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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 1999
COMMISSION FILE NUMBER 001-14905
BERKSHIRE HATHAWAY INC.
(Exact name of Registrant as specified in its charter)
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Delaware 47-0813844
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification number)
1440 Kiewit Plaza, Omaha, Nebraska 68131
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(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code (402) 346-1400
Securities registered pursuant to Section 12(b) of the Act*:
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Title of each class Name of each exchange on which registered
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Class A Common Stock, $5.00 Par Value New York Stock Exchange
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Class B Common Stock, $0.1667 Par Value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: NONE
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, and (2) has been subject to the
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant - $50,151,403,850 **
Indicate number of shares outstanding of each of the Registrant's classes of
common stock:
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March 20, 2000 -- Class A Common Stock, $5 par value ................ 1,341,155 shares
March 20, 2000 -- Class B Common Stock, $0.1667 par value ........... 5,387,475 shares
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DOCUMENTS INCORPORATED BY REFERENCE
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Document Incorporated In
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Proxy Statement for Registrant's
Annual Meeting to be held April 29, 2000 Part III
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* OBH Inc., a wholly-owned subsidiary of the Registrant, issued 1% Senior
Exchangeable Notes due December 2, 2001, which are registered on the New
York Stock Exchange.
** This aggregate value is computed at the last sale price of the common
stock on March 20, 2000. It does not include the value of Class A Common
Stock (531,879 shares) and Class B Common Stock (437 shares) held by
Directors and Executive Officers of the Registrant and members of their
immediate families, some of whom may not constitute "affiliates" for
purpose of the Securities Exchange Act of 1934.
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Part I
ITEM 1. BUSINESS
Berkshire Hathaway Inc. ("Berkshire", "Company" or "Registrant") is a
holding company owning subsidiaries engaged in a number of diverse business
activities. The most important of these are insurance businesses conducted
nationwide on a primary basis and worldwide on a reinsurance basis. Berkshire
also owns and operates a number of other businesses engaged in a variety of
activities, as identified herein.
Operating decisions for the various Berkshire businesses are made by
managers of the business units. Investment decisions and all other capital
allocation decisions are made for Berkshire and its subsidiaries by Warren E.
Buffett, in consultation with Charles T. Munger. Mr. Buffett is Chairman and Mr.
Munger is Vice Chairman of Berkshire's Board of Directors.
INSURANCE AND REINSURANCE BUSINESSES
Berkshire's insurance and reinsurance business activities are conducted
through 31 domestic and 16 foreign-based insurance companies. Since the
beginning of 1996, Berkshire's insurance operations expanded significantly as a
result of the January 1996 acquisition of GEICO Corporation ("GEICO Corp.") and
the December 1998 acquisition of General Re Corporation ("General Re").
Historically, Berkshire's insurance businesses provided insurance and
reinsurance of property and casualty risks primarily in the United States.
Through General Re and its affiliates, Berkshire's insurance operations also
include meaningful amounts of life, accident and health reinsurance, as well as
international property and casualty reinsurance.
In primary (or direct) insurance activities, the insurer assumes the
risk of loss from persons or organizations that are directly subject to the
risks. Such risks may relate to property, casualty (or liability), life,
accident, health, financial or other perils that may arise from an insurable
event. In reinsurance activities, the reinsurer assumes defined portions of
similar or dissimilar risks that other primary insurers or reinsurers have
assumed in their own insuring activities.
Reinsurance contracts are normally classified as treaty or facultative
contracts. Treaty reinsurance refers to automatic reinsurance coverage for all
or a portion of a specified class of risks ceded by the primary insurer, while
facultative reinsurance involves underwriting of individual risks. Coverage of
risks assumed under reinsurance contracts may be classified as quota-share or
excess. Under quota-share (or pro-rata) reinsurance, the reinsurer shares
proportionally in the original premiums, losses, and expenses of the primary
insurer or reinsurer. Excess (or non-proportional) reinsurance provides for the
indemnification of the primary insurer or reinsurer for all or a portion of the
loss in excess of an agreed upon amount or "retention". Both quota-share and
excess reinsurance may provide for aggregate limits of indemnification.
Except for regulatory considerations, there are virtually no barriers to
entry into the insurance and reinsurance industry. Competitors may be domestic
or foreign, as well as licensed or unlicensed. The number of competitors within
the industry is not known. Insurers and reinsurers compete on the basis of
reliability, financial strength and stability, ratings, underwriting
consistency, service, business ethics, price, performance, capacity, policy
terms and coverage conditions.
Insurers and reinsurers based in the United States are subject to
regulation by their states of domicile and by those states in which they are
licensed. The primary focus of regulation is to assure that insurers are
financially solvent and that policyholder interests are otherwise protected.
States establish minimum capital levels for insurance companies and establish
guidelines for permissible business and investment activities. States have the
authority to suspend or revoke a company's authority to do business, as
conditions warrant.
Most primary insurers are required to obtain regulatory approval of the
policy forms issued and premium rates charged to policyholders. Reinsurers are
normally not required to obtain such approvals. States regulate the payment of
dividends by insurance companies to their shareholders. Dividends of
extraordinary amounts are subject to prior regulatory approval.
1
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
The insurance regulators of every state participate in the National
Association of Insurance Commissioners ("NAIC"). The NAIC adopts forms,
instructions and accounting procedures for use by U.S. insurers and reinsurers
in preparing and filing annual statutory financial statements. However, an
insurer's state of domicile has ultimate authority over accounting practices.
In 1998, the NAIC adopted statutory accounting principles ("SAP")
developed under its Codification Project, which was intended to bring greater
uniformity in accounting practices throughout the United States. The
codification guidance is expected to become effective in 2001 and, in its
current form, should not have a significant effect on Berkshire's insurance
businesses. However, the amount of reported regulatory capital, also known as
statutory surplus, of Berkshire's insurance subsidiaries is expected to decline
due to the recognition of deferred income tax liabilities on unrealized
appreciation of investments. Under current SAP, such liabilities are not
recognized.
In addition to its activities relating to the annual statement and SAP,
the NAIC develops or adopts model laws, regulations and programs for use by its
members. Such matters deal with regulatory oversight of solvency, compliance
with financial regulation standards, and risk-based capital reporting
requirements.
In general, regulation of the reinsurance industry outside of the United
States is subject to the differing laws and regulations of each country in which
the reinsurer has operations or writes premiums. Some jurisdictions, such as the
United Kingdom, impose complex regulatory requirements on reinsurance companies,
while other jurisdictions, such as Germany, impose fewer requirements. Local
reinsurance business conducted by General Re's subsidiaries in some countries
requires licenses issued by governmental authorities. These licenses may be
subject to modification, suspension or revocation dependent on such factors as
amount and types of reserves and minimum capital and solvency tests. The
violation of regulatory requirements may result in fines, censures and/or
criminal sanctions in various jurisdictions.
Berkshire's insurance companies maintain capital strength at
unparalleled levels, significantly higher than normal in the industry. This
strength differentiates Berkshire's insurance companies from their competitors.
Collectively, the aggregate statutory surplus of Berkshire's U.S. based insurers
has grown from $13.4 billion at December 31, 1994 to approximately $44.5 billion
at December 31, 1999. All of Berkshire's major insurance companies are rated AAA
by Standard & Poor's Corporation, the highest Financial Strength Rating assigned
by Standard & Poor's, and are rated A++ (superior) by A.M. Best with respect to
their financial condition and operating performance.
Berkshire's insurance and reinsurance operations are not significantly
affected by seasonal variances. However, periodic underwriting results from
Berkshire's property/casualty insurance and reinsurance operations can be
volatile. Underwriting results can be significantly affected by the timing and
magnitude of catastrophe losses incurred, especially with respect to reinsurance
assumed business.
Insurance underwriting operations are comprised of the following
sub-groups: (1) GEICO Corp. and its subsidiaries, (2) Berkshire Hathaway
Reinsurance Group, (3) Berkshire Hathaway Direct Insurance Group, and (4)
General Re and its subsidiaries. Additional information related to each of these
four underwriting units follows.
GEICO CORPORATION -- On January 2, 1996, GEICO Corp. became an indirect
wholly-owned subsidiary of Berkshire as a result of the merger of an indirect
wholly-owned subsidiary of Berkshire with and into GEICO Corp. The acquisition
was pursuant to an Agreement and Plan of Merger wherein each outstanding share
of GEICO Corp., except treasury shares and shares already held by Berkshire
subsidiaries, was converted to the right to receive $70 cash, or $2.3 billion in
the aggregate. Immediately prior to the merger, Berkshire subsidiaries owned
approximately 51% of all outstanding GEICO Corp. common stock.
GEICO Corp. is headquartered in Chevy Chase, Maryland and its principal
insurance subsidiaries include: Government Employees Insurance Company
("GEICO"), GEICO General Insurance Company ("GEICO General"), GEICO Indemnity
Company ("GI"), and GEICO Casualty Company ("GEICO Casualty"). These companies
offer primarily private passenger automobile insurance to individuals in 48
states and the District of Columbia. Since being acquired by Berkshire, premium
volume has grown as a result of significantly higher advertising expenditures
and competitive premium rates. As a consequence, voluntary automobile policies
in-force have grown by approximately 87% since 1995. To facilitate servicing
in-force policy growth, during 1998 and 1999, GEICO opened sales and claims
service centers in several new locations. Net premiums written in 1999 were
$4,953 million compared to $2,856 million in 1995. Collectively, GEICO Corp.
companies are currently the sixth largest auto insurer, in terms of premium
volume, in the United States.
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GEICO CORPORATION (CONTINUED)
GEICO, founded in 1936, is a multiple-line property and casualty insurer
engaged primarily in writing private passenger automobile insurance for
preferred-risk government employees and military personnel. Prior to 1996, GEICO
also wrote homeowners, fire and boat owners insurance. Since then, GEICO
substantially exited these markets. GEICO also writes small amounts of personal
umbrella insurance for qualified applicants. GEICO General writes private
passenger automobile insurance for preferred-risk drivers not associated with
the government or military. GI writes standard-risk private passenger automobile
and motorcycle insurance. GEICO Casualty writes non-standard risk private
passenger automobile insurance. Each of these companies market their policies
primarily through direct response methods, in which applications for insurance
are submitted directly to the companies by telephone, through the mail, or via
the Internet.
Seasonal variations in GEICO Corp.'s insurance business are not
significant. However, extraordinary weather conditions or other factors may have
a significant effect upon the frequency or severity of automobile claims and, to
a diminishing degree, homeowners claims.
GEICO Corp. companies compete for private passenger auto insurance
customers with other companies that sell directly to the customer, as well as
with companies that use a traditional agency sales force. Private passenger
automobile insurance business is highly competitive in the areas of price and
service. Some insurance companies exacerbate price competition by selling their
products for a period of time at less than adequate rates, because they
underestimate ultimate claim costs and/or overestimate the amount of investment
income expected to be earned from the cash flow generated as a result of
premiums being received before claims are paid. Like all other Berkshire
insurance and reinsurance businesses, GEICO Corp. companies will not knowingly
follow that strategy.
Private passenger auto insurance is stringently regulated by state
insurance departments. As a result, it is difficult for insurance companies to
differentiate their products to consumers. Competition for preferred-risk
private passenger automobile insurance, which is substantial, tends to focus on
price and level of customer service provided, whereas price tends to be the
primary focus for other risks. GEICO Corp. companies place great emphasis on
customer satisfaction. GEICO Corp. companies' cost efficient direct response
marketing methods and emphasis on customer satisfaction enable it to offer
competitive rates and value to customers.
Management believes that the name and reputation of the GEICO Corp.
companies is a material asset and protects its name and other service marks
through appropriate registrations.
BERKSHIRE HATHAWAY REINSURANCE GROUP -- The Berkshire Hathaway
Reinsurance Group is headed by National Indemnity Company ("National
Indemnity"), and operates from offices located in Stamford, Connecticut.
National Indemnity provides principally excess and, to a lesser degree,
quota-share reinsurance to other property and casualty insurers and reinsurers.
National Indemnity's clients and risks assumed are located throughout
the world, but are primarily located within the United States. Minimal
organizational, but huge financial, resources are currently devoted to this
business. Over the past 5 years, annual net premiums written have ranged from
$777 million (in 1995) to $2,410 million (in 1999).
During the past five years, National Indemnity has written a
considerable number of catastrophe excess contracts. A catastrophe excess policy
provides protection to the counterparty from the accumulation of primarily
property losses arising from a single loss event or series of events. These
policies may provide significant amounts of indemnification per contract and a
single loss event may produce losses under a number of contracts.
National Indemnity does not generally cede any of the risks assumed
under catastrophe excess reinsurance contracts, due to perceived uncertainties
in recovering amounts from other reinsurers that are financially weaker. As a
result, the catastrophe excess reinsurance business can produce extreme
volatility in periodic underwriting results. Accounting consequences, however,
do not influence decisions of Berkshire's management with respect to this or any
other business. This factor along with its extraordinary financial strength, are
believed to be the primary reasons why National Indemnity has become a major
provider of such coverages.
3
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
BERKSHIRE HATHAWAY REINSURANCE GROUP (CONTINUED)
In recent years, the amount of capital (i.e. capacity) devoted to the
catastrophe excess reinsurance business by the industry has increased, through
additional capital raised by newly-formed entities and the introduction in the
financial markets of new types of catastrophe risk management products. The
effect of such increased insuring capacity is a reduction in opportunities to
write this business at acceptable prices. However, the occasional acceptance of
catastrophe excess reinsurance contracts can produce considerable premiums.
Over the past five years, National Indemnity's non-catastrophe
reinsurance business has derived primarily from a relatively small number of
excess policies written for major U.S. insurers and reinsurers. For instance,
National Indemnity has entered into several retroactive reinsurance contracts
over the past three years. Retroactive reinsurance contracts produced written
premiums of $1,508 million in 1999, $343 million in 1998 and $143 million in
1997. Coverage under such contracts is usually provided on
an excess basis and amounts of indemnification are subject to an aggregate
limit, which is usually substantial. Retroactive reinsurance contracts afford
protection to ceding companies against the adverse development of claims arising
under policies issued in prior years. Significant amounts of environmental and
latent injury claims may arise under the contracts.
Under the terms of many other non-catastrophe contracts, limits of
indemnification also may be subject to minimum and maximum payment amounts.
Minimum amounts may arise from profit-sharing or commutation clauses under the
contracts.
In National Indemnity's non-catastrophe reinsurance business, the
concept of time-value-of money is often an important element in establishing
prices and contract terms, since the payment of losses under the agreements are
often expected to occur over lengthy periods of time. Losses payable under the
contracts are normally expected to exceed premiums and therefore, produce
underwriting losses. This business is accepted, in part, because of the large
amounts of policyholder funds ("float") generated for investment, the economic
benefit of which will occur through increased investment income in future
periods.
BERKSHIRE HATHAWAY DIRECT INSURANCE GROUP -- The Berkshire Hathaway
Direct Insurance Group is a collection of smaller primary insurance operations
that provide a wide variety of insurance coverages to insureds principally in
the U.S. National Indemnity and certain affiliates underwrite motor vehicle
insurance to commercial enterprises. This business is written
nationwide primarily through insurance agents and brokers and is based in Omaha,
Nebraska. National Indemnity and certain other affiliates also solicit and
underwrite various unusual or especially large property and casualty risks.
Other insurance operations include: several companies referred to as the
"Homestate Companies", based in Colorado and Nebraska and with branch offices in
several other states, which market various commercial coverages for standard
risks to insureds in their state of domicile and an increasing number of other
states; Cypress Insurance Company, based in California, an underwriter of
principally workers' compensation policies for insureds located in California
and a small number of other states; Central States Indemnity Company of Omaha,
86.4% owned by Berkshire and located in Omaha, Nebraska, which provides credit
card credit insurance marketed primarily through credit card issuers nationwide;
80.1% owned Kansas Bankers Surety Company, based in Kansas, an insurer of
primarily crime, fidelity, errors and omissions, officers and directors
liability and related insurance coverages directed toward small and medium-sized
banks throughout the midwestern United States; and Berkshire Hathaway
International Ltd, an insurer of primarily private passenger and commercial auto
risks in the United Kingdom.
GENERAL RE -- On June 19, 1998, Berkshire and General Re executed a
Merger Agreement and Plan of Merger. In September 1998, shareholders of the two
companies approved the merger and during the fourth quarter all regulatory
approvals and tax rulings were received. The transaction was completed on
December 21, 1998. General Re shareholders received merger consideration
consisting of approximately 272,200 equivalent Class A shares.
Berkshire's Consolidated Balance Sheets at December 31, 1999 and 1998
include the consolidation of the General Re accounts. Berkshire's Consolidated
Statements of Earnings and Cash Flows include the consolidated results of
General Re for all of 1999 and for the 10 day period ending December 31, 1998.
Additional information regarding General Re's insurance and reinsurance business
is provided below.
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GENERAL RE (CONTINUED)
General Re was established in 1980 to serve as the holding company of
General Reinsurance Corporation ("GRC", incorporated in 1921) and its
affiliates. Other General Re affiliates include Kolnische Ruckversicherungs
Gesellschaft AG ("Cologne Re"), a major international reinsurer based in
Germany. General Re, directly and indirectly through a joint venture
arrangement, held an 88% economic interest in Cologne Re as of December 31,
1999. General Re acquired a majority economic ownership of Cologne Re in 1994.
General Re subsidiaries currently conduct global reinsurance businesses
in 71 cities throughout the world and provide reinsurance coverage in 126
countries. General Re operates three principal reinsurance businesses: North
American property/casualty reinsurance, International property/casualty
reinsurance, and global life/health reinsurance. General Re's reinsurance
operations are primarily based in Stamford, Connecticut and Germany.
Collectively, General Re and Cologne Re are among the four largest reinsurers in
the world based on net premiums written and capital.
NORTH AMERICAN PROPERTY/CASUALTY REINSURANCE
General Re's North American property/casualty business is principally
treaty and facultative reinsurance that is marketed directly to clients without
involving a broker or intermediary. General Re companies underwrite
predominantly excess coverages for clients located throughout the United States
and Canada. North American reinsurance operations are conducted primarily
through GRC and to a lesser degree through National Reinsurance Corporation
("NRC"), both based in Stamford, Connecticut. GRC is domiciled in Delaware and
licensed in the District of Columbia and all states but Hawaii, where it is an
accredited reinsurer. NRC is domiciled in Delaware and licensed in all 50
states, the District of Columbia, Puerto Rico, Canada and the United Kingdom.
North American property/casualty business also includes smaller specialty
insurers.
North American reinsurance operations generated $2,801 million in net
written premiums in 1999. Casualty reinsurance represented approximately 69
percent of North American property/casualty net premiums written and property
reinsurance represented approximately 23 percent.
General Re's specialty insurers include the General Star companies,
which underwrite excess and surplus lines and are domiciled in Connecticut and
Ohio. Also, the Genesis companies underwrite excess insurance for self-insured
programs and are domiciled in Connecticut and North Dakota. Fairfield Insurance
Company, a subsidiary of NRC engaged in property and casualty insurance
services, is domiciled in Connecticut, and is licensed in 48 states and the
District of Columbia. These businesses together represented approximately 8
percent of General Re's North American property/casualty net premiums written in
1999.
INTERNATIONAL PROPERTY/CASUALTY REINSURANCE
In total, General Re operates its International property/casualty
reinsurance business in 28 countries and provides reinsurance coverage in 126
countries throughout the world. In 1999, the International property/casualty
operations principally wrote business in the form of reinsurance treaties with
lesser amounts written on a facultative basis. Approximately 80 percent of
International property/casualty reinsurance business is written through Cologne
Re. In addition, international reinsurance business is written through a number
of wholly-owned subsidiaries of General Re. At the end of 1998, General Re
acquired D.P. Mann Holdings Limited ("DP Mann"). DP Mann owns both the managing
agent of Syndicate 435 at Lloyd's of London and DP Mann Corporate Name Limited,
which provides capacity and participates in the results of Syndicate 435 (31.6%
in 1999).
In 1999, General Re's International property/casualty operations
produced net written premiums totaling $2,506 million. Approximately 80 percent
of international premiums written related to quota-share coverages and 20
percent were excess coverages. Property premiums written were approximately 59
percent of total International property/casualty premiums and casualty premiums
were approximately 41 percent. Approximately 72 percent of International
property/casualty written premiums are attributed to Germany and Western Europe.
