<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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)
<TABLE>
<S> <C>
Delaware 04 2254452
------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
</TABLE>
1440 Kiewit Plaza, Omaha, Nebraska 68131
---------------------------------------------------
(Address of principal executive office)
(Zip Code)
(402) 346-1400
-------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
X
----- ----
YES NO
Number of shares of common stock outstanding as of October 30, 1998:
Class A -- 1,183,579
Class B -- 1,883,864
<PAGE> 2
FORM 10-Q
BERKSHIRE HATHAWAY INC.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets-- 2
September 30, 1998 and December 31, 1997
Consolidated Statements of Earnings-- 3
Third Quarter and First Nine Months 1998 and 1997
Condensed Consolidated Statements of Cash Flows-- 4
First Nine Months 1998 and 1997
Notes to Interim Consolidated Financial Statements 5-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-15
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 15
</TABLE>
1
<PAGE> 3
FORM 10-Q
BERKSHIRE HATHAWAY INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 6,892 $ 1,002
Investments:
Securities with fixed maturities due within one year . 2,403 1,785
Securities with fixed maturities due after one year .. 2,666 8,513
Equity securities and other investments .............. 31,193 36,248
Receivables ............................................ 1,900 1,711
Inventories ............................................ 762 639
Assets of finance businesses ........................... 1,397 1,249
Property, plant and equipment .......................... 1,325 1,057
Goodwill of acquired businesses ........................ 4,042 3,067
Other assets ........................................... 1,530 840
------- -------
$54,110 $56,111
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses .................... $ 7,513 $ 6,850
Unearned premiums ...................................... 1,583 1,274
Accounts payable, accruals and other liabilities ....... 2,226 2,202
Income taxes, principally deferred ..................... 8,345 10,539
Borrowings under investment agreements and other debt .. 1,792 2,267
Liabilities of finance businesses ...................... 1,222 1,067
------- -------
22,681 24,199
------- -------
Minority shareholders' interests ....................... 472 457
------- -------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value and Class B
Common Stock, $0.1667 par value .................... 7 7
Capital in excess of par value ....................... 3,024 2,347
Unrealized appreciation of investments, net .......... 14,758 18,198
Retained earnings .................................... 13,197 10,934
------- -------
30,986 31,486
Less: Cost of Class A common shares in treasury ...... 29 31
------- -------
Total shareholders' equity ................... 30,957 31,455
------- -------
$54,110 $56,111
======= =======
</TABLE>
* Class B Common Stock has economic rights equal to one-thirtieth (1/30) of
the economic rights of Class A Common Stock. On an equivalent Class A Common
Stock basis, there are 1,246,365 shares outstanding at September 30, 1998
and 1,234,127 shares outstanding at December 31, 1997.
See accompanying Notes to Interim Consolidated Financial Statements
2
<PAGE> 4
FORM 10-Q
BERKSHIRE HATHAWAY INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned ...................... $ 1,367 $ 1,089 $ 3,983 $ 3,332
Sales and service revenues ..................... 1,134 855 3,150 2,493
Interest, dividend and other investment income . 242 237 774 686
Income from finance businesses ................. 13 9 36 24
Realized investment gain ....................... 153 183 2,227 251
---------- ---------- ---------- ----------
2,909 2,373 10,170 6,786
---------- ---------- ---------- ----------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses .. 1,014 823 2,962 2,540
Insurance underwriting expenses ................ 272 197 804 559
Cost of products and services sold ............. 773 543 2,053 1,555
Selling, general and administrative expenses ... 248 221 744 650
Goodwill amortization .......................... 26 21 73 63
Interest expense ............................... 28 29 82 84
---------- ---------- ---------- ----------
2,361 1,834 6,718 5,451
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 548 539 3,452 1,335
Income taxes ................................... 179 169 1,166 395
Minority interest .............................. 4 3 23 11
---------- ---------- ---------- ----------
NET EARNINGS ..................................... $ 365 $ 367 $ 2,263 $ 929
========== ========== ========== ==========
Average shares outstanding * ................... 1,244,275 1,234,121 1,242,075 1,232,878
NET EARNINGS PER SHARE * ......................... $ 293 $ 297 $ 1,822 $ 754
========== ========== ========== ==========
</TABLE>
* Average shares outstanding include average Class A Common shares and
average Class B Common shares determined on an equivalent Class A Common
Stock basis. Net earnings per 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.
See accompanying Notes to Interim Consolidated Financial Statements
3
<PAGE> 5
FORM 10-Q
BERKSHIRE HATHAWAY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
First Nine Months
-----------------
1998 1997
---- ----
<S> <C> <C>
Net cash flows from operating activities .............................. $ 14 $ 1,855
-------- --------
Cash flows from investing activities:
Purchases of investments ....................................... (4,615) (6,784)
Proceeds on sales and maturities of investments ................ 11,475 5,384
Loans and investments originated in finance businesses ......... (395) (352)
Principal collections on loans and investments originated
in finance businesses ........................................ 213 214
Acquisitions of businesses ..................................... (549) (775)
Other .......................................................... (202) (147)
-------- --------
Net cash flows from investing activities .............................. 5,927 (2,460)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses ................. 120 76
Proceeds from other borrowings ................................. 897 778
Repayments of borrowings of finance businesses ................. (80) (156)
Repayments of other borrowings ................................. (1,035) (905)
Other .......................................................... 3 (1)
-------- --------
Net cash flows from financing activities .............................. (95) (208)
-------- --------
Increase(decrease) in cash and cash equivalents ....................... 5,846 (813)
Cash and cash equivalents at beginning of year* ....................... 1,058 1,350
-------- --------
Cash and cash equivalents at end of first nine months* ................ $ 6,904 $ 537
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ................................................... $ 1,437 $ 338
Interest ....................................................... 102 98
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses 276 25
Common shares issued in connection with acquisitions of businesses 675 73
Contingent value of Exchange Notes recognized in earnings ........ 61 --
Value of equity securities used to redeem Exchange Notes ......... 344 --
* Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance businesses ............................................... $ 56 $ 10
Other ............................................................ 1,002 1,340
-------- --------
$ 1,058 $ 1,350
======== ========
End of first nine months --
Finance businesses ............................................... $ 12 $ 16
Other ............................................................ 6,892 521
-------- --------
$ 6,904 $ 537
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
4
<PAGE> 6
FORM 10-Q
BERKSHIRE HATHAWAY INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited consolidated financial statements include the
accounts of Berkshire consolidated with the accounts of all its subsidiaries.
Reference is made to Berkshire's most recently issued Annual Report that
included information necessary or useful to understanding of Berkshire's
businesses and financial statement presentations. In particular, Berkshire's
significant accounting policies and practices were presented as Note 1 to the
Consolidated Financial Statements included in that Report.
Financial information in this Report reflects any adjustments (consisting
only of normal recurring adjustments) that are, in the opinion of management,
necessary to a fair statement of results for the interim periods in accordance
with generally accepted accounting principles. Certain amounts for 1997 have
been reclassified to conform with the 1998 presentation.
For a number of reasons, Berkshire's results for interim periods are not
normally indicative of results to be expected for the year. The timing and
magnitude of catastrophe losses incurred by insurance subsidiaries and the
estimation error inherent to the process of determining liabilities for unpaid
losses of insurance subsidiaries can be more significant to results of interim
periods than to results for a full year. Realized investment gains/losses are
recorded when investments are sold, other-than-temporarily impaired or in
certain situations, as required by GAAP, when investments are marked-to-market
with the corresponding gain or loss included in earnings. Variations in amount
and timing of realized investment gains/losses can cause significant variations
in periodic net earnings.
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 -- "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes new standards for reporting information about operating segments in
interim and annual financial statements. SFAS No. 131 is effective for periods
beginning after December 15, 1997 and will be adopted by the Company as of
December 31, 1998.
During 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999.
Berkshire does not anticipate that adoption of these standards will have a
material effect on its financial position, results of operations, or disclosures
within the financial statements.
NOTE 2. BUSINESS ACQUISITIONS
On January 7, 1998, the previously announced merger of International Dairy
Queen, Inc. ("Dairy Queen") with and into a wholly owned subsidiary of Berkshire
was completed. Owners of Dairy Queen shares outstanding received merger
consideration of approximately $588 million, consisting of $265 million in cash
and the remainder in Class A and Class B Common Stock.
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.
On July 23, 1998, Berkshire announced that it had signed a merger agreement
with Executive Jet, Inc. ("Executive Jet"). On August 7, 1998, the merger was
consummated. Under the terms of the agreement, shareholders of Executive Jet
received total consideration of $701 million, consisting of $350 million in cash
and $351 million in Class A and Class B Common Stock.
Executive Jet is the world's leading provider of fractional ownership
programs for general aviation aircraft. Executive Jet currently operates its
NetJets(R) fractional ownership programs in the United States and Europe. In
addition, Executive Jet is pursuing other international activities. The
fractional ownership concept was first introduced in 1986. Since then the
NetJets program has grown to include nine aircraft types with plans to introduce
several more models in the next two years.
The purchase method was used to account for each of the mergers. The excess
of the purchase prices over the fair values of net assets acquired was recorded
as goodwill of acquired businesses and is being amortized ratably over forty
years. Berkshire's results of operations include the results of Dairy Queen
beginning on January 7, 1998 and Executive Jet beginning on August 7, 1998.
5
<PAGE> 7
FORM 10-Q
BERKSHIRE HATHAWAY INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PENDING MERGER
On June 19, 1998, Berkshire announced that it had signed a merger agreement
with General Re Corporation ("General Re"). The merger was approved by Berkshire
shareholders on September 16, 1998 and by General Re shareholders on September
18, 1998. As of October 30, 1998, all necessary regulatory approvals have been
received. Under the terms of the agreement, General Re shareholders will receive
at their election either 0.0035 shares of Berkshire Class A Common Stock or
0.105 shares of Berkshire Class B Common Stock for each share of General Re
common stock they own at the time the transaction is consummated.
The merger agreement provides that Berkshire and General Re must receive
certain tax rulings from the Internal Revenue Service prior to February 19, 1999
or an alternative form of transaction can be elected by Berkshire. Under the
alternative transaction, shareholders of General Re will receive the same
aggregate value in consideration as stated in the prior paragraph, but will
receive 3% of the consideration in cash rather than stock. It is expected that
the transaction will be completed during 1998's fourth quarter after receipt of
the tax rulings. The total consideration for the transaction, based upon the
closing price of Berkshire Class A Common Stock on October 30, 1998 is
approximately $17.5 billion.
General Re is a holding company for global reinsurance and related risk
management operations. It owns General Reinsurance Corporation and National
Reinsurance Corporation, the largest professional property/casualty reinsurance
group domiciled in the United States, and also holds a controlling interest in
Kolnische Ruckversicherungs-Gesellschaft AG (Cologne Re), a major international
reinsurer. Together, General Re and Cologne Re transact reinsurance business as
"General & Cologne Re".
In addition, General Re writes excess and surplus lines insurance through
General Star Management Company, provides alternative risk solutions through
Genesis Underwriting Management Company, provides reinsurance brokerage services
through Herbert Clough, Inc., manages aviation insurance risks through United
States Aviation Underwriters, Inc., and acts as a business development
consultant and reinsurance intermediary through Ardent Risk Services, Inc.
General Re also operates as a dealer in the swap and derivatives market through
General Re Financial Products Corporation, and provides specialized investment
services to the insurance industry through General Re-New England Asset
Management, Inc.
NOTE 4. INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
Data with respect to investments in securities with fixed maturities (other
than securities with fixed maturities held by finance businesses -- See Note 9)
are shown in the tabulation below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Amortized cost ......................... $ 5,127 $ 9,113
Gross unrealized gains ................. 105 1,186
Gross unrealized losses ................ (163) (1)
-------- --------
Estimated fair value ................... $ 5,069 $ 10,298
======== ========
Estimated fair value due within one year $ 2,403 $ 1,785
Estimated fair value due after one year 2,666 8,513
-------- --------
$ 5,069 $ 10,298
======== ========
</TABLE>
6
<PAGE> 8
FORM 10-Q
BERKSHIRE HATHAWAY INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVESTMENTS IN EQUITY SECURITIES AND OTHER INVESTMENTS
Data with respect to investments in equity securities and other investments
are shown in the tabulation below (in millions). Individual investments whose
fair values exceed ten percent of consolidated shareholders' equity at September
30, 1998 are listed separately.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Total cost ............................. $ 8,211 $ 9,017
Gross unrealized gains ................. 23,151 27,277
Gross unrealized losses ................ (169) (46)
-------- --------
Total fair value ....................... $ 31,193 $ 36,248
======== ========
Fair value:
American Express Company ............. $ 3,839 $ 4,414
The Coca-Cola Company ................ 11,525 13,338
The Gillette Company ................. 3,672 4,821
Federal Home Loan Mortgage Corporation 3,164 2,683
All others ........................... 8,993 10,992
-------- --------
Total ................................ $ 31,193 $ 36,248
======== ========
</TABLE>
NOTE 6. DEFERRED INCOME TAX LIABILITIES
The tax effects of significant items comprising the Company's net deferred
tax liabilities as of September 30, 1998 and December 31, 1997 are as follows
(in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Relating to unrealized appreciation
of investments ................... $ 8,078 $ 9,940
Other .............................. 869 1,168
-------- --------
8,947 11,108
Deferred tax assets .................... (682) (708)
-------- --------
Net deferred tax liabilities ....... $ 8,265 $ 10,400
======== ========
</TABLE>
NOTE 7. COMMON STOCK
The following table summarizes Berkshire's common stock activity during the
first nine months of 1998.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
(1,500,000 shares authorized) (50,000,000 shares authorized)
---------------------------------------- ------------------------------
Issued In Treasury Outstanding Issued and Outstanding
------ ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ......... 1,366,090 168,202 1,197,888 1,087,156
Common Stock issued in connection with
acquisition of businesses ........ -- (9,709) 9,709 72,814
Conversions of Class A Common Stock
to Class B Common Stock and other (23,644) -- (23,644) 712,382
---------- ---------- ---------- ----------
Balance at September 30, 1998 ........ 1,342,446 158,493 1,183,953 1,872,352
========== ========== ========== ==========
</TABLE>
7
<PAGE> 9
FORM 10-Q
BERKSHIRE HATHAWAY INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMON STOCK (CONTINUED)
Each Class A Common share is entitled to one vote per share. Each Class B
Common share possesses the voting rights of one-two-hundredth (1/200) of the
voting rights of a Class A share. Class A and Class B Common shares vote
together as a single class.
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. 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 1,246,365
shares outstanding at September 30, 1998 and 1,234,127 shares outstanding at
December 31, 1997.
NOTE 8. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting of Comprehensive Income", as of
the beginning of 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. Other comprehensive income
of the Company consists of unrealized gains and losses on investments. SFAS No.
130 does not affect the measurement of the items included in other comprehensive
income; it affects only where those items are displayed and how they are
described.
Comprehensive income for the third quarter and first nine months of 1998 and
1997 is as follows (in millions):
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings .................................... $ 365 $ 367 $ 2,263 $ 929
Other comprehensive income:
Increase/(decrease) in unrealized appreciation
of investments ............................. (10,360) (680) (5,310) 5,600
Applicable income taxes and minority interests 3,681 236 1,870 (2,021)
-------- -------- -------- --------
(6,679) (444) (3,440) 3,579
-------- -------- -------- --------
Comprehensive income (loss) ..................... $ (6,314) $ (77) $ (1,177) $ 4,508
======== ======== ======== ========
</TABLE>
NOTE 9. FINANCE BUSINESSES
Assets and liabilities of Berkshire's finance businesses are summarized
below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents ........................... $ 12 $ 56
Installment loans and other receivables ............. 236 222
Fixed maturity investments .......................... 1,149 971
------ ------
$1,397 $1,249
====== ======
Liabilities
Borrowings under investment agreements and other debt $ 370 $ 326
Annuity reserves and policyholder liabilities ....... 808 697
Other ............................................... 44 44
------ ------
$1,222 $1,067
====== ======
</TABLE>
8
<PAGE> 10
FORM 10-Q
BERKSHIRE HATHAWAY INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. 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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents ........................... $ 12 $ 11
Installment loans and other receivables * ........... 188 189
Mortgage-backed securities, at cost ................. 16 50
---- ----
$216 $250
==== ====
Liabilities
Borrowings under investment agreements and other debt $155 $192
Other ............................................... 24 25
---- ----
$179 $217
==== ====
</TABLE>
* Includes receivables from affiliated companies of $43 million and $49
million at September 30, 1998 and December 31, 1997, respectively.
Net income from Scott Fetzer Financial Group businesses for the third
quarter and first nine months of 1998 and 1997 is summarized below (in
millions).
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................. $11 $12 $32 $37
Costs and expenses ....... 6 9 19 28
--- --- --- ---
Income before income taxes 5 3 13 9
Income taxes ............. 2 1 5 3
--- --- --- ---
Net income ............... $ 3 $ 2 $ 8 $ 6
=== === === ===
</TABLE>
9
<PAGE> 11
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter and first nine months of the current and
prior year are summarized in the following table. Amounts are in millions and
each figure is income tax effected.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance, except realized investment gain . $ 202 $ 202 $ 636 $ 620
Manufacturing, merchandising and services .. 71 58 221 179
Unallocated income/expense, net ............ 8 5 20 17
Interest expense * ......................... (17) (17) (49) (50)
------- ------- ------- -------
Earnings before realized investment gain 264 248 828 766
Realized investment gain ................... 101 119 1,435 163
------- ------- ------- -------
Net earnings ........................... $ 365 $ 367 $ 2,263 $ 929
======= ======= ======= =======
</TABLE>
* For purposes of the above table, interest expense of finance businesses is
netted against the directly related service activity revenues.
INSURANCE GROUP
The after tax figures shown above for Insurance Group earnings, except
realized investment gain, are detailed in the following table. Amounts are in
millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned from:
Direct insurance .................... $ 1,116 $ 968 $ 3,204 $ 2,786
Reinsurance assumed ................. 251 121 779 546
------- ------- ------- -------
$ 1,367 $ 1,089 $ 3,983 $ 3,332
======= ======= ======= =======
Underwriting gain (loss) attributable to:
Direct insurance .................... $ 97 $ 112 $ 246 $ 247
Reinsurance assumed ................. (16) (43) (29) (14)
------- ------- ------- -------
Total underwriting gain ........... 81 69 217 233
Net investment income ................... 216 218 700 631
Goodwill amortization * ................. (12) (10) (33) (32)
------- ------- ------- -------
Earnings before income taxes ...... 285 277 884 832
Income tax expense ...................... 81 73 242 206
Minority interest ....................... 2 2 6 6
------- ------- ------- -------
Net earnings from Insurance,
except realized investment gain $ 202 $ 202 $ 636 $ 620
======= ======= ======= =======
</TABLE>
* Principally related to the GEICO merger.
In direct insurance activities, Insurance Group members assume risks of loss
from parties who are directly subject to the risks. In reinsurance activities,
the members assume defined portions of similar or dissimilar risks to which
other insurers or reinsurers have subjected themselves in their own insuring
activities.
Direct insurance activities are conducted by GEICO, which became a wholly
owned subsidiary of Berkshire in January 1996, and, to a lesser degree, by
several other Berkshire subsidiaries. GEICO, through its subsidiaries, provides
primarily private passenger automobile insurance to insureds in 48 states and
the District of Columbia. GEICO policies are marketed mainly through direct
response methods, in which insureds 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. Other direct insurance
activities are conducted through 14 other Berkshire affiliates. These businesses
offer a wide variety of commercial and personal insurance coverage to insureds
located principally in the United States.
10
<PAGE> 12
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (CONTINUED)
Insurance premiums earned during the third quarter by GEICO totaled $1,035
million in 1998 and $887 million in 1997. For the first nine months, premiums
earned by GEICO were $2,957 million in 1998 and $2,557 million in 1997. The
growth in premiums earned largely derived from significant increases in
voluntary auto policies in-force, partially offset by declines in residual
market auto and homeowners insurance business. Voluntary auto premiums earned
for the first nine months of 1998 exceeded 1997 by 17.6%, reflecting a 19.1%
increase in policies in-force offset slightly by the effects of certain premium
rate reductions. Policy growth over the past twelve months was 15.7% in the
preferred-risk auto business and 38.6% in the standard and non-standard auto
lines. The in-force policy growth resulted from GEICO's ongoing marketing
efforts and competitive prices. It is expected that voluntary policies in-force
will continue to grow at the same or greater annual rates over the remainder of
1998 and into 1999. Premium rate reductions were taken in certain states during
1998 with the intention of better aligning premium rates with profit targets.
Such reductions will be fully reflected in premiums earned over the next twelve
months and are expected to reduce profit margins.
GEICO produced net underwriting gains during the third quarter totaling
approximately $102 million in both 1998 and 1997. For the first nine months,
GEICO's net underwriting gains were $256 million in 1998 and $220 million in
1997. GEICO's net underwriting results in 1998 and 1997 benefitted from lower
than expected claim losses and claim handling expenses. For the first nine
months, losses and loss adjustment expenses incurred, as a percentage of earned
premiums, were 73.0% in 1998 compared to 75.2% in 1997. The lower than expected
ratios in both years reflect declining severity of auto liability claims,
reduced frequency of physical damage claims resulting from generally mild
weather conditions, and relatively minor amounts of catastrophe losses. The 1998
periods reflect higher levels of underwriting expenses related to advertising
and other costs associated with the in-force policy growth and significantly
increased accruals for profit sharing costs.
For the third quarter of 1998, premiums earned from Berkshire's other
diverse direct insurance activities were $81 million, unchanged from the third
quarter of 1997. For the first nine months, premiums earned by these direct
insurance businesses were $247 million in 1998 and $229 million in 1997. In each
period, Central States' credit card credit insurance business was the largest
contributor (approximately 40%) of the total premiums earned by these
businesses. During 1998, other direct insurance businesses collectively produced
net underwriting losses of $5 million for the third quarter and $10 million for
the first nine months compared to net underwriting gains in 1997 of $10 million
for the third quarter and $27 million for the first nine months. The decline in
comparative net underwriting results during 1998 periods primarily reflects the
effects of increased underwriting losses from international auto insurance,
increased claim costs associated with traditional commercial motor vehicle
insurance, and lower underwriting profits from specialty risk insurance.
Reinsurance premiums earned during the first nine months of 1998 and 1997
included $335 million and $142 million, respectively, from retroactive
reinsurance and structured settlement contracts. Such contracts provide for the
indemnification of insurance risks associated with past loss events or periodic
payments on settled claims. Retroactive reinsurance and structured settlement
contracts generated third quarter underwriting losses of $22 million in 1998 and
$18 million in 1997. For the first nine months, these contracts produced
underwriting losses of $68 million in 1998 and $58 million in 1997. Claims
related to these contracts are expected to be paid over lengthy time periods.
Accordingly, the premiums charged for such policies are based in part on time
discounting of such loss payments. Underwriting losses related to retroactive
reinsurance and structured settlement contracts represent the recurring
recognition of time value of money concepts, the accretion of discounted
structured settlement liabilities and amortization of deferred charges re
reinsurance assumed. The accretion and amortization charges are recorded as
losses incurred and, because there is no offsetting premiums, as underwriting
losses. Nevertheless, this business is accepted because of the large amounts of
investable policyholder funds ("float") generated.
Reinsurance premiums earned other than from retroactive reinsurance and
structured settlement contracts were $201 million in the third quarter of 1998
as compared to $121 million in the comparable prior year period. For the first
nine months, such premiums earned were $444 million in 1998 as compared to $404
million in 1997. The increases in other reinsurance premiums earned during the
third quarter and first nine months of 1998 were principally attributable to
higher amounts earned from property catastrophe reinsurance policies, and for
the first nine months was partially offset by lower amounts earned from
non-catastrophe policies. While eroding market prices for catastrophe
reinsurance in recent years has significantly reduced Berkshire's opportunities
to write the business at acceptable prices, the Insurance Group's superior
capital strength permits it to offer and accept coverages
11
<PAGE> 13
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (Continued)
of exceptionally large risks. Consequently, the occasional acceptance of a
catastrophe risk can produce significant premium volume. The decline in premiums
earned during the first nine months from non-catastrophe policies mainly related
to the expiration and non-renewal of a single large excess of loss contract at
the end of 1997.
During the third quarter, other reinsurance activities produced net
underwriting gains of $6 million in 1998 compared to net losses of $25 million
in 1997. For the first nine months, these activities contributed net
underwriting gains of $39 million in 1998 and $44 million in 1997. Catastrophe
reinsurance policies produced net underwriting gains during the first nine
months of $116 million in 1998 and $107 million in 1997. Exposure to risks
assumed from catastrophe reinsurance policies remain significant, particularly
with respect to hurricane and earthquake perils in the United States. So,
underwriting results from such contracts remain subject to extreme volatility.
Underwriting losses from non-catastrophe reinsurance for the first nine months
of 1998 and 1997 were $77 million and $63 million, respectively.
Net investment income earned by the Insurance Group during the first nine
months of 1998 exceeded amounts earned during the corresponding 1997 period by
$69 million (10.9%). Increased amounts of taxable interest earned in 1998 more
than offset the comparative declines in dividends and tax exempt interest income
earned. For the first nine months, dividends earned from investments in US
Airways Preferred shares were $6 million in 1998 compared to $70 million in
1997. In March 1998, all preferred shares of US Airways were converted into
common shares of that company. US Airways has not paid dividends on its common
stock for the past several years.
The Insurance Group continues to maintain substantial levels of investments
derived from shareholder capital, as well as large amounts of float produced by
the insurance and reinsurance underwriting activities. Aggregate float, an
estimate of the level of policyholder funds available for investment, was
approximately $7.6 billion at September 30, 1998.
Income tax expense as a percentage of earnings before income taxes was 27.4%
for the first nine months of 1998 and 24.8% for the first nine months of 1997.
Changes in these ratios reflect changes in the relative mix of underwriting
gains or losses and taxable interest income to tax exempt interest and dividend
income, which are taxed at rates below the full statutory federal income tax
rate.
MANUFACTURING, MERCHANDISING AND SERVICES
Results of operations of Berkshire's diverse non insurance businesses are
shown in the following table. Dollar amounts are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
--------------------------------------- --------------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ----------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $1,156 100.0 $872 100.0 $3,213 100.0 $2,542 100.0
Costs and expenses............... 1,029 89.0 771 88.4 2,823 87.9 2,235 87.9
----- ---- ---- ----- ----- ----- ------ -----
Earnings before income taxes and
minority interest ............ 127 11.0 101 11.6 390 12.1 307 12.1
Applicable income taxes and
minority interest............. 56 4.9 43 4.9 169 5.2 128 5.0
------ ---- ---- ----- ------ ----- ------ -----
Net earnings..................... $ 71 6.1 $ 58 6.7 $ 221 6.9 $ 179 7.1
====== ==== ==== ===== ====== ===== ===== =====
</TABLE>
Revenues from these diverse business activities during 1998's third quarter
and first nine months were greater by $284 million (32.6%) and $671 million
(26.4%) respectively, than revenues during the corresponding 1997 periods. A
significant portion of the increases both for the third quarter and first nine
months relates to three business acquisitions. On August 7, 1998, the
acquisition of Executive Jet, Inc. ("Executive Jet") was completed. Executive
Jet is the world's leading provider of fractional ownership programs for general
aviation aircraft. On January 7, 1998, the acquisition of International Dairy
Queen, Inc. ("Dairy Queen") was completed. 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. (See Notes to Interim
Consolidated Financial Statements for additional information
12
<PAGE> 14
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
MANUFACTURING, MERCHANDISING AND SERVICES (Continued)
regarding these acquisitions.) A smaller acquisition occurred on July 1, 1997,
when Berkshire acquired Star Furniture Company ("Star"). Star is headquartered
in Houston, Texas and is a major retailer of home furnishings in that market.
Net earnings from this group of businesses were greater by $13 million
(22.4%) during 1998's third quarter and $42 million (23.5%) for the first nine
months of 1998. The inclusion of Executive Jet's and Dairy Queen's results
accounted for about 65% of the increase in 1998's third quarter and along with
Star accounted for about 62% of the increase for the first nine months. Several
of Berkshire's other non insurance businesses also reported comparative
increases in earnings during these periods with the most significant reported by
FlightSafety. Earnings of the shoe businesses, however, declined.
REALIZED INVESTMENT GAIN/LOSS
Realized investment gain/loss has been a recurring element in Berkshire's
net earnings for many years. Such amounts -- recorded when investments are sold,
other than temporarily impaired or in certain situations, as required under
GAAP, when investments are marked-to-market with a corresponding gain or loss
included in earnings -- may fluctuate significantly from period to period,
resulting in a meaningful effect on reported net earnings. The Consolidated
Statements of Earnings include after-tax realized investment gains of $1,435
million for the first nine months of 1998 versus $163 million in the comparative
prior year period.
While the amount of the realized investment gain had a material impact on
reported net earnings for the 1998 periods, the effect on the changes in the
Company's total shareholders' equity was much less significant. This is due to
the fact that Berkshire carries most of its investments at market value, with
the unrealized gains, net of tax, reported as a separate component of
shareholders' equity.
FINANCIAL CONDITION
Berkshire's consolidated shareholders' equity at September 30, 1998 was
$31.0 billion, compared to $36.9 billion at June 30, 1998, and $31.5 billion at
December 31, 1997. The balance of consolidated shareholders' equity includes the
after-tax net unrealized gains associated with Berkshire's investment portfolio,
of which a significant portion is represented by equity securities. The fair
values of equity investments, and, therefore, the related unrealized
appreciation of such investments, has been and remains subject to considerable
volatility due to market price changes in equity markets.
During the first nine months of 1998, borrowings under investment agreements
and other debt declined from $2.3 billion at December 31, 1997 to $1.8 billion
at September 30, 1998. The decline primarily reflects the reduction of
outstanding 1% Senior Exchangeable Notes due to elections exercised by the
holders to convert the notes into common shares of Travelers Group, as well as a
decline in the contingent value associated with the outstanding Exchange Notes
at September 30, 1998.
YEAR 2000 ISSUES
Many computer systems in use today may be unable to correctly process data
or may not operate at all after December 31, 1999 because those systems
recognize the year within a date only by the last two digits. Some computer
programs may interpret the year "00" as 1900, instead of as 2000, causing errors
in calculations or the value "00" may be considered invalid by the computer
program, causing the system to fail. Year 2000 issues affect: (1) Information
Technology (IT) utilized in the Company's widely diversified business
information systems, including mainframe and client server hardware and software
applications, (2) non-IT systems utilized by the Company, such as
communications, facilities management, and manufacturing and service equipment
containing embedded computer chips, and (3) IT and non-IT systems of significant
customers, suppliers, business partners and equity investees.
Berkshire and its subsidiaries could be adversely affected if Year 2000
issues are not resolved by Berkshire or its significant customers, suppliers,
business partners or equity investees before the Year 2000. Possible adverse
consequences include but are not limited to: (1) the inability to obtain
products or services used in business operations, (2) the inability to transact
business with key customers, (3) the inability to execute transactions through
the financial markets, (4) the inability to manufacture or
13
<PAGE> 15
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
YEAR 2000 ISSUES (continued)
deliver goods or services sold to customers, (5) the decline in economic value
of one or more of Berkshire's significant equity investees and (6) the
occurrence of Year 2000 related losses under property and casualty insurance and
reinsurance contracts entered into by subsidiaries. Berkshire's management
believes that at least some minor disruptions due to Year 2000 issues will
occur. On a worst case basis, if Berkshire, one or more of its significant
business partners, or key governmental bodies are unable to implement timely and
effective solutions to the Year 2000 issues, Berkshire could suffer material
adverse effects. The financial impact of such effects cannot currently be
estimated.
Although Berkshire's business operations are diverse, they all rely on
computers to conduct daily business activities. Because of the diversity of
those operations, Year 2000 issues are independently managed at each of the
Company's operating units. Berkshire and its subsidiaries have been working on
Year 2000 readiness issues in varying degrees for several years.
Generally, the stages involved in managing Year 2000 issues include (a)
identifying the IT and non-IT systems that are non-compliant, (b) formulating
strategies to remedying the problems, (c) making the changes necessary through
purchasing compliant systems or fixing existing systems, and (d) testing the
changes. The identification and formulation stages are nearly complete at all
significant operating units. Many systems have been purchased, upgraded or
corrected to make them Year 2000 compliant. In certain instances the Company has
obtained certifications of Year 2000 compliance from the manufacturers of
systems used by the Company. Management expects that by the end of 1999, all
critical systems that are not currently Year 2000 compliant will be corrected or
replaced.
The Company has begun the testing of several systems that are believed to be
Year 2000 compliant. It is expected that significant levels of testing will
occur over the remainder of 1998 and throughout 1999. In addition, Berkshire has
contacted a large number of its business partners to obtain information
regarding their own progress on Year 2000 issues. While all business partners
have not fully completed their own Year 2000 projects, Berkshire is currently
not aware of any significant business partner whose Year 2000 issues will not be
resolved in a timely manner. However, there is no assurance that significant
Year 2000 related problems will not ultimately arise with its business partners.
Berkshire and its subsidiaries expect to ultimately incur about $45 million
in identification, remediation and testing of Year 2000 issues. Approximately
$20 million of this amount was already incurred as of September 30, 1998. Year
2000 related costs are expensed as incurred. The Company does not believe that
any significant IT projects have been delayed due to Year 2000 efforts.
Berkshire and its subsidiaries have begun consideration of contingency plans
to deal with certain Year 2000 issues in the event that remediation efforts are
unsuccessful. Such plans will be more fully developed in 1999 to address
specific areas of need.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document,
including but not limited to those under the caption Year 2000 Issues as well as
some statements by the Company in periodic press releases and some oral
statements of Company officials during presentations about the Company, are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include
statements which are predictive in nature, which depend upon or refer to future
events or conditions, which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", or similar expressions. In
addition, any statements concerning future financial performance (including
future revenues, earnings or growth rates), ongoing business strategies or
prospects, and possible future Company actions, which may be provided by
management are also forward-looking statements as defined by the Act. Forward-
looking statements are based on current expectations and projections about
future events and are subject to risks, uncertainties, and assumptions about the
Company, economic and market factors and the industries in which the Company
does business, among other things. These statements are not guaranties of future
performance and the Company has no specific intention to update these
statements.
14
<PAGE> 16
FORM 10-Q
BERKSHIRE HATHAWAY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
FORWARD LOOKING STATEMENTS (continued)
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in market
prices of Berkshire's significant equity investees, the ability of the Company
and its significant business partners and equity investees to successfully
implement timely year 2000 solutions, 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, and changes in general economic and market
factors that affect the prices of securities or the industries in which
Berkshire and its affiliates do business, especially those affecting the
property and casualty insurance industry.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of Berkshire Hathaway Inc. ("Berkshire")
was held on September 16, 1998. The special meeting was held for the purpose of
1) consideration of a proposal to approve and adopt the Agreement and Plan of
Merger dated as of June 19, 1998 between Berkshire and General Re Corporation
and the transactions contemplated ("Proposal 1") and 2) consideration of a
proposal to amend the Restated Certificate of Incorporation of Berkshire to
increase to 1,650,000 (from 1,500,000) the number of authorized shares of
Berkshire Class A Common Stock, and to increase to 55,000,000 (from 50,000,000)
the number of authorized shares of Berkshire Class B Common Stock ("Proposal
2").
Following are the votes cast in favor, against and abstentions with respect
to each proposal:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Proposal 1 990,946 3,571 716
Proposal 2 993,114 1,147 973
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 -- Financial Data Schedule
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HATHAWAY INC.
(Registrant)
Date November 13, 1998 /s/ Marc D. Hamburg
-------------------------------
(Signature)
Marc D. Hamburg, Vice President
and Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED IN FORM 10-Q AS
FILED HEREWITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND RELATED NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,892
<SECURITIES> 36,262
<RECEIVABLES> 1,900
<ALLOWANCES> 0
<INVENTORY> 762
<CURRENT-ASSETS> 0
<PP&E> 1,325
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,110
<CURRENT-LIABILITIES> 0
<BONDS> 1,792
0
0
<COMMON> 7
<OTHER-SE> 30,950
<TOTAL-LIABILITY-AND-EQUITY> 54,110
<SALES> 3,150
<TOTAL-REVENUES> 7,169
<CGS> 2,053
<TOTAL-COSTS> 5,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 3,452
<INCOME-TAX> 1,166
<INCOME-CONTINUING> 2,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,263
<EPS-PRIMARY> 1,822
<EPS-DILUTED> 1,822
</TABLE>
