USAir

The proceeds from our bond sales, along with our excess cash at the beginning of the year and that generated later through earnings, went into the purchase of three convertible preferred stocks. In the first transaction, which took place in July, we purchased $600 million of The Gillette Co. preferred with an 8 3/4% dividend, a mandatory redemption in ten years, and the right to convert into common at $50 per share. We next purchased $358 million of USAir Group, Inc. preferred stock with mandatory redemption in ten years, a dividend of 9 1/4%, and the right to convert into common at $60 per share. Finally, late in the year we purchased $300 million of Champion International Corp. preferred with mandatory redemption in ten years, a 9 1/4% dividend, and the right to convert into common at $38 per share. Unlike standard convertible preferred stocks, the issues we own are either non-salable or non-convertible for considerable periods of time and there is consequently no way we can gain from short-term price blips in the common stock. I have gone on the board of Gillette, but I am not on the board of USAir or Champion. (I thoroughly enjoy the boards I am on, but can’t handle any more.)

| Pre-Tax Earnings | Berkshire’s Share of Net Earnings (after taxes and minority interests) | | | | | :--- | :---: | :---: | :---: | :---: | | | 1994 | 1993 | 1994 | 1993 | | | Operating Earnings: | | | | | Insurance Group: | Underwriting | $129,926 | $ 30,876 | $ 80,860 | | | $ 20,156 | Net Investment Income | 419,422 | 375,946 | | | 350,453 | 321,321 | | | | Buffalo News | 54,238 | 50,962 | 31,685 | 29,696 | | Fechheimer | 14,260 | 13,442 | 7,107 | 6,931 | | Finance Businesses | 21,568 | 22,695 | 14,293 | 14,161 | | Kirby | 42,349 | 39,147 | 27,719 | 25,056 | | Nebraska Furniture Mart | 17,356 | 21,540 | 8,652 | 10,398 | | Scott Fetzer Manufacturing Group | 39,435 | 38,196 | 24,909 | 23,809 | | See’s Candies | 47,539 | 41,150 | 28,247 | 24,367 | | Shoe Group | 85,503 | 44,025 | | | | * | 55,750 | 28,829 | | | | World Book | 24,662 | 19,915 | 17,275 | 13,537 | | Purchase-Price Premium Charges | (22,595) | (17,033) | (19,355) | (13,996) | | Interest Expense** | (60,111) | (56,545) | (37,264) | (35,614) | | Shareholder-Designated Contributions | (10,419) | (9,448) | (6,668) | (5,994) | | Other | 36,232 | 28,428 | 22,576 | 15,094 | | | Operating Earnings | 839,365 | 643,296 | 606,239 | | | 477,751 | | | | | Sales of Securities | 91,332 | 546,422 | 61,138 | 356,702 | | Decline in Value of USAir Preferred Stock | (268,500) | | | | | --- | (172,579) | | | | | --- | | | | | | Tax Accruals Caused by New Accounting Rules | | | | | | --- | | | | | | --- | | | | | | --- | (146,332) | | | | | Total Earnings — All Entities | $662,197 | $1,189,718 | $494,798 | $688,121 | Egregious as it is, the Cap Cities decision earns only a silver medal. Top honors go to a mistake I made five years ago that fully ripened in 1994: Our $358 million purchase of USAir preferred stock, on which the dividend was suspended in September. In the 1990 Annual Report I correctly described this deal as an “unforced error,” meaning that I was neither pushed into the investment nor misled by anyone when making it. Rather, this was a case of sloppy analysis, a lapse that may have been caused by the fact that we were buying a senior security or by hubris. Whatever the reason, the mistake was large.

