<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to________________________
Commission file number 1-10125
---------
BERKSHIRE HATHAWAY INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04 2254452
- -------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1440 Kiewit Plaza, Omaha, Nebraska 68131
-----------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(402) 346-1400
------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 such
filing requirements for the past 90 days.
X
- ------- -------
YES NO
Number of shares of common stock outstanding as of October 31, 1996:
Class A -- 1,188,879
Class B -- 656,490
<PAGE> 2
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -- 2
September 30, 1996 and December 31, 1995
Consolidated Statements of Earnings -- 3
Third Quarter and First Nine Months, 1996 and 1995
Condensed Consolidated Statements of Cash Flows -- 4
First Nine Months, 1996 and 1995
Notes to Interim Consolidated Financial Statements 5-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-14
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 14
</TABLE>
1
<PAGE> 3
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 810.7 $ 2,703.8
Investments:
Securities with fixed maturities at estimated fair value:
Maturing within two years (cost: 1996-$3,032.2; 1995-$596.5). . . 3,048.4 615.7
Maturing after two years (cost: 1996-$3,289.2; 1995-$651.7) . . . 3,491.4 807.5
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . 25,567.9 21,017.6
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476.2 718.9
Assets of finance businesses . . . . . . . . . . . . . . . . . . . . 868.3 756.7
Goodwill of acquired businesses . . . . . . . . . . . . . . . . . . . 2,275.7 672.0
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,668.1 1,419.2
--------- ---------
$39,206.7 $28,711.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . $ 6,237.2 $ 3,698.6
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 1,492.5 374.1
Accounts payable, accruals and other liabilities . . . . . . . . . . 1,638.8 1,039.1
Income taxes, principally deferred . . . . . . . . . . . . . . . . . 6,155.1 4,849.5
Borrowings under investment agreements and other debt . . . . . . . . 1,435.2 1,061.7
Liabilities of finance businesses . . . . . . . . . . . . . . . . . . 747.4 685.2
--------- ---------
17,706.2 11,708.2
--------- ---------
Minority shareholders' interests . . . . . . . . . . . . . . . . . . 311.8 264.5
--------- ---------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value, 1,376,870 and 1,381,308
shares issued; 1,189,074 and 1,193,512 shares outstanding 6.9 6.9
Class B Common Stock, $0.1667 par value, 650,640 shares issued
and outstanding in 1996 . . . . . . . . . . . . . . . . . . . . 0.1 --
Capital in excess of par value . . . . . . . . . . . . . . . . . . 1,566.6 1,001.7
Unrealized appreciation of investments, net . . . . . . . . . . . . 10,981.8 9,220.7
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 8,668.0 6,544.1
--------- ---------
21,223.4 16,773.4
Less: Cost of 187,796 Class A common shares in treasury . . . . . . 34.7 34.7
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 21,188.7 16,738.7
--------- ---------
$39,206.7 $28,711.4
========= =========
</TABLE>
* As more fully described in the Notes to Interim Consolidated Financial
Statements, on May 8, 1996, Berkshire issued 517,500 shares of Class B
Common Stock having 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 1,210,762 shares outstanding at
September 30, 1996 versus 1,193,512 outstanding at December 31, 1995. Net
book value per equivalent Class A Common share is $17,500 at September 30,
1996 and $14,025 at December 31, 1995.
See accompanying Notes to Interim Consolidated Financial Statements
2
<PAGE> 4
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned . . . . . . . . . . . . . . $ 971.2 $ 173.8 $2,904.8 $ 579.4
Sales and service revenues . . . . . . . . . . . . . 721.8 682.7 2,137.0 1,871.4
Interest, dividend and other investment income . . . 220.3 175.6 582.5 456.1
Income from finance businesses . . . . . . . . . . . 5.9 8.3 16.9 21.5
Realized investment gain . . . . . . . . . . . . . . 96.1 66.8 2,428.6 141.2
-------- -------- -------- --------
2,015.3 1,107.2 8,069.8 3,069.6
-------- -------- -------- --------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses . . . . 769.1 153.0 2,291.1 468.7
Insurance underwriting expenses . . . . . . . . . . . 172.3 49.6 506.0 157.7
Cost of products and services sold . . . . . . . . . 469.4 442.1 1,349.9 1,189.5
Selling, general and administrative expenses . . . . 196.9 187.3 611.5 505.4
Goodwill amortization . . . . . . . . . . . . . . . . 15.1 4.7 45.7 11.6
Interest expense . . . . . . . . . . . . . . . . . . 26.5 14.0 79.7 40.6
-------- -------- -------- --------
1,649.3 850.7 4,883.9 2,373.5
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST . . 366.0 256.5 3,185.9 696.1
Income taxes . . . . . . . . . . . . . . . . . . . . 98.2 59.2 1,045.4 160.0
Minority interest . . . . . . . . . . . . . . . . . . 3.8 2.8 16.6 10.4
-------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . $ 264.0 $ 194.5 $2,123.9 $ 525.7
======== ======== ======== ========
Average shares outstanding* . . . . . . . . . . . . . 1,210,762 1,193,512 1,202,704 1,184,942
NET EARNINGS PER SHARE* . . . . . . . . . . . . . . . . $218 $163 $1,766 $444
==== ==== ====== ====
</TABLE>
* As more fully described in the Notes to Interim Consolidated Financial
Statements, on May 8, 1996, Berkshire issued 517,500 shares of Class B
Common Stock having economic rights equal to one-thirtieth (1/30) of Class
A Common Stock. Average shares outstanding for the 1996 periods include
average Class A Common shares and average Class B Common shares determined
on an equivalent Class A Common Stock basis. Net earnings per share shown
above represents net earnings per Class A Common share. Net earnings per
Class B Common share is equal to one-thirtieth (1/30) of such amount or $7
and $59 per share for the third quarter and first nine months of 1996
respectively.
