1986 年伯克希尔完整年报

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BERKSHIRE HATHAWAY INC: -1986 « ANNUAL REPORT TO PHE STOCKHOLDERS

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BERKSHIRE HATHAWAY INC. • 1886 ANNUAL REPORT • TABLE OF CONTENTS Selected Financial Data At Five-Year Intervals ... Inside Front Cover Business Activities . . . Owner-Related Business Principles 4 Chairman's Letter* 6 Appendix: Purchase-Price Accounting Adjustments and the "Cash-Flow" Fallacy* • 22 Accountants' Certificete ..26 Consolidated Financial Statements ,27 Summarized Financial Statements - Parent Cornpany Only ..44 Managements' Discussion ..45 Annual Report Lettel - Wesco Financial Corporation ..50 Shareholder-Designated Contributions ..58 Selecied Financial Data For The Past Five Years .60 Directors and Officers of the Company .Inside Back Cover Common Stock Data ..Inside Back Cover Copyrig All Rights waven t. Buffe eserve

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to 1985 is available upon request. Direct your request to the Coripany at 1440 Kiewit Plaza, Omaha, A compilation of letters taken from Berkshire Hathaway Inc. Arnual Reports for the years from 1979 Nebraska 68131. 2

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BERKSHIRE HATHAIVAY INC. Businesa A livlies December . 1, : :86 business Berkshire Hathaway Inc. is a holding company ownung subsidiaries engaged in a nu.yber of diverse conducted on both a cirect and reinsurance basis throus h a number of subsidiaries collectively referred activities. The most important of these is the property and casualty insurance business to in this report as the Berkshire Hathaway irisurance Group. Business activities conducted by other and instructional materia! (World Book and Childcraft psoducts), manufacture and marketing of vacuum Berkshire subsidieries include publication and distribu ion of encyclopedias and related educational cleaners and related accessories (sold principally under the Kirby name), manufacture and sale of boxed chocolates and other confectionery products (See's Condies), publication of a daily and Sunday Furniture Mart) and manufacture and distribution of uniforms (The Fechheimer Brothers Company). newspaper in upstste New York (the Buffalo News), retailing of home furnishings (the Nebraska stock that is not owned by Berkshire is held by public shareholders. Wesco stock is listed on the Wesco Finaricial Corporation is an 80.1% owned suhsidiary of the Company. Wesco's common American Stock Exchange and the Pacific Stock Exchange. Wesco's principal businesses are conducted insurance business and its results are included in this report with those of the Berkshire Hathaway by its wholly-owned subsidiaries. One such subsidiary is engaged in the property and casualty Insurance Group, Wesco also has investments in real estate and owns a California chartered savings and loan company (Mutual Savings and Loan Association, Pasadena, California) and a steel service center business. business is upon specific product/r. vrket segments. For example, liability coverages for truck and bus operators is and long has * cit such a, ius of National Indemnity. Marketing intermediaries eployed include general and i spendent agent as well as wholesale and retail insurance and reinsurance brokers. The Group * ;, since September 1. 1985, participated heavily as a quota share reinsurer oi other major insuran : companies. Financial trength that is significantly higher than normal for the property/casualty in: urance industry is a frat re and marketing aid of Berkshire Hathaway Insurance Group members. the Insurance Grou Significant am ints of investment income re generated by investment activities that center in funds committed t the operations as well a: from policyholder fund; represented by unearned Group members' investabl • funds derive from the extensive amount of capital premiums and ioss 1 serves. Very significant outstanding capital stock of GEICO Corporation, and of approximately 18% of the capital stock of • kihir investments include ownership of approximately 41% of the Capital Cities/ABC, Inc. units. Investment decisions and all other capital allocation decisions aro made ior the businesses by Operating decisions for the various Berkshire businesses are inade by managers of the business Warren E. Buffett, in consultation with Charles T. Munger. Mr. Buffet is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board of Directors. Additionally, Mr. Munger is Chairman of Wesco's Board of Directors. 65 3

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BERKSHIRE HATHAWAY INC. OWNER-RELATED BUSINESS PRINCIPLES Reproduced from 1983 Arinual Report • Although oui form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners. (Because of the size oi our sharelloldings we also are, for better or warse, controlling partners.) We do not view the company itself as the ultimate owner of our business asse's but, instead, view the company as a conduit thrugh which our shareholders own. the assets. In the case of at least four of the five, over 50% of family net worth is represented by holdings of • In line with this owner-orientation, our directors are all major shareholders of Berkshire Hathaway. Barkshire. We eat our own cooking. • Our long-term economir goal (subject to some qualifications mentioned later) is to the average annual rate of gain in intrinsic business value un a per-share basis. M: du no measure maximize the economic significance or performance of Berkshire by its size: ve measure b! per-share | rogress. We are certain that the rate of per-share progress will diminish in the future -- a greatly + nlarged average large American corporation. capital base will see to that. But we will be disappointed if our rate does not exceed tha of the that generate cash and consistentiy earn above-average returns on capital. Our second choice is to • Our preference would be to real: this goal by directly owning a diversified group of businesses own parts of similar businesses, attained primarily through purchases of marketable common stocks capital determine any given year's capital alication. by our insurance subsidiaries. The price and availabilit of businesses and the need for insurance • Because of this two-pronged approach to business uwnership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major busiress we control, numbers the individual businesses, should generally aid you in making judgments about them. we consider of great importance. These figures, along with other information we will supply about acquisition costs are sirilar, we much prefer to purchase $2 of earnings that is not reportable by us

• Arcounting consequences do not influence our operating or capital-allocation decisions. When

under standard accounting principles than to purchase $1 of earnings that is reportable. This is frequently seli for double the pro-rata price of small portions (whose carings will be largely unre portable). precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) In asgregate and over time, we expect the unreported tarnings to be fully reflected in our intrinsir: business value through capital gains. • We sarely use much debt and, when we do, we atiempt to structure it on a long-term fixed- rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, depositors, lenders and the many equity holders who have winners said: "To finish first, you must first finish.") committed unusually large portions of their net worth to our care. (As one of the Indianapolis "500"

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purchasing untire businesses • A managerial "wish list" will not be flled at shareholder expense. We will not diversify by shareholders. We will only do with your money what we would do with our own, weighing fully ai contro. prices that ignore long-tert economic consequences to our the values you cal obtain by diversifying your own portfolios through direct purchases in the stock market. • We feel noble intentions should be checked periodically against results. We test the wisdom of relaining eurnings by assessing whether retention, over time, delivers sharsholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it in more difficult to use retained earnings wisely. • We will issue common stock only when we receive as much in business palue as we give. for-debt swaps, siock options, and convertible securities as well. We will not sell small portions of This rule applies to all forms of issuance — not only mergers or public stock offerings, but stock- the value of the entire enterprise. your conipany -- and that is what the issuance of shares amounts to — on a basis inconsistent with • You should be fully aware of one attitude Charlie and I share that hurts our financial performance: regardless of price, we have no interest at ail in selling any good businesses that Berkshire owns, and are very reluctani to sell sub-par businesses as long as ve expect thom to generate at leas! some cash and as long as we feel good about their managers and labor relations. We hope not to ir peat the capital-allocation mistakes ihat led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses con be restored in satisfactory profitability by major capital expenditures, (The projections will be dazzling -- the advocates will be sincere -- but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggiing in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at in it. each turn) is not our style. We would rather have our overall results penalized a bit than engage business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on eventually mislead himself in private. others. We also believe candor denafits us as managers: the CEO who misleads others in public may • Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legaily required. Good investment ideas are rare, valuable and subject to competitive talk about our investment ideas. This ban extends even to securities we have old (because we may appropriation just as good product or business acquisition ideas are. Therefore, we normally will not but say "no commont" on other occasions, the no-comments become confirmation. purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny those reports 5

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BERKSHIKE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Our gain in net worth during 1986 was $492.5 million, or 26.1%. Over the last 22 years (that is, since present managerent took over), our per-share book value has grown from $19.46 io $2,073.06, book value calculation: during or 23.3% compounded annually. Both the numerator and denominator are iportant in the per-share while shares outstanding have increased less than 1%. the 22-year period our corporate net worth has increased 10,600% in past reports I have noted that book value at most companies differs widely from intrinsic has served for more than a decade as a reasonable if somewhat conservative proxy for business value. business value - the number that really counts for owners. In our own case, however, book value That is, our business value has moderately exceeded our book value, with the ratio between the two remaining fairly steady. The good news is that in 1983 our porcentage gain in business value probably exceeded the book- value gain. ! say "probabiv" because business value is a soft number: in our own case, two equally well inforized observers might make judgments more than 10% apart. perforinance of key managers at our major operating businesses. These managers — the Blumkins, A large measure of our improvement i* usiness value relative to book value reflects the outstanding Mike Goldberg, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph Schey — have over the years improved 'he earnings of their businesses dramatically while, except in the case of insurance, utilizing littie additial capital. This accomplishinent builds economic value, or "Goodwili," thai dines not show up in the net worth figure on our balance sheet, nor in our per-share book value la 1986 this unrecorded gain was substantial So much for the good news. The bad news is thai my performance did not match that of our managers. While they were doirg a superb job in running our businesses, I was unable to skillfully deploy mu. of the capital they generated. Charlie Munger, our Vice Chairmon, and I really have oniy iwc jobs. One is to attract and keep outstanding managers to rur: our various operations. This hasn't been all that difficult. Usually the that spanned a wide variety of business circumstances. Ther were managerial stars long before they managers came with the companies we bought, having demunstrated their talents throughout caleors kne v us, and our main contribution has been io not get in • : way. This approach seems elementary: if my joh were to manage a golt team - and if Jack Nicklaus or Arnold Palmer were willing to play for me - neither would get a lit of directives from me about how to swing. Some of our key managers are independently wealthy (ve hope they all become so), but that thrill of outstanding performance. They unfailingly think like owners (the highest compliment we poses no threat to their continued interest: they work beudure they love what they do and relish the can pay a manager) and find all aspects of their business absorbing. (Ou prototype for occupational fervor is the Catholic tilor who used his small savings of many get his first-hand account of the Pope. "Tell us," said the enger faithful, "just what sort of fellow is years to finance a pilgriage to the Vatican. When he returned, his parish held a special meeting to he?" Our hero wasted no words: "He's a forty-four, medinm.") subscribe to the philosophy of Ogilvy & Mather's founding gerius, David Ogilvy: "If each of us hireg Charlie and I know that the right players will make a! -osi any team manager look good. Ve people who are smaller than we are, we shall become a corpany of dwarfs. But, if each of us hires people v. ho art bigger than we are, we sidil become a company of giants." We've read taanagement treatises that sperify exactly how many people should report A by-product of our managerial style is the ability it gives us to easily expand Berkshire's activities. executive, but thay make little sense to ne. When you have able managers of high character running .o any one businesses about whici: they are passionate, you can have a dozen or more reporting to you ard still 6

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have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handie. Charlie and I could work with double the number of managers we now have, so long as they had the rare qualities of the present ones. We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time. On the other hand, working with people who cause your stomach to churn seems inuch like marrying for money - prubably a bad idea under any circumstances, but absolute madness if you are already rich. considerably more important challenge than at most companies. Three factors make that so: we earn The second job Charlie and I must handle is the allocation of capital, which at Berkshire is a for the inost part, require little incremental capital to remain competitive and to grow. Obviously, the raore noney than average; we retain all that we earn; and, we are fortunate to have operations that, future results of a business earning 23% annually and retaining it all are far more affected by today's capital shareholders. If our retaired allocations than are the results of a business earning 10% and distributing half of that to AbC, Inc. — are employed in an unproductive manner, the economics of Berkshire will deteriorate earnings — and those of our major investees, GEICO and Capital Cities/ though still important, will change the company's economics far more slowly. very quickly, In a company adding only, say, 5% to net worth annually, capital-allocation decisions,

• The Fechheimer Bros. Company, which we will discuss in a later section. Fechheimer is a company

Capital allocation at Berkshire was tough work in 1986. We did make one business acquisition with axcelient economics, run by exacily the kind of people with whom we enjoy being associated. But it is relatively small, utilizing only shout 2% of Berkshire's net worth. Meanwhile, we had no new ideas in the marketable equities field, an area in which once, only a few years ago, we could readily employ large sums in outstanding businesses at very reasonable prices. So our main capital allocation moves in 1986 were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either. If Charlie And I were to draw blanks for a few years in our capital-aliocation endeavors, Berkshire's rate of growth would slow significantly. such a business every couple of years. But an acquisition will have to be large if it is to help our We will continue to look for operating businesses that meet our tosts and, with luck, will acquire performance materially. Under current stock market conditions, we have little hope of finding equities to buy for our insurance companies. Markets will change significantly - vou can be sure of that -- might happen. and some day we will again get our turn at bat. However, we haven't the faintest idea when that our returns are certain to drop substantially because of our enlarged size. We have told you that we It can't be said too often (although I'n sure you feel I've tried) that, even under favorable conditions, hope to average a return of 15% on equity and we maintain that hope, despite some negative tax- law changes described in a later section of this report. If we are to achieve this rate of return, our only if, before too long, we come up with a tew very big (and good) ideas. Charlie and I can't promise net worth must increase $7.2 billion in the next ten years. A gain of that magnitude will be possible results, but we do promise you that we will keep our efforts focused on our goals. Sources of Reported : differs in several ways from the one presented last year. We have added four new lines of business The table on the next wage shows the major sources of Berkshire's reporteci earnings. This table because of the Scott Fetzer and Fechheimer acquisitions. in the caso of Scott Fetzer, the two major units acquired were WorlJ Book and Kirby, and each is presented separately. Fourteen other businesses of Scott Fetzer are arregated in Scull Fetzer -- Diversified Manufacturing. SF Financial Group, a because Berkshire is so ruch larger, we also have eliminated separate reporting for several of our credit company hoiding berh Wurid Book and Kirby receivables, is included in "Other." This year, smaller businesses. 7

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the Scott Fetzer and Fechheimer acquisitions created accounting Goodwill, which is why the amortization charge for Goodwil! increased in 1986. Adaitionaliy, the Scott Fetzer acquisition required other major purchase-price accounting adjustments, a* prescribed by generally accepted accounting principles (GAAP). The GAAP figures, of course, are the ones used in our consolidated financial statements. But, in our viow, the GAAP figures are not necessarily the most useful ones for investors or managers. Therefora, the figures shown for specific operating urits are earnings before purchase-price adjustments are taken into account. In effect, these are the earnings that would have been reported by the businesses if we had nut purchased them. A discussion of letter. This Appendix will never substitute for a steamy novel and definitely is not required reading. our reasons for preferring this form of presentation is in the Appendix to this However, I know that on accounting — and I hope that both of you enjoy the Appendix, among cui 6,000 shareholders there are those who are thrilled hy my essays In the Business Segment Data on pages 41-43 and in the Management's Discussion sectior on pages 45-49, you will find much additional information about our businesses. I urge you to read those sections, as well as Charlie Munger's letter to Wesco shareholders. describing the various businesses of that subsidiary, which starts on page 50. (000s omitted) Berkshire's Share (afte: taxes and of Net Earnings Pre-Tax Earnings minority interests) 1986 1985 1086 1985 Operating Earnings: Insurance Group: Underwriting Not Investment Income $(55,844) $(44,230) $(29,864) $(23,569) Buffalo News 107,143 34,736 95.217 Fechheimer (Acquired 6/3/86) 29,921 96,440 16,918 79,716 Nebraska Furniture Mart Kirhy 8,400 20,218 16,508 3,792 14,580 - See's Candies Scott Fetzer - Diversified Mfg. 17,685 25,358 12,686 13,354 7,192 5,181 Wesco — cther than insurance 30,347 28,989 5,542 16,018 15,176 21,978 11,670 5,550 14,558 World Book 9.684 Amortization of Goodwill (2,555) (1.475) (2,555) (1,475) - Other purchase-price accounting charges Interest on Debt and Pre-Payment penalty (10,033) (23,891) - (11,031, Other Shareholder-Designated Contributions (3,997) (14,415) (4,006) (12,213) (2,158) (2,164) (7,288) 20.770 6.744 8,685 3,725 Operating Earnings Special General Foods Distribution . 195,857 125,449 - 4.127 131,464 - 92,948 Sales of securities Special Washington Post Distribution - 14,877 3,779 216,242 468,903 - 13,851 Total Earnings — all entities 150,897 325,237 $412,099 $613.356 $282,361 $435.815 came from the insurance operation, whose resulis I will discuss in a later section. Fechheimer also As you can see, operating earnings substantially improved during 1986. Some of the improvement will be discussed separately. Our other major businesses parformed as follows: 8