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GLOBAL LIFE/HEALTH REINSURANCE
This business includes the North American and International life/health
operations of Cologne Re. Life/health net premiums written in 1999 were $1,736
million. Approximately 31 percent of life/health net premiums were written in
Western Europe, another 56 percent were written in the United States and the
remaining 13 percent were written throughout the rest of the world. The
life/health operations provide individual life, group life, group health,
long-term care, individual health and finite risk reinsurance. Most of the life
reinsurance business is written on a proportional treaty basis, with smaller
amounts written on a facultative basis, while health business is predominantly
written on an excess treaty basis. The life/health business is marketed
primarily on a direct basis with the exception of group health, which is
marketed primarily through brokers.
INVESTMENTS -- The levels of reinsurance assumed business in recent
years, plus the acquisitions of GEICO Corp. and General Re, have produced an
exceptional increase in the amount of "float" held by Berkshire's insurance
businesses. "Float" is an approximation of the amount of net policyholder funds
available for investment. That term denotes the sum of unpaid losses and loss
adjustment expenses, unearned premiums and other policyholder liabilities, less
the aggregate amount of premium balances receivable, losses recoverable from
reinsurance ceded, deferred policy acquisition costs, deferred charges -
reinsurance assumed, and related prepaid income taxes. The amount of float has
grown from about $3.4 billion at the end of 1994 to about $25.3 billion at the
end of 1999. Approximately two-thirds of the year end 1999 amount derives from
General Re which was acquired in 1998. The increases in the amounts of float
plus the substantial amounts of shareholder capital devoted to insurance and
reinsurance activities has generated meaningful increases in the levels of
investments and investment income.
Investment portfolios of insurance subsidiaries include equity ownership
percentages of other publicly traded companies. Investments with a market value
in excess of $750 million at the end of 1999 include approximately 11% of the
outstanding capital stock of American Express Company, approximately 8% of the
capital stock of The Coca- Cola Company, approximately 8 1/2% of the capital
stock of Federal Home Loan Mortgage Corporation ("Freddie Mac"), approximately
9% of the capital stock of The Gillette Company, approximately 18% of the
capital stock of The Washington Post Company and approximately 3 1/2% of the
capital stock of Wells Fargo and Company. Much information about these
publicly-owned companies is available, including information released from time
to time by the companies themselves.
NON-INSURANCE BUSINESSES OF BERKSHIRE
The Registrant's eight non-insurance "reportable business segments" are
described below.
BUFFALO NEWS - The Buffalo News publishes a Sunday edition and nine
editions each weekday from its headquarters in Buffalo, New York. It is the only
metropolitan newspaper published daily within a ten county upstate New York
distribution area that comprises one of the 50 largest primary market areas in
the United States.
Among newspapers published in those primary markets, The Buffalo News
claims the highest percentage of its area household coverage, 57% on weekdays
and 76% on Sundays. Berkshire management believes the "newshole" percentage
(portion of the paper devoted to news) of The Buffalo News to be greater than
any other dominant newspaper of its size or larger. During 1999, this percentage
was approximately 58%.
FLIGHT SERVICES -- On December 23, 1996, FlightSafety International Inc.
("FSI") became a wholly-owned subsidiary of Berkshire. Aggregate consideration
of $1.5 billion was paid to former FSI shareholders, consisting of approximately
$769 million in cash, and the remainder in Berkshire Class A and Class B Common
Stock. FSI's corporate headquarters is located at LaGuardia Airport in Flushing,
New York.
FSI and its subsidiaries engage primarily in the business of providing
high technology training to operators of aircraft and ships. FSI's training
activities include: advanced pilot training in the operation of aircraft and air
traffic control procedures; aircrew training for military and other government
personnel; aircraft maintenance technician training; ab-initio (primary) pilot
training to qualify individuals for private and commercial pilots' licenses; and
ship handling and related training services. FSI also develops classroom
instructional systems and materials for use in its training business and for
sale to others.
A significant part of FSI's training programs derives from the use of
simulators, which incorporate computer-based technology to replicate the
operation of particular aircraft or ocean-going vessels. Simulators reproduce,
with a high degree of accuracy, certain sights, movements, and aircraft or
vessel control responses experienced by the operator of the aircraft or ship.
FSI utilizes approximately 250 training devices, including 222 civil aviation
simulators. FSI's training businesses are conducted primarily in the United
States, with facilities located in 20 states. FSI also operates training
facilities in Australia, Canada, China, France, United Kingdom and the
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
FLIGHT SERVICES (CONTINUED)
Netherlands. During 1997, FSI and The Boeing Company, a leading airplane
manufacturer, established a joint venture to provide pilot and aircrew training
for airline customers around the world.
FSI also designs and manufactures full motion flight simulators, visual
displays, and other training equipment for use in its training business and for
sale to others. Manufacturing facilities are located in Oklahoma and Missouri.
Berkshire added to its flight services business upon the acquisition of
Executive Jet, Inc. ("EJ"), which was completed on August 7, 1998. EJ
shareholders received aggregate consideration of $725 million, consisting of
$350 million in cash and the remainder in Berkshire Class A and B Common Stock.
EJ is the world's leading provider of fractional ownership programs for
general aviation aircraft. The fractional ownership of aircraft concept permits
customers to acquire a specific percentage of a certain aircraft type and allows
them to utilize the aircraft for a specified number of flight hours per annum.
In addition, EJ provides management, ground support and flight operation
services to customers after the sale. EJ's revenues derive from both the sale of
fractional interests as well as management and usage fees charged to clients in
connection with flight operations.
The fractional ownership concept is designed to meet the needs of
customers who cannot justify the purchase of an entire aircraft based upon
expected usage. In addition, fractional ownership programs are available for
corporate flight departments seeking to outsource their general aviation needs
or looking for additional capacity for peak periods and for others that
previously chartered aircraft. EJ places great emphasis on customer service. Its
programs are designed to offer customers guaranteed availability of aircraft,
lower and predictable operating costs and liquidity.
In 1986, EJ created the fractional ownership of aircraft concept and
introduced its NetJets(R) program in the U.S. with one aircraft type. The
NetJets(R) program currently offers twelve aircraft types. EJ plans to introduce
several new models in the next few years. In late 1996, EJ expanded its
fractional ownership programs to Europe via a joint venture arrangement, which
is 91% owned by EJ.
EJ is currently believed to be the world's largest purchaser of general
aviation aircraft. The company maintained 206 aircraft in its fleet as of
December 31, 1999. EJ management believes that the market for fractional
ownership of aircraft programs is large and growing and will contribute to EJ's
continued growth over the foreseeable future. EJ's executive offices are located
in New Jersey, while most of its logistical and flight operations are based at
Port Columbus International Airport in Columbus, Ohio. EJ's European operations
are based in Lisbon, Portugal.
HOME FURNISHINGS - The Home Furnishings segment includes the retail
furniture businesses of the Nebraska Furniture Mart ("NFM"), R.C. Willey Home
Furnishings ("R.C. Willey"), Star Furniture Company ("Star"), and Jordan's
Furniture, Inc. ("Jordan's"). NFM is 80% owned by Berkshire, whereas R.C.
Willey, Star and Jordan's are 100% owned by Berkshire. Berkshire has owned its
interest in NFM since 1983, and acquired R.C. Willey in 1995 and Star in 1997.
Jordan's was acquired by Berkshire on November 13, 1999.
NFM, R.C. Willey, Star and Jordan's each offer a wide selection of
furniture and accessories. In addition, NFM and R.C. Willey sell a full line of
major household appliances, electronics, computers and other home furnishings.
NFM, R.C. Willey and Star also offer customer financing to complement their
retail operations. An important feature of each of these businesses is their
ability to control costs and to produce high business volume from offerings of
significant value to its customers.
NFM operates its business from a single very large - approximately
508,000 square feet - retail complex and sizable warehouse and administrative
facilities in Omaha, Nebraska. NFM's customers are drawn from a radius around
Omaha of approximately 300 miles and it is the largest furniture retailer in the
area.
R.C. Willey, founded in 1932 and based in Salt Lake City, is the
dominant home furnishings retailer in Utah. R.C. Willey operates seven full
retail stores, including a new store that was opened in August of 1999 in
Meridian, Idaho, a distribution center and three clearance facilities. These
facilities -- which include more than 760,000 square feet of retail space -- are
strategically located throughout northern Utah and in Meridian, Idaho. R.C.
Willey serves customers in four western states.
7
<PAGE> 9
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
HOME FURNISHINGS (CONTINUED)
Star's retail, office and warehouse facilities, include about 580,000
square feet of retail space in ten locations. Seven retail locations are in
Houston, Texas where Star is a major furniture retailer in that market.
Jordan's operates a furniture retail business from three locations in
Massachusetts and one in New Hampshire. Jordan's is believed to be the largest
furniture retailer, as measured by sales, in the Massachusetts and New Hampshire
areas. Jordan's, which opened business in 1927, is well known in its markets for
its unique store arrangements and advertising campaigns.
INTERNATIONAL DAIRY QUEEN -- On January 7, 1998, Berkshire completed the
acquisition of International Dairy Queen ("IDQ"). IDQ shareholders received
total merger consideration of approximately $590 million, consisting of $ 265
million in cash and the remainder in Berkshire Class A and B stock.
IDQ develops, licenses and services a system of 5,955 Dairy Queen stores
that feature hamburgers, hot dogs, various dairy desserts and beverages,
including 56 stores that are wholly or jointly owned. The company predominantly
franchises Dairy Queen stores either directly with individual operators or
indirectly through agreements with territorial operators, who then grant
franchises to individual operators within a specific geographical territory. IDQ
supports and promotes the store operations of franchisees through product
development, market testing, advertising, training and advisory services. IDQ
creates and enforces quality control standards for franchisees. A major portion
of IDQ's operating profit derives from franchise service fees paid by franchised
stores and stores licensed by territorial operators.
IDQ also sells equipment directly to stores and sells products used in
store operations to a system of independently-owned warehouses that also
purchase approved products from other suppliers. These warehouses in turn sell
products to the Dairy Queen stores within specified geographical areas. The
first Dairy Queen store was opened in 1940 and stores are currently located in
49 states, as well as Canada, Japan, and several other countries.
The company also develops and services approximately 400 stores
operating under the name of Orange Julius featuring blended fruit drinks and
snack items and approximately 30 stores operating under the name of Karmelkorn
featuring popcorn and other snacks items.
JEWELRY -- In 1995, Berkshire acquired Helzberg's Diamond Shops, Inc.
("Helzberg's"). Helzberg's, based in North Kansas City, Missouri, operates a
chain of 208 retail jewelry stores in thirty-one states. Most of Helzberg's
stores are located in malls or power strip centers, and operate under the name
Helzberg Diamonds. In addition, since 1989, Berkshire has owned an interest
(currently 88%) in Borsheim's Jewelry Company ("Borsheim's"). From its single
store located in Omaha, Nebraska, Borsheim's is a high volume retailer of fine
jewelry, watches, crystal, china, stemware, flatware, gifts and collectibles.
SCOTT FETZER COMPANIES -- The Scott Fetzer Companies are a diversified
group of 22 businesses that manufacture and distribute a wide variety of
products for residential, industrial and institutional use. The two most
significant of these businesses are Kirby home cleaning systems and Campbell
Hausfeld.
Kirby's home cleaning systems are sold to approximately 850 independent
authorized factory distributors in the United States and foreign countries.
Sales are made through in-the-home demonstrations by independent salespeople.
The distributors independently establish the prices at which they offer Kirby
products. Kirby and its distributors believe they offer a premium product, and
it is believed that prices are generally higher than most of its major
competitors. Additionally, a wholly-owned subsidiary purchases consumer finance
contracts from about 520 Kirby authorized factory distributors in the United
States.
Campbell Hausfeld manufactures a variety of products including air
compressors, air tools, painting systems, pressure washers, welders and
generators which are marketed primarily to retailers and industrial products
distributors. Scott Fetzer management believes that Campbell Hausfeld offers
products that are a superior value to the consumer in comparison to its
competitors.
SEE'S CANDIES - See's Candies produces boxed chocolates and other
confectionery products with an emphasis on quality in two large kitchens in
California. See's distributes its candies through its own retail stores - nearly
200 in number, located in 10 western and midwestern states, including Hawaii -
and by mail order. A meaningful volume of candy business is also recorded from
direct shipments made nationwide from its California based quantity order
distribution centers.
8
<PAGE> 10
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
SEE'S CANDIES (CONTINUED)
Seasonality in this business is extreme. Nearly 50% of each year's unit
sales volume is generated during the last two months of the year, when quantity
order sales at reduced prices to businesses and other organizations augment the
extremely high retail store and mail order volume during December.
SHOE GROUP -- This segment includes H. H. Brown Shoe Company ("H. H.
Brown"), Lowell Shoe, Inc. ("Lowell") and Dexter Shoe Company ("Dexter"). A
description of each of these businesses follows.
H. H. Brown manufactures, imports and markets work, safety, outdoor,
western work and casual footwear. They are distributed under the H. H. Brown,
Born, Carolina, Double-H Boot and other brand names as well as under private
label. H. H. Brown is the leading domestic producer of steel toe safety work
shoes. The company maintains a significant share in many niche markets in which
it competes by providing functional footwear and emphasizing comfort and unique
technologies. The company's competitors in this market are typically domestic
work boot manufacturers. Management believes that its products are competitive
in terms of quality and price.
In addition to manufacturing its products at three facilities located in
the United States and a facility in Canada, H. H. Brown sources shoes and shoe
components offshore. The company markets its products primarily within the
United States and Canada through a direct sales force of about 120 employees.
Its customer base is primarily composed of small independent retailers and
wholesalers who sell to workers in a variety of industries including
construction, heavy manufacturing, agriculture and other light duty and service
occupations.
Lowell manufactures and markets women's casual, service and nurses
footwear. These products are marketed primarily under the brand names Soft Spots
and Nurse Mates.
Dexter manufactures and markets men's and women's dress, casual and
athletic footwear. All products are manufactured and sold under the trademark
Dexter and are marketed primarily in the United States and Canada. The company
specializes in the construction of Handsewns, Welts and Cements. Leather is
purchased from domestic tanneries, and many of the other components used in the
manufacturing process are made by Dexter. Dexter has four manufacturing
facilities in Maine, two in Puerto Rico and one in the Dominican Republic. In
addition to the manufacturing facilities, Dexter operates 88 factory outlet
stores located in 16 states and Puerto Rico.
OTHER NON-INSURANCE ACTIVITIES not identified with Berkshire business
segments include a group of finance and financial products businesses. Included
in these business activities is General Re Financial Products Corporation and
affiliates ("GRFP"). GRFP is a dealer in derivative products offering a full
line of interest rate, currency, and equity swap and option products, as well as
structured finance products. Berkshire's other finance and financial products
businesses engage in commercial real estate financing, leveraged financial
instruments investing, consumer receivable financing in connection with sales of
Kirby and World Book products, and sales of annuity contracts.
On March 14, 2000, Berkshire invested approximately $1.24 billion cash
in common stock and convertible preferred stock of a newly-formed entity that
merged with and into MidAmerican Energy Holdings Company ("MidAmerican"). These
securities possess 9.7% of the voting interest and 76% of the economic interest
on a fully-diluted basis in MidAmerican. In addition, Berkshire subsidiaries
acquired $455 million of 11% non-transferable trust preferred securities of
MidAmerican. Additional information concerning these investments and
MidAmerican's business activities is provided in Note 3 to the Registrant's
Consolidated Financial Statements.
Berkshire Hathaway Inc. and subsidiaries employed approximately 51,500
persons on a full-time equivalent basis at December 31, 1999.
ADDITIONAL INFORMATION WITH RESPECT TO BERKSHIRE'S BUSINESSES
The amounts of revenue, operating profit and identifiable assets
attributable to the aforementioned business segments are included in Note 16 to
Registrant's Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data. Additional information regarding Registrant's
investments in fixed maturity and marketable equity securities is included in
Notes 4 and 5 to Registrant's Consolidated Financial Statements.
9
<PAGE> 11
ITEM 2. PROPERTIES
The physical properties used by the Registrant and its significant
business segments are summarized below:
<TABLE>
<CAPTION>
Owned Approx.
or Square
Business Location Type of Property Leased Footage
-------- -------- ---------------- ------ -------
<S> <C> <C> <C> <C>
Company Headquarters Omaha, NE Offices Leased 7,000
GEICO Chevy Chase, MD, and other Offices Owned 2,800,000
locations in New York,
Georgia, Texas, California,
Florida & Virginia
Various locations throughout the Offices and drive-in Leased 200,000
United States claims facilities
Berkshire Hathaway Stamford, CT Offices Leased 10,000
Reinsurance Group
Berkshire Hathaway Direct Omaha, NE Offices Owned 73,000
Insurance Group Omaha, NE & various locations Offices Leased 136,000
throughout the United States &
England
General Re Cologne, Germany and Offices Owned 170,000
various non-U.S. locations
Stamford, CT, Various U.S. and Offices Leased 1,411,000
non-U.S. locations
Buffalo News Buffalo, NY Offices Owned 195,000
Buffalo, NY Printing Plant Owned 150,000
New York & Washington, D.C. Offices/Warehouses Leased 85,000
Flight Services 25 U.S. States, Canada, Offices/Training Owned 1,036,000
Netherlands, France, Facilities/Hangars Leased 1,717,000
Switzerland, Portugal,
United Kingdom and China
Oklahoma and Missouri Manufacturing Owned 152,000
Leased 95,000
Home Furnishings Omaha, NE, San Antonio, TX, Retail Stores Owned 1,517,000
Avon & Waltham, MA, Warehouses/Offices Owned 1,991,000
Salt Lake City, UT &
other locations in Idaho, Utah
and Nebraska
Salt Lake City, UT, Natick, Retail Stores Leased 654,000
MA, Nashua, NH, Warehouses/Offices Leased 938,000
Houston, TX & other
locations in Utah, Texas and
Iowa
</TABLE>
10
<PAGE> 12
ITEM 2. PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
Owned Approx.
or Square
Business Location Type of Property Leased Footage
-------- -------- ---------------- ------ -------
<S> <C> <C> <C> <C>
International Dairy Queen Decatur, GA, Minneapolis, MN Manufacturing/ Owned 158,000
& Canada Offices/
Warehouses
16 U.S. locations Restaurants/Stores Owned 50,000
11 U.S. locations & Canada Offices/Warehouses Leased 54,000
47 U.S. locations Restaurants/Stores Leased 136,000
Jewelry Kansas City, MO Office/Warehouse Owned 65,000
Omaha, NE and 208 Retail stores/offices Leased 512,000
other U.S. locations
Scott Fetzer Companies Cleveland, OH, & other Plants/Warehouses/ Owned 2,350,000
locations in 13 U.S. states Offices
Warehouses/Offices Leased 960,000
Canada, England, Taiwan & Warehouses/Offices Leased 93,000
Mexico
See's Candies Los Angeles, CA & South San Plants/Warehouses/ Owned 625,000
Francisco, CA Offices
California Warehouses/Offices Leased 242,000
California & other locations Retail outlets and Leased 331,000
principally in western states quantity order
(201 locations) centers
Shoe Group Morganton, NC, Womelsdorf, Plants/Warehouses/ Owned 1,723,000
PA, Martinsburg, PA, Offices
Hudson, NH, Dexter, ME,
and other locations in Maine,
Puerto Rico & Canada
Greenwich, CT, Morganton, Plants/Warehouses/ Leased 828,000
NC, Newton, MA, Offices
Northkingstown, RI,
Womelsdorf, PA, Hudson,
NH, Canada, Puerto Rico &
Dominican Republic
42 U.S. locations Retail Stores Owned 294,000
66 U.S. & Puerto Rico Retail Stores Leased 459,000
locations
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Litigation pending against the Company and its subsidiaries is not
considered material or is ordinary routine litigation incidental to the
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of the Registrant's executive officers:
<TABLE>
<CAPTION>
Name Age Position with Registrant Since
- ---- --- ------------------------ -----
<S> <C> <C> <C>
Warren E. Buffett 69 Chairman of the Board 1970
Marc D. Hamburg 50 Vice President 1992
Charles T. Munger 76 Vice Chairman of the Board 1978
</TABLE>
Each executive officer serves, in accordance with the by-laws of the
Registrant, until the first meeting of the Board of Directors following the next
annual meeting of shareholders and until his respective successor is chosen and
qualified or until he sooner dies, resigns, is removed or becomes disqualified.