See accompanying Notes to Interim Consolidated Financial Statements
3
<PAGE> 5
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
First Nine Months
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash flows from operating activities . . . . . . . . . . . . . . . . $ 842.4 $ 829.9
--------- ---------
Cash flows from investing activities:
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . (3,104.8) (1,576.2)
Proceeds on sales and maturities of investments . . . . . . . . . . . 2,132.8 2,441.8
Loans and investments originated in finance businesses . . . . . . . (425.6) (326.3)
Principal collections on loans and investments originated
in finance businesses . . . . . . . . . . . . . . . . . . . . . . . 287.2 302.8
Acquisitions of businesses . . . . . . . . . . . . . . . . . . . . . (2,024.9) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.2) (10.5)
--------- ---------
Net cash flows from investing activities . . . . . . . . . . . . . . . . (3,160.5) 831.6
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses . . . . . . . . . . . 234.2 231.3
Proceeds from other borrowings. . . . . . . . . . . . . . . . . . . . 881.5 825.9
Repayments of borrowings of finance businesses . . . . . . . . . . . (368.6) (202.3)
Repayments of other borrowings. . . . . . . . . . . . . . . . . . . . (916.7) (905.5)
Net proceeds from issuance of Class B Common Stock . . . . . . . . . 565.0 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.9) (0.8)
-------- ---------
Net cash flows from financing activities . . . . . . . . . . . . . . . . 392.5 (51.4)
-------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . (1,925.6) 1,610.1
Cash and cash equivalents at beginning of year* . . . . . . . . . . . . . 2,744.5 289.9
-------- ---------
Cash and cash equivalents at end of first nine months* . . . . . . . . . $ 818.9 $ 1,900.0
======== =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 745.6 $ 214.6
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.0 65.0
Non-cash investing activities:
Liabilities assumed in connection with acquisitions of businesses . . . 3,920.3 248.5
Common shares issued in connection with acquisitions of businesses . . -- 348.6
*Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance businesses . . . . . . . . . . . . . . . . . . . . . . . . . $ 40.7 $ 16.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,703.8 273.9
-------- --------
$2,744.5 $ 289.9
======== ========
End of first nine months --
Finance businesses . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.2 $ 20.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810.7 1,879.2
-------- --------
$ 818.9 $1,900.0
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
4
<PAGE> 6
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
As more fully discussed in Note 2, on January 2, 1996, GEICO
Corporation ("GEICO") became a wholly-owned subsidiary of Berkshire Hathaway
Inc. ("Berkshire" or "Company"). Consequently, the Condensed Consolidated
Balance Sheet as of September 30, 1996 and the Consolidated Statements of
Earnings for the third quarter and first nine months of 1996 include the
accounts of GEICO. Prior to January 2, 1996, Berkshire owned approximately 51%
of the outstanding common stock of GEICO. Previously the investment in GEICO
common stock had been classified as an available-for-sale security and was
carried in Berkshire's Consolidated Balance Sheet at fair value.
Generally accepted accounting principles require that prior year
financial statements be restated when control of a business is obtained on a
"step-by-step" basis. Accordingly, the Condensed Consolidated Balance Sheet as
of December 31, 1995 and the Consolidated Statements of Earnings for the third
quarter and first nine months of 1995 have been restated to account for
Berkshire's previous investment in GEICO common stock under the equity method.
Berkshire's proportionate share of GEICO's net income reduced by amortization
of related goodwill is included in the 1995 Consolidated Statements of Earnings
as a component of interest, dividend and other investment income. The
principal effect of the restatement was to decrease shareholders' equity as of
December 31, 1995 by $478.4 million from the amount previously reported.