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Lipsey. For the third year in a row, man-hours worked feil significantly and orher costs were closely • Operating results at The Buffalo Nows continue to reflect a truly superb managerial job by Stan rate increases were well below those of most major newspapers. controlled. Consequently, our operating margins improved materially in 1986, even though our advertising Our cost-control efforts have in no way reduced our commitment to news. We continue to deliver a 50% "news hole" (the portion of the total space in the paper devoted to news), a higher percentage, we believe, than exists at any dominant newspaper in this country of our size or larger. 40% and 51% is more important than it might first seem: a paper with 30 pages of ads and a 40% The average news hole at papers comparable to the News is about 40%. The difference between of news. Therefore, given ad pages equal in number, we end up delivering our readers no less than news hole delivers 20 pages of news a day, whereas our paper matcles 30 pages of ads with 30 pages 50% more news. We believe this heavy commitment to news is one of the reasons The Buffalo News has the highest weekday penetration rate (the percentage of households in the paper's primary marketing area purchasing it each day) among any of the top 50 papers in the country. Our Sunday penetration, Buffalo (the Courier-Express) had circulation of 271,000 and a penetration ratio of about 63%. The where we are also number one, is even more impressive. Ter years ago, the only Sunday paper serving Courier-Express had served the area for many decades and its penetration ratio -- which was similar to those existing in many metropolitan markets — was thought to be a "natural" oue, accurately reflecting the local citizenry's appetite for a Sunday product. Our Sunday paper was started in late 1977. It now has a penetration ratio of 83% and sells about 100,000 copies more each Sunday than did the Courier-Express ten years ago - even though population in our market area has declined during the decade. In rement history, no other city that has long had a local Sunday paper has experienced a penetration gain anywhere close to Buffalo's. A major newsprint price increase took effect ai the end of 1986, and our advertising rate incroases Despite our exceptional market acceptance, our operating margins almost certainly have peaked. in 1987 will again be moderate compared to those of the industry. However, even if margins should materially shrink, we would not reduce our news-hole ratio. it has brouglit us have far exceeded our expectations and so, too, have the non-financial rewards. Our As I write this, it has been exactly ten years since we purchased The News. The findicial rowards respect for the News - high when we bought it - has grown cons: tently ever since the purchase, as has our respect and admiration for Murray Light, the editor who turns out the product that receives the News during its dark days of financial reversals and litigation, have not in the least bean lessened such extraordinary communit! acceptance. The efforts of Murray and Stan, which were crucial to by prosperity. Charlie and i are grateful to them. • The amazing Blumkins continue to perform business miracles at Nebraska Furniture Mart. Cumpetitors come and go (mostly go), but Mrs. B. and her progeny roll on. In 1986 net sales increased 10.2% to $132 million. Ten years ago sales were $44 million and, even then, NFM apprared lo be doing just about all of the business available in the Greater Omaha Area. Given NFM's remarkable the goods NFM sells, how can this operation continue to rack up such large sales gains? The oniy dominance, Omaha's slow growth in population and the modest inflation rates that have applied to logical explanation is that the marketing territory of NEM's one-and-only store continues to widen because of its ever-growing reputation for rock-botton everyday prices and the broadest of selections. In preparation for further gains, NFM is expanding the capacity of its warehouse, located a ew hundred yards from the store, by about one-third. Mrs. B, Chairman of Nebraska Furniture Mart, continues manager I've ever seen. She's at the store seven days a week, from opening to close. Competing with at age 93 to outsell and out-husile any her represents a triumph of courage over judgment. It's easy to overlook what I consider to be the critical lesson of the Mrs. B saga: at 93, Omaha- based Board Chairmen have yet to reach their peak. Please file this fact away to consult befure you mark your baliot at the 2024 annual meeting of Berkshire. 9

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• At See's, sales trends improved somewhat trom those of recent years. Tutal pounds sold rose about 2%. (For you chocaholics who like to fantasize, one statistic: we sell over 12,000 tons annually.) Same-store sales, measured in pounds, were virtually unchanged. In the previous six years, same. particularly strong Christmas season in 1986 siemmed the decline. By stabilizing same-store volume gained or maintained poundage volume only by adding stores. But a and making a major effort fo control costs, See's was able to maintain its excellent profit margin in 1986 though it put through only minimal price increases. We have Chuck Huggins, our long-time manager at See's, to thank for this significant achievement. taste and moderate price, the company's total control of the distribution process, and the exceptional See's has a one-of-a-kind product "personality" produced by a combination of its candy's delicious service provided by store employees. Chuck rightfully measures his success by the satisfaction of our customers, and his attitude permeates the organization. Few major retailing companies have been able well at See's. to sustain such a customer-oriented spirit, and we owe Chuck a great deal for keeping it alive and modestly, merely matching prospective cost increases. See's profits should stay at abrut their present level. We will continue to increase prices very of 1986. Last year I reported to you enthusiastically about the businesses of Scott Fetzer and about • World Book is the largest of 17 Scort Fetzer operations that joined Berkshire at the beginning Ralph Schey, its manager. A year's experience has added to my enthusiasm for both. Ralph is a superb businessman and a straight shooter. He also brings exceptional versatility and energy to his job: despite the wide array of businesses that he manages, he is on top of the operations, opportunities and fortune continues. problems of each. And, like our other managers, Ralph is a real pleasure to 'vork with. Our good 7% over 1985 and 45% over 1982. Childcraft's unit sales also grew significantly. World Book's unit volume increased for the fourth consecutive year, with encyclopedia sales up World Book continues to dominate the U.S. direct sales encyclopedia market — and for good reasons. Extraordinarily well-editer and priced at under 5ø per page, theso books are a bargain for youngster and adult alike. You may find one editing technique interesting: World Book ranks over 44,000 words by difficulty. Longer entries in the encyclopedia include only the most vasily comprehended words in the opening sections, with the difficulty of the material gradually escalating as the exposition proceeds. As a result, youngsters can easily and profitably read to the point at which subject matter gets too difficult, instead of immediately having to deal with a discussion that mixes up words requiring college-level comprehension with others of fourth-grade level. Selling World Book is a calling. Over one-half of our active salespeople are teachers or former teachers, do a terrific job. If you don't have a World Book set in your house, I recommend one. and anot her 5% have had experience as librarians. They correctly think of themselves as educators, and they 4% from 1985 and 33% from 1982. While the Kirby product is more expensive than most cleaners, • Kirby likewise recorded its fourth straight year of unit volume gains. Worldwide, unit sales grew it performs in a manner that leaves cheaper units far behind ("in the dust," so to speak). Many 30- and 40-year-old Kirby cleaners are still in active duty. If you want the best, you buy a Kirby. years. Certainly the era of the working woman has created new challenges for direct sales organizations. Some companies that historically have had great success in diruct sales have stumbled in recent So far, the record shows that both Kirby and World Book have responded most successfully. any of these uses hour mataly change anyone of one ear described in this section can be characterized as having very strong market positions, very high returns on capital employed, and the best of operating managements. 10

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The Fechheimer Bros. Co. would like to buy. This "ad" paid off in 1986. Every year in Berkshire's annual report I include a description of the kind of business that we On January 15th of last ycar I received a letter from Bob Heldman of Cincinnati, a shareholder for many years and also Chairman of Fechheimer Bros. Until I read the letter, however, I did not know of either Bob or Fechheimer. Bob wrote that he ran a company that met our tests and suggested that we get together, which we did in Omaha after their results for 1985 were compiled. began operations in 1842. Warren Heldman, Bob's father, became involved in the business in 1941 He filled me in on a little history: Fechheimer, a uniform manufacturing and distribution business, Under the Heldmans' inanagement, the business was highly successful. and his sons, Bob and George (now President), along with their sons, subsequently joined the company. In 1981 Fechheimer was sold to a group of venture capitalists in a leveraged buyout (an LBO). with management retaining an equity interest. The new company, as ic the case with all LBOs, started with an exceptionally high dett/equity ratio. After the buyout, however, operations continued to be very successful. So by the start of last year debt had been paid down substantially and the value of the equity had increased dramatically. For a variety of reasons, the venture capitalists wished to sell and Bob, heving dutifully read Berkshire's annual reports, thought of us. Fechheimer is exactly the sort of business we like to buy. Its economic record is superb; its managers are talented, high-grade, and love what they do; and the Heldman family wanted to continue for a price that was based upon a $55 million valuation for the entire business. its financial interest in partnership with us. Therefore, we quickly purchased about 84% of the stock The circumstances of this acquisition were similar to those prevailing in our purchase of Nebraska Furniture Mart most of the shares were held by people who wished to employ funds elsewhere; family members who enjoyed running their business wanted to continue both as owners and managers; several generations of the family were active in the business, providing management for as far as the and who would let the business be run in the future as it had been in the past. Both Fechheimer eye can see; and the managing family wanted a purchaser who would not re-sell, regardless of price, and NFM were right for us, and we were right for them. You moy be amused to know that neither Charlie nor I have been to Cincinnati, headquarters for Fechheimer, to see their operation. (And, incidentally, it works both ways: Chuck Huggins, who has been running See's for 15 years, has never been to Omaha.) If our success were to depend upon insights we developed through plant inspections. Berkshire would be in big trouble. Rather, considering an acquisition, we attempt to evaluate the economic characteristics of the business — ils in competitive strengths and weaknesses — and the quality of the people we will be joining. Fechheimer was a standout in both respects. In addition to Bob and George Heldman, who are in their mid-60s and Fred, to insure continuity.

• spring chickens by our standards — there are three members of the next generation, Gary, Roger

As a prototype for acquisitions, Fechhaimer has only one drawback: size. We hope our next for minimum annual after-tax earnings of potential acquisitions has been moved up to $10 million acquisition is at least several times as large — but a carbon copy in all other respects. Our threshold from the $5 million level that prevailed when Bob wrote to me. ably, write. Flushed with success, we repeat our ad. If you have a business that fits, call me or, prefer- Here's what we're lonking for: (1) 'arge purchases (at least $10 million of after-lax carnings), (2) di monstrated consistent earning power (future projections are of little interest to us, nor are "turn-around" situations). (3) businesses earning good returns on equity while employing little or no debt. (4) inanagement in place (we can't supply it), (5) simple businesses (if there's lots of technology, we won't understand it). (6) an offering price (wa don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown). 11 73

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fast answer -- customarily within five minutes — as to whether we're interested. We prefer to buy We will not engage in uniriendly takeovers. We can promise complete confidentiality and a very for cash, but will consider issuing stock when we receive as much in intrinsic business value as we issuance may be quite feasible. We invite potential sellers to check us out by contacting people with give. Indead, following recent advances in the price of Berkshire stock, transactions involving stock whom we have done business in the past. For the right business — and the right people — we can provide a good home. On the other hand, we frequently get approeched about acquisitions that don't come close to meeting our tests: new ventures, turn-arounds, auction-like sales, and the ever-popular (among brokers) "I'm-sure-something-will-work-nut-if-you-people-get-to-know-fach-other." None of these attracts us in the least. * Besides being interested in the purchases of entire businesses as described above, we are also interested in the negotiated purchase of large, but not controlling, blocks of stock, as in our Cap Cities purchase. Such of the business and the ability and integrity of the people running the operation. We prefer large purchases appeal to us only when we are very comfortable with both the economics transactions: in the unusual case we might do something as small as $50 million (or even smaller), but our preference is for commitments many times that size. Insurance Operations losses and the GNP inflation index. The contrast in 1986 beiweer the growth in premiums and growth We present our usual table of industry figures, expanded this year to include data about incurred in incurred losses will show you why underwriting results for the year improved materially; Yearly Change Combined Ratio Statutory in Premiums After Policyholder Yearly Change in Incurred Inflation Rate Written (%)_ Measured by 1981 Dividends 3.8 Losses (%)... 106.0 GNP Deflator (%) 1982 1983 4.4 4.6 109.8 6.5 9.7 112.0 8.4 6.8 6.4 1984 9.2 3.9 1985 22.1 117.9 116.5 16.9 16.1 3.8 1986 (Est.) ..... 22.6 108.5 15.5 2.6 3.3 Source: Best's Insurance Management Reports The combined ratio represents total insurance costs (losses incurred plus experises) compared to a loss. When the investrent income that an insurer earns from holding on to pulicyholders' funds revenue from premiums: a ratio below 100 indicates an underwriting profit, and one above 100 indicates ("the float") is taken into account, a combined ratio in the 107-112 range typically produces an overall breakeven result, exclusive of earnings on the funds provided by shareholders. when the industry's annual gain in revenues (premiums) pokes along at 4% or 5%, underwriting losses The math of the insurance business, encapsulated by the table, is not very complicated. In years are sure to mount. This is not because more frequently, nor has it lately been the fault of general inflation. Today, social and judicial inflation auto accidents, fires, windstorms and the like are occurring are the major culprits: the cost of entering a courtroom has simply ballooned. Part of the jump in cost arises from skyrocketing verdicts, and part from the tendency of judges and juries to expand the Seeing no let-up in either trend, we continue to believe that the industry's revenues must grow al coverage of insurance policies beyond that contemplated by the insurer when the policies were written. close to 10% annually for it to just hold its own in terms of profitability, even though general inflation may be running only 2% - 4%. 12

[PAGE 15]

In 1986, as noted. the industry's premium volume soared even faster than less costs. Consequently, the underwriting loss of the industry fell dramatically. In last year's report we predicted this sharp improvement but also predicted that prosperity would be fleeting. Alas, this second prediction is already proving accurate. The rate of gain in the industry's premium volume has slowed significantly (from an estimated 27.1% in 1986's first quarter, to 23.5% in the second, to 21.8% in the third, to below my 10% "equilibrium" figure by the third quarter. 18.7% in the fourth), and we expect further slowing in 1987. Indeed, the rate of gain may well fall Nevertheless, underwriting results in 1987, assuming they are not dragged down by a major natural lagged basis. In effect, the good catastrophe, will again improve materially because price increases are recognized in revenues on a months. But the improving trend in earnings wil! probably end by late 1988 or early 1989. Thereafter news in earrings follows the good news in prices by six to twelve the industry is likely to head south in a hurry. Pricing behavior in the insurance industry continues lo be exactly what can be expocted in a commodity-type business. Only under shortage conditions are high profits achieved, and such conditions don't last long. When the profit sun begins to shine, long-established insurers shower investors with new shares in order to build capital. In addition, newly-formed insurers rush to sell shares at the advantageous prices available in the new-issue market (prices advantageous, that is, to the insiders capacity soars, competitive juices flow, and prices fade. promoting the company but rarely to the new shareholders). These mores guarantee future trouble: It's interesting to observe insurance leaders beseech their colleagues to behave in a more "statesmanlike" manner when pricing policies. "Why," they ask, "can't we learn from history, even out the peaks and valleys, and consistently price to make reasonable profits?" What they wish, of course, is pricing that resembles, say, that of The Wall Street Journal, whose prices are ample to start with and rise consistently each year. Such calls for improved behavior have all of the efficacy of those made by a Nebraska corn grower asking his fellow growers, worldwide, to market their corn w th more statesmanship. What's needed is not more statesmen, but less corn. By raising large amounts of capital in the last two years, the increase in "crop" — ie., the proliferation of insurance capacity — will have the same effect on insurance industry has, to continue our metaphor, vastly expanded its plantings of corn. The resulting prices and profits that surplus crops have had since time immemorial. Our own insurance operation did well in 1986 and isi also likely to do well in 1987. We have and ability of Mike Goldberg, manager of all insurance operations. benefited significantly from industry conditions. But much of our prosperity arises from the efforts Our combined ratio (on a statutory basis and excluding structured settlements and financial reinsurance, fell from 111 in 1985 to 103 in 1986. In addition, our premium growth has been exceptional: although fina: igures aren't available, I believe that over the past two years we were the fastesi growing company among the country's top 100 insurers. Some of our growth, it is true, came from our large letter on page 54. But even if the premiums from that contract are excluded from the calculation, we quota-share contract with Fireman's Fund, described in last year's report and updated in Charlie's probably still ranked first in growih. In fact, we shrank - and we will do so again from time to time in the future. Our large swings in Interestingly, we were the slowest-growing large insurer in the years immediately preceding 1985. volume do not mean that we come ind go from tha insurance marketpiace. Indeed, we are its most steadfast participant, always standing roady, at prices we believe adequaie, to write a wide variety behavior of other insurers. When most insurers are "gone." because their capital is inadequate or they of high-limit coverages. The swings in our volume arise instead from the here-today, gone-tomorrow hordes of insurers are "here." and have been frightened by losses, insureds rush to us —- and find us ready to do business. But when naturally leave us in order to take advantage of the bargains temporarily being offered by our competition. are slashing prices far below expectable costs, many customers 13 5

[PAGE 16]

Our firmness on prices works no hardship on the consumer: he is being bombarded by attractively- priced insurance offers at those times when we are doing little business. And it works no hardship on nur ernployees: we don't engage in layoffs when we experience a cyclical slowdown at one of our fear that large layoffs will accompany sizable reductions in premium volume will understandably generaliy-protitable insurance operations. This no-layoff practice is in our seif-interest. Employees who produce scads of business through thick and thin (mostly thin). The trends in National Indemnity's traditional business - the writing of commercial auto and general liability policies through general agents - suggest how gun-shy other insurers vecame for a while and how brave they are now getting. In the last quarter of 1984, NICO's morthly volunte averaged $5 million, about what it had been running for several years. By the first quartir of 1986, monthly volume had climbed to about $35 million. In recent months, a sharp decline has set in. Monthly volume is currently about $20 million and will continue to fall as new competitors surface and prices are cut. Ironically, the managers of certain major new competitors are the very same manager.i that just a few years ago bankrupted insurers that were our old competitors. Through state-mandated writing the same sort of business under a new name. C'est la guerre. guaranty funds, we must pay some of the lusses these managers left unpaid, and now we find trem The business we call "large risks" expanded significantly during 1986. and will be important to us in the future. In this operation, we regularly write policies with annual premiums of $1 - $3 million, or even higher. This business will necessarily be highly volatile — both in volume anc very strong force in the market when prices are right. On the oir.. hand, our structured settlement profitability — but our premier capital position and willingnes: .. write large net lines make: 1s a business has become near-dormant because present prices make no sense to us. show the amount of error in our yearend 1985 liabilities that a year of settlements and further evaluation The 1986 loss reserve development of our insurance group is chronicied on page 46. The figures has revealed. As you can

• and that makes three

see, what I told you last year about our loss liabilities was far from true were to apply to me, my nose would now draw crowds. years in a row oi error. If the physiological rules that applied to Pinocchio When insurance executives belatedly establish proper reserves, they often speak of "reserve strengthening." a term that has a rather noble ring to it. They almost make it sound as if they are adding extra layers of strength to an already-solid balance sheet. That's not the case: instead the term is a euphemisin for what shuuld more properly be called "correction of previous untruths" (albeit non-intentional ones). We made a special effort at the end of 1986 to reserve accuritely. However, we tried just as hard at the end of 1985. Only time will tell whether we have finally succeeded in correctly estimating our insurance liabilities. Despite the difficulties we have hrd in reserving and the commodity econmics of the industry, we expect our insurance business to both grow and make significant umounts of money — but profess will be distinctly irregular and there will be major unpleasant surprises from time to time. It's a treacherous business and a wary attitude is essential. We must heel Woody Allen: "While the lamb may lie down with the lion, the lamb shouldn't count on getting a whole lot of sleep." and we are developing an advantage in personnel. Additionally, I like do think we have some long. In our insurance operations we have an advantage in attitude, we have an advantage in capital, term edge in investing the float developed from policyholder funds. The nature of the business suggests that we will need all of these advantages in order lo prosper. * underwriting experience in personal lines did not improve nearly as GEICO Corporation, 41% owned by Berkshire, had an outstanding vear in 1986. Industrywide, lines. But GEICO, writing personal lines almost exclusively, improved .: combined ratin to 96.9 and arch as it did in commercial recorded a 16% gain in premium volume. GMICO also continued to repurchase its ov a shares and ended the year with 5.5% fewer shates outstanding than it had at the start of the year. Our share of bnok of business is one of the bout in the world of insurance, far better indeed than Berkshires GEICO's premiam volume is ove: $500 million, close to double that of only three years ago. GRICO's own book. 14