Mr. Buffett and Mr. Munger also serve as directors of the Registrant.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
MARKET INFORMATION
The Company's Class A and Class B Common Stock are listed for trading on
the New York Stock Exchange, trading symbol: BRK.A and BRK.B. The
following table sets forth the high and low sales prices per share, as
reported on the New York Stock Exchange Composite List during the
periods indicated:
<TABLE>
<CAPTION>
1999 1998
---- ----
Class A Class B Class A Class B
------- ------- ------- -------
High Low High Low High Low High Low
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter .......... $81,100 $61,900 $ 2,713 $ 2,048 $69,500 $45,700 $ 2,324 $ 1,526
Second Quarter ......... 78,600 68,300 2,540 2,211 84,000 65,800 2,795 2,184
Third Quarter .......... 73,000 54,600 2,333 1,802 78,500 57,000 2,622 1,893
Fourth Quarter ......... 66,900 52,000 2,219 1,700 1/2 71,000 57,700 2,396 1,916
</TABLE>
SHAREHOLDERS
Berkshire had approximately 9,200 record holders of its Class A Common
Stock and 14,600 record holders of its Class B Common Stock at March 3, 2000.
Record owners included nominees holding at least 380,000 shares of Class A
Common Stock and 5,100,000 shares of Class B Common Stock on behalf of
beneficial-but-not-of-record owners.
DIVIDENDS
Berkshire has not declared a cash dividend since 1967.
12
<PAGE> 14
Part II (Continued)
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR THE PAST FIVE YEARS
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned .................... $ 14,306 $ 5,481 $ 4,761 $ 4,118 $ 957
Sales and service revenues ................... 5,918 4,675 3,615 3,095 2,756
Interest, dividend and other investment income 2,314 1,049 916 778 629
Income from finance and financial products
businesses ................................. 125 212 32 25 27
Realized investment gain (1) ................. 1,365 2,415 1,106(2) 2,484(3) 194
-------- -------- -------- -------- --------
Total revenues ............................... $ 24,028 $ 13,832 $ 10,430 $ 10,500 $ 4,563
======== ======== ======== ======== ========
EARNINGS:
Before realized investment gain .............. $ 671 $ 1,277 $ 1,197 $ 884 $ 670
Realized investment gain (1) ................. 886 1,553 704(2) 1,605(3) 125
-------- -------- -------- -------- --------
Net earnings ................................. $ 1,557 $ 2,830 $ 1,901 $ 2,489 $ 795
======== ======== ======== ======== ========
EARNINGS PER SHARE:
Before realized investment gain .............. $ 442 $ 1,021 $ 971 $ 733 $ 565
Realized investment gain (1) ................. 583 1,241 571(2) 1,332(3) 105
-------- -------- -------- -------- --------
Net earnings ................................. $ 1,025 $ 2,262 $ 1,542 $ 2,065 $ 670
======== ======== ======== ======== ========
YEAR-END DATA (4):
Total assets ................................. $131,416 $122,237 $ 56,111 $ 43,409 $ 28,711
Borrowings under investment agreements
and other debt (5) ......................... 2,465 2,385 2,267 1,944 1,062
Shareholders' equity ......................... 57,761 57,403 31,455 23,427 16,739
Class A equivalent common shares
outstanding, in thousands .................. 1,521 1,519 1,234 1,232 1,194
Shareholders' equity per outstanding
Class A equivalent share ................... $ 37,987 $ 37,801 $ 25,488 $ 19,011 $ 14,025
======== ======== ======== ======== ========
</TABLE>
- -----------------
(1) The amount of realized investment gain/loss for any given period has
no predictive value, and variations in amount from period to period
have no practical analytical value, particularly in view of the
unrealized appreciation now existing in Berkshire's consolidated
investment portfolio.
(2) In November 1997, Travelers Group Inc. completed its acquisition of
Salomon Inc. A pre-tax realized gain of $678 million ($427 million
after-tax) is included in 1997's results.
(3) In March 1996, The Walt Disney Company completed its acquisition of
Capital Cities/ABC, Inc. A pre-tax realized gain related to this
transaction of $2.2 billion ($1.4 billion after-tax) is included in
1996's results.
(4) Year-end data for 1998 includes General Re Corporation acquired by
Berkshire on December 21, 1998.
(5) Excludes borrowings of finance businesses.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for each of the past three years are disaggregated in the
table that follows. Amounts are after deducting minority interests and taxes.
<TABLE>
<CAPTION>
-- (dollars in millions)--
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Insurance segments - underwriting ............................. $ (897) $ 171 $ 298
Insurance segments - investment income ........................ 1,764 731 704
Non-Insurance business segments ............................... 427 389 311
Interest expense .............................................. (70) (63) (67)
Goodwill amortization and other purchase-accounting-
adjustments ................................................. (648) (118) (94)
Other ......................................................... 95 167 45
------- ------- -------
Earnings before realized investment gain .................... 671 1,277 1,197
Realized investment gain ...................................... 886 1,553 704
------- ------- -------
Net earnings ................................................ $ 1,557 $ 2,830 $ 1,901
======= ======= =======
</TABLE>
The business segment data (Note 16 to Consolidated Financial Statements)
should be read in conjunction with this discussion.
INSURANCE SEGMENTS -- UNDERWRITING
A summary follows of underwriting results from Berkshire's insurance
segments for the past three years.
<TABLE>
<CAPTION>
-- (dollars in millions)--
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Underwriting gain (loss) attributable to:
GEICO ................................... $ 24 $ 269 $ 281
General Re .............................. (1,184) -- --
Berkshire Hathaway Reinsurance Group .... (256) (21) 128
Berkshire Hathaway Direct Insurance Group 22 17 52
------- ------- -------
Underwriting gain (loss)-- pre-tax ........... (1,394) 265 461
Income taxes and minority interest ........... (497) 94 163
------- ------- -------
Net underwriting gain (loss) ................. $ (897) $ 171 $ 298
======= ======= =======
</TABLE>
Berkshire engages in both primary insurance and reinsurance of property
and casualty risks. Through General Re, Berkshire also reinsures life and health
risks. In primary insurance activities, Berkshire subsidiaries assume defined
portions of the risks of loss from persons or organizations that are directly
subject to the risks. In reinsurance activities, Berkshire subsidiaries assume
defined portions of similar or dissimilar risks that other insurers or
reinsurers have subjected themselves to in their own insuring activities.
Berkshire's principal insurance businesses are: (1) GEICO, the sixth largest
auto insurer in the United States, (2) General Re, one of the four largest
reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and
(4) Berkshire Hathaway Direct Insurance Group. See Note 2 to the Consolidated
Financial Statements for information regarding the General Re acquisition.
A significant marketing strategy followed by all these businesses is the
maintenance of extraordinary capital strength. Statutory surplus as regards
policyholders of Berkshire's insurance businesses increased to approximately $45
billion at December 31, 1999. This superior capital strength creates
opportunities, especially with respect to reinsurance activities, to negotiate
and enter into contracts of insurance specially designed to meet unique needs of
sophisticated insurance and reinsurance buyers. Additional information regarding
Berkshire's insurance and reinsurance operations is presented on the following
pages.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
GEICO
GEICO provides primarily private passenger automobile coverages to
insureds in 48 states and the District of Columbia. GEICO policies are marketed
mainly by direct response methods in which customers apply for coverage directly
to the company over the telephone, through the mail or via the Internet. This is
a significant element in GEICO's strategy to be a low cost insurer and, yet,
provide high value to policyholders.
GEICO's underwriting results for the past three years are summarized
below.
<TABLE>
<CAPTION>
-- (dollars are in millions)--
1999 1998 1997
-------------------- ------------------- ---------------------
Amount % Amount % Amount %
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums written .......... $4,953 $4,182 $3,588
====== ====== ======
Premiums earned ........... $4,757 100.0 $4,033 100.0 $3,482 100.0
------ -------- ------ -------- ------ --------
Losses and loss expenses .. 3,815 80.2 2,978 73.8 2,630 75.5
Underwriting expenses ..... 918 19.3 786 19.5 571 16.4
------ -------- ------ -------- ------ --------
Total losses and expenses . 4,733 99.5 3,764 93.3 3,201 91.9
------ ======== ------ ======== ------ ========
Underwriting gain-- pre-tax $ 24 $ 269 $ 281
====== ====== ======
</TABLE>
Premiums earned in 1999 exceeded premiums earned in 1998 by 17.9%, which
followed growth in 1998 of 15.8% over 1997 and 12.6% in 1997 over 1996. The
increased premiums earned in recent years reflects significant growth in the
numbers of voluntary auto policies-in-force, partially offset by the effects of
premium rate reductions taken in certain states. Rate reductions have been taken
during the past three years to better align premium rates with pricing targets.
Voluntary auto policies-in-force during 1999 grew by 21.5% over 1998 following
growth of 20.8% in 1998 and 16.0% in 1997. Over the past three years, GEICO
experienced significant growth in the preferred-risk markets, as well as the
standard and non-standard auto lines. New business sales in 1999 exceeded 1998
by 31.9%. The growth in premium volume in recent years is attributed to
substantially higher amounts of advertising and competitive premium rates.
GEICO's net underwriting profits in 1999 declined significantly from the
underwriting profits in 1998 and 1997. Underwriting results in 1999 reflect the
aforementioned premium rate reductions, relatively higher levels of claim costs
and increased marketing expenditures. In 1998 and 1997, GEICO's underwriting
results were better than expected primarily due to favorable claims experience.
Also, GEICO's underwriting results are subject to volatility, given the inherent
uncertainty in anticipating the levels of claim losses for a given period.
Losses and loss expenses incurred as percentages of premiums earned were
80.2% in 1999, 73.8% in 1998 and 75.5% in 1997. As a result of the
aforementioned premium rate reductions, claim costs incurred in 1999 were
expected to rise at faster rates than premiums. In addition, higher claim
frequency was experienced in 1999. Claim costs in 1998 and 1997 were lower than
normal reflecting generally mild weather conditions and declining severity of
auto liability claims. Catastrophe losses added 1.0% to the loss and loss
expense ratio in 1999, compared to 0.7% in 1998 and 0.3% in 1997.
GEICO's underwriting expenses in 1999 exceeded 1998 by $132 million
(16.8%) and underwriting expenses in 1998 exceeded 1997 by $215 million (37.7%).
The increase in expenses in 1999 relates primarily to costs incurred in
connection with the generation and servicing of new business, offset somewhat by
the effect of the deferral of certain costs associated with the development of
computer software for internal use, as prescribed by new accounting rules
effective in 1999. GEICO expects to increase spending to generate new policy
growth in 2000.
During 1999, GEICO was named as a defendant in a number of class action
lawsuits related to the use of repair parts not produced by original equipment
manufacturers in connection with settlement of collision damage claims. Similar
lawsuits have been filed against several other major private-passenger auto
insurers. Management intends to vigorously defend GEICO's position of
recommending the use of after-market parts in certain auto accident repairs. The
lawsuits are in the early stages of development and the ultimate outcome cannot
be reasonably determined at this time.
Although competition for private passenger auto insurance remains
intense, GEICO expects voluntary auto policies-in-force to continue to grow in
2000 as a result of accelerating marketing efforts and competitive rates. New
business is initially unprofitable due in large part to first year acquisition
costs. The costs of acquiring new business are expected to rise further in 2000.
These factors produce lower overall underwriting margins during periods of
growth. Thus, GEICO's underwriting results are expected to further decline in
2000 from 1999.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
General Re
On December 21, 1998, General Re became a wholly owned subsidiary of
Berkshire upon completion of the merger of the two companies. General Re's
results of operations are included in Berkshire's consolidated results beginning
as of that date. For comparative purposes in this discussion, the historical
results for all of 1998 are presented although the full-year results are not
included in Berkshire's 1998 consolidated results.
General Re and its affiliates conduct a global reinsurance business,
which provides reinsurance coverage in the United States and 125 other countries
around the world. General Re's principal reinsurance operations are: (1) North
American property/casualty, (2) International property/casualty, and (3) Global
life/health. The International property/casualty operations are conducted
primarily through Germany-based Cologne Re and its subsidiaries. At December 31,
1999, General Re had an 88% economic ownership interest in Cologne Re.
General Re's consolidated underwriting results for the past two years are
summarized below. Dollar amounts are in millions.
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Premiums written .......... $ 7,043 $ 6,084
======= =======
Premiums earned ........... $ 6,905 100.0 $ 6,095 100.0
------- -------- ------- --------
Losses and loss expenses .. 6,022 87.2 4,607 75.6
Underwriting expenses ..... 2,067 29.9 1,858 30.5
------- -------- ------- --------
Total losses and expenses . 8,089 117.1 6,465 106.1
------- ======== ------- ========
Underwriting loss-- pre-tax $(1,184) $ (370)
======== =========
</TABLE>
General Re's reinsurance operations produced large net underwriting
losses in 1999. The aggregate net underwriting loss of $1,184 million in 1999 is
the worst annual underwriting result of the company over the past 15 years.
Following is additional information and discussion with respect to each of
General Re's underwriting units.
General Re's North American property/casualty pre-tax underwriting
results for the years ending December 31,1999 and 1998 are summarized below.
Dollar amounts are in millions.
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Premiums written ................. $ 2,801 $ 2,707
======= ========
Premiums earned .................. $ 2,837 100.0 $ 2,708 100.0
------- -------- ------- --------
Losses and loss expenses ......... 2,547 89.8 1,830 67.6
Underwriting expenses ............ 874 30.8 857 31.6
------- -------- ------- --------
Total losses and expenses ........ 3,421 120.6 2,687 99.2
------- ======== ------- ========
Underwriting gain (loss)-- pre-tax $ (584) $ 21
======= =======
</TABLE>
General Re's North American property/casualty operations underwrite
predominantly excess reinsurance across multiple lines of business. North
American property/casualty premiums earned grew 4.8% in 1999. Premiums earned in
1999 included $154 million related to a single new stop-loss reinsurance
contract. Otherwise, premiums decreased primarily due to reduced business with
national accounts and declines in excess and surplus lines insurance businesses.
These declines exceeded growth in regional, specialty, and casualty facultative
reinsurance businesses during 1999.
Underwriting results from North American property/casualty operations in
1999 deteriorated significantly when compared to results for 1998. Net
underwriting losses in 1999 include fourth quarter losses of $353 million. Large
net underwriting losses in 1999 were generated in both property and casualty
reinsurance lines, which in the aggregate, produced a small net underwriting
profit in 1998.
The North American property/casualty loss ratio of 89.8% in 1999 exceeded
the loss ratio for 1998 by 22.2 percentage points. The increase in the 1999 loss
ratio was primarily due to the effects of inadequate premium rates,higher
current accident year losses in property lines of business and considerably
lower amounts of favorable development of loss reserves established for previous
years' casualty claims. Losses in 1999 arising from catastrophic events and
other large property losses under facultative and treaty contracts added 9.4
percentage points to the loss and loss expense ratio in 1999 compared to 4.1
percentage points in 1998.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
General Re (Continued)
General Re's International property/casualty underwriting results for
years ending December 31,1999 and 1998 are summarized below. Dollar amounts are
in millions.
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Premiums written .......... $ 2,506 $ 2,072
======= =======
Premiums earned ........... $ 2,343 100.0 $ 2,095 100.0
------- -------- ------- --------
Losses and loss expenses .. 2,041 87.1 1,514 72.3
Underwriting expenses ..... 775 33.1 682 32.5
------- -------- ------- --------
Total losses and expenses . 2,816 120.2 2,196 104.8
------- ======== ------- ========
Underwriting loss-- pre-tax $ (473) $ (101)
======= ========
</TABLE>
The International property/casualty operations write quota-share and
excess reinsurance on risks around the world. Earned premiums in 1999 exceeded
premiums earned in 1998 by 11.8%. The increase was primarily due to business
produced by DP Mann, reduced levels of premiums ceded, including amounts ceded
to General Re's North American reinsurance operations and a large new contract
involving motor business in Argentina. DP Mann is a Lloyd's underwriting manager
that was acquired by General Re at the end of 1998.
General Re's International property/casualty underwriting results for
1999 were poor. Loss and loss expense ratios for 1999 were 87.1% as compared to
72.3% for 1998. The increase in the 1999 loss ratio was mainly due to inadequate
premium rates, higher catastrophe losses and deteriorating results in the excess
liability, motor and the Australian professional indemnity lines of businesses.
In addition, the motion picture film finance business experienced significant
losses in the fourth quarter of 1999. Losses from catastrophic events, including
fourth quarter 1999 European winter storms, earthquakes in Taiwan and Turkey and
an Australian hailstorm, aggregated $126 million in 1999 or 5.4 loss ratio
points, compared to $28 million of catastrophic losses or 1.3 loss ratio points
in 1998.
General Re's Global life/health underwriting results for the years ending
December 31,1999 and 1998 are summarized below. Dollar amounts are in millions.
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Premiums written ................................ $1,736 $1,305
====== ======
Premiums earned ................................. $1,725 100.0 $1,292 100.0
------ ----- ------ -----
Losses and loss expenses ........................ 1,434 83.2 1,263 97.8
Underwriting expenses ........................... 418 24.2 319 24.6
--- ---- --- ----
Total losses and expenses ....................... 1,852 107.4 1,582 122.4
----- ===== ----- =====
Underwriting loss-- pre-tax ..................... $ (127) $(290)
======= ======
</TABLE>
General Re's Global life/health affiliates reinsure such risks worldwide.
The life business represented approximately 52% of the total life/health
premiums in 1999 compared to about 63% in 1998. Global life/health premiums
earned increased 33.6% in 1999 over 1998. The increase was principally related
to higher premiums earned in connection with the run off of health lines written
by a former London agent of Cologne Re's U.S. subsidiary ("GCL" formerly "CLR")
and growth from several new contracts written in the U.S. individual and group
health markets.
The Global life/health net underwriting losses in 1999 and 1998 were
principally attributed to the health business. In both 1999 and 1998, the life
business produced modest underwriting profits although mortality experience in
the individual life business worsened in 1999. The unsatisfactory underwriting
experience in the group health business in 1999 reflected increases in GCL's
health claim reserves that resulted from a comprehensive review conducted during
the first half of 1999. Prior to the merger with Berkshire in 1998, a loss
provision of $275 million was established on GCL's portion of a pool of workers'
compensation carve-out business written by the former London-based managing
underwriter. After considering settlements negotiated by other parties involved
in this business and actuarial reviews of other available loss information,
management concluded that no change to the reserve was warranted for 1999.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group ("BHRG") underwrites principally
excess-of-loss reinsurance coverages for insurers and reinsurers. BHRG is
believed to be one of the world leaders in providing catastrophe excess-of-loss
reinsurance. In recent years, BHRG has generated significant premium volume from
a few very sizable retroactive reinsurance contracts.
Underwriting results for the past three years are summarized in the
following table. Dollar amounts are in millions.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Premiums written ............................. $2,410 $986 $955
====== ==== ====
Premiums earned .............................. $2,382 100.0 $939 100.0 $967 100.0
------ ----- ---- ----- ---- -----
Losses and loss expenses ..................... 2,573 108.0 765 81.5 676 69.9
Underwriting expenses ........................ 65 2.7 195 20.7 163 16.9
-- --- --- ---- --- ----
Total losses and expenses .................... 2,638 110.7 960 102.2 839 86.8
----- ===== --- ===== --- ====
Underwriting gain (loss)-- pre-tax ........... $ (256) $(21) $128
====== ===== ====
</TABLE>
Premiums earned from retroactive reinsurance contracts, including
structured settlements, were $1,508 million in 1999, $343 million in 1998 and
$144 million in 1997. Premiums earned in 1999 included $1,250 million related to
a single contact entered into with an affiliate of a major U.S.
property/casualty insurer.
Generally, retroactive reinsurance contracts indemnify the ceding
company, subject to aggregate loss limits, with respect to past loss events that
were insured by the counterparty. It is generally expected that losses
ultimately paid under these arrangements will exceed the premiums received,
possibly by a wide margin. Premiums are based in part on time-value-of-money
concepts because loss payments are expected to occur over lengthy time periods.
However, retroactive contracts do not significantly impact earnings in the year
of inception. Consistent with Berkshire's accounting policy, the excess of the
estimated ultimate losses payable over the premiums received is established as a
deferred charge and amortized against income over the estimated future claim
settlement periods.
Net underwriting losses with respect to retroactive reinsurance contracts
were $97 million in 1999, $90 million in 1998 and $82 million in 1997. The net
underwriting losses from this business reflect the recurring recognition of
time-value-of-money concepts, the amortization of deferred charges on
retroactive reinsurance and accretion of discounted structured settlement
liabilities. The amortization and accretion charges are reported as losses
incurred and because there are no offsetting premiums, as underwriting losses.
Due to the large retroactive reinsurance contracts entered into during 1999,
deferred charges increased significantly. Consequently, the periodic
amortization and therefore, underwriting losses are expected to increase in
future periods.
Premiums earned from non-catastrophe reinsurance contracts totaled $560
million in 1999, $310 million in 1998 and $513 million in 1997. In each of the
last three years, the premiums earned from this business were derived
predominantly from a small number of sizable contracts. Premiums earned in 1999
included $113 million from contracts with General Re's North American
property/casualty operations.
