BERKSHIRE HATHAWAY INC.
INTERIM REPORT
For the Quarter
Ended June 30, 1997
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
June 30, December 31,
1997 1996
--------- ---------
ASSETS
Cash and cash equivalents...................... $ 1,050.9 $ 1,339.8
Investments:
Securities with fixed maturities.............. 7,343.0 6,446.9
Equity securities............................. 33,771.2 27,750.6
Receivables.................................... 1,716.2 1,523.2
Inventories.................................... 638.1 619.6
Assets of finance businesses................... 1,075.6 968.8
Property, plant and equipment.................. 1,066.3 1,034.2
Goodwill of acquired businesses................ 3,072.4 3,110.3
Other assets................................... 820.1 616.0
--------- ---------
$50,553.8 $43,409.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses............ $ 6,840.7 $ 6,274.4
Unearned premiums.............................. 1,539.2 1,183.5
Accounts payable, accruals
and other liabilities.................... 1,880.7 2,556.8
Income taxes, principally deferred............. 9,063.3 6,837.6
Borrowings under investment agreements
and other debt........................... 1,883.5 1,944.4
Liabilities of finance businesses.............. 937.0 851.3
--------- ---------
22,144.4 19,648.0
--------- ---------
Minority shareholders' interests............... 397.8 335.1
--------- ---------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value,
1,369,474 and 1,376,188 shares
issued; 1,199,406 and 1,206,120
shares outstanding..................... 6.8 6.9
Class B Common Stock, $0.1667 par value,
985,253 and 783,755 shares issued
and outstanding........................ 0.2 0.1
Capital in excess of par value............... 2,274.2 2,274.1
Unrealized appreciation of investments....... 16,166.9 12,143.9
Retained earnings............................ 9,594.9 9,032.7
--------- ---------
28,043.0 23,457.7
Less: Cost of 170,068 Class A common shares
in treasury............................ 31.4 31.4
--------- ---------
Total shareholders' equity 28,011.6 23,426.3
--------- ---------
$50,553.8 $43,409.4
========= =========
* 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 1,232,248
shares outstanding at June 30, 1997 and 1,232,245 at December 31,
1996. Net book value per equivalent Class A Common share is $22,732
at June 30, 1997.
See accompanying Notes
BERKSHIRE HATHAWAY INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Second Quarter First Half
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Insurance premiums earned............................$ 1,260.1 $ 1,011.7 $ 2,243.1 $ 1,933.6
Sales and service revenues........................... 820.5 715.1 1,638.0 1,415.2
Interest and dividend income......................... 213.9 190.0 448.7 362.2
Income from finance businesses....................... 8.2 5.2 15.0 11.0
Realized investment gain (loss)...................... 35.5 (7.2) 68.2 2,332.5
--------- --------- --------- ---------
2,338.2 1,914.8 4,413.0 6,054.5
--------- --------- --------- ---------
Cost and expenses:
Insurance losses and loss adjustment expenses........ 964.5 784.1 1,717.1 1,522.0
Insurance underwriting expenses...................... 202.4 172.2 362.2 333.7
Cost of products and services sold................... 458.8 449.0 908.5 880.5
Selling, general and administrative expenses......... 266.9 203.7 533.0 414.6
Goodwill amortization................................ 20.7 15.5 41.4 30.6
Interest expense..................................... 27.3 26.9 55.4 53.2
--------- --------- --------- ---------
1,940.6 1,651.4 3,617.6 3,234.6
--------- --------- --------- ---------
Earnings before income taxes and minority interest... 397.6 263.4 795.4 2,819.9
Income taxes......................................... 116.1 69.1 225.7 947.2
Minority interest.................................... 3.7 3.1 7.5 12.8
--------- --------- --------- ---------
Net earnings.......................................$ 277.8 $ 191.2 $ 562.2 $ 1,859.9
========= ========= ========= =========
Average shares outstanding * 1,232,246 1,203,748 1,232,246 1,198,630
Net earnings per share * $ 225 $ 159 $ 456 $ 1,552
======= ======= ======= =======
* Class B Common Stock has economic rights equal to one-thirtieth
(1/30) of the economic rights of Class A Common Stock. Average
shares outstanding include average Class A Common shares and
average Class B Common shares, if any, 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
BERKSHIRE HATHAWAY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Half
---------------------
1997 1996
--------- ---------
Net cash flows from operating activities...........................$ 1,166.7 $ 346.1
--------- ---------
Cash flows from investing activities:
Purchases of investments........................................ (2,826.3) (2,430.8)
Proceeds on sales and maturities of investments................. 2,447.2 1,759.3