[PAGE 17]

company apart from literally hundreds of competitors that offer auto insurance. The total of GEICO's The most important ingredient in GEICO's success is rock-bottom operating costs, which set the underwriting expense and loss adjustmeni expense in 1986 was only 23.5% of premiums. Many major and State Farm incur appreciably higher costs than does GEICO. companies show percentages 15 points higher than that. Even such huge direct writers as Allstate a valuable and much-sought-after business castle. No one understanis this moat-around-the-castle The difference between GEICO's costs and those of its competitors is u kind of moat that protects concept better than Bill Snyder, Chairman of GEICO. He continually widens the moat by driving down costs still more, thereby defending and strengthening the economic franchise. Between 1985 and 1986, leadership, the ratio is almost certain to drop further. If it does — and if GEICO maintains its service GEICO's total expense ratio dropped from 24.1% to the 23.5% mentioned earlier and, under Bill's and underwriting standards - the company's future will be brilliant indeed. the coinpany's investments since late 1979. Indeed, it's a little embarrassing for me, the fellow responsible The second stage of the GEICO rocket is fueled by Lou Simpson, Vice Chairman, who has run for investments at Berkshire, to chronicle Lou's performance at GEICO. Only my ownership of a controlling block of Berkshire stock makes me secure enough to give you the following figures, comparing the overall return of the equity portfolio at GEICO to that of the Standard & Poor's 500: 1980 Year GEICO's Equities S&P_ 500 1981 ... 23.7% 1982 •.. 5.4 32.3% ••• 45,8 (5.0 ) 1983 36.0 21.4 1984 1985 21.8 22.4 45.8 6.2 1936 ... 38.7 31.6 1B.G way. Lou has consistently invested in undervalued common stocks that, individually, were unlikely These are not only terrific figures but, fully as important, they have been achieved in the right to present him with a permanent loss and that, collectively, wert close to risk-free. associated with them. In sum, GEICO is an exceptional business run by exceptional managers. We are fortunate to be Marketable Securities having a maturity of 8 to 12 years. Yur raight think that this cimmitment indicates a considerable During 1986, our insurance companies purchas: d about $700 million of tax-exempt bonds, most They simply seemed the least objectionable alternative at the time we bought them, and still seem enthusiasm for such bonds. Unfortunately, that's not so: at best, the bonds are mediocre investments so. (Currendly liking neither stocks Jor bonds, 1 find myself the polar opposite of Mae West as she declared: "I like only two kinds of men — foreign and domestic.") comes in, we have only five directions to go: (1) long-terin common stock investments: (2) long-term We must, of necossity, hold marketable securities in our insurance companies and, as money (5) short-term arbitrage commitments. fixed-income securities; (3) medium-term fixed-income securities; (4) short-term cash equivalents; and with good economics and good management sell well below intrinsic business value - stocks sometimes Common stocks, of course, are the most fun. When conditions are right - that is, when companies provide grand-slam home runs. But we currently find no equities tests. This statement in no way translates into a stock market prediction: we have no idea - and that come close to meeting our term future. never have had — whether the market is going to go up, down, of sideways in the near- or intermediate. 15

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What we do know, however. is that occasional nutbrenks of those two super-contagious diseasus. fear and graed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate che arrival or departure of either disease. Our goal is more modest: we simply altempt to be fearful when othes are greedy and to be greedy only when othors are fearful. What could be more exhilarating than to participate in a bull market in which the rewards to nwners As this is written, little fear is visible in Wall Street. Instead, euphoria prevails — and why not? Unfortunitely, however, stocks can't outperform businesses Indufnitely. of busineises become gloriously uncoupled from the plodding performances of the businesses themselves. as a whole and over the long term must inevitably underperform the companies they own. If American Indeed, because of the heavy transaction and investment management costs ihey tear, stockholders business, in aggregate, earns about 12% on equity annually, investors must end up earning significantly less. Bull markets can obscure mathematical laws, but they cannot repeal them. are untıkely to be of interest to us except in very special situations, such as the Washington Public The second category of investments open to our insurance companies is long-term bonds. These WPPSS issues having an amortized cost of $218 million and a markel value of $310 million, paying Power Supply System #1, #2 and #3 issues. discussed in our 1984 rport. (At yearend, we owned that we will see much higher rates of inflation within the next decade. Over time, the behavior of us $31.7 million in annual tax-axempt income.) Our aversion to lung-term bonds relates to our fear threat to currency stability — and a corresponding threat to the owners of long-term bonds. our currency will be determined by the behavior of our legislators. This relationship poses a continuing who purchase dozens of securities each yeur. we purchase only a few. We restrict ourselves to large We continue to periodically employ money in the arbitrage field. However, unlike most arbitrageurs, are apt to be small; but, with luck, our disoppointments will also be few. deals thai have been announced publicly and do not bet on the come. Therefore, our potential profits Our yearend portiolio shown below includes one arbitrage commitment, Lear-Siegler. Our balance sheet also includes a receivable for $145 million, representing tho money owed us land paid a few holdings. Arbitrage is an alternative to Treasury Bills as a short-term parking place for money — a days later) by Unilever, then in the process of purchasing Chesebrough-Ponds, another of our arbitrage choice that combines potentially higher returns with higher risks. To date. our returns from the funds funds in Treasury Bills. Nonetheless, one bad experience could change the scorecard markedly. committed to arbitrage have been many times higher than they would have been had we left those alternative io short-term Treasury holdings. Buying these bonds, we run a risk of significant loss if, We also, though it takes some straining, currently view medium-term tax-exempt bonds as an than counter-balanced first, by the much higher after-tax returns currently realizable from these securities as seems probable, we sell many of them well before maturity. However, we believe this risk is more as compared to Treasury Bills and second, by the possibility that sales will produca an overall pront rather than a loss. Our expectation of a higher total return. after allowing for the possibility of loss and after taking into account all tax effects, is a relatively close call and could well be wrong. Even than we would have realizer bs repeatedly rolling over Treasury Bills. if we sell our bonds at a fairly large loss, however, we may end up reaping a higher after-tax return In any event, you should know that our expectations for both the stocks and bonds we now hold are exceptionally modest, given current market levels. Probably the bust thing thnt could happen to order to re-allocaie funds to the far-better equity vilues then very likely to exist. The bond losses I us is a market in which we would choose to setl many of our bond holdings at a signiticant loss in am talking about ivould occur if high interest rates fur s d'ong; the same rules would probably depress common stocks considerably more than medium-ter: wi.ds. 16

[PAGE 19]

We show buicw our 1986 yearend net holdings in marketable equities. All positions with a market value of over $25 million are lisled, and the interests attributable to minority shareholdings of Wasco Financial Corp. and Nebraska Furniture Mari are excluderi. No. of Shares _Cost Market _ 2,990,000 (000s omitted) 6,850,000 Capital Cities/ABC, Inc. 2,379,200 GEICO Corporation $515,775 $ 801,634 489,300 Handy & Harman 45,713 674,725 Lear Siegler, Inc. 27,318 46,989 1,727,765 The Washington Post Company 4+, 06+ 9,731 44,587 269,531 All Other Common Stockholdings 642,601 12,763 1,837,526 Total Coinmon Stocks 36,507 $655.364 $1,874,033 ABC, Inc., GEICO Corporation, and The Washington Post. Even if these securities were to appear We should note that we expect to keep permanently our three primary holdings, Capital Cities! significantly overpriced, we would not anticipate selling them, just as we would not sell See's or Buffalo Evening News if someone were to offer us a price far above what we believe those businesses are worth. order of the day. The modern manager refers to his "portfolic" of businesses - meaning that all of This attitude may seem old-fashioned in a corporate world in which activity has become the them are candidates for "restructuring" whenever such a move is diclated by Wall Street preferences, operating conditions or a new corporate "concept." (Restructuring is defined narrowly, however: it the businesses in the first place. "Hate the sin but love the sinner" is a theology as popular with the extends only to dumping offending businesses, not to dumping the officers and directors who bought Fortune 500 as it is with the Salvation Army.) Investment managers are even more hyperkinetic: their behavior during trading hours makes whirling dervishes appear sedated by comparison. Indeed, the term "institutional investor" is becorning one of those self-contradictions called an oxymoron, comparable to "jumbo shrimp," "lady mud- v. restler" and "inexpensive lawyer." Despite the enthusiasm for ai with our 'til-death-do-us-part policy. It's the only one with which Charlie and 1 are comfortable, it ' that has swept business and financial America, we will stick of distractions. produces decent results, and it lets our managers and those of our investees run their businesses free NHP, Inc. Last year we paid $23.7 million for about 50% of NHP, Inc.. a developer, syndicator, owner and manager of multi-family rental housing. Should all executive stock options that have been authorized be granted and exercised, our equity interest will decline to slightly over 45%. business and civic leaders, led by Edgar Kaiser, to study ways to increase the supply of mult-family NHP. Inc. has a most unusual genealogy. In 1967. President Johnson appointed a commission of housing for low- and moderate-income tenants. Certain members of the commission subsequertly formed and promoted two business entities to foster this goal. Both are now owned by NHP, Inc. and with the advice and consent of the Senate, and it is also required by law to submit an annual report one operates under unust al ground rules: three of its directors must be appointed by the President, to the President. Over 260 major corporations, motivated more by the idea of public service than profit, invested $42 million in the two original entities, which promptly began, through partnerships, to develop governn.ent-subsidized rental largely financed by a non-recourse mortgage. Most of the equity money for each partnership was property. The typical partnership owned a single property and was went with the investment. NHP acted as general pariner and also purchased a small portion of each supplied by a group of limited partners who were primarily attracted by the large tax deouctions that partnership's equity. 17

[PAGE 20]

$50 million annually. NHP now oversees about 500 parinership properties that are located in 40 states, the District of Columbia and averto Rico, and ihar include about 80 000 housing unis. The cost of these properties was more than $2.5 billion and they have heen well maintained. NHP directly manages about 55,000 of the housing units and managemeni are about $16 million annually, and growing. supervises the management of the rest. The cuinpany's revenues from ir addition to the equity interects it purchased upon the forination of cach partnership. NHP owns varying residual interests that come into play when properties are disposed of and distributions are made to the limited unlikely to be of much partners. The residuals on many of NHP's "deep subsidy" properties aru particulariy if inflation should heat up value. But residuals on certain other properties could prove quite valuable. The tax-oriented syndication of properties to individuals llas been halted by the Tax Reform Act of 1086. In the mair, NHP is currently trying to develop equity positions or significant residuel interests in non-cubsidized rental pruberties of quality and size (typically 200 to 500 units). In projects of this kind, NHP usually works with one or more large institutional investers or lenders. NHP will cuntinue to seek ways to deweinp low-and inoderate-income apartment housing, but will net likely icet success unless government polity changes. Liesides ourselvos, the large shareholders in NHP are Weyerhauser (whose interest is about 25%) alen continue to brid small interests, none larger ihan 2%. and a management group lad by Rod Heller, chief executive of NHP. About 60 major corporations Taxation Aithough we find much to praise in the Act, ihe ner financial effect for Berkshire is negative: our The Tax Reform Act of 1986 affects our various businesses in important and divergent ways. rate of increase in business value is likely to be at least moderately slower under the new law than under the old. The net effect for our sharehoiders is even inore negative: every dollar of increase in per-share business value, assuming the increase is accompanied by an equivalent dollar gain in the market value of Burkshire stock, will produce 72v of after-tex gain for our shareholders rather than on personai capital gains from 20% to 28%. the 80¢ produced under the old law. This result. i course, ruflects the rise in the maximum tax zate Here are the main tax changes tha! afiect Berkshire: • Thr tax irt on corporare ordinary income is schuduled to decrease trom 46% in 1986 to 34% in 1988. This change obvicusly aífects in positively - and it also has a significant pesitive eflect on two of our three major investees, Capital Cities/ABG and The Washington Post Company. I say this knowing that over the vears there has been a lot of fuzzy and ofter partisan conmentary about who really pays corporate taxes --. businesses or their customers. The argument, nt course, has usurily turned around tax increases, bot decreases. These people resisting, incroases in corporate rates frequentlv argue that corporations in reality pay none of the taxes levie? on them but, instead, act any corporate-tax increase will simply lead to higher prices that, for the corporation, offset the increase. as a sort of economic pipeline, passing all taxes through to consumers. According to these advocates, Having taken this position, proponents of the "pipeline" theory must also conciude that a tax decrease for corporations will not hulp profits but will instend flow through, leading to correspondingly lower prices fur consumers. them also. Consumers, this school says, will be uraffected by changes in corporate rates. Conversely, others argue that corporations not oniy pay the taxes levied upon them, but absorb What really happens? When the corporate rate is cut, do Beikshire, The Washington Post, Cap Cities, etc., themselves soak up the benefits. or do these companies pass the benefits along to their customers in the form of lower prices? This is an impurtant question for investors and managers, as well as for policymakers.

[PAGE 21]

almost exclusively, upon the corporation and its shareholders, and that in oiher cases the benefits Our conclusion is that in some cases the benefits of lower corporate tares fall exclusively, or are entirely, or alniost entirely, passed through to the customer. What defermines the outcomo is the regulated. strength of the corporation's business franchise and whether the profitability of that franchise is manner, as is the case with electric utilities, changes in corporate tax rates are largely reflected in For example, when the franchise is strong and after-tax profits are regulated in a relatively precise are increated, prices will rise, though often not as promptly. prices, not in profits. When taxes are cut, prices will usually be reduced in short order. When taxes A similar result occurs in a second arena — in the price-competitive indusiry, whose companies typically operate with very weak business franchises. In such industries, the free market "regulates" after-tax profits in a delayed and irregular, but generally effective, manner. The markerplace, in effect, performs much the same function in dealing with the price-competitive industry as the Public Utilities Commission does in dealing with electric utilities. In these industries, therefore, tax changes eventually affect prices more than profiis. the cornoration and its shareholders are then the major beneficiaries of tax cuts. These companies benefit In the case of unregulated businesses biessed with strong franchises, however, it's a different story: from a tax cut much as the electric company would if it lacked a regulater to force down prices. Many of our businesses, both thoso we own in whole and in part, possess such franchises. Consequently, reductions in their taxes largely end up in our pockets rather than the pockets of our customers. While this may be impolitic to state, it is impossible to deny. If you are tempted to believe otherwise, think for a moment of the most able brait surgeon or lawyer in your area. Do you really expect the fees of this expert (the local "franchise holder" in his or her specialtyj to be reduced now that the top personal lax rate is being cut from 30% to 28%? Your joy at our conclusion that lower rates benefit a nunber of our operating businesses and investees should be severely tempered, hrwever, by another of our convictions: scheduled 1988 tax rates, both individual and corporate, serin totally unrealistic to us. These rates will very likely bestow a fiscai probier on Washingion that will prove incompatible with price stability. We believe, therefore, that ultimately — within, say, five vears — either higher tax rates or higher inflation rates are almost certain to materialize. And it would not surprise us to see both. change will have an importart adverse effect on Berkshire because we expect much of our gain in • Corporate capital gains tax rates have beer increased from 28% to 34%, effective in 1987. This business value in the future, as in the past, to arise from capital gains. For example, our three major investment holdings . Cap Cities, GEICO, and Washington Post - at yearend had a inarket value of over $1.7 billior:, close to 75% of the total net worth of Berkshire, and yet they deliver us only which wa expect to eventually deliver us capital gains. about $9 million in annual income. Instead, all three retain a very high percentage of their earnings. that existed before the lair was eracted. At yearend, ve had $1.2 billion of such unrealized gains in The new law increases the rate for all gains realized in the future, including the unrealized gains our equity investments. The +ffect of the new law on our balance sheet will be delayed because a GAAP rule stipulates that the deferred tax liability appliceble to unrealized gains should be stated at last year's 28% tax rata rather than the current 34% rate. This rule is expected to change soon. The deferred tax account. moment it doss, about $73 million will disappear from our GAAP net worth and be added to the h.:./ under the new law. First, all corporations will be faxed on 20% of the dividends they receive • Dividend and interest income received by our insurance companies will be taxed far more from other domestic corporations, up from 15% under the old law. Second, there is a change concerning the resichal 80% that applies only to property/casualty companies: 15% of that residual will be taxed if the stocks paying the dividends were purchased after August 7, 1986. A third change, again applying insurers after August 7, 1986 will only be 85% tax-exempt. only to property/casualty companies, concerns tax-exempt bond interest on bonds purchased by 19 8