Net underwriting losses from the non-catastrophe reinsurance business
were $355 million in 1999, $86 million in 1998 and $73 million in 1997. BHRG
incurred a net loss of approximately $220 million from a single aggregate excess
contract during the fourth quarter of 1999. Also, the 1999 underwriting loss
includes $126 million of net losses on reinsurance assumed from General Re's
North American property/casualty businesses. As with retroactive reinsurance
contracts, the premiums established for non-catastrophe reinsurance contracts
are based on time-value-of-money concepts because loss payments are expected to
occur over lengthy time periods. Loss reserves for this business are established
without such time discounting but, unlike retroactive reinsurance contracts, no
deferred charges are established. Consequently, significant underwriting losses
result. This business is accepted because of the large amounts of investable
policyholder funds ("float") that is produced. It is anticipated that Berkshire
will derive significant economic benefits over the lengthy period of time that
the float will be available for investment.
Premiums earned from catastrophe excess contracts were $314 million in
1999, $286 million in 1998 and $310 million in 1997. Competition within the
catastrophe reinsurance markets remains intense, which in many instances,
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - INVESTMENT INCOME (continued)
Berkshire Hathaway Reinsurance Group (Continued)
makes premium rates inadequate or coverage conditions unacceptable. As a result,
BHRG has accepted relatively few new arrangements. However, it is expected that
this business will still produce meaningful amounts of earned premiums during
2000.
Net underwriting gains from catastrophe reinsurance were $196 million in
1999, $155 million in 1998 and $283 million in 1997. Catastrophe losses incurred
in 1999 and 1998 were relatively minor. Significant exposure to losses remains
with respect to contracts that are in-force at year-end 1999, especially with
respect to a major earthquake in California or a hurricane affecting the U.S.
Future periodic underwriting results of this business are subject to extreme
volatility. However, Berkshire's management is willing to accept volatility in
reported results, provided there is a reasonable prospect of long-term
profitability.
Berkshire Hathaway Direct Insurance Group
The Berkshire Hathaway Direct Insurance Group is comprised of a wide
variety of smaller property/casualty businesses. These businesses include:
National Indemnity Company's traditional commercial motor vehicle and specialty
risk operations; six companies collectively referred to as "homestate"
operations that provide primarily standard commercial coverages to insureds in
an increasing number of states; Cypress Insurance Company, a provider of
workers' compensation insurance in California and other states; Central States
Indemnity Company, a provider of credit card credit insurance to individuals
nationwide through financial institutions; Kansas Bankers Surety Company, an
insurer for primarily small and medium size banks located in the midwest; and
Berkshire Hathaway International, a London-based writer of personal and
commercial auto insurance.
Collectively, direct insurance businesses produced earned premiums of
$262 million in 1999, $328 million in 1998 and $312 million in 1997. The
decrease in premiums earned in 1999 compared to 1998 was essentially attributed
to the credit card and international auto businesses, whereas the comparative
increase in premiums earned in 1998 over 1997 was largely due to those same
operations. Net underwriting gains of the direct businesses totaled $22 million
in 1999, $17 million in 1998 and $52 million in 1997. The increase in
underwriting profits in 1999 over 1998 was due primarily to lower net losses
from the international auto business. The decline in net underwriting gains in
1998 from 1997 was principally due to lower profits from the specialty risk
operations.
INSURANCE SEGMENTS - INVESTMENT INCOME
Following is a summary of the insurance segments net investment income
for the past three years.
<TABLE>
<CAPTION>
(dollars in millions)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income before taxes .................... $2,482 $ 974 $ 882
Applicable income taxes and minority interest ..... 718 243 178
------ ------ ------
Investment income after taxes and minority interest $1,764 $ 731 $ 704
====== ====== ======
</TABLE>
Investment income before taxes from the insurance operations in 1999
includes $1,328 million from General Re, which was acquired by Berkshire on
December 21, 1998. Invested assets grew by approximately $25 billion as a result
of the General Re acquisition. At December 31, 1999, cash and invested assets
totaled approximately $72 billion. Excluding the impact of General Re, net
investment income in 1999 grew 18.5% over amounts earned in 1998. In 1998, net
investment income exceeded 1997 by 10.4%.
Berkshire's insurance businesses generate large amounts of investment
income derived from shareholder capital, as well as policyholder float. Float
represents an estimate of the amount of funds ultimately payable to
policyholders that is available for investment. Float denotes the sum of net
loss and loss adjustment expense reserves, unearned premiums, and funds held
under reinsurance agreements, less premiums receivable, deferred acquisition
costs, deferred charges on retroactive reinsurance and prepaid income taxes. The
aggregate float was approximately $25.3 billion at December 31, 1999 and $22.8
billion at December 31, 1998. The acquisition of General Re increased float by
approximately $14.9 billion.
Income taxes and minority interest as a percentage of investment income
before taxes were 28.9% for 1999, 24.9% for 1998 and 20.2% for 1997. The
increase in the rates reflects an increase in the proportion of taxable interest
income relative to the amounts of dividend and tax-exempt interest, which are
effectively taxed at lower rates. Minority interest applicable to investment
income in 1999 also increased due to amounts related to investment income of
Cologne Re.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (continued)
A summary follows of results to Berkshire from these identified business
segments for the past three years.
<TABLE>
<CAPTION>
-- (dollars in millions)--
1999 1998 1997
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................... $5,701 100 $4,438 100 $3,404 100
Cost and expenses ................ 4,997 88 3,803 86 2,892 85
------ ------ ------ ------ ------ ------
Operating profit ................. 704 12 635 14 512 15
Income taxes and minority interest 277 5 246 5 201 6
------ ------ ------ ------ ------ ------
Contribution to net earnings ..... $ 427 7 $ 389 9 $ 311 9
====== ====== ====== ====== ====== ======
</TABLE>
A comparison of revenues and operating profits between 1999, 1998 and
1997 for each of the eight identifiable non-insurance business segments follows.
<TABLE>
<CAPTION>
-- (dollars in millions) -- Operating Profit
Revenues Operating Profits as a % of Revenues
-------------------------- -------------------------- ------------------------
Segment 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Buffalo News ............ $ 157 $ 157 $ 156 $ 55 $ 53 $ 56 35 34 36
Flight Services ......... 1,856 858 411 225 181 140 12 21 34
Home Furnishings ........ 917 793 667 79 72 57 9 9 9
International Dairy Queen 460 420 -- 56 58 -- 12 14 --
Jewelry ................. 486 420 398 51 39 32 10 9 8
Scott Fetzer Companies .. 1,021 1,002 961 147 137 119 14 14 12
See's Candies ........... 306 288 269 74 62 59 24 22 22
Shoe Group .............. 498 500 542 17 33 49 3 7 9
------ ------ ------ ------ ------ ------
$5,701 $4,438 $3,404 $ 704 $ 635 $ 512
====== ====== ====== ====== ====== ======
</TABLE>
1999 compared to 1998
Revenues from the eight identifiable non-insurance business segments of
$5,701 million in 1999 increased $1,263 million (28.5%) from the prior year. The
aggregate operating profits from these business segments of $704 million in 1999
increased $69 million (10.9%). The inclusion of Executive Jet, which was
acquired during August, 1998, for a full year in 1999 accounts for a significant
portion of the comparative increases. The following is a discussion of other
significant matters impacting comparative results for each of the non-insurance
business segments.
Buffalo News
The Buffalo News revenues were relatively unchanged in 1999 as compared
to 1998. Operating profits in 1999 of $55 million increased $2 million (3.8%)
from the comparable 1998 amount. Much of the increase arose as a result of a
special non recurring charge which was recorded in 1998 related to workers'
compensation insurance. Without the charge, operating profits in 1999 would have
been comparable to the prior year.
Flight Services
This segment includes FlightSafety and Executive Jet. FlightSafety
provides high technology training to operators of aircraft and ships.
FlightSafety's worldwide clients include corporations, the military and
government agencies. On August 7, 1998, Berkshire acquired Executive Jet, the
worlds' leading provider of fractional ownership programs for general aviation
aircraft. Executive Jet operates the NetJets(R) fractional ownership program in
the United States and Europe. Revenues of this segment increased $998 million
(116.3%) over comparable prior year amounts. The inclusion of Executive Jet for
the full year of 1999 accounts for a substantial portion of the overall revenue
increase. Operating profits of this segment increased $44 million (24.3%) over
comparable prior year amounts. Executive Jet accounts for almost 2/3 of the
overall increase. FlightSafety's operating profits increased significantly over
1998 as a result of continued growth in all areas of its training business.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-INSURANCE BUSINESS SEGMENTS (continued)
Home Furnishings
This segment is comprised of four separately managed but similar retail
home furnishing businesses: Nebraska Furniture Mart ("NFM"), based in Omaha,
Nebraska; R.C. Willey Home Furnishings ("Willey"), based in Salt Lake City,
Utah; Star Furniture Company ("Star"), based in Houston, Texas; and Jordan's
Furniture, Inc. ("Jordan's"), based in Boston, Massachusetts. Berkshire acquired
NFM in 1983, Willey in 1995 and Star in 1997. Jordan's was acquired on November
13, 1999 and is the largest furniture retailer in Massachusetts and New
Hampshire. Revenues of this segment increased $124 million (15.6%) as compared
to the prior year. NFM, Willey and Star each reported revenue increases of
between 8% and 10%. Additionally, Jordan's results were included in Berkshire's
segments results for about the last 45 days of the year. Operating profits of
$79 million in 1999 increased $7 million (9.7%) over the comparable prior year
amount. The increase arose from increased sales and improved margins at NFM,
Willey and Star.
International Dairy Queen
At the beginning of 1998, Berkshire completed the acquisition of Dairy
Queen. Dairy Queen develops, licenses and services a system of about 6,000 Dairy
Queen stores located throughout the United States, Canada and other foreign
countries. Dairy Queen stores feature hamburgers, hot dogs, various dairy
desserts and beverages. Dairy Queen revenues increased $40 million (9.5%) as
compared to the prior year. About 75% of the increase relates to increased
distribution business. A significant portion of the remaining increase relates
to sales by company-owned stores. Operating profit of $56 million declined $2
million (3.4%) from the prior year.
Jewelry
This segment consists of two separately managed retailers of fine
jewelry. Borsheim's operates from a single location in Omaha, Nebraska.
Helzberg's Diamonds operates a national chain of retail stores located primarily
in malls throughout the United States. Revenues of $486 million increased $66
million (15.7%) and operating profits of $51 million increased $12 million
(30.8%) over the comparable prior year amounts. While the revenue increase
accounted for much of the increase in operating profits, both of these
businesses were able to effectively control operating expenses resulting in
improved results.
Scott Fetzer Companies
The Scott Fetzer companies are a group of about twenty diverse
manufacturing and distribution businesses under common management. Principal
businesses in this group of companies sell products under the Kirby (home
cleaning systems), Campbell Hausfeld (air compressors, paint sprayers and
pressure washers) and World Book (encyclopedias and other educational products)
names. Revenues of $1,021 million increased $19 million (1.9%) over the
comparable prior year amount. The increase in revenues was primarily due to
revenue increases at Campbell Hausfeld and World Book offset somewhat by lower
revenues from Kirby's home cleaning system's business. Operating profits of $147
million increased $10 million (7.3%) from the prior year. Increased sales at
Campbell Hausfeld along with improved results from World Book's domestic and
international businesses account for a significant portion of the improved
results.
See's Candies
See's revenues increased $18 million (6.2%) over comparable prior year
amounts. Total pounds of candy sold increased about 7.2% with strong increases
being achieved both in See's quantity order business as well as its retail
stores. Operating profits increased $12 million (19.3%) as compared to the prior
year. The revenue increase as well as a slightly over 1% increase in gross
margin percentage accounts for the increase.
Shoes
This segment includes H. H. Brown Shoe Company, Inc., Lowell Shoe, Inc.
and Dexter Shoe Companies. These businesses manufacture and distribute work,
dress, casual and athletic footwear. In addition, over 100 retail shoe stores
are included in this segment. Revenues for this segment decreased by $2 million
in 1999 as compared to 1998. Operating profits of $17 million in 1999 decreased
$16 million (48.5%) from the prior year. The significant profit decline arose at
Dexter. It has become increasingly difficult for a domestic producer of shoes
like Dexter to compete in an industry where over 90% of the items sold are
produced abroad, where low-cost labor is the rule. In order to remain
competitive, Dexter has begun shutting down certain of its domestic plants and
sourcing more of its output internationally. The results for 1999 include
severance and relocation costs.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (continued)
1998 compared to 1997
Revenues from the non-insurance business segments increased $1,034
million (30.4%) in 1998 as compared to 1997. Operating profits of $635 million
during 1998 increased $123 million (24.0%) from the comparable 1997 amount. The
most significant factor which gave rise to the increase in both revenues and
operating profits were the acquisitions of Dairy Queen at the beginning of 1998
and Executive Jet during August, 1998. With the exception of the shoe group, all
other reportable segments reported excellent results in 1998 as compared to
1997.
REALIZED INVESTMENT GAIN
Realized investment gain has been a recurring element in Berkshire's net
earnings for many years. The amount -- recorded when investments are sold,
other-than-temporarily impaired or in certain situations, as required by GAAP,
when investments are marked-to-market with the corresponding gain or loss
included in earnings -- may fluctuate significantly from period to period, with
a meaningful effect upon Berkshire's consolidated net earnings. However, the
amount of realized investment gain or loss for any given period has no
predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the net unrealized price
appreciation now existing in Berkshire's consolidated investment portfolio.
While the effects of realized gains are often material to the
Consolidated Statements of Earnings, such gains often produce a minimal impact
on Berkshire's total shareholders' equity. This is due to the fact that
Berkshire's investments are carried in prior periods' consolidated financial
statements at market value with unrealized gains, net of tax, reported as a
separate component of shareholders' equity.
GOODWILL AMORTIZATION AND OTHER PURCHASE-ACCOUNTING-ADJUSTMENTS
Goodwill amortization and other purchase-accounting-adjustments reflect
the after-tax effect on net earnings with respect to the amortization of
goodwill of acquired businesses and the amortization of fair value adjustments
to certain assets and liabilities which were recorded at the acquisition dates
of certain businesses (principally General Re and GEICO). The significant
increase in such charges during 1999 as compared to 1998 periods is primarily
due to the acquisition of General Re on December 21, 1998.
MARKET RISK DISCLOSURES
Berkshire's Consolidated Balance Sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risks.
Berkshire's significant market risks are primarily associated with equity prices
and interest rates and to a lesser degree financial products. The following
sections address the significant market risks associated with Berkshire's
business activities.
EQUITY PRICE RISK
Strategically, Berkshire strives to invest in businesses that possess
excellent economics, with able and honest management and at sensible prices.
Berkshire's management prefers to invest a meaningful amount in each investee.
Accordingly, Berkshire's equity investments are concentrated in relatively few
investees. At year-end 1999 and 1998, approximately 60% of the total fair value
of investments in equity securities was concentrated in three investees.
Berkshire's preferred investment strategy contemplates that equity
investments will be held for very long periods of time. Thus, Berkshire
management is not necessarily troubled by short term price volatility with
respect to its investments provided that the underlying business, economic and
management characteristics of the investees remain favorable. Berkshire strives
to maintain above average levels of shareholder capital to provide a margin of
safety against short term equity price volatility.
The carrying values of investments subject to equity price risks are
based on quoted market prices or management's estimates of fair value as of the
balance sheet dates. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
22
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EQUITY PRICE RISK (continued)
In addition to its equity investments, Berkshire's obligations with
respect to the 1% Senior Exchangeable Notes are subject to equity price risks.
See Note 10 to the Consolidated Financial Statements for information regarding
the Exchange Notes. Given the current market price of the underlying stock into
which Exchange Notes may be converted, the fair values of the Exchange Notes are
primarily subject to equity price risk.
The table below summarizes Berkshire's equity price risks as of December
31, 1999 and 1998 and shows the effects of a hypothetical 30% increase and a 30%
decrease in market prices as of those dates. The selected hypothetical change
does not reflect what could be considered the best or worst case scenarios.
Indeed, results could be far worse due both to the nature of equity markets and
the aforementioned concentrations existing in Berkshire's equity investment
portfolio. Dollars are in millions.
<TABLE>
<CAPTION>
Estimated Hypothetical
Fair Value after Percentage
Hypothetical Hypothetical Increase (Decrease) in
Fair Value Price Change Change in Prices Shareholders' Equity
---------- ------------ ---------------- --------------------
<S> <C> <C> <C> <C>
As of December 31, 1999
Equity securities ............... $37,772 30% increase $49,104 12.6
30% decrease 26,440 (12.6)
1% Senior Exchangeable Notes 447 30% increase 581 (0.2)
30% decrease 313 0.2
As of December 31, 1998
Equity securities * $38,476 30% increase $50,019 12.8
30% decrease 26,933 (12.8)
1% Senior Exchangeable Notes 489 30% increase 636 (0.2)
30% decrease 342 0.2
</TABLE>
* Includes redeemable convertible preferred shares of investees in which
the market prices of the common stock of the investees significantly
exceeded the related conversion prices.
INTEREST RATE RISK
This section discusses interest rate risks associated with Berkshire's
financial assets and liabilities, other than those of its finance and financial
products businesses, which are discussed later. Berkshire's management prefers
to invest in equity securities or to acquire entire businesses based upon the
principles discussed in the preceding section on equity price risk. When unable
to do so, management may alternatively invest in bonds or other interest rate
sensitive instruments. Berkshire's strategy is to acquire securities that are
attractively priced in relation to the perceived credit risk. Management
recognizes and accepts that losses may occur. Berkshire has historically
utilized a modest level of corporate borrowings and debt. Further, Berkshire
strives to maintain the highest credit ratings so that the cost of debt is
minimized. Berkshire utilizes derivative products to manage interest rate risks
to a very limited degree.
The fair values of Berkshire's fixed maturity investments and borrowings
under investment agreements and other debt will fluctuate in response to changes
in market interest rates. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.
The following table summarizes the estimated effects of hypothetical
increases and decreases in interest rates on assets and liabilities that are
subject to interest rate risk. It is assumed that the changes occur immediately
and uniformly to each category of instrument containing interest rate risks. The
hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. The hypothetical fair values are based upon
the same
23
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INTEREST RATE RISK (continued)
prepayment assumptions utilized in computing fair values at year-end 1999 and
1998. Significant variations in market interest rates could produce changes in
the timing of repayments due to prepayment options available. For these reasons,
actual results might differ from those reflected in the table which follows.
Dollars are in millions.
<TABLE>
<CAPTION>
Estimated fair value after
--------------------------
Hypothetical change in interest rates
-------------------------------------
(bp=basis points)
100 bp 100 bp 200 bp 300 bp
Fair Value decrease increase increase increase
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
As of December 31, 1999
Investments in securities with fixed
maturities .......................... $30,222 $31,942 $28,483 $26,852 $25,413
Borrowings under investments agreements
and other debt ...................... 1,971 2,059 1,891 1,819 1,753
As of December 31, 1998
Investments in securities with fixed
maturities .......................... $20,891 $21,774 $19,974 $19,093 $18,130
Borrowings under investments agreements
and other debt ...................... 1,986 2,095 1,865 1,768 1,681
</TABLE>
FINANCIAL PRODUCTS RISK
The finance and financial products operations are subject to market risk
principally through General Re Financial Products ("GRFP"). GRFP monitors its
market risk on a daily basis across all swap and option products by calculating
the effect on operating results of potential changes in market variables over a
one week period, based on historical market volatility, correlation data and
informed judgment. This evaluation is done on an individual trading book basis,
against limits set by individual book, to a 95% probability level. GRFP sets
market risk limits for each type of risk, and for an aggregate measure of risk,
based on a 99% probability that movements in market rates will not affect the
results from operations in excess of the risk limit over a one week period.
GRFP's weekly aggregate market risk limit is $15 million. During 1999, the
actual losses exceeded the market risk limit on one occasion. In addition to
these daily and weekly assessments of risk, GRFP prepares periodic stress tests
to assess its exposure to extreme movements in various market risk factors.
The table below shows the highest, lowest and average value at risk, as
calculated using the above methodology, by broad category of market risk to
which GRFP is exposed. Dollars are in millions.
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
Foreign 1998
Interest Rate Exchange Rate Equity Credit All Risks All Risks
------------- ------------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Highest $11 $ 5 $ 7 $ 5 $10 $13
Lowest 6 3 4 1 4 6
Average 8 4 6 2 8 9
</TABLE>
GRFP evaluates and records a fair-value adjustment to recognize
counterparty credit exposure and future costs associated with administering each
contract. The expected credit exposure for each trade is initially established
on the trade date and is determined through the use of a proprietary credit
exposure model that is based on historical default probabilities, market
volatilities and, if applicable, the legal right of setoff. These exposures are
continually monitored and adjusted due to changes in the credit quality of the
counterparty, changes in interest and currency rates or changes in other factors
affecting credit exposure. Since inception, GRFP has not experienced any credit
losses.
