to send this summary atleast once a year. The objective of The Pabrai Investment Funds is to, over the long haul, beat all three major indices – Nasdaq Composite, DJIA and the S&P 500. As you can see for the above data, PIF2 has exceeded this yardstick so far. A few comments on this front: • The results for PIF2 during this short a window are not that meaningful. One will be able to get a good idea of PIF2 performance in a 3 to 5 year timeframe. Both funds have performed well over the limited time of their existence, but the litmus test will the performance record established over the next five years. I’m happy that we’re off to a healthy start. • PIF2 is up 13.8% in 4 months. A 13.8% return in 4 months works out to an annualized return of 41.4%. An annualized 41+% return is unlikely to be sustainable or achievable over the long haul and partners should keep expectations in line with the funds’ stated objectives.

Over the long haul, the objective of The Pabrai Investment Funds is to beat all three major indices – Nasdaq Composite, DJIA and the S&P 500. As you can see for the above data, both PIFI and PIF2 have exceeded this yardstick so far. A few comments: • The results for PIF2 during this short six-month window are not that meaningful. One will be able to get a good idea of PIF2 performance in a 3 to 5 year timeframe. Both funds have performed well over the limited time of their existence, but the litmus test will the performance record established over the next five years. We’re off to a healthy start. • The last six months have been painful for many investors in the stock market. There are very few instances in history when a major index (Nasdaq) loses 50% of its value in six short months. Including all trading expenses and margin interest, PIF2 is off just 3.3% during the same period. I don’t like to see any negative numbers, but was happy to see that the core fundamentals of value investing held up well during the last few months. The fund was fully invested with an outstanding margin balance during most of the period. • We own pieces of some very exceptional companies bought at exceptional prices. I am very bullish about their future regardless of the market. Over time, I hope I’ll be able to share some of them with you. In the letter dated 12/4/00, I had talked about one of the holdings in PIFI (Diamond Technology Partners) and the thinking behind buying and selling Diamond.

Along with the audit report, I’ll send each of you an updated statement of the value of your holdings as of 8/1/01 well before the annual meeting for your perusal. The diligent reader of these memos will recall the PIF2 was up 20.9% as of 6/30/01 and is up 34.1% as of 7/27/01 – a gain of over 13% in less than a month. July saw all three of the benchmark indices go down, yet the fund went up. How come? Publicly traded stocks are strange creatures. Historically, stocks have delivered an annualized rate of 10-12%. This 10-12% has been delivered in a very lumpy form. The DJIA hit the same number in 1966 and 1982 – a gap of 16 years. Thus one could have invested in 1966 in 30 formidable blue chips and shown a 0% return after 16 years! The return in the next 16 years (1983-1999) were stellar and well above the 12% norm. But it would have taken 30+ years to get the 10+% annualized rate. That’s long term! The Pabrai Funds investment style is hard to distill down to two words, but “Focused Value” comes close. Focus means that we have positions in a handful of equities. As I write this PIFI has a total of 11 distinct stocks and PIF2 has a total of 15 distinct stocks and bonds. Buffett’s partner, Charlie Munger, would probably view the Pabrai Funds portfolio as somewhat over diversified. Charlie feels that 3 or 4 well-selected businesses are all that is required to have a diversified portfolio.

In addition, we have 2 offshore investors. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A.Summary:

07 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 388 .05 1,281 .18 Goodwill amortization (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,814) (.96) (5,867) (.82) Other(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 632 .09 167 .02 52,536 7.38 70,087 9.84 Realized net securities gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 852,383 119.72 Wesco consolidated net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,536 $7.38 $922,470 $129.56 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) In accordance with a new pronouncement of the Financial Accounting Standards Board, Wesco will no longer be required to amortize goodwill beginning in 2002. The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, at which time the intangible would be written down or written oÅ, as appropriate. (4) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries.

Over the long haul, the objective of The Pabrai Investment Funds is to beat all three major indices – Nasdaq Composite, DJIA and the S&P 500. As you can see for the above data, both PIFI and PIF2 have exceeded this yardstick so far. A few comments: • The results for PIF2 during this short eight-month window are not that meaningful. One will be able to get a good idea of PIF2 performance in a 3 to 5 year timeframe. Both funds have performed well over the limited time of their existence, but the litmus test will the performance record established over the next five years. We’re off to a healthy start. • We own pieces of some very exceptional companies bought at exceptional prices. In addition, we have some low-risk, high-return special situation investments. I am very bullish about their future regardless of the market. Over time, I hope I’ll be able to share some of them with you. As I write this letter, Stewart Enterprises (STEI) is hitting a 52-week high of $8/share. You’ll recall that in one of my moments of brilliance, I sold 100% of our holdings at around $4/share. However, it was a special situation play for us that had a very very high likelihood of delivering around a 100% return in under 2 years. It delivered that in less than a year and I didn’t want to hold a highly leveraged company once our special situation return was achieved. The irony is that Wall Street had sell recommendations on it at $2 and buy recommendations when its fully priced at $8!

Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 PIFI S&P 500 DJIA NASDAQ For completeness, here are the latest published performance numbers for PIF2: PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 7/27/01 -0.9% -44.8% -16.1% +34.1% +27.0% Annualized -1.1% -53.8% -19.3% +40.1% +32.4% Comparison of Changes in value of $100,000 invested in PIF2 vs. the Indices $0 $50,000 $100,000 $150,000 Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- PIF2 S&P 500 DJIA NASDAQ The diligent reader would have noticed that PIFI is up 14% in the last two months versus a significant drop in the three benchmark indices. Since inception, PIFI is outperforming the Dow, Nasdaq and S&P 500 by 24.7%, 39.4% and 30.5% on an annualized basis after all fees and expenses respectively. Page 2

The objective of the Pabrai Funds is to, over the long haul, beat the three major indices. In doing so, I believe we’d be outperforming 90+% of funds and portfolio managers. To date, both funds have exceeded this objective by a wide margin. However, we have to remember the PIFI is just 2½ years old and PIF2 is even younger at just 14 months. All we can say at this juncture is that we’re off to a fine start. We need at least 5-10 years of performance history before meaningful conclusions can be drawn. 9/11 was a very tragic day for our country and in its aftermath, the stock markets got quite rattled. If I had just one wish, I’d wish that 9/11 was just another ordinary day in our lives with no terrorist activity. However, flush with cash on 10/1 and with the market inefficiency gap significantly widened after 9/11, I went hunting for value. We were quite lucky. Late September and early October was an especially fertile time and I was able to add some exceptional businesses and special situations to our portfolio at big discounts to their intrinsic value. Both funds have stronger portfolios with bigger discounts to intrinsic value than they did on 9/10/01. Over the last year, we’ve had more than our fair share of great ideas. If we have just 3 or 4 good ideas in a year, I think our results will be exceptional. Our approach is highly opportunistic. There is no way for me to know when we’ll have our next great idea.

• For PIFI we now have 2 full years of performance data. In spite of the good performance and beating all three indices by a wide margin, investors who came in on 3/1/00 are down 5.5% on their investment todate. Investors who came in on 9/1/2000 are down 17.4%. To them I’d like to say that it’s been 16 and 10 months respectively since you made your investment. I hope you’ll gauge the performance over a longer time horizon of atleast 3-5 years. • All investors in PIF2 have a gain as we are at a historical high with a 20.9% gain in 9 months. Nonetheless, its only 9 months. We’ll be able to truly judge performance over the next few years. • All in all I am happy with the results that PIFI and PIF2 have achieved todate. Both funds are ahead of 99+% of mutual and hedge funds in their performance since inception. Annual Meeting Reminder: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2001. The meeting location is: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.0990 4:00 PM - Meeting 5:30 PM - Cocktails 7:00 PM - Dinner For out-of-towners, The Marriott Suites and Westin O’Hare in Rosemont are both walking distance to the restaurant. You should all have received your invites in the mail. I do hope that you’ll bring all your toughest questions to the meeting. Next Investment Window The next date when funds will be added to PIF2 is August 1, 2001. I continue to have more opportunities than cash.

Annual Meeting: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2000 at 4:00 PM. The location is: Maggiano’s Restaurant Oak Brook, Illinois We will have a private room and the meeting will be followed by cocktails and dinner. Last year’s meeting was fun. All limited partners and their spouses/significant others/dates are invited. I hope all of you can attend. Please mark it on your calendar. Next Investment Window The next date when funds will be added to PIF2 is April 1, 2001. I’m planning to add around $1 Million on 4/1/01. If you’re interested in investing, please contact me so I can make the allocation. More importantly, I’d appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor.2

Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 PIFI S&P 500 DJIA NASDAQ The diligent reader of these letters will recall that PIF2 was up 34.1% as of 7/27/01 and is up 17.6% as of 9/30/01 – a loss of 12.3% in the last two months. Virtually all of the loss in value of the PIF2 portfolio is the result of the tragic events of Sept. 11. To understand the 9/11 impact on the stock market, I’d like to categorize publicly traded companies into four categories. All companies fall into one of these categories. They are: 1. Companies whose prospects are significantly impaired in the short and long term (e.g. American Airlines, Midway Airlines). The impact on Midway Airlines is particularly poignant and painful. The airline folded all operations on Sept. 12. Midway was in the midst of downsizing its fleet and operations when the Sept. 11 tragedy dealt it a fatal crippling blow. Stocks of these businesses should have taken a hit as their future prospects were bleak in the near term and impacted in the long term. We had just one holding that fell into this category. Their near term profitability is substantially reduced and it will impact them in the long run as well with a significantly weakened balance sheet. As I write this, I’m unable to determine if we’ll have a gain or loss on this holding eventually. 2.

shareholders. The total consolidated net income shown above is, of course, identical to the total in our audited Ñnancial statements. Insurance Businesses Consolidated operating earnings from insurance businesses represent the com- bination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to all insurance operations except The Kansas Bankers Surety Company (""KBS''), which is sepa- rately discussed below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2001 2000 2001 2000 Underwriting loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12,403,000) $ (616,000) $(8,062,000) $ (400,000) Net investment income ÏÏÏÏÏÏÏÏÏ 64,529,000 53,412,000 44,001,000 38,958,000 Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 52,126,000 $52,796,000 $35,939,000 $38,558,000 As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. However, operating income excludes realized net securities gains, net of income taxes, of $853.1 million in 2000. There were no such gains in 2001. Our discussion will concentrate on insurance underwriting, not on the results from investments. Results for 2001 from insurance underwriting, other than at KBS, were the worst since we entered into the insurance business in 1985.