AUDIENCE MEMBER: Mr. Buffett, Greg Elright (PH) from Washington, DC. In the last year, United Airlines and Northwest have resolved some of their financial problems by moving ownership over to the employees. With USAir’s current positions — uh, problems — what do you see as occurring with USAir and do you see any movement toward employee ownership? And how will that affect Berkshire’s interest in the company? WARREN BUFFETT: USAir has a cost structure which is non-viable in today’s airline business. Now that, in an important way, involves its labor cost, but it involves other things, too. But it certainly involves its labor costs. And they’ve stated this publicly. And I think — and they have — they are talking with their unions about it and they’re talking with other people about other parts of their cost structure. And I think you’ll just see what unfolds in the next relatively few months, because there isn’t any question that the cost structure is out of line. I think the cost structure could be brought into line. But whether it will be brought into line or not is another is another question. And, looking backwards, the answer is not to get into businesses that need to solve problems like that. It’s to — but — that was a mistake I made. And I think in Seth Schofield you’ve got a manager who understands that business extremely well, who probably is as — in my view, anyway — is as well regarded and trusted by people who are going to have to make changes as anyone could be in that position.

| Pre-Tax Earnings | Berkshire’s Share of Net Earnings (after taxes and minority interests) | | | | | :--- | :---: | :---: | :---: | :---: | | | 1995 | 1994 | 1995 | 1994 | | | Operating Earnings: | | | | | Insurance Group: | Underwriting | $ 20.5 | $129.9 | $ 11.3 | | | $ 80.9 | Net Investment Income | 501.6 | 419.4 | | | 417.7 | 350.5 | | | | Buffalo News | 46.8 | 54.2 | 27.3 | 31.7 | | Fechheimer | 16.9 | 14.3 | 8.8 | 7.1 | | Finance Businesses | 20.8 | 22.1 | 12.6 | 14.6 | | Home Furnishings | 29.7 (1) | 17.4 | 16.7 (1) | 8.7 | | Jewelry | 33.9 (2) | | | | | --- (3) | 19.1 (2) | | | | | --- (3) | | | | | | Kirby | 50.2 | 42.3 | 32.1 | 27.7 | | Scott Fetzer Manufacturing Group | 34.1 | 39.5 | 21.2 | 24.9 | | See’s Candies | 50.2 | 47.5 | 29.8 | 28.2 | | Shoe Group | 58.4 | 85.5 | 37.5 | 55.8 | | World Book | 8.8 | 24.7 | 7.0 | 17.3 | | Purchase-Price Premium Charges | (27.0) | (22.6) | (23.4) | (19.4) | | Interest Expense(4) | (56.0) | (60.1) | (34.9) | (37.3) | | Shareholder-Designated Contributions | (11.6) | (10.4) | (7.0) | (6.7) | | Other | 37.4 | 35.7 | 24.4 | 22.3 | | | Operating Earnings | 814.7 | 839.4 | 600.2 | | | 606.2 | | | | | Sales of Securities | 194.1 | 91.3 | 125.0 | 61.1 | | Decline in Value of USAir Preferred Stock | | | | | | --- | (268.5) | | | | | --- | (172.6) | | | | | Total Earnings — All Entities | $1,008.8 | $662.2 | $725.2 | $494.8 | I discussed the USAir investment at length in last year’s report. The company’s results improved in 1995, but it still faces significant problems. On the plus side for us is the fact that our preferred is structurally well-designed: For example, though we have not been paid dividends since June 1994, the amounts owed us are compounding at 5% over the prime rate. On the minus side is the fact that we are dealing with a weak credit.

AUDIENCE MEMBER: You don’t have to come back to the shareholders for a vote, after these shares are authorized, for the terms of it. And you’ve discussed this in terms of buying companies. My question is, you yourself, through Berkshire Hathaway, own the preferred shares of several companies: Salomon, USAir, American Express. Do those shareholders have to vote on the terms of the preferred shares that you bought for those companies? Or is that left at the board of directors’ decision level. AUDIENCE MEMBER: Are you there? Hi, I’m Susie Taylor (PH) from Lincoln, Nebraska. By way of explaining — we wrote down the value of USAir, reflecting our investment’s current market value. You had a good explanation in your report as to why the economics of the business are unattractive. And I presume, given the choice, we wouldn’t do it over again.

Two years ago, I gave you an update on the five convertible preferreds that we purchased through private placements in the 1987-1991 period. At the time of that earlier report, we had realized a small profit on the sale of our Champion International holding. The four remaining preferred commitments included two, Gillette and First Empire State, that we had converted into common stock in which we had large unrealized gains, and two others, USAir and Salomon, that had been trouble-prone. At times, the last two had me mouthing a line from a country song: “How can I miss you if you won’t go away?”