LIQUIDITY AND CAPITAL RESOURCES
Berkshire's Consolidated Balance Sheet as of December 31, 1999, reflects
continuing capital strength. In the past three years, Berkshire shareholders'
equity has increased from approximately $23.4 billion at December 31, 1996, to
approximately $57.8 billion at December 31, 1999. In that three-year period,
realized and unrealized securities gains increased equity capital by
approximately $8.2 billion, and reinvested earnings, other than realized
securities gains, were about $3.1 billion.
24
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 ISSUE
Prior to January 1, 2000, there was widespread concern that many computer
systems in use would be unable to correctly process data or may not operate at
all after December 31, 1999. It was feared that some computer programs may
interpret the year "2000" incorrectly, causing errors in calculations or causing
the system to fail. Year 2000 issues affect: (1) Information Technology (IT)
utilized in Berkshire's widely diversified business information systems, (2)
non-IT systems, such as communications, facilities management, and manufacturing
and service equipment containing embedded computer chips, and (3) IT and non-IT
systems of significant customers, suppliers, business partners and equity
investees.
To date, Berkshire has not experienced any significant Year 2000 related
failures or disruptions with respect to its IT and non-IT systems. In addition,
Berkshire has not experienced any significant adverse consequences due to Year
2000 related problems suffered by its significant business partners, including
equity investees.
Berkshire and its subsidiaries could still be adversely affected if Year
2000 issues are not resolved by Berkshire or its significant customers,
suppliers, business partners or equity investees. However, the most likely
adverse consequence at this date could ultimately relate to losses incurred
under property and casualty insurance and reinsurance contracts issued by
subsidiaries. Otherwise, Berkshire management believes that the potential for
adverse consequences arising out of the ordinary day-to-day operations of its
businesses has diminished greatly since December 31, 1999. The financial impact
of any adverse consequences cannot currently be estimated.
Berkshire and its subsidiaries have incurred about $60 million in
identification, remediation and testing of Year 2000 issues. Year 2000 related
costs are expensed as incurred. Berkshire management does not believe that any
significant IT projects were delayed due to Year 2000 efforts.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press releases
and some oral statements of Company officials during presentations about the
Company, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects",
"anticipates", "intends", "plans", "believes", "estimates", or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be
provided by management are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the industries in
which the Company does business, among other things. These statements are not
guaranties of future performance and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in market
prices of Berkshire's significant equity investees, the occurrence of one or
more catastrophic events, such as an earthquake or hurricane that causes losses
insured by Berkshire's insurance subsidiaries, changes in insurance laws or
regulations, changes in Federal income tax laws, and changes in general economic
and market factors that affect the prices of securities or the industries in
which Berkshire and its affiliates do business, especially those affecting the
property and casualty insurance industry.
25
<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Disclosures" contained in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire
Hathaway Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Berkshire Hathaway Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
March 3, 2000
Omaha, Nebraska
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 3,835 $ 13,582
Investments:
Securities with fixed maturities .................... 30,222 21,246
Equity securities and other investments ............. 39,508 39,761
Receivables ............................................ 8,558 7,224
Inventories ............................................ 844 767
Assets of finance and financial products businesses .... 24,229 16,989
Property, plant and equipment .......................... 1,903 1,509
Goodwill of acquired businesses ........................ 18,281 18,570
Other assets ........................................... 4,036 2,589
-------- --------
$131,416 $122,237
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses .................... $ 26,802 $ 23,012
Unearned premiums ...................................... 3,718 3,324
Accounts payable, accruals and other liabilities ....... 7,458 7,182
Income taxes, principally deferred ..................... 9,566 11,762
Borrowings under investment agreements and other debt .. 2,465 2,385
Liabilities of finance and financial products businesses 22,223 15,525
-------- --------
72,232 63,190
-------- --------
Minority shareholders' interests ....................... 1,423 1,644
-------- --------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value
and Class B Common Stock, $0.1667 par value ..... 8 8
Capital in excess of par value ....................... 25,209 25,121
Accumulated other comprehensive income ............... 17,223 18,510
Retained earnings .................................... 15,321 13,764
-------- --------
Total shareholders' equity ....................... 57,761 57,403
-------- --------
$131,416 $122,237
======== ========
</TABLE>
* Class B Common Stock has economic rights equal to one-thirtieth (1/30) of the
economic rights of Class A Common Stock. Accordingly, on an equivalent Class
A Common Stock basis, there are 1,520,562 shares outstanding at December 31,
1999 versus 1,518,548 outstanding at December 31, 1998.
See accompanying Notes to Consolidated Financial Statements
27
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Insurance premiums earned ........................... $ 14,306 $ 5,481 $ 4,761
Sales and service revenues .......................... 5,918 4,675 3,615
Interest, dividend and other investment income ...... 2,314 1,049 916
Income from finance and financial products businesses 125 212 32
Realized investment gain ............................ 1,365 2,415 1,106
---------- ---------- ----------
24,028 13,832 10,430
---------- ---------- ----------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses ....... 12,518 4,040 3,420
Insurance underwriting expenses ..................... 3,220 1,184 880
Cost of products and services sold .................. 4,065 3,018 2,187
Selling, general and administrative expenses ........ 1,164 1,056 921
Goodwill amortization ............................... 477 111 83
Interest expense .................................... 134 109 112
---------- ---------- ----------
21,578 9,518 7,603
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST .... 2,450 4,314 2,827
Income taxes ........................................ 852 1,457 898
Minority interest ................................... 41 27 28
---------- ---------- ----------
NET EARNINGS .......................................... $ 1,557 $ 2,830 $ 1,901
========== ========== ==========
Average common shares outstanding * ................. 1,519,703 1,251,363 1,233,192
NET EARNINGS PER COMMON SHARE * ....................... $ 1,025 $ 2,262 $ 1,542
========== ========== ==========
</TABLE>
* Average shares outstanding include average Class A Common shares and average
Class B Common shares determined on an equivalent Class A Common Stock basis.
Net earnings per common share shown above represents net earnings per
equivalent Class A Common share. Net earnings per Class B Common share is
equal to one-thirtieth (1/30) of such amount or $34 per share for 1999, $75
per share for 1998, and $51 per share for 1997.
See accompanying Notes to Consolidated Financial Statements
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................... $ 1,557 $ 2,830 $ 1,901
Adjustments to reconcile net earnings to cash flows
from operating activities:
Realized investment gain ............................ (1,365) (2,415) (1,106)
Depreciation and amortization ....................... 688 265 227
Changes in assets and liabilities before effects from
business acquisitions:
Losses and loss adjustment expenses ............... 3,790 347 576
Deferred charges - reinsurance assumed ............ (958) (80) (142)
Unearned premiums ................................. 394 179 90
Receivables ....................................... (834) (56) (120)
Accounts payable, accruals and other liabilities .. (5) 4 547
Income taxes ...................................... (1,395) (329) 383
Other ............................................... 328 (88) (21)
-------- -------- --------
Net cash flows from operating activities .......... 2,200 657 2,335
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities with fixed maturities ......... (18,380) (2,697) (6,837)
Purchases of equity securities and other investments .. (3,664) (1,865) (714)
Proceeds from sales of securities with fixed maturities 4,509 6,339 3,397
Proceeds from redemptions and maturities of securities
with fixed maturities ............................... 2,833 2,132 779
Proceeds from sales of equity securities and other
investments ......................................... 4,355 4,868 2,016
Loans and investments originated in finance businesses (2,526) (1,028) (491)
Principal collection on loans and investments
originated in finance businesses .................... 845 295 276
Acquisitions of businesses, net of cash acquired ...... (153) 4,971 (775)
Other ................................................. (417) (302) (182)
-------- -------- --------
Net cash flows from investing activities .......... (12,598) 12,713 (2,531)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of finance businesses ........ 714 120 157
Proceeds from other borrowings ........................ 1,846 1,339 1,074
Repayments of borrowings of finance businesses ........ (335) (83) (214)
Repayments of other borrowings ........................ (1,721) (1,318) (1,112)
Other ................................................. (137) 3 (1)
-------- -------- --------
Net cash flows from financing activities .......... 367 61 (96)
-------- -------- --------
Increase (decrease) in cash and cash equivalents .. (10,031) 13,431 (292)
Cash and cash equivalents at beginning of year .......... 14,489 1,058 1,350
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR * .............. $ 4,458 $ 14,489 $ 1,058
======== ======== ========
* Cash and cash equivalents at end of year are
comprised of the following:
Finance and financial products businesses ........... $ 623 $ 907 $ 56
Other ............................................... 3,835 13,582 1,002
-------- -------- --------
$ 4,458 $ 14,489 $ 1,058
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
29
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in millions)
<TABLE>
<CAPTION>
Accumulated
Class A & B Capital in Class A Other
Common Excess of Treasury Retained Comprehensive Comprehensive
Stock Par Value Stock Earnings Income Income
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 ............ $ 7 $ 2,274 $ (31) $ 9,033 $ 12,144
Common stock issued in connection
with acquisitions of businesses ...... -- 73 -- --
Net earnings ......................... -- -- -- 1,901 $ 1,901
--------
Other comprehensive income items:
Unrealized appreciation of
investments .......................... -- -- -- -- 10,574 10,574
Reclassification adjustment for
appreciation included in net
earnings ............................. -- -- -- -- (1,106) (1,106)
Income taxes and minority interests .. -- -- -- -- (3,414) (3,414)
--------
Other comprehensive income ........... 6,054
--------
Total comprehensive income ........... $ 7,955
-------- -------- -------- -------- -------- ========
BALANCE DECEMBER 31, 1997 ............ $ 7 $ 2,347 $ (31) $ 10,934 $ 18,198
Common stock issued in connection
with acquisitions of businesses ...... 1 22,803 2 --
Retirement of treasury stock ......... -- (29) 29 --
Net earnings ......................... -- -- -- 2,830 $ 2,830
--------
Other comprehensive income items:
Unrealized appreciation of
investments .......................... -- -- -- -- 3,011 3,011
Reclassification adjustment for
appreciation included in net
earnings ............................. -- -- -- -- (2,415) (2,415)
Income taxes and minority interests .. -- -- -- -- (284) (284)
--------
Other comprehensive income ........... 312
--------
Total comprehensive income ........... $ 3,142
-------- -------- -------- -------- -------- ========
BALANCE DECEMBER 31, 1998 ............ $ 8 $ 25,121 $ -- $ 13,764 $ 18,510
Net earnings ......................... -- -- -- 1,557 $ 1,557
--------
Exercise of stock options issued
in connection with business
acquisitions ......................... -- 88 -- --
Other comprehensive income items:
Unrealized appreciation of
investments .......................... -- -- -- -- (795) (795)
Reclassification adjustment for
appreciation included in net
earnings ............................. -- -- -- -- (1,365) (1,365)
Foreign currency translation losses .. -- -- -- -- (16) (16)
Income taxes and minority interests .. -- -- -- -- 889 889
--------
Other comprehensive income ........... (1,287)
--------
Total comprehensive income ........... $ 270
-------- -------- -------- -------- -------- ========
BALANCE DECEMBER 31, 1999 ............ $ 8 $ 25,209 $ -- $ 15,321 $ 17,223
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
30
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Nature of operations and basis of consolidation
Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding company
owning subsidiaries engaged in a number of diverse business
activities. The most important of these are property and casualty
insurance businesses conducted on both a direct and reinsurance
basis. Further information regarding these businesses and
Berkshire's other reportable business segments is contained in Note
16. The accompanying consolidated financial statements include the
accounts of Berkshire consolidated with accounts of all its
subsidiaries. Intercompany accounts and transactions have been
eliminated. As more fully described in Note 2, on December 21, 1998,
Berkshire consummated a merger with General Re Corporation ("General
Re"). The balance sheet of General Re is consolidated with the
balance sheets of Berkshire and its other subsidiaries as of
December 31, 1999 and 1998. General Re's results of operations are
included in the Consolidated Statements of Earnings for the ten day
period ended December 31, 1998 and the year ended December 31, 1999.
During the second quarter of 1999, the company adjusted its December
31, 1998 Consolidated Balance Sheet. The adjustment resulted from a
further review of the opening balance sheet of General Re which was
used as the basis for recording the fair value of the assets and
liabilities acquired in connection with the acquisition of General
Re. The effect of the adjustment was to increase goodwill of
acquired businesses by $124 million and to increase property, plant
and equipment by $18 million with a corresponding decrease of $142
million in other assets from the amounts previously reported. The
adjustment had no effect on the previously reported earnings for the
year ended December 31, 1998.
(b) Use of estimates in preparation of financial statements
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and
expenses during the period. Actual results may differ from the
estimates and assumptions used in preparing the consolidated
financial statements.
(c) Cash equivalents
Cash equivalents consist of funds invested in money market accounts
and in investments with a maturity of three months or less when
purchased.
(d) Investments
Berkshire's management determines the appropriate classifications of
investments at the time of acquisition and re-evaluates the
classifications at each balance sheet date. Investments may be
classified as held for trading, held to maturity, or, when neither
of those classifications is appropriate, as available-for-sale.
Berkshire's investments in fixed maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are
stated at fair value with unrealized gains or losses, net of taxes
and minority interest, reported as a separate component in
shareholders' equity. Realized gains and losses, which arise when
available-for-sale investments are sold (as determined on a specific
identification basis) or other than temporarily impaired are
included in the Consolidated Statements of Earnings.
Other investments include investments in limited partnerships and
commodities which are carried at fair value in the accompanying
balance sheets. Investments in limited partnerships are classified
as available-for-sale. The realized and unrealized gains and losses
associated with commodities are included in the Consolidated
Statements of Earnings as a component of realized investment gain.
Accounting policies and practices for investments held by finance
and financial products businesses are described in Note 7.
31
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
(e) Goodwill of acquired businesses
Goodwill of acquired businesses represents the difference between
purchase cost and the fair value of the net assets of acquired
businesses and is being amortized on a straight line basis generally
over forty years. The Company periodically reviews the
recoverability of the carrying value of goodwill of acquired
businesses to insure it is appropriately valued. In the event that a
condition is identified which may indicate an impairment issue
exists, an assessment is performed using a variety of methodologies.
(f) Insurance premiums
Insurance premiums for prospective insurance and reinsurance
policies are earned in proportion to the level of insurance
protection provided. In most cases, premiums are recognized as
revenues ratably over their terms with unearned premiums computed on
a monthly or daily pro rata basis. Consideration received for
retroactive reinsurance policies, including structured settlements,
is recognized as premiums earned at the inception of the contracts.
Premiums earned are stated net of amounts ceded to reinsurers.
(g) Insurance premium acquisition costs
Certain costs of acquiring insurance premiums are deferred,
subject to ultimate recoverability, and charged to income as the
premiums are earned. The recoverability of premium acquisition costs
of direct insurance businesses is determined without regard to
investment income. The recoverability of premium acquisition costs
from reinsurance assumed businesses, generally, reflects
anticipation of investment income. The unamortized balances of
deferred premium acquisition costs are included in other assets and
were $791 million and $666 million at December 31, 1999 and 1998,
respectively.
(h) Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses
represent estimated claim and claim settlement costs of
property/casualty insurance and reinsurance contracts. The
liabilities for losses and loss adjustment expenses are recorded at
the estimated ultimate payment amounts, except amounts arising from
certain reinsurance assumed businesses are discounted. Estimated
ultimate payment amounts are based upon (i) individual case
estimates, (ii) estimates of incurred-but-not-reported losses, based
upon past experience and (iii) reports of losses from ceding
insurers.
The estimated liabilities of certain workers' compensation claims
assumed under reinsurance contracts and liabilities assumed under
structured settlement reinsurance contracts are carried in the
Consolidated Balance Sheets at discounted amounts. Discounted
amounts pertaining to reinsurance of certain workers' compensation
risks are based upon an annual discount rate of 4.5%. The discounted
amounts for structured settlement reinsurance contracts are based
upon the prevailing market discount rates when the contracts were
written and range from 5% to 13%. The periodic accretion of
discounts is included in the Consolidated Statements of Earnings as
a component of losses and loss adjustment expenses incurred. Net
discounted liabilities were $1,529 million at December 31, 1999 and
$1,637 million at December 31, 1998.
(j) Deferred charges-reinsurance assumed
The excess of estimated liabilities for claims and claim costs
over the consideration received with respect to retroactive property
and casualty reinsurance contracts that provide for indemnification
of insurance risk is established as a deferred charge at inception
of such contracts. The deferred charges are subsequently amortized
using the interest method over the expected settlement periods of
the claim liabilities. The periodic amortization charges are
reflected in the accompanying Consolidated Statements of Earnings as
losses and loss adjustment expenses. The unamortized balance of
deferred charges is included in other assets and was $1,518 million
at December 31, 1999 and $560 million at December 31, 1998.
(k) Reinsurance
Provisions for losses and loss adjustment expenses are reported in
the accompanying Consolidated Statements of Earnings after deducting
amounts recovered and estimates of amounts that will be ultimately
recoverable under reinsurance contracts. Reinsurance contracts do
not relieve the ceding company of its obligations to indemnify
policyholders with respect to the underlying insurance and
reinsurance contracts. Estimated losses and loss adjustment expenses
recoverable under reinsurance contracts are included in receivables
and totaled $2,331 million and $2,167 million at December 31, 1999
and 1998, respectively.
32
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICES AND PRACTICES (Continued)
(m) Foreign currency
The accounts of several foreign-based subsidiaries are measured
using the local currency as the functional currency. Revenues and
expenses of these businesses are translated into U.S. dollars at the
average exchange rate for the period. Assets and liabilities are
translated at the exchange rate as of the end of the reporting
period. Gains or losses from translating the financial statements of
foreign-based operations are included in shareholders' equity as a
component of other comprehensive income. Gains and losses arising
from other transactions denominated in a foreign currency are
included in the Consolidated Statement of Earnings.
(n) Accounting pronouncements to be adopted subsequent to December 31,
1999
During 1998 and 1999, the Financial Accounting Standards Board ("FASB")
and the Accounting Standards Executive Committee ("AcSEC") issued
the following new accounting standards that become effective after
December 31, 1999:
(i) The FASB issued Statement of Financial Accounting Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and hedging activities. In
June 1999, the FASB issued SFAS No. 137 which delays the effective
date for implementing SFAS No. 133. Berkshire expects to adopt SFAS
No. 133 as of the beginning of 2001.
(ii) AcSEC issued Statement of Position ("SOP") No. 98-7 "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk". SOP No. 98-7 provides guidance on
accounting and disclosure for insurance and reinsurance contracts
that do not transfer insurance risk. This SOP is effective for
fiscal years beginning after June 15, 1999. Berkshire will adopt
this pronouncement as of the beginning of 2000.
The Company does not believe that adoption of these new accounting
principles will have a material effect on its financial position or
the results of operations.
(2) SIGNIFICANT BUSINESS ACQUISITIONS
During 1998, Berkshire consummated three significant business
acquisitions -- International Dairy Queen, Inc. ("Dairy Queen"), effective
January 7, 1998; Executive Jet, Inc. ("Executive Jet"), effective August 7,
1998; and General Re Corporation ("General Re"), effective December 21, 1998.
Additional information regarding these acquisitions is provided below.
On January 7, 1998, the merger of Dairy Queen with and into a wholly
owned subsidiary of Berkshire was completed. Shareholders of Dairy Queen
received merger consideration of approximately $590 million, consisting of $265
million in cash and the remainder in shares of Class A and Class B Common Stock.
Dairy Queen develops, licenses and services a system of almost 6,000 Dairy Queen
stores located throughout the United States, Canada, and other foreign
countries, which feature hamburgers, hot dogs, various dairy desserts and
beverages. Dairy Queen also develops, licenses and services other stores and
shops operating under the names of Orange Julius and Karmelkorn, which feature
blended fruit drinks, popcorn and other snacks.
On August 7, 1998, the merger of Executive Jet with and into a wholly
owned subsidiary of Berkshire was completed. Total consideration paid by
Berkshire was approximately $725 million, consisting of $350 million in cash and
the remainder in shares of Class A and Class B Common Stock. Executive Jet is
the world's leading provider of fractional ownership programs for general
aviation aircraft. Executive Jet currently operates its NetJets(R) fractional
ownership programs in the United States and Europe. In addition, Executive Jet
is pursuing other international activities.
