BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)

   December 31,

     2001

    2000

ASSETS

   

Cash and cash equivalents

$ 5,313

$ 5,263

Investments:

   

   Securities with fixed maturities

36,509

32,567

   Equity securities

28,675

37,619

   Other

1,974

1,637

Receivables

11,926

11,764

Inventories

2,213

1,275

Investments in MidAmerican Energy Holdings Company

1,826

1,719

Assets of finance and financial products businesses

41,591

16,829

Property, plant and equipment

4,776

2,699

Goodwill of acquired businesses

21,407

18,875

Other assets

    6,542

    5,545

 

$162,752

$135,792

 

======

======

     

LIABILITIES AND SHAREHOLDERS' EQUITY

   

Losses and loss adjustment expenses

$ 40,716

$ 33,022

Unearned premiums

4,814

3,885

Accounts payable, accruals and other liabilities

9,626

8,374

Income taxes

7,021

10,125

Borrowings under investment agreements and other debt

3,485

2,663

Liabilities of finance and financial products businesses

  37,791

14,730

103,453

72,799

Minority shareholders' interests

    1,349

  1,269

Shareholders' equity:

   

   Common Stock:*

   

     Class A Common Stock, $5 par value

   

       and Class B Common Stock, $0.1667 par value

8

8

   Capital in excess of par value

25,607

25,524

   Accumulated other comprehensive income

12,891

17,543

   Retained earnings

  19,444

  18,649

       Total shareholders' equity

  57,950

  61,724

 

$162,752

$135,792

 

======

======

 

* 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 1,528,217 shares outstanding at December 31, 2001 versus 1,526,230 shares outstanding at December 31, 2000.

 

See accompanying Notes to Consolidated Financial Statements



BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)

 

   Year Ended December 31,

 

   2001

   2000

   1999

Revenues:

     

   Insurance premiums earned

$17,905

$19,343

$14,306

   Sales and service revenues

14,902

7,361

5,918

   Interest, dividend and other investment income

2,765

2,686

2,314

   Income from MidAmerican Energy Holdings Company

165

105

¾

   Income from finance and financial products businesses

568

556

125

   Realized investment gain

  1,363

  3,955

  1,365

 

37,668

34,006

24,028

Cost and expenses:

     

   Insurance losses and loss adjustment expenses

18,398

17,332

12,518

   Insurance underwriting expenses

3,574

3,632

3,220

   Cost of products and services sold

10,446

4,893

4,065

   Selling, general and administrative expenses

3,000

1,703

1,164

   Goodwill amortization

572

715

477

   Interest expense

     209

     144

     134

36,199

28,419

21,578

Earnings before income taxes and minority interest

1,469

5,587

2,450

   Income taxes

620

2,018

852

   Minority interest

     54

    241

      41

Net earnings

$ 795

$ 3,328

$ 1,557

  ==== ===== =====

   Average common shares outstanding *

1,527,234

1,522,933

1,519,703

Net earnings per common share *

$ 521

$ 2,185

$ 1,025

  ==== ===== =====

* Average shares outstanding include average Class A Common shares and average Class B Common shares determined on an equivalent Class A Common Stock basis. Net earnings per common share shown above represents net earnings per equivalent Class A Common share. Net earnings per Class B Common share is equal to one-thirtieth (1/30) of such amount or $17 per share for 2001, $73 per share for 2000, and $34 per share for 1999.

 

See accompanying Notes to Consolidated Financial Statements



BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)

   Year Ended December 31,

 

   2001

   2000

   1999

Cash flows from operating activities:

     

   Net earnings

$ 795 

$3,328 

$1,557 

   Adjustments to reconcile net earnings to cash flows
   from operating activities:

     

   Realized investment gain

(1,363)

(3,955)

(1,365)

   Depreciation and amortization

1,076 

997 

688 

   Changes in assets and liabilities before effects from
     business acquisitions:

     

     Losses and loss adjustment expenses

7,571 

5,976 

3,790 

     Deferred charges ¾ reinsurance assumed

(498)

(1,075)

(958)

     Unearned premiums

929 

97 

394 

     Receivables

219 

(3,062)

(834)

     Accounts payable, accruals and other liabilities

(339)

660 

(5)

     Finance businesses trading activities

(1,083)

(1,126)

473 

     Income taxes

(329)

757 

(1,395)

   Other

 (404)

   350 

 (145)

   Net cash flows from operating activities

6,574 

2,947 

2,200 

 

     

Cash flows from investing activities:

     

   Purchases of securities with fixed maturities

(16,475)

(16,550)

(18,380)

   Purchases of equity securities

(1,075)

(4,145)

(3,664)

   Proceeds from sales of securities with fixed maturities

8,470 

13,119 

4,509 

   Proceeds from redemptions and maturities of securities
     with fixed maturities

4,305 

2,530 

2,833 

   Proceeds from sales of equity securities

3,881 

6,870 

4,355 

   Loans and investments originated in finance businesses

(9,502)

(857)

(2,526)

   Principal collection on loans and investments
     originated in finance businesses

4,126 

1,142 

845 

   Acquisitions of businesses, net of cash acquired

(4,697)

(3,798)

(153)

   Other

  (727)

  (582)

  (417)

   Net cash flows from investing activities

(11,694)

(2,271)

(12,598)

 

     

Cash flows from financing activities:

     

   Proceeds from borrowings of finance businesses

6,288 

120 

736 

   Proceeds from other borrowings

824 

681 

1,118 

   Repayments of borrowings of finance businesses

(865)

(274)

(46)

   Repayments of other borrowings

(798)

(806)

(1,333)

   Change in short term borrowings of finance businesses

826 

500 

(311)

   Changes in other short term borrowings

(377)

324 

340 

   Other

   116 

  (75)

   (137)

   Net cash flows from financing activities

6,014 

  470 

     367 

   Increase (decrease) in cash and cash equivalents

894 

1,146 

(10,031)

Cash and cash equivalents at beginning of year

5,604 

4,458 

14,489 

Cash and cash equivalents at end of year *

$ 6,498 

$ 5,604 

$ 4,458 

 

===== 

===== 

===== 

* Cash and cash equivalents at end of year are comprised of the following:

     

   Finance and financial products businesses

$ 1,185 

$ 341 

$ 623 

   Other

5,313 

5,263 

3,835 

 

$ 6,498 

$ 5,604 

$ 4,458 

 

==== 

==== 

==== 

See accompanying Notes to Consolidated Financial Statements


BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in millions)

 


Class A & B
Common
Stock


Capital in
Excess of
Par Value



Retained
Earnings

Accumulated
Other
Comprehensive
Income



Comprehensive
Income

           

Balance December 31, 1998

$ 8

$25,121

$13,764

$18,510 

 

Net earnings

    1,557   $ 1,557 

Exercise of stock options issued in
connection with business acquisitions

  88      

Other comprehensive income items:

Unrealized appreciation of investments

(795)

(795)

Reclassification adjustment for
appreciation included in net earnings

 

    (1,365) (1,365)

Foreign currency translation losses

(16)

(16)

Income taxes and minority interests

889 

    889 

Other comprehensive income

(1,287)

Total comprehensive income

       

           

           

             

$   270 

Balance December 31, 1999

$ 8

$25,209

$15,321

$17,223 

===== 

Net earnings

3,328

$ 3,328 

Common stock issued in connection
with business acquisitions

 

224

 

 

Exercise of stock options issued in
connection with business acquisitions

 

91

 

 

Other comprehensive income items:

Unrealized appreciation of investments

4,402 

$4,402 

Reclassification adjustment for
appreciation included in net earnings

 

 

 

(3,955)

(3,955)

Foreign currency translation losses and other

(153)

(153)

Income taxes and minority interests

26 

      26 

Other comprehensive income

    320 

Total comprehensive income

       

           

           

             

$ 3,648 

Balance December 31, 2000

$ 8

$25,524

$18,649

$17,543 

===== 

Net earnings

795

$ 795 

Exercise of stock options issued in
connection with business acquisitions

 

83

 

 

 

Other comprehensive income items:

Unrealized appreciation of investments

(5,706)

(5,706)

Reclassification adjustment for
appreciation included in net earnings

 

 

 

(1,363) (1,363)

Foreign currency translation losses and other

 

 

 

(151)

(151)

Income taxes and minority interests

2,568 

 2,568 

Other comprehensive income

(4,652)

Total comprehensive income

       

           

           

             

$(3,857)

Balance December 31, 2001

$ 8

$25,607

$19,444

$12,891 

===== 

 

===

=====

=====

===== 

 

See accompanying Notes to Consolidated Financial Statements


BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001

(1) Significant accounting policies and practices

(a) Nature of operations and basis of consolidation

Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are property and casualty insurance businesses conducted on both a direct and reinsurance basis. Further information regarding these businesses and Berkshire's other reportable business segments is contained in Note 19. Berkshire initiated and/or consummated several business acquisitions over the past three years. The significant business acquisitions are described more fully in Note 2. The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with accounts of all its subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts in 2000 and 1999 have been reclassified to conform with current year presentation.

