<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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)
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
Class A Common Stock, $5.00 Par Value New York Stock Exchange
Class B Common Stock, $0.1667 Par Value New York Stock Exchange
1% Senior Exchangeable Notes due December 2, 2001 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 - $46,812,567,000*
Indicate number of shares outstanding of each of the Registrant's classes of
common stock:
March 19, 1998 -- Class A Common Stock, $5 par value............1,197,970 shares
March 19, 1998 -- Class B Common Stock, $0.1667 par value.......1,296,398 shares
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 May 4, 1998 Part III
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* This aggregate value is computed at the last sale price of the common stock on
March 19, 1998. It does not include the value of Class A Common Stock (546,792
shares) and Class B Common Stock (92 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.
<PAGE> 2
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 is the property and casualty insurance
business conducted nationwide on a direct basis and worldwide on a reinsurance
basis through a number of subsidiaries collectively referred to in this report
as the Berkshire Hathaway Insurance Group ("Insurance Group").
Additionally, Berkshire Hathaway Inc. publishes the Buffalo News, a daily
and Sunday newspaper in upstate New York. Other business activities conducted by
non-insurance subsidiaries include training services to operators of aircraft
and ships (FlightSafety International), manufacture and marketing of home
cleaning systems and related accessories (sold principally under the Kirby
name), manufacture and sale of boxed chocolates and other confectionery products
(See's Candies), retailing of home furnishings (Nebraska Furniture Mart, R.C.
Willey Home Furnishings and Star Furniture Company), and manufacture, import and
distribution of footwear (H. H. Brown Shoe Company, Lowell Shoe, Inc. and Dexter
Shoe Company). Berkshire also owns 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.
PROPERTY AND CASUALTY INSURANCE AND REINSURANCE BUSINESS
Berkshire's insurance and reinsurance businesses are conducted through 20
separate property and casualty insurance companies. In 1996, the Insurance Group
expanded significantly as a result of the January 1996 acquisition of GEICO
Corporation ("GEICO Corp.").
The Insurance Group maintains capital strength at unparalleled levels,
significantly higher than normal in the industry. This strength differentiates
Insurance Group members from their competitors. For example, the Insurance
Group's ratio of net premiums written to year-end statutory surplus was
approximately 13%in 1997 and 16% in 1996. In each year from 1993 through 1995,
the Insurance Group's ratio was less than 10%. Comparatively, the industry's
average net premiums-to-surplus ratio from 1992 through 1996 ranged from 105% to
140%, based upon statistics published by A.M. Best & Company. The Insurance
Group's aggregate statutory surplus has grown from $10.4 billion at year-end
1992 to over $37 billion at year-end 1997. Insurance Group members are rated AAA
by Standard & Poor's Corporation with respect to their claims-paying abilities
and are rated A++ (superior) by A.M. Best with respect to their financial
condition and operating performance. The obvious margins of safety thus provided
to clients of the Insurance Group are particularly persuasive in marketing
reinsurance contracts.
Underwriting operations of the Insurance Group are comprised of three
sub-groups: (1) the direct insurance operations of GEICO Corp. and its
subsidiaries, (2) the reinsurance assumed business of National Indemnity Company
and certain affiliated companies ("National Indemnity"), and (3) various other
direct insurance businesses. In direct insurance activities, Insurance Group
members assume defined portions of risk of loss from persons or organizations
that are directly subject to the risks. In reinsurance activities, Insurance
Group members assume defined portions of similar or dissimilar risks that other
insurance or reinsurance companies have subjected themselves in their own
insuring activities.
DIRECT INSURANCE OF GEICO CORP. -- 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 dated August 25,
1995, 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.
1
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ITEM 1. BUSINESS (CONTINUED)
PROPERTY AND CASUALTY INSURANCE AND REINSURANCE BUSINESS (CONTINUED)
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. Collectively, GEICO Corp. companies are
currently the seventh largest auto insurer, in terms of premium volume, in the
United States. In 1997, aggregate net premiums written totaled $3.6 billion.
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. To a lesser extent,
GEICO writes homeowners, fire and boat owners insurance (businesses that GEICO
has, since 1995, substantially reduced and plans to fully exit by 1999), and
personal umbrella insurance for all 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 or through the
mail.
Other active subsidiaries of GEICO Corp. include a variety of smaller
entities engaged in the sale of insurance and insurance related products, real
estate management, miscellaneous investment ventures, and other general
corporate activities.
Seasonal variations in GEICO Corp.'s property and casualty insurance
businesses are not significant. However, extraordinary weather conditions or
other factors may affect the frequency or severity of automobile claims and, to
a diminishing degree, of homeowners claims. Weather related catastrophes can
severely affect periodic underwriting results.
GEICO Corp. companies compete most directly with companies that
concentrate on preferred-risk private passenger automobile insurance. To an
increasing degree, GEICO Corp. companies compete with companies that write
private passenger automobile insurance for standard and non-standard risks.
Private passenger automobile insurance is highly competitive and
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' cost efficient direct response marketing methods and emphasis on
customer satisfaction enable it to offer competitive rates. 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, or overestimate the amount of investment income they will earn on
premiums before the claims are paid. Although certain rates are subject to
regulatory approval, GEICO Corp. companies' six-month policy terms permit them
to effectively manage premium rate changes.
GEICO Corp. companies place great emphasis on customer satisfaction.
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.
REINSURANCE ASSUMED -- The reinsurance division of National Indemnity,
located in Stamford, Connecticut, provides excess-of-loss and quota-share
reinsurance to other property and casualty insurers and reinsurers. Generally,
an excess-of-loss reinsurance contract provides indemnification to the reinsured
party against all or a portion of covered losses, subject to a specified limit,
in excess of a specified retention. A quota-share reinsurance contract provides
indemnification to the reinsured party on a pro-rata basis with respect to each
covered loss under the contract. A quota-share contract may also provide for
aggregate limits of indemnification.
National Indemnity's clients and risks assumed are located throughout the
world, but are primarily within the United States. Minimal organizational but
huge financial resources are currently devoted to this business. From 1993
through 1997, annual net premiums written from reinsurance activities have
ranged from $528.7 million (in 1993) to $955.4 million (in 1997). During the
past five years, reinsurance assumed business included considerable amounts from
catastrophe excess-of-loss contracts.
2
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ITEM 1. BUSINESS (CONTINUED)
PROPERTY AND CASUALTY INSURANCE AND REINSURANCE BUSINESS (CONTINUED)
In the early 1990's, Berkshire management perceived that declines in
industry capacity occurred with respect to catastrophe excess-of-loss
reinsurance coverages. Since then, National Indemnity wrote a number of such
policies. In recent years, the amount of capital (i.e. capacity) devoted to the
catastrophe excess-of-loss reinsurance business by the industry has increased,
including additional capital raised by newly-formed entities. In addition, new
types of catastrophe risk management products have been introduced in the
financial markets. 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-of-loss reinsurance contracts can
produce considerable premiums.
A catastrophe excess-of-loss 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 in excess of specified retentions and a
single loss event may produce losses under a number of contracts. Generally,
National Indemnity does not cede any of the risks it has assumed under
catastrophe excess-of-loss reinsurance contracts to third-party reinsurers, due
to perceived uncertainties in recovering amounts from reinsurers that are
financially weaker. As a result, the catastrophe excess-of-loss 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
the Insurance Group's extraordinary financial strength, are believed to be the
primary reasons why National Indemnity has become a major provider of such
coverages.
In National Indemnity's non-catastrophe reinsurance business, the concept
of time-value-of money is 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. Under the terms of most
contracts, limits of indemnification may be subject to minimum and maximum
payment amounts. Minimum payment requirements may originate in commutation (or
termination) clauses that call for repayments to the reinsureds, on specified
dates, of amounts not otherwise paid as losses. Transaction amounts and limits
of indemnification are likely to be large and contracts may span a number of
years. This business is accepted, in large part, because of the substantial
amounts of policyholder funds ("float") that it produces.
OTHER DIRECT INSURANCE BUSINESSES -- In Berkshire's other direct insurance
businesses, Insurance Group members underwrite various lines of insurance
coverages for primarily commercial accounts. National Indemnity and certain
affiliates provide motor vehicle insurance to commercial truck and bus
operators, which is written nationwide primarily through insurance agents and
brokers. This business is based in Omaha, Nebraska.
National Indemnity and certain other affiliates also solicit and
underwrite certain unusual or especially large property and casualty risks. This
business is referred to as the "Professional Liability and Specialty Risk
Division." In recent years, most of the insurance written by the Professional
Liability and Specialty Risk Division has been from individually negotiated
property catastrophe insurance policies issued to commercial enterprises.
Other Insurance Group members market various commercial coverages for
standard risks to insureds in their state of domicile and an increasing number
of other states. These operations are referred to as the "Homestate Businesses"
and are based in Colorado and Nebraska, with branch operations located in
several other states. In addition, Cypress Insurance Company, based in
California, writes principally workers' compensation policies for insureds
located in California and a small number of other states.
At the end of 1992, Berkshire acquired 82% of Central States Indemnity
Company of Omaha ("CSI"). CSI, located in Omaha, Nebraska, offers credit card
credit insurance marketed primarily through credit card issuers nationwide. CSI
insures the credit card debt of policyholders should they become unemployed or
disabled.
In mid-1996, Berkshire acquired, through an 80.1% owned affiliate, Kansas
Bankers Surety Company ("KBS"). KBS, based in Topeka, Kansas, provides
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.
3
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ITEM 1. BUSINESS (CONTINUED)
PROPERTY AND CASUALTY INSURANCE AND REINSURANCE BUSINESS (CONTINUED)
INVESTMENTS -- The volume of reinsurance assumed business in recent years, plus
the acquisition of GEICO Corp. in 1996, has produced an exceptional increase in
the amount of "float" held by the Insurance Group. "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 re reinsurance assumed, and related prepaid
income taxes. The amount of float has grown from about $2.5 billion at the end
of 1992 to about $7.3 billion at the end of 1997. The increases in the amounts
of float plus the reinvested net earnings of the Insurance Group has generated
meaningful increases in the levels of investments and investment income.
Investment portfolios of Insurance Group members include meaningful equity
ownership percentages of other publicly traded companies. Such investments at
year-end 1997 include approximate ownership percentages of the common or capital
stock of the following companies: American Express Company (10.5%), The
Coca-Cola Company (8%), Federal Home Loan Mortgage Corporation ("Freddie Mac")
(9.5%), The Gillette Company (8.5%), The Washington Post Company (16.5%), and
Wells Fargo & Company (8%). Much information about these companies is available,
including information released from time-to-time by the companies themselves.
NON-INSURANCE BUSINESSES OF BERKSHIRE
Registrant's six non-insurance "reportable business segments" are described
below.
AVIATION TRAINING -- 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, 17,728 shares of Berkshire Class A Common
Stock and 112,655 shares of Berkshire 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
shiphandling 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 element 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 more than 200 civil aviation simulators and training devices. FSI's
training businesses are conducted primarily in the United States, with
facilities located in 20 states. FSI also operates training facilities in
Canada, China, France, United Kingdom and the Netherlands.
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.
During 1997, FSI and Boeing Co., a leading airplane manufacturer, established a
joint venture to provide pilot and aircrew training for Boeing's new airplane
sales and airline customers around the world.
CANDY - 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 - over 200 in number,
located in 11 western and midwestern states, including Hawaii - and by mail
order. A meaningful volume of candy business is also recorded for direct
shipments made nationwide from its California based quantity order distribution
centers.
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
sales at reduced prices to businesses and other organizations augment the
extremely high retail store and mail order volume during December.
4
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
HOME CLEANING SYSTEMS -- This segment of Berkshire's business is
principally represented by Kirby home cleaning systems and products, sold to
approximately 835 independent authorized factory distributors in the United
States and foreign countries. These factory distributors sell to the consumer or
to independent authorized area distributors who sell to the consumer. Sales are
made through in-the-home demonstrations by independent salespeople.
Substantially all of Kirby's sales to distributors are for cash. A wholly-owned
Berkshire subsidiary offers financing to about 720 authorized distributors in
the United States. 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 the prices are generally higher than
those of most of its major competitors.
This segment also includes the Douglas Products business that manufactures
specialty vacuum cleaners such as electric hand held and cordless vacuum
cleaners. Channels of distribution for these products include retail discount
stores, catalogue showrooms, hardware stores and department stores.
Additionally, Cleveland Wood Products, a manufacturer of vacuum cleaner brushes
and bags, is included in this segment.
HOME FURNISHINGS -- The Nebraska Furniture Mart ("NFM"), 80% owned by
Berkshire, operates a home furnishing retail business from a very large -
approximately 400,000 square feet - retail complex and sizable warehouse
facilities in Omaha, Nebraska. Types of merchandise offered by NFM include
furniture, major appliances, electronics, computers, floor coverings, and other
home furnishings. The business serves a trade area with a radius around Omaha of
approximately 300 miles. An important feature of the business is its ability to
control its costs and to produce a high business volume from offerings of
significant value to its customers, while realizing highly satisfactory
earnings.
The Home Furnishings segment expanded significantly in June 1995, when
Berkshire acquired 100 percent of the stock of R.C. Willey Home Furnishings
("R.C. Willey"). R.C. Willey, founded in 1932, is the dominant home furnishings
retailer in Utah. R.C. Willey sells basically the same types of products as NFM.
In addition, R.C. Willey provides significant levels of customer financing which
compliment its retail operations. Based in Salt Lake City, R.C. Willey operates
six full retail stores, a distribution center and two clearance facilities.
These facilities -- which include more than 585,000 square feet of retail space
- -- are strategically located within a 35 mile radius of Salt Lake City and serve
customers in 4 western states.
The Home Furnishings segment expanded again in July 1997, when Berkshire
acquired 100 percent of the outstanding stock of Star Furniture Company
("Star"). Star's retail, office and warehouse facilities, which include about
460,000 square feet of retail space in twelve locations, are located primarily
in Houston, Texas. Star is a major furniture retailer in that market.
NEWSPAPER -- The Buffalo News, a division of Berkshire, 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, 66% on weekdays
and 81% 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 1997 this percentage
was approximately 57%.
SHOES -- 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. 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.
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
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 entirely 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. 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 95 factory outlet stores located in 16 states and Puerto Rico.
The customer base is composed of independent retailers and department
stores throughout the United States. Dexter's major customers are large
department stores, including J. C. Penney and Nordstroms, specialty retailers
such as Famous Footwear and military PX's. Additionally, Dexter exports its
products to numerous foreign countries.
OTHER NON-INSURANCE ACTIVITIES not identified with Berkshire business
segments include the more than one dozen diverse manufacturing businesses of The
Scott Fetzer Company. The largest revenue producer of these businesses is
Campbell Hausfeld/Scott Fetzer Company, which manufactures and markets a variety
of products including air compressors, air tools, painting systems, pressure
washers, welders and generators.
In April 1995, Berkshire acquired 100 percent of the stock of Helzberg's
Diamond Shops, Inc. ("Helzberg's"). Helzberg's, based in North Kansas City,
Missouri, operates a chain of over 180 retail jewelry stores in twenty-eight
states. Most of Helzberg's stores are located in malls or power strip centers,
and operate under the name Helzberg Diamonds. In addition, for many years
Berkshire has owned an 85% interest in Borsheim's, a long established, high
volume retailer of fine jewelry, watches, crystal, china, stemware, flatware,
gifts and collectibles located in Omaha, Nebraska.
Berkshire's finance group consists of several entities that are engaged in
a variety of commercial and consumer financing activities. Included in this
group is Berkshire Hathaway Life Insurance Company of Nebraska. Since 1993, this
company has primarily sold annuity contracts that provide for periodic payments
to claimants associated with settlements of personal injury claims.
Additionally, the finance group includes Scott Fetzer Financial Group, Inc.,
which for many years through a subsidiary has provided financing of receivables
related to products sold by the Home Cleaning Systems segment.
On October 21, 1997, Berkshire and International Dairy Queen, Inc. ("IDQ")
executed a definitive merger agreement, pursuant to which Berkshire would
acquire IDQ through the merger of IDQ with and into a wholly-owned subsidiary of
Berkshire. IDQ shareholders received total merger consideration of approximately
$587.8 million, consisting of $ 264.5 million in cash and the remainder in
Berkshire Class A and B stock. The merger was completed on January 7, 1998.
IDQ develops, licenses and services a system of approximately 5,800 Dairy
Queen stores that feature hamburgers, hot dogs, various dairy desserts and
beverages. The company 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. The company also directly owns and operates
approximately 50 stores. 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.
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
IDQ also sells equipment 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 50 stores operating under the name of Karmelkorn featuring
popcorn and other snacks items.
Berkshire Hathaway Inc. and subsidiaries employed approximately 38,000
persons on an equivalent full-time basis at December 31, 1997.
ADDITIONAL INFORMATION WITH RESPECT TO BERKSHIRE'S BUSINESSES
The amounts of revenue, operating profit and identifiable assets
attributable to each of the seven aforementioned business segments are included
in Note 15 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 3 and 4 to Registrant's Consolidated Financial Statements.
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
Insurance Omaha, NE, Chevy Chase, Offices Owned 1,773,000
MD, Woodbury, NY,
Macon, GA, Dallas, TX,
& Fredricksburg, VA
Omaha, NE & various Offices and Leased 384,000
locations throughout drive-in claims
the United States facilities
Aviation Training 20 U.S. States, Canada, Training Facilities Owned 307,000
Netherlands, France, Offices/Training Leased 1,318,000
China and United Kingdom Facilities
Oklahoma and Missouri Manufacturing Owned
and leased 84,000
Candy Los Angeles, CA & South Plants/Warehouses/
San Francisco, CA Offices Owned 625,000
California Warehouses/Offices Leased 393,000
California & other Retail outlets and Leased 350,000
locations principally quantity order centers
in western states (210 locations)
Newspaper Buffalo, NY Offices Owned 195,000
Buffalo, NY Printing Plant Owned 150,000
New York &
Washington, D.C. Offices/Warehouses Leased 85,000
</TABLE>
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ITEM 2. PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
Owned Approx.
or Square
Business Location Type of Property Leased Footage
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home Omaha, NE, Salt Lake City, Retail Stores Owned 883,000
Furnishings UT & other locations Warehouses/Offices Owned 1,756,000
in UT & NE
Salt Lake City, UT, Retail Stores Leased 569,000
Houston, TX and other Warehouses/Offices Leased 469,000
locations in UT, TX & IA
Home Cleaning Cleveland, OH,
Systems Andrews, TX & Plants/Warehouses/ Owned 465,000
Walnut Ridge, AR Offices
Cleveland, OH Warehouses/Offices Leased 23,000
Canada & England Warehouses/Offices Leased 22,000
Shoes Morganton, NC, Womelsdorf,
PA, Martinsburg, PA,
Hudson, NH, Dexter, ME & Plants/Warehouses/
Canada Offices Owned 1,687,000
Greenwich, CT, Ontario, CA,
Morganton, NC, Skowhedgan,
ME, Newton, MA,
Northkingston, RI
Canada, Puerto Rico & Plants/Warehouses/
Dominican Republic Offices Leased 771,000
46 U.S. locations Retail Stores Owned 316,000
67 U.S. & Puerto Rico locations Retail Stores Leased 427,000
</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
8
<PAGE> 10
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 67 Chairman of the Board 1970
Marc D. Hamburg 48 Vice President 1992
Charles T. Munger 74 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>
1997 1996
------ ------
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.............. $37,900 $33,000 $1,264 $1,088 $38,000 $ 29,800 N/A N/A
Second Quarter............. 48,600 35,900 1,624 1,197 36,000 30,000 $1,220 $ 990
Third Quarter.............. 48,300 41,300 1,608 1,377 33,500 30,500 1,117 1,005
Fourth Quarter............. 47,200 42,500 1,565 1,400 36,500 31,000 1,175 1,036
</TABLE>
*Class B Common Stock was first issued on May 8, 1996. At that time Berkshire's
then outstanding common stock was redesignated Class A Common Stock.
SHAREHOLDERS
The Company had approximately 9,000 record holders of its Class A Common Stock
and 8,600 record holders of its Class B Common Stock at March 6, 1998. Record
owners included nominees holding at least 240,000 shares of Class A Common Stock
and 1,100,000 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.
9
<PAGE> 11
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>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned ................. $ 4,761.1 $ 4,117.8 $ 957.5 $ 923.2 $ 650.7
Sales and service revenues ................ 3,577.5 3,061.2 2,755.9 2,351.9 1,962.9
Interest and dividend income .............. 953.3 811.9 629.2 519.0 520.7
Income from finance businesses ............ 31.8 25.3 26.6 24.9 22.2
Realized investment gain (1) .............. 1,106.3(2) 2,484.1(3) 194.1 91.3 546.4
---------- ---------- ---------- ---------- ----------
Total revenues ............................ $ 10,430.0 $ 10,500.3 $ 4,563.3 $ 3,910.3 $ 3,702.9
========== ========== ========== ========== ==========
EARNINGS:
Before realized investment gain and
cumulative effect of accounting change $ 1,198.1 $ 883.4 $ 669.9 $ 491.9(4) $ 520.2(5)
Realized investment gain (1) .............. 703.5(2) 1,605.2(3) 125.0 61.1 356.7
Cumulative effect of change in accounting
for income taxes ..................... -- -- -- -- (33.3)
---------- ---------- ---------- ---------- ----------
Net earnings .............................. $ 1,901.6 $ 2,488.6 $ 794.9 $ 553.0 $ 843.6
========== ========== ========== ========== ==========
EARNINGS PER SHARE:
Before realized investment gain and
cumulative effect of accounting change $ 971.54 $ 732.96 $ 564.31 $ 417.66(4) $ 449.90(5)
Realized investment gain (1) .............. 570.47(2) 1,331.83(3) 105.30 51.88 308.50
Cumulative effect of change in accounting
for income taxes ..................... -- -- -- -- (28.80)
---------- ---------- ---------- ---------- ----------
Net earnings .............................. $ 1,542.01 $ 2,064.79 $ 669.61 $ 469.54 $ 729.60
========== ========== ========== ========== ==========
YEAR-END DATA:
Total assets .............................. $ 56,110.9 $ 43,409.4 $ 28,711.4 $ 20,609.6 $ 18,697.5
Borrowings under investment agreements
and other debt (6) ................... 2,266.7 1,944.4 1,061.7 810.7 972.4
Shareholders' equity ...................... 31,455.2 23,426.3 16,738.7 11,651.5 10,140.2
Class A equivalent common shares
outstanding, in thousands ............ 1,234 1,232 1,194 1,178 1,178
Shareholders' equity per outstanding
Class A equivalent share ............. $ 25,488 $ 19,011 $ 14,025 $ 9,893 $ 8,610
========== ========== ========== ========== ==========
</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 $677.9 million ($427.3 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) Includes a charge of $172.6 million representing an other-than-temporary
decline in value of investment in USAirWays Group, Inc. Preferred Stock.
(5) Includes a charge of $53.6 million representing the effect of the change
in U.S. Federal income tax rates on deferred taxes applicable to
unrealized appreciation.
(6) Excludes borrowings of finance businesses.
10
<PAGE> 12
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)
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Insurance segment, except realized gain $ 952.6 $ 689.6 $ 496.4
Non-Insurance business segments ....... 225.8 157.0 133.3
Other businesses ...................... 72.2 69.5 58.1
Interest expense ...................... (66.2) (55.7) (34.9)
Other ................................. 13.7 23.0 17.0
-------- -------- --------
Earnings before realized gain ... 1,198.1 883.4 669.9
Realized gain ......................... 703.5 1,605.2 125.0
-------- -------- --------
Net earnings .................... $1,901.6 $2,488.6 $ 794.9
======== ======== ========
</TABLE>
The business segment data (Note 15 to Consolidated Financial Statements)
should be read in conjunction with this discussion.
INSURANCE SEGMENT
A summary follows of results to Berkshire from the insurance segment for
the past three years.
<TABLE>
<CAPTION>
(dollars in millions)
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Premiums earned from:
Direct insurance ................................ $3,794.5 $3,360.3 $ 239.9
Reinsurance assumed ............................. 966.6 757.5 717.6
-------- -------- --------
$4,761.1 $4,117.8 $ 957.5
======== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance ................................ $ 333.6 $ 238.5 $ 40.6
Reinsurance assumed ............................. 127.8 (7.8) (21.0)
-------- -------- --------
461.4 230.7 19.6
Net investment income ................................. 872.9 712.1 575.8
Goodwill amortization ................................. (42.9)* (42.6)* --
-------- -------- --------
Pre-tax earnings ................................ 1,291.4 900.2 595.4
Income taxes .......................................... 330.4 203.3 92.0
Minority interest ..................................... 8.4 7.3 7.0
-------- -------- --------
Net earnings from insurance, except realized gain $ 952.6 $ 689.6 $ 496.4
======== ======== ========
</TABLE>
* Virtually all of the goodwill amortization relates to the amortization of
goodwill that arose in connection with the GEICO merger.
The Berkshire Hathaway Insurance Group engages in both direct insurance
and reinsurance of property and casualty risks. In direct insurance activities,
Insurance Group members assume defined portions of the risks of loss from
persons or organizations that are directly subject to the risks. In reinsurance
activities, Insurance Group members assume defined portions of similar or
dissimilar risks that other insurers or reinsurers have subjected themselves in
their own insuring activities.
A significant marketing strategy followed by all Insurance Group members
is the maintenance of extraordinary capital strength. Statutory surplus as
regards policyholders of the Insurance Group increased to approximately $37.2
billion at December 31, 1997. 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.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENT (Continued)
Direct Insurance Underwriting
A summary follows of the combined underwriting results of
Berkshire's direct insurance businesses, stated on the basis of generally
accepted accounting principles ("GAAP").
<TABLE>
<CAPTION>
(Dollars are in millions)
------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Premiums written............. $3,896.9 $3,389.7 $247.2
======== ======== ========
Premiums earned ............. $3,794.5 100.0 $3,360.3 100.0 $ 239.9 100.0
-------- ======== -------- ======== -------- ========
Losses and loss expenses .... 2,744.3 72.3 2,516.6 74.9 90.0 37.5
Underwriting expenses ....... 716.6 18.9 605.2 18.0 109.3 45.6
-------- -------- -------- -------- -------- --------
Total losses and expenses.... 3,460.9 91.2 3,121.8 92.9 199.3 83.1
-------- ======== -------- ======== -------- ========
Underwriting gain-- pre-tax.. $ 333.6 $ 238.5 $ 40.6
======== ======== ========
</TABLE>
The net underwriting results from direct insurance in 1997 and
1996 include the results of GEICO Corporation ("GEICO"). Through its
subsidiaries, 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 or through the mail. This is a significant
element in GEICO's strategy to be a low-cost provider of such coverages. In
previous years, a relatively small percentage of GEICO's insurance business was
derived from homeowner's and other non-automobile insurance coverages. In 1995,
GEICO entered into an agreement with another major insurance provider that over
time will allow it to effectively exit the homeowner's insurance business.
GEICO's underwriting results for 1997 and 1996 are summarized
below. Amounts for 1995 are shown for comparative purposes, although such
amounts are not included in Berkshire's Consolidated Financial Statements.
<TABLE>
<CAPTION>
(Dollars are in millions)
----------------------------------------------------------------------
1997 1996 1995
------------------ ------------------- --------------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Premiums written.................... $3,588.4 $3,122.1 $2,855.8
======== ======== ========
Premiums earned..................... $3,481.8 100.0 $3,091.6 100.0 $2,787.0 100.0
-------- ----- -------- ----- -------- -----
Losses and loss expenses............ 2,630.1 75.5 2,424.9 78.4 2,254.2 80.9
Underwriting expenses............... 571.0 16.4 486.7 15.8 440.7 15.8
-------- ----- -------- ----- ------- -----
Total losses and expenses........... 3,201.1 91.9 2,911.6 94.2 2,694.9 96.7
-------- ===== -------- ===== ------- =====
Underwriting gain-- pre-tax......... $ 280.7 $ 180.0 $ 92.1
======== ======== =======
</TABLE>
As shown in the table above, premiums earned by GEICO grew
significantly during 1997 and 1996. Premiums earned by GEICO in 1997 exceeded
amounts earned in 1996 by 12.6% and amounts earned in 1996 surpassed 1995 by
10.9%. The increases in premium volume were attributed to growth in voluntary
auto insurance business partially offset by declines in involuntary residual
auto market and homeowner's businesses. In-force policy growth for GEICO's core
preferred-risk auto business was 12.8% in 1997 and 7.3% in 1996. Policy growth
in standard and non-standard auto markets was 36.6% in 1997 and 33.5% in 1996
reflecting continued marketing efforts to offer rate quotes to potential
customers who do not meet GEICO's preferred-risk underwriting guidelines.
Voluntary new auto policy growth was 47.8% in 1997 as compared to 1996 and
followed growth of 33.8% in 1996 as compared to 1995.
Losses and loss expenses incurred during 1997 were 8.5% greater
than amounts incurred during 1996. This followed a 7.6% increase in such costs
during 1996 as compared to 1995. The loss and loss expense ratio, a measurement
of the portion of earned premiums that were paid or reserved for losses and
related claims handling expenses, was 75.5% in 1997, 78.4% in 1996, and 80.9% in
1995. The lower ratio in 1997 reflects milder weather conditions resulting in
reduced frequency of auto physical damage claims and lower catastrophe losses.
Catastrophe losses added 0.3% to the loss and loss expense ratio in 1997
compared to 1.7% in 1996 and 1.9% in 1995. Both 1997 and 1996 benefitted from
reduced average severity of liability claims.
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENT (Continued)
Direct Insurance Underwriting (continued)
Underwriting expenses in 1997 for GEICO's businesses increased
$84.3 million (17.3%) over 1996 and in 1996 increased $46.0 million (10.4%) over
1995. The increases reflect additional advertising and other costs incurred to
generate the aforementioned in-force policy growth, as well as increased levels
of administrative expenses, particularly profit-sharing costs.
GEICO's underwriting performance during 1997 was exceptional and
better than its pricing targets. Generally, the results produced by the industry
with respect to private passenger auto insurance during this period have been
good as well. GEICO has taken certain rate reductions in 1997 and will take
further rate reductions in 1998 to adjust its rates to its pricing targets.
Premium rates are also subject to downward pressure through competition and
through the ordinary rate regulation processes of state insurance departments.
In addition, while the level of claim costs (including catastrophe losses) in
1997 and 1996 have been relatively low, there is no assurance that these
favorable conditions will continue. Accordingly, management expects that GEICO's
underwriting profit margins will return to more normal levels as losses increase
faster than premiums. Notwithstanding, Berkshire's management believes that
GEICO's underwriting results will remain better than industry averages.
Berkshire's other direct insurance businesses are comprised of a
wide variety of smaller property/casualty activities. These businesses include:
National Indemnity Company's traditional commercial motor vehicle and specialty
risk operations; five 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; and Kansas Bankers Surety Company, an
insurer for primarily small and medium size banks located in the midwest.
Collectively, the non-GEICO direct insurance businesses produced
earned premiums of $312.7 million in 1997, $268.7 million in 1996 and $239.9
million in 1995. The increases in premiums earned in recent years were achieved
by the homestate, credit card credit, and specialty risk operations offset by
declines in the traditional commercial motor vehicle business. Net underwriting
gains attributed to non-GEICO direct insurance activities were $52.9 million in
1997, $58.5 million in 1996 and $40.6 million in 1995.
Reinsurance Assumed
Underwriting results for the past three years, stated on a GAAP
basis with respect to the reinsurance assumed business, are summarized in the
following table.
<TABLE>
<CAPTION>
(dollars in millions)
--------------------------------------------------------------
1997 1996 1995
----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Amount % Amount % Amount %
------ ------ ------ ------ ------- ------
Premiums written................... $955.4 $715.5 $777.0
====== ====== ======
Premiums earned ................... $966.6 100.0 $757.5 100.0 $717.6 100.0
------ ------ ------ ------ ------ ------
Losses and loss expenses .......... 675.8 69.9 572.9 75.6 522.0 72.7
Underwriting expenses ............. 163.0 16.9 192.4 25.4 216.6 30.2
------ ------ ------ ------ ------ ------
Total losses and expenses ......... 838.8 86.8 765.3 101.0 738.6 102.9
------ ====== ------ ====== ------ ======
Underwriting gain (loss)--pre-tax.. $127.8 $ (7.8) $(21.0)
====== ====== ======
</TABLE>
Reinsurance premiums earned from catastrophe excess-of-loss
policies totaled $309.9 million in 1997, $268.0 million in 1996 and $260.0
million in 1995. Management believes that increased industry capital devoted to
this type of business and the lack of large catastrophic events in recent years
is contributing to intensifying price competition in the catastrophe reinsurance
markets. As a result, there are currently fewer opportunities to write
catastrophe reinsurance coverages at acceptable prices. Management anticipates
that the level of catastrophe reinsurance business accepted will decline in
1998.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENT (Continued)
Reinsurance Assumed (continued)
The catastrophe reinsurance business produced net underwriting
gains in 1997 of $283.0 million as compared to net underwriting gains of $167.0
million in 1996 and $152.1 million in 1995. During the 1995-1997 period, there
were no truly large insured catastrophic events. Catastrophe losses incurred
during 1997 were minimal. In 1996 and 1995, catastrophe losses incurred were
$45.7 million and $39.4 million respectively. Underwriting results for 1997 also
reflected lower underwriting expenses than in previous years.
Berkshire's management continues to believe that, eventually, a
large catastrophe event will occur that will produce a significant loss to the
Insurance Group, although the timing of the loss cannot be predicted. The
Insurance Group's exposure to loss from a single event with respect to in-force
policies at year end 1997 is estimated at approximately $600 million after-tax.
Accordingly, periodic underwriting results remain subject to extreme volatility.
Berkshire's management is willing to accept such volatility provided there is a
reasonable prospect of long-term profitability.
Premiums earned from other property and casualty excess-of-loss
and quota-share reinsurance contracts totaled $513.2 million in 1997, $484.5
million in 1996 and $450.7 million in 1995. These contracts often provide
considerable amounts of indemnification in exchange for large premiums. Certain
of these contracts, which produced annual premiums of approximately $200 million
in 1997 and 1996, expired at the end of 1997 and are not expected to renew in
1998. Consequently, premiums earned in 1998 from other reinsurance activities
may decline. Other property and casualty reinsurance contracts produced net
underwriting losses of approximately $73.2 million in 1997, $101.0 million in
1996 and $97.7 million in 1995. Premiums from these types of reinsurance
contracts are often based, in part, on time discounting of estimated loss
payments because such payments are expected to occur over lengthy time periods.
Estimated claim liabilities are established for financial reporting purposes
without recognition of such discounting, thus producing underwriting losses.
This business is accepted because of the large amounts of policyholder float
that it generates.
Premiums earned from retroactive reinsurance and structured
settlement contracts were $143.5 million in 1997. Relatively minor amounts of
premiums were earned from such contracts in 1996 and 1995. These contracts
provide excess of loss coverage with respect to past loss events or periodic
payments to claimants in connection with settled claims. Underwriting losses
occur from such policies as a result of the recurring recognition of time value
of money concepts--the amortization of deferred charges re reinsurance assumed
and the accretion of discounted structured settlement liabilities. The
amortization and accretion charges are reported as losses incurred, and because
there is no offsetting premium income, as underwriting losses. Underwriting
losses from retroactive reinsurance and structured settlement contracts were
$82.0 million in 1997, $73.8 million in 1996 and $75.4 million in 1995.
Insurance Segment Investment Income
Following is a summary of Insurance Group net investment income
for the past three years.
<TABLE>
<CAPTION>
(Dollars in millions)
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Investment income before taxes............................... $872.9 $712.1 $575.8
Applicable income taxes ..................................... 169.0 122.6 84.8
Applicable minority interest ................................ 6.4 5.7 5.0
------ ------ ------
Investment income after taxes and minority interest.......... $697.5 $583.8 $486.0
====== ====== ======
</TABLE>
Investment income of the Insurance Group in 1997 exceeded amounts
earned in 1996 by $160.8 million (22.6%). Investment income earned in 1997
reflects increased dividend income and taxable interest income, partially offset
by lower tax-exempt interest income. Dividends earned from the Insurance Group's
investment in US Airways Group, Inc. ("US Airways") Cumulative Convertible
Preferred Stock, including amounts previously in arrears, were $78.4 million in
1997 and $46.5 million in 1996. No dividends were earned in 1995 from this
investment. During the first quarter of 1998, Berkshire expects to convert the
US Airways preferred shares, which have been called for redemption, into common
shares of that company. Dividends earned by the Insurance Group in 1998 may
decline from amounts earned in 1997.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENT (Continued)
Insurance Segment Investment Income (Continued)
Net investment income in 1997 and 1996 includes the investment
results of GEICO, which became a wholly-owned subsidiary in January 1996.
Investment income generated by GEICO was $262.1 million in 1997 and $227.2
million in 1996. Investment income before taxes of the Insurance Group in 1995
includes $112.6 million representing the equity in net earnings of GEICO less a
charge for amortization of related goodwill.
Insurance Group members continue to generate significant levels
of investment income from maintaining large levels of invested assets. Increases
in invested assets in recent years derive from reinvested earnings of the Group
and additional capital contributions, as well as increases in the amounts of
"float". Reinvested earnings of the Insurance Group and capital contributions
over the three year period ending December 31, 1997 were approximately $5.5
billion. Float represents the sum of unpaid losses and loss expenses, unearned
premiums, and other liabilities to policyholders less the aggregate of premiums
and reinsurance balances receivable, deferred policy acquisition costs, deferred
charges re reinsurance assumed and related prepaid income taxes. Total float was
approximately $7.3 billion at year end 1997.
Income tax expense as a percentage of investment income before
taxes was 19.4% in 1997, 17.2% in 1996 and 14.7% in 1995. Investment income in
each of these years includes substantial amounts of interest on municipal
obligations and dividends and earnings from equity investments that are
effectively taxed at rates below the full statutory federal rate.
NON-INSURANCE BUSINESS SEGMENTS
A summary follows of results to Berkshire from these identified
business segments for the past three years.
<TABLE>
<CAPTION>
(dollars in millions)
-------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- ---------------------
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ..................... $2,297.8 100.0 $1,812.3 100.0 $1,617.2 100.0
Cost and expenses ............ 1,905.9 83.0 1,552.7 85.7 1,391.4 86.0
-------- -------- -------- -------- -------- --------
Operating profit ............. 391.9 17.0 259.6 14.3 225.8 14.0
Income taxes ................. 163.2 7.1 100.2 5.5 90.5 5.6
Minority interest ............ 2.9 0.1 2.4 0.1 2.0 0.1
-------- -------- -------- -------- -------- --------
Contribution to net earnings.. $ 225.8 9.8 $ 157.0 8.7 $ 133.3 8.3
======== ======== ======== ======== ======== ========
</TABLE>
A comparison of revenues and operating profits between 1997, 1996 and 1995
for each of the six identifiable non-insurance business segments follows.
<TABLE>
<CAPTION>
(dollars in millions) Operating Profit
---------------------------------------------------------------- ----------------------
Revenues Operating Profits as a % of Revenues
------------------------------ ------------------------------- ----------------------
Segment 1997 1996 1995 1997 1996 1995 1997 1996 1995
- -------- -------- --------- --------- -------- --------- -------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aviation training............ $ 410.9 $ 8.4 $ -- $118.6 $ 2.7 $ -- 28.9 32.1 --
Candy........................ 269.2 248.9 233.6 57.6 50.9 49.3 21.4 20.4 21.1
Home cleaning systems........ 253.5 253.7 235.6 66.5 62.5 52.6 26.2 24.6 22.3
Home furnishings............. 667.1 586.6 428.1 53.7 41.0 28.1 8.0 7.0 6.6
Newspaper.................... 155.5 154.2 154.8 55.4 49.8 46.3 35.6 32.3 29.9
Shoes........................ 541.6 560.5 565.1 40.1 52.7 49.5 7.4 9.4 8.8
------- -------- -------- ------ ------ ------
$2,297.8 $1,812.3 $1,617.2 $391.9 $259.6 $225.8
======== ======== ======== ====== ====== ======
</TABLE>
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (continued)
1997 compared to 1996
Revenues from the six identifiable non-insurance business
segments of $2,297.8 million increased $485.5 million (26.8%) from the prior
year. The overall operating profit from these business segments of $39l.9
million increased $132.3 million (51.0%). The acquisition of FlightSafety
International ("FlightSafety") at the end of 1996 accounts for a substantial
portion of these increases. The following is a discussion of significant matters
impacting comparative results for each of the non-insurance business segments.
Aviation Training
On December 23, 1996, FlightSafety became a wholly-owned
subsidiary of Berkshire. FlightSafety provides high technology training to
operators of aircraft and ships. Total training systems are used which include
sophisticated simulators and training devices, computer based training and
professional instructors. FlightSafety's worldwide clients include corporations,
airlines, the military and government agencies. Revenues and operating profits
for 1996 as shown in the preceding table only reflect the results for the last
eight days of 1996. For the full year of 1996, FlightSafety revenues were $363.7
million and pro forma operating profits were $90.2 million (after adjusting for
goodwill amortization which would have been reflected in FlightSafety's results
had the acquisition occurred at the beginning of 1996). FlightSafety's operating
results during 1997 were excellent reflecting increased revenues and operating
margins. Management expects continued positive results from this business.
Candy
Revenues of the candy segment increased $20.3 million (8.2%) over
comparable prior year amounts. Total pounds of candy sold increased about 5.5%.
Substantially all of the volume increase arose from See's quantity order, mail
order and licensee programs. Pounds sold during 1997 from quantity order and
mail order programs increased about 10% over 1996's volume. Operating profits
increased $6.7 million (13.2%) over comparable prior year amounts.
Home Cleaning Systems
Revenues of the home cleaning systems segment (which consists of
products sold principally under the Kirby name) were relatively unchanged and
operating profits increased $4.0 million (6.4%) over comparable prior year
amounts. Unit sales volume in foreign markets, which comprise about 30% of total
volume, increased about 4%. However, domestic unit sales volume decreased 9%.
The decline in domestic volume was due to ineffective recruiting and training of
independent dealers. Management has addressed the problem and during early 1998,
sales volume is exceeding 1997 levels. Offsetting the impact of the volume
decline was the fact that during 1997, an improved model was introduced which
was sold at higher prices than the prior model.
Home Furnishings
Revenues from this segment increased in 1997 by $80.5 million
(13.7%) over the prior year. A major portion of this increase (about 75%)
relates to the acquisition on July 1, 1997 of Star Furniture Company ("Star").
Star is headquartered in Houston, Texas and is a major retailer of home
furnishings in that market. Additionally, Star has locations in other cities in
Texas. Operating profits of $53.7 million were $12.7 million (31.0%) greater in
1997 than in the prior year. Star's inclusion in this segment's results for the
last half of 1997 accounts for almost 50% of the comparative increase. The
remainder of the increase arose primarily from increased sales and improved
margins at Nebraska Furniture Mart and R.C. Willey.
Newspaper
Operating profits during 1997 of $55.4 million increased $5.6
million (11.2%) over the comparable 1996 amount. Much of the increase in
comparative operating profits arose because the average cost of newsprint in
1997 was about 13.6% less than 1996's average. However, it should be noted that
by year end 1997 the cost of newsprint was above the average cost in 1997 and
management believes the cost will remain at such levels for at least the
foreseeable future.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (Continued)
1997 compared to 1996 (continued)
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 $18.9 million (3.4%) in 1997 as compared to 1996. Operating profits
of $40.1 million decreased $12.6 million (23.9%). The unfavorable results are
primarily due to disappointing results at Dexter where sales volume declined
about 12% in 1997 as compared to 1996. Management at Dexter is repositioning its
brand to be more competitive in a highly discount oriented retail environment.
It has implemented a brand marketing strategy that includes global advertising
to better promote its products and brand. Management anticipates that a
substantial portion of the lost volume will be recovered in 1998.
1996 compared to 1995
Revenues from the non-insurance business segments increased
$195.1 million (12.1%) in 1996 as compared to 1995. The most significant revenue
increase arose in the "home furnishings" segment where revenues increased $158.5
million (37.0%) over the comparable prior year figures. The inclusion of R.C.
Willey's results for a full year in 1996 versus six months in 1995 accounts for
the comparative increase. Operating profits of $259.6 million during 1996
increased $33.8 million (15.0%) from the comparable 1995 amount. As reflected in
the preceding table, each segment reported increased operating profits in 1996
as compared to 1995.
BUSINESS OTHER THAN IDENTIFIED SEGMENTS
<TABLE>
<CAPTION>
(dollars in millions)
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... $1,349.4 $1,306.2 $1,179.6
======== ========= ========
Operating profits.............................. $123.4 $116.1 $101.2
Income taxes................................. 48.3 44.6 40.8
Minority interest............................ 2.9 2.0 2.3
------ ------ ------
Contribution to net earnings................... $ 72.2 $ 69.5 $ 58.1
======== ========= ========
</TABLE>
The above represent aggregate data for businesses that numbered
28 in 1997. Revenues from businesses not identified with specific business
segments increased by $43.2 million (3.3%) in 1997 as compared to the prior
year. Operating profits from this group of businesses increased by $7.3 million
(6.3%) in 1997 versus the prior year.
INTEREST EXPENSE AND OTHER
The increase in interest expense in 1997 as compared to 1996 is
primarily due to the issuance during late 1996 of $500 million principal amount
of 1% Senior Exchangeable Notes, due December 2, 2001. For additional
information regarding these notes, see Note 9 to Consolidated Financial
Statements.
Other earnings consist primarily of investment income of
Berkshire and its non-insurance subsidiaries offset by Berkshire's corporate
costs (including charges related to Berkshire's shareholder designated
contribution program). The decrease in 1997 as compared to 1996 primarily
relates to a decrease in interest income earned by Berkshire.
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.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
REALIZED INVESTMENT GAIN (continued)
The Consolidated Statement of Earnings for 1997 reflects a pre-tax
realized investment gain of $1.1 billion ($703.5 million after-tax). A
significant portion ($677.9 million pre-tax) of this gain resulted from
Travelers Group Inc.'s acquisition of Salomon Inc. See Notes 5 and 9 to
Consolidated Financial Statements for additional details regarding this
transaction.
The Consolidated Statement of Earnings for 1996 reflects a pre-tax
realized investment gain of $2.5 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 that 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 effects of these transactions are material to the Consolidated
Statements of Earnings, the completion of these acquisitions had a minimal
impact on Berkshire's shareholders' equity. This is due to the fact that
Berkshire's investments in Salomon Inc and Capital Cities had been carried in
prior periods' consolidated financial statements at market value with unrealized
gains, net of tax, reported as a separate component of shareholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
Berkshire's Consolidated Balance Sheet as of December 31, 1997,
reflects continuing capital strength. In the past three years, Berkshire
shareholders' equity has increased from approximately $11.7 billion at December
31, 1994, to approximately $31.5 billion at December 31, 1997. In that
three-year period, realized and unrealized securities gains increased equity
capital by approximately $15 billion, and reinvested earnings, other than
realized securities gains, were about $2.8 billion.
MARKET RISK DISCLOSURES
Berkshire's Consolidated Balance Sheet includes a substantial
amount of assets and liabilities whose fair values are subject to market risks.
Due to Berkshire's significant level of investments in equity securities and, to
a lesser degree, in certain securities with fixed maturities (convertible
preferred stocks), equity price fluctuations represent the largest market risk
factor affecting Berkshire's consolidated financial position. The following
sections address the significant market risks associated with Berkshire's
financial activities as of year end 1997.
EQUITY PRICE RISK
Strategically, Berkshire management strives to invest in
businesses that possess excellent economics, with able and honest management and
at sensible prices. Berkshire's management prefers, if possible to make an
investment in each investee in a size that is meaningful in relation to
Berkshire's investment portfolio. Accordingly, Berkshire's equity investments
are concentrated in relatively few investees. As of December 31, 1997, over 60%
of the total fair value of investments in equity securities is concentrated in
three investees. See Note 4 to Consolidated Financial Statements.
Berkshire's investment strategy contemplates that most
investments will be held for very long periods of time. Berkshire generally does
not acquire investments for trading purposes. Thus, Berkshire management is not
necessarily concerned with short term price volatility with respect to its
investments provided that the underlying business, economic and management
characteristics of the investees remain favorable. Berkshire maintains above
average levels of shareholder capital to provide a margin of safety against
short term equity price volatility.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
EQUITY PRICE RISK (continued)
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 date. 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.
In addition to common stock investments, Berkshire's investments in
preferred stocks and its obligations with respect to the 1% Senior
Exchangeable Notes are subject to equity price risks. As of December 31,
1997, approximately 97% of the total fair value of preferred stocks is
comprised of convertible preferred shares of Travelers and US Airways. As
of that date, the market prices of the common stocks into which these
preferred shares are convertible far exceeded the related conversion
prices. The Exchange Notes are, under certain conditions, exchangeable
into shares of Travelers common stock. As of December 31, 1997 the market
price of Travelers common stock far exceeded the current exchange price of
the Exchange Notes. Therefore, the fair values of preferred stock
investments and the Exchange Notes are primarily subject to equity price
risk.
The table below summarized Berkshire's equity price risks as of
December 31, 1997 and shows the effects of a hypothetical 20% increase and
a 20% decrease in market prices as of December 31, 1997. A comparison of
quarter end stock prices on the individual stocks within the Company's
equity portfolios over the three years ending December 31, 1997 indicated
that the change from one quarter end to the next was 20% or less
approximately 90% of the time. 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 concentration existing in Berkshire's investment portfolio.
<TABLE>
<CAPTION>
(dollars in millions)
--------------------------------------------------------------------------------
Estimated Hypothetical
Fair Value after Percentage
Fair Value at Hypothetical Hypothetical Increase (Decrease) in
December 31, 1997 Price Change Change in Prices Shareholders' Equity
----------------- ------------ ---------------- ---------------------
<S> <C> <C> <C> <C>
Equity securities................... $36,247.7 20% increase $43,497.2 15.0
20% decrease 28,998.2 (15.0)
Convertible preferred stocks........ 1,279.7 20% increase 1,535.4 *
20% decrease 1,023.7 *
1% Senior Exchangeable Notes........ 780.0 20% increase 936.0 *
20% decrease 624.0 *
</TABLE>
* Less than 1%
INTEREST RATE RISK
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 make investments that are
attractively priced in relation to the perceived credit risk. Management
recognizes and accepts that losses may occur. Generally investments in
interest rate sensitive instruments are not made for trading purposes. The
Company does not actively utilize stand-alone derivatives to manage
interest rate risks.
The Company 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
customarily utilizes debt or debt-like instruments in its finance
businesses.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INTEREST RATE RISK (continued)
Berkshire's fixed maturity investments and borrowings under
investment agreements and other debt are subject to interest rate risk.
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 table below summarizes the estimated effects of hypothetical
increases and decreases in interest rates. 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 reflect what could
be deemed best or worst case scenarios. The hypothetical fair values are based
upon the same prepayment assumptions utilized in computing fair values at
December 31, 1997. Significant variations in market interest rates could produce
changes in the timing of repayments due to prepayment options available. The
fair value of such instruments could be affected and therefore actual results
might differ from those reflected in the table which follows.
<TABLE>
<CAPTION>
(dollars in millions)
-----------------------------------------------------------------------------------
Estimated
Hypothetical Fair Value after Hypothetical
Change in Hypothetical Percentage
Fair Value at Interest Rate Change in Increase (Decrease) in
December 31, 1997 (bp=basis points) Interest Rate Shareholders' Equity
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Assets:
US Treasury securities and
obligations of US government
corporations and agencies............ $6,490.6 100 bp decrease $7,693.2 2.5
100 bp increase 5,454.0 (2.1)
200 bp increase 4,766.8 (3.6)
300 bp increase 4,198.7 (4.7)
Other fixed maturity investments(1)..... 2,527.4 100 bp decrease 2,589.8 *
100 bp increase 2,402.6 *
200 bp increase 2,307.4 *
300 bp increase 2,217.5 *
Assets of finance businesses(2)......... 1,311.2 100 bp decrease 1,420.9 *
100 bp increase 1,188.9 *
200 bp increase 1,094.5 *
300 bp increase 1,012.9 *
Liabilities:
Borrowings under investment
agreements and other debt(3)........ 1,482.0 100 bp decrease 1,534.7 *
100 bp increase 1,409.5 *
200 bp increase 1,354.3 *
300 bp increase 1,302.7 *
Liabilities of finance businesses...... 1,149.4 100 bp decrease 1,344.8 *
100 bp increase 989.3 *
200 bp increase 859.8 *
300 bp increase 753.6 *
</TABLE>
* Less than 1%
(1) Excludes preferred stocks (See Equity Price Risk)
(2) Excludes cash and cash equivalents
(3) Excludes 1% Senior Exchangeable Notes (See Equity Price Risk)
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
COMMODITY PRICE RISK
As of December 31, 1997, Berkshire was party to derivative
contracts with respect to crude oil and had commitments to purchase silver at
future dates. Such contracts provide that Berkshire acquire the commodity at a
fixed price at fixed future dates. At expiration, the derivative crude oil
contracts are settled by a net amount equal to the difference between the then
current price of crude oil and the fixed contract price. The silver contracts
are settled by the delivery of silver to Berkshire in exchange for cash
payments. These contracts were not entered into to offset any specific
underlying commodity price risks associated with Berkshire's business
activities.
Berkshire is subject to commodity price risk to the extent that
crude oil and/or silver market prices deviate from the fixed contract settlement
prices. As of December 31, 1997, the aggregate contract or notional amounts of
these commitments were less than 3% of Berkshire's consolidated shareholders'
equity. Therefore, any significant change in price in either of these
commodities would not have a material impact on Berkshire's financial condition.
YEAR 2000 ISSUE
Many computer systems used today may be unable to interpret data
correctly after December 31, 1999 because they allow only two digits to indicate
the year in a date. Berkshire and its subsidiaries have been engaged in
assessing this Year 2000 issue as it relates to their businesses, including
their electronic interactions with banks, vendors, customers, and others. This
project, along with developing and implementing solutions to the Year 2000
issue, is continuing. Management currently anticipates that the project will be
substantially completed well in advance of year end 1999, and will not have a
material impact on Berkshire's consolidated financial results or position.
Berkshire's consolidated financial results could also be adversely affected if
one or more of the companies in which it has material investments were
materially adversely affected by the Year 2000 issue.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document, including but not limited to those under the caption "Market Risk
Disclosures", 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, or which, like those under "Market Risk Disclosure" involve
hypothetical events. 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 investees (see discussion under "Market Risk
Disclosure"), the occurrence of one or more catastrophic events, such as an
earthquake or hurricane, that causes losses insured by members of Berkshire's
Insurance Group, changes in insurance laws or regulations, changes in Federal
income tax laws, as well as 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.
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.
21
<PAGE> 23
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, 1997 and 1996, 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, 1997. 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 generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Berkshire Hathaway
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 6, 1998
22
<PAGE> 24
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,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................ $ 1,002.4 $ 1,339.8
Investments:
Securities with fixed maturities ............................... 10,297.8 6,446.9
Equity securities .............................................. 36,247.7 27,750.6
Receivables ...................................................... 1,711.5 1,523.2
Inventories ...................................................... 639.0 619.6
Assets of finance businesses ..................................... 1,248.8 968.8
Property, plant and equipment .................................... 1,056.5 1,034.2
Goodwill of acquired businesses .................................. 3,066.5 3,110.3
Other assets ..................................................... 840.7 616.0
--------- ---------
$56,110.9 $43,409.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses .............................. $ 6,850.5 $ 6,274.4
Unearned premiums ................................................ 1,273.7 1,183.5
Accounts payable, accruals and other liabilities ................. 2,202.3 2,556.8
Income taxes, principally deferred ............................... 10,538.8 6,837.6
Borrowings under investment agreements and other debt ............ 2,266.7 1,944.4
Liabilities of finance businesses ................................ 1,067.2 851.3
--------- ---------
24,199.2 19,648.0
--------- ---------
Minority shareholders' interests ................................. 456.5 335.1
--------- ---------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value, 1,366,090 and 1,376,188
shares issued; 1,197,888 and 1,206,120 shares outstanding .. 6.8 6.9
Class B Common Stock, $0.1667 par value, 1,087,156 and 783,755
shares issued and outstanding .............................. 0.2 0.1
Capital in excess of par value ................................. 2,347.1 2,274.1
Unrealized appreciation of investments ......................... 18,197.9 12,143.9
Retained earnings .............................................. 10,934.3 9,032.7
--------- ---------
31,486.3 23,457.7
Less: Cost of 168,202 and 170,068 Class A common shares in
treasury ................................................... 31.1 31.4
--------- ---------
Total shareholders' equity .......................... 31,455.2 23,426.3
--------- ---------
$56,110.9 $43,409.4
========= =========
</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 1,234,127 shares outstanding at
December 31, 1997 versus 1,232,245 outstanding at December 31, 1996.
See accompanying Notes to Consolidated Financial Statements
23
<PAGE> 25
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,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Insurance premiums earned ...................... $ 4,761.1 $ 4,117.8 $ 957.5
Sales and service revenues ..................... 3,577.5 3,061.2 2,755.9
Interest, dividend and other investment income . 953.3 811.9 629.2
Income from finance businesses ................. 31.8 25.3 26.6
Realized investment gain ....................... 1,106.3 2,484.1 194.1
------------ ------------ ------------
10,430.0 10,500.3 4,563.3
------------ ------------ ------------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses .. 3,420.1 3,089.5 612.0
Insurance underwriting expenses ................ 879.6 797.6 325.0
Cost of products and services sold ............. 2,186.9 1,884.0 1,706.7
Selling, general and administrative expenses ... 920.8 861.9 759.6
Goodwill amortization .......................... 83.1 61.7 16.3
Interest expense ............................... 111.9 99.7 59.3
------------ ------------ ------------
7,602.4 6,794.4 3,478.9
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,827.6 3,705.9 1,084.4
Income taxes ................................... 897.7 1,196.8 276.2
Minority interest .............................. 28.3 20.5 13.3
------------ ------------ ------------
NET EARNINGS ..................................... $ 1,901.6 $ 2,488.6 $ 794.9
============ ============ ============
Average common shares outstanding * ............ 1,233,192 1,205,257 1,187,102
NET EARNINGS PER COMMON SHARE * .................. $ 1,542 $ 2,065 $ 670
============ ============ ============
</TABLE>
* Average shares outstanding for 1997 and 1996 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 $51 per share for 1997 and $69 per share for 1996.
See accompanying Notes to Consolidated Financial Statements
24
<PAGE> 26
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,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................................... $ 1,901.6 $ 2,488.6 $ 794.9
Adjustments to reconcile net earnings to cash flows ........................
from operating activities:
Realized investment gain .............................................. (1,106.3) (2,484.1) (194.1)
Depreciation and amortization ......................................... 227.3 151.6 75.7
Changes in assets and liabilities before effects from business
acquisitions:
Losses and loss adjustment expenses .............................. 576.1 352.1 268.6
Deferred charges re reinsurance assumed .......................... (142.3) 51.8 51.0
Unearned premiums ................................................ 90.2 (8.8) 66.9
Receivables ...................................................... (120.2) (127.1) (35.4)
Accounts payable, accruals and other liabilities ................. 547.4 558.3 228.2
Income taxes ..................................................... 382.8 221.9 (29.9)
Other ................................................................. (21.0) 55.7 (98.0)
-------- -------- --------
Net cash flows from operating activities ....................... 2,335.6 1,260.0 1,127.9
-------- -------- --------
Cash flows from investing activities:
Purchases of securities with fixed maturities .............................. (6,837.3) (2,464.7) (273.9)
Purchases of equity securities ............................................. (714.3) (1,423.4) (1,459.9)
Proceeds from sales of securities with fixed maturities .................... 3,397.5 277.5 669.7
Proceeds from redemptions and maturities of securities
with fixed maturities ................................................. 779.6 791.9 954.6
Proceeds from sales of equity securities ................................... 2,015.6 1,531.0 1,352.7
Loans and investments originated in finance businesses ..................... (491.1) (577.1) (381.2)
Principal collection on loans and investments
originated in finance businesses ...................................... 276.0 351.5 363.0
Acquisitions of businesses, net of cash acquired ........................... (774.9) (1,975.3) --
Other ...................................................................... (182.3) (19.2) (11.4)
-------- -------- --------
Net cash flows from investing activities ....................... (2,531.2) (3,507.8) 1,213.6
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses ............................. 157.5 285.1 265.7
Proceeds from other borrowings ............................................. 1,073.6 1,604.3 1,232.7
Repayments of borrowings of finance businesses ............................. (214.1) (427.3) (232.1)
Repayments of other borrowings ............................................. (1,111.8) (1,170.0) (1,151.7)
Net proceeds from issuance of Class B Common Stock ......................... -- 565.0 --
Other ...................................................................... (1.4) (3.5) (1.5)
-------- -------- --------
Net cash flows from financing activities ....................... (96.2) 853.6 113.1
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............... (291.8) (1,394.2) 2,454.6
Cash and cash equivalents at beginning of year .................................. 1,350.3 2,744.5 289.9
-------- -------- --------
Cash and cash equivalents at end of year * ...................................... $1,058.5 $1,350.3 $2,744.5
======== ======== ========
* Cash and cash equivalents at end of year are comprised of the following:
Finance businesses.............................................. $ 56.1 $ 10.5 $ 40.7
Other .......................................................... 1,002.4 1,339.8 2,703.8
-------- -------- --------
$1,058.5 $1,350.3 $2,744.5
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
25
<PAGE> 27
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>
Unrealized
Par Value Capital in Appreciation Class A
Common Stock Excess of of Retained Treasury
Class A Class B Par Value Investments Earnings Stock
--------- --------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 .................... $ 6.9 $ -- $ 656.1 $ 5,276.9 $ 5,749.2 $ 37.6
Net earnings ................................. -- -- -- -- 794.9 --
Increase in unrealized appreciation
included in carrying value of investments -- -- -- 6,177.1 -- --
Increase in deemed applicable deferred
income taxes ............................ -- -- -- (2,176.2) -- --
Increase in minority interest in unrealized
appreciation ............................ -- -- -- (57.1) -- --
Common stock issued in connection with
acquisitions of businesses .............. -- -- 345.6 -- -- (2.9)
--------- --------- -------- --------- --------- ---------
Balance December 31, 1995 .................... 6.9 -- 1,001.7 9,220.7 6,544.1 34.7
Net earnings ................................. -- -- -- -- 2,488.6 --
Increase in unrealized appreciation
included in carrying value of investments -- -- -- 4,604.0 -- --
Increase in deemed applicable deferred
income taxes ............................ -- -- -- (1,629.1) -- --
Increase in minority interest in unrealized
appreciation ............................ -- -- -- (51.7) -- --
Common stock issued in connection with
acquisition of business ................. -- -- 707.5 -- -- (3.3)
Issuance of Class B Common stock ............. -- 0.1 564.9 -- -- --
--------- --------- -------- --------- --------- ---------
Balance December 31, 1996 .................... 6.9 0.1 2,274.1 12,143.9 9,032.7 31.4
Net earnings ................................. -- -- -- -- 1,901.6 --
Increase in unrealized appreciation
included in carrying value of investments -- -- -- 9,468.2 -- --
Increase in deemed applicable deferred
income taxes ............................ -- -- -- (3,318.9) -- --
Increase in minority interest in unrealized
appreciation ............................ -- -- -- (95.3) -- --
Common stock issued in connection with
acquisition of business ................. -- -- 72.7 -- -- (0.3)
Other ........................................ (0.1) 0.1 0.3 -- -- --
--------- --------- -------- -------- --------- ---------
Balance December 31, 1997 .................... $ 6.8 $ 0.2 $2,347.1 $18,197.9 $10,934.3 $ 31.1
========= ======= ======== ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 is the property and casualty
insurance business conducted on both a direct and reinsurance basis.
Further information regarding this business and Berkshire's other
reportable business segments is contained in Note 15. The
accompanying consolidated financial statements include the accounts
of Berkshire consolidated with accounts of all its subsidiaries.
Intercompany accounts and transactions have been eliminated.
(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) Accounting pronouncements to be adopted in 1998
During 1997, the Financial Accounting Standards Board issued the
following Statements of Financial Accounting Standards ("SFAS") that
are effective for periods beginning after December 15, 1997 and will
be adopted by the Company during 1998. The Company does not expect
that adoption of these Standards will have a material effect on its
financial position, results of operations or on disclosures within
the financial statements.
(1) SFAS No. 130 -- "Reporting Comprehensive Income", which
establishes standards for the reporting and display of
comprehensive income and its components.
(2) SFAS No. 131 -- "Disclosures about Segments of an Enterprise
and Related Information", which establishes new standards for
reporting information about operating segments in interim and
annual financial statements.
(d) 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.
(e) Investments
Management determines the appropriate classifications of investments
in securities with fixed maturities and equity securities at the
time of purchase and reevaluates such designations as of each
balance sheet date. Investments in equity securities are classified
as available-for-sale. Investments in securities with fixed
maturities, except for such securities held by finance businesses,
are classified as available-for-sale. Securities with fixed
maturities held by finance businesses are classified as
held-to-maturity. Securities with fixed maturities are deemed to be
held-to-maturity securities when the Company has the ability and
positive intent to hold them to maturity.
Available-for-sale securities are stated at fair value with
unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. Held-to-maturity securities are
carried at amortized cost. Realized gains and losses, which arise
when investments are sold (as determined on a specific
identification basis), other-than-temporarily impaired or in certain
situations when investments are marked-to-market, are included in
the Consolidated Statements of Earnings.
(f) 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 over
forty years. The Company periodically reviews the recoverability of
the carrying value of goodwill of acquired businesses using the
methodology prescribed by SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
(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 ultimate recoverability of premium acquisition costs
is determined without regard to investment income. The unamortized
balance of deferred premium acquisition costs is included in other
assets.
27
<PAGE> 29
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)
(h) Deferred charges re reinsurance assumed
The excess of estimated liabilities for claims and claim costs
ultimately payable by the Insurance Group over consideration
received with respect to retroactive property/casualty reinsurance
contracts that provide for indemnification of insurance risk, other
than structured settlements, 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 unamortized balance is
included in other assets and was $480.2 million at December 31, 1997
and $337.9 million at December 31, 1996.
(j) Losses and loss adjustment expenses
Liability for unpaid losses and loss adjustment expenses represents
the aggregate of such obligations of members of the Insurance Group
with respect to: (i) prospective property/casualty insurance and
reinsurance contracts, (ii) retroactive property/casualty
reinsurance contracts that provide for indemnification of insurance
risk, other than structured settlements, and (iii) reinsurance
contracts providing for periodic payments with respect to settled
claims ("structured settlements"). Except for structured settlement
liabilities which are stated at discounted present values, the
liability for unpaid losses and loss adjustment expenses is at the
aggregate of estimated ultimate payment amounts.
Ultimate payment amounts with respect to prospective contracts are
determined from: (i) individual case estimates, (ii) estimates of
incurred but not reported losses, based on past experience, and
(iii) reports of losses from ceding insurers.
Ultimate payment amounts with respect to retroactive reinsurance
contracts that provide for indemnification of insurance risk, other
than structured settlements, are established for financial reporting
purposes at maximum limits of indemnification under the contracts.
(See also 1(h) above related to deferred charges re reinsurance
assumed.)
Liabilities under structured settlement contracts are established
when the contracts are entered into, at the then present value of
the actuarially determined ultimate payment amount discounted at the
prevailing market interest rate. Annual accretions to the
liabilities are charged to losses incurred. This accounting policy
also applies to annuity reserves and policyholder liabilities which
are included in liabilities of finance businesses.
(k) 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 is accounted for as premiums earned
at the inception of the contracts. Premiums earned are stated net of
amounts ceded to reinsurers.
(m) 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 Insurance Group members of their 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.
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS
During 1996, Berkshire consummated mergers with GEICO Corporation
("GEICO") and FlightSafety International, Inc. ("FlightSafety"). Each of these
mergers was accounted for by the purchase method. The excess of the purchase
cost of each business over the fair value of net assets acquired as of each
merger date was recorded as goodwill of acquired businesses and is being
amortized over forty years. The aggregate amount of goodwill applicable to these
acquisitions was approximately $2.5 billion. Additional information concerning
each merger is provided below.
(a) GEICO
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. 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 dated August 25, 1995 (the "GEICO Agreement"). Pursuant to
the GEICO 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.
As of the merger date, subsidiaries of Berkshire owned 34,250,000
common shares of GEICO, which were acquired 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.
(b) FlightSafety
On December 23, 1996, FlightSafety became a wholly-owned subsidiary
as a result of the merger of FlightSafety with and into a subsidiary
of Berkshire. FlightSafety provides high technology training to
operators of aircraft and ships throughout the world.
The merger was consummated pursuant to an Agreement and Plan of
Merger dated October 14, 1996 (the "FlightSafety Agreement").
Pursuant to the FlightSafety Agreement, aggregate consideration of
approximately $1.5 billion was paid to FlightSafety shareholders
consisting of $769.0 million in cash, 17,728 shares of Berkshire's
Class A common stock and 112,655 shares of Berkshire's Class B
common stock.
The results of operations for each of these entities are fully included in
Berkshire's Consolidated Statements of Earnings beginning on the effective dates
of each of the mergers (GEICO -- January 2, 1996 and FlightSafety -- December
23, 1996). In the accompanying Consolidated Statement of Earnings for 1995,
Berkshire's previous investment in GEICO was accounted for under the equity
method. Berkshire's proportionate share of GEICO's net earnings, reduced by
amortization of goodwill, is included as a component of interest, dividends, and
other investment income.
The following table sets forth certain unaudited condensed consolidated
earnings data for the years ended December 31, 1996 and 1995, as if the GEICO
and FlightSafety mergers had been consummated on the same terms at the beginning
of 1995. Dollar amounts are in millions, except per share amounts.
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Insurance premiums earned......................... $ 4,117.8 $3,744.5
Sales and service revenues........................ 3,416.5 3,081.6
Total revenues.................................... 10,823.5 7,640.9
Net earnings...................................... 2,515.0 833.8
Earnings per equivalent Class A common share...... 2,051 690
</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
reissuing 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 over 180 jewelry stores
operating in 28 states and R.C. Willey, through its several 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 Statements of
Earnings from the effective dates of the mergers (Helzberg's -- April 30, 1995;
R.C. Willey -- June 29, 1995).
29
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS (Continued)
On October 21, 1997, Berkshire and International Dairy Queen, Inc. ("Dairy
Queen") executed a definitive Merger Agreement pursuant to which Berkshire would
acquire Dairy Queen through the merger of Dairy Queen with and into a
wholly-owned subsidiary of Berkshire. The Merger Agreement provided that,
subject to certain limitations and conditions, the holders of Dairy Queen Class
A and Class B common stock could receive either $27.00 cash or $26.00 of
Berkshire Class A or Class B common stock for each Dairy Queen share. The total
merger consideration was approximately $587.8 million consisting of $264.5
million in cash and the remainder in Class A and Class B common stock. The
merger was completed on January 7, 1998.
Dairy Queen develops, licenses and services a system of approximately
5,800 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.
(3) INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
The amortized cost and estimated fair values of investments in securities
with fixed maturities as of December 31, 1997 and 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
December 31, 1997 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,890.4 $ 600.8 $ (0.6) $ 6,490.6
Obligations of states, municipalities
and political subdivisions .............. 2,151.0 58.3 (0.2) 2,209.1
Corporate bonds ........................... 34.7 -- -- 34.7
Redeemable preferred stocks ................. 764.3 515.4 -- 1,279.7
Mortgage-backed securities .................. 272.8 10.9 -- 283.7
--------- --------- --------- ---------
$ 9,113.2 $ 1,185.4 $ (0.8) $10,297.8
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $2,618.8 $ 4.0 $ (5.7) $2,617.1
Obligations of states, municipalities
and political subdivisions .............. 2,502.0 32.4 (1.8) 2,532.6
Corporate bonds ........................... 22.0 -- -- 22.0
Redeemable preferred stocks ................. 584.3 275.9 (4.3) 855.9
Mortgage-backed securities .................. 415.2 6.1 (2.0) 419.3
-------- -------- -------- --------
$6,142.3 $ 318.4 $ (13.8) $6,446.9
======== ======== ======== ========
</TABLE>
Amounts above exclude securities with fixed maturities held by finance
businesses. See Note 7.
Shown below are the amortized cost and estimated fair values of the above
securities at December 31, 1997, 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 .............. $ 1,278.7 $ 1,785.0
Due after one year through five years 2,151.6 2,183.1
Due after five years through ten years 781.4 818.4
Due after ten years .................. 4,628.7 5,227.6
--------- ---------
8,840.4 10,014.1
Mortgage-backed securities ........... 272.8 283.7
--------- ---------
$ 9,113.2 $10,297.8
========= =========
</TABLE>
30
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN EQUITY SECURITIES
Data with respect to the consolidated investment in equity securities are
shown below. Individual investments whose fair values exceed ten percent of
consolidated shareholders' equity at December 31, 1997 and 1996 are listed
separately. Amounts are in millions.
<TABLE>
<CAPTION>
December 31, 1997
Unrealized Fair
Cost Gains Value
--------- --------- ---------
<S> <C> <C> <C>
Common stock of:
American Express Company $ 1,392.7 $ 3,021.3 $ 4,414.0
The Coca-Cola Company .. 1,298.9 12,038.6 13,337.5
The Gillette Company ... 600.0 4,221.0 4,821.0
All other equity securities 5,725.1 7,950.1* 13,675.2
--------- --------- ---------
$ 9,016.7 $27,231.0 $36,247.7
========= ========= =========
</TABLE>
December 31, 1996
<TABLE>
<CAPTION>
Unrealized Fair
Cost Gains Value
--------- --------- ---------
<S> <C> <C> <C>
Common stock of:
American Express Company $ 1,392.7 $ 1,401.6 $ 2,794.3
The Coca-Cola Company .. 1,298.9 9,226.1 10,525.0
The Gillette Company ... 600.0 3,132.0 3,732.0
All other equity securities 5,860.4 4,838.9** 10,699.3
--------- --------- ---------
$ 9,152.0 $18,598.6 $27,750.6
========= ========= =========
</TABLE>
* Represents gross unrealized gains $7,995.9 less gross unrealized
losses $45.8.
** Represents gross unrealized gains $4,861.3 less gross unrealized
losses $22.4.
Common shares of American Express Company ("AXP") owned by Berkshire and
its subsidiaries possessed approximately 10.5% of the voting rights of all AXP
shares outstanding at December 31, 1997. 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.
(5) REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) from sales and redemptions of investments are
summarized below (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equity securities--
Gross realized gains .................................. $ 739.2 $2,379.1 $ 109.9
Gross realized losses ................................. (23.3) (36.4) (14.2)
Securities with fixed maturities and other investments --
Gross realized gains .................................. 395.9 144.6 100.8
Gross realized losses ................................. (5.5) (3.2) (2.4)
-------- -------- --------
$1,106.3 $2,484.1 $ 194.1
======== ======== ========
</TABLE>
In November 1997, the merger of Salomon Inc ("Salomon") with and into a
subsidiary of Travelers Group Inc. ("Travelers") was completed. Berkshire
subsidiaries received common and preferred stock of Travelers in exchange for
common and preferred shares of Salomon then owned. The value of the Travelers
shares received was approximately $1.8 billion. Realized investment gains for
1997 include $677.9 million with respect to the transaction. The gain is net of
a charge of $298.4 million for the contingent value associated with Berkshire's
Exchange Notes. See Note 9 for additional information regarding the Exchange
Notes.
In March 1996, The Walt Disney Company ("Disney") completed its
acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). 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. Gross
realized gains from sales of equity securities include a gain of $2.2 billion
relating to Disney's acquisition of Capital Cities.
31
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) COMMITMENT TO PURCHASE SILVER
During 1997, the Company entered into several forward contracts to purchase
silver during the first quarter of 1998. As of December 31, 1997, the Company
had committed to purchase 111.2 million ounces of silver which had an estimated
fair value of about $665 million. Subsequent to year end, the Company committed
to purchase an additional 18.5 million ounces of silver. The Consolidated
Statement of Earnings for 1997 includes a pre-tax gain of $97.4 million
representing the excess of fair value over net cost of the commitments.
(7) FINANCE BUSINESSES
Berkshire's finance businesses are comprised of commercial and consumer
finance companies and an annuity business. Assets and liabilities of Berkshire's
finance businesses are summarized below (in millions):
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................. $ 56.1 $ 10.5
Installment loans and other receivables ............................... 221.8 215.9
Fixed maturity investments (a) ........................................ 970.9 742.4
-------- --------
$1,248.8 $ 968.8
======== ========
LIABILITIES
Borrowings under investment agreements and other debt (b) ............. $ 225.9 $ 281.8
6 3/4% Notes, due 2001 ................................................ 99.6 99.5
Annuity reserves and policyholder liabilities ......................... 697.4 434.8
Other ................................................................. 44.3 35.2
-------- --------
$1,067.2 $ 851.3
======== ========
</TABLE>
(a) At December 31, 1997 and 1996, mortgage-backed securities of $857.3 and
$601.6 respectively were included in this caption. Estimated fair values
and gross unrealized gains and losses as of December 31, 1997 and 1996,
are as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997 .......................... $970.9 $111.7 $ (0.2) $ 1,082.4
1996 .......................... 742.4 25.2 (4.8) 762.8
</TABLE>
(b) Borrowings under investment agreements and other debt are made pursuant to
contracts with terms generally ranging from six months to thirty years and
at fixed interest rates ranging from 5.0% to 7.2%. Payments of principal
amounts expected during the next five years are as follows (in millions):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$76.9 $ 3.3 -- -- --
</TABLE>
Income from finance businesses for each of the past three years
is summarized below (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Interest on loans ................. $ 36.9 $ 38.8 $ 38.4
Interest income ................... 74.4 54.4 39.2
Annuity premiums earned ........... 248.0 259.5 75.2
------ ------ ------
359.3 352.7 152.8
------ ------ ------
COST AND EXPENSES
Interest expense .................. 19.9 30.3 28.9
Annuity benefits and expenses ..... 286.6 276.7 80.8
General and administrative expenses 21.0 20.4 16.5
------ ------ ------
327.5 327.4 126.2
------ ------ ------
$ 31.8 $ 25.3 $ 26.6
====== ====== ======
</TABLE>
32
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE BUSINESSES (Continued)
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>
Dec. 31, Dec. 31,
1997 1996
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................... $ 11.4 $ 6.4
Installment loans and other receivables * ..... 188.3 233.0
Mortgage-backed securities, at cost
(Fair value: 1997-- $51.2; 1996-- $146.1) 50.3 145.5
------ ------
$250.0 $384.9
====== ======
LIABILITIES
6 3/4% Notes, due 2001 ......................... $ 99.6 $ 99.5
Borrowings under investment agreements ........ 92.7 221.3
Other ......................................... 24.4 29.7
------ ------
$216.7 $350.5
====== ======
</TABLE>
* Includes receivables from affiliated companies of $48.7 and $85.1 at
December 31, 1997 and 1996, respectively.
Net income from Scott Fetzer Financial Group businesses for each of the
past three years is summarized below (in millions).
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
REVENUES
Interest on installment loans and other receivables ** $40.8 $45.7 $43.4
Other interest ....................................... 6.6 13.2 15.0
----- ----- -----
47.4 58.9 58.4
----- ----- -----
COST AND EXPENSES
Interest expense ..................................... 15.9 27.8 28.9
General and administrative expenses .................. 20.6 20.1 16.2
----- ----- -----
36.5 47.9 45.1
----- ----- -----
Income before taxes .................................. 10.9 11.0 13.3
Income taxes ......................................... 3.7 3.6 4.6
----- ----- -----
Net income ........................................... $ 7.2 $ 7.4 $ 8.7
===== ===== =====
</TABLE>
** Includes interest on loans and receivables from affiliated companies of
$3.2, $6.9 and $5.0 in 1997, 1996 and 1995, respectively.
33
<PAGE> 35
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
Supplemental data with respect to unpaid losses and loss adjustment
expenses of property/casualty insurance subsidiaries (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Unpaid losses and loss adjustment expenses:
Balance at beginning of year .............. $6,274.4 $5,923.9* $3,430.0
Less ceded liabilities and deferred charges 585.8 645.0* 573.9
-------- -------- --------
Net balance ................................... 5,688.6 5,278.9* 2,856.1
-------- -------- --------
Incurred losses recorded:
Current accident year ..................... 3,551.4 3,179.7 556.5
All prior accident years .................. (131.3) (90.2) 55.5
-------- -------- --------
Total incurred losses ..................... 3,420.1 3,089.5 612.0
-------- -------- --------
Payments with respect to:
Current accident year ..................... 1,602.1 1,484.9 43.6
All prior accident years .................. 1,410.3 1,194.9 246.2
-------- -------- --------
Total payments ............................ 3,012.4 2,679.8 289.8
-------- -------- --------
Unpaid losses and loss adjustment expenses:
Net balance at end of year ................ 6,096.3 5,688.6 3,178.3
Plus ceded liabilities and deferred charges 754.2 585.8 520.3
-------- -------- --------
Balance at end of year ** ..................... $6,850.5 $6,274.4 $3,698.6
======== ======== ========
</TABLE>
* Includes GEICO balances as of the acquisition date.
** Unpaid losses and loss adjustment expenses include liabilities established
with respect to retroactive reinsurance contracts that provide for
indemnification of insurance risk. These liabilities aggregated $1,398.1,
$1,263.6, and $1,283.5 at December 31, 1997, 1996 and 1995 respectively.
Related deferred charges were established with respect to these contracts
and are reported as other assets. Also included in unpaid losses and loss
adjustment expenses are discounted structured settlement reinsurance
liabilities, which totaled $212.3, $217.2, and $221.7 at December 31,
1997, 1996 and 1995 respectively.
Incurred losses "all prior accident years" reflects the amount of
estimation error charged or credited to earnings in each year. In addition, this
amount includes amortization of deferred charges re reinsurance assumed and
accretion of discounted structured settlement liabilities. The use of estimates
is inherent in the process of establishing unpaid losses and loss expenses.
Additional information will be revealed over time and those estimates and
assumptions will be revised resulting in gains or losses in the period made.
(9) 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,
1997 1996
-------- --------
<S> <C> <C>
Borrowings under investment agreements $ 816.2 $ 865.3
1% Senior Exchangeable Notes Due 2001 805.9 454.6
Other debt ........................... 644.6 624.5
-------- --------
$2,266.7 $1,944.4
======== ========
</TABLE>
Borrowings under investment agreements are made pursuant to contracts with
terms generally ranging from three months to forty years and calling for
interest payable, normally semiannually, at fixed rates ranging from 3% to 9%
per annum. The borrowings are senior unsecured debt obligations of the Company.
On December 2, 1996, Berkshire received net proceeds of $447.1 million
from the issuance of $500 million principal amount of 1% Senior Exchangeable
Notes, due December 2, 2001 (the "Exchange Notes"). Under certain conditions, on
the last trading day of January, April, July and October from January 1997
through July 2001, each $1,000 principal amount Exchange Note is exchangeable at
the option of the holder into 29.92 shares of Travelers Group Inc. common stock
("Travelers Stock"). (Prior to November 28, 1997, each Exchange Note was
exchangeable into 17.65 shares of Salomon Inc common stock.) Beginning on
December 2, 1999, under certain conditions, the Exchange Notes are exchangeable
into 29.92 shares of Travelers Stock at the option of the Company. Upon such
exchange, Berkshire may elect to redeem the Exchange Notes for the equivalent
cash value of the underlying Travelers Stock. In all other circumstances,
Berkshire will pay the principal amount at maturity.
34
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT (Continued)
The Exchange Notes are carried at accreted value plus an additional
amount (the "contingent value") representing the excess, if any, of the value of
the underlying Travelers Stock over the accreted value of the Notes. The
contingent value of the Exchange Notes is initially charged to unrealized
appreciation of investments. The contingent value amount is subsequently
recognized in the Consolidated Statements of Earnings as a charge against
realized investment gains on the earliest of the (i) dates that the Exchange
Notes mature or are exchanged or otherwise redeemed or (ii) the date the related
underlying stock is otherwise no longer owned by the Company. As of December 31,
1997, the contingent value component of the aggregate carrying value of the
Exchange Notes was $342.6 million. There was no contingent value associated with
the Exchange Notes at year end 1996.
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>
1998 1999 2000 2001 2002
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
$200.4 $ 61.7 $ 13.4 $829.6 $ 24.6
</TABLE>
(10) 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,
1997 1996
--------- ---------
<S> <C> <C>
Payable currently $ 138.5 $ (41.1)
Deferred ........ 10,400.3 6,878.7
--------- ---------
$10,538.8 $ 6,837.6
========= =========
</TABLE>
The Consolidated Statements of Earnings reflect charges for
income taxes as shown below (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal .. $ 864.8 $1,169.9 $ 252.3
State .... 32.1 26.1 22.6
Foreign .. 0.8 0.8 1.3
-------- -------- --------
$ 897.7 $1,196.8 $ 276.2
======== ======== ========
Current .. $ 691.4 $ 818.9 $ 331.0
Deferred . 206.3 377.9 (54.8)
-------- -------- --------
$ 897.7 $1,196.8 $ 276.2
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996, are shown below (in millions):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Deferred tax liabilities:
<S> <C> <C>
Relating to unrealized appreciation of investments ............ $ 9,940.5 $ 6,620.6
Other ......................................................... 1,168.1 860.9
--------- ---------
.......................................................... 11,108.6 7,481.5
Deferred tax assets ................................................ (708.3) (602.8)
--------- ---------
Net deferred tax liability.......................................... $10,400.3 $ 6,878.7
========= =========
</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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earnings before income taxes ...................... $2,827.6 $3,705.9 $1,084.4
======== ======== ========
Hypothetical amounts applicable to above
computed at the federal statutory rate ....... $ 989.7 $1,297.1 $ 379.5
Decreases, resulting from:
Tax-exempt interest income ................... (35.8) (41.7) (10.6)
Dividends received deduction ................. (104.4) (90.3) (86.3)
Goodwill amortization ............................. 29.1 21.6 5.7
State income taxes, less federal income tax benefit 20.8 17.0 14.7
Other differences, net ............................ (1.7) (6.9) (26.8)
-------- -------- --------
Total income taxes ................................ $ 897.7 $1,196.8 $ 276.2
======== ======== ========
</TABLE>
35
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) COMMON STOCK
Changes in issued and outstanding common stock of the Company during the
three years ended December 31, 1997, are shown in the table below.
<TABLE>
<CAPTION>
Class A Common, $5 Par Value Class B Common
----------------------------------------- $0.1667 Par Value
Shares Treasury Shares Shares Issued and
Issued Shares Outstanding Outstanding
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance December 31, 1994 .................. 1,381,308 203,558 1,177,750 --
Common stock issued in connection
with acquisitions of businesses . -- (15,762) 15,762 --
---------- ---------- ---------- ----------
Balance December 31, 1995 .................. 1,381,308 187,796 1,193,512 --
Issuance of Class B common stock ........... -- -- -- 517,500
Common stock issued in connection
with acquisition of business .... -- (17,728) 17,728 112,655
Conversions of Class A common stock
to Class B common stock ......... (5,120) -- (5,120) 153,600
--------- ---------- ---------- ----------
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
========= ========== ========== ==========
</TABLE>
On May 6, 1996, Berkshire shareholders approved a recapitalization
plan which created a new class of common stock, designated as Class B Common
Stock. In connection therewith, Berkshire's then 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. 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.
On May 8, 1996, Berkshire completed an initial public offering of
517,500 shares of Class B Common Stock. Berkshire received net proceeds from the
offering of $565.0 million. 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.
(12) DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES
Payments of dividends by Insurance Group members are restricted by
insurance statutes and regulations. Without prior regulatory approval in 1998,
Berkshire can receive up to approximately $3.5 billion as dividends from
insurance subsidiaries.
Combined shareholders' equity of insurance subsidiaries determined
pursuant to statutory accounting rules (Statutory Surplus as Regards
Policyholders) was approximately $37.2 billion at December 31, 1997. This amount
exceeded by approximately $7.8 billion 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 re
reinsurance assumed, and unrealized gains and losses on investments in
securities with fixed maturities are recognized under GAAP but not for statutory
reporting purposes. In addition, goodwill of acquired businesses is subject to a
shorter amortization period under statutory accounting rules than is permitted
under GAAP.
36
<PAGE> 38
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, the Company used quoted market prices when
available. For instruments where quoted market prices were not available, the
Company used independent pricing services or appraisals by the Company's
management. 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 the Company could
realize 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 the Company's other financial
instruments as of December 31, 1997 and 1996, are as follows (in millions):
<TABLE>
<CAPTION>
Carrying Value Estimated Fair Value
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Investments in securities with fixed
maturities.......................................... $ 10,297.8 $ 6,446.9 $ 10,297.8 $ 6,446.9
Investments in equity securities......................... 36,247.7 27,750.6 36,247.7 27,750.6
Assets of finance businesses............................. 1,248.8 968.8 1,367.3 997.7
Borrowings under investment agreements and
other debt.......................................... 2,266.7 1,944.4 2,262.0 1,937.9
Liabilities of finance businesses........................ 1,067.2 851.3 1,149.4 851.9
</TABLE>
(14) 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
1997 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues .................................... $ 2,074.8 $ 2,338.2 $ 2,372.7 $ 3,644.3
--------- --------- --------- ---------
Earnings:
Excluding realized investment gain ..... $ 263.1 $ 254.9 $ 248.1 $ 432.0
Realized investment gain ............... 21.3 22.9 118.5 540.8*
--------- --------- --------- ---------
Net earnings ........................... $ 284.4 $ 277.8 $ 366.6 $ 972.8
========= ========= ========= =========
Earnings per equivalent Class A common share:
Excluding realized investment gain ..... $ 213.51 $ 206.86 $ 201.03 $ 350.05
Realized investment gain ............... 17.29 18.58 96.02 438.20*
--------- --------- --------- ---------
Net earnings ........................... $ 230.80 $ 225.44 $ 297.05 $ 788.25
========= ========= ========= =========
</TABLE>
* Includes $427.3 million ($346.47/share), net of taxes, related to gain
arising from Travelers Group Inc.'s acquisition of Salomon Inc. See Note
5.
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
1996 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues .................................... $ 4,139.7 $ 1,914.8 $ 2,015.3 $ 2,430.5
--------- --------- --------- ---------
Earnings:
Excluding realized investment gain ..... $ 160.2 $ 193.7 $ 201.4 $ 328.1
Realized investment gain (loss) ........ 1,508.5* (2.5) 62.6 36.6
--------- --------- --------- ---------
Net earnings ........................... $ 1,668.7 $ 191.2 $ 264.0 $ 364.7
========= ========= ========= =========
Earnings per equivalent Class A common share:
Excluding realized investment gain ..... $ 134.23 $ 160.91 $ 166.34 $ 270.52
Realized investment gain (loss) ........ 1,263.92* (2.08) 51.70 30.17
--------- --------- --------- ---------
Net earnings ........................... $1,398.15 $ 158.83 $ 218.04 $ 300.69
========= ========= ========= =========
</TABLE>
* Includes $1.4 billion ($1,143.68/share), net of taxes, related to gain
arising from The Walt Disney Company's acquisition of Capital Cities/ABC,
Inc. See Note 5.
37
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) BUSINESS SEGMENT DATA
Berkshire identified seven business segments for purposes of 1997
reporting pursuant to SFAS No. 14. These include the property and casualty
insurance business (The Insurance Segment) conducted on both a direct and
reinsurance basis through a number of subsidiaries. Included in this segment is
GEICO Corporation, the seventh largest auto insurer in the United States and
National Indemnity Company, one of the world's leading providers of catastrophe
excess of loss reinsurance. Berkshire's six separately conducted non-insurance
business segments are as follows:
<TABLE>
<CAPTION>
Business identity
and headquarters Segment Activity
---------------- ------- --------
<S> <C> <C>
FlightSafety International Aviation training High technology training to operators of
Flushing, NY aircraft and ships
See's Candies Candy Manufacture and distribution at retail
South San Francisco, CA and by catalog solicitation
Kirby, Douglas and
Cleveland Wood Divisions
of The Scott Fetzer Company Home cleaning systems Manufacture and sale principally to distributors
Cleveland, OH
Nebraska Furniture Mart, Home furnishings Retailing
R.C. Willey Home Furnishings
and Star Furniture Company
Omaha, NE, Salt Lake
City, UT and Houston, TX
Buffalo News Newspaper Publication of a daily and Sunday newspaper
Buffalo, NY
H. H. Brown Shoe Co.,
Lowell Shoe, Inc. and
Dexter Shoe Companies Shoes Manufacture, importing and distribution at wholesale
Greenwich, CT, Hudson, and retail
NH and Dexter, ME
</TABLE>
The business segments identified above were responsible in 1997 for
86% of Berkshire's consolidated revenues. Other businesses activities that
contributed for 1997, in the aggregate, 13% of Berkshire's consolidated
revenues, were as follows:
<TABLE>
<CAPTION>
Business identity Product/Service/Activity
- ----------------- ------------------------
<S> <C>
Adalet Electrical enclosure systems and cable accessories
BHR Real estate management
Berkshire Hathaway
Credit Corporation Commercial financing
Berkshire Hathaway Life
Insurance Co. Annuities and other financial products
Blue Chip Stamps Marketing motivational services
Borsheim's Retailing fine jewelry
Campbell Hausfeld Air compressors, air tools, painting systems, pressure washers, welders and generators
Carefree Comfort and convenience products for the recreational vehicle industry
Fechheimer Bros. Co. Uniforms and accessories
France Ignition and sign transformers and components
Halex Zinc die cast conduit fittings and other electrical construction materials
Helzberg's Diamond Shops Retailing fine jewelry
Kingston Appliance controls
Meriam Pressure and flow measurement devices
Northland Fractional horsepower electric motors
Powerwinch Marine and general purpose winches, windlasses, and hoists
Precision Steel Products Steel service center
Quikut Cutlery for home and sporting goods markets
ScottCare Cardiopulmonary rehabilitation and monitoring equipment
Scott Fetzer Financial Group Commercial and consumer finance companies
Scot Labs Cleaning and maintenance chemicals
Stahl Truck equipment including service bodies, flatbed bodies, cranes, tool boxes and dump bodies
Wayne Combustion Systems Oil and gas burners for residential and commercial furnaces and water heaters
Wayne Pumps Sump, utility and sewage pumps
Wesco Financial Real estate management
Western Enterprises Medical and industrial compressed gas fittings and regulators
Western Plastics Molded plastic components
World Book Printed and multimedia encyclopedias and other reference materials
</TABLE>
38
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) 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 OPERATING PROFIT BEFORE TAXES
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Identified Segments:
Insurance .................. $ 6,695.4 $ 7,133.1 $ 1,715.7 $ 2,346.7 $ 3,189.6 $ 776.5
Non-insurance businesses ... 2,297.8 1,812.3 1,617.2 391.9 259.6 225.8
--------- --------- --------- --------- --------- ---------
8,993.2 8,945.4 3,332.9 2,738.6 3,449.2 1,002.3
Other than identified segments .. 1,436.8 1,554.9 1,230.4 194.2 349.7 138.1
Interest expense * .............. (105.2) (93.0) (56.0)
--------- --------- --------- --------- --------- ---------
Aggregate consolidated total $10,430.0 $10,500.3 $ 4,563.3 $ 2,827.6 $ 3,705.9 $ 1,084.4
========= ========= ========= ========= ========= =========
</TABLE>
* Amounts of interest expense represent those for borrowings under
investment agreements and other debt exclusive of that of finance
businesses and interest allocated to certain identified segments.
<TABLE>
<CAPTION>
INSURANCE SEGMENT REVENUES OPERATING PROFIT BEFORE TAXES
1997 1996 1995 1997 1996 1995
-------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned: *
Direct............................ $ 3,878.5 $ 3,432.9 $ 287.3
Reinsurance assumed............... 968.4 764.0 718.4
Reinsurance ceded................. (85.8) (79.1) (48.2)
-------- --------- --------
4,761.1 4,117.8 957.5
Underwriting........................... $ 461.4 $ 230.7 $ 19.6
Goodwill amortization.................. (42.9) (42.6) --
Investment income...................... 879.0 725.9 577.1 872.9 712.1 575.8
Realized investment gain............... 1,055.3 2,289.4 181.1 1,055.3 2,289.4 181.1
-------- --------- -------- -------- -------- -------
$6,695.4 $7,133.1 $1,715.7 $2,346.7 $3,189.6 $776.5
======== ========= ======== ======== ======== ======
</TABLE>
* Premiums written were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Direct................................................. $3,980.4 $3,465.4 $ 294.8
Reinsurance assumed.................................... 956.5 722.7 777.9
Reinsurance ceded...................................... (84.6) (82.9) (48.5)
--------- --------- ---------
$4,852.3 $4,105.2 $1,024.2
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
NON-INSURANCE BUSINESS SEGMENTS REVENUES OPERATING PROFIT BEFORE TAXES
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aviation training .............. $ 410.9 $ 8.4 $ -- $ 118.6 $ 2.7 $ --
Candy .......................... 269.2 248.9 233.6 57.6 50.9 49.3
Home cleaning systems 253.5 253.7 235.6 66.5 62.5 52.6
Home furnishings ............... 667.1 586.6 428.1 53.7 41.0 28.1
Newspaper ...................... 155.5 154.2 154.8 55.4 49.8 46.3
Shoes .......................... 541.6 560.5 565.1 40.1 52.7 49.5
-------- -------- -------- -------- -------- --------
$2,297.8 $1,812.3 $1,617.2 $ 391.9 $ 259.6 $ 225.8
======== ======== ======== ======== ======== ========
</TABLE>
39
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) BUSINESS SEGMENT DATA (Continued)
<TABLE>
<CAPTION>
OTHER THAN IDENTIFIED SEGMENTS REVENUES OPERATING PROFIT BEFORE TAXES
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Other businesses ....................... $1,349.4 $1,306.2 $1,179.6 $ 123.4 $ 116.1 $ 101.2
Not identified with specific businesses:
Interest and dividend income ...... 36.4 54.0 37.8 36.4 54.0 37.8
Realized investment gain .......... 51.0 194.7 13.0 51.0 194.7 13.0
All other except interest expense . (16.6) (15.1) (13.9)
-------- -------- -------- -------- -------- --------
$1,436.8 $1,554.9 $1,230.4 $ 194.2 $ 349.7 $ 138.1
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DEPREC. & AMORT.
CAPITAL EXPENDITURES * OF TANGIBLE ASSETS
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Insurance ........... $ 28.7 $ 12.2 $ 1.2 $ 27.2 $ 26.3 $ 0.9
Aviation training ... 118.9 -- -- 54.9 -- --
Candy ............... 20.1 5.3 5.1 4.5 4.5 4.1
Home cleaning systems 0.6 2.0 0.3 2.8 2.7 3.0
Home furnishings .... 43.3 21.6 9.2 10.5 10.0 9.7
Newspaper ........... 2.9 1.0 1.8 2.4 2.8 4.9
Shoes ............... 10.8 12.8 13.7 13.2 13.4 12.0
Other ............... 16.9 26.9 22.9 28.6 28.0 25.7
------ ------ ------ ------ ------ ------
$242.2 $ 81.8 $ 54.2 $144.1 $ 87.7 $ 60.3
====== ====== ====== ====== ====== ======
</TABLE>
* Excludes expenditures which were part of business acquisitions.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
AT YEAR-END
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Insurance ........... $49,962.5 $36,597.8 $25,280.0
Aviation training ... 1,679.2 1,683.7 --
Candy ............... 88.1 74.1 74.5
Home cleaning systems 43.2 44.3 42.9
Home furnishings .... 593.9 445.8 427.7
Newspaper ........... 42.1 42.0 45.0
Shoes ............... 634.7 624.4 656.7
Other ............... 3,067.2 3,897.3 2,184.6
--------- --------- ---------
$56,110.9 $43,409.4 $28,711.4
========= ========= =========
</TABLE>
(16) SUPPLEMENTAL CASH FLOW INFORMATION
A summary of supplemental cash flow information is presented in the
following table (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes..................................................... $ 498.5 $ 965.9 $ 294.6
Interest ........................................................ 123.1 129.4 83.9
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses 25.4 4,172.1 248.0
Common shares issued in connection with acquisitions of
businesses .................................................. 73.0 710.8 348.5
Fair value of investments acquired as part of exchanges
and conversions ............................................. 1,837.4 1,618.6 --
Contingent value of Exchange Notes
recognized in earnings ...................................... 298.4 -- --
</TABLE>
40
<PAGE> 42
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 May 4, 1998, 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 22
Consolidated Balance Sheets at December 31, 1997 and 1996 23
Consolidated Statements of Earnings for the years ended
1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the years ended
1997, 1996 and 1995 25
Consolidated Statements of Changes in Shareholders' Equity
for the years ended 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 27-40
</TABLE>
<TABLE>
<CAPTION>
(a) 2. Financial Statement Schedule PAGE
<S> <C>
Independent Auditors' Report on Schedule 43
Schedule I -- Parent Company 44-45
Condensed Balance Sheets as of December 31, 1997
and 1996 and Condensed Statements of Earnings and
Cash Flows for the years ended 1997, 1996 and
1995.
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.
</TABLE>
(a) 3. Exhibits
See the "Exhibit Index" at page 46.
(b) Reports on Form 8-K -- None
41
<PAGE> 43
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 27, 1998 /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 27, 1998
- ----------------------------- of Directors - Chief --------------
Warren E. Buffett Executive Officer Date
/s/ Howard G. Buffett Director March 27, 1998
- ----------------------------- --------------
Howard G. Buffett Date
/s/ Susan T. Buffett Director March 27, 1998
- ----------------------------- --------------
Susan T. Buffett Date
/s/ Charles T. Munger Vice Chairman of the March 27, 1998
- ----------------------------- Board of Directors --------------
Charles T. Munger Date
/s/ Malcolm G. Chace Director March 27, 1998
- ----------------------------- --------------
Malcolm G. Chace Date
/s/ Walter Scott, Jr. Director March 27, 1998
- ----------------------------- --------------
Walter Scott, Jr. Date
/s/ Ronald L. Olson Director March 27, 1998
- ----------------------------- --------------
Ronald L. Olson Date
/s/ Marc D. Hamburg Vice President - March 27, 1998
- ----------------------------- Principal Financial --------------
Marc D. Hamburg Officer Date
/s/ Daniel J. Jaksich Controller March 27, 1998
- ----------------------------- --------------
Daniel J. Jaksich Date
</TABLE>
42
<PAGE> 44
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, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated March 6, 1998; 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 6, 1998
43
<PAGE> 45
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I
This Schedule includes the accounts of the Buffalo News Division, a
division of Registrant. Its business is the publishing of a daily and Sunday
newspaper in Buffalo, New York.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
--------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents ........................... $ 365.8 $ 718.9
Investments in consolidated subsidiaries ............ 32,586.9 23,846.2
Investments - other than consolidated subsidiaries .. 36.7 900.9
Other assets (includes identifiable assets of the
Buffalo News Division of $42.1 and $42.0 at
December 31, 1997 and 1996 respectively) ....... 54.7 64.3
--------- ---------
$ 33,044.1 $ 25,530.3
========= =========
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses ............... $ 27.9 $ 798.5
Borrowings under investment agreements and other debt 1,627.1 1,324.9
Income taxes, principally deferred .................. (66.1) (19.4)
--------- ---------
1,588.9 2,104.0
Shareholders' equity ................................ 31,455.2 23,426.3
--------- ---------
$ 33,044.1 $ 25,530.3
========= =========
</TABLE>
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ending December 31,
Income items: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
From consolidated subsidiaries:
Interest ............................. $ 11.2 $ 7.1 $ 6.8
Dividends ............................ 328.3 304.4 341.1
Undistributed earnings ............... 1,771.0 2,080.7 441.7
-------- -------- --------
2,110.5 2,392.2 789.6
Interest and dividends - other investments 6.5 34.6 21.1
Realized investment gain (loss) ........... (296.7) 137.4 5.8
Revenues of Buffalo News Division ......... 155.6 154.3 154.8
-------- -------- --------
1,975.9 2,718.5 971.3
-------- -------- --------
Cost and expense items:
Costs and expenses of Buffalo News Division 100.3 104.5 108.5
General and administrative ................ 8.5 6.8 7.5
Interest and finance charges .............. 66.8 57.5 48.9
Income tax expense (benefit) .............. (101.3) 61.1 11.5
-------- -------- --------
74.3 229.9 176.4
-------- -------- --------
Net earnings ......................... $1,901.6 $2,488.6 $ 794.9
======== ======== ========
</TABLE>
See Note to Condensed Financial Information
44
<PAGE> 46
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I (continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ending December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ...................................... $1,901.6 $2,488.6 $ 794.9
Adjustments to reconcile net earnings to
cash flows from operating activities:
Undistributed current earnings of subsidiaries (1,771.0) (2,080.7) (441.7)
Realized investment (gain) loss .............. 296.7 (137.4) (5.8)
Increase (decrease) in income taxes .......... (35.3) (77.2) 21.5
Other ........................................ (4.5) (72.7) 2.0
-------- -------- --------
Net cash flows from operating activities .......... 387.5 120.6 370.9
-------- -------- --------
Cash flows from investing activities:
Investments in and advances to consolidated
subsidiaries ................................... (880.8) 24.2 (546.8)
Purchases of investments .......................... -- (717.6) (81.8)
Proceeds on sales and maturities of investments ... 189.0 36.4 279.8
-------- -------- --------
Net cash flows from investing activities .......... (691.8) (657.0) (348.8)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings .......................... 1,004.8 1,525.7 1,196.5
Repayment of borrowings ........................... (1,053.9) (1,085.4) (1,076.7)
Net proceeds from issuance of Class B Common Stock -- 565.0 --
Other ............................................. 0.3 -- --
-------- -------- --------
Net cash flows from financing activities .......... (48.8) 1,005.3 119.8
-------- -------- --------
Increase (decrease) in cash and cash equivalents ........ (353.1) 468.9 141.9
Cash and cash equivalents at beginning of year .......... 718.9 250.0 108.1
-------- -------- --------
Cash and cash equivalents at end of year ................ $ 365.8 $ 718.9 $ 250.0
======== ======== ========
Other cash flow information:
Income taxes paid ................................. 469.5 887.3 273.3
Interest paid ..................................... 57.4 55.2 47.6
</TABLE>
NOTE TO CONDENSED FINANCIAL INFORMATION
Borrowings under investment agreements are made pursuant to contracts
with terms generally ranging from three months to forty years and calling for
interest payable, normally semiannually, at fixed rates ranging from 3% to 9%
per annum. The borrowings are senior unsecured debt obligations of the Company.
No materially restrictive covenants are included in any of the various debt
agreements.
Principal payments of the Registrant's borrowings under investment
agreements and other debt outstanding at December 31, 1997, during the next five
years are expected as follows (in millions): 1998 - $49.1; 1999 - $15.8; 2000 -
$13.1; 2001 - $820.7; 2002 - $21.2.
Other debt consists primarily of 1% Senior Exchangeable Notes issued
in 1996 and due in 2001. The terms, conditions, and financial statement
presentation of the Exchange Notes, including the related contingent payment
feature, are described in Notes 5 and 9 to Berkshire's Consolidated Financial
Statements.
45
<PAGE> 47
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.
3 Restated Certificate of Incorporation Incorporated by reference to
Exhibit 3 of the Registrant's 1996 Annual Report filed on Form 10-K.
3.1 By-Laws Incorporated by reference to Exhibit 3 to Registration
Statement No. 333-40685 filed on Form S-4.
4.1 Form of Indenture dated as of December 1, 1987 between 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 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, 1997. 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.)
46
<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,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net earnings ................................... $1,901.6 $2,488.6 $ 794.9 $ 553.0 $ 843.6
Income tax expense ........................ 897.7 1,196.8 276.2 163.3 439.7**
Minority interest in earnings ............. 28.3 20.5 13.3 8.7 10.0
Equity in the net income of investees
accounted for under the equity method -- -- (92.5) (29.9) (103.6)
Fixed charges* ............................ 140.9 124.0 75.5 70.2 65.7
-------- -------- -------- ------- --------
Earnings available for fixed charges ........... $2,968.5 $3,829.9 $1,067.4 $ 765.3 $1,255.4
======== ======== ======== ======= ========
Realized investment gain, pretax, included in
earnings available for fixed charges ...... $1,106.3 $2,484.1 $ 194.1 $ 91.3 $ 546.4
======== ======== ======== ======= ========
Fixed charges*
Interest on indebtedness (including amorti-
zation of debt discount and expense) . $ 111.9 $ 99.7 $ 59.3 $ 60.1 $ 56.6
Rentals representing interest ............. 29.0 24.3 16.2 10.1 9.1
-------- -------- -------- ------- --------
$ 140.9 $ 124.0 $ 75.5 $ 70.2 $ 65.7
======== ======== ======== ======= ========
Ratio of earnings to fixed charges* ............ 21.07x 30.89x 14.14x 10.90x 19.11x
======== ======== ======== ======= ========
Ratio of earnings, excluding realized invest-
ment gain, to fixed charges* .............. 13.22x 10.85x 11.57x 9.60x 10.79x
======== ======== ======== ======= ========
</TABLE>
- ----------
* Excludes fixed charges of finance businesses. Fixed charges of finance
businesses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
$20.1 $30.4 $29.1 $31.8 $24.4
</TABLE>
Including fixed charges of finance businesses the ratios of earnings
to fixed charges were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C>
Including realized investment gain.... 18.56x 25.00x 10.48x 7.81x 14.20x
Excluding realized investment gain.... 11.69x 8.91x 8.63x 6.92x 8.14x
</TABLE>
** Includes charge of $33.3 representing the cumulative effect of change in
accounting for income taxes.
<PAGE> 1
Reg. S-K
Item 601
Exhibit 21
BERKSHIRE HATHAWAY INC.
Subsidiaries of Registrant (1)
December 31, 1997
<TABLE>
<CAPTION>
State of
Company Name Incorporation
------------ -------------
<S> <C>
Berkshire Hathaway Credit Corporation Nebraska
Berkshire Hathaway Life Insurance Company of Nebraska Nebraska
BHG Life Insurance Company Nebraska
BHSF Inc. Delaware
BH Shoe Holdings, Inc. Delaware
Blue Chip Stamps California
Borsheim Jewelry Company, Inc. Nebraska
Campbell Hausfeld/Scott Fetzer Company Delaware
Central States Indemnity Co. of Omaha Nebraska
Central States of Omaha Companies, Inc. Nebraska
Columbia Insurance Company Nebraska
Continental Divide Insurance Company Colorado
Cornhusker Casualty Company Nebraska
Cypress Insurance Company California
Dexter Shoe Company Maine
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
Government Employees Insurance Company Maryland
Helzberg's Diamond Shops, Inc. Missouri
H. H. Brown Shoe Company, Inc. Delaware
Isabela Shoe Corporation Delaware
Kansas Bankers Surety Company Kansas
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
Nebraska Furniture Mart, Inc. Nebraska
Oak River Insurance Company Nebraska
OCSAP, Ltd Maine
R.C. Willey Home Furnishings Utah
Redwood Fire and Casualty Insurance Company Nebraska
Resolute Reinsurance Company New York
The Scott Fetzer Company Delaware
Scott Fetzer Financial Group, Inc. Delaware
</TABLE>
<PAGE> 2
Reg. S-K
Item 601
Exhibit 21
BERKSHIRE HATHAWAY INC.
Subsidiaries of Registrant (1) (Continued)
December 31, 1997
<TABLE>
<CAPTION>
State of
Company Name Incorporation
------------ -------------
<S> <C>
See's Candies, Inc. California
See's Candy Shops, Incorporated 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 29 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. 33-50989), Form S-3 (File No.
33-58983), Form S-3 (File No. 33-60855) and Form S-3 (File No. 333-31237) of our
reports dated March 6, 1998, appearing in this Annual Report on Form 10-K of
Berkshire Hathaway Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 27, 1998
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,002
<SECURITIES> 46,546
<RECEIVABLES> 1,712
<ALLOWANCES> 0
<INVENTORY> 639
<CURRENT-ASSETS> 0
<PP&E> 1,057
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,111
<CURRENT-LIABILITIES> 0
<BONDS> 2,267
0
0
<COMMON> 7
<OTHER-SE> 31,448
<TOTAL-LIABILITY-AND-EQUITY> 56,111
<SALES> 3,578
<TOTAL-REVENUES> 8,370
<CGS> 2,187
<TOTAL-COSTS> 6,487
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 2,828
<INCOME-TAX> 898
<INCOME-CONTINUING> 1,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,902
<EPS-PRIMARY> 1,542
<EPS-DILUTED> 1,542
</TABLE>