Thus I’d like to add more cash. It’s a great time to invest. If you’re interested in investing, please contact me so I can make the allocation. More importantly, I’d appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence.3

In this letter, I’m sharing another one – Stewart Enterprises. • The benchmarks we have set to beat are high benchmarks. Historically any fund that has, over the long term, beaten these three indices, has been in the top 3-5% of mutual or hedge funds in performance. • If we, over the long haul, do not beat the indices, then there would have been no point to having the funds. You’d be better off picking one or more of the indices. If I cannot perform better than an unmanaged group of equities then I should not be in the fund management business! In my letter to investors dated December 4, 2000, I had mentioned the there are two types of businesses of interest to the fund: 1. Great, compelling companies that may have little to no growth, but a solid cash flow engine and trading at markets caps substantially below their sale price in a private transaction. 2. Growth at Reasonable Price (GARP) companies. Fast growers that are really cheap. There is a third category that sometimes fits into the first category (compelling value), but not always.3

I do have some confidence that a few good ideas will pop up on the radar every so often – just as they have over the last seven years. PIF3 Approved by the BVI Pabrai Investment Fund 3 (PIF3) has been formally approved and setup as an Offshore Mutual Fund based in the British Virgin Islands. I’d like to thank Walter Stasiuk at Sonnenschein, Nath and Rosenthal (New York) and Conyers, Dill and Pearman (BVI) who serve as legal counsel for PIF3 for all their help and efforts in getting the fund setup. Its scheduled to go live on 1/1/02 with the 2 offshore investors in PIF2 moving their interest to PIF3. PIF3 is limited to accredited investors and they must be non U.S. Citizens or Residents. Unlike PIFI and PIF3, there is no limit to the number of investors in PIF3. As a result of the redemption of PIF2 units on 1/1/02, I’ll be reporting NAV on that date as well. I do not expect the redemptions to affect our holdings as nearly $2 Million has come into the funds in the last 2 months and the total redemption will be under $300,000. Raising the Minimum Amount for new Partners Going forward, the new minimum investment to join the funds as a new partner will be $100,000. The previous minimum was $50,000. This is effective 2/1/02. We can have only 99 partners in each fund and as the number of slots left go down, the minimum needs to go up to delay the closing of the present fund for as long as possible to new investors.3

A few years ago John Bogle wrote an outstanding book entitled Common Sense on Mutual Funds. John was the Chairman of Vanguard and an exceptionally brilliant and direct person. He’s an excellent writer as well. In the book, John gave a lot of good empirical data on the probabilities of the typical portfolio or fund manager beating the market. Over 85% of mutual and hedge funds lag the market after all fees and expenses. He further showed that the empirical data suggests that just 1 in 200 fund managers is able to beat the market by over an average of 3% annually. I am confident that the deeply rooted grounding in Buffett/Graham/Munger principles of investing that I have embraced will result is outperforming the three indices over the long haul. I don’t think a 25% annualized outperformance of these indices is a rational expectation for the Pabrai Funds. So, while the results of both funds have been exceptional so far, we should remember that: 1. The funds are just 26 months old. We can look back on the track record after 5+ years. 2. The stock market is nearly fully efficient. However, occasionally, Mr. Market will underprice a company or two substantially. Our investment style is very opportunistic. We play in the crevices of inefficiency within an otherwise nearly fully efficient market. Occasionally as I crawl through these crevices, I’m able to uncover great investment ideas. I’ll act upon a good idea when I see one.

The logic Charlie is applying is the following: If I were forced to trim a 15 stock portfolio to 4 stocks, chances are high that I’d pick 4 businesses that I would be far more knowledgeable about than even 15 businesses and its very likely that the 4 stock portfolio would outperform the 15 stock portfolio. The key words that Charlie is emphasizing are “well selected”. There is a fund manager friend of mine who runs a fund with just 3 stocks in it. I spent some time looking at his three holdings (two of them are represented in The Pabrai Funds) and the conclusion I came to was that the probabilities of his losing money on any of the three stocks was very very remote. On the other hand, it is pretty much guaranteed that his portfolio will blow away S&P 500 returns over the long haul. They represent three very well selected businesses with phenomenal business models, exceptional management and bought at dirt- cheap prices – dramatically below intrinsic value. I’d ideally like to hold positions in 10 securities in a given portfolio and, over time, will manage both PIFI and PIF2 towards fewer holdings than today. The small minority of fund managers who consistently beat the market, do it with relatively focused portfolios. The corollary is that there is an extremely high probability of under performing the market with portfolios where the top 20 holdings comprise less than 20% of the portfolio.3