Since acquired in December 1998 and through the third quarter of 2000, the international property/casualty and global life/health reinsurance activities of General Re were reported in Berkshire's financial statements based on a one-quarter lag to facilitate the timely completion of the Consolidated Financial Statements. During the fourth quarter of 2000, General Re implemented a number of procedural changes and improvements to allow reporting of these businesses without the one-quarter lag. Accordingly, Berkshire's Consolidated Statements of Earnings and Cash Flows for the year ended December 31, 2000 include five quarters of results of operations and cash flows of these operations. The effect of eliminating the one-quarter lag in reporting was not significant to Berkshire's Consolidated Statement of Earnings for the year ending December 31, 2000.

(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. In particular, estimates of unpaid losses and loss adjustment expenses for property and casualty insurance are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. Actual results may differ from the estimates and assumptions used in preparing the Consolidated Financial Statements.

(c) Cash equivalents

Cash equivalents consist of funds invested in money market accounts and in investments with a maturity of three months or less when purchased.

(d) Investments

Berkshire's management determines the appropriate classifications of investments at the time of acquisition and re-evaluates the classifications at each balance sheet date. Investments may be classified as held-for-trading, held-to-maturity, or, when neither of those classifications is appropriate, as available-for-sale. Berkshire's investments in fixed maturity and equity securities are primarily classified as available-for-sale, except for certain investments, which are classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, reflecting Berkshire's intent and ability to hold the securities to maturity. Available-for-sale securities are stated at fair value with net unrealized gains or losses reported as a separate component in shareholders' equity. Realized gains and losses, which arise when available-for-sale investments are sold (as determined on a specific identification basis) or other-than-temporarily impaired are included in the Consolidated Statements of Earnings.

Other investments include investments in commodities, limited partnerships and warrants, which are carried at fair value in the accompanying Consolidated Balance Sheets. Realized and unrealized gains and losses associated with these investments are included in the Consolidated Statements of Earnings as a component of realized investment gain.

Accounting policies and practices for investments held by finance and financial products businesses are described in Note 9.

(e) Inventories

Inventories are stated at the lower of cost or market. Cost with respect to manufactured goods includes raw materials, direct and indirect labor and factory overhead. Approximately 46% of the total inventory cost was determined using the first-in-first-out (FIFO) method with the remainder valued using the last-in-first-out (LIFO) method. With respect to inventories carried at LIFO cost, the aggregate difference in value between LIFO cost and cost determined under FIFO methods was not material as of December 31, 2001 and December 31, 2000.

(f) Property, plant and equipment

Property, plant and equipment is recorded at cost. Depreciation is provided principally on the straight-line method over estimated useful lives as follows: aircraft, simulators, training equipment and spare parts, 4 to 20 years; buildings and improvements, 10 to 40 years; machinery, equipment, furniture and fixtures, 3 to 20 years. Leasehold improvements are amortized over the life of the lease or the life of the improvement, whichever is shorter. Interest is capitalized as an integral component of cost during the construction period of simulators and facilities and is amortized over the life of the related assets.

(g) Goodwill of acquired businesses

Goodwill of acquired businesses represents the difference between purchase cost and the fair value of the net assets of acquired businesses and is being amortized on a straight-line basis generally over 40 years. The Company periodically reviews the recoverability of the carrying value of goodwill of acquired businesses to ensure it is appropriately valued. In the event that a condition is identified which may indicate an impairment issue exists, an assessment is performed using a variety of methodologies.

As a result of new accounting standards issued in June 2001, accounting for goodwill has changed. Goodwill arising from business acquisitions after July 1, 2001 is subject to an impairment only model, instead of an amortization and impairment model. See Note 1(n) below for further discussion of these new standards.

During the fourth quarter of 2000, Berkshire management concluded that an impairment of goodwill existed with respect to the Dexter Shoe business. Goodwill amortization shown in the accompanying Consolidated Statements of Earnings for 2000 includes a goodwill impairment charge of $219 million related to this business.

(h) Revenue recognition

Insurance premiums for prospective property/casualty insurance and reinsurance and health 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. Premium adjustments on contracts and audit premiums are based on estimates made over the contract period. Consideration received for retroactive reinsurance policies is recognized as premiums earned at the inception of the contracts. Premiums for life contracts are earned when due. Premiums earned are stated net of amounts ceded to reinsurers.

Revenues from product sales are recognized upon passage of title to the customer, which coincides with customer pickup, product shipment, delivery or acceptance, depending on terms of the sales arrangement. Service revenues are recognized as the services are performed. Services provided pursuant to a contract are either recognized over the contract period, or upon completion of the elements specified in the contract, depending on the terms of the contract.

(i) 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. Acquisition costs consist of commissions, premium taxes, advertising and other underwriting costs. The recoverability of premium acquisition costs, generally, reflects anticipation of investment income. The unamortized balances of deferred premium acquisition costs are included in other assets and were $1,029 million and $916 million at December 31, 2001 and 2000, respectively.

(j) Losses and loss adjustment expenses

Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement costs of property/casualty insurance and reinsurance contracts. The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, except that amounts arising from certain reinsurance businesses are discounted as discussed below. Estimated ultimate payment amounts are based upon (1) individual case estimates, (2) estimates of incurred-but-not-reported losses, based upon past experience and (3) reports of losses from ceding insurers.

The estimated liabilities of workers' compensation claims assumed by General Re under reinsurance contracts and liabilities assumed under structured settlement reinsurance contracts by Berkshire Hathaway Reinsurance Group are carried in the Consolidated Balance Sheets at discounted amounts. Discounted amounts pertaining to General Re's workers' compensation risks are based upon an annual discount rate of 4.5%. The discounted amounts for structured settlement reinsurance contracts are based upon the prevailing market discount rates when the contracts were written and range from 5% to 13%. The periodic discount accretion is included in the Consolidated Statements of Earnings as a component of losses and loss adjustment expenses.

(k) Deferred charges-reinsurance assumed

The excess of estimated liabilities for claims and claim costs over the consideration received with respect to retroactive property and casualty reinsurance contracts that provide for indemnification of insurance risk is established as a deferred charge at inception of such contracts. The deferred charges are subsequently amortized using the interest method over the expected settlement periods of the claim liabilities. The periodic amortization charges are reflected in the accompanying Consolidated Statements of Earnings as losses and loss adjustment expenses.

(l) 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 recoverable under reinsurance contracts. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify policyholders with respect to the underlying insurance and reinsurance contracts. Estimated losses and loss adjustment expenses recoverable under reinsurance contracts are included in receivables.

(m) Foreign currency

The accounts of several foreign-based subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of these businesses are translated into U.S. dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating the financial statements of foreign-based operations are included in shareholders' equity as a component of other comprehensive income. Gains and losses arising from other transactions denominated in a foreign currency are included in the Consolidated Statements of Earnings.

(n) Accounting pronouncements to be adopted subsequent to December 31, 2001

In June 2001, the Financial Accounting Standards Board ("FASB") issued two Statements of Financial Accounting Standards ("SFAS"). SFAS No. 141 "Business Combinations" requires usage of the purchase method for all business combinations initiated after June 30, 2001, and prohibits the usage of the pooling of interests method. The provisions of SFAS No. 141 relating to the application of the purchase method are generally effective for business combinations completed after July 1, 2001.

SFAS No. 142 "Goodwill and Other Intangible Assets" changes the current accounting model that requires amortization of goodwill, supplemented by impairment tests, to an accounting model that is based solely upon impairment tests. SFAS No. 142 also provides guidance on accounting for identifiable intangible assets that may or may not require amortization. The provisions of SFAS No. 142 related to accounting for goodwill and intangible assets will be generally effective for Berkshire at the beginning of 2002, except, among other things, that goodwill and identifiable intangible assets with indefinite lives arising from combinations completed after July 1, 2001 are not being amortized.

SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" generally retains the basic accounting model for the identification and measurement of impairments to long-lived assets to be held and such assets to be disposed. SFAS No. 144 also addresses several implementation and financial statement presentation issues not previously addressed under GAAP. The provisions of SFAS No. 144 will be effective for Berkshire at the beginning of 2002.