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The last two changes are very important. They mean that our income from the investments we make in future years will be significantly lower than would have been the case under the old law. operation by at least 10% fron what we could previously have expected. My best guess is that these changes alone will eventually reduce the earning power of our insurance • The new tax law also insurance companies. One new rule i yuires us to discount our loss reserves in our tax returns, a materip"v changes the timing of tax payments by property/casually six years, requires us to include 20% of our unearned premium reserve in taxable income. change that will decrease deductions and incrcase taxable income. Ancther rule, to be phased in over Neither rule changes the amount of the annual tax accrual in our reports te you, but each materially accelerates the schedule of payments. Thet is, taxes formerly deferred will now be front-ended, a change that will significantly cut the profitability of our business. An analogy will suggest the toll: if. upon turning, 21, you were required to immediately pa, tax on all inuome you were due to receive throughout your life, both your lifetime wealth and your estate would be a small fraction of what they would be if all taxes on your income were payable only when you died. price-competitive industrias, we suggested that tax increases or reductions affect these companies Attentive readers may spot an inconsistency in what we say. Earlier, discussing companies in relatively little, but instead are largely passed along to their customers. But now we are saying that in tin intensely price-competitive industry. tax increases will affect profits of Berkshire's property/casualty companies even though they operate The reason this industry is likely to be an exception to our general rule is that not all major insurers will be working with identical tax equations. Inportant differences will exist for several reasons: a new alternative minimum tax will materially affect some companies bur not others; certain major insurers have huge loss carry-forwards that will largely shield their income from significant taxes for at inast a few years; and the results of some large insurers will be folded into the consolidated returns of companies with non-insurance businesses. Theso disparate conditions will produce widely- varying marginal tax rates in the property/casualty industry. That will not be the case, however, in the major players will generally contend with similar tax equations. most other price-competitive industries, such as aluminum, autos and department stores, in which The absence of a common tax calculus for property/casualty companies means that the increased taxes falling on the industry will probably not be passed along to customers to the degree that they of the new tax burdens. would in a typical price-competitive industry. Insurers, in other words, will themselves bear much • A partial offset to these burdens is a "fresh start" adjustment that occurred on January 1, 1987 when our December 31, 1986 loss reserve figures were converted for tax purposes to the newiy-required discounted basis. (In our reports to you. however, reserves will remain on exactly the same basis as in the past - undiscounted except in special cases such as structured settiements.) The net effect of the "fresh start" is to give us a double deduction: we will get a tax deduction in 1937 and future years for a portion of our incurred-but-unpaid insurance losses that have already been fully deducted as costs in 1986 and earlier years. statements. Rather, under present GAAP rules (which may be changed). the benefit will flow into the The increase in net worth that is produced by this change is not yet reflected in our financial earnings statement and, consequenily, into net worth over the next few years by way of reduced tax charges. We expect the total benefit from the fresh-start adjustment to be in the $30 - $40 million the other insurance-related range. It should be noted, however, that this is a one-time benefit, whereas the negative impact of more severe as time passes. tax changes is not oniy siguing bui, in important resperto, will become • The General Utilities Doctrine was repealed by the new tax law. This means that in 1987 and thereafter there will be a double tax on corporate liquidations, one at the corporate level and another at the shareholder level. In the past, the tax at the corporate level could be avoided. If Berkshire, for example, were to be liquidated — which it most certainly won't be — shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties had 20

[PAGE 23]

been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments, Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed -- though the companies' operating economics will not have changed adversely at all. My impression is that ihis important change in the law has not yet been fully comprehended by either investors or managers. This section of our report has been longer and more complicated than ! would have liked. But the changes in the law are many and important, particularly for property/casualty insurers. As I have noted, the new law will hurt Berkshire's results, but the negative impact is impossible to quantify with any precision. Miscellaneous and a luxury in situations like ours where litle travel to out-of-the-way places is required. And planes We bought a corporate int last yoer. What you have heard about such planes is true: they are very expensive rot only cost a loi to operate, they cost a lot just to look at. Pre-tax, cost of capital plus depreciation on a new $15 million plane probabiy runs $3 million annually. On our own plane, bought for $850,000 used, cuch costs run close to $200,000 arnually. Cognizant of such figures, your Chairman, unfortunately, has in the past made a number of rather intemperate remarks about corporate jets. Accordingly, prior to our purchase, 1 was forced into my Galileo mode. I promptly experienced the necessary "counter-revelation" and travel is now considerably easier — and considerably costlier - than in the past. Whether Berkshire will get its money's worth from the plane is an open question, but I will work at achieving some business triumph that I can (no matter how dubiously) attribute to it. I'm afraid Ben Franklin had my number. Said he: "So cunvenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do." program. Contributicus made through the program were $4 million, and 1,934 charities were recipients. About 97% of ali eligible shares participated in Berkshir's 1986 shareholder-designater contributions We urge new shareholders to read the description of our shareholder-designated contributions urge that you immediately make sure your shares are registered in the name of the actual owner, not progian that appears on pages 58 and 59. If you wish to participate in future programs, we strongly in "street' rame or nominee narne. Shares not so registered on September 30, 1987 will be ineligible for thr. 1987 program. * * Last year almost 450 people attended our shareholders' meeting, up from about 250 the year before (and from aboui a dozen ten years ago). I hope you can join us on May 19th in Omaha. Charlie many good ones. Finishing up the questions may take quite a while — we had about 65 last year — and I like to answer owner-relaled questions and I can promise you that our shareholders will pose so you should feel free to leave once your own have been answered. Last year, after the meeting, one shareholder from New Jersey and another from New York went to the Furniture Mart, where each purchased a $5,000 Oriental rug from Mrs. B. (To be precise, they purchased rugs that might cost $10,000 elsewhere for which they were charged about $5,000.) Mrs. B was pleased - but not satisfied — and she will be looking for you at the store after this year's meeting. Unless our shareholders top last year's record, I'll be in trouble. So do me (and yourself) a favor, and go set her. February 27, 1987 Warren E. Buffett Chairman of the Board 21 3

[PAGE 24]

Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy • ; business is the more valuable? First a short quiz: below are abbreviated 1986 statements of earnings for two companies. Which Company O Lompany N Revenues ........ $677,240 (000s Omitted) $677,240 Cost of Goods Sold: Historical costs, excluding Special non-cash depreciation . . . . $341,170 $341,170 Depreciation of plant inventory costs 4,979111 and equipment 8.301 13,355 (2) Gross Profit... 349.471 Amortization of Goodwill Selling & Admin. Expense $327,769 $317,736 359,504 $260.266 $260,286 595 al Operating Profit ............. 260,286 $ 67,483 260,881 Other Income, Net $ 71.618 4.135 $56,855 Pre-Tax Income 5 60,990 4,135 Applicable Income Tax: Historical deferred Non-Cash Inter-period and current tax $ 31,387 $ 31,387 Allocation Adjustment - 998(" Net Income 31,387 32,385 $ 40,231 ≤ 28,605 (Numbers (1) through (4) designate items discussed later in this section.) As you've probably guessed, Companies O and N are the same business — Scott Fetzer. In the if we had not purchased it; in the "N" !for "new") colimn we have shown Scott Fetzer's GAAP "O" (for "old") column we have shown wirat the company's 1986 GAAP earnings would have heen earnings as actually reported by Berkshire. It should be emphasized that the two columns depict identical economics — i.e., the same sales, wages, taxes, etc. And both "companies" generate the same amount of cash for owners. Only the accounting is different. and investors focus? So, fellow philosophers, which column presents truth? Upon which set of numbers should managers Before we tackle those questions, let's look at what produces the disparity between O and N. We in analysis or conclusions. will simplify our discussion in some respects. but the simplification should not produce any inaccuracies was different from its stated net worth. Under GAAP, such differences - such premiums or discounts The contrast between O and N comes about because we paid an amount for Scott Fetzer that

• must be accounted for by "purchase-price adjustments. " In Scott Fetzer's case, we paid $315 million

for net assets that were carried on its books at $173.4 million. So we paid a premium of $142.6 million. 22

[PAGE 25]

The first step in accounting for any prernium paid is to adjust the carrying value of current assets lo current values. In practice, this requirement usually does not affect receivables, which are routinely carried at current value, but often affects inventories. Because of a $22.9 million LIFO reserve ard other accounting intricacies, Scott Fetzer's inventory account was carried at a $37.3 million discount from current value. So, making our first accounting move, we used $37.3 million of our $142.6 million premium to increase the carrying value of the inventory. assets to current value. In our case, this adjustment also required a few accounting acrobatics relating Assuming any premium is left after current assets are adjusted, the next step is to adjust fixed to deferred taxes. Since this has been billed as a simplified discussion. I will skip the details and give you the bottom line: $68.0 million was added to fixed assets and $13.0 millior was eliminated from deferred tax liabilities. Alter making his $81.0 million adjustment, we were left with $24.3 million of premium to allocale. intangible assets other than Grodwill to current fair values, and the restatement of liabilities to current Had our situation called for them, two steps would next have been required: the adjustment of fair values, a requirement that typically affects only long-term debt and unfunded pension liabilitios. Ir Scott Fetzer's case, however, neither of these staus was necessary. The final accounting adjustment we needed to make, after recording fair market values for al! assets and liabilities, was the assignment of the residual premium to Goodwill (technically known as "excess of cost over the fair value of net assets acquired"). This residual amounted to $24.3 million. below in column O, was transformed by the purchase into the balance sheet showr in column N. In Thus, the balance sheet of Scott Fetzer immediately before the acquisition, which is summarized real terms, both balance sheets depict the same: assets and liabilities -- but, as you can see, certain figures differ significantly. Company O Compuny N. Assets (000s Omitted) Ri ceivables, net Cash and Cash Equivalents $ 3,593 Other Inventories 90,919 $ 3,593 77.489 114,764 90.919 Property, Plant, and Equipment, net Total Current Assets 5.954 5,954 177,955 Investments in and Advances to Unconsolidated 80,967 148,960 215,230 Other Assets, including Goodwill Subsidiaries and Joint Ventures -9,836 93,589 93,589 34,210 $362,347 $491.989 Liabilities Notes Payable and Current Portion of Accounts Payable Long-term Debt .. $ 4,650 $ 4,650 Accrued Liabilities 39,003 39.003 Long-tern Debt and Capitalized Leases Total Current Liabilities 84,939 84,939 128,592 128,592 Other Deferred Credits Duferred Income Taxes ... . .. 34,669 17,052 34,669 4,075 Shareholdlers' Equity Total Liabilities 9,657 9,657 172,377 189,970 176,993 314.996 $362.347 $491.989 in column N of the earnings statemen! presented earlier. This is the result of the asset write-ups and The higher balance sheet figures shown in column N produce the lower income figures shown of the fact that some of the written-up assets must be deg eciated or amortized. The higher the asset figure, the higher the annual depreciation or amortization charge to earnings must be. The charges 23

[PAGE 26]

that flowed to the earnings statement because of the balance sheet write-ups were numbered in the statement of earnings shown darlier: 1. $4,979,000 for non-cash inventory costs resulting, primarily, from reductions that Scott Fetzer made in its inventories during 1986; charges of this kind are apt to be small or non-existent in future years. 2. $5,054,000 for extra depreciation attributable to the write-up of fixed assets; a charge approximating this amount will probably be made annuaily for 12 more years. 3. $595,000 for amortization of Goodwill: this charge will be made annually for 39 more years in a applies to only 98% of the year. slightly larger amount because our purchase was made on January 6 and, therefore, the 1986 figure 4. $998,000 for deferred-tax acrobatics that are beyond my ability to explain briefly (or perhaps even non-briefly); a charge approximating this amount will probably be made annually for 12 more years. million, are deductible for income tax purposes. The "new" Scctt Fetzer pays exactly the same tax It is important to understand that none of these newly-created accounting costs, totaling $11.6 as the "old" Scott Fetzer would have, even though the GAAP earnings of the two entities differ greatly. And, in respect to operating earnings, that would be true in the fature also. However, in the unlikely company might differ widely. event that Scott Fetzer sells one of its businesses, the tax consequences tu the "old" and "new" By the end of 1986 the difference between the net worth of the "old" and "new" Scol Fetzer had been reduced from $142.f million to $131.0 million by means of the extra $11.6 million that was charged to earnings of the now entity. As the years go by, similar charges to earnings will cause most of the premium to disappear, and the two balance sheets will converge. However, the higrer land values and most of the higher inventory valuer that were established on the new balance sheet will remain unless land is disposed of or inventory levels are further reduced. * * What does all this mean for owners? Did the shareholders of Berkshire buy a business that earned $40.2 million in 1986 or did they buy one earning $28.6 million? Were those $11.6 million of new charges a real economic cost to us? Should investors pay more for the stock of Company O than of Company N? And, if a business is worth some given multiple of earnings. was Scott Frizer worth considerably more the day before we bought it than it was worth the following day? earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and If we think through these questions, we can gain some insights about what may be called "owner certain other non-cash charges such as Company N's items (1) and (4) less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional workied in tel However, bist compettive However, bus rosses fallowing the LO inventory method usualy do not red b additional working capital if unit volume does not change.) Our owner-earnings equation since (c) must be a guess -- and one sometimes very difficult to make. Despite this problom, we does not yield the deceptively precise figures provided by SAAR. consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes Keynes's observation: "I would rather he vaguely right than precisely wrong."

• both for investors in buying stocks and for managers in buying entire businesses. We agree with

The approach we have outlined produces "owner earnings" for Company O and Company N that are identical, which means valuations are also identical, just as common sense would tell you should be the case. This result is reached because the sum of (a) and (t, is ibe same in with columns ) and N, and because (c) is necessarily the same in both cases. And what do Charlie and 1, as owners and managers, believe is the correct figure for the owner earnings of Scott Fetzer? Under current circumstances, we believe (c) is very close to the "old" company's (b) rumber of $8.3 million and much below the "new" company's (b) number of $19.9 24

[PAGE 27]

million. Therefore, we believe that owner earnings are far better depicted by the roported earnings in the O column than by those in the N column. In other words, we feel owner earnings of Scott Fetzer are considerably larger than the GAAf figures that we report. such plecsant news. That is obviously a happy state of affairs. But calculations of this sort usually do not provide more than (b) on their businesses over the longer term just to hold their ground in terms of both unit Most managers probably will acknowledge that they need to spend something volume and competitive position. When this imperative exists -- that is, when (c) exceeds (b) - GAAP earnings overstate owner earnings. Frequently this overstatement is substantia!. The oit industry has in recent years provided a conspicuous example of this phenomenon. Had most major oil companies spent only (b) each year, they would have guaranteed their shrinkage in real terms. Sireet reports. These numbers routinely include (a) plus (b) - but do not subtract (c). Most sales All of this points up the absurdity of the "cash flow" numbers that are often set forth in Wall brochures of investment bankers also feature deceptive presentations of this kind. These imply that the business being offered is the commercial counterpart of the Pyramids - forever state-of-the-art, never needing to be replaced, improved or refurbished. Indeed, if all U.S. corporations were to be offered simultaneously for sale through our leading investment bankers — and if the sales brochures spending would have io be slashed by 90%. describing them were to be believed - governmental projections of national plant and equipment "Cash Flow," true, mas serve as a shorthand of some utility in descriptions of certain real estate businesses ur other emerprises that inake huge initial outlays and only tiny oullays thereafter. A company whose only holding is a bridge or an axtremely long-lived gas field would be an example. and utilities because, for them, (c) is always significant. To be sure, businesses of this kind may in But "cash flow" is meaningless in such businesses as manufacturing, retailing, extractive companies, a given year be able to defer capital spending. But over a five- or ten-year period, they must make the investment — or the business decays. Why, then, are "cash flow" numbers so popular today? In answer, we confess our cynicism: we believe these numbers are frequently used by marketers of businesses and securities in attempts to justify the unjustifiable (and thereby to sell what should be the unsalable). When (a) -- that is, GAAP earnings - looks by itseli inadequate to service debt of a junk bond or justify a foolish stock price, how convenient it becomes for salesmen to focus on [a) + (b). But you shouldn't add (b) without is not true for (c). The compery or investor believing that the dabt-servicing ability or the equity subtracting (c): though dentists correctly claim that if you ignore your teeth they'll go away, the same valuation of an enterprise can be measured by totalling (a) and (b) while ignoring (c) is headed for certain trouble. ** To sum up: in the case of both Scott Fetzer and our other businesses, we feel that (b) or an historical-cost basis -- i.e., with both amortization of intangibles and other purchase-price adjustments excluded - is quite close in amount to (c). (The two items are not iduntical, of course. For example, simply to hold our ground competitively.) Our conviction about this point is the reason we show our ai See's we annually make capitalized expenditures that exceed depreciation by $500,000 to $1 million, amortization and other purchase-price adjustment iters separately in the table on page 8 and is also our reason for viewing the earnings of the individual businesses as reported there as much more closely approximating owner earnings than the GAAP figures. for if it is not to deliver us the "truth" about our business. But the accountants' job is to record, not Questioning GAAP figures may seem impious to some. After all, what are we paying the accountants to evaluate. The evaluation job fails to investors and managers. Accounting numbers, of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progiess. Charlie and I would be lost without ihese numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that ducounting is but an aid to business thinking, never a substitute for it. 25

[PAGE 28]

Folax: 6716075 THOSS UW пітераннь фос ото : год March I1, 1987 Io the Board of Directors and Storkholders Berkshire Hathaway Inc. Inc. and consolidated subsidiaries as of December 31, 1986 and December 28. We have examined tie consolidated balance sheets of Berkshire Hathaway 1985, and the relited consolidated statemeats of earnings and financial position for the years ten endrd. Our examinations were made in changes in accordance wich generally included such tesca the accounting records and accepted audining standards and, accordingly, proceduras as we considered necessary in the circumatances. The consolidated such other auditiag Inc. and consolidated subaidiaries for the year ended December 29, 1984 were statenents of earnings and changes in financial position of Berkahire Hathaway examined by other auditors whose report dated March 13, 1985, except as Note 21 to the 1984 financial statements expreased an unqualified opinion on those statenents. ã8 of March 18, 1985, In out opinion, the 1986 and 1985 referred to above present fairly the financial position of Berkalire Hathaway consolidated financial statements 1985, and the results of their operations and the changes in their financial Inc, and consolidated aubaidiaries as of December 31, 1986 and December 28, position for the years then ended, accounting principles applied on • consistent tasis. confornity with generally accepted buche Fosed le. Jauk Road Co. 26 Touche Ross Internation:

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BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries • CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share amounts) Dec. 31, 1986 Dec. 28. ASSETS 1985 Cash and temporary cash investments Investments, other than investments in affiliates: $ 292.473 $1,017,667 Obligations with fixed maturities, principally bonds — at cost (market value: Dec. 31, 1986 — $1,274,342, Dec. 28, 1985 — $543,101) Marketable equity securities (Notes 3. 4 and 5) 1.124,389 Inventories (Note 7) ....... Accounts receivable from customers, agents and others (Note 6) 1,871,933 475,216 434,705 1,183,476 Properties and equipment (Note 8) 159,660 156,362 Deferred insurance premium acquisition costs ...... 37,386 212,211 Goodwill of acquired businesses .... 79,146 69,369 Other assets (Notes 9 and 10) 126,957 75.109 51,368 140,183 114,705 $4.441.655 $3.180,718 Losses and loss adjustment expenses .. LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 860,228 Accounts payable, accruals and other liabilities 414,986 411,305 229,440 Income taxes, principally deferred (Note 11) 236,157 Term debt and other borrowings (Note 12) 414,275 120,823 94,923 381,581 117.879 2,020,569 1,261,028 Minority shareholders' interests 43,289 34,360 Stockholders' equity (Notes 13 and 14): Common stock of $5 par value. Authorized 1,500,000 shares; issued Capital in excess of par value 1,375,183 shares, including shares held in treasury 6,876 Retained earnings Unrealized appreciation of marketable equity securities, net 874,813 157.377 6,876 157,377 1,379.669 664,707 1,097,308 Less common stock in treasury, at cost (228,274 shares) 2,418,735 1,926,268 Total stockholders' equity 40,938 40,938 2.377.797 1.885,330 Commitments (Note 10) 84.441.655 $3.180.718 See accompanying Notes to Cunsolidated Financial Statements 27

[PAGE 30]

BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENTS OF EARNINGS and Consolidated Subsidiaries (dollars in thousands except per share amounts) Fiscal Year Ended Saturday Nearest December 31 December 31 Income items: 1986 1985. 1984 Insurance premiums earned Sales and service revenues $1.225,290 Interest and dividend income (Note 15) 823,884 $ $08.764 Equity in earnings excluding realized investment 118,429 317,059 $ 500,219 107,662 140,242 84,161 gain of unconsolidated subsidiaries 9,062 6,379 2,176,665 4.557 939,864 729,179 Cost and expense items: cost of products and services sold nsurance losses and loss adjustment expense 651,717 Insurance underwriting expenses ... 655,758 285,92$ Interest and financing costs Seiling, general and administrative expenses 223,970 280,249 296,770 425,5€z 81,040 141,550 150,423 46,752 23,892 138,875 14,415 14,734 Earnings from operations including minority 1.980.899 812.052 638.681 interest in consolidated subsidiaries, realized investment gain before applicable income taxes and befure Income taxes applicable to above (Note 11) 195,766 127,812 59.152 90,498 31,271 Minority interest applicable to above. 136,614 10.420 Realized investment gein, net (Note 16) Earnings before realized invostment gain •... 5,150 96,541 74.078 3,593 .... 131,464 3.677 Net earnings 150,897 92,948 70,201 342,86Z 78.694 $ 282,361 435,815 148.845 Average shares outstanding Per share: _ 1,146.909 1.146,909 -110.909 Net earnings Earnings before realized investment gain 5 114.62 $ 81.04 246.19 179.99 61.21 123.84 See accompanying Notes to Consolidater Financial Statements 28

[PAGE 31]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (dollars in thousands) Fisce' ear Ended aturday Nearesi December 31

• 1986

- lecermber 31 1984 Consolidated assets at beginning of yea: Changes during the year resulted from: .... $3,180,718. $2.035,203 31,837,543 Net earnings Net increase in losses, loss adjustment expenses and 282,361 435,815 148,895 Net increase (decrease) in other consolidated unearnedi premiums of insurance subsidiaries .... 634,469 348,348 23,903 liabilities increases essentiaily from operations (76,999) 839,831 109,779 893.942 19,856 192,661 Net increase in unrealized appreciation included in Kopayment of debt carrying value of marketable securities •.. ...... 291,811 248,810 (69,097) 5,682 12,061 (9,298) 2,612 Obligations to which assets uf purchased businesses were Not increase in minority interests. .... (1.922) 4,309 subject, when acquired: Term debt and other borrowings .. Other liabilities ....... 46,141 146.569 ...- Total changes 1.260.932 19%660 -. : Consulidated assets at end of year $4.441.655 2318025 .$2.035,203 See accompanying Notes to Consolidated Financial Statements 20

[PAGE 32]

NOTES TO CONSOLIDATED FINANCIAL STATEMENT'S and Consolidated Subsidiaries December 3i, 1986 (dollars in thousands excepi per share amounts) (1) Significant: Accounting Policies and Fractices (a) Basis oj Consolidation The accompanying Consolidate Financial Statements include the accounts of Berkshire Hathaway Inc. (the "Comnany" or "Berkshire") consolidated with accounts of all of its subsidiaries except as indicated in the immediately following paragraph. Consolidated subsidiaries include companies engaged in a number of diverse businesses. See Note 19. (b) Unconsciidated Subsidiaries An exception to Berkshire's practice of consolidation of ail subsidiaries is made for those in which Berkshire's investments are minor and ivith respect to companies engaged in banking, savings and loan, or financing activities, Berkshire has indirectly owned 80.1% of Mutual Savings and Loan Association ("Niatual") since mid-1983. (Berkshire owned, boneficially, d lesser percentaga nf Mutual for several earlizz years.) Since January 6, 1936 Berkshire has indirectly owned all of World Book Firance Inc. and United Consumer Financial Services Company, each engaged in financing activities. Berkshire's investments in suhsidiaries not consolidated aid accounter for using the equity method of accounting. (c) Accounting Period In 1986, Berkshire adopted the calendar year as its annual accounting ! eriod. For years 31. With the exception of See's Candies, who continue to employ a 52-53 week year prior to 1986, Berkshire used 52-53 week years that ended on the Saturday nsarest December ending with respect to December 31, all of Berkshire's significant subs diaries employed the calendar year for 191t and for prior years. The change hy the Company had no position. measurable effect upon 1936 consolidated earnings or year-end consolidated financial (d) Investments in Securities, Other Than Affiliates Investments in obligations with fixed dates of maturity -- bonds and redeemable preferred of premium. stocks —— are stated at cost, adjusted where appropriate for accretion of discount or amortization Investments in marketable equity serurities held by members of the Insurance Group are carried at market value. Investments in marketable aquity securities held by consolidated subsidiaries which are not members of the Insurance Group are carried at the lower of aggregate cost or market. Cost of securities sold is usually determined on a first-in, first-out basis. Occasionally, when specific identification of securities sold results in lower applicable income tax, identified cost is used. ie! Inventories Inventories are stated at the lower of o'st or market. Cost has been determined on a last- in, first-out ("LIFO") basis for approximately 70% of total inventories at December 31, using the first-in, first-out ("FIFO") or average cost methods. 1986 (26% at December 28, 1985). Cost for the remaining inventory has been determined (f) Properties and equipment These items of property (including significant betterments and renewals) are carried at cost, depreciated principaily ou a straight line basis over their useful lives estimated it the dat of acquisition. Maintenance, repairs and renewals of a minor nature are penerally " charged to operations as incurred. a 30

[PAGE 33]

(1) Significant Accounting Policies and Practices (Continued) (g) Goudwill and Negative Goodwill of Acquired Businesses The difference betwean purchase cost and the fair value of the net assets of acquired businesses is amortized on a straight line basis over forty years. (h) Insurance Fremium Acquisition Costs For financial reporting purposes, certain costs of acquiring insurance prentiums are deferred, sibject to ultimate recoverability, and charged to income as the premiums are earned. "Vith respect to premiums received under maji quota-share reinsurance contructs, the computation of ultimate recoverability of the directly related acquisition costs takes into account investment income anticipated to be earned on funds held subject to the contracts. Otherwise, ultimate recoverability of premium acquisition costs is determined without income tax reporting purposes, premiur acquisition costs are charged to income when regard to investment income. For statutory insunce accourting and through 1986, for (1) Losses and Loss Adjns'...ent Expenses The Insurance Cup provides for rosses and iuss adjustment expenses for unsettled cases based vi estimates factimate liability with respect to reported cases, plus estimates of aggregate liabily with respect to incurred but not reported losses. Estimates of liability ssurers. The liability provision is reduced for amounts recovorable on account of reinsurance relating assumed roinsurance are based on loss reports receivad from the primary raspectively. ceded: these reductions amounted to $11,397 and $12,023 at December 31, 1986 and 1985, An Hossgate liability amounting to $52,029 and $40,841 at December 31, 1986 and 1985, *rěspectively, was additionally established at present value on a contract-by-contract basis with respect to periodic payment obligations ("Structured Settlements") assumed by members of the Insurance Group. The specific present value discount rate applicable to d given contraci is dependent upon market interest rates at the contract inception date. The weighted average discount rate for all such contracts at December 31, 1986 for financia! negotia proves a gym reporting purposes was approximately 11.2%. For statutory insurance accounting and tax regulatizy authority. reperting rurposes, these liabilities were discounted at a rate of 7% as prescribed by Addition: lly at December 31, 1986 and 1985, an aggregate liability amounting to $58,706 of the Insurance Group. Liabilities under these contracts are established at their inception and $47,03, respectively, was established with respect i portfolio reinsurance obligations dates at amounts approximately equal to the consideration then received, and thereafter thereunder. at amounts determined by management to approximate the value of ultimate liability Incurred losses and loss adjustment expenses in the accompanying Consolidated Statements collection in accordance with statutory accounting requirements for insurance companies. of Earnings are net of recoveries of salvage and subrogation collected or in process uf 31

[PAGE 34]

is gal accouling tolicies and Practices (Continued) (k) Insurance Premiums Insurance premiums are recognized as revenues ratably over the terms of the policies nearned promi ms are computed on a monthly or daily pro rata basis and are statad! after deducti . of premiums for reinsurance placed with $3,567 and $4,398 at December 31, 1986 and 1985, respectively. reinsurers in the amount of Dividends to policyholders are paid or credited to policyholders with respect to participating are raflected in the accompanying Consolidated Statements of Earnings as a deduction policies issued by certain members of the Berkshice Hathaway Insurance Group. These froin earned premiums. This reluction amounted to $4,477 ior 1986, $5,243 for 1985, and $3,110 for 1984. (m) Income Taxes Income taxes reflected in the consolidated financial statements represent those of the Company and those of its subsidiaries that are consolidated therein. Certain items of income and deductions are recognized in the financial statements in time filed for the companies giving rise to recognition in the financial statements of net deferred periods that differ from those in which they are recognized in the income tax returns income taxes. The liability for income taxes in Berkshire's consolidated balance sheets also includes Federal income taxes, computed at the rate of 28%, that applied through 1986 to long term capital securities. gains, deemed applicable to unrealized appreciation included in carrying value of marketable (n) Reclassifications nelson nine presentation of reacted statement for cures ayer presentin. 32

[PAGE 35]

(2) Businesses Acquired The Scott & Fetzer Company In a cash merger transaction on January 6, 1986, Berkshire succeeded to all of the assets of The Scott & Fetzer Company ("Scutt Fetzer") subject to all of Scott Fetzer's liabilities. Scott Fetzer, headquartered in Westlake, Ohio, conducts diversified manufacturing and marketing activities. Two of Scott Fetzer's principal product lines are vacuum cleaners and related accessories primarily for home use sold under World book and Childcraft names. Scott Fetzer had more tian a dozen other operating units, the businesses the Kirby and other brand names, and encyclopedies and related products for education sold under the of which involve raanufacture and sale of a variety of products and services. The cash cost to Berkshire of the S'cott Fetzer b'sinesses vas approximately $315,000. The business combination was accounted for as a purchase, and assets and liabilities of Scott Fetzer at estimated fair values as of January 6, 1986 were recor jed as follows: Current assets .. Investment in unconsolicated finance Properties and plants. $ 215,230 148,960 Other (including $26,687 goodwill! subsidisries..... 34,210 93,589 Liabilities, other than term debt 491,989 Term debt .. 137,674 Net assets ......... 39,319 176,993 $ 314,996 Since the January 6, 1986 date of acquisition, 'he accounts of Scott Fetzer have been included in for by the squity method of accounting. Berkshire's consolidated data except that the acquired unconsolidated finance subsidiaries are accounted The Fechheimer Brothers Company In June, 1986, Berkshire acqui-ed for approximately $46,000 cash approximately 84% of the outstanding capital stock of The Fechheimer Brothers Company, ("Fechhaimer's"). This business is headquartered in Cincinnati, Ohio. It manufactures and distributes uniforms. This business combination was accounted for 1986, were as follows: as a purchase. Assets, liabilities and minority interest uf Fechheimer's recorded by Berkshire as of June 3, * Current assets Other (including $28,279 goodwill) Property, plant and equipment $ 25,863 29,259 6,469 Liabilities, other than terra debt. $ 61,591 Minority interest Term debt ... $ 5,648 3,247 6,82? 15,717 $ 45.874 consolidated dada. Since the june 3, 1966 date of acquisition, the accounts of Fechheimer's have been included in Berkshire's Pro Forma Data The consolidated financial statements for 1985 do not reflect the accounts of Scott Fetzer and Fechheimer's. The following sets forti? on an unaudited pro forma basis certain consolidated statement of earnings information for 1985, as if those businesses were acquired at the beginning of 1985, on the same purchase terms. Total income iterns Net earnings $1.709,893 Net earnings per share $ 447,817 $ 390.46 Similar information developed on a pro forma basis 1o:: 1986, as if those businesses were acquired at the very beginning of the current year. would not materially differ from that reflected in the accompanying Consolidatod Statement of Earnings for 1986. 33 5

[PAGE 36]

(3)Investments in Marketable Equity Securities shown below as of the dates for which consolidated balance sheets are presented herein. See Note Aggregate data with respect to the consolidated investment in marketable equity securities is 1(d) as to methods applied to determine carrying value of these securities. December 31, 1986 Unrealized Common stock of: Cast Gain Market Carrying Value Capital Cities/ABC Inc. GEICO Corporation $517,500 $ 286,875 The Washington Post Company 45,713 $ 804,375 All Others 9.731 259,800 649,012 $ 799,594 674,725 84,145 269,531 674,725 49,938 128,083 128,083 269,531 $657.089 $1,219.625 $1,876,714 $1,871,933 December 31, 1985 Cost Unrealized Gain Market Carrying Common stock of: Value GEICO Corporation American Broadcasting Conpanies, Inc. $ 54,435 $ 54,562 $ 108,997 The Washington Post Company 45,713 550,237 $ 108,997 595,950 All Others 9,731 195,441 150,558 122,799 205,172 595,950 205,172 273,357 273.357 $260,437 $923,039 $1,183,476 _$1,183.476 December 31, 1985. There were no unrealized losses with respect to these securities a December 31, 1986 or at (4) Investment in shares of Capital Cities/ABC Inc. shares of Capital Cities/ABC Inc. (Capital Cities") pursuant to a Letter Agreement between Berkshire On January 2, 1986, subsidiories of Berkshire acquired for $517,50ü cash three million common and Capital Cities dated March 18, 1985. The shares represented approximately 18.75% of the total outstanding shares of Capital Cities immediately after the transaction. Berkshire subsidiaries hold the shares subject to an Agreement the terms of which, among other provisions, grant to Capital Cities a right of first refusal to purchase the siares and otherwise govern until January 3, 1997 lhe manner shareholders of Capital Cities. The proxies expire on January 2, 1997 or at the earlier date when neither of such persons is chief executive officer of Capital Cities. (5) Investment in GEICO Corporation shares of common stock of GEICO Corporatica. The shares possessed approximately 41% of the voting Subsidiaries of Berkshire, at buth December 31, 1986 and at December 28, 1985, owned 6,850,000 rights of all GEICO shares outstanding at December 31. 1986 (38-2% at December 28, 1985), but Berkshire holds the shares subject to an Order of the Superintendent of Insurance of the District of Columbia, the corporate domicile of GEICO, which prohibits Berkshire from exercising such rights. The Order provides that Berkshire must maintain an independent proxy arrangement for voting of these shares and prohibits Berkshire from seeking or causing to change the independent proxy. Also, under the Order, no officer or director of Berkshire or of any affiliate or subsidiary of Berkshire is permitted to serve as a director of GEICO. As a result of the Order, which divests Berkshire of its for its investment in GEICO. voling rights with respect to its GEICO holdings, Berkshire does not use the equity method of accounting 34

[PAGE 37]

Accounts receivable from customers, agents and others were made up of the following: • Dec. 31, 1986 Der. 28, Trade accounts receivable, net of allowances for 1985 doubtful accounts Agents' balances and premiums in course of collection $128,800 $ 48,322 Reinsurance recoverable on loss payments 116,415 74,001 Investment income due and accrued 2,056 490 Amounts due from sale of securities 145,244 42,188 32,060 1,489 $434,703 $156,362 (7) Inventories as follows: Inventories of Berkshire's non-insurance businesses at the end of each of the last two years were Dec. 31, 1986 Dec. 28, Kaw materials and supplies 1985 Finished goods Work-in-process $ 45,714 $ 18,095 .C••..••• 45,064 68,882 28 19,263 $ 159,660 $ 37,386 to $112,021 at December 31, 1986 and $9,628 at December 28, 1985. The aggregate carrying value of Included in the totals are costs determined using the Last-in First-Out ("LIFO") method amounting inventories at December 31, 1986 is not materially different from aggregate current replacement cost. Berkshire's acquisition of Scott Fetzer on January 6, 1986 was tax free to the constituent companies. In Berkshire's accounting pursuant to generally accepted accounting principles for the acquisition, it included inventories with respect to which the LIFO cost method was and continues to be used for recorded the purchase at fair value on the acquisition date of Scott Fetzer's assets. Acquired assets value of inventories is $32,296 higher than used for Federal income tax reporting purposes. Federal income tax reporting purposes. As a result, at December 31, 1986 the above shown carrying (8) Properties and Equipment The composition of properties and equipment at the end of the past two years is shown below: Dec. 31, Land 1986 Dec. 28, 1985 Buildings $ 13,795 $ Machinery and equipment 88,756 40,708 7,455 Furniture, fixtures and leasehold improvements 149,158 65,810 56,343 33,760 Less accumulated depreciation and amortization 308,052 95.841 147,733 78,364 _$212,211 $ 69,369 35 97 1..:

[PAGE 38]

of Berkshire. The investment in Mutual is reflected in other assets in the Consolidated Balance Sheets. Mutual is wholly owned by Wesco Financial Corporation, an 80.1% beneficially owned subsidiary Summarized consolidated financial information of Mutual is as follows: Balance Sheet Data December 31. Cash and marketable securities Assets 1986 1985 Other assets Loans receivablc. net.. $253.828 78.613 $235,969 9,759 83,425 $342.200 12.203 $331,597 Savings accounts Liabilities and Shareholder's Equity Other liabilities $282,441 $269,313 Shareholder's equity, substantially Total liabilities $287,437 4,998 $274.018 .. 4.705 restricted 54,763 $342,200 _ 57.579 S431.592 Earnings Statement Data Total revenues ...

• 1946

1985 Net income ...........

• $2$149

$3B,796 1984 $26,882 $ 4.684 $ 9,330 $ 6,844 Figure represen erish led 80.% are of Metal Mural were eul let Recene rag oil. (10) Investment in World Book Finance Inc. : See Note 2. World Book Finance, Inc. ("WBFI") was acquired by Berkshire in is acquisition of Scott Fetzer. products. Berkshire's investment in WBFI, $40,656 at December 31, 1986, is reflected in other assets WBFI and its subsidiaries provide consumer fina. cing, principally for World Book and Kirby in the Consolidated Balance Sheet. as follows: Summerized consolidated balance sheet information of WBFI as of December 31, 1986, is Assets $ 43,572 170,289 5219.375 5.514 Accounts polities and Sher hider suity Term deb.... $ 13,472 165,247 40,656 $219,373 1986 to December 31, 1986. Net income for the period was $5,367. Total revenues of Scott Fetzer's financing activities were $37,233 for the period from Januiry 6, Berkshire agreed with WBFI, Ly letter agreement dated July 1, 1986 and amended August 31, 1.186, among other things, that Berkshire would (1) cause WBFT's quarterly consolidated net income to be at least a minimum amount (by payment to WBFI of a facilitating fee, if required), (2) cause WBFI to maintain capital of not less than a specified minimum amount, and (3) continue, directly or indirectly, to own all of the capital stock of WBFI. The agreement was rade to accommodate the continuing financing needs of WBFI. It remains in effect, the agreement terms are not burdensome, and to date there has been no requirement thereunder for payment by Berkshire to WBFI of any facilitating fees. 36

[PAGE 39]

[PAGE 40]

(12) Term Debi Payable and Other Borrowings Decenıber 17, 1936, on which date Berkshire redeemed the entire issue. A premium of $5,355 Ir: 1980, Berkshire issued $60,000 face amount of 124% riebentures. These were outstanding until face amount was paid in connection with the redemption. in debt of consolidated subsidiaries at December ?1. 1986 amounted to $77,974. Included is a Remaining outstanding Berkshire term debt at December 31, 1986, amounted to $16,949. Outstanding →2. 19 issue of 9½% Notes payable $2,500 annually f'rough 1998, and $25,000 of 10 Notes maturing in 1.' e mat materially restrictive as to their current or prospective activities. Covenants of various borrowing Agreemerits to which the Company or its subsidiaries are parties succreding five years as follows: Frincipal payments on term debt outstanding at December 31, 1986 are required during the 1987 1988 $ 9,796 1989 5,984 1990 5,584 19:1 5,536 30,705 (13) Stockholders' Equity Accounts Changes in Stockholders' Equity accounts during the most recent three year: were as follows: Net Unrealized! Appreciation Retained Increase during 1984 in unrealized appreciation included Balance at January 1, 1984 $483,280 Earnings $ 512,598 Change during 1984 in deemed applicable in carrying value of marketable equity securities 2,612 Net earnings 1984 income taxes 1,061 Balance at December 29, 1984 $486,953 $ 661,493 148,895 Increase during 1985 in unrealized appreciation included Change during 1985 in deemed applicable in carrying value of marketable equity securities 248.978 Increase in minority shareholders' interest in income taxes (71,217) Net earnings 1985 net unrealized appreciation (7) Increase during 1986 in unrealized appreciation included Balance ai December 28, 1985 $564,707 $1,097,308 435,815 Change during 1986 in deemed applicable in carrying value of marketable equity securities 291,804 Decrease in minority shareholders' interest in income taxes (81,705) Net earnings 1986 net urrealized appreciation 7 Balanc: at December 31, 1986 5824,813 282.361 $1,379,669 100 38

[PAGE 41]

Payments of dividends by insurance Group members are restricted by insurance statutes and regulations. Payrrent to Berkshire by Insurance Group members of dividends in 1987 which exceed $204,350 would require approval of regulatory authorities. Combined stockholders' equity of insurance subsidiaries, determined pursuant to statutory accounting rules (Statutory Surplus as Regards Policyholders) was $2,121,821 and $1,681,874 at December 31, 1986 and 1985, respectively. Corresponding amounts determined on the basis of generally accepted accounting principles were $1,843,169 and $1,410,976. (15) Interest and Dividend Income Investment income for each of the past three years was comprised of the following: Dividends: 1986 1985 1981 Capital Cities/ABC Inc. American Broadcasting Companies $ - Exxon Corporation 600 $ 1,441 GEICO Corporation - - The Washington Post Company General Foods Corporation 7.398 6,850 5,588 6.120 All Others .. 1,935 7.727 Interest exempt from Federal income taxes Total dividends 1.875 1/26 10,973 17,808 10,786 1,495 Other interest ............. 71.982 34,118 20,933 Interest and dividend income .. 28.639 36.965 36,579 23,896 41,964 $118.429 $107.662 $84,161 18,301 (16) Realized Investment Gain following table: A summary of net realized investment gain for each of the past three years is presented in the Pre-tax gain realized from special share 1986 1985 1984 Pre-lax gain realized on sale of General Foods stock* redemption transactions $ = $19,004 '$ 8.111 Pre-tax net gain realized on other sales of 333,479 Applicable income taxes securities by consolidated companies 216,241 135,424 101,692 Applicsble minority interest (66,956) (411) (140,946) 12,551) (31,221) 148,874 339,410 (2.035) quity in after-tax gain realized by Mutual Savings 76,547 nd Loan Association, an unconsolidated subsidiary Realized investment gain, net 2,023 3,457 2.147 6150,897 $342,B8Z $ 78.694 "Berkshire subsidiaries sold their investment in General Foods Corporation common stock in the fourth over the then prevailing market price. Stated on an aller tax basis and after deducting applicable quarter of 1985 to Philip Morris Company in response to the letter's tendor offer at a large premium minority interests Berkshire's gain from this single 1985 transaction amounted to $227.797 ($198.62 39

[PAGE 42]

Employees of Borkshire and its consolidated subsidiaries who meet certain eligibility requirements are covered under either employer-sponsored or union sponsored pension plans. Total pension expense includes, as lo certain of the plans, amortization of prior service costs over periuds of 10 to 30 years. charged to consolidated earrings was $3,200 in 1986, $2,469 in 1985 and $2,455 in 1984, which Berkshire and its subsidiaries generally fund pension costs as accrued. A comparison of accumulated plan benefits and plan net assets as of the latest valuatinn dates (various dates from January 1, 1984 to December 31, 1986) for the Company's defined henefit pension plans was as follows: Interest rate assumptions Actuarial present value of 6-10% accumulated plan benefits: Vested Non-vested ... $ 58,513 Total 4,826 ... $ 63,339 Market value of net assets available for benefits $105,410 Included in the total pension expense was $1,919 in 1986, $1,498 in 1985 and $1,372 in 1984. for contributions to various union-sponsored, muiti-employer plans. The relative position of the by the Company. Company regarding the accumulated benefits and net assets of multi-employer plans is not determinable (18) Quarterly Data information is unaudited. A surmary of earnings by quarter for the past two years is presented in the following table. This 1986 1st 2nd 3rd 4th Income items Quarter Quarter_ _Quarter Realized investment gain Earnings before realized investment gain $542.229 Quarter_ $496,307 39,437 $553.710 $604.419 28,421 Ne: earnings 46.832 33,320 94.756 30,286 2.761 6,548 Per outstanding share: $ 86.269 _$128.172 S 36.081 $ 36.83$ Earnings before realized investment gain Net earnings $ 34.39 $ 24.78 $ 29.05 75.22 107.40 26.40 31.45 32.11 Income items 1985 Realized! investment gain Earnings before realized investment gain

• $178,693

$190,116 $227.761 22,708 $343.294 Net earnings 22,289 18,696 18,253 48.065 33.291 37.200 235 313 Per outstanding share: $ 44,997 $ 66,761

• 55.453

$268.604 Net earnings Earnings before realized investment gain $ 39.23 19.80 $ 16.30 $ 15.91 58.21 48.35 29.03 231.22 Revenues and earnings from marketing of World Book produrts are concentrated in the first quarter. (World Book products are a significant Scott Feizer product line.) In the fourth quarter, See's Candies normally records up io one-half of its annual revenues. Newspaper revenues and earnings aiso peak in the fourth quarter af the year. In the fourth quarter of 1986, adverse loss developnient (particulariy losses on reinsurance) was recorded by the Insurance Group in amounts which tended to obscure the proportionately higher earnings in that period of the candy and newspaper businesses. 100 40

[PAGE 43]

(19) Husiness Segment Data business segments. The tables below refiect data for each of the three most recent fiscal years, braken down as to Revenues Insurance

• 1980

1985 Newspaper Candy $ 9. 1.379 тілам 1984 151,861 $412,481 Encyclopedias, other reference Relailing of home furnishings ....... 114,267 145,103 $209,523 107,864 136,053 Home cleaning products materials 285.356 135,501 123,292 101,639 118,176 Revenues not identified with segments 113,547 - .. . .

• 444.754

151,124 163,788 $2.176.665 $939,864 $729,129 Operating Profit Fefore Taxes Insurance 1986 1985 1984 Candy .. .... $ 51,299 29,373 $ 50,987 28,014 $ 20,843 Newspaper 25,669 Retailing of home furnishings ... 34,137 29,322 17,176 26,729 Encyclopedias, other reference materiais 20,534 12,179 14,044 Home cleaning products - Pre-tax operating profits not identified with segments ..... 19,586 Corporate expenses ••• 54,297 (2.748) 27,458 (1.725) 22,668 ... Shareholder designated contributions . (3,997) (4,006) (1,543) Interest expense (23,891) (3,178) (14,415) (14,734) $195,760 $127,812 -590,498 depreciation and amortization of tangible and intarigible assets have been taken into account. See Amounts are stated before deduction of any applicable minority interest. Charges or credits for below. Realized investment gains are not reflected. Capital Expenditures Insurance 1986 1985 1984 Candy $ 607 4.138 $ 623 Newspaper .... 764 3,756 441 3,771 3.602 3,727 Retailing of home furnishings 734 Encyclopedits, other reference Home cleaning products materials 307 1,665 623 .... Other ... 1,453 - 8.556 -- 2,077 2,061

• 819,596

$11,723 $ 7,586 Expenditures which were part of business acquisitions are excluded. 103 41

[PAGE 44]

[PAGE 45]

(19) Business Segment Data (Centinued) Revenues of the Insurance Segment Premiums written 1986 1985 1984 Premiums earned: $1,009,430 $497,400 5133,558 Specialized auto and general liability Home State multiple lines Workers' Compensation* 385,737 18,691 123,410 17,715 64,003 Reinsurance ... Subtotal — excludes reinsurance assumed

• 58,779

43,208 22,665 163,117 184,333 32,598 Major quota-share reinsurance 26,595 12,616 119,266 16,066 Structurer settlements and portfolio reinsurance 317,790 70,261 Ipvestment income Total premiums earned 16,382 823,884 49,849 317,059 4,910 107,495 95,422 140,242 $ 931,379 C7,281 -S412,481 $209,523 "Workars' Compensation coverage written by the Home State Companies, as part of their multiple line business, is not disaggregated from their total earned premiums. Insurance Segraent Operating Profit Before Taxes Underwriting gain (loss):

• 1986

1985. 1984 Specialized cuto and general liability Home State multiple lines Workers' Compensation $ 10,548 {3,891) $(2,950) $(16,049) Reinsurance Subtotal - excludes reinsurence astumed (3,119) (2,406) (12,703) 3,538 12,791) -(4,101) Major quota-share reinsurance (31,406) (8,147) Structured settlements and portfolio reinsurance. (17,949) (18,712) (32,853) (10,261) (12,560) Net Investment income Total underwriting (loss) (10,027) 16,110) - (55,844) (44,230) (2,647) -107,843 €51,299 -- 95,217 (48,030) ≤ 50,987 -- 58,903

• 820,843

43 105

[PAGE 46]

PARENT COMPANY ONLY — SUMMARIZED FINANCIAL STATEMENTS (dollars in thousands) These summarized financiai statements should be read in conjunction with the Consolidated Financial Statements of Berkshire Hathaway Iac. and consolidated subsidiaries and the notes thereto. Balance Sheets Dec. 11, Dec. 28. Assets _1986_

• 1985

Cash and invested cash $ 1•151 $ 2.724 Investment in subsidiaries (including unrealized apprcciation of marketable equity securities owned by insuranca subsidiaries, $664,707 at Dec. 28, 1985) riet of taxes, amounting to $874,813 at Dec. 31, 1986 and Other assets 2.393.873 2.055,875 _3.102 5.734 $c.405,126 $2,064.332 Liabilities and Stockholders' Equity Terra debt and other bortowings .. Accounts payable and accrued expenses $ 2.244 $ Income taxes 16.949 79.261 7,020 _E.136 _92.726 Stockholders' equity (Sce Consolidatad Balance Sheet s) 2: 329 1 9.007 *.177232 1,885,330 $2.405.120 $2.004,337 Statements of Earnings Income items: 196 L 1985 1984 From subsidiaries: Interest Dividends $ 299 507 $ 470 Undistributed earnings (134,7731 427,546 86.094 24,732 315,396 121,990 293,072 Other income Interest and dividends - other investments 441,997 2,904 1,276 147,192 1,263 Income lax credit 4 3,626 11,292 -••• 207 4,529 2,190 302,546 450,706 164,300 Cost ant expense items: Corporate administration ... Shareholder designated contributions* 2,748 1,725 1.544 Textile business expenses** 867 805 B08 Interest expense ... 1,474 1.850 2,279 15.090 10.611 10,774 20,185 14,891 15,405 Net earnings $282,361 $435,815 $148,895 *Additional shareholder designated contributions were made by wholly-owned subsidiaries. **The parent company operated a textile products manufacturing and marketing business that was discontinued at the end of 1985. Cross profit from sale of textile products is reflected above in administrative and selling «xpenses of the business. Textile business expenses for 1986 represents other income for 1984 and 1985. Textile business expenses reflected for 1984 and 1985 represent costs associated with abanrlonment of the business, net of rental income receiver from leasing to unrelated persons of portions of the real properties previously used in the business. 06 44

[PAGE 47]

Management's Discussion and Analysis of Financial Condition and Results of Oper sions Results of Operations be referenced in connection with thi: discussion. Note 19 to the Consolidated Finaricial Statements (the "Segment 'ote"), at pages 41 to 43, should Revenues $940 million in 1985 Total consolidatei revenues in 1966 were in excess of $2.1 billion, compared to approximately ano non-insurance business segments —- increased from $509 million in 1985 to over $1.2 billion in 1986. $729 million in 1984. "Sales and service ¡evenues" — sales recorded for Berkshire's acquisition on January 6 1986 of Scott Fetzer resulted in a notable increase in scope and diversity of activities conducted by Berkshire subsidiaries. Of the total 1986 sales and service revenues. Scott Fetzer operations contributed $677 million. Also, on June 3, 1986, Berkshire purchased an 84% interest in the business of The Fechheitner Brothers Company, and approximately $41 million of of the year. Berkshire's 1986 sales revenues relect those generated by this business during the last seven months Berkshire Hathaway Insurance Croup. Major quota share reinsurance contracts that were not in force Exceptional growth also occurred during 1986, as well as in 1985, in premiums earned by the premiums per risk in excess of $1 million), underwritten by a department new to the Group in 1985, two years ago contributed $313 million to 1986 earned premiums. "Special large risks" (annual contributed $71 million to 1986 earned premiums. Other earned premium increases reflect significantly higher average premium tales applicable to policies issued in a tight market to a greater number of risks. The tight market and higher premium rates were features of the property/casualty insurance industry in both 1985 and 1936. Earnings past three years for each of The Segment Note reflects, among other information, operating profit before taxes for each of the Insurance Group's investment income is free of income taxes. A capital gains tax rate applies to the significant Berkshire business segmenta. A large proportion of the rualized securities gains. After-tax net earnings are disaggregated in the following table, thus reflecting income. results after giving effect to the different rates of income tax that apply to different categories of After-Tax Earnings (Costs) 000s Omitted Insurance 1986 м... 1985 1984 Interest and financing cosis Manufacturing, merchancising and services $ 66,576 80,743 $ 56,147 $ 36,104 47,184 44,098 Other unallocated corporeta costs (12,213) (3,642) (7,288) (7,452) Earnings be ore realized investment gaini (8,095) (2,549) Realized investment gain 131.464 92,948 70,201 150,897 342,867. 78,694 Net earnings $282261 S435,815 $148,895 Berkshire's consolidated Federal income tax return, so that their after-tax net earnings as shown above Berkshire's insurance businesses in each: of die past three years generated a net tax bereft in exceeds their operating profit before taxes as shown in the Segment Note. 45 107 52.

[PAGE 48]

A summary of the underwriting results of the Berkshire Hathaway Insurance Group is presented below, on the basis of generally accepted accounting principles ("GAAP"), for the past three years, with dollars in thousands: 1986 1985 Premiums written Amouni 1984 % Ainount $1,009,+30 $497.400 Amount % Premiums earned $133,558 Losses and loss expenses 823.884 100.0 317,059 100.0 Underwriting expenses 655,758 79.6 140,242 100.0 Total losses and expenses 223,970 27.2 280,249 88.4 ฿1,040 25.6 141,550 100.9 46,752 33.4 879,728 Underwriting loss — pre-tax 106.8 361,289 114.0 108,302 134.3 Applicab income tax credit (55,844) Applicable minority interest 25,688 (44,230) •.•... 292 20,346 (48,060) 22,105 After-tax Ioss 315 $ (29,864) $(23,562) S(25,955) to premiuns earned (hereafter, the "loss and expense ratio") is comparable but not identical to the The percentage figures shown in the above table representing the ratio of total lossen and expenses "combined i atio" that is compuled for companies in the industry hased on data assembled for statutory the loss and expense ratio is less than 100% and unprofitable to the extent that it exceeds 100%. reporting purposes. Underwriting results, computed on a GAAP basis, are profitable to the extent that for the past three years are shown in the following tabls. Summaries of aggregate loss and loss expense data for the Berkshire Hathaway Insurance Group 000s Omitted Unpaid losses and loss expense at beginning cí year -1980 1985 1984 Incurred losses recordad: 3411,305 $243,298 $212,706 Current year occurrences All prior years' occurrences 593,017 Structured settlement and portíolio reinsurance obligations 37,014 206,194 19,505 116,441 25,727 17,770 54,550 7,339 Payments with respect io:

• -

655,758 280,249 141,550 Current year occurrences All prior years' occurrences 96,797 40,574 Structured settlement and portfolio reinsurance obligations 107,167 74,341 40,820 2,871 (2.673)* 77,216 17,078)* Unpaid losses and loss expense at end of year 206,835 112,242 110,958 $860,228 $411,305 $243,298 Aciverse loss development is represented by the figures for incurred losses captioned "All prior *Ne! recoveries years' occurrences" (837,014,000 for 1986, $19,505,000 for 1985, and $17,770,000 for 1984), These figures represent increases in the given year to the estimates of prior years' loss occurrences, based on information that came to light in that given year with respect to such prior occurrences. If the prior year-end estimation processes would have been perfect, all of the costs related to prior years' occurrences would have been charged lo prior years' results. Thus, the amount of "development" recorded in a given year is an indication of the estimation error that resulted when the prior year- end liability for unpaid losses mus established. It is only an indicator of the degree of that error. because even though oue additional year's hindsight is employed in making the revised estimate, additional information will become available and events will subsequently occur that influence the actual loss amounts ultimately incurred with respect to the prior years' occurrences. It takes many years to determine the precise amount of estimation error that existed in an original estimate. One- year developments, as [resented above, have the advantage of revealing the effect on reported income of any given year of the estimation error recognized in that year.

[PAGE 49]

mal alco Aggregation of underwriting data of the Berkshire Hathaway Insurance Group serves a purpose underwing toons dody with Berkshire's insurance operations requires further disaggregation of Insurance Group data. Varicus in any broad analysis of Berkshire! total operations. However, analysis and discussion that deals only sub-groupings are possible, one of which is reflected in the last two tables of the Segment Note insurance basiness. The balance of this discussion centers around that breakdown, summarized as to appearing a' page 43. 'That breakdown aligns with management's view of the components of Berkshire's (i) business other than reinsurance assumed, and (ii) reinsurance assumed. Insurance Operatiors Excluding: Reinsurance Assumed Business Group, excluding reinsurance assumed business. Dollars are in thousands. A summary follow's of the consbined underwriting results of the Berkshire Hathaway Insurance 1986 1985. 1984 _Amount % Amount Amount % Premiums written $594,607 $269,057 $118,090 Premiums earned 463,117 100.0

• 184,333

100.0 119,266 100.0 Losses and loss expenses Underwriting expenses ... 347,468 75.0 140,029 76.0 110.491 92.6 112,111 24.2 52,451 .28.4 41,628 34.9 Total losses and expenses 459,579 99.2 192.180 104.4 152.116 127.5 Underwriting gain (loss) - pre-tax 3,538 (8.117) (32,853) Applicable income tax credit (expense) -_..(1.628) -3.748 15,110 Aiter-tax gair: (l08s) .... ·1910 $ 14399) $ 117,743) expenses to premiums earnel. To some extent this is attributable to the nature of some administrative Decreases have occurred in each of the past two years in the ratio of incurred underwriting contributed. Also, undarwriting expenses are a much lower percentage of premiums for special large costs which do not vary proportionately with changes in volume. But, cost control measures also risk coverages than is true for other of the Group's direct business. This caused a decrease between 1985 and 1986 in the expense ratio inasmuch as the special large risks earned premiums made up 15% of 1986 vs. only 4% of 1985 earned premiums shown above. Summarized beiow is loss and loss expense data for this business. 000s Omitted 1986 1985 1984 Unpaid losses and loss expense at beginning of year $209,236 Incurred losses recorded: $164.776. $150,804 Current year occurrences All prior years' occurrencos 331,463 16,005 131,966 63 102,386 8,105 347,468 140,029 110,491 Payments with respect to: Current year occurrences All prior years' occurrences 53,086 35.419 74,113 60,150 36,608 59,911 127,199 95,569 96,519 Unpaid losses and loss expense at end of year $429,505 $209,236 $164,776 Adverse loss development of $16,005,000 in 1986 added about 3.5 percentage points to tle 1986 loss and expense ratio bringing it up to 75 in total. The adverse developinent is a higher ratio (7.6%) of heginning of year reserves. Because the reserve for losses is estimated, some development, either 5% range. positive or negative, will always occur, but 7.6 points is outside of the more respectable plus-or-minus 47 109

[PAGE 50]

The combined underwriting results of the Borkshire Hathaway Insurance Group for subsegments are summarized in the following table, with dollars in thousands. of the business involving reinsurance assured, other than structured settlements and portfolio reinsurance, 1986 1985 Amourt Amount _ - 1994 Premiums written $398.446 ..% Amount ..% Premiums earned $178,502 S 10,542 Losses and loss expenses 344,385 100.0 82,877 Underwriting expenses 282,563 100.0 82.0 16.056 85,670 Total losses and expenses 111,127 _ 32.3 103.4 22,180 23,720 100.0 _ 32.8 4,906 147.6 30.5 393,740 Underwriting loss - pre-tax 114.3 _112,850 136.2 28,626 Applicable income tax credit (49,355) (29,973) 178.1 Applicablt minority interest 22,703 13,788 (13,560) 5/77 After-tax loss 292 315 $(26,360) 5(15,870) $(6,783) business for the past three years. Summarized below is loss and loss expense data with respect to the above summarized assumed 000s Omitted Unpaid losses and loss expense at beginning of year 1986 - Incurred losses recorded: $114,191 1985_ 1984 $ 47,867 $ 45,664 Current year occurrences Al: prior years' occurrences 261,554 21,009 66,228 19,442 14,055 282,563 9,545 Payments with respect to: 5,670 23,720 Current year occurrences All prior years' occurrences 43,711 5.155 4,212

• 33.054.

-14,191 76,765 17.302 Unpaid losses and loss expense at end of year 19,346 $319,989 21.517 M1*131 $ 47.8Z agreernents, one invulving 7% of the post 8/31/85 business of Fireman's Fund Insure ice companies The above data includes the significant amounts that resulted from major quota-shan reinsurance and another, first effective in 1986, involving a sizable part of the business of another major insurance company. No adverse loss development has been recorded by the Group with respect in those contracts. Instead, the adverse development reflected above relates to several smaller contracts which have developed unfavorably for the Group. Approximately $19 million of the 198f adverse development was recorded in the fourth quarter of the year. Comparable summaries of the structured settlemenis and portfolio subsegment of the reinsurance business are not informative, since different ratio enalyses are applicable, depending on the varying nature of the several different arrangements included ir this very specialized are. Reference is made to the Segment Note which reflects this subsegment's premium and pre-tax loss information. 48

[PAGE 51]

Berkshire's non-insurance business activities became more diverse in 1986. Businesses that were acquiren in 1986, discussed elsewhere herein, were largely responsible for the significant difference between 1986 and 1983 aggregate results of these activities. Interest and Dividend income This income is largely earned by the Insurance Group, However, Wesco, certain other subsidiaries total interest and dividend income is shown in Note 15 to the consolidated financial statements, It and, from time to time, Berkshire also have investments in securities. The makeup of the consolidated is summarized and reduced to after-tax earnings, in thousands of dollars, in the following tabla. Before Applicaole income Applicable Taxes minority 198E interest Net 1985 $118.429 $14,023

• narnings

$2.333 1984 107.662 8-1,161 19,865 $102,073 11,802 1,593 86,204 _ 1.342 71,012 investments in State and Municipal obligations have increased substantially. Tax exempt interest incone has increased significantly in each of the past two years, because Interest and Financing Costs Interest and financing costs increated approximately $9.5 million, before income tax effect. in scheduled tu mature in the veirs 1991 through 2005. Pursuant to the terms of the Indemure under 1986 over 1985. Berkshire called for prepayment on December 17, 1986 its $60 million 124% debentures, which these obligations were issued in paid in connection with the early redemption. 1980, an 8.925% call premium, amounting lo $5,355,000 was Berkshire in January 1985 amnunted to approximately $4.4 million in 1986. Also, interest on term debt of Scott Fetzer to which its assets were subject when acquired by Realized Investment Gain Realized investment gain has beei! an element of Berkshire's net earnings for each of the past several years. The amount of this gain -- recorded by Berkshire when appreciated securities are sold — tends to fluctuate significantly from period to period The varying eifect upon Berkshire's consolidated net earnings is evident un the face of the consolidated staiments of carnings. The amount of realized investment gain for any period has no predictive value. and veriations in amount from period to appreciation in Berkshire's consolidated investment portfolio. period have no practical analytical value. given the pre-existence oi substantial unrealized price Liquidity and Capital Resources Berkshire's consolidated balance sheet as of December 31, 1986 reflects continuing capital is ingth and liquidity. Berkshire shareholders' equity has increased from $1,119.193.000 at December 31, 1983 lo $2,377,797,000 at December 31, 1986. In that three-year period, realized ond unrealized securities realized sect gains increased equity capital by approximateiy $964 million, and reinvested earnings, other than The total consolidated liabilities reflected on Berkshire's December 31, 1983 consolidated balance sheet wies gains, were approximately $295 mullion, Berkshire's liabilities have also increased. $2 billion. The increase dues not reflect additional liability for borrowed funds. To the contrary, were about $700 million. Three years later, at December 31, 1986, the corresponding total is just over $05 million at the end of 1986. The increase in total liabilities largely arose from increased funds consolidated torn debt, approximately $129 million three years ago, was reduced to approximately held for the benefit of Berkshire Hathaway Insurance Group policyholders — unpaid losses. loss adjustment expenses and unearned premiums of Berkshire's insurance subsidiaries. Their total increased approximately $1 billion in the most recent three-year period. Berkshire's financial policies are directed ample liquidiy, in support of the Company's financial obligations. so as to continuously grovide wide margins of safety, in the form of significant financial strength and 49

[PAGE 52]

from the Chairman of the Company. O H WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated "normal" operating income (i.e., before all unusual operating income and all net gains from sales of securities) for the calendar year 1986 increased to $11,934,000 ($1.68 per share) from $8,347,000 ($1.17 per share) in the previous year. Consolidated net income (i.e., after unusual operating incorne and ail net gains from sales of securities) decreased to $16,524,000 ($2.32 war share) from $51,541,000 ($7.24 per share) in the previous year. General Foods stock caused most of the net income in 1985. The able below gives A highly unusual capital gain, of a not-likely-to-recur type, trom disposition of particulars. Wesco has three major subsidiaries, Mutual Savings, in Pasadena, Precision Steel, headquartered in Chicago and engaged in the stee! Warehousing and specialty metal products businesses, and Wesco-Financial insurance Company, headquartered in Omaha and currently engaged in the reinsurance business. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)!"': Year Enced December 31, 1986 Wesco Per December 31, 1985 Per Amount Share Amount Share Werco "Normal" net operating income (loss) of: Mutual Savings Precision Steel businesses $ 2,159 •$ .30 $ 3,342 $ Wesco-Financial Insurance business — 1,701 .47 .24 2,010 .28 Underwriting ... investment activity (1,469) (.21) 8,084 1.14 (1,584) (.22) 1,225 6,615 •93 (359) (.05) All other "normal" net operating income!? 1,459 .21 3,354 .47 Fluctuation in market value of GNMA futures contract 11,934 1.68 4,590 - 8,347 1.17 Net gains on sales of securities (3) .. 1,671 .24 Wesco consolidated net income .. 41,523 5.83 $16,524 $2.32 $51,541 $7.24 (2) Alter deduction of interest anc. oliner corporate expenses. Incorne Ma from ownership of the Mutual Savings headquarters (1) Al figures are net of income taxes. effice building, primarily leased to outside tenants, and interest and dividen d income from cash equivalents and marketable (3) " he 1985 tigure includes a $34,363,000 ($4.83 per share) gain realized by Wescu on the sale of its General Foods Corporation securitie uwned nulside the savings and loan and insurance subsidianes. rommon slock to Philip Morns Company in connection with the latter's cublich announced tender ofíer. This supplementary breakdown of earnings differs somewhat from that used in audited financial siatements which follow standard arcounting convention. The supple- mentary breakdown is furnished because it is considered useful to shareholders. 12 50

[PAGE 53]

Reproduced from 1986 Annual Report of West? Financial Corporation Mutual Savings Mutual Savings' "normal" net operating income of $2,159,000 in 1986 represented a decrease of 35% from the $3,342,000 figure the previous year. Separate balance sheets of Mutua! Savings at yearend 1985 and 1986 are set forth at the end of this annual report. They show (1) total savings accounts rising to $282 million from $269 million the year before, (2) a very high ratio of shareholders' equity to savings account liabilities (probably the highest for any mature U.S. savings and loan associa- tion), (3) a substantial portion of savings account liavilities offset by cash equivalents and marketable securities, (4) a loan portfolio (mostly real estate mortgages) of about $79 million at the end of 1986, down 6% from the $83 million at the end of 1985, and (5) favorable effects of securities gains, which caused net worth to decline only $3 million in 1986 despite payment of a dividend of $7.5 million to the parent corporation. The loan portfolio at the end of 1936, although containing almost no rick of loss from defaults, bore an average interest rate of only 7,48%, probably the lowest for any U.S. savings and loan association and about equal to the average interest rate which now must be paid to hold savings accounts. This, of course, leaves no net interest margin now more than offset by unrealized appreciation in Mutual Savings' interest-bearing io cover operating costs. However, the unrealized depreciation in the loan portfolio is securities and preferred stocks. Such unrealized appreciation at December 31, 1986 was about $17 million. As pointed out in footnote 14 to the accompanying tinancial statements, the book value of Wesco's equity in Mutual Savings ($54.8 million at December 31, 1986) over- states the amount realizable, after taxes, from sale or liquidation at book value. If all Mutual Savings' assets, net of liabilities, were to be sold, even pursuant to a plan of com- plete liquidation, for the $54.8 million in book value reported under applicable accounting convention, the parent corporation would receive much less than $54.8 mil- lion after substantial income taxation imposed because about $47 million of what is reserves for most tax purposes. designated shareholders' equity for accounting purposes is considered bad debt There is, however, in Mutual Savings, not only a buried plus value in unrealized appreciation of securities, but also a buried plus value in real estate. The foreclosed property on hand (mostly 22 largely oceanfront acres in Santa Barbara) has become worth over a long holding period much more than its $1.6 million balance sheet carrying cost. Reasonable, community-sensitive development of this property has been delayed over 11 years in the course of administration of land-use laws. But we are optimistic that delay will end in 1987 and that the Santa Barbara and Montecito communities will be very pleased with development into 32 houses interspersed with large open areas. the quality of its landscaping. Mutual Savings plans to make the developrent first rate in every respect, and unique in The buried plus value in real estate is limited by the small number of houses important of all, various charges and burdens imposed by governmental bodies will drastically reduce our potential recovery from what it would have been had the zoning and development climate of the early 1970s continued into 1987. 5! 3

[PAGE 54]

Balancing all merits and demerits, t iutual Savings, as it has been managed under present conditions by the writer and others, continues to be a mediocre business from the shareholders' point of view. Mutual Savings' good points are: (1) high asset quality and sound balance sheet; (2) a maturity match of interest-bearing assets and liabilities which makes risk of insolvency near zero, whatever happens to interest rates; and (3) a deserved reputation for high quality service to account holders, achiered at below- average cost to the institution in an efficient one-large-office operation, as distinguished from a many-small-branch-offices operation. Mutual Savings' bad points are: (1) ali recent growth in savings accounts, considered on an incremental-effects basis, has been loss business because interest and other costs incurred exceed income obtained by employing proceeds in short-term interest-bearing assets; (2) a burdensome position under the FSLIC account-insurance system causes payments of ever-higher amounts into the system to help bail out more ven'uresome savings and loan associations which become insolvent, with the payments being required despite the fact that Mutual Sav- ings imposes almost no risk on FSLIC; (3) "norrul" net operating inco.ne is below an acceptable rate of return on present book yalur of shareholders' equity, with such return reaching an arceptable level over recent years enly with help from securities gains and other unusual items; (4) It would not be easy to leave the savings and loan business, should this course of action ever be desired, without a large income tax bur- den of a type not applied to corporations other than savings and loan associations; (5) as explained in last year's annual report, the regulatory structure of the savings and loan business creates a competitive situation in which it is hard to make respectable profits through careful operations; and (6) management has not yet found an acceptable rem- edy for any of the previously listed bad points, despite years of trying. Moreover, comparisons of post-1934 financial results for Mutual Savings with resuits for many other and more typical savings and ioan associations in California con- tinue to leave Mutual Savings locking inferior, to put it mildly. As interest rates went down these other associations, which have greater financial leverage and operated less fearfully than Mutual Savings during former high-interest periods, came to have loan and investment portfolios which (1) now are worth more on average than book value and (2) now produce a high return on book value of shareholders' equity, after deduc- tion of operating expenses and interest to account holders at present rates. Any Wesco shareholder who thinks Mutual Savings has any expertise in predicting and profiting from interest rate charges can look at the 1985-1986 record and despair. Despite the fact that some other savings and loan associations did much better after 1984 than Mutuali Savings, and are now much better poised to report good figures for 1987, we plan to continue operating only in ways acceptable in our own judgment, anticipating as a consequence widely fluctuatin g and sometimes inadequate returns. In the future, however, Mutual Savings will make and purchase more loans. Now that Mutual Savings' old mortgage loans have declined in amount and increased in market ...ue (the market value increase being cau ed both by a decline in generally prevailing interest rates and by a shortening of renaining loan life), new loans will be added as seems wise, with a target that at least 60% of assets be in housing-related loans. New direct loans aggregating $9 million were made in 1986, all adjustable rate mortgages with no cap on future interest rate changes but with an extremely low "spread" for the lender. In recent months the total of all loans on hand has risen as new loans made exceeded principal payoffs on old Icans. 52

[PAGE 55]