Reference is made to Berkshire's most recently issued Annual Report
that included information necessary or useful to understanding of Berkshire's
businesses and financial statement presentations. In particular, Berkshire's
significant accounting policies and practices were presented as Note 1 to the
Consolidated Financial Statements included in that Report.
Financial information in this Report reflects any adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair statement of results for the interim periods in
accordance with generally accepted accounting principles.
For a number of reasons, Berkshire's results for interim periods are
not normally indicative of results to be expected for the year. Most
significantly, the estimation error inherent to the process of determining
liabilities for unpaid losses of insurance subsidiaries can be relatively more
significant to results of interim periods than to results for a full year.
Realized investment gains/losses are 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. Variations in amount and timing of realized investment
gains/losses can cause significant variations in periodic net earnings.
NOTE 2. BUSINESS ACQUISITIONS
On January 2, 1996, GEICO became a wholly-owned subsidiary as a result
of the merger of an indirect wholly-owned subsidiary of Berkshire with and into
GEICO. The date of January 2, 1996 is hereafter referred to as the "Merger
Date". GEICO, through its subsidiaries, is a multiple line property and
casualty insurer, the principal business of which is underwriting private
passenger automobile insurance.
The merger was consummated pursuant to an Agreement and Plan of Merger
(the "Agreement") dated August 25, 1995. Pursuant to the Agreement, each
issued and outstanding common share of GEICO, except shares held by Berkshire
subsidiaries and GEICO, was converted into the right to receive $70 per share,
or an aggregate amount of $2.3 billion (the "Merger Consideration"). The
amount of Merger Consideration was based upon 33,284,733 outstanding shares
held by the public on the Merger Date.
As of the Merger Date, subsidiaries of Berkshire owned 34,250,000
common shares of GEICO, which were acquired in years prior to 1981 at an
aggregate cost of $45.7 million. Up to the Merger Date, neither Berkshire nor
its subsidiaries had acquired any shares of GEICO common stock since 1980.
However, Berkshire's ownership percentage, due to intervening stock repurchases
by GEICO, gradually increased from about 33% in 1980 to almost 51% immediately
prior to the Merger Date.
5
<PAGE> 7
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BUSINESS ACQUISITIONS (CONTINUED)
The merger has been accounted for by the purchase method. The excess of
the purchase cost over the fair value of net assets acquired at the Merger Date
is recorded as goodwill of acquired businesses and will subsequently be
amortized over 40 years. The following sets forth certain consolidated
earnings statement information on a pro forma basis for the first nine months
of 1995 as if the GEICO merger had been consummated, on the same terms, at the
beginning of that year. Dollars are in millions, except per share amounts.
<TABLE>
<S> <C>
Insurance premiums earned . . . . . . . $2,637.3
Total revenues . . . . . . . . . . . . 5,115.5
Net income . . . . . . . . . . . . . . 521.0
Earnings per share . . . . . . . . . . 440
</TABLE>
During 1995, the Company consummated mergers with Helzberg's Diamond
Shops, Inc. ("Helzberg's") and R.C. Willey Home Furnishings ("R.C. Willey") by
issuing 15,762 shares of its common stock (subsequently redesignated Class A
Common Stock) held in treasury in exchange for 100% of the common stock of each
of these companies. Helzberg's consists of a chain of 181 jewelry stores
operating in 28 states and R.C. Willey, through its seven locations, is the
dominant retailer of home furnishings in Utah.
Each of these mergers was accounted for by the purchase method and,
accordingly, the operating results of these businesses are included in the
Company's consolidated results of operations from the effective dates of the
mergers (Helzberg's -- April 30, 1995; R.C. Willey -- June 29, 1995). Had the
results of these businesses been included commencing with operations at the
beginning of 1995, the reported results would not have been materially
affected.
NOTE 3. RECAPITALIZATION
On May 6, 1996, Berkshire shareholders approved a recapitalization
plan which creates a new class of common stock, designated as Class B Common
Stock. In connection therewith, Berkshire's existing common stock was
redesignated as Class A Common Stock. Each share of Class A Common Stock is
convertible, at the option of the holder, into thirty shares of Class B Common
Stock.
On May 8, 1996, Berkshire completed its initial public offering of
517,500 shares Class B Common Stock. Berkshire received net proceeds from the
offering of $565.0 million. The Company expects that, in time, it will use the
net proceeds for acquisitions of businesses, for augmenting the capital of its
insurance subsidiaries, or for other general corporate purposes.
Since the Class B Common shares are equivalent to one-thirtieth (1/30)
of the economic rights of Class A Common shares, the issuance of the Class B
Common Stock was equivalent to the issuance of 17,250 Class A Common shares or
approximately 1.4% of Class A Common shares outstanding at the time of the
issuance of Class B Common shares.