Loans and investments originated in finance businesses.......... (226.2) (332.5)
Principal collections on loans and investments originated
in finance businesses........................................ 141.8 189.9
Acquisitions of businesses...................................... (774.9) (1,946.2)
Other........................................................... (81.7) (18.6)
--------- ---------
Net cash flows from investing activities........................... (1,320.1) (2,778.9)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses.................. 45.0 115.3
Proceeds from other borrowings.................................. 514.1 610.6
Repayments of borrowings of finance businesses.................. (109.0) (129.5)
Repayments of other borrowings.................................. (578.9) (580.8)
Net proceeds from issuance of Class B Common Stock.............. -- 565.0
Other........................................................... (0.8) (1.2)
--------- ---------
Net cash flows from financing activities........................... (129.6) 579.4
--------- ---------
Decrease in cash and cash equivalents.............................. (283.0) (1,853.4)
Cash and cash equivalents at beginning of year*.................... 1,350.3 2,744.5
--------- ---------
Cash and cash equivalents at end of second quarter*................$ 1,067.3 $ 891.1
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes...............................................$ 195.6 $ 524.6
Interest................................................... 59.5 62.8
Non-cash investing activity:
Liabilities assumed in connection with acquisition of business... -- 3,901.5
* Cash and cash equivalents are comprised of the following:
Beginning of year
Finance businesses........................................$ 10.5 $ 40.7
Other..................................................... 1,339.8 2,703.8
--------- ---------
$ 1,350.3 $ 2,744.5
========= =========
End of second quarter--
Finance businesses........................................$ 16.4 $ 24.7
Other..................................................... 1,050.9 866.4
--------- ---------
$ 1,067.3 $ 891.1
========= =========
See accompanying Notes
BERKSHIRE HATHAWAY INC.
Notes To Interim Consolidated Financial Statements
June 30, 1997
Note 1. General
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.
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. In March 1996, The
Walt Disney Company ("Disney") completed its acquisition of
Capital Cities/ABC, Inc. Subsidiaries of Berkshire received
aggregate consideration of $2.5 billion, which included cash
of $1.2 billion and common shares of Disney with a value of
$1.3 billion. The Consolidated Statement of Earnings for
the first half of 1996 includes a pre-tax realized
investment gain of $2.2 billion from the Disney transaction.
Note 2. Business acquisitions
On December 23, 1996, FlightSafety International, Inc.
("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") between Berkshire and
FlightSafety. 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 FlightSafety are included
in Berkshire's consolidated results of operations beginning
on the effective date of the merger December 23, 1996. The
following table sets forth certain consolidated statement of
earnings data for the first half of 1996, as if the
FlightSafety merger had been consummated on the same terms
at the beginning of 1996. Dollar amounts are in millions,
except per share amounts.
1996
--------
Insurance premiums earned.......................$1,933.6
Sales and service revenues...................... 1,595.1
Total revenues.................................. 6,215.4
Net income...................................... 1,876.4
Earnings per equivalent Class A commonshare..... 1,538
On January 2, 1996, GEICO Corporation ("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 (the "GEICO Agreement") dated August 25,
1995. 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. The amount of the merger consideration was
based upon 33,284,733 outstanding shares held by the public
on the merger date. Since January 2, 1996, the accounts of
GEICO have been included in Berkshire's consolidated
financial statements.
As of the merger date, subsidiaries of Berkshire owned
34,250,000 common shares of GEICO, which were acquired in
years prior to 1981 at an aggregate cost of $45.7 million.
Up to the merger date, neither Berkshire nor its
subsidiaries had acquired any shares of GEICO common stock
since 1980. However, Berkshire's ownership percentage, due
to intervening stock repurchases by GEICO, gradually
increased from about 33% in 1980 to almost 51% immediately
prior to the merger date.
Each of the mergers described above was accounted for
by the purchase method. The excess of the purchase cost
over the fair value of net assets acquired is recorded as
goodwill of acquired businesses and is being amortized over
forty years.