Although Berkshire has not completed its assessment of these new accounting standards, it expects that the provisions of SFAS No. 142 related to accounting for goodwill will have a significant impact on its consolidated earnings in 2002 when compared to consolidated earnings for years prior to 2002. The accompanying Consolidated Statement of Earnings for 2001 includes goodwill amortization of $572 million. Additionally Berkshire's equity income from its investment in MidAmerican Energy Holdings Company includes its share of MidAmerican's $96 million of goodwill amortization.

(2) Significant business acquisitions

During 2001, Berkshire completed four significant business acquisitions. Information concerning these acquisitions follows.

Shaw Industries, Inc. ("Shaw")

On January 8, 2001, Berkshire acquired approximately 87.3% of the common stock of Shaw for $19 per share or $2.1 billion in total. An investment group consisting of Robert E. Shaw, Chairman and CEO of Shaw, Julian D. Saul, President of Shaw, certain family members and related family interests of Messrs. Shaw and Saul, and certain other directors and members of management acquired the remaining 12.7% of Shaw. In January 2002, Berkshire acquired all of the shares of Shaw held by the investment group in exchange for 4,505 shares of Berkshire Class A common stock and 7,063 shares of Class B common stock.

Shaw is the world's largest manufacturer of tufted broadloom carpet and rugs for residential and commercial applications throughout the U.S. and exports to most markets worldwide. Shaw markets its residential and commercial products under a variety of brand names.

Johns Manville Corporation ("Johns Manville")

On February 27, 2001, Berkshire acquired Johns Manville. Berkshire purchased all of the outstanding shares of Johns Manville common stock for $13 per share or $1.8 billion in total. Johns Manville is a leading manufacturer of insulation and building products. Johns Manville manufactures and markets products for building and equipment insulation, commercial and industrial roofing systems, high-efficiency filtration media, and fibers and non-woven mats used as reinforcements in building and industrial applications.

MiTek Inc. ("MiTek")

On July 31, 2001, Berkshire acquired a 90% equity interest in MiTek from Rexam PLC for approximately $400 million. Existing MiTek management acquired the remaining 10% interest. MiTek, headquartered in Chesterfield, Missouri, produces steel connector products, design engineering software and ancillary services for the building components market.

XTRA Corporation ("XTRA")

On September 20, 2001, Berkshire acquired XTRA through a cash tender offer and subsequent statutory merger for all of the outstanding shares. Holders of XTRA common stock received aggregate consideration of approximately $578 million. XTRA, headquartered in Westport, Connecticut, is a leading operating lessor of transportation equipment, including over-the-road trailers, marine containers and intermodal equipment.

In addition, Berkshire completed six significant acquisitions in 2000. Information concerning five of these acquisitions follows. Information concerning the other acquisition is contained in Note 3 (Investments in MidAmerican Energy Holdings Company).

CORT Business Services Corporation ("CORT")

Effective February 18, 2000, Wesco Financial Corporation, an indirect 80.1% owned subsidiary of Berkshire, acquired CORT. CORT is a leading national provider of rental furniture, accessories and related services in the "rent-to-rent" segment of the furniture industry.

Ben Bridge Jeweler ("Ben Bridge")

Effective July 3, 2000, Berkshire acquired Ben Bridge. Ben Bridge is the leading operator of upscale jewelry stores based in major shopping malls in the Western U.S.

Justin Industries, Inc. ("Justin")

Effective August 1, 2000, Berkshire acquired Justin. Principal businesses of Justin include: Acme Building Brands, a leading manufacturer and producer of face brick, concrete masonry products and ceramic and marble floor and wall tile and Justin Brands, a leading manufacturer of Western footwear under a number of brand names.

U.S. Investment Corporation ("USIC")

Effective August 8, 2000, Berkshire acquired USIC. USIC is the parent of the United States Liability Insurance Group, one of the premier U.S. writers of specialty insurance.

Benjamin Moore & Co. ("Benjamin Moore")

Effective December 18, 2000, Berkshire acquired Benjamin Moore. Benjamin Moore is a formulator, manufacturer and retailer of a broad range of architectural and industrial coatings, available principally in the U.S. and Canada.

Aggregate consideration paid for the five business acquisitions consummated in 2000 totaled $2,370 million, consisting of $2,146 million in cash and the remainder in Berkshire Class A and Class B common stock.

Each of the business acquisitions described above was accounted for under the purchase method. The excess of the purchase cost of the business over the fair value of net assets acquired was recorded as goodwill of acquired businesses.

The results of operations for each of the nine entities acquired in 2001 and 2000 are included in Berkshire's consolidated results of operations from the effective date of each merger. The following table sets forth certain unaudited consolidated earnings data for 2001 and 2000, as if each of the acquisitions discussed above were consummated on the same terms at the beginning of each year. Dollars are in millions except per share amounts.

2001 2000

Total revenues

$38,137

$41,724

Net earnings

803

3,420

Earnings per equivalent Class A Common Share

526

2,243

During the second half of 2001 Berkshire initiated two additional business acquisitions which had not closed as of December 31, 2001. Information concerning these transactions follows.

Albecca Inc. ("Albecca")

Effective February 8, 2002, Berkshire acquired for cash all of the outstanding shares of Albecca. Albecca designs, manufactures and distributes a complete line of high-quality custom picture framing products primarily under the Larson-Juhl name.

Fruit of the Loom ("FOL")

On November 1, 2001, Berkshire announced that it had entered into an agreement with Fruit of the Loom, LTD. and Fruit of the Loom, Inc. (together the "FOL entities") to acquire the FOL entities' basic apparel business. Under terms of the agreement, the purchase price of $835 million in cash is subject to significant reduction for certain liabilities, as well as adjustment upward or downward depending on working capital levels.

The FOL entities are currently operating as debtors-in-possession pursuant to its Chapter 11 bankruptcy filing currently pending before the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On January 2, 2002, the Bankruptcy Court issued an order determining Berkshire as the successful bidder for the FOL entities' basic apparel business. A hearing to determine whether the FOL reorganization plan is confirmed (such plan contemplates the aforementioned sale of the basic apparel business to Berkshire) has been scheduled for April 4, 2002. If the FOL reorganization plan is confirmed at that time, the closing will occur in the second quarter of 2002.

The FOL apparel business is a leading vertically integrated basic apparel company manufacturing and marketing underwear, activewear, casualwear and childrenswear. The FOL apparel business operates on a worldwide basis and sells its products principally in North America under the Fruit of the Loom and BVD brand names.

(3) Investments in MidAmerican Energy Holdings Company

On March 14, 2000, Berkshire invested approximately $1.24 billion in common stock and a non-dividend paying convertible preferred stock of MidAmerican Energy Holdings Company ("MidAmerican"). Such investment gave Berkshire about a 9.7% voting interest and a 76% economic interest in MidAmerican on a fully-diluted basis. Berkshire subsidiaries also acquired approximately $455 million of an 11% non-transferable trust preferred security. Mr. Walter Scott, Jr., a member of Berkshire's Board of Directors, controls approximately 86% of the voting interest in MidAmerican.

MidAmerican is a global leader in the production of energy from diversified fuel sources including geothermal, natural gas, hydroelectric, nuclear and coal. MidAmerican also is a leader in the supply and distribution of energy in the U.S. and U.K. consumer markets.

Berkshire's aggregate investments in MidAmerican are included in the Consolidated Balance Sheets as Investments in MidAmerican Energy Holdings Company. Berkshire is accounting for its investments in the common and non-dividend paying convertible preferred stock pursuant to the equity method. The carrying value of these equity method investments totaled $1,372 million at December 31, 2001 and $1,264 million at December 31, 2000. The 11% non-transferable trust preferred security is classified as a held-to-maturity security, and is carried at cost.

The Consolidated Statements of Earnings reflect, as Income from MidAmerican Energy Holdings Company, Berkshire's proportionate share of MidAmerican's net income with respect to the investments accounted for pursuant to the equity method, as well as interest earned on the 11% trust preferred security. Income derived from equity method investments totaled $115 million in 2001 and $66 million for the period beginning on March 14, 2000 and ending December 31, 2000.

Condensed consolidated balance sheets of MidAmerican as of December 31, 2001 and 2000 are as follows. Amounts are in millions.

  2001 2000

Assets:

   

Properties, plants, contracts and equipment, net

$  6,527

$  5,349

Goodwill

3,639

3,673

Other assets

   2,452

   2,659

 

$12,618

$11,681

 

======

======

Liabilities and shareholders' equity:

   

Term debt

$ 7,163

$ 5,919

Redeemable preferred securities

1,009

1,032

Other liabilities and minority interests

  2,734

  3,154

 

10,906

10,105

Shareholders' equity

   1,712

   1,576

 

$12,618

$11,681

 

======

======

Condensed consolidated statements of earnings of MidAmerican for the year ending December 31, 2001 and for the period from March 14, 2000 through December 31, 2000 are as follows. Amounts are in millions.