Subsequent to the issuance of Class B Common Stock and as of September
30, 1996, shareholders formerly holding 4,438 shares of Class A Common Stock
elected to convert such shares into 133,140 shares of Class B Common Stock.
The following table summarizes Berkshire's common stock activity during the
first nine months of 1996.
<TABLE>
<CAPTION>
Shares of Shares of
Class A Common Stock Class B Common Stock
---------------------------------------- ----------------------
Issued Held in Treasury Outstanding Issued and Outstanding
--------- ---------------- ----------- ----------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . . 1,381,308 (187,796) 1,193,512 --
Issuance of Class B Common Stock . . . -- -- -- 517,500
Conversions of Class A Common Stock
to Class B Common Stock . . . . . . (4,438) -- (4,438) 133,140
--------- -------- --------- -------
Balance at September 30, 1996 . . . . . 1,376,870 (187,796) 1,189,074 650,640
========= ======== ========= =======
</TABLE>
6
<PAGE> 8
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENTS IN EQUITY SECURITIES
Data with respect to investments in equity securities are shown in the
tabulation below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Total cost . . . . . . . . . . . . . . . . . $ 8,703.4 $ 7,176.2
Gross unrealized gains . . . . . . . . . . . 16,908.4 13,933.4
Gross unrealized losses . . . . . . . . . . . (43.9) (92.0)
--------- ---------
Total carrying value . . . . . . . . . . . . $25,567.9 $21,017.6
========= =========
Carrying value:
American Express Company . . . . . . . . . $ 2,287.4 $ 2,046.3
Capital Cities/ABC, Inc. (a) . . . . . . . -- 2,467.5
The Coca-Cola Company . . . . . . . . . . . 10,175.0 7,425.0
The Walt Disney Company (a) . . . . . . . . 1,556.8 --
Federal Home Loan Mortgage Corporation . . 1,568.0 1,044.0
GEICO Corporation (b) . . . . . . . . . . . -- 1,175.8
The Gillette Company . . . . . . . . . . . 3,462.0 2,502.0
Wells Fargo & Company . . . . . . . . . . . 1,895.8 1,466.9
All others . . . . . . . . . . . . . . . . 4,622.9 2,890.1
--------- ---------
Total . . . . . . . . . . . . . . . . . . . $25,567.9 $21,017.6
========= =========
</TABLE>
(a) In March 1996, The Walt Disney Company ("Disney") completed its acquisition
of Capital Cities/ABC, Inc. Subsidiaries of Berkshire received aggregate
consideration of $2.5 billion, which included cash of $1.2 billion and
common shares of Disney with a value of $1.3 billion. The Consolidated
Statement of Earnings for the first nine months of 1996 includes a pre-tax
realized investment gain of $2.2 billion from the Disney transaction.
(b) The carrying value of GEICO common stock as of December 31, 1995 has been
restated from the amount previously reported. See Notes 1 and 2.
NOTE 5. DEFERRED INCOME TAX LIABILITY
The tax effects of significant items comprising the Company's net deferred
tax liability as of September 30, 1996 and December 31, 1995 are as follows (in
millions):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Relating to unrealized appreciation
of investments . . . . . . . . . . . . . . $5,980.2 $4,908.5
Other . . . . . . . . . . . . . . . . . . . . 744.0 157.0
-------- --------
6,724.2 5,065.5
Deferred tax assets . . . . . . . . . . . . . . . (595.4) (302.8)
-------- --------
Net deferred tax liability . . . . . . . . . $6,128.8 $4,762.7
======== ========
</TABLE>
7
<PAGE> 9
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. FINANCE BUSINESSES
Assets and liabilities of Berkshire's finance businesses are summarized
below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Assets
------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 8.2 $ 40.7
Installment loans and other receivables . . . . . . . . . . . . . . . . . 213.5 185.9
Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . 646.2 529.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.7
------ ------
$868.3 $756.7
====== ======
Liabilities
-----------
Borrowings under investment agreements and other debt . . . . . . . . . . $389.1 $523.6
Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320.4 116.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.9 44.9
------ ------
$747.4 $685.2
====== ======
</TABLE>
The preceding summarized financial data includes the commercial and
consumer finance activities conducted by the Scott Fetzer Financial Group and
its subsidiaries. Assets and liabilities of these businesses are summarized
below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 4.8 $ 40.5
Installment loans and other receivables * . . . . . . . . . . . . . . . . 215.3 334.9
Mortgage-backed securities, at cost . . . . . . . . . . . . . . . . . . 174.9 211.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.7
------ ------
$395.3 $587.8
====== ======
LIABILITIES
Borrowings under investment agreements and other debt . . . . . . . . . . $333.0 $523.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.4 29.9
------ ------
$359.4 $553.5
====== ======
</TABLE>
*Includes receivables from affiliated companies of $67.9 and $182.8 at
September 30, 1996 and December 31, 1995, respectively.