Annual Meeting Reminder: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2001 at 4:00 PM. The meeting location has changed to: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.0990 The funds’ partners are no longer a Chicago-centric group. Many of you are from all over the country and around the globe. Rosemont is right next to Chicago’s O’Hare Airport and several hotels are within walking distance of Carlucci’s to accommodate the growing number of out-of-towners. Last year, we had about a dozen folks in attendance. This year I hope to see many times that number. We will have a private room and the meeting will be followed by cocktails and dinner. All limited partners and their spouses/significant others are invited. I hope all of you can attend. Please mark it on your calendar.3

Most mutual funds have over 100 stocks in a given fund. That would imply that the fund manager spends 500-700 hours a year just on the 400 earnings conference calls annually in the portfolio – without accounting for reading or researching stocks not yet in the portfolio. I have a hard enough time keeping up with the 15 businesses. I don’t know how anyone can be intimately familiar with all the nuances of 100+ diversified dynamic businesses and know them as well as the 3 stock fund manager. Both PIFI and PIF2 are fully invested as I write this letter. We own small pieces of some exceptional businesses. We now also have some Special Situation investments and bonds with low risk and terrific Yield to Maturity (YTM) in PIF2. Even after the reported PIF2 gains in July, both portfolios are, in my opinion, valued at substantial discounts to intrinsic value by the market. Annual Meeting Reminder: I’ve received most of the RSVPs. If you have not sent yours in, please do before 8/31 so we have an accurate count. From the list of attendees we have so far I know that we’ll have a fun meeting. The meeting is scheduled to be on Saturday, September 8, 2001 at 4:00 PM. The meeting location is: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.0990 Nearby Hotels – Marriott Suites O’Hare, The Westin O’Hare Next Investment Window The next date when funds will be added to PIF2 is October 1, 2001. I continue to have more opportunities than cash.

As an FYI, we crossed the $10 Million mark in assets under management on 12/1/01. Assets have grown over 10 fold since inception less than 2½ years ago. Thank you for your support. Pabrai Investment Funds Assets Under Management (In Millions of $) 7/1/1999 7/1/2000 7/1/2001 12/1/2001 Assets Under Management Appointing a Third-Party Administrator (TPA) For PIFI and PIF2 A few current and prospective partners have expressed concerns about the lack of transparency in the funds. For example, I am the portfolio manager and I issue the NAV calcs and statements. A TPA would alleviate this concern. TPA’s are entities that provide administrative services for hundreds of funds with billions under management. Investors would get their statements and NAV calculations from a reputed and independent third-party. In addition, they’d co-sign all checks or wires for redemptions, fund expenses etc. The advantages for an investor are obvious. The disadvantage is the cost. I’ll be seeking input from all of the limited partners and then, based on the feedback, will move forward with an amendment to add the TPA function to the funds. I’d recommend adding the TPA as it makes the funds more professional as we scale. Next Investment Window The next date when funds will be added to PIF2 is February 1, 2002. It’s a great time to invest. I’d also appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor.

There is no way to predict how many good ideas I’ll be able to uncover in the next few years. I think I’ve had more than my share of good ideas in the last few years. I don’t consider the stock market at large to be underpriced. Most of the stuff I look at is either fully priced or over priced. Its hard to find good investment ideas – but that’s precisely the reason you’ve engaged me. I love digging and analyzing and occasionally we hit pay dirt. So I’ll continue digging and crawling to find hidden value. Annual Meeting Reminder: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2001. The meeting location is: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.3

Companies whose prospects are impaired only in the short term, but have minimal impact long term (e.g. American Express). It’s clear that American Express’s near term earnings will take a hit as travel slows down. American Express earnings took a hit during the Gulf War as well. But what was the impact on American Express’s intrinsic value in 2001 related to the Korean War, Cuban Missile Crisis, the Kennedy assassination, the Vietnam War and the Gulf War? The answer is zero. I suspect that the impact on them 2-3 years from now will again be close to zero. I’m ploughing through companies in this category that are now “on clearance sale” to see if they fit our investment criteria.3

The nature of our non-KBS insurance business was roughly described in our year 2000 Annual Report wherein we reported to shareholders that we were not currently active in super-catastrophe reinsurance and had never suÅered a super-catastrophe loss, but that shareholders should continue to realize that Wes-FIC's marvelous underwriting results were sure to be followed, sometime, by one or more horrible underwriting losses. When we said that, we had in mind a natural catastrophe. But, instead, we were clobbered by a man-made catastrophe on September 11 Ì an event that delivered the insurance industry its largest loss in history. Fortunately, we recorded a loss of only $10 million, before income taxes ($6.5 million, after taxes) in connection with that event. The $10 million is an estimate and is subject to considerable estimation error. It will literally take years to resolve complicated coverage issues, as well as to develop an accurate estimation of insured losses that will ultimately be incurred. That $10 million, however, was the principal cause of our substantial underwriting loss in 2001. At the end of 2001 we retained about $17 million in invested assets, oÅset by claims reserves, from our former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.loss-related