With assets not employed in direct real-estate lending, Mutual Savings continues not only to make payments to FS:IC far in excess of fair charges for risks imposed on FSLiC but also to employ a large part of total assets in short-term loans to the Federal Home Loan Bank. These practices are pro-social but will continue to reduce profits. Mutual Savings also continues to support the Federal Home Loan Bank Board in its efforts to change the present rules of the savings and loan business to augment average soundness of FSLIC-insured associations and prevent recurrence of widespread insol- vencies like those now bedevilling the industry. Precision Steel Wesco's Precision Steel subsidiary, located in the outskirts of Chicago ai Franklin Park, Illinois, was acquired for approximately $15 million on February 28, 1579. The price was roughly book value for a company which carried its inventories on a conser- vative LIFO accounting basis and which contained significant cash balances. More important, the company had reached its position from a modest beginning through maintenance of sound, customer-oriented business values inculcated over a long time by a gifted founder and his succes ors. Precision Steel owns a well-established steel service center business and a subsidiary engaged in the manufacture and distribuiion of too! room supplies and other specialty metal products. Precision Steel's businesses contributed $1,701,000 to "normal" net operating income in 1986. down 15% compared with $2,010,000 in 198:5. The decrease in 1986 profit occurred in spite of increased revenues (up 2% to $52,304,000). Under the skilled leadership of David Hilistrom, Precision Steel's businesses are now quite satisfactory, taking into account the financial leverage put into Wesco's con- solidated picture incident to their acquisition. Shortly after Wesco's purchase of Precision Steel, a substantial physical expansion of steel warehousing facilities was authorized, involving a rew building in Charlotte, North Carolina. The new building and the whole North Carolina operation are now very successtul, contributing $10,172,000 to 1986 sales at a protit margin higher trian has previled in the long-established Chicago headquarters' facility precision Steel's businesses, despite their mundane nomenclature, are steps adva iced on the quality scale from mere commodity-type businesses. Many customers of Precision Steel, needing dependable supply on short notice of specialized grades of high quality, cold-rolled strip steel, reasonable prices, technical excellence in cutting to order, and remembrance when supplies are short, rightly believe that they have no fully comparable alternative in Precision Steel's market area. Indeed, many customers at locations remote from Chicago and Charlotte (for instance, Los Angeles) seek out Preci- sion Steel's service. available liquid assets. Wesco remains interested in logical expansion of Precision Steel's businesses, using 53

[PAGE 56]

IMAGE EVALUATION TEST TARGET (MT-3) FEEEEEEE "This microfiche, Inclusting title information and formiat is © 1986 Buchtal Information Servicos All rights raservod." 1.0 512 125 122 1a 122 L4 136 lai EFFE 1.25 1.4 150mm Ai BECHTEL Information Services 15740 Shady Grove load Gaithersburg, Maryland 20877-1454

[PAGE 57]

Asproduced from 1986 Annie. Dort of Wesco Financial Corporation Wesco-Financial Insurance Company 80% owner and ultimate parent corporation, Berkshire Hathaway Inc. A new business was added to the Wesco group in 1985, in co-venture with Wesco's With the enthusiastic approval of all Wesco's directors, including substantial Wesco shareholders in the Peters and Caspers families, without whose approval such action would not have been taken, Wesco in 1985 invested $45 million in cash equivalents in a newly organized, wholly owned, Nebraska-chartered insurance company, Wesco- January 1996. Financial Insurance Company ("Wes-FIC"). Another $36.2 million was invested in The new subsidiary, Wes-FIC, has reinsured, through another Berkshire Hathaway insurance company subsidiary as intermediary-without-profit, 2% of the entire book of insurance business of the long-established Fireman's Fund Corp. (listed on the NYSE). Wes-FIC thereby assumed the benefits and burdens of Fireman's Fund's prices, costs and losses under a contract covering all insurance premiums earned by Fireman's Fund during a four-year period commencing September 1, 1985. The arrangement puts Wes- FIC in almost exactly the position it would have been in if it, instead of Fireman's Fund, had directly written 2% of the business. Differences in results should occur only from the investment side of insurance, as Wes-FIC, instead of Fireman's Fund, invests funds from "float" generated. Wes-FIC's share of premiums earned in 1986 exceeded $67 million. Wes-FIC's separate financial statements, covering the brief period of its existence, September 1, 1985, to December 31, 1986, are included or page 30 of this Annual Report, and show that Wes-FIC's net income for 1986 was $6,967,000 versus a small deficit ($359,000) for its first 4 months of operation in 1985. The 1986 net income figure included securities gains, net of income taxes, of $352,000. It is in the nature of even the finest casualty insurance businesses that in keeping theiraccounts they must estimate and deduct all future costs and losses from premiums already earned. Uncertainties inherent in this undertaking make financial statements more mere "best honest guesses" than is typically the case with accounts of non- insurance-writing corporations. And the reinsurance portion of the casualty insurance business, because it contains one or more extra links in the loss. reporting chain, usually creates more accounting uncertainty than the non-reinsurance portion. Wesco shareholders should remain aware, not only of the inherent imperfections of Wes- FIC's accounting, but also of the inherent cyclicality of its business. However, Wesco hopes for: (1) a reasonable return on its investment over the four contracts with other insurers. years of the Fireman's Fund reinsurance contract, and (2) possible future reinsurance We very much like our association with Fireman's Fund, a real class operation, and with Jack Byrne, its CEO, who displayed great integrity, intelligence and vigor in return- ing GEICO Corporation to glory before he took his present position. 54

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Reproduced from 1986 Arnual Report of Wesco Financial Corporation Vith assets not employed in direct real-estate lending, Mutual Savings continue: 101 only to make payments to FSLIC tar in excess of fair charges for risks imposed or FSLIC but also to employ a large part of total assets in short-term loans to the Federal Home Loan Bank. These practices are pro-social but will continue to reduce profits. Mutuai Savings also continues to support the Federal Home Lean Bank Board in its efforts to change the present rules of the savings and loan business to augment average soundness of FSLIC-insured associations and prevent recurrence of widespread insol- vencies like those now bedevilling the industry. Precision Steel Wesco's Precision Steel subsidiary, located in the outskirts of Chicago at Franklin Park, Illinois, was aiquired for approximately $15 million on February 28, 1979. The price was roughly book value for a company which carried its inventories on a conser- vative LIFO accounting basis and which contained significant cash balances. More important, the company had reached its position from a modest beginning through naintenance fsound, customer-oriented business values inculcated over a long time y a gitted founder and his successors. Precision Steel owns a well-established stee service center business and a subsidiary engaged in the manufacture and distribution of tool room supplies and other specialty metal prod: icts. Precision Steel's businesses contributed $1,701,000 to "normal" net operating income in 1986, down 15% compared with $ź,010,000 in 1985. The decrease in 1986 profit occurred in spite of increased revenues (up 2% to $52,304,000). Under the skilled leadership of David Hillstrom, Precision Steel's businesses are solidated picture incident to their acquisition. now quite satisfactory, taking into account the financial leverage put into Wesco's con- Shortly after Wesco's purchase of Precision Steei, a substantial physical expansion of steel warehousing facilities was authorized, involving a new building in Charlotte, North Carolina. The new building and the whole North Carolina operation are now very successful, contributing $10,172,000 to 1986 sales at a prufit margin higher than has prevailed in the long-established Chicago headquarters' facility. Precision Steel's businesses, despite their mundane nomenclature, are steps advanced on the quality scale from mere commodity-type businesses. Many customers of Precision Steel, needing dependable supply on short notice of specialized grades of high-quality; cold-rolled strip steel, reasonable prices, technical excellence in cutting to order, and remembrance when supplies are short, rightly believe that they have rio fully comparable alternative ir. Precision Steel's market area. Indeed, many customers at sion Steel's service. locations remote from Chicago and Charlotte (for instance, Lüs Angeles) scek out Preci- available liquid assets. Wesco rerains interested in logical expansion of Precision Steel's businesses, using 53 5

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Reproduced from 1986 Annual Report of Wesco Financial Corprration All Other "Normal" Net Operating Income All other "normal" net operating income, net of interest paid and general corporate expenses, decreased to $1,459,000 in 1986 from $3,354,000 in 1985. Sources were (1) rents ($2,229,000 gross, excluding rent from Mutual Savings) from Wesco's Pasadena office building block (predominantly leased to outsiders although Mutual Savings is the ground floor tenant) and (2) interest and dividends from cash equivalents and market- able securities held by Precision Steel and its subsidiaries and at the parent company level. The great decrease in interest and dividends received in this "other income" cate- insurance income. gory was caused by the transfer of assets to Wes-FIC, where income is now classified as Net Gains on Sales of Securities decreased to $4,590,000 in 1986 from $41,523,000 in 1985. Wesco's aggregate net gains on sales of securities, conbined, after income taxes, Bowery Savings Bank In 1985 Wesco, in another co-venture with its parent corporation, approved by wesco's directors in the same manner as the Wes-FIC co-venture, joined a group which invested $100,000,000 cash in a newly organized, New York-chartered savings bank. Savings Bank in the city of New York. The takeover received (1) much needed assistance The new bank then took over the name, assets and liabilities of the insolvent Bowery from FDIC, the federal agency, akin to FSLIC, which insures deposits in banks, and (2) the blessing of New York bank regulators. Wesco invested $9,000,000, other Berkshire balance of the $100,000,000. Hathaway subsidiaries invested $12,384,000, and other unrelated investors invested the The terms of the FDIC assistance, which include income-assistance payments over marized as far from adequate to assure that the investors will make a profit. This is as it many years to the newly organized bank, are extremely complex but can be fairly sum- should be when $100 million buys a highly-leveraged residual equity position in a $5 billion bank, albeit one with many sick assets. Any minority-position investment with such extreme financial leverage (in effect buying with a 2% down payment), involving a troubled company in a demanding environment, can fairly be called a venture-capital type investment for Wesco. In our judgment, the prospect for gain justified the risk of loss. This investment continues to be carried at cost in Wesco's accompanying financial statements, and we continue in guarded optimism regarding our position. Consolidated Balance Sheet and Related Discussion Wesco's consolidated balance sheet (1; retains a strength befitting a company reflects a continuing slow pace of acquisition of additional businesses because few are whose consolidated net worth supports large outstanding promises to others and (2) found available, despite constant search, at prices deemed rational fron the standpoint 55

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Reproduced from 1986 Annual Report of Wasco Financial Corporation As indicated in Noie 3 to the accompanying financial statements, the aggregate market value of Wesco's marketable equity securities was higher than their aggregate carrying value at December 31, 1986 by about $13 million, up modestly from about $5 million one year earlier. The consolidated aggregate market value of all marketable securities, including bonds and other fixed-income securities, exceeded aggregate car- appreciation lies within the savings and loan subsidiary. rying value by about $23 million. As earlier noten, about $17 million of this unrealized Wesco's Pasadena real estate, a full block (containing (1) about 125,000 first class plus 2) an additional net rentabie 34l0 square feet of economically marine spade f old buildings requiring expensive improvement), has a market value substantially in excess of carrying value, demonstrated by (1) mortgage debt ($4,940,000 at 9.25% fixed) against this real estate now exceeding its depreciated carrying value ($3,091,000) in Wesco's balance sheet at December 31, 1986, and (2) substantial current net cash flow (about $1 million per year) to Wesco after debt service on the inortgage. The mod- ern office building is 96% rented, despite a glut of vacant office space in Pasadena. We charge just-below-standard rents and run the building as a sort of first-class club for ten- ants we admire. With these practices, a prime location and superior parking facilities, we anticipate future increases in cash flow, but at no better rate than the rate of inflation. Wesco remains in a prudent position when total debt is compared to total share- holders' equity and total liquid assets. Wesco's practice has been to do a certain amount flexibility to face both hazards and opportunities. of long-term borrowing in advance of specitic need, in order to have maximum financial It is expected that the balance sheet strength of the consolidated enterprise will in due course be used in one or more business extensions. The extension activity, how- ever, requires patience, as suitable opportunities are not always present. As indicated in Schedule I accompanying Wesco's financial statements, invest- ments, both those in the savings and loan and reinsurance subsidiaries and those held temporarily elsewhere pending sale to fund business extension, tend to be concen- trated in very few places. Through this practice of concentration of investments, better understanding is sought with respect to the few decisions made. The ratio of Wesco's annual reported consolidated net inconie to reported consoli- dated shareholders equity, about 19% in 1984-86, was deperdent to a very large extent on securities gains, irregular by nature. This recent ratio is almost certain to continue to decline, probably sharply, as it did in 1986. Neither possible future acquisitions of other businesses nor possible future securities gains appear likely to help much in the short term. The business acquisition game continues to be crowded with optimistic players who usually force prices for low-leverage acquirers like Wesco to levels where return- n-investment prospects are modest. And future securities gains are likely to prove harder to come by tor very simple reasons. Because securities generally traded lowel severa: years ago than they do now, relative to the intrinsic values of the businesses rep- resented by the securities, creating more obviously sound investments then than now, and because prospects for above-average returns tend to go down as assets managed go up, it is now, early in 1987, even easier than it was early in 1986, to predict less desirable future results. It is also easy for any sophisticated Wesco shareholder, reviewing either (i) this virtua! reprint of last year's letter or (ii) Wesco's marketable securities disclosed ideas than they were a year earlier. herein, to diagnose (correctly) that the decision-makers are now even more dry of good 56

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Reproduced from 1986 Annual Report of Wasco Financial Corporation cial position as this is written does not resuit from our forecast that business conditions The considerable, and higher than normal, liquidity of Wesco's consolidated finan- are about to worsen, or that interest rates are about to rise, or that common stock prices are about to fall. Wesco's condition results, instead, from our simply not finding oppor- tunities for more aggressive use of capital with which we are comfortable. Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric (including much modern "strategic planning" and "portfolio theory"). Such an approach, while it has worked fairly well on average in, he past and will probably work fairly well over the long-term future, is bound to encounter periors of dullness and disadvantage as it linzits action. Moreover, the approach is being ap- plied to no great base position. Wesco is sort of scrambling ihrough the years without owning a single business, even a smali one, with enough commercial advantage in place to pretty well assure hign future returns on its capital. In contrast, Berkshire Hathaway, Wesco's parent corporation, owns a fair number of such high-return businesses. On January 22, 1987, Wesco increased its regular quarterly dividend from 16½ record as of the close of business on February 20, 1987. cents per share to 17½ cents per share, payable March 12, 1987, to shareholders of This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes deta'led information about Wesco and its subsidi- careful attention is sought with respect to these items. aries as well as audited financial statements bearing extensive footnotes. As usual, your CharlesT manger Charles T. Munger Chairman of the Board February 13, 1987 57 119

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BERKSHIRE HATHAWAY INC. SHAREHOLDER-DESIGNATED CONTRIBUTIONS The Company has conducted this prograin of corporate giving for six years. On October 14, 1981, the Chairman sent to the shareholders a letter giving the reasons for the program. Portions of that letter follow: in most years, should produce a significant benefit for charities of your choice. "On September 30, 1981 Berkshire received a tax ruling from the U.S. Treasury Departrent that, he owns - will be able to designate recipients of charitable contributions by our company. You'll "Each Berkshire shareholder —- on a basis proportional to the number of shares of Berkshire that name the charity: Berkshire will write the check. The ruling states that there will be no personal tax consequences lo our shareholders from making such designations. "Thus, our approximately 1500 onris now can exercise a perarisite that, although routinely in more widely-held businesses. exercised by the owners in closely-held businesses, is almost exclusivaly exercised by the managers input at all from shareholders, in two main categories: "In a widely-held corporation the executives ordinarily arrange all charitable donations, with no (1) Donations considered to benefit the corporation directly in an amount roughly commensurate with the cost of the donation: and (2) Donations considered to benefit the corporation indirectly through hard-to-measure, long- delayed feedback eifects of various kinds. "I and other Berkshire executives have arranged in the past, as we will arrange in the future, all charitable donations in the first category. However, the aggregate level of giving in such category has been quite low, and very likely will remain quite low, berause not many gifts can be show. to produce roughiy commensurate direct benefits to Berkshire. comfortable with ordinary corporate practice and had no better practice to substitute. What bothers "In the second category, Berkshire's charitable gifts have been virtually nil, because I am not asking and how corporate peers are responding than on an objective evaluation of the donee's activities. me about ordinary corporate practice is the way gifts tend to be inade based more on who does the Conventionality often overpowers rationality. "A common result is the use of the stockholder's money to implement the charitable inclinations of the corporate manager, who usually is heavily influenced by specific social prassures on him. Frequently there is an added incongruity; many corporate managers deplore governmental allocation of the taxpayer's doliar but embrace enthusiastically their own allocation of the shareholder's dollar. "For Berkshire, a different model seems appropriate. Just as I wouldn't want you to implement it inappropriate to write checks or your corporate "bank account" for charities of my choice. Your your personal judgments by writing checks on riy bank account for charities of your choice, I feel charitable preferences are as good as mine and, tor both you and me, funds available to foster charitable interests in a tax-deductible manner reside largely at the corporate level rather than in our own lands. "Under such circurastances, I believe Berkshim should imitate more closely-held companies, not larger public companies. If you and I each owned 50% i a corporation, our charitable decision making claim on our available charitable funds. Any balance i vailable after the "operations-related' contribution: would be simple. Charities very directly related t the operations of the business would have first to our ownership interest. If the manager of our company had some suggestions, we would listen would be divided among various charitable interests of the two of us, on a basis roughly propurtional business we probably would betrave as if we were & partnership. caretully ... but the firal decision would be ours. Despite our corporate form, in this aspect of the "Wharever ieasible, 1 balieve in maintaining such a partnership frame of mind, even though we operate through a large, fairly widely-held corporation. Our Treasury ruling will allow such partnership- like behavior in this area 58

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"I am pleased that Berkshire donations can become owner-directed. It is ironic, but un Jerstandabie, that a large and growing number of major corporations have charitable policies pursuant to which they will march gifts made by their employees (and - brace yourself for this one - many over owners. I say "understandabie" because much of the stock of many large corporations is owned or match gifts made by directors) but none, to my knowledge, has a plan matching charitible gifts by a "revolving door" basis by institutions that have short-term investment horizons, and that lack a long-term owner's perspective ... "Our own shareholders are a different brsed. As I mentioned in the 1979 annual report. at the beginning of the year. This long-terin commitment to the business reflects an owner mentality which, end of each year more than 98% of our shares are owned by people who were shareholders at the as your manager, 1 intend to acknowledge in all feasible ways. The designated contributions policy is an example of that intent."

• * *

The history of contributions made pursuant to this prograni since its inception follows: Specified 4mount Percent