Net income from Scott Fetzer Financial Group businesses for the third
quarter and first nine months of 1996 and 1995 is summarized below (in
millions).
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------------------- ----------------------------
1996 1995 1996 1995
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $14.1 $14.3 $45.3 $42.0
Costs and expenses . . . . . . . . . . . . . . 12.1 11.4 38.0 32.8
----- ----- ----- -----
Income before income taxes . . . . . . . . . . 2.0 2.9 7.3 9.2
Income taxes . . . . . . . . . . . . . . . . . 0.7 1.0 2.5 3.2
----- ----- ----- -----
Net income . . . . . . . . . . . . . . . . . . $ 1.3 $ 1.9 $ 4.8 $ 6.0
===== ===== ===== =====
</TABLE>
8
<PAGE> 10
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. UNREALIZED APPRECIATION OF INVESTMENTS
Changes in "Unrealized appreciation of investments, net", the balance of
which is carried in shareholders' equity, were as follows during the third
quarter and first nine months of 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Increase in unrealized appreciation . . . . . . $ 1,434.1 $1,658.5 $ 2,783.7 $ 4,934.4
Increase in deemed applicable
income taxes . . . . . . . . . . . . . . . . (502.2) (583.1) (990.9) (1,737.2)
Increase in minority shareholders' interest . . (18.2) (7.6) (31.7) (37.9)
--------- -------- --------- ---------
Net increase . . . . . . . . . . . . . . . . 913.7 1,067.8 1,761.1 3,159.3
Balance at beginning of period . . . . . . . . 10,068.1 7,368.4 9,220.7 5,276.9
--------- -------- --------- ---------
Balance at end of third quarter . . . . . . . $10,981.8 $8,436.2 $10,981.8 $ 8,436.2
========= ======== ========= =========
</TABLE>
NOTE 8. ACQUISITION OF FLIGHTSAFETY INTERNATIONAL, INC.
On October 15, 1996, Berkshire and FlightSafety International, Inc.
("FlightSafety") announced that they had entered into a merger agreement
pursuant to which FlightSafety will be acquired by Berkshire. FlightSafety
provides high-technology training to operators of aircraft and ships throughout
the world. FlightSafety shareholders will have the option to receive for each
of their shares of FlightSafety either $50 in cash or $48 in Berkshire Class A
or Class B Common Stock for a total value of approximately $1.5 billion,
subject to a limitation that the amount of cash to be issued will not exceed
58% of the total value of the consideration to be received by FlightSafety
shareholders.
Consummation of the merger is subject to the approval of two-thirds of the
outstanding shares of FlightSafety and certain other customary conditions. It
is expected that the transaction will become effective late in December, 1996
at which time FlightSafety will become a wholly-owned subsidiary of Berkshire.
The merger will be accounted for by the purchase method of accounting, and,
accordingly, the operating results of FlightSafety will be included in
Berkshire's consolidated financial statements from the effective date of the
merger.
9
<PAGE> 11
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter and first nine months of the current and
prior year are disaggregated in the following table. Amounts are in millions
and each figure is income tax effected.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Insurance, except realized investment gain . . . . $ 165.4 $ 120.4 $ 454.5 $ 331.3
Manufacturing, merchandising and services . . . . . 40.0 33.9 123.2 111.5
Unallocated income/expense, net . . . . . . . . . . 8.9 5.7 22.7 17.9
Interest expense * . . . . . . . . . . . . . . . . (12.9) (8.7) (45.1) (25.2)
-------- -------- --------- --------
Earnings before realized investment gain . . . 201.4 151.3 555.3 435.5
Realized investment gain . . . . . . . . . . . . . 62.6 43.2 1,568.6 90.2
-------- ------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . $ 264.0 $ 194.5 $2,123.9 $ 525.7
======= ======= ======== ========
</TABLE>
* For purposes of the above table, interest expense of finance businesses is
netted against the directly related service activity revenues.