On December 21, 1998, the merger with General Re was completed. General
Re shareholders received, at their election, either 0.0035 shares of Berkshire
Class A Common Stock or 0.105 shares of Berkshire Class B Common Stock for each
share of General Re common stock they owned. Berkshire issued approximately
272,200 Class A equivalent shares in exchange for the General Re shares
outstanding as of December 21, 1998. The total consideration for the
transaction, based upon the closing prices of Berkshire Class A Common Stock for
the 10-day period ending June 26, 1998, (the merger agreement was entered into
by the parties on June 19, 1998) was approximately $22 billion.
33
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS (Continued)
General Re is a holding company for global reinsurance and related risk
management operations. It owns General Reinsurance Corporation, which together
with its affiliates, comprise the largest professional property and casualty
reinsurance group domiciled in the United States. General Re also owns a
controlling interest in Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne
Re"), a major international reinsurer. Together, General Re and Cologne Re
transact reinsurance business as "General & Cologne Re". General & Cologne Re
operate in 28 countries and provide reinsurance coverage in 125 countries around
the world.
In addition, General Re writes excess and surplus lines insurance through
General Star Management Company, provides alternative risk solutions through
Genesis Underwriting Management Company, provides reinsurance brokerage services
through Herbert Clough, Inc., manages aviation insurance risks through United
States Aviation Underwriters, Inc., and acts as a business development
consultant and reinsurance intermediary through Ardent Risk Services, Inc.
General Re also operates as a dealer in the swap and derivatives market through
General Re Financial Products Corporation, and provides specialized investment
services to the insurance industry through General Re-New England Asset
Management, Inc.
Each of the business acquisitions described above was accounted for under
the purchase method. The excess of the purchase cost of the business over the
fair value of net assets acquired was recorded as goodwill of acquired
businesses. The aggregate goodwill associated with the three acquisitions
discussed above was $15.7 billion, including $14.7 billion associated with the
General Re merger.
The results of operations for each of these entities are included in
Berkshire's consolidated results of operations from the dates of each merger.
The following unaudited table sets forth certain consolidated earnings data for
the years ended December 31, 1998 and 1997 as if the Dairy Queen, Executive Jet
and General Re acquisitions had been consummated on the same terms at the
beginning of 1997. Dollars in millions except per share amounts.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Insurance premiums earned .................. $11,395 $11,369
Sales and service revenues ................. 5,267 4,719
Total revenues ............................. 24,174 19,422
Net earnings ............................... 4,764 2,438
Earnings per equivalent Class A Common Share 3,137 1,607
</TABLE>
(3) INVESTMENT IN MIDAMERICAN ENERGY HOLDINGS COMPANY
On October 24, 1999, Berkshire entered into an agreement along with
Walter Scott, Jr. and David L. Sokol, to acquire MidAmerican Energy Holdings
Company ("MidAmerican"). Pursuant to the terms of the agreement, Berkshire
expects to invest approximately $1.24 billion in common stock and a non-dividend
paying convertible preferred stock of a newly formed entity which will merge
with and into MidAmerican, with MidAmerican continuing as the surviving
corporation. Such investment will give Berkshire about a 9.7% voting interest
and a 76% economic interest in MidAmerican on a fully-diluted basis. Mr. Scott,
a member of Berkshire's Board of Directors, will control approximately 86% of
the voting interest in MidAmerican. Mr. Sokol is the current CEO of MidAmerican.
Berkshire will also acquire approximately $455 million of an 11%
non-transferable trust preferred security. Under certain conditions, for a
period of up to seven years subsequent to the transaction, Berkshire may be
required to purchase up to $345 million of additional trust preferred
securities. The merger and related investments by Berkshire and the other
investors are subject to terms and conditions including approval by shareholders
of MidAmerican and certain regulatory approvals. On January 27, 2000, the
transaction was approved by the shareholders of MidAmerican. All regulatory
approvals are expected to be received prior to March 31, 2000. It is currently
anticipated that the transaction will close by March 31, 2000.
Through its retail utility subsidiaries, MidAmerican Energy in the U.S.
and Northern Electric in the U.K., MidAmerican provides electric service to 2.2
million customers and natural gas service to 1.2 million customers worldwide.
MidAmerican manages and owns interests in approximately 8,300 net megawatts of
diversified power generation facilities in operation, construction and
development.
34
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
The amortized cost and estimated fair values of investments in securities
with fixed maturities as of December 31, 1999 and 1998 are as follows (in
millions):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost(2) Gains Losses Value
======== ======== ======== ========
<S> <C> <C> <C> <C>
December 31, 1999(1)
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 4,001 $ 3 $ (189) $ 3,815
Obligations of states, municipalities
and political subdivisions .............. 9,029 13 (436) 8,606
Obligations of foreign governments ........ 2,208 6 (49) 2,165
Corporate bonds ........................... 5,901 21 (237) 5,685
Redeemable preferred stocks ................. 133 1 (5) 129
Mortgage-backed securities .................. 10,157 7 (342) 9,822
-------- -------- -------- --------
$ 31,429 $ 51 $ (1,258) $ 30,222
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost(2) Gains Losses Value
======== ======== ======== ========
<S> <C> <C> <C> <C>
December 31, 1998(1)
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 2,518 $ 10 -- $ 2,528
Obligations of states, municipalities
and political subdivisions .............. 9,574 73 -- 9,647
Obligations of foreign governments ........ 2,864 -- -- 2,864
Corporate bonds ........................... 4,609 -- -- 4,609
Redeemable preferred stocks ................. 359 3 (7) 355
Mortgage-backed securities .................. 1,235 8 -- 1,243
-------- -------- -------- --------
$ 21,159 $ 94 $ (7) $ 21,246
======== ======== ======== ========
</TABLE>
(1) Amounts above exclude securities with fixed maturities held by finance
and financial products businesses. See Note 7.
(2) In connection with the acquisition of General Re on December 21, 1998,
fixed maturity securities with a then fair value of $17.6 billion were
acquired. Such amount which was approximately $1.2 billion in excess of
General Re's historical amortized cost. The writeup of $1.2 billion was
included as a component of the amortized cost at December 31, 1998. Of
this amount, approximately $900 million remains unamortized and is
included as a component of amortized cost as of December 31, 1999.
Shown below are the amortized cost and estimated fair values of
securities with fixed maturities at December 31, 1999, by contractual maturity
dates. Actual maturities will differ from contractual maturities because issuers
of certain of the securities retain early call or prepayment rights. Amounts are
in millions.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less ....................................... $ 1,975 $ 1,965
Due after one year through five years ......................... 5,443 5,339
Due after five years through ten years ........................ 5,335 5,126
Due after ten years ........................................... 8,519 7,970
------- -------
21,272 20,400
Mortgage-backed securities .................................... 10,157 9,822
------- -------
$31,429 $30,222
======= =======
</TABLE>
35
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) INVESTMENTS IN EQUITY SECURITIES AND OTHER INVESTMENTS
Data with respect to the consolidated investment in equity securities and
other investments are shown below. Amounts are in millions.
<TABLE>
<CAPTION>
Unrealized Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
December 31, 1999
Common stock of:
American Express Company * $ 1,470 $ 6,932 $ 8,402
The Coca-Cola Company .... 1,299 10,351 11,650
The Gillette Company ..... 600 3,354 3,954
Other equity securities .... 6,305 7,461 13,766
Other investments .......... 1,651 85 1,736
------- ------- -------
$11,325 $28,183** $39,508
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Unrealized Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
December 31, 1998
Common stock of:
American Express Company * $ 1,470 $ 3,710 $ 5,180
The Coca-Cola Company .... 1,299 12,101 13,400
The Gillette Company ..... 600 3,990 4,590
Other equity securities .... 5,889 9,062 14,951
Other investments .......... 1,639 1 1,640
------- ------- -------
$10,897 $28,864** $39,761
======= ======= =======
</TABLE>
* Common shares of American Express Company ("AXP") owned by Berkshire and
its subsidiaries possessed approximately 11% of the voting rights of all AXP
shares outstanding at December 31, 1999. The shares are held subject to various
agreements with certain insurance and banking regulators which, among other
things, prohibit Berkshire from (i) seeking representation on the Board of
Directors of AXP (Berkshire may agree, if it so desires, at the request of
management or the Board of Directors of AXP to have no more than one
representative stand for election to the Board of Directors of AXP) and (ii)
acquiring or retaining shares that would cause its ownership of AXP voting
securities to equal or exceed 17% of the amount outstanding (should Berkshire
have a representative on the Board of Directors, such amount is limited to 15%).
In connection therewith, Berkshire has entered into an agreement with AXP which
became effective when Berkshire's ownership interest in AXP voting securities
reached 10% and will remain effective so long as Berkshire owns 5% or more of
AXP's voting securities. The agreement obligates Berkshire, so long as Harvey
Golub is chief executive officer of AXP, to vote its shares in accordance with
the recommendations of AXP's Board of Directors. Additionally, subject to
certain exceptions, Berkshire has agreed not to sell AXP common shares to any
person who owns 5% or more of AXP voting securities or seeks to control AXP,
without the consent of AXP.
** Net of unrealized losses of $149 million and $38 million as of December
31, 1999 and 1998, respectively.
(6) REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) from sales and redemptions of investments are
summarized below (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equity securities and other investments--
Gross realized gains ................... $ 1,507 $ 2,087 $ 739
Gross realized losses .................. (77) (272) (23)
Securities with fixed maturities--
Gross realized gains ................... 39 602 396
Gross realized losses .................. (104) (2) (6)
------- ------- -------
$ 1,365 $ 2,415 $ 1,106
======= ======= =======
</TABLE>
36
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES
Assets and liabilities of Berkshire's finance and financial products
businesses are summarized below (in millions).
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 623 $ 907
Investments in securities with fixed maturities:
Held to maturity, at cost (fair value $2,223 in 1999; $1,366 in 1998) 2,293 1,227
Trading, at fair value (cost $11,330 in 1999; $5,279 in 1998) ...... 11,277 5,219
Available for sale, at fair value (cost $997 in 1999; $745 in 1998). 999 743
Trading account assets .............................................. 5,881 6,234
Securities purchased under agreements to resell ..................... 1,171 1,083
Other ............................................................... 1,985 1,576
------- -------
$24,229 $16,989
======= =======
LIABILITIES
Annuity reserves and policyholder liabilities ....................... $ 843 $ 816
Securities sold under agreements to repurchase ...................... 10,216 4,065
Securities sold but not yet purchased ............................... 1,174 1,181
Trading account liabilities ......................................... 5,930 5,834
Notes payable and other borrowings* ................................. 1,998 1,503
Other ............................................................... 2,062 2,126
------- -------
$22,223 $15,525
======= =======
</TABLE>
*Payments of principal amounts of notes payable and other borrowings during the
next five years are as follows (in millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$49 $120 $260 $707 $475
</TABLE>
Berkshire's finance and financial products businesses consist primarily
of the financial products businesses of General Re, the consumer finance
business of Scott Fetzer Financial Group, the real estate finance business of
Berkshire Hathaway Credit Corporation, the financial instrument trading business
of BH Finance and a life insurance subsidiary in the business of selling
annuities. General Re's financial products businesses consist of General Re
Financial Products ("GRFP") group and a collection of other businesses that
provide investment, insurance, reinsurance and real estate management and
brokerage services. Significant accounting policies and disclosures for these
businesses are discussed below.
Investment securities (principally fixed maturity and equity investments)
that are acquired for purposes of selling them in the near term are classified
as trading securities. Such assets are carried at fair value. Realized and
unrealized gains and losses from trading activities are included in income from
finance and financial products businesses. Trading account assets and
liabilities are marked-to-market on a daily basis and represent the estimated
fair values of derivatives in net gain positions (assets) and in net loss
positions (liabilities). The net gains and losses reflect reductions permitted
under master netting agreements with counterparties.
Securities purchased under agreements to resell (assets) and securities
sold under agreements to repurchase (liabilities) are accounted for as
collateralized investments and borrowings and are recorded at the contractual
resale or repurchase amounts plus accrued interest. Other investment securities
owned and liabilities associated with investment securities sold but not yet
purchased are carried at fair value.
GRFP is engaged as a dealer in various types of derivative instruments,
including interest rate, currency and equity swaps and options, as well as
structured finance products. These instruments are carried at their current
estimates of fair value, which is a function of underlying interest rates,
currency rates, security values, volatilities and the creditworthiness of
counterparties. Future changes in these factors or a combination thereof may
affect the fair value of these instruments with any resulting adjustment to be
included currently in the Consolidated Statement of Earnings.
37
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
Interest rate, currency and equity swaps are agreements between two
parties to exchange, at particular intervals, payment streams calculated on a
specified notional amount. Interest rate, currency and equity options grant the
purchaser the right, but not the obligation, to either purchase from or sell to
the writer a specified financial instrument under agreed terms. Interest rate
caps and floors require the writer to pay the purchaser at specified future
dates the amount, if any, by which the option's underlying market interest rate
exceeds the fixed cap or falls below the fixed floor, applied to a notional
amount.
Futures contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and are generally settled in
cash. Forward-rate agreements are financial instruments that settle in cash at a
specified future date based on the differential between agreed interest rates
applied to a notional amount. Foreign exchange contracts generally involve the
exchange of two currencies at agreed rates on a specified date; spot contracts
usually require the exchange to occur within two business days of the contract
date.
A summary of notional amounts of derivative contracts at December 31,
1999 and 1998 is included in the table below. For these transactions, the
notional amount represents the principal volume, which is referenced by the
counterparties in computing payments to be exchanged, and are not indicative of
the Company's exposure to market or credit risk, future cash requirements or
receipts from such transactions.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
(in millions) (in millions)
------------- -------------
<S> <C> <C>
Interest rate and currency swap agreements $531,645 $514,935
Options written ........................... 121,683 88,245
Options purchased ......................... 151,006 90,826
Financial futures contracts:
Commitments to purchase ................. 32,377 26,041
Commitments to sell ..................... 11,368 6,872
Forward - rate agreements ................. 5,164 24,579
Foreign exchange spot and forward contracts 10,430 14,794
</TABLE>
The following tables discloses the net fair value or carrying amount at
December 31, 1999 and 1998 as well as the average fair value during 1999 for
each class of derivative financial contract held or issued by GRFP.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------- -----------------------
Asset Liability Asset Liability
----- --------- ----- ---------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Interest rate and foreign currency swaps . $ 22,593 $ 22,819 $ 25,963 $ 25,445
Interest rate and foreign currency options 5,980 5,714 4,338 4,439
-------- -------- -------- --------
Gross fair value ......................... 28,573 28,533 30,301 29,884
Adjustment for counterparty netting ...... (22,692) (22,692) (24,067) (24,067)
-------- -------- -------- --------
Net fair value ........................... 5,881 5,841 6,234 5,817
Security receivables/payables ............ -- 89 -- 17
-------- -------- -------- --------
Trading account assets/liabilities ....... $ 5,881 $ 5,930 $ 6,234 $ 5,834
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Average 1999
------------
Asset Liability
----- ---------
(in millions)
<S> <C> <C>
Interest rate and foreign currency swaps ...................... $ 23,213 $ 23,071
Interest rate and foreign currency options .................... 4,657 4,687
-------- --------
Gross fair value .............................................. 27,870 27,758
Adjustment for counterparty netting ........................... (22,579) (22,579)
-------- --------
Net fair value ................................................ 5,291 5,179
Security receivables/payables ................................. 85 111
-------- --------
Trading account assets/liabilities ............................ $ 5,376 $ 5,290
======== ========
</TABLE>
38
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
The derivative financial instruments involve, to varying degrees,
elements of market, credit, and legal risks. Market risk is the possibility that
future changes in market conditions may make the derivative financial instrument
less valuable. Credit risk is defined as the possibility that a loss may occur
from the failure of another party to perform in accordance with the terms of the
contract which exceeds the value of existing collateral, if any. The
derivative's risk of credit loss is generally a small fraction of notional value
of the instrument and is represented by the fair value of the derivative
financial instrument. Legal risk arises from the uncertainty of the
enforceability of the obligations of another party, including contractual
provisions intended to reduce credit exposure by providing for the offsetting or
netting of mutual obligations.
With respect to Berkshire's life insurance business, annuity reserves and
policyholder liabilities are carried at the present value of the actuarially
determined ultimate payment amounts discounted at market interest rates existing
at the inception of the contracts. Such interest rates range from 5% to 8%.
Periodic accretions of the discounted liabilities are charged against income
from finance and financial products businesses.
Investments in securities with fixed maturities held by Berkshire's life
insurance business are classified as held-to-maturity. Investments classified as
held-to-maturity are carried at amortized cost reflecting the Company's ability
and intent to hold such investments to maturity. Such items consist
predominantly of mortgage loans and collateralized mortgage obligations.
(8) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Supplemental data with respect to unpaid losses and loss adjustment
expenses of property/casualty insurance subsidiaries (in millions) is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unpaid losses and loss adjustment expenses:
Balance at beginning of year ................................... $ 23,012 $ 6,850 $ 6,274
Less ceded liabilities and deferred charges .................... 2,727 754 586
-------- -------- --------
Net balance .................................................... 20,285 6,096 5,688
-------- -------- --------
Incurred losses recorded:
Current accident year .......................................... 11,275 4,235 3,551
All prior accident years ....................................... (192) (195) (131)
-------- -------- --------
Total incurred losses .......................................... 11,083 4,040 3,420
-------- -------- --------
Payments with respect to:
Current accident year .......................................... 3,648 1,919 1,602
All prior accident years ....................................... 4,532 1,834 1,410
-------- -------- --------
Total payments ................................................. 8,180 3,753 3,012
-------- -------- --------
Unpaid losses and loss adjustment expenses:
Net balance at end of year ..................................... 23,188 6,383 6,096
Ceded liabilities and deferred charges ......................... 3,848 2,727 754
Foreign currency translation adjustment ........................ (234) -- --
Net liabilities assumed in connection with business acquisitions -- 13,902 --
-------- -------- --------
Balance at end of year ........................................... $ 26,802 $ 23,012 $ 6,850
======== ======== ========
</TABLE>
Incurred losses "all prior accident years" reflects the amount of
estimation error charged or credited to earnings in each year with respect to
the liabilities established as of the beginning of that year. This amount
includes amortization of deferred charges regarding retroactive reinsurance
assumed and accretion of discounted liabilities. See Note 1 for additional
information regarding these items. Additional information regarding incurred
losses will be revealed over time and the estimates will be revised resulting in
gains or losses in the periods made.
39
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued)
The balances of unpaid losses and loss adjustment expenses are based upon
estimates of the ultimate claim costs associated with claim occurrences as of
the balance sheet dates. Considerable judgement is required to evaluate claims
and establish estimated claim liabilities, particularly with respect to certain
lines of business, such as reinsurance assumed, or certain types of claims, such
as environmental or latent injury liabilities.
Berkshire continuously evaluates its liabilities and related reinsurance
recoverable for environmental and latent injury claims and claim expenses, which
arise from exposures in the U.S., as well as internationally. Environmental and
latent injury exposures do not lend themselves to traditional methods of loss
development determination and therefore reserve estimates related to these
exposures may be considerably less reliable than for other lines of business
(e.g., automobile). The effect of joint and several liability claims severity
and a provision for inflation have been included in the loss development
estimate. The Company has also established a liability for litigation costs
associated with coverage disputes arising out of direct insurance policies.
The liabilities for environmental and latent injury claims and claim
expenses net of related reinsurance recoverables were $3,211 million and $1,913
million, respectively, at December 31, 1999 and 1998. The liabilities recorded
for environmental and latent injury claims and claim expenses are management's
best estimate of future ultimate claim and claim expense payments and recoveries
and are expected to develop over the next several decades.
Berkshire monitors evolving case law and its effect on environmental and
latent injury claims. Changing government regulations, newly identified toxins,
newly reported claims, new theories of liability, new contract interpretations
and other factors could result in significant amounts of adverse development of
the balance sheet liabilities. Such development could be material to Berkshire's
results of operations. It is not possible to estimate reliably the amount of
additional net loss, or the range of net loss, that is reasonably possible.