  2001 2000

Revenues:

   

Operating revenue

$ 5,061

$ 3,946

Other income

   276

     94

 

5,337

4,040

Costs and expenses:

   

Cost of sales and operating expenses

3,794

3,041

Depreciation and amortization

539

383

Interest expense and minority interest

   606

   482

4,939

3,906

Income before taxes

398

134

Income taxes

250

53

Cumulative effect of accounting change

      5

   ¾

Net income

$143

$ 81

 

====

===

(4) Investments in securities with fixed maturities

Data with respect to investments in securities with fixed maturities are shown below (in millions).

Amortized
Cost(2)

Unrealized
Gains

Unrealized
Losses

Fair
Value

   December 31, 2001(1)

Available for sale:

  Bonds:

   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies

$ 8,969

$ 62

$(212)

$ 8,819

   Obligations of states, municipalities
     and political subdivisions

7,390

98

(43)

7,445

   Obligations of foreign governments

2,460

55

(15)

2,500

   Corporate bonds

5,802

427

(498)

5,731

  Redeemable preferred stocks

93

1

(4)

90

  Mortgage-backed securities

11,379

257

   (2)

11,634

36,093

900

(774)

36,219

Held to maturity securities

      290

   94

  ¾  

      384

$36,383

$994

$(774)

$36,603

=====

====

==== 

=====

Amortized
Cost(2)

Unrealized
Gains

Unrealized
Losses

Fair
Value

   December 31, 2000(1)

Available for sale:

  Bonds:

   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies

$ 3,662

$ 26

$ (9)

$ 3,679

   Obligations of states, municipalities
     and political subdivisions

8,185

45

(57)

8,173

   Obligations of foreign governments

1,944

19

(20)

1,943

   Corporate bonds

5,918

147

(209)

5,856

  Redeemable preferred stocks

102

¾

(5)

97

  Mortgage-backed securities

12,609

  275

  (65)

12,819

$32,420

$512

$(365)

$32,567

=====

====

==== 

=====

(1) Amounts above exclude securities with fixed maturities held by finance and financial products businesses. See Note 9.

(2) In connection with the acquisition of General Re on December 21, 1998, fixed maturity securities with a fair value of $17.6 billion were acquired. Such amount was approximately $1.2 billion in excess of General Re's historical amortized cost. The unamortized excess amount was $565 million at December 31, 2001 and $680 million at December 31, 2000.

Shown below are the amortized cost and estimated fair values of securities with fixed maturities at December 31, 2001, 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.

Amortized
Cost

Fair
Value

Due in one year or less

$ 2,498

$ 2,563

Due after one year through five years

5,141

5,265

Due after five years through ten years

6,022

6,016

Due after ten years

11,281

11,063

24,942

24,907

Mortgage-backed securities

11,441

11,696

$36,383

$36,603

=====

=====

(5) Investments in equity securities

Data with respect to investments in equity securities are shown below. Amounts are in millions.

Cost

Unrealized
Gains

Fair
Value

December 31, 2001

Common stock of:

   American Express Company(1)

$1,470

$ 3,940

$ 5,410

   The Coca-Cola Company

1,299

8,131

9,430

   The Gillette Company

600

2,606

3,206

   Wells Fargo & Company

306

2,009

2,315

Other equity securities

4,868

3,446

8,314

$8,543

$20,132

(2)

$28,675

====

=====

 

=====

Cost

Unrealized
Gains

Fair
Value

December 31, 2000

Common stock of:

   American Express Company(1)

$ 1,470

$ 6,859

$ 8,329

   The Coca-Cola Company

1,299

10,889

12,188

   The Gillette Company

600

2,868

3,468

   Wells Fargo & Company

319

2,748

3,067

Other equity securities

6,714

3,853

10,567

$10,402

$27,217

(2)

$37,619

=====

=====

 

=====

(1) Common shares of American Express Company ("AXP") owned by Berkshire and its subsidiaries possessed approximately 11% of the voting rights of all AXP shares outstanding at December 31, 2001. 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 Kenneth Chenault 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.

(2) Net of unrealized losses of $143 million and $77 million as of December 31, 2001 and 2000, respectively.

(6) Realized investment gains (losses)

Realized gains (losses) from sales and redemptions of investments are summarized below (in millions). Realized losses include impairment charges of $247 million in 2001.

2001

2000

1999

Equity securities and other investments ¾ 

   Gross realized gains

$1,522 

$4,467 

$1,507 

   Gross realized losses

(369)

(317)

(77)

Securities with fixed maturities ¾ 

   Gross realized gains

411 

153 

39 

   Gross realized losses

(201)

(348)

(104)

$1,363 

$3,955 

$1,365 

==== 

==== 

==== 

(7) Receivables

Receivable balances as of December 31, 2001 and 2000 are as follows (in millions).

 

2001

2000

     

Insurance and reinsurance premiums

$ 5,571

$ 5,624

Ceded loss reserves

2,959

2,997

Trade receivables and other

  3,396

  3,143

$11,926

$11,764

=====

=====

(8) Accounts payable, accruals and other liabilities

Accounts payable, accruals and other liabilities as of December 31, 2001 and 2000 are as follows (in millions).

 

2001

2000

     

Life and health insurance benefits

$ 2,058

$ 1,959

Other balances due to policyholders

3,319

3,554

Trade payables and other

 4,249

 2,861

$ 9,626

$ 8,374

=====

=====

(9) Finance and financial products businesses

Berkshire's finance and financial products businesses consist of numerous businesses engaged in a variety of activities. The principal business activities include proprietary investing (BH Finance), real estate financing (Berkshire Hathaway Credit Corporation), transportation equipment leasing (XTRA Corporation, acquired in September 2001), risk management products (General Re Securities or "GRS"), annuities (Berkshire Hathaway Life Insurance Company of Nebraska) and Berkadia LLC (see Note (c) below).

In January 2002, General Re announced that it would commence a long-term run-off of GRS. The run-off is expected to occur over a period of years, during which, GRS will limit its new business to certain risk management transactions and will unwind its existing asset and liability positions in an orderly manner.

Assets and liabilities of Berkshire's finance and financial products businesses as of December 31, 2001 and 2000 are summarized below (in millions).

2001

2000

Assets

   

Cash and cash equivalents

$ 1,185

$ 341

Investments in securities with fixed maturities:

   

   Held-to-maturity, at cost (fair value $1,888 in 2001; $1,734 in 2000)

1,813

1,664

   Available-for-sale, at fair value (cost $21,125 in 2001; $880 in 2000)*

21,061

880

   Trading, at fair value (cost $2,297 in 2001; $5,194 in 2000)

2,252

5,244

Trading account assets

5,561

5,429

Loans and other receivables

6,262

1,186

Securities purchased under agreements to resell

333

680

Other

  3,124

  1,405

 

$41,591

$16,829

 

=====

=====

Liabilities

   

Securities sold under agreements to repurchase

$21,465

$ 3,386

Securities sold but not yet purchased

354

715

Trading account liabilities

4,803

4,974

Notes payable and other borrowings**

9,019

2,116

Annuity reserves and policyholder liabilities

894

868

Other

  1,256

  2,671

 

$37,791

$14,730

 

=====

=====

*Consists primarily of U.S. Treasury securities and obligations of U.S. government corporations and agencies.

**Payments of principal amounts of notes payable and other borrowings during the next five years are due as follows (in millions).

2002

2003

2004

2005

2006

$2,405

$490

$459

$73

$5,022

Income of Berkshire's finance and financial products businesses is shown below (in millions).

 

2001

2000

1999

Revenues

     

   Interest income

$1,377

$ 910

$ 737 

   Realized investment gain

120

367

103 

   Unrealized investment gain (loss)

5

177

(221)

   Other

     62

     51

 368 

 

1,564

1,505

 987 

Cost and expenses

     

   Annuity expenses

57

54

53 

   Selling, general and administrative expenses

180

123

228 

   Interest expense

  759

  772

581 

 

  996

  949

862 

Earnings before income taxes

$ 568

$ 556

$ 125 

====

====

=== 

Additional information regarding Berkshire's finance and financial products business follows:

a) Significant accounting policies

Investment securities (principally fixed maturity and equity investments) that are acquired with the expectation of selling them in the near term are classified as trading securities. Such assets are carried at fair value. Realized and unrealized gains and losses related to securities classified as trading are included in income. Trading account assets and liabilities are marked-to-market on a daily basis and represent the estimated fair values of derivatives in net gain positions (assets) and in net loss positions (liabilities). The net gains and losses reflect reductions permitted under master netting agreements with counterparties.

Securities purchased under agreements to resell (assets) and securities sold under agreements to repurchase (liabilities) are accounted for as collateralized investments and borrowings and are recorded at the contractual resale or repurchase amounts plus accrued interest. Other investment securities owned and liabilities associated with investment securities sold but not yet purchased are carried at fair value.

GRS is engaged as a dealer in various types of derivative instruments, including interest rate, currency and equity swaps and options, as well as structured finance products. These instruments are carried at their current estimates of fair value, which is a function of underlying interest rates, currency rates, security values, volatilities and the creditworthiness of counterparties. Future changes in these factors or a combination thereof may affect the fair value of these instruments with any resulting adjustment to be included currently in the Consolidated Statements of Earnings. The net fair values of derivative contracts reflect the legal right to net transactions through qualifying master netting arrangements with various counterparties. The carrying values of trading account assets and trading account liabilities reflect a net decrease of $18,129 million at December 31, 2001 and $14,275 million at December 31, 2000 as a result of the netting arrangements.

Annuity reserves and policyholder liabilities are carried at the present value of the actuarially determined ultimate payment amounts discounted at market interest rates existing at the inception of the contracts. Such interest rates range from 5% to 8%. Periodic accretions of the discounted liabilities are included in annuity expenses.

b) Derivative instruments

Interest rate, currency and equity swaps are agreements between two parties to exchange, at particular intervals, payment streams calculated on a specified notional amount. Interest rate, currency and equity options grant the purchaser the right, but not the obligation, to either purchase from or sell to the writer a specified financial instrument under agreed terms. Interest rate caps and floors require the writer to pay the purchaser at specified future dates the amount, if any, by which the option's underlying market interest rate exceeds the fixed cap or falls below the fixed floor, applied to a notional amount.

Futures contracts are commitments to either purchase or sell a financial instrument at a future date for a specified price and are generally settled in cash. Forward-rate agreements are financial instruments that settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. Foreign exchange contracts generally involve the exchange of two currencies at agreed rates on a specified date; spot contracts usually require the exchange to occur within two business days of the contract date.

The derivative financial instruments involve, to varying degrees, elements of market, credit, and liquidity risks. Market risk is the possibility that future changes in market conditions may make the derivative financial instrument less valuable. The level of market risk is influenced by factors such as volatility, correlation and liquidity. GRS controls market risk exposures by taking offsetting positions in either cash instruments or other derivatives. GRS manages its exposures on a portfolio basis and monitors its market risk on a daily basis across all products by calculating the effect on operating results of potential changes in market variables over a one week period. GRS has established $22 million as its value at risk (VAR) limit with a 99th percentile confidence interval for potential losses over a weekly horizon.

Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract which exceeds the value of existing collateral, if any. The derivative's risk of credit loss is generally a small fraction of notional value of the instrument and is represented by the fair value of the derivative financial instrument. GRS evaluates and records a fair value adjustment against trading revenue to recognize counterparty credit exposure and future costs associated with administering each contract. The fair value adjustment for counterparty credit exposures and future administrative costs on existing contracts was $126.1 million at December 31, 2001. Counterparty credit limits are established, and credit exposures are monitored in accordance with these limits. GRS receives cash and/or investment grade securities from certain counterparties as collateral and, where appropriate, may purchase credit insurance or enter into other transactions to mitigate its credit exposure. GRS also incorporates into contracts with certain counterparties provisions which allow the unwinding of these transactions in the event of a downgrade in credit rating or other indications of decline in creditworthiness of the counterparty.

At December 31, 2001, GRS had accepted collateral that is permitted by contract or industry practice to sell or repledge with a fair value of $1,150 million. Of the securities held as collateral, approximately $41 million were repledged as of December 31, 2001. At December 31, 2001, securities owned by GRS with a fair value of approximately $347 million (which includes $41 million of repledged securities as described above) were pledged against derivative transactions with a fair value of $550 million. Further, securities with a fair value of approximately $97 million were pledged against futures positions at two futures clearing brokers. Contractual terms with counterparties often require additional collateral to be posted immediately in the event of a decline in the financial rating of the counterparty or its guarantor.

Assuming non-performance by all counterparties on all contracts potentially subject to a loss, the maximum potential loss, based on the cost of replacement, net of collateral held, at market rates prevailing at December 31, 2001 approximated $4,375 million. The following table presents GRS's derivatives portfolio by counterparty credit quality and maturity at December 31, 2001. The amounts shown under gross exposure in the table are before consideration of netting arrangements and collateral held by GRS. Net fair value shown in the table represents unrealized gains on financial instrument contracts in gain positions, net of any unrealized loss owed to these counterparties on offsetting positions. Net exposure shown in the table that follows is net fair value less collateral held by GRS. Amounts are in millions.

Gross Exposure

0 - 5

6 - 10

Over 10

Total

Net Fair
Value

Net
Exposure

Percentage
of Total

Credit quality

AAA

$ 1,735

$ 738

$1,058

$ 3,531

$1,295

$1,295

29%

AA

4,913

3,761

2,719

11,393

2,521

1,969

45   

A

3,224

2,238

1,681

7,143

1,338

1,033

24   

BBB and Below

  1,050

   404

   133

  1,587

   371

     78

    2   

   Total

$10,922

$7,141

$5,591

$23,654

$5,525

$4,375

100%

=====

====

====

=====

====

====

===   

Liquidity risk can arise from funding of GRS's portfolio of open transactions. Movements in underlying market variables affect both future cash flows related to the transactions and collateral required to cover the value of open positions. Strategies have been developed to ensure GRS has sufficient resources to cover its potential liquidity needs through its access to General Re Corporation's (the parent company of GRS) internal sources of liquidity, commercial paper program, lines of credit and medium-term program.

c) Berkadia LLC

On August 21, 2001, Berkshire and Leucadia National Corporation ("Leucadia"), through Berkadia LLC, a newly formed and jointly owned entity formed for this purpose, loaned $5.6 billion on a senior secured basis (the "Berkadia Loan") to FINOVA Capital Corporation, ("FNV Capital") a subsidiary of The FINOVA Group ("FNV"). The Berkadia Loan was made in connection with a restructuring of all of FNV Capital's outstanding bank debt and publicly traded debt securities. As of December 31, 2001, the unpaid balance of the Berkadia Loan was $4.9 billion and is included in loans and other receivables.

Berkadia financed the entire Berkadia Loan through a third party lending facility led by Fleet Bank ("Fleet Loan"). Both the Berkadia Loan and the Fleet Loan are due on August 20, 2006. Under the terms of the Fleet Loan, Berkadia is obligated to use the proceeds received from principal prepayments on the Berkadia Loan to prepay the Fleet Loan. Since the end of 2001, FNV Capital has prepaid $1.0 billion aggregate principal amount of the Berkadia Loan and Berkadia has repaid a like amount to its lenders. The Fleet Loan is collateralized by the Berkadia Loan. Among other things, the Fleet Loan requires that FNV maintain a minimum ratio of its consolidated assets to the outstanding Fleet Loan balance. Berkadia is required to pay down the loan to the extent such ratio is under the minimum. Berkshire provided Berkadia's lenders with a 90% primary guaranty of the Berkadia Loan and also provided a secondary guaranty to the 10% primary guaranty provided by Leucadia. Berkshire has a 90% economic interest in Berkadia's loan to FNV Capital and Berkadia's borrowings from the lending facility.

In connection with the restructuring and concurrent with the loan to FNV Capital, Berkadia received 61,020,581 shares of FNV common stock representing 50% of the total FNV outstanding shares. Berkadia initially recorded the FNV common stock at fair value and subsequently accounted for the stock pursuant to the equity method. The value assigned to the stock increased the discount on the Berkadia Loan, which will subsequently be accreted into interest income over the life of the Berkadia Loan. Berkshire and Leucadia each have a 50% economic interest in Berkadia's ownership of the FNV common stock. Due to post-August 21 operating losses of FNV, the investment in FNV common stock was completely written off. Consequently, the equity method was suspended as of September 30, 2001.

d) Other investment

On July 1, 1998, Value Capital L.P., a limited partnership commenced operations. A wholly owned subsidiary of Berkshire is a limited partner in Value Capital. The partnership's investment objective is to achieve income and capital growth from investments and arbitrage in fixed income investments. Berkshire accounts for this investment pursuant to the equity method. Since inception Berkshire has contributed $430 million to the partnership. At December 31, 2001, the carrying value of $542 million (including Berkshire's share of accumulated earnings of $112 million) is included as a component of other assets on the preceding summary of assets and liabilities. Neither Berkshire nor any of its subsidiaries provides or will provide any financial support of the obligations of this partnership or of the other partners. As a limited partner, Berkshire's exposure to loss is limited to the carrying value of its investment.

(10) Unpaid losses and loss adjustment expenses

Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance subsidiaries (in millions) is as follows.

 

2001

2000

1999

Unpaid losses and loss adjustment expenses:

     

   Gross liabilities at beginning of year

$33,022 

$26,802 

$23,012 

   Ceded losses and deferred charges

(5,590)

(3,848)

(2,727)

   Net balance

27,432 

22,954 

20,285 

Incurred losses recorded:

     

   Current accident year

15,608 

15,252 

11,275 

   All prior accident years

  1,165 

     211 

   (192)

   Total incurred losses

16,773 

15,463 

11,083 

Payments with respect to:

     

   Current accident year

4,435 

4,589 

3,648 

   All prior accident years

5,366 

5,890 

4,532 

   Total payments

9,801 

10,479 

8,180 

Unpaid losses and loss adjustment expenses:

     

   Net balance at end of year

34,404 

27,938 

23,188 

   Ceded losses and deferred charges

6,189 

5,590 

3,848 

   Foreign currency translation adjustment

30 

(722)

(234)

   Net liabilities assumed in connection with business acquisitions

       93 

     216 

       ¾ 

Gross liabilities at end of year

$40,716 

$33,022 

$26,802 

 

===== 

===== 

===== 

The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet dates. Considerable judgment is required to evaluate claims and establish estimated claim liabilities, particularly with respect to certain lines of business, such as reinsurance assumed, or certain types of claims, such as environmental or latent injury liabilities. Additional information regarding incurred losses will be revealed over time and the estimates will be revised resulting in gains or losses in the periods made.

The accompanying Consolidated Statement of Earnings for 2001 includes estimated pre-tax underwriting losses of approximately $2.4 billion resulting from the terrorist attack in the U.S. on September 11, 2001. This amount is included in the table as incurred loss current accident year. Berkshire's management believes it will literally take years to resolve complicated coverage issues, which could produce a material change in the ultimate loss amount.

Incurred losses "all prior accident years" reflects the amount of estimation error charged or credited to earnings in each year with respect to the liabilities established as of the beginning of that year. During 2001, Berkshire's insurance subsidiaries recorded additional losses of $1,165 million in connection with losses occurring in years prior to 2001. This amount includes $878 million arising from General Re's traditional North American property/casualty business. The net effect of General Re's prior year reserve adjustments was a reduction of pre-tax income of approximately $800 million due to additional premiums triggered by the losses. Most of the reserve increases were taken in several casualty lines of businesses.

Prior accident years' losses incurred also include amortization of deferred charges related to retroactive reinsurance contracts incepting prior to the current year. Amortization charges included in prior accident years' losses were $328 million in 2001, $145 million in 2000 and $59 million in 1999. The increases in such charges in 2001 and 2000 are the result of several new contracts written over the past three years. The unamortized balance of deferred charges was $3,232 million at December 31, 2001 compared to $2,593 million at December 31, 2000. Net discounted liabilities at December 31, 2001 and 2000 were $1,834 million and $1,531 million, respectively. Periodic accretions of these liabilities are also a component of prior year losses incurred. See Note 1 for additional information.

Berkshire has exposure to environmental, asbestos and other latent injury claims arising from insurance and reinsurance contracts. Loss reserve estimates for environmental and asbestos exposures include case basis reserves, which also reflect reserves for legal and other loss adjustment expenses and incurred but not reported ("IBNR") reserves. IBNR reserves are determined based upon Berkshire's historic general liability exposure base and policy language, previous environmental and loss experience and the assessment of current trends of environmental law, environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos liabilities.

The liabilities for environmental and latent injury claims and claims expenses net of reinsurance recoverables were approximately $6.3 billion at December 31, 2001. Approximately, $5.0 billion of these reserves were assumed under retroactive reinsurance contracts written by the Berkshire Hathaway Reinsurance Group. Claims arising from these contracts are subject to aggregate policy limits. Thus, Berkshire's exposure to environmental and latent injury claims under these contracts are, likewise, limited.

Berkshire monitors evolving case law and its effect on environmental and latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could result in significant amounts of adverse development of the balance sheet liabilities. Such development could be material to Berkshire's results of operations. It is not possible to estimate reliably the amount of additional net loss, or the range of net loss, that is reasonably possible.

(11) Borrowings under investment agreements and other debt

Liabilities as of December 31, 2001 and 2000 for this balance sheet caption are as follows (in millions).

 

2001

2000

Commercial paper and other short-term borrowings

$1,777

$ 991

Borrowings under investment agreements

478

508

General Re Corporation 9% debentures due 2009 (non-callable)

150

150

GEICO Corporation 7.35% debentures due 2023 (non-callable)

160

160

Other debt due 2002 ¾ 2028

   920

   854

 

$3,485

$2,663

 

====

====

Commercial paper and other short-term borrowings are obligations of several Berkshire subsidiaries that utilize short-term borrowings as part of their day-to-day business operations. Berkshire affiliates have approximately $4 billion available unused lines of credit to support their short-term borrowing programs and, otherwise, provide additional liquidity.

Borrowings under investment agreements are made pursuant to contracts calling for interest payable, normally semiannually, at fixed rates ranging from 2.5% to 8.6% per annum. Contractual maturities of borrowings under investment agreements generally range from 3 months to 30 years. Under certain conditions, these borrowings may be redeemable prior to the contractual maturity dates.

Other debt includes variable and fixed rate term bonds and notes issued by various of Berkshire subsidiaries. These obligations generally, are redeemable prior to maturity at the option of the issuing company.

No materially restrictive covenants are included in any of the various debt agreements. Payments of principal amounts expected during the next five years are as follows (in millions).

2002

2003

2004

2005

2006

$1,835

$53

$40

$415

$98

During the second quarter of 2001, Berkshire filed a shelf registration to issue up to $700 million in new debt securities at a future date. The intended purpose of the future issuance of debt is to fund the repayment of borrowings of certain Berkshire subsidiaries. The timing and amount of the debt to be issued under the shelf registration has not yet been determined.

(12) Income taxes

The liability for income taxes as of December 31, 2001 and 2000 as reflected in the accompanying Consolidated Balance Sheets is as follows (in millions).

 

2001

2000

Payable currently

$ (272)

$ 522

Deferred

7,293 

  9,603

$7,021 

$10,125

=====

=====

The Consolidated Statements of Earnings reflect charges for income taxes as shown below (in millions).

 

2001

2000

1999

Federal

$ 629 

$2,136 

$ 748 

State

68 

32 

43 

Foreign

 (77)

 (150)

   61 

 

$ 620 

$2,018 

$ 852 

 

==== 

==== 

==== 

Current

$ 109 

$2,012 

$1,189 

Deferred

   511 

    6 

 (337)

 

$ 620 

$2,018 

$ 852 

 

==== 

==== 

==== 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are shown below (in millions).

 

2001

2000

Deferred tax liabilities:

   Relating to unrealized appreciation of investments

$7,078 

$9,571 

   Deferred charges reinsurance assumed

1,131 

916 

   Investments

382 

441 

   Other

 1,552 

  717 

10,143 

11,645 

Deferred tax assets:

   Unpaid losses and loss adjustment expenses

(752)

(1,061)

   Unearned premiums

(294)

(227)

   Other

(1,804)

   (754)

(2,850)

(2,042)

Net deferred tax liability

$7,293 

$9,603 

 

===== 

===== 

Charges for income taxes are reconciled to hypothetical amounts computed at the Federal statutory rate in the table shown below (in millions).

2001

2000

1999

Earnings before income taxes

$1,469 

$5,587 

$2,450 

 

==== 

==== 

==== 

Hypothetical amounts applicable to above
   computed at the Federal statutory rate

$ 514 

$1,955 

$ 858 

Decreases resulting from:

     

   Tax-exempt interest income

(123)

(135)

(145)

   Dividends received deduction

(129)

(116)

(95)

Goodwill amortization

191 

240 

161 

State income taxes, less Federal income tax benefit

44 

21 

28 

Foreign tax rate differential

82 

34 

45 

Other differences, net

     41 

     19 

    ¾  

 

$ 620 

$2,018 

$ 852 

 

==== 

==== 

==== 

(13) Dividend restrictions ¾ Insurance subsidiaries

Payments of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior regulatory approval, insurance subsidiaries may pay up to approximately $637 million as dividends from insurance subsidiaries during 2002.