INSURANCE GROUP
The after tax figures shown above for Insurance Group earnings, except
realized investment gain, are aggregated in the following table. Dollar
amounts are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------ -----------------------
1996 1995 1996 1995
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Premiums earned from:
Direct insurance . . . . . . . . . . . . . . . $ 854.3 $ 60.4 $2,483.7 $ 176.3
Reinsurance assumed . . . . . . . . . . . . . . 116.9 113.4 421.1 403.1
-------- -------- -------- --------
$ 971.2 $ 173.8 $2,904.8 $ 579.4
======== ======== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance . . . . . . . . . . . . . . . $ 65.1 $ 6.9 $ 155.3 $ 10.4
Reinsurance assumed . . . . . . . . . . . . . . (35.3) (35.8) (47.6) (58.0)
-------- -------- -------- --------
Total underwriting gain (loss) . . . . . . . 29.8 (28.9) 107.7 (47.6)
Net investment income . . . . . . . . . . . . . . . 191.4 166.0 510.3 426.6
Goodwill amortization . . . . . . . . . . . . . . . (10.5) -- (31.9) --
-------- -------- -------- --------
Earnings before income taxes . . . . . . . . 210.7 137.1 586.1 379.0
Income tax expense . . . . . . . . . . . . . . . . 43.4 15.2 126.1 42.1
Minority interest . . . . . . . . . . . . . . . . . 1.9 1.5 5.5 5.6
-------- -------- -------- --------
Net earnings from Insurance,
except realized investment gain . . . . . . . . $ 165.4 $ 120.4 $ 454.5 $ 331.3
======== ======== ======== ========
</TABLE>
As discussed more fully in the Notes to Interim Consolidated Financial
Statements, Berkshire acquired control of GEICO Corporation ("GEICO") in
January, 1996. The inclusion of GEICO's accounts in Berkshire's consolidated
financial statements in 1996 has significantly impacted the revenues and
operating results of Berkshire's Insurance Group.
In direct insurance activities, Insurance Group members assume risks of
loss from parties who are directly subject to the risks. In reinsurance
activities, the members assume defined portions of similar or dissimilar risks
to which other insurers or reinsurers have subjected themselves in their own
insuring activities.
GEICO, through its subsidiaries, 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 or
through the mail. This is a significant element in GEICO's strategy to be a
low cost provider of such coverages.
10
<PAGE> 12
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INSURANCE GROUP (CONTINUED)
GEICO's underwriting results for the third quarter and first nine months of
1996 are summarized below. Amounts for 1995 periods are shown for comparative
purposes, although such amounts are not included in Berkshire's Consolidated
Financial Statements. Dollar amounts are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------------------ -----------------------------------
1996 1995 1996 1995
---------------- --------------- ---------------- ---------------
Amount % Amount % Amount % Amount %
-------- ----- ------ ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums earned . . . . . . . . $780.5 100.0 $710.3 100.0 $2,278.1 100.0 $2,057.9 100.0
------ ----- ------ ----- -------- ----- -------- -----
Losses and loss expenses . . . 601.3 77.1 558.2 78.6 1,808.1 79.4 1,668.5 81.1
Underwriting expenses . . . . . 125.0 16.0 113.5 16.0 348.3 15.3 315.8 15.3
------ ----- ------ ----- -------- ----- -------- -----
726.3 93.1 671.7 94.6 2,156.4 94.7 1,984.3 96.4
------ ===== ------ ===== -------- ===== -------- =====
Underwriting gain . . . . . . . $ 54.2 $ 38.6 $ 121.7 $ 73.6
====== ====== ======== ========
</TABLE>
Intensified marketing efforts for GEICO's voluntary preferred-risk,
standard and non-standard-risk private passenger auto insurance have
contributed to the increases in business accepted. Such efforts have resulted
in in-force policy growth over the past twelve months of 6.3% in preferred-risk
auto and 29.2% in the standard and non-standard auto lines. Recent trends
indicate that growth in GEICO's voluntary auto lines may continue at
approximately these levels for the remainder of 1996 and into 1997.
Berkshire's other direct insurance businesses produced earned premiums of
$205.6 million and $176.3 million for the first nine months of 1996 and 1995,
respectively. Premiums earned by Berkshire's other direct insurance businesses
for the third quarter totaled $73.8 million in 1996 and $60.4 million in 1995.
Most of the increases in premiums earned in 1996 periods compared to 1995
periods derived from the Group's professional/specialty risk and credit
insurance businesses.
For the first nine months of 1996 and 1995, underwriting gains from
non-GEICO direct insurance businesses were $33.6 million and $10.4 million,
respectively. For the third quarter, these operations produced net underwriting
gains of $10.9 million in 1996 and $6.9 million in 1995. The increases in
underwriting gains in 1996 periods derived mainly from the traditional motor
vehicle and professional/specialty risk businesses.
Premiums earned from reinsurance activities in the first nine months and
third quarter of 1996 exceeded amounts earned in the corresponding 1995 periods
by 4.5% and 3.1%, respectively. Premiums earned in the first nine months from
catastrophe excess-of-loss contracts totaled $145.4 million in 1996 and $133.5
million in 1995. Premiums earned from other excess-of-loss, quota-share, and
structured settlement reinsurance contracts totaled $275.7 million and $269.6
million for the first nine months of 1996 and 1995, respectively. Reinsurance
premiums earned from both catastrophe and non-catastrophe reinsurance in the
third quarter of 1996 were relatively unchanged from amounts earned in 1995's
third quarter.