(9) INCOME TAXES
The liability for income taxes as reflected in the accompanying
Consolidated Balance Sheets is as follows (in millions):
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
---- ----
<S> <C> <C>
Payable currently $ (27) $ 1,006
Deferred ........ 9,593 10,756
-------- --------
$ 9,566 $ 11,762
======== ========
</TABLE>
The Consolidated Statements of Earnings reflect charges for income taxes
as shown below (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal ............ $ 748 $ 1,421 $ 865
State .............. 43 31 32
Foreign ............ 61 5 1
------- ------- -------
$ 852 $ 1,457 $ 898
======= ======= =======
Current ............ $ 1,189 $ 1,643 $ 692
Deferred ........... (337) (186) 206
------- ------- -------
$ 852 $ 1,457 $ 898
======= ======= =======
</TABLE>
40
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998, are shown below (in millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Relating to unrealized appreciation of investments ....... $ 9,383 $ 10,149
Other .................................................... 1,252 1,615
-------- --------
10,635 11,764
Deferred tax assets ........................................ (1,042) (1,008)
-------- --------
Net deferred tax liability ................................. $ 9,593 $ 10,756
======== ========
</TABLE>
Charges for income taxes are reconciled to hypothetical amounts computed
at the federal statutory rate in the table shown below (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Earnings before income taxes ...................... $ 2,450 $ 4,314 $ 2,827
======= ======= =======
Hypothetical amounts applicable to above
computed at the federal statutory rate ......... $ 858 $ 1,510 $ 989
Decreases resulting from:
Tax-exempt interest income ..................... (145) (30) (36)
Dividends received deduction ................... (95) (78) (104)
Goodwill amortization ............................. 161 39 29
State income taxes, less federal income tax benefit 28 20 21
Foreign tax rate differential ..................... 45 -- --
Other differences, net ............................ -- (4) (1)
------- ------- -------
Total income taxes ................................ $ 852 $ 1,457 $ 898
======= ======= =======
</TABLE>
(10) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT
Liabilities reflected for this balance sheet caption are as follows (in
millions):
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
---- ----
<S> <C> <C>
Borrowings under investment agreements ........................ $ 613 $ 724
1% Senior Exchangeable Notes Due 2001 ("Exchange Notes") ...... 449 469
GEICO Corporation 7.5% debentures due 2005* ................... 106 107
General Re Corporation 8.85% debentures due 2009* ............. 107 108
General Re Corporation 9% debentures due 2009* ................ 150 150
GEICO Corporation 9.15% debentures due 2021 ................... 107 107
GEICO Corporation 7.35% debentures due 2023* .................. 160 160
Other debt .................................................... 773 560
------ ------
$2,465 $2,385
====== ======
</TABLE>
* Non-callable
Borrowings under investment agreements are made pursuant to contracts
calling for interest payable, normally semiannually, at fixed rates ranging from
2.5% to 8.6% per annum. Contractual maturities of borrowings under investment
agreements generally range from 3 months to 30 years. Under certain conditions,
these borrowings are redeemable prior to the contractual maturity dates.
Under certain conditions, each $1,000 par amount Exchange Note is
currently exchangeable at the option of the holder or redeemable at the option
of Berkshire into 44.875 shares of Citigroup common stock. Berkshire, at its
option, may settle any exchange or redemption at the equivalent value in cash.
The Exchange Notes are carried at accreted value plus an additional amount (the
"contingent value") representing the excess of the value of the underlying
Citigroup common stock over the accreted value of the Exchange Notes. The
contingent value component of the aggregate carrying value of the Exchange Notes
was $276 million at December 31, 1999 and $171 million at year end 1998. During
1999, approximately $136 million par amount of Exchange Notes were converted by
holders into Citigroup common shares.
41
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT (Continued)
Other debt includes primarily commercial paper, revolving bank debt, and
variable rate term bonds issued by a variety of Berkshire subsidiaries and
generally, may be redeemed at any time at the option of the issuing company.
No materially restrictive covenants are included in any of the various
debt agreements. Payments of principal amounts expected during the next five
years are as follows (in millions):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$522 $473 $ 28 $ 54 $ 18
</TABLE>
(11) DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES
Payments of dividends by insurance subsidiaries members are restricted by
insurance statutes and regulations. Without prior regulatory approval in 2000,
Berkshire can receive up to approximately $4.2 billion as dividends from
insurance subsidiaries.
Combined shareholders' equity of U.S. based property/casualty insurance
subsidiaries determined pursuant to statutory accounting rules (Statutory
Surplus as Regards Policyholders) was approximately $44.5 billion at December
31, 1999. This amount differs from the corresponding amount determined on the
basis of GAAP. The major differences between statutory basis accounting and GAAP
are that deferred income tax assets and liabilities, deferred
charges-reinsurance assumed, unrealized gains and losses on investments in
securities with fixed maturities and goodwill of acquired businesses are
recognized under GAAP but not for statutory reporting purposes.
(12) COMMON STOCK
Changes in issued and outstanding common stock of the Company during the
three years ended December 31, 1999, are shown in the table below.
<TABLE>
<CAPTION>
Class B Common
$0.1667 Par Value
Class A Common, $5 Par Value -----------------
---------------------------- (55,000,000 shares
(1,650,000 shares authorized*) authorized*)
Shares Treasury Shares Shares Issued and
Issued Shares Outstanding Outstanding
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance December 31, 1996 ................. 1,376,188 170,068 1,206,120 783,755
Common stock issued in connection
with acquisition of business ........... -- (1,866) 1,866 165
Conversions of Class A common stock
to Class B common stock and other ...... (10,098) -- (10,098) 303,236
---------- ---------- ---------- ----------
Balance December 31, 1997 ................. 1,366,090 168,202 1,197,888 1,087,156
Common stock issued in connection
with acquisitions of businesses ........ 168,670 (9,709) 178,379 3,174,677
Conversions of Class A common stock
to Class B common stock and other ...... (26,732) -- (26,732) 808,546
Retirement of treasury shares ............. (158,493) (158,493) -- --
---------- ---------- ---------- ----------
Balance December 31, 1998 ................. 1,349,535 -- 1,349,535 5,070,379
Conversions of Class A common stock
to Class B common stock and other ...... (7,872) (7,872) 296,576
---------- ---------- ---------- ----------
Balance December 31, 1999 ................. 1,341,663 -- 1,341,663 5,366,955
========== ========== ========== ==========
</TABLE>
* Prior to the General Re merger the number of authorized Class A and Class B
Common shares was 1,500,000 and 50,000,000 respectively.
Each share of Class A Common Stock is convertible, at the option of the
holder, into thirty shares of Class B Common Stock. Class B Common Stock is not
convertible into Class A Common Stock. Each share of Class B Common Stock
possesses voting rights equivalent to one-two-hundredth (1/200) of the voting
rights of a share of Class A Common Stock. Class A and Class B common shares
vote together as a single class.
In connection with the General Re merger, all shares of Class A and Class
B Common Stock of the Company outstanding immediately prior to the effective
date of the merger were canceled and replaced with new Class A and Class B
common shares and all Class A treasury shares were canceled and retired. See
Note 2 for information regarding the General Re merger.
42
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires certain fair value disclosures. Fair value disclosures are required for
most investment securities as well as other contractual assets and liabilities.
Certain financial instruments, including insurance contracts, are excluded from
SFAS 107 disclosure requirements due to perceived difficulties in measuring fair
value. Accordingly, an estimation of fair value was not made with respect to
unpaid losses and loss adjustment expenses.
In determining fair value, Berkshire used quoted market prices when
available. For instruments where quoted market prices were not available,
independent pricing services or appraisals by Berkshire's management were used.
Those services and appraisals reflected the estimated present values utilizing
current risk adjusted market rates of similar instruments.
Considerable judgement is necessarily required in interpreting market
data used to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value.
The carrying values of cash and cash equivalents, receivables and
accounts payable, accruals and other liabilities are deemed to be reasonable
estimates of their fair values. The estimated fair values of Berkshire's other
financial instruments as of December 31, 1999 and 1998, are as follows (in
millions):
<TABLE>
<CAPTION>
Carrying Value Estimated Fair Value
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investments in securities with fixed maturities ............... $30,222 $21,246 $30,222 $21,246
Investments in equity securities and other investments ........ 39,508 39,761 39,508 39,761
Assets of finance and financial products businesses ........... 24,229 16,989 24,167 17,129
Borrowings under investment agreements and other debt ......... 2,465 2,385 2,418 2,475
Liabilities of finance and financial products businesses ...... 22,223 15,525 22,151 15,698
</TABLE>
(14) LITIGATION
During 1999, GEICO was named as a defendant in a number of class action
lawsuits related to the use of repair parts not produced by original equipment
manufacturers in connection with settlement of collision damage claims. One of
the lawsuits has been dismissed. The remaining lawsuits are in the early stages
of development and the ultimate outcome cannot be reasonably determined at this
time. Management intends to vigorously defend GEICO's position of recommending
use of after-market parts in certain auto accident repairs.
Berkshire and its subsidiaries are parties in a variety of legal actions
arising out of the normal course of business. In particular, and in common with
the insurance industry in general, such legal actions affect Berkshire's
insurance and reinsurance businesses. Such litigation generally seeks to
establish liability directly through insurance contracts or indirectly through
reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally
seek punitive or exemplary damages. Berkshire does not believe that such normal
and routine litigation will have a material effect on its financial condition or
results of operations.
(15) SUPPLEMENTAL CASH FLOW AND INSURANCE PREMIUM INFORMATION
A summary of supplemental cash flow information is presented in the
following table (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes ................................................................ $2,215 $ 1,703 $ 498
Interest of finance and financial products businesses ....................... 513 21 21
Other interest .............................................................. 136 111 102
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses ........... 61 36,064 25
Common shares issued in connection with acquisitions of businesses .......... -- 22,795 73
Fair value of investments acquired as part of exchanges and conversions ..... -- -- 1,837
Contingent value of Exchange Notes recognized in earnings ................... 87 54 298
Value of equity securities used to redeem Exchange Notes .................... 298 344 --
</TABLE>
43
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) SUPPLEMENTAL CASH FLOW AND INSURANCE PREMIUM INFORMATION (Continued)
Premiums written and earned by Berkshire's property/casualty and
life/health insurance businesses during each of the three years ending December
31, 1999 are summarized below. Dollars are in millions.
<TABLE>
<CAPTION>
Property/Casualty Life/Health*
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Premiums Written:
Direct ............................... $ 5,798 $ 4,503 $ 3,980 $ -- $ --
Assumed .............................. 7,951 1,184 957 1,981 46
Ceded ................................ (818) (83) (85) (245) (5)
-------- -------- -------- -------- --------
$ 12,931 $ 5,604 $ 4,852 $ 1,736 $ 41
======== ======== ======== ======== ========
Premiums Earned:
Direct ............................... $ 5,606 $ 4,382 $ 3,879 $ -- $ --
Assumed .............................. 7,762 1,147 968 1,971 45
Ceded ................................ (788) (89) (86) (245) (4)
-------- -------- -------- -------- --------
$ 12,580 $ 5,440 $ 4,761 $ 1,726 $ 41
======== ======== ======== ======== ========
</TABLE>
*There were no premiums written or earned in 1997
(16) BUSINESS SEGMENT DATA
SFAS No. 131 requires certain disclosures about operating segments in a
manner that is consistent with how management evaluates the performance of the
segment. Information related to Berkshire's twelve reportable operating segments
is shown below.
<TABLE>
<CAPTION>
Business Identity Business Activity
- ----------------- -----------------
<S> <C>
GEICO Underwriting private passenger automobile
insurance mainly by direct response methods
General Re Underwriting excess-of-loss and quota-share
reinsurance worldwide
Berkshire Hathaway Reinsurance Group Underwriting excess-of-loss and quota-share
reinsurance for property and casualty insurers
and reinsurers
Berkshire Hathaway Direct Insurance Group Underwriting multiple lines of
property and casualty insurance
policies for primarily commercial
accounts
Buffalo News Publication of a daily and Sunday newspaper in
Western New York
FlightSafety and Executive Jet ("Flight Training to operators of aircraft and ships and
Services") providing fractional ownership programs for
general aviation aircraft
Nebraska Furniture Mart, R.C. Willey Home Retail sales of home furnishings, appliances and
Furnishings, Star Furniture Company and electronics
Jordan's Furniture ("Home Furnishings")
International Dairy Queen Licensing and servicing a system of almost 6,000
Dairy Queen stores
Helzberg's Diamond Shops and Borsheim's Retailing of fine jewelry
("Jewelry")
Scott Fetzer Companies Diversified manufacturing and distribution of
various consumer and commercial products with
principal brand names including Kirby and
Campbell Hausfeld
See's Candies Manufacture and distribution of boxed chocolates
and other confectionery products
H.H. Brown Shoe Company, Lowell Shoe, Inc. Manufacture and distribution of footwear
and Dexter Shoe Company ("Shoe Group")
</TABLE>
General Re's reinsurance business is included as a reportable segment
beginning in 1999. General Re Corporation was acquired by Berkshire on December
21, 1998. For further information regarding the acquisition, see Note 2.
44
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
(16) BUSINESS SEGMENT DATA (Continued)
A disaggregation of Berkshire's consolidated data for each of the three
most recent years is presented in the tables which follow on this and the
following page. Amounts are in millions.
<TABLE>
<CAPTION>
REVENUES
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING SEGMENTS:
Insurance group revenues:
GEICO * ....................................................... $ 4,757 $ 4,033 $ 3,482
General Re * .................................................. 6,905 -- --
Berkshire Hathaway Reinsurance Group * ........................ 2,382 939 967
Berkshire Hathaway Direct Insurance Group * ................... 262 328 312
Interest, dividend and other investment income ................ 2,500 982 888
-------- -------- --------
Total insurance group revenues .................................. 16,806 6,282 5,649
Buffalo News .................................................... 157 157 156
Flight services ................................................. 1,856 858 411
Home furnishings ................................................ 917 793 667
International Dairy Queen ....................................... 460 420 --
Jewelry ......................................................... 486 420 398
Scott Fetzer Companies .......................................... 1,021 1,002 961
See's Candies ................................................... 306 288 269
Shoe group ...................................................... 498 500 542
-------- -------- --------
22,507 10,720 9,053
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ...................................... 1,365 2,415 1,106
Other revenues ................................................ 381 703 280
Purchase-accounting-adjustments ............................... (225) (6) (9)
-------- -------- --------
$ 24,028 $ 13,832 $ 10,430
======== ======== ========
</TABLE>
*Represents insurance premiums earned
<TABLE>
<CAPTION>
OPERATING PROFIT BEFORE TAXES
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING SEGMENTS:
Insurance group operating profit:
GEICO* ........................................................ $ 24 $ 269 $ 281
General Re* ................................................... (1,184) -- --
Berkshire Hathaway Reinsurance Group* ......................... (256) (21) 128
Berkshire Hathaway Direct Insurance Group* .................... 22 17 52
Interest, dividend and other investment income ................ 2,482 974 882
-------- -------- --------
Total insurance group operating profit .......................... 1,088 1,239 1,343
Buffalo News .................................................... 55 53 56
Flight services ................................................. 225 181 140
Home furnishings ................................................ 79 72 57
International Dairy Queen ....................................... 56 58 --
Jewelry ......................................................... 51 39 32
Scott Fetzer Companies .......................................... 147 137 119
See's Candies ................................................... 74 62 59
Shoe group ...................................................... 17 33 49
-------- -------- --------
1,792 1,874 1,855
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ...................................... 1,365 2,415 1,106
Interest expense ** ........................................... (109) (100) (107)
Corporate and other ........................................... 141 248 72
Goodwill amortization and other purchase-accounting-adjustments (739) (123) (99)
-------- -------- --------
$ 2,450 $ 4,314 $ 2,827
======== ======== ========
</TABLE>
* Represents underwriting profit (loss)
** Amounts of interest expense represent interest on borrowings under
investment agreements and other debt exclusive of that of finance
businesses and interest allocated to certain identified segments.
45
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) BUSINESS SEGMENT DATA (Continued)
<TABLE>
<CAPTION>
DEPREC. & AMORT.
CAPITAL EXPENDITURES * OF TANGIBLE ASSETS
1999 1998 1997 1999 1998 1997
OPERATING SEGMENTS: ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Insurance group:
GEICO .......................................... $ 87 $101 $ 27 $ 40 $ 27 $ 26
General Re ..................................... 17 -- -- 25 -- --
Berkshire Hathaway Reinsurance Group ........... -- -- -- -- -- --
Berkshire Hathaway Direct Insurance Group ...... 1 1 1 1 1 1
---- ---- ---- ---- ---- ----
Total insurance group ............................ 105 102 28 66 28 27
Buffalo News ..................................... 5 2 3 2 2 3
Flight services .................................. 323 213 119 77 58 55
Home furnishings ................................. 41 21 43 16 13 10
International Dairy Queen ........................ 9 10 -- 4 3 --
Jewelry .......................................... 14 12 9 11 10 10
Scott Fetzer Companies ........................... 14 10 6 11 11 11
See's Candies .................................... 6 15 20 5 5 5
Shoe group ....................................... 6 9 11 12 13 12
---- ---- ---- ---- ---- ----
523 394 239 204 143 133
RECONCILIATION OF SEGMENTS TO CONSOLIDATED
AMOUNT:
Corporate and other ............................ 7 5 3 11 4 3
Purchase-accounting-adjustments ................ -- -- -- 3 8 8
---- ---- ---- ---- ---- ----
$530 $399 $242 $218 $155 $144
==== ==== ==== ==== ==== ====
</TABLE>
* Excludes expenditures which were part of business acquisitions.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
AT YEAR-END
1999 1998 1997
OPERATING SEGMENTS: -------- -------- --------
<S> <C> <C> <C>
Insurance group:
GEICO .................................................... $ 9,381 $ 8,663 $ 7,683
General Re ............................................... 30,168 32,011 --
Berkshire Hathaway Reinsurance Group ..................... 39,607 36,611 34,781
Berkshire Hathaway Direct Insurance Group ................ 4,866 5,564 5,902
-------- -------- --------
Total insurance group ...................................... 84,022 82,849 48,366
Buffalo News ............................................... 30 29 28
Flight services ............................................ 1,790 1,345 792
Home furnishings ........................................... 648 489 457
International Dairy Queen .................................. 207 199 --
Jewelry .................................................... 258 234 219
Scott Fetzer Companies ..................................... 298 242 256
See's Candies .............................................. 78 79 65
Shoe group ................................................. 301 336 353
-------- -------- --------
87,632 85,802 50,536
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Corporate and other ...................................... 25,276 17,671 2,450
Goodwill and other purchase-accounting-adjustments ....... 18,508 18,764 3,125
-------- -------- --------
$131,416 $122,237 $ 56,111
======== ======== ========
</TABLE>
46
<PAGE> 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) QUARTERLY DATA
A summary of revenues and earnings by quarter for each of the last two
years is presented in the following table. This information is unaudited.
Dollars are in millions, except per share amounts.
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1999 ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues ......................................... $5,446 $5,461 $7,051 $6,070
------ ------ ------ ------
Earnings:
Excluding realized investment gain ............ $ 294 $ 299 $ 156 $ (78)
Realized investment gain * .................... 247 273 264 102
------ ------ ------ ------
Net earnings .................................. $ 541 $ 572 $ 420 $ 24
====== ====== ====== ======
Earnings per equivalent Class A common share:
Excluding realized investment gain ............ $ 194 $ 197 $ 103 $ (52)
Realized investment gain * .................... 162 179 173 69
------ ------ ------ ------
Net earnings .................................. $ 356 $ 376 $ 276 $ 17
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1998 ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues ......................................... $3,325 $3,936 $2,909 $3,662
------ ------ ------ ------
Earnings:
Excluding realized investment gain ............ $ 252 $ 312 $ 264 $ 449
Realized investment gain * .................... 470 864 101 118
------ ------ ------ ------
Net earnings .................................. $ 722 $1,176 $ 365 $ 567
====== ====== ====== ======
Earnings per equivalent Class A common share:
Excluding realized investment gain ............ $ 203 $ 251 $ 212 $ 352
Realized investment gain * .................... 379 696 81 92
------ ------ ------ ------
Net earnings .................................. $ 582 $ 947 $ 293 $ 444
====== ====== ====== ======
</TABLE>
* The amount of realized gain for any given period has no predictive value and
variations in amount from period to period have no practical analytical value
particulary in view of the unrealized appreciation now existing in
Berkshire's consolidated investment portfolio.
47
<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) INFORMATION ABOUT CERTAIN SUBSIDIARIES
The accompanying consolidated financial statements include the accounts
of OBH Inc. (formerly Berkshire Hathaway Inc.), which became a wholly-owned
subsidiary of Berkshire Hathaway Inc. upon completion of the General Re merger.