Note 3. Recapitalization and Common Stock
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 existing common stock was
redesignated as Class A Common Stock. Each share of Class A
Common Stock is convertible, at the option of the holder,
into thirty shares of Class B Common Stock. On May 8, 1996,
Berkshire completed an initial public offering of 517,500
shares of Class B Common Stock. Berkshire received net
proceeds from the offering of $565.0 million.
The following table summarizes Berkshire's common stock
activity during the first half of 1997:
Shares of Shares of
Class A Common Stock Class B Common Stock
---------------------------------------- ----------------------
Issued Held in Treasury Outstanding Issued and Outstanding
--------- ---------------- ----------- ----------------------
Balance at December 31, 1996..............1,376,188 (170,068) 1,206,120 783,755
Conversions of Class A Common Stock
to Class B Common Stock and other.... (6,714) -- (6,714) 201,498
--------- --------- --------- -------
Balance at June 30, 1997..................1,369,474 (170,068) 1,199,406 985,253
========= ========= ========= =======
Note 4. Investments in securities with fixed maturities
Data with respect to investments in securities with
fixed maturities (other than securities with fixed
maturities held by finance businesses See Note 7) are
shown in the tabulation below (in millions).
June 30, December 31,
1997 1996
--------- -----------
Amortized cost................$ 6,942.3 $ 6,142.3
Gross unrealized gains........ 411.9 318.4
Gross unrealized losses....... (11.2) (13.8)
--------- ---------
Estimated fair value..........$ 7,343.0 $ 6,446.9
========= =========
Note 5. Investments in equity securities
Data with respect to investments in equity securities
are shown in the tabulation below (in millions). Individual
investments whose fair values exceed ten percent of
consolidated shareholders' equity at June 30, 1997 and
December 31, 1996 are listed separately.
June 30, December 31,
1997 1996
--------- -----------
Total cost...................$ 8,988.9 $ 9,152.0
Gross unrealized gains....... 24,805.5 18,621.0
Gross unrealized losses...... (23.2) (22.4)
--------- ---------
Total fair value.............$33,771.2 $27,750.6
========= =========
Fair value:
American Express Company....$ 3,684.5 $ 2,794.3
The Coca-Cola Company....... 13,600.0 10,525.0
The Gillette Company........ 4,548.0 3,732.0
All others.................. 11,938.7 10,699.3
--------- ---------
Total.......................$33,771.2 $27,750.6
========= =========
Note 6. Deferred income tax liability
The tax effects of significant items comprising the
Company's net deferred tax liability as of June 30, 1997 and
December 31, 1996 are as follows (in millions):
June 30, December 31,
1997 1996
--------- -----------
Deferred tax liabilities:
Relating to unrealized
appreciation of investments.....$ 8,818.9 $ 6,620.6
Other............................. 828.4 860.9
--------- ---------
9,647.3 7,481.5
Deferred tax assets................. (661.8) (602.8)
--------- ---------
Net deferred tax liability........$ 8,985.5 $ 6,878.7
========= =========
Note 7. Finance businesses
Assets and liabilities of Berkshire's finance
businesses are summarized below (in millions):
June 30, December 31,
1997 1996
Assets -------- -----------
Cash and cash equivalents................$ 16.4 $ 10.5
Installment loans and other receivables.. 226.6 215.9
Fixed maturity investments............... 832.6 742.4
-------- --------
$1,075.6 $ 968.8
======== ========
Liabilities
Borrowings under investment agreements
and other debt......................$ 317.3 $ 381.3
Annuity reserves and policyholder
liabilities......................... 576.9 434.8
Other.................................... 42.8 35.2
-------- --------
$ 937.0 $ 851.3
======== ========
Note 8. Unrealized appreciation of investments
Changes in "Unrealized appreciation of investments",
the balance of which is carried in shareholders' equity,
were as follows during the second quarter and first half of
1997 and 1996 (in millions):
Second Quarter First Half
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Increase in unrealized appreciation............$ 5,540.0 $ 1,764.8 $ 6,279.7 $ 1,349.6
Increase in deemed applicable
income taxes................................. (1,940.6) (617.4) (2,200.1) (488.7)
Increase in minority shareholders' interest.... (55.4) (10.6) (56.6) (13.5)
--------- --------- --------- ---------
Net increase................................. 3,544.0 1,136.8 4,023.0 847.4
Balance at beginning of period................. 12,622.9 8,931.3 12,143.9 9,220.7
--------- --------- --------- ---------
Balance at end of second quarter...............$16,166.9 $10,068.1 $16,166.9 $10,068.1
========= ========= ========= =========
BERKSHIRE HATHAWAY INC.