Combined shareholders' equity of U.S. based property/casualty insurance subsidiaries determined pursuant to statutory accounting rules (Statutory Surplus as Regards Policyholders) was approximately $27.2 billion at December 31, 2001 and $41.5 billion at December 31, 2000. Effective January 1, 2001, Berkshire's insurance companies adopted several new statutory accounting policies as required under the Codification of Statutory Accounting Principles. Upon adoption of the new statutory accounting policies, the combined statutory surplus of Berkshire's insurance businesses declined approximately $8.0 billion to $33.5 billion as of January 1, 2001. The most significant new accounting policy related to the recording of net deferred income tax liabilities, which included deferred taxes on existing unrealized gains in equity securities. During 2001, combined statutory surplus declined further, primarily as a result of a decline in the net unrealized appreciation of certain equity investments.

Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The major differences between statutory basis accounting and GAAP are that deferred charges-reinsurance assumed, deferred policy acquisition costs, unrealized gains and losses on investments in securities with fixed maturities and related deferred income taxes are recognized under GAAP but not for statutory reporting purposes. In addition, statutory accounting for goodwill of acquired businesses requires amortization over 10 years, compared to 40 years under GAAP.

(14) Common stock

Changes in issued and outstanding Berkshire common stock during the three years ended December 31, 2001 are shown in the table below.

Class A Common, $5 Par Value

Class B Common $0.1667 Par Value

(1,650,000 shares authorized)

(55,000,000 shares authorized)

Shares Issued and

Shares Issued and

Outstanding

Outstanding

Balance December 31, 1998

1,349,535 

5,070,379

Conversions of Class A common stock
   to Class B common stock and other

     (7,872)

   296,576

Balance December 31, 1999

1,341,663 

5,366,955

Common stock issued in connection
   with acquisitions of businesses

3,572 

1,626

Conversions of Class A common stock
   to Class B common stock and other

     (1,331)

   101,205

Balance December 31, 2000

1,343,904 

5,469,786

Conversions of Class A common stock
   to Class B common stock and other

   (20,494)

   674,436

Balance December 31, 2001

1,323,410 

6,144,222

 

======= 

=======

Each share of Class A Common Stock is convertible, at the option of the holder, into thirty shares of Class B Common Stock. Class B Common Stock is not convertible into Class A Common Stock. Each share of Class B Common Stock possesses voting rights equivalent to one-two-hundredth (1/200) of the voting rights of a share of Class A Common Stock. Class A and Class B common shares vote together as a single class.

(15) Fair values of financial instruments

The estimated fair values of Berkshire's financial instruments as of December 31, 2001 and 2000, are as follows (in millions).

Carrying Value

Fair Value

2001

2000

2001

2000

Investments in securities with fixed maturities

$36,509

$32,567

$36,603

$32,567

Investments in equity securities

28,675

37,619

28,675

37,619

Assets of finance and financial products businesses

41,591

16,829

41,710

16,913

Borrowings under investment agreements and other debt

3,485

2,663

3,624

2,704

Liabilities of finance and financial products businesses

37,791

14,730

37,917

14,896

In determining fair value of financial instruments, Berkshire used quoted market prices when available. For instruments where quoted market prices were not available, independent pricing services or appraisals by Berkshire's management were used. Those services and appraisals reflected the estimated present values utilizing current risk adjusted market rates of similar instruments. 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.

Considerable judgment is necessarily required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

(16) Litigation

GEICO has been named as a defendant in a number of class action lawsuits related to the use of replacement repair parts not produced by the original auto manufacturer, the calculation of "total loss" value and whether to pay diminished value as part of the settlement of certain claims. Management intends to vigorously defend GEICO's position on these claim settlement procedures. However, these lawsuits are in various stages of development and the ultimate outcome cannot be reasonably determined.

Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the normal course of business. In particular, and in common with the insurance industry in general, such legal actions affect Berkshire's insurance and reinsurance businesses. Such litigation generally seeks to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. Berkshire does not believe that such normal and routine litigation will have a material effect on its financial condition or results of operations.

(17) Insurance premium and supplemental cash flow information

Premiums written and earned by Berkshire's property/casualty and life/health insurance businesses during each of the three years ending December 31, 2001 are summarized below. Dollars are in millions.

Property/Casualty

Life/Health

2001

2000

1999

2001

2000

1999

Premiums Written:

  Direct

$ 8,294 

$ 6,858 

$ 5,798 

  Assumed

9,332 

11,270 

7,951 

$2,162 

$2,520 

$1,981 

  Ceded

  (890)

  (729)

  (818)

  (157)

  (257)

  (245)

$16,736 

$17,399 

$12,931 

$2,005 

$2,263 

$1,736 

===== 

===== 

===== 

==== 

==== 

==== 

Premiums Earned:

  Direct

$ 7,654 

$ 6,666 

$ 5,606 

  Assumed

9,097 

11,036 

7,762 

$2,143 

$2,513 

$1,971 

  Ceded

   (834)

   (620)

   (788)

  (155)

  (252)

  (245)

$15,917 

$17,082 

$12,580 

$1,988 

$2,261 

$1,726 

===== 

===== 

===== 

==== 

==== 

==== 

Insurance premiums written by geographic region (based upon the domicile of the insured) are summarized below.

Property/Casualty

Life/Health

2001

2000

1999

2001

2000

1999

United States

$13,319

$11,409  

$ 8,862

$1,176

$1,296

$ 970

Western Europe

2,352

5,064*

2,000

518

633

539

All other

1,065

926   

2,069

311

334

227

$16,736

$17,399   

$12,931

$2,005

$2,263

$1,736

====

====   

====

====

====

====

*Premiums attributed to Western Europe include $2,438 million from a single reinsurance policy.

A summary of supplemental cash flow information is presented in the following table (in millions).

2001

2000

1999

Cash paid during the year for:

   Income taxes

$ 905

$1,396

$2,215

   Interest of finance and financial products businesses

672

794

513

   Other interest

225

157

136

Non-cash investing and financing activities:

   Liabilities assumed in connection with acquisitions of businesses

3,507

901

61

   Common shares issued in connection with acquisitions of businesses

¾

224

¾

   Contingent value of Exchange Notes recognized in earnings

105

117

87

   Value of equity securities used to redeem Exchange Notes

228

278

298

(18) Pension plans

Certain Berkshire insurance and non-insurance subsidiaries individually sponsor defined benefit pension plans covering their employees. Benefits under the plans are generally based on years of service and compensation, although benefits under certain plans are based on years of service and fixed benefit rates. Funding policies are generally to contribute amounts required to meet regulatory requirements plus additional amounts determined by management based on actuarial valuations. Most U.S. plans are funded through assets held in trust. However, pension obligations under plans for non-U.S. employees are unfunded. Plan assets are primarily invested in fixed income obligations of U.S. Government Corporations and agencies and cash equivalents and equity securities.

The components of net periodic pension expense for all plans are as follows (in millions).

 

2001

2000

1999

Service cost

$ 71 

$ 44 

$ 44 

Interest cost

140 

73 

66 

Expected return on plan assets

(136)

(73)

(66)

Net amortization, deferral and other

   2 

   (2

   6 

Net pension expense

$ 77 

$ 42 

$ 50 

 

==== 

==== 

==== 

Changes in projected benefit obligations and plan assets are as follows (in millions).

 

2001

2000

Projected benefit obligation, beginning of year

$1,335 

$ 978 

Service cost

71 

44 

Interest cost

140 

73 

Benefits paid

(101)

(53)

Benefit obligations of acquired businesses

730 

257 

Actuarial (gain) loss and other

  208 

   36 

Projected benefit obligation, end of year

$2,383 

$1,335 

 

==== 

==== 

 

 

 

Plan assets at fair value, beginning of year

$1,433 

$1,015 

Employer contributions

34 

10 

Benefits paid

(98)

(49)

Plan assets of acquired businesses

707 

346 

Actual return on plan assets

140 

112 

Expenses and other

    (2)

    (1)

Plan assets at fair value, end of year

$2,214 

$1,433 

 

==== 

==== 

The funded status of the plans is as follows (in millions).

 

Dec. 31,
2001

Dec. 31,
2000

Plan assets over (under) benefit obligations

$(169)

$   98 

Unrecognized net actuarial gains and other

(107)

(308)

Accrued benefit cost liability

$(276)

$(210)

 

====

====

Four of Berkshire's recently acquired businesses sponsor defined benefit plans. Certain actuarial assumptions which were being used to value the assets and obligations of these plans at the time of acquisition have been revised in 2001 to better reflect the current economic environment and in particular the recent decline in interest rates. The total funded status for plans with benefit obligations in excess of assets was $424 million and $211 million as of December 31, 2001 and 2000, respectively.

Weighted average assumptions used in determining projected benefit obligations were as follows.