Next Investment Window The next date when funds will be added to PIF2 is August 1, 2001. I continue to have more opportunities than cash. Thus I’d like to add more cash. It’s a great time to invest. If you’re interested in investing, please contact me so I can make the allocation. More importantly, I’d appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Warm Regards, Mohnish Pabrai Page 4

from them in the 1950s and 60s Buffett Partnerships. Buffett continues to invest in workouts for his own account as well as Berkshire Hathaway. Another terms for workouts would be Arbitrage or simply “Special Situations” Buffett does two types of investing. One is buying great companies at compelling valuations and holding them for a long time (Coca Cola, American Express etc.) The other is workout investing. He has made a lot of money in his career for these workouts. Workouts typically offer modest returns, but virtually no risk. Let me give you some examples: Company A is publicly traded and its stock is at $30/share. Company A announces that it has reached an agreement to be sold to Company B in an all-cash transaction for $35/share. They announce that the both the boards have approved the transaction and recommended that shareholders approve it as well. A month later, the shareholders have approved the merger and the deal is expected to close in 30-45 days. Company A’s stock is trading in a range of $34-$34.50/share. The NASDAQ drops 10% a month before the merger and the stock drops to $33.50/share. If one bought the stock at $33.50 and got $35 a month later, it’s a 53.73% annualized rate of return with virtually no risk! This is known as “Merger Arbitrage”. Usually spreads on announced cash mergers are slim, but occasionally these spreads widen. They are sometimes quite wide if the companies are small cap as liquidity issues keep big players out.

Over the December holidays, I wrote an article entitled “ The Intrinsic Value of Cisco, Intel and Microsoft”. I’m sending it as an attachment for those of you interested in reading it. It’ll give you a better sense of some of the tools I use in analyzing businesses for the portfolio. Its also being posted on the website. Your K-1s for 2000 Our auditors, Gleeson, Sklar, Sawyers and Cumpata, are in the midst of preparing all your K-1s for the 2000 tax year. They should be out to you by Feb. 15, 2001. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Warm Regards, Mohnish Pabrai Page 3

For out-of-towners, The Marriott Suites and Westin O’Hare in Rosemont are both walking distance to the restaurant. You should all have received your invites in the mail. I do hope that you’ll bring all your toughest questions to the meeting. Next Investment Window The next date when funds will be added to PIF2 is October 1, 2001. I continue to have more opportunities than cash. Thus I’d like to add more cash. It’s a great time to invest. If you’re interested in investing, please contact me so I can make the allocation. More importantly, I’d appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Warm Regards, Mohnish Pabrai mpabrai@pabraifunds.com +1630.240.1652 Page 4

expenses, beneÑting after-tax operating earnings in 2001 and 2000 by $.8 million each. We engage in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fire- man's Fund Group, and, from time to time, in super-cat reinsurance, described in detail in previous annual reports, which Wesco shareholders should re-read each year. In almost all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent, Berkshire Hathaway, sold several times as much reinsurance to the same customers on the same terms. In certain instances, such subsidiaries have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs with regard to those policies. KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $9.3 million to the after-tax operating earnings of the insurance busi- nesses in 2001 and $7.0 million in 2000. These Ñgures are before goodwill amortiza- tion under accounting convention of $.8 million each year. The results of KBS have been combined with those of Wes-FIC, and are included in the table on page 1 in the category of ""insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas.

Buffett has done a lot of merger arbitrage in his investing career. The returns are nearly as well locked in as Bank CDs, but with much higher returns. Occasionally things can go awry, but one needs to study each deal and evaluate risk of deals not closing etc. There are many types of Special Situations. Another is closed-end funds selling at deep discounts to NAV. Typically most closed end fund sport a modest discount or premium to NAV. However, sometimes the discount widens to large numbers – I’ve seen 50+% discounts to NAV. One has to again evaluate the probabilities of the spread narrowing and the timeframe involved, but the potential returns can be high. Yet another that was available in 1999 and 2000 in spades was in Real Estate Investment Trusts (REITs). Let’s say there is a company that owns the Oak Brook Mall and this company is publicly traded. Its only business is to keep up the property, find tenants for vacant space and maintain the premises. It would be classified as a REIT. Typically, it would distribute to shareholders most of the rent after expenses. If the Oak Brook Mall is 90+% leased to Fortune 1000 names on long term leases and the yield on its dividend is 15%, one can evaluate what are the future expected dividend streams and what the property might be sold for some day. Like closed-end funds, many REIT prices collapsed as the NASDAQ was soaring and yields went quite high.

Thus I’d like to add more cash. It’s a great time to invest. I’d also appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence.4

category. Their cash flow may decline for a few quarters, but they’ll be back on track after that. 3. Companies whose prospects are not impaired at all by the events of 9/11. Of particular interest are those whose stock prices have taken a hit (e.g. Liquidation World). I wrote an article in Silicon India that explains Liquidation World’s business model. These are interesting to analyze as their market caps have dropped substantially with no change in their future cash flow. We have a few holdings in this category and I expect that Mr. Market will soon realize the folly of his pricing aberration on these businesses. 4. Companies whose prospects are improved as a result of the Greenspan rate cut and are indifferent to the Sept. 11 tragedy (e.g. Stewart Enterprises, Radiologix etc.) As the Silicon India article shows, both these companies have business models that largely insulate them from events like Sept. 11. Stewart is in the Funeral Services business and Radiologix runs stand-alone and outsourced medical x-ray and CAT scan facilities. Both businesses have substantial debt tied to the US prime rate. When Greenspan cut rates their respective earnings got a boost going forward. Both stocks should have rallied in the aftermath, but instead both fell as Mr. Market went into a depressed state. I have always enjoyed studying businesses like these because they are so resilient to what might be severely traumatic for many other businesses.

Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Happy Holidays!!! To do our part in stimulating the economy, Harina, the kids and me are going to Disneyworld later this month!4

Those that underwent a decline in their market caps and meet the Buffett description of a good business are of particular interest. Businesses in all four categories took a hit in their market caps as a result of Sept. 11. We had many holdings in categories 2,3 and 4 that took a hit as well. I fully expect them to get back on track. The good news is that there is a good amount of dry powder available to take advantage of these anomalies for all of our benefit. I am able to replace special situation investments with great GARP (growth at a reasonable price) businesses or even better special situations – which only improves upon our expected future results. To summarize, I’d like to say that in my judgment we have a portfolio with a higher intrinsic value today than we did on Sept. 10. While the NAV may be lower, the intrinsic value is higher. 2002 Annual Meeting: The 2002 Annual Meeting will be held at 4:00 PM on the Saturday following Labor Day (Sept.4

Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 27 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 5% under arrangements whereby other Berkshire subsidiaries take 50% and unrelated reinsurers take the other 50%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 55.1% for 2001 and 73.9% for 2000, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is ably run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees.

Another type of Special Situation arises when there is a cloud hanging over a company that leads to a mass exodus of investors. A recent example is Buffett’s $150 Million investment in US Gypsum (USG). USG was trading at a P/E ratio of about 3 when Buffett bought about 15% of the company’s stock on the open market. It has asbestos liabilities and lawsuits which have historically cost the company $50+/million annually in recent years. Clearly Buffett does not view USG and Coca Cola in the same light. USG is a special situation play for him. He understands asbestos related liabilities probably better than most of Wall Street due to his extensive 40+ years in Property/Casualty Insurance etc. He probably thinks that the street has thrown the baby out with the bath water. Thus he must believe that future worst case asbestos when fully factored point to a far higher valuation for USG. He will exit USG when he feels its stock price reflects its intrinsic value including asbestos liabilities. We invested in a special situation in Q42000 and just sold the last of our position in March 2001. Let me share it with you. Stewart Enterprises, Inc. (STEI) About five or six years ago, I recall reading an interesting article in the Chicago Tribune. The article talked about business failure rates in various industries. Of particular interest was a table that listed rates of business failure by SIC code.

Rosemont, Illinois 60018 Tel. +1847.518.0990 Please note is on your calendar. With 12 attendees in 2001 and 47 attendees in 2001, I’d love to host over 100 for the 2002 meeting. Be There! Next Investment Window The next date when funds will be added to PIF2 is December 1, 2001. It’s a great time to invest. I’d also appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Warm Regards, Mohnish Pabrai Page 5

I found it interesting that the lowest rate of failure of any class of business was Funeral Homes. When I thought about it, it made perfect sense. When one is growing up and thinking about career paths, I don’t know anyone who would say “I’d like to run a funeral home.”. It’s a morbid business and few aspire to enter it. Thus, chances are, that if you own a funeral home you won’t see competitors spring up all over the place. Also, when one seeks out a funeral home for a loved one, you’re not interested in going to the newest one around, but rather the one with the deepest roots in the community. Its also a highly predictable business. Average life expectancy of humans changes very slowly. Any life insurer can predict the number of people who will die in Chicago in 2002, 2003 etc. They don’t know who will die, but know how many will. So, unlike many businesses I look at, future revenue for a given funeral home is not too hard to figure out. I subscribe to Value Line and they categorize summaries of stocks at the extreme with various characteristics – Lowest P/E stocks, Highest P/E, Widest discount from Book Value. I noticed that two companies in the Funeral Services business showed up on two lists – lowest P/E and widest discount from book value. They were Service Corp (SRV) and Stewart Enterprises (STEI). Not only did they show up on the list, but Stewart had a P/E ratio of about 3.5

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $395 million for calendar 2001, versus $361 million for the ten months that we owned it in the year 2000. Of these amounts, furniture rental revenues were $329 million and $306 million, and furniture sales revenues were $66 million and $55 million. CORT contributed $13.1 million to Wesco's consoli- dated operating income for the entire year of 2001, versus $29.0 million for the ten months of 2000. These Ñgures are before (1) goodwill amortization of $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.7 million in 2000. CORT's after-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $33.4 million compared to only $13.1 million for 2001, a decline of 61%.