Management's Discussion
June 30, 1997
Net earnings for the second quarter and first half of
the current and prior year are summarized in the following
table. Amounts are in millions and each figure is income
tax effected.
Second Quarter First Half
-------------- ----------------
1997 1996 1997 1996
------ ------ ------ --------
Insurance, except realized investment gain/loss...$207.1 $160.5 $418.3 $ 289.1
Manufacturing, merchandising and services......... 59.1 43.3 120.7 83.2
Unallocated income/expense, net................... 6.0 6.7 12.1 13.8
Interest expense *................................ (17.3) (16.8) (33.1) (32.2)
------ ------ ------ --------
Earnings before realized investment gain/loss... 254.9 193.7 518.0 353.9
Realized investment gain (loss)................... 22.9 (2.5) 44.2 1,506.0
------ ------ ------ --------
Net earnings....................................$277.8 $191.2 $562.2 $1,859.9
====== ====== ====== ========
* For purposes of the above table, interest expense of
finance businesses is netted against the directly related
service activity revenues.
Insurance Group
The after tax figures shown above for Insurance Group
earnings, except realized investment gain/loss, are
aggregated in the following table. Dollar amounts are in
millions.
Second Quarter First Half
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Premiums earned from:
Direct insurance.............................$ 933.3 $ 823.6 $1,817.8 $1,629.4
Reinsurance assumed.......................... 326.8 188.1 425.3 304.2
-------- -------- -------- --------
$1,260.1 $1,011.7 $2,243.1 $1,933.6
======== ======== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance.............................$ 57.1 $ 50.1 $ 134.5 $ 90.2
Reinsurance assumed.......................... 36.1 5.5 29.3 (12.3)
-------- -------- -------- --------
Total underwriting gain..................... 93.2 55.6 163.8 77.9
Net investment income.......................... 196.3 165.9 413.2 318.9
Goodwill amortization *........................ (11.0) (10.6) (21.5) (21.4)
-------- -------- -------- --------
Earnings before income taxes................ 278.5 210.9 555.5 375.4
Income tax expense............................. 69.4 48.8 133.0 82.7
Minority interest.............................. 2.0 1.6 4.2 3.6
-------- -------- -------- --------
Net earnings from Insurance,
except realized investment gain/loss.....$ 207.1 $ 160.5 $ 418.3 $ 289.1
======== ======== ======== ========
* 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.
In January 1996, GEICO became a wholly-owned subsidiary
of Berkshire. (See Notes to Interim Consolidated Financial
Statements for additional information regarding this
acquisition.) GEICO, through its subsidiaries, provides
primarily private passenger automobile coverages to insureds
in 48 states and the District of Columbia. GEICO policies
are marketed mainly by direct response methods, in which
customers apply for coverage directly to the company over
the telephone or through the mail. This is a significant
element in GEICO's strategy to be a low cost provider of
such coverages. Since 1995, GEICO has substantially reduced
the amounts of homeowners and boat insurance offered and
plans to fully exit those lines of business by 1999.
Insurance premiums earned during the second quarter by
GEICO were $855.6 million in 1997 and $757.4 million in
1996. For the first half, premiums earned by GEICO were
$1.67 billion in 1997 and $1.50 billion in 1996. Premiums
earned during the first half of 1997 from voluntary auto
business exceeded 1996 by 17.7%, reflecting primarily
increased numbers of policies-in-force. In-force policy
growth over the last twelve months was 10.7% in GEICO's
preferred-risk auto business and 38.1% in the standard and
non-standard auto lines as efforts have been expanded to
offer rate quotes to potential customers who do not meet
GEICO's preferred-risk underwriting guidelines. Voluntary
auto new business sales during the first half of 1997
increased 58.3% over 1996. The growth in voluntary auto
business was partially offset by declines in premiums
generated from non-auto and residual auto insurance
coverages. Increased premium volume is expected to continue
for the remainder of 1997 with respect to GEICO's private
passenger automobile insurance businesses.