 

2001

2000

Discount rate

6.6

7.4

Discount rate non-U.S. plans

5.9

6.0

Long-term expected rate of return on plan assets

6.5

8.3

Rate of compensation increase

4.8

5.1

Rate of compensation increase non-U.S. plans

4.5

3.5

Most Berkshire subsidiaries also have defined contribution retirement plans, such as a 401(k) or profit sharing plans. The plans generally cover all employees who meet specified eligibility requirements. Employee contributions to the plans are subject to regulatory limitations and the specific plan provisions. Berkshire subsidiaries generally match these contributions up to levels specified in the plans, and may make additional discretionary contributions as determined by management. The total expenses related to employer contributions for these plans were $70 million, $80 million and $144 million for the years ended December 31, 2001, 2000 and 1999, respectively.

(19) Business Segment Data

Information related to Berkshire's reportable business operating segments is shown below.

Business Identity

Business Activity

GEICO

Underwriting private passenger automobile insurance mainly by direct response methods

General Re

Underwriting excess-of-loss, quota-share and facultative reinsurance worldwide

Berkshire Hathaway Reinsurance Group

Underwriting excess-of-loss and quota-share reinsurance for property and casualty insurers and reinsurers

Berkshire Hathaway Primary Insurance Group

Underwriting multiple lines of property and casualty insurance policies for primarily commercial accounts

Acme Building Brands, Benjamin Moore, Johns Manville and MiTek ("Building products")

Manufacturing and distribution of a variety of building materials and related products and services

Finance and financial products

Proprietary investing, real estate financing, transportation equipment leasing and risk management products

FlightSafety and Executive Jet ("Flight services")

Training to operators of aircraft and ships and providing fractional ownership programs for general aviation aircraft

Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company, Jordan's Furniture, Borsheim's, Helzberg Diamond Shops and Ben Bridge Jeweler ("Retail")

Retail sales of home furnishings, appliances, electronics, fine jewelry and gifts

Scott Fetzer Companies

Diversified manufacturing and distribution of various consumer and commercial products with principal brand names including Kirby and Campbell Hausfeld

Shaw Industries

Manufacturing and distribution of carpet and floor coverings under a variety of brand names

Other businesses not specifically identified above consist of: Buffalo News, a daily newspaper publisher in Western New York; International Dairy Queen, which licenses and services a system of about 6,000 Dairy Queen stores; See's Candies, a manufacturer and distributor of boxed chocolates and other confectionery products; H.H. Brown Shoe, Lowell Shoe, Dexter Shoe and Justin Brands, manufacturers and distributors of footwear and CORT Business Services, a leading national provider of rental furniture and related services.

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.

Operating Businesses:

Revenues

Insurance group:

2001

2000

1999

  Premiums earned:

    GEICO $ 6,060  $ 5,610  $ 4,757 
    General Re 8,353  8,696  6,905 
    Berkshire Hathaway Reinsurance Group 2,991  4,712  2,387 
    Berkshire Hathaway Primary Insurance Group 501  325  257 
  Investment income 2,844  2,796  2,507 
Total insurance group 20,749  22,139  16,813 
Building products 3,269  178 

¾ 

Finance and financial products 519  530 

117 

Flight services 2,563  2,279  1,856 
Retail 1,998  1,864  1,402 
Scott Fetzer Companies 914  963  1,021 
Shaw Industries 4,012 

¾ 

¾ 

Other businesses

2,329 

2,180 

1,639 

36,353  30,133  22,848 
Reconciliation of segments to consolidated amount:

  Realized investment gain 1,363  3,955  1,365 
  Other revenues 35  54  40 
  Eliminations (16)

¾ 

¾ 

  Purchase-accounting adjustments    (67)    (136)    (225)

$37,668  $34,006  $24,028 

=====  =====  ===== 

     

Operating Businesses:

Operating Profit before Taxes

Insurance group operating profit:

2001

2000

1999

  Underwriting profit (loss):

    GEICO $ 221  $ (224) $ 24 
    General Re (3,671) (1,254) (1,184)
    Berkshire Hathaway Reinsurance Group (647) (162) (251)
    Berkshire Hathaway Primary Insurance Group 30  25  17 
  Net investment income 2,824  2,773  2,489 
Total insurance group operating profit (loss) (1,243) 1,158  1,095 
Building products 461  34 

¾ 

Finance and financial products 519  530 

117 

Flight services 186  213  225 
Retail 175  175  130 
Scott Fetzer Companies 129  122  147 
Shaw Industries 292 

¾ 

¾ 

Other businesses    344    326     211 

863  2,558  1,925 
Reconciliation of segments to consolidated amount:

  Realized investment gain 1,320  3,955  1,365 
  Interest expense* (92) (92) (109)
  Corporate and other 22 
  Goodwill amortization and other purchase-accounting adjustments    (630)   (856)   (739)

$ 1,469  $ 5,587  $ 2,450 

=====  =====  ===== 

*Amounts of interest expense represent interest on borrowings under investment agreements and other debt exclusive of that of finance businesses and interest allocated to certain businesses.

Capital expenditures *

Deprec. & amort.
of tangible assets

Operating Businesses:

2001

2000

1999

2001

2000

1999

Insurance group:

  GEICO

$ 20

$ 29

$ 87

$ 70

$ 64

$ 40

  General Re

19

22

17

20

39

25

  Berkshire Hathaway Reinsurance Group

¾

¾

¾

¾

¾

¾

  Berkshire Hathaway Primary Insurance Group

3

4

1

2

1

1

Total insurance group

42

55

105

92

104

66

Building products

152

15

¾

124

9

¾

Finance and financial products

16

1

4

50

3

6

Flight services

408

472

323

108

90

77

Retail

76

48

55

37

33

27

Scott Fetzer Companies

6

11

14

10

10

11

Shaw Industries

71

¾

¾

88

¾

¾

Other businesses

   40

  28

   29

   34

   32

   27

811

630

530

543

281

214

Reconciliation of segments to consolidated amount:

Corporate and other

¾

¾

¾

¾

¾

1

Purchase-accounting adjustments

    ¾

    ¾

    ¾

     1

     1

     3

$ 811

$ 630

$ 530

$ 544

$ 282

$ 218

====

====

====

====

====

====

*Excludes expenditures which were part of business acquisitions.

Identifiable assets
at year-end

Operating Businesses:

2001

2000

1999

Insurance group:

  GEICO

$ 11,309

$ 10,569

$ 9,381

  General Re

34,575

31,594

30,168

  Berkshire Hathaway Reinsurance Group

38,595

45,775

39,607

  Berkshire Hathaway Primary Insurance Group

  3,360

  4,168

  4,866

Total insurance group

87,839

92,106

84,022

Building products

2,535

686

¾

Finance and financial products

41,599

16,837

24,235

Flight services

2,816

2,336

1,790

Retail

1,215

1,154

906

Scott Fetzer Companies

281

295

298

Shaw Industries

1,619

¾

¾

Other businesses

  2,406

  2,388

     712

140,310

115,802

111,963

Reconciliation of segments to consolidated amount:

  Corporate and other

992

1,049

945

  Goodwill and other purchase-accounting adjustments

  21,450

  18,941

  18,508

$162,752

$135,792

$131,416

======

======

======

(20) 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.

1st

2nd

3rd

 

4th

    2001

Quarter

Quarter

Quarter

 

Quarter

 

Revenues

$8,142

$10,656

$9,310 

 

$ 9,560

Earnings:

 

   Excluding realized investment gain

$ 462

$ 353

$ (895)

(2)

$ 33

   Realized investment gain(1)

  144

  420

  216 

 

    62

   Net earnings (loss)

$ 606

$ 773

$ (679)

 

$ 95

 

====

====

====

 

===

Earnings per equivalent Class A common share:

 

   Excluding realized investment gain

$ 303

$ 231

$ (586)

 

$ 22

   Realized investment gain(1)

    94

  275

  141 

 

41

Net earnings (loss)

$ 397

$ 506

$ (445)

 

$ 63

 

====

====

====

 

===

   2000

 

 

Revenues

$6,479

$ 6,564

$8,434 

 

$12,529

Earnings:

 

   Excluding realized investment gain

$ 354

$ 245

$ 301 

 

$ 36

   Realized investment gain(1)

  453

  395

  496 

 

  1,048

Net earnings

$ 807

$ 640

$ 797 

 

$ 1,084

 

====

====

==== 

 

====

Earnings per equivalent Class A common share:

 

Excluding realized investment gain

$ 233

$ 161

$ 197 

 

$    23

   Realized investment gain(1)

  298

  260

  326 

 

  687

Net earnings

$ 531

$ 421

$ 523 

 

$ 710

 

====

====

====

 

===

(1) The amount of realized gain for any given period has no predictive value and variations in amount from period to period have no practical analytical value particularly in view of the unrealized appreciation now existing in Berkshire's consolidated investment portfolio.

(2) Includes pre-tax underwriting losses of $2.275 billion related to the then estimated losses incurred in connection with the September 11th terrorist attack.