When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, continued weakness in the economy and the events of Septem- ber 11, CORT's operations were hammered in 2001. Moreover, CORT started up a new subsidiary during the year, Relocation Central Corporation, whose $12 million in expenses far exceeded its $1 million in revenues. The results of its operations have been consolidated with those reported for CORT, shown above. Relocation Central has developed a virtual call center which carries out an internet-based furniture and apartment leads operation (www.relocationcentral.com), and it has begun marketing CORT's furniture rental services to real estate investment trusts, owners of many major apartment communi- ties. CORT is hopeful that, through Relocation Central, it will ultimately become the principal source of rental furniture to the apartment industry. We hope to report in due course that all CORT operations have become more satisfactory, but prospects for 2002 do not thrill us. However, there is good news along with bad. CORT operates at a positive cash Öow.

universe of 1700 companies). Stewart was trading at about $2/share. Its historical high was about $28/share (achieved in 1999). Stewart was also showing a book value of $8.50/share. It was thus trading at less than ¼ of book value. Its book value excluding goodwill was $400 Million or about $4/share. Most of the book value was in real estate etc. whose value was probably higher due to the depreciation charges that accounting standards dictate. Land does not usually depreciate. Stewart’s earnings and operating cash flow for the six months ended April 30, 2000 was about $38 Million or about $0.36/share. On an annualized basis they were producing free cash flow of about $0.72 cents/share. The stock was trading at less than 3 times cash flow!! It was also trading at about ¼ of annual revenue. Why? After I spent several days pouring through all the 10-Ks, 10-Qs, listing to recent conference calls and looking at all the analysts reports I could get my hands on, the picture became clear. Stewart was a 90 year old company that has done a roll-up in the funeral service business in the early 90s. Funeral Services is a highly fragmented business worldwide. Three players in the industry – Carriage Services, Service Corp. and Stewart Enterprises had been successful in acquiring hundreds of mom and pop funeral operators. All three followed the same modus operandi. On the exterior, there was no visible change after the mom and pop was acquired.

The name was maintained (as these small funeral homes had tremendous brand equity in their communities), but the back-end, merchandizing, selling pre-paid funerals etc. was streamlined and corporatized. The mistake all three made was that most of the acquisitions were done for cash rather than stock and they freely borrowed money to support their acquisition binge. Then the music stopped. The street lost its excitement for the funeral business and their stocks started to come down. Bankers and lenders weren’t interested in further lending and wanted balance sheets deleveraged. With no additional acquisitions, sales went flat. This is not a growth business. Stewart found itself in 2000 with $930 Million of long-term debt with about $500 Million coming due in 2002. The company had said to the street that they had excellent relations with their bankers, had never violated a bank covenant and were confident that their bankers would extend the loan. They also said that they had begun to explore the sale of international funeral homes and cemeteries in Europe, Mexico etc. International assets comprised about 20% of revenues and assets, but weren’t generating much cash flow. Thus Stewart has about $460 Million in assets outside the US. Despite this data, the stock was at $2/share. I figured that there were two possible scenarios – the company would either be forced into bankruptcy by lenders or they would refinance/eliminate debt and continue as usual.6

poor part of the business cycle when we turn it to our advantage by expanding business through cash acquisition at sound prices. We continue to believe that CORT's operations will remain proÑtable in any likely recession-related decline in the rent-to-rent segment of the furniture business. When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $264 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). Wesco's reported earnings were reduced by about $7 million of mostly-non-tax-deductible amortiza- tion of goodwill for 2001 and $6 million for 2000. The Financial Accounting Standards Board has recently adopted a rule that will no longer require automatic amortization of acquired goodwill beginning in 2002. Thus, earnings we report in the future will more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 55, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT.

We are absolutely delighted to have Paul and CORT within Wesco, are pleased with CORT's perform- ance under his leadership, despite adverse developments in 2001, and we hope to see a considerable expansion of CORT's business and earnings in future years. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $.4 million to Wesco's net operating earnings in 2001, down from $1.3 million in 2000 and $2.5 million in 1999. Had it not been for LIFO inventory accounting adjustments, Precision Steel would have reported no income at all for the year 2001, versus $1.7 million, after taxes, for 2000. Last year we reported that the U.S. steel industry was generally a disaster in 2000, and that Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. The year 2001 was much worse. The absence of Precision Steel's operating earnings for 2001, before the eÅect of the LIFO adjustment, was due principally to a signiÑcant reduction in demand for steel, combined with intensiÑed competition above the Ñerce level encountered in the prior year. This resulted in a 29.7% decrease in pounds of product sold. Sales revenues declined 25.6%. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power.

If the company liquidated, at the “store” level, each store was very profitable, so they’d be sold off as going concerns. Stores would not be sold for 3 times cash flow. Buyers would bid them up to 6-10 times cash flow. Presumably, worst case, the previous owners would buy them back for less than they sold them for. So under a 2002 bankruptcy, I figured the worst-case liquidation value was $4-5/share. If they indeed did sell off international operations, than would generate $300-500 Million in cash, which would eliminate the 2002 issue with the lenders. Thinking back to the Tribune article, while I allowed for bankruptcy as an option, I thought it was very unlikely given the nature of the business. This qualified as a Buffett-style workout or special situation. It was a play to get $4-5/share within a maximum of 2 years and exit (a 50% annual rate of return). I like all aspects of Stewart’s business except the leverage in the balance sheet. If I could buy Stewart with no debt at 3 times cash flow, I’d do it in a heartbeat and hold it for much longer – till it got to 8-10 times cash flow. But with the leveraged balance sheet this was simply a special situation play. The final piece of the research was to kick the tires. I met a friend of mine who had known Stewart for years and mentioned that their properties and services were the best in the business. They were at the high-end and very committed to service.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $5.8 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.6 million in 2001 and $.2 million in 2000. Sources were (1) rents ($3.2 million gross in 2001) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Net Securities Gains The main tag end from Wesco's savings and loan days was an investment in Freddie Mac common stock, purchased by Mutual Savings for $72 million at a time when Freddie Mac shares could be lawfully owned only by a savings and loan association.