The net underwriting gains produced by GEICO for the
second quarter of 1997 and 1996 were $48.1 million and $37.7
million, respectively. For the first half, underwriting
gains totaled $118.1 million in 1997 and $67.5 million in
1996. GEICO's first half underwriting results included
charges for catastrophe losses of approximately $6 million
in 1997 and $36 million in 1996. Catastrophe losses of
about $24 million in 1996 resulted from homeowner losses
primarily associated with the January 1996 east coast
blizzard. First half underwriting results in 1997 also
benefitted from relatively mild winter weather conditions
that resulted in a reduced frequency of automobile physical
damage claims.
Second quarter premiums earned from the various other
direct insurance businesses were $77.7 million and $66.2
million in 1997 and 1996, respectively. First half premiums
earned totaled $147.7 million and $131.8 million in 1997 and
1996, respectively. Collectively, the various other direct
insurance businesses generated second quarter underwriting
gains of $9.0 million in 1997 and $12.4 million in 1996.
For the first six months of 1997 and 1996, the non-GEICO
direct insurance businesses produced net underwriting gains
of $16.4 million and $22.7 million, respectively.
Reinsurance premiums earned during the second
quarter from catastrophe excess-of-loss contracts were $92.1
million in 1997 and $94.1 million in 1996. For the first
half of 1997 catastrophe reinsurance premiums earned were
$100.6 million compared to $126.9 million in the comparable
prior year period. Price competition for catastrophe
reinsurance business continues to intensify in 1997. As a
result, the number of acceptably priced offerings to the
Insurance Group declined. However, the Group's
extraordinary financial strength permits it to occasionally
write exceptionally large catastrophe polices. For example,
a policy with the California Earthquake Authority ("CEA")
became effective on April 1, 1997. The CEA policy provides
aggregate protection of about $1 billion and will be called
upon if the CEA incurs aggregate earthquake losses in excess
of about $5 billion during the four year period ending March
31, 2001.
The property catastrophe reinsurance business
contributed second quarter underwriting gains of $81.7
million in 1997 and $58.3 million in 1996. First half
underwriting gains from catastrophe policies totaled $97.2
million in 1997 and $72.7 million in 1996. Lower amounts of
catastrophe losses and expenses incurred in 1997 periods
more than offset the comparative decline in premiums earned.
The magnitude of underwriting gains achieved from the
catastrophe reinsurance business should not be viewed as
predictive of future profitability. The timing and
magnitude of catastrophic loss events can cause extreme
volatility in periodic underwriting results.
Reinsurance premiums earned during the second quarter
and first half of 1997 include $140.1 million attributable
to the Insurance Group's "retroactive" reinsurance business.
A retroactive reinsurance policy covers certain past loss
occurrences of the ceding company. There were no premiums
earned from retroactive reinsurance policies in the
corresponding 1996 periods.
Reinsurance underwriting results for 1997 and 1996
periods include net charges related to the amortization of
deferred charges re reinsurance assumed established with
respect to retroactive reinsurance policies and the
accretion of discounted structured settlement liabilities.
These recurring charges reflect the recognition of time-
value-of-money concepts. Accretion and amortization charges
for the second quarter of 1997 and 1996 were $18.7 million
and $17.0 million, respectively. For the first half, such
charges totaled $39.7 million in 1997 and $36.7 million in
1996.
Premiums earned in 1997 periods from the other non-
catastrophe reinsurance contracts were basically unchanged
from corresponding 1996 periods. In both 1997 and 1996,
other non-catastrophe reinsurance business derived
principally from a few sizable excess-of-loss contracts.
These contracts generated net underwriting losses of $26.9
million and $35.8 million in the second quarter of 1997 and
1996, respectively. First half underwriting losses from
these contracts were $28.2 million in 1997 and $48.3 million
in 1996. Time-value-of-money concepts are important
considerations in establishing premiums for most non-
catastrophe reinsurance coverages because claim losses are
expected to be paid over extended time periods.
Underwriting losses often occur as the provisions for
estimated claim losses are established for financial
reporting purposes without discounting for time. This
business is accepted because of the large amounts of
policyholder funds ("float") produced.
Net investment income for the second quarter of 1997
exceeded amounts earned during the second quarter of 1996 by
$30.4 million. For the first half of 1997, net investment
income exceeded amounts earned during the first half of
1996 by $94.3 million. During 1997, Insurance Group members
received dividends (including all amounts previously in
arrears) totaling $8.1 million for the second quarter and
$62.3 million for the first half from its investment in US
Airways Cumulative Convertible Preferred Shares. Net
investment income for the corresponding 1996 periods include
no dividends with respect to the US Airways Preferred
Shares.