Underwriting results from reinsurance activities include gains from
catastrophe excess-of-loss policies of $80.6 million and $73.8 million for the
first nine months of 1996 and 1995, respectively. Relatively minor underwriting
gains were produced from such policies in the third quarter of 1996 and 1995.
During the fourth quarter of 1996, many of the catastrophe policies will expire
and the related premiums will be earned reflecting the Group's practice to
defer earning catastrophe premiums until the earlier of a loss or policy
expiration. In the absence of any fourth quarter catastrophe losses, this
business could produce a pre-tax underwriting gain of approximately $90 million
in 1996's fourth quarter. This compares to 1995's fourth quarter pre-tax gain
of $78.3 million.
11
<PAGE> 13
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INSURANCE GROUP (CONTINUED)
Net underwriting losses from other reinsurance activities totaled $73.7
million and $78.7 million for the first nine months of 1996 and 1995,
respectively. For the third quarter, net underwriting losses from these
coverages were $25.4 million in 1996 and $22.9 million in 1995. Generally,
time-value-of-money concepts are important considerations in establishing
premiums for non-catastrophe policies due to the anticipation of more extended
claim payment periods. Underwriting losses often occur as the estimates of
losses and loss adjustment expenses are established on an undiscounted basis,
often in amounts exceeding premiums. Nevertheless, this business is accepted
because of the significant amounts of investable policyholder funds ("float")
generated.
Charges related to the amortization of deferred charges re reinsurance
assumed and accretion of discounted structured settlement liabilities are a
recurring element of Berkshire's reinsurance underwriting results. These
charges reflect recognition of time-value-of-money concepts. For the first nine
months, amortization and accretion charges were $54.5 million in 1996 and $53.1
million in 1995. For the third quarter, such charges were $17.8 million in
1996 and $18.8 million in 1995.
The accompanying consolidated balance sheet includes liabilities of about
$6.2 billion representing estimated unpaid losses and loss adjustment expenses
related to insurance and reinsurance activities. Subsequent loss payments will
likely differ and further revisions of the estimates will occur. These
revisions will be reflected in earnings in the period made and may have a
substantial effect on future periodic underwriting results.
The Insurance Group continues to generate significant levels of investment
income, reflecting large amounts of invested assets. Investable policyholder
funds (or "float") at September 30, 1996 approximated $6.9 billion and included
over $2.5 billion added upon the acquisition of GEICO in January 1996. Net
investment income of the Insurance Group for the third quarter and first nine
months of 1996 includes the investment results of GEICO. Net investment income
of GEICO was $57.1 million for the third quarter of 1996 and $163.1 million for
the first nine months of 1996. In 1995 periods, net investment income of the
Insurance Group included the equity in net earnings of GEICO -- $33.1 million
for the third quarter and $85.5 million for the first nine months.
Investment income for the third quarter of 1996 also includes dividends of
$25 million related to Berkshire's investment in USAir Group, Inc. ("USAir")
preferred stock. As previously reported, during 1994 USAir suspended dividend
payments on this investment. Subsequent to September 30, 1996, Berkshire
received an additional dividend payment of $22 million which will be reflected
in fourth quarter earnings. After receipt of the latter payment, USAir
dividends which remain in arrears are approximately $37 million.
MANUFACTURING, MERCHANDISING AND SERVICES
Results of operations of Berkshire's diverse non-insurance businesses are
aggregated in the following table. Dollar amounts are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- -------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $728.3 100.0 $688.2 100.0 $2,157.0 100.0 $1,890.3 100.0
Costs and expenses . . . . . . 660.7 90.7 629.2 91.4 1,947.6 90.3 1,700.1 89.9
------ ----- ------ ----- -------- ----- -------- -----
Earnings before income taxes . 67.6 9.3 59.0 8.6 209.4 9.7 190.2 10.1
Applicable income taxes . . . . 26.5 3.6 24.0 3.5 83.1 3.9 75.7 4.0
Applicable minority interest . 1.1 0.2 1.1 0.2 3.1 0.1 3.0 0.2
------ ----- ------ ----- -------- ----- -------- -----
Net earnings . . . . . . . . . $ 40.0 5.5 $ 33.9 4.9 $ 123.2 5.7 $ 111.5 5.9
====== ===== ====== ===== ======== ===== ======== =====
</TABLE>
12
<PAGE> 14
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
MANUFACTURING, MERCHANDISING AND SERVICES (CONTINUED)
Revenues from these several and diverse business activities during
1996's third quarter and first nine months were greater by $40.1 million (5.8%)
and $266.7 million (14.1%) than revenues recorded during the corresponding 1995
periods. The comparative increase in revenues for the first nine months is
primarily due to the acquisitions during 1995's second quarter of Helzberg's
Diamond Shops, Inc. ("Helzberg's") and R.C. Willey Home Furnishings ("R.C.
Willey"). Helzberg's operates a chain of 181 jewelry stores and R.C. Willey is
the dominant retailer of home furnishings in Utah. (See Notes to Interim
Consolidated Financial Statements for additional information regarding these
acquisitions). The comparative increase in third quarter revenues arose as a
result of increases in all of Berkshire's reportable segments except for the
"encyclopedias, other reference materials" segment.
Net earnings from this group of businesses increased $6.1 million
(18.0%) during 1996's third quarter and $11.7 million (10.5%) during 1996's
first nine months as compared to the prior year. The inclusion of Helzberg's
and R.C. Willey for the entire first nine months of 1996 had a favorable impact
on comparative results for the first nine months as did improved comparative
results for Berkshire's home cleaning systems segment. However, somewhat
offsetting these increases were comparative declines in the first nine months
in Berkshire's shoe and newspaper segments.
REALIZED INVESTMENT GAIN
Realized investment gain/loss 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.
The Consolidated Statement of Earnings for the first nine months of
1996 reflects a pre-tax realized investment gain of $2.4 billion ($1.6 billion
after tax). Most of this gain resulted from The Walt Disney Company's
("Disney") acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). Prior
to the acquisition, subsidiaries of Berkshire owned common stock of Capital
Cities which had been acquired in 1986 for an aggregate cost of $345.0 million.
In exchange for the Capital Cities common stock, Berkshire subsidiaries
received cash and Disney common stock having an aggregate value of $2.5
billion.
While the effect of this transaction is material to the Consolidated
Statement of Earnings, the completion of the acquisition had a minimal impact
on Berkshire's shareholders' equity. This is due to the fact that Berkshire's
investment in Capital Cities had been carried in the prior periods'
consolidated financial statements at market value with unrealized gains, net of
tax, reported as a separate component of shareholders' equity. As of December
31, 1995, the pre-tax unrealized gain related to Berkshire's investment in
Capital Cities was approximately $2.1 billion.
FINANCIAL CONDITION
On May 8, 1996, Berkshire completed a public offering of a new class
of common stock. The net proceeds from the offering were approximately $565.0
million. The Company expects that in time it will use the net proceeds for
acquisitions of businesses, for augmenting the capital of its insurance
subsidiaries, or for other general corporate purposes.
On October 15, 1996, Berkshire and FlightSafety International, Inc.
("FlightSafety") announced that they had entered into a merger agreement
pursuant to which FlightSafety will be acquired by Berkshire. The form of the
aggregate $1.5 billion consideration to be paid will be dependent on elections
of FlightSafety shareholders who will have an option of receiving either $50 in
cash or $48 in Berkshire Class A or Class B Common Stock for each of their
shares. Additionally the total cash consideration cannot exceed approximately
$870 million. It is anticipated that the merger will become effective in late
December 1996.
13
<PAGE> 15
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/96
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
Berkshire's balance sheet continues to reflect significant liquidity
and above average capital strength. Shareholders' equity at September 30,
1996, was $21.2 billion or $17,500 per equivalent Class A Common share.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K
Form 8-K Filed July 26, 1996 -- Item 5 - Other Events - Financial
Statements and exhibits. Included in the report are Restated
Consolidated Balance Sheets of Berkshire Hathaway Inc. as of December
31, 1995 and 1994 and related Restated Consolidated Statements of
Earnings and Cash Flows for each of the three years in the period
ending December 31, 1995, together with the Notes to the Consolidated
Financial Statements and the related Independent Auditors' Report.
SIGNATURE
Pursuant to the requirement 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.
------------------------------------
(Registrant)
Date November 11, 1996 /s/ MARC D. HAMBURG
------------------------------------
(Signature)
Marc D. Hamburg, Vice President
and Principal Financial Officer
14
<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-Q 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 811
<SECURITIES> 32,108
<RECEIVABLES> 1,476
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,207
<CURRENT-LIABILITIES> 0
<BONDS> 1,435
0
0
<COMMON> 7
<OTHER-SE> 21,182
<TOTAL-LIABILITY-AND-EQUITY> 39,207
<SALES> 2,137
<TOTAL-REVENUES> 5,059
<CGS> 1,350
<TOTAL-COSTS> 4,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 3,186
<INCOME-TAX> 1,045
<INCOME-CONTINUING> 2,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124
<EPS-PRIMARY> 1,766
<EPS-DILUTED> 1,766
</TABLE>