In this market, one is not looking for the cheapest solution, but the most respectable and dignified one. So they appeared to have some pricing power – which was great. I backed up the proverbial truck. In August I bought as much as I could for my personal account and PIFI. The other problem with Stewart was the lack of float. It was a $2/share, but very little volume. It took days to fill my limit orders, but I’m a patient man. In December, I got a bonus, Stewart dipped to $1.75 (the December effect) and I added a bunch more PIF2 in December. The average buy price for PIF2’s Stewart stake was $1.99/share, including trading commissions. In the last conference call on March 15, Stewart announced that they were close to a few deals for the International Properties and expected to have firm announcements within 90 days. They had also paid down $50+ Million of debt and cash flow remains strong. In March, Stewart stock price was around $3.50-4.00/share and Reuters did a positive story on how the industry was intensely focused on deleveraging their balance sheets and this was a non-cyclical highly predictable business. I started exiting Stewart at about $3.75/share and sold everything at $4/share. We were in and out in less than six months with a 150+% annualized rate of return. Thank you Stewart. You can rest assured that we’ll be back in the straddle with Stewart if nothing changes and the stock goes back to $1.75.7

Those shares, carried on Wesco's balance sheet at yearend 1999 at a market value of $1.4 billion, were sold in 2000, giving rise to the principal portion of the $852.4 million of after-tax securities gains realized by Wesco in 2000, versus no gains or losses realized in 2001. Although the realized gain had a material impact on Wesco's reported earnings for 2000, it had a very minor impact on Wesco's shareholders' equity. Inasmuch as the greater portion of the realized gain had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, the amount was merely switched from unrealized gains to retained earnings, another component of shareholders' equity. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, decreased to $1.91 billion ($269 per Wesco share) at yearend 2001 from $1.98 billion ($278 per Wesco share) at yearend 2000. The foregoing $269-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Perhaps this assumption is too conservative.liquidation

for another $2-3 appreciation in the short term was akin to gambling. It reminds me of a Buffett quote that goes something like this: “When buying a stock, don’t count on a good sale price, focus on a great purchase price so that even a mediocre sale price looks great.” We bought Stewart at a great price and sold at a mediocre price. With the Diamond and Stewart examples, I am trying to help my partners better understand how this “black box” functions. Over time, I hope to share more successes and failures with you. It should also help explain why we didn’t drop 50% in value when the Nasdaq did. Annual Meeting Reminder: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2001 at 4:00 PM. The location is: Maggiano’s Restaurant Oak Brook, Illinois We will have a private room and the meeting will be followed by cocktails and dinner. Last year’s meeting was fun. All limited partners and their spouses/significant others/dates are invited. I hope all of you can attend. Please mark it on your calendar. Next Investment Window The next date when funds will be added to PIF2 is June 1, 2001. I continue to have more opportunities than cash. Thus I’d like to add more cash. It’s a great time to invest. If you’re interested in investing, please contact me so I can make the allocation. More importantly, I’d appreciate any referrals you might have. I have an information kit that’s easy for me to send to any prospective investor.

value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena containing only 125,000 net rentable square feet), and (2) possible unrealized appreciation in other assets cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. The sale of the Freddie Mac shares in 2000 was principally responsible for the reduction of that interest-free ""loan'' from $705 million as of yearend 1999 to $199 million as of yearend 2001. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $28 per Wesco share at year end 2001. However, some day, additional parts of the interest-free ""loan'' may be re- moved as securities are sold, as happened to such a large extent with the sale of Freddie Mac stock in 2000. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $28 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $28 per Wesco share.

Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies like CORT, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. The thing that should interest Wesco shareholders most with respect to 2001 is that we found no new common stocks for our insurance companies to buy. We are not excited by general prospects for common stocks. The Board of Directors recently increased Wesco's regular dividend from 311 /2 cents per share to 321 /2 cents per share, payable March 6, 2002, to shareholders of record as of the close of business on February 6, 2002.

This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 5, 2002

Decision — Launched Nomad; cigar-butt beginnings (Saks, Int’l Speedway, Conseco…). Context: Dec 2002 letter documents the early book. Outcome (known): Journey “from cigar butt investing to near permanent holdings” (preamble).

Decision — Initiated and defended Amazon through the post-crash controversy. Context: FCF-per-share logic; Bezos quote on givebacks; “the ever widening of the moat.” Outcome (known): Signature position; final letter recommended partners simply hold it.