The condensed consolidated balance sheets of OBH Inc. as of December 31, 1999
and 1998 are as follows (dollars in millions):
<TABLE>
<CAPTION>
DEC. 31, 1999 DEC. 31, 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 2,661 $ 8,841
Investments, primarily equity securities ...................... 48,635 40,572
Assets of finance and financial products businesses ........... 13,369 5,759
Goodwill of acquired businesses ............................... 3,926 4,004
Other assets .................................................. 7,382 5,140
------------ ------------
$ 75,973 $ 64,316
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses ........................... $ 10,637 $ 7,198
Unearned premiums, accounts payable and other liabilities ..... 4,743 4,483
Income taxes, principally deferred ............................ 9,689 10,426
Borrowings under investment agreements and other debt ......... 2,156 2,056
Liabilities of finance and financial products businesses ...... 12,094 4,881
------------ ------------
39,319 29,044
------------ ------------
Total shareholders' equity .................................... 36,654 35,272
------------ ------------
$ 75,973 $ 64,316
============ ============
</TABLE>
The condensed consolidated statements of earnings of OBH Inc. for the
years ended December 31, 1999 and 1998 are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Insurance premiums earned ....................................... $ 7,400 $ 5,300
Sales and service revenues ...................................... 5,882 4,675
Investment income ............................................... 1,208 1,013
Income (loss) from finance and financial products businesses .... (21) 205
Realized investment gain ........................................ 1,294 2,415
-------- --------
15,763 13,608
-------- --------
COST AND EXPENSES
Insurance losses, loss adjustment and underwriting expense ...... 7,610 5,035
Cost of products and services sold .............................. 4,039 3,018
Selling, general and administrative expenses .................... 1,256 1,148
Interest expense ................................................ 110 109
-------- --------
13,015 9,310
-------- --------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST .............. 2,748 4,298
Income taxes and minority interests ............................. 924 1,474
-------- --------
NET EARNINGS .................................................... $ 1,824 $ 2,824
======== ========
</TABLE>
The consolidated statement of earnings for the year ended December 31,
1997 is identical to the accompanying Consolidated Statement of Earnings of
Berkshire Hathaway Inc.
48
<PAGE> 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) INFORMATION ABOUT CERTAIN SUBSIDIARIES (Continued)
The summarized financial data of the finance and financial products
businesses (See Note 7) includes the activities conducted by the Scott Fetzer
Financial Group and its subsidiaries ("SFFG"). Assets and liabilities of SFFG
are summarized below (in millions).
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................... $ 1 $ 98
Mortgage-backed securities, installment loans and other receivables* .... 196 371
Trading securities, at market ........................................... -- 3,488
Securities purchased under agreements to resell ......................... -- 192
------ ------
$ 197 $4,149
====== ======
LIABILITIES
6 3/4% Notes, due 2001 and borrowings under investment agreements ....... $ 137 $ 152
Securities sold under agreements to repurchase .......................... -- 3,469
Securities sold but not yet purchased ................................... -- 177
Other* .................................................................. 27 208
------ ------
$ 164 $4,006
====== ======
</TABLE>
* Other receivables include receivables from affiliates of $40 at December
31, 1999 and other liabilities include payables to affiliates of $105 at
December 31, 1998.
Net income of SFFG for each of the past three years is summarized below
(in millions).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues .......................... $ 255 $ 211 $ 47
Cost and expenses ................. 301 28 36
----- ----- -----
Earnings (loss) before taxes ...... (46) 183 11
Income taxes ...................... (16) 64 4
----- ----- -----
Net earnings (loss) ............... $ (30) $ 119 $ 7
===== ===== =====
</TABLE>
49
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III
Except for the information set forth under the caption "Executive
Officers of the Registrant" in Part I hereof, information required by this Part
(Items 10, 11, 12, and 13) is incorporated by reference from the Registrant's
definitive proxy statement, filed pursuant to Regulation 14A, for the Annual
Meeting of Shareholders of the Registrant to be held on April 29, 2000, which
meeting will involve the election of directors.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, as well as the
Independent Auditors' Report, are included in Part II Item 8 of
this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 26
Consolidated Balance Sheets at December 31, 1999 and 1998 27
Consolidated Statements of Earnings for the years ended
1999, 1998 and 1997 28
Consolidated Statements of Cash Flows for the years ended
1999, 1998 and 1997 29
Consolidated Statements of Changes in Shareholders' Equity
for the years ended 1999, 1998 and 1997 30
Notes to Consolidated Financial Statements 31-49
</TABLE>
<TABLE>
<CAPTION>
(a) 2. Financial Statement Schedule PAGE
----
<S> <C>
Independent Auditors' Report on Schedule 52
Schedule I -- Parent Company 53-54
Condensed Balance Sheets as of December 31, 1999 and 1998 and
Condensed Statements of Earnings and Cash Flows for the years
ended 1999, 1998 and 1997.
Other schedules are omitted because they are not required,
information therein is not applicable, or is reflected in the
Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits
See the "Exhibit Index" at page 55.
(b) Reports on Form 8-K
Form 8-K filed November 1, 1999 -- Item 5 Other Events. Report
indicated that the Registrant had entered into a subscription
agreement whereby the Registrant would make a significant
investment in an entity that would be the survivor in a merger
with MidAmerican Energy Holdings Company.
</TABLE>
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BERKSHIRE HATHAWAY INC.
Date: March 29, 2000 /s/ Marc D. Hamburg
------------------ -------------------------------
Marc D. Hamburg
Vice President and 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.
<TABLE>
<S> <C> <C>
/s/ Warren E. Buffett Chairman of the Board March 29, 2000
- --------------------------- --------------
Warren E. Buffett of Directors - Chief Date
Executive Officer
/s/ Howard G. Buffett Director March 29, 2000
- --------------------------- --------------
Howard G. Buffett Date
/s/ Susan T. Buffett Director March 29, 2000
- --------------------------- --------------
Susan T. Buffett Date
/s/ Charles T. Munger Vice Chairman of the March 29, 2000
- --------------------------- --------------
Charles T. Munger Board of Directors Date
/s/ Malcolm G. Chace Director March 29, 2000
- --------------------------- --------------
Malcolm G. Chace Date
/s/ Walter Scott, Jr. Director March 29, 2000
- --------------------------- --------------
Walter Scott, Jr. Date
/s/ Ronald L. Olson Director March 29, 2000
- --------------------------- --------------
Ronald L. Olson Date
/s/ Marc D. Hamburg Vice President - March 29, 2000
- --------------------------- --------------
Marc D. Hamburg Principal Financial Date
Officer
/s/ Daniel J. Jaksich Controller March 29, 2000
- --------------------------- --------------
Daniel J. Jaksich Date
</TABLE>
51
<PAGE> 53
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the consolidated financial statements of Berkshire
Hathaway Inc. and subsidiaries as of December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, and have issued our
report thereon dated March 3, 2000; such consolidated financial statements and
report are included elsewhere in this Form 10-K. Our audits also included the
financial statement schedule of Berkshire Hathaway Inc., listed in Item 14. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 3, 2000
52
<PAGE> 54
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
<S> <C> <C>
Assets:
Cash and cash equivalents ............................... $ -- $ --
Investments in consolidated subsidiaries ................ 57,761 57,411
Investments - other than consolidated subsidiaries ...... -- --
Other assets ............................................ -- --
------- -------
$57,761 $57,411
======= =======
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses ................... $ -- $ 8
Borrowings under investment agreements and other debt ... -- --
Income taxes, principally deferred ...................... -- --
------- -------
-- 8
Shareholders' equity .................................... 57,761 57,403
------- -------
$57,761 $57,411
======= =======
</TABLE>
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ending December 31,
Income items: 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
From consolidated subsidiaries:
Interest ................................... $ -- $ 6 $ 11
Dividends .................................. 500 1,241 328
Undistributed earnings ..................... 1,057 1,626 1,771
------- ------- -------
1,557 2,873 2,110
Interest and dividends - other investments .... -- 4 7
Realized investment gain (loss) ............... -- (60) (297)
Revenues of Buffalo News ...................... -- 157 156
------- ------- -------
1,557 2,974 1,976
------- ------- -------
Cost and expense items:
Costs and expenses of Buffalo News ............ -- 105 100
General and administrative .................... -- 8 9
Interest and finance charges .................. -- 62 67
Income tax expense (benefit) .................. -- (31) (101)
------- ------- -------
1,557 144 75
------- ------- -------
Net earnings ............................... $ 1,557 $ 2,830 $ 1,901
======= ======= =======
</TABLE>
See Note to Condensed Financial Information
53
<PAGE> 55
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I (continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ending December 31,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ............................................ $ 1,557 $ 2,830 $ 1,901
Adjustments to reconcile net earnings to cash flows
from operating activities:
Undistributed current earnings of subsidiaries .... (1,057) (1,626) (1,771)
Realized investment loss .......................... -- 60 297
Decrease in income taxes .......................... -- (31) (35)
Other ............................................. (8) (8) (4)
------- ------- -------
Net cash flows from operating activities ................ 492 1,225 388
------- ------- -------
Cash flows from investing activities:
Investments in and advances to subsidiaries ............. (579) (803) (881)
Purchases of investments ................................ -- (382) --
Proceeds on sales and maturities of investments ......... -- 16 189
------- ------- -------
Net cash flows from investing activities ................ (579) (1,169) (692)
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings ................................ -- 1,048 1,005
Repayment of borrowings ................................. -- (1,476) (1,054)
Other ................................................... 87 6 --
------- ------- -------
Net cash flows from financing activities ................ 87 (422) (49)
------- ------- -------
Decrease in cash and cash equivalents ................... -- (366) (353)
Cash and cash equivalents at beginning of year .......... -- 366 719
------- ------- -------
Cash and cash equivalents at end of year ................ $ -- $ -- $ 366
======= ======= =======
Other cash flow information:
Income taxes paid .................................... -- $ 1,656 $ 470
Interest paid ........................................ -- 60 57
</TABLE>
NOTE TO CONDENSED FINANCIAL INFORMATION
The condensed statements of earnings and cash flows of Berkshire
Hathaway Inc. for 1998 and 1997 include the earnings and cash flow data of OBH
Inc. (formerly Berkshire Hathaway Inc. - parent company). OBH Inc. became a
wholly-owned subsidiary of Berkshire Hathaway Inc. as of December 21, 1998 upon
completion of the General Re merger. At December 31, 1999 and 1998, Berkshire
Hathaway Inc.'s investment in the net assets of OBH Inc. is included in
investments in consolidated subsidiaries in the condensed balance sheet.
Borrowings under investment agreements and other Berkshire Hathaway Inc. debt
outstanding as of the General Re merger date remain obligations of the former
parent company, now OBH Inc.
54
<PAGE> 56
EXHIBIT INDEX
Exhibit No.
2.1 Agreement and Plan of Merger dated as of August 25, 1995,
between the Registrant and GEICO Corporation. Incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K dated August
25, 1995.
2.2 Agreement and Plan of Merger dated as of October 14, 1996
between the Registrant and FlightSafety International, Inc.
Incorporated by reference to Exhibit 1 to the Registrant's Form
8-K filed on October 16, 1996.
2.3 Agreement and Plan of Merger dated as of June 19, 1998 between
Registrant and General Re Corporation. Incorporated by reference
to Annex I to Registration Statement No. 333-61129 filed on Form
S-4.
3 Restated Certificate of Incorporation Incorporated by reference
to Exhibit 3.1 to Registration Statement No. 333-61129 filed on
Form S-4.
3.1 By-Laws Incorporated by reference to Exhibit 3.2 to Registration
Statement No. 333-61129 filed on Form S-4.
4.1 Form of Indenture dated as of December 1, 1987 between OBH Inc.
(formerly Berkshire Hathaway Inc.) and State Street Bank and
Trust Company (as successor trustee to The First National Bank
of Boston), trustee with respect to 9 3/4% Debentures due
January 15, 2018
Incorporated by reference to Exhibit 4 to Registration Statement
No. 33-19000 filed on Form S-3.
4.2 Form of Indenture dated as of December 1, 1987 between OBH Inc.
(formerly Berkshire Hathaway Inc.) and State Street Bank and
Trust Company (as successor trustee to The First National Bank
of Boston), trustee with respect to 1% Senior Exchangeable Notes
due December 2, 2001.
Incorporated by reference to Exhibit 4 to Registration Statement
No. 33-30570 filed on Form S-3.
OTHER INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM
DEBT OF REGISTRANT AND ITS SUBSIDIARIES ARE NOT BEING FILED
SINCE THE TOTAL AMOUNT OF SECURITIES AUTHORIZED BY ALL OTHER
SUCH INSTRUMENTS DOES NOT EXCEED 10% OF THE TOTAL ASSETS OF THE
REGISTRANT AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS AS OF
DECEMBER 31, 1999. THE REGISTRANT HEREBY AGREES TO FURNISH TO
THE COMMISSION UPON REQUEST A COPY OF ANY SUCH DEBT INSTRUMENT
TO WHICH IT IS A PARTY.
12 Statement of computation of ratio of earnings to fixed charges
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
(Submitted as an Exhibit pursuant to the requirements of Item
601(b)(27) of Reg. S-K and not deemed filed for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
55
<PAGE> 1
Reg S-K
Item 601
Exhibit 12
BERKSHIRE HATHAWAY INC.
Calculation of Ratio of Consolidated Earnings to Consolidated Fixed Charges
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net earnings .......................................... $ 1,557 $ 2,830 $ 1,901 $ 2,489 $ 795
Income tax expense .................................. 852 1,457 898 1,197 276
Minority interest in earnings ....................... 41 27 28 20 13
Equity in the net income of investees
accounted for under the equity method ............ -- -- -- -- (92)
Fixed charges* ...................................... 187 142 141 124 75
------- ------- ------- ------- -------
Earnings available for fixed charges .................. $ 2,637 $ 4,456 $ 2,968 $ 3,830 $ 1,067
======= ======= ======= ======= =======
Realized investment gain, pretax, included in
earnings available for fixed charges ................ $ 1,365 $ 2,415 $ 1,106 $ 2,484 $ 194
======= ======= ======= ======= =======
Fixed charges*
Interest on indebtedness (including amortization
of debt discount and expense) .................... $ 134 $ 109 $ 112 $ 100 $ 59
Rentals representing interest ....................... 53 33 29 24 16
------- ------- ------- ------- -------
$ 187 $ 142 $ 141 $ 124 $ 75
======= ======= ======= ======= =======
Ratio of earnings to fixed charges* ................... 14.10x 31.38x 21.05x 30.89x 14.23x
======= ======= ======= ======= =======
Ratio of earnings, excluding realized investment
gain, to fixed charges* ............................. 6.80x 14.37x 13.21x 10.85x 11.64x
======= ======= ======= ======= =======
</TABLE>
- ------------
*Excludes fixed charges of finance businesses. Fixed charges of finance
businesses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 586 $ 21 $ 20 $ 30 $ 29
</TABLE>
Including fixed charges of finance businesses the ratios of earnings to fixed
charges were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Including realized investment gain .... 4.17x 27.47x 18.56x 25.06x 10.54x
Excluding realized investment gain .... 2.40x 12.65x 11.69x 8.94x 8.67x
</TABLE>
<PAGE> 1
Reg. S-K
Item 601
Exhibit 21
BERKSHIRE HATHAWAY INC.
Subsidiaries of Registrant (1)
December 31, 1999
<TABLE>
<CAPTION>
Domicile or
State of
Company Name Incorporation
- ------------ -------------
<S> <C>
Berkshire Hathaway Credit Corporation Nebraska
Berkshire Hathaway International Insurance Ltd. United Kingdom
Berkshire Hathaway Life Insurance Company of Nebraska Nebraska
BHG Life Insurance Company Nebraska
BHSF, Inc. Delaware
BH Finance LLC Nebraska
BH Shoe Holdings, Inc. Delaware
Blue Chip Stamps California
Borsheim's Jewelry Company, Inc. Nebraska
Campbell Hausfeld/Scott Fetzer Company Delaware
Central States Indemnity Co. of Omaha Nebraska
Central States of Omaha Companies, Inc. Nebraska
General & Cologne Life Reinsurance Company of America Connecticut
General & Cologne Life Reinsurance Co. of
Australasia Ltd. Australia
Cologne Reinsurance Company Ltd. Ireland
The Cologne Reinsurance Company Ltd. United Kingdom
The Cologne & General Reinsurance Co. of Africa Ltd. South Africa
Columbia Insurance Company Nebraska
Continental Divide Insurance Company Colorado
Cornhusker Casualty Company Nebraska
Cypress Insurance Company California
Dexter Shoe Company Maine
DP Mann Limited United Kingdom
Europa Ruckversicherung AG Germany
Executive Jet, Inc. Delaware
Fairfield Insurance Company Connecticut
The Fechheimer Brothers Company (2) Delaware
FlightSafety International Inc. New York
GEICO Casualty Company Maryland
GEICO Corporation Delaware
GEICO General Insurance Company Maryland
GEICO Indemnity Company Maryland
GRD Corporation Delaware
Gen Re Holdings, Inc. Delaware
General Re-CKAG Reinsurance and Investment S.a r.l Luxembourg
General Re Corporation Delaware
General Re Europe Limited United Kingdom
General Re Financial Products Corp. Delaware
General Re Financial Products (Japan) Inc. Delaware
General Re Financial Securities Ltd. United Kingdom
General Re Services Corporation Delaware
General Reinsurance Corporation Delaware
General Star Indemnity Company Connecticut
General Star National Insurance Company Ohio
Genesis Indemnity Insurance Company North Dakota
Genesis Insurance Company Connecticut
Government Employees Insurance Company Maryland
Helzberg's Diamond Shops, Inc. Missouri
</TABLE>
<PAGE> 2
Reg. S-K
Item 601
Exhibit 21
BERKSHIRE HATHAWAY INC.
Subsidiaries of Registrant (1)
December 31, 1999
<TABLE>
<CAPTION>
Domicile or
State of
Company Name Incorporation
- ------------ -------------
<S> <C>
Herbert Clough, Inc. New York
H. H. Brown Shoe Company, Inc. Delaware
Isabela Shoe Corporation Delaware
Jordan's Furniture, Inc. Massachusetts
Kansas Bankers Surety Company Kansas
Kolnische Ruck Wien Austria
Kolnische Ruckversicherungs-Gesellschaft AG Germany
Lowell Shoe, Inc. New Hampshire
National Fire & Marine Insurance Company Nebraska
National Indemnity Company Nebraska
National Indemnity Company of the South Florida
National Indemnity Company of Mid-America Minnesota
National Liability and Fire Insurance Company Connecticut
National Re Corporation Delaware
National Reinsurance Corporation Delaware
Nebraska Furniture Mart, Inc. Nebraska
Oak River Insurance Company Nebraska
OBH Inc. Delaware
OCSAP, Ltd Maine
R.C. Willey Home Furnishings Utah
Redwood Fire and Casualty Insurance Company Nebraska
The Scott Fetzer Company Delaware
Scott Fetzer Financial Group, Inc. Delaware
See's Candies, Inc. California
See's Candy Shops, Inc. California
Star Furniture Company Texas
Wesco Financial Corporation Delaware
Wesco-Financial Insurance Company Nebraska
Wesco Holdings Midwest, Inc. Nebraska
World Book/Scott Fetzer Company Nebraska
</TABLE>
(1) Each of the named subsidiaries is not necessarily a "significant
subsidiary" as defined in Rule 1-02(w) of Regulation S-X, and Berkshire has
several additional subsidiaries not named above. The unnamed subsidiaries,
considered in the aggregate as a single subsidiary, would not constitute a
"significant subsidiary" at the end of the year covered by this report.
(2) The names have been omitted of 31 wholly-owned U.S. subsidiaries of
The Fechheimer Brothers Company, each of whom operated in the business of
uniform manufacturing and/or distribution.
<PAGE> 1
Reg S-K
Item 601
Exhibit 23
Page 1 of 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements of
Berkshire Hathaway Inc. on Form S-3 (File No. 333-31237), Form S-3 (File No.
333-62215), Form S-3 (File No. 333-68175), Form S-8 (File No. 333-18443), Form
S-8 (File No. 333-70609), and Form S-8 (File No. 333-62273) of our reports dated
March 3, 2000, appearing in this Annual Report on Form 10-K of Berkshire
Hathaway Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED IN FORM 10-K AS
FILED HEREWITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND RELATED NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,835
<SECURITIES> 69,730
<RECEIVABLES> 8,558
<ALLOWANCES> 0
<INVENTORY> 844
<CURRENT-ASSETS> 0
<PP&E> 1,903
<DEPRECIATION> 0
<TOTAL-ASSETS> 131,416
<CURRENT-LIABILITIES> 0
<BONDS> 2,465
0
0
<COMMON> 8
<OTHER-SE> 57,753
<TOTAL-LIABILITY-AND-EQUITY> 131,416
<SALES> 5,918
<TOTAL-REVENUES> 20,349
<CGS> 4,065
<TOTAL-COSTS> 19,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> 2,450
<INCOME-TAX> 852
<INCOME-CONTINUING> 1,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,557
<EPS-BASIC> 1,025
<EPS-DILUTED> 1,025
</TABLE>