The Insurance Group continues to generate significant
levels of investment income, reflecting large levels of
invested assets. Invested assets derive from shareholder
capital and reinvested earnings, as well as substantial
levels of policyholder funds ("float") generated from
insurance and reinsurance underwriting activities. As of
June 30, 1997, "float", the approximate level of invested
policyholder funds, was about $7.4 billion.
Manufacturing, Merchandising and Services
Results of operations of Berkshire's diverse non-
insurance businesses are aggregated in the following table.
Dollar amounts are in millions.
Second Quarter First Half
------------------------------ --------------------------------
1997 1996 1997 1996
-------------- -------------- --------------- ---------------
Amount % Amount % Amount % Amount %
------- ----- ------- ----- -------- ----- -------- -----
Revenues.........................$ 837.2 100.0 $ 721.8 100.0 $1,669.7 100.0 $1,428.7 100.0
Costs and expenses............... 734.9 87.8 648.0 89.8 1,463.6 87.7 1,286.9 90.1
------- ----- ------- ----- -------- ----- -------- -----
Earnings before income taxes..... 102.3 12.2 73.8 10.2 206.1 12.3 141.8 9.9
Applicable income taxes.......... 41.8 5.0 29.3 4.0 82.9 5.0 56.6 4.0
Applicable minority interest..... 1.4 0.1 1.2 0.2 2.5 0.1 2.0 0.1
------- ----- ------- ----- -------- ----- -------- -----
Net earnings.....................$ 59.1 7.1 $ 43.3 6.0 $ 120.7 7.2 $ 83.2 5.8
======= ===== ======= ===== ======== ===== ======== =====
Revenues from these several and diverse business
activities during 1997's second quarter and first half were
greater by $115.4 million (16.0%) and $241.0 million (16.9%)
than revenues recorded during the corresponding 1996
periods. The increases are primarily due to the acquisition
at the end of 1996 of FlightSafety International, Inc.
("FlightSafety"). FlightSafety provides high technology
training to operators of aircraft and ships throughout the
world. See Notes to Interim Consolidated Financial
Statements for additional information regarding this
acquisition.
Net earnings from this group of businesses were greater
by $15.8 million (36.5%) during 1997's second quarter and
$37.5 million (45.1%) during 1997's first half than net
earnings reported in the corresponding prior year periods.
The inclusion of FlightSafety's results during 1997 is
primarily responsible for the improved results.
Realized Investment Gain/Loss
Realized investment gain/loss has been a recurring
element in Berkshire's net earnings for many years. The
amount recorded when securities are sold, other than
temporarily impaired or in certain situations, as required
by GAAP, when investments are marked-to-market with a
corresponding gain or loss included in earnings may
fluctuate significantly from period to period, with a
meaningful effect upon Berkshire's consolidated net
earnings. However, the amount of realized investment gain
or loss for any given period has no predictive value, and
variations in amount from period to period have no practical
analytical value, particularly in view of the net unrealized
price appreciation now existing in Berkshire's consolidated
investment portfolio.
The Consolidated Statement of Earnings for the first
half of 1996 reflects a pre-tax realized investment gain of
$2.3 billion ($1.5 billion after tax). Most of this gain
resulted from The Walt Disney Company's ("Disney")
acquisition of Capital Cities/ABC, Inc. ("Capital Cities").
Prior to the acquisition, subsidiaries of Berkshire owned
common stock of Capital Cities which had been acquired in
1986 for an aggregate cost of $345.0 million. In exchange
for the Capital Cities common stock, Berkshire subsidiaries
received cash and Disney common stock having an aggregate
value of $2.5 billion.
While the realized gain had a material impact on
Berkshire's 1996 reported earnings, it had a very minor
impact on Berkshire's shareholders' equity. Berkshire
records its investments at market value and the appreciation
in the Capital Cities stock had been previously reflected as
a component of shareholders' equity in periods prior to
1996's first quarter.
Financial Condition
Berkshire's balance sheet continues to reflect
significant liquidity and above average capital strength.
Shareholders' equity at June 30, 1997, was $28.0 billion or
$22,732 per equivalent share of Class A Common Stock.
* * * * *
CONTACT: Marc Hamburg, 402-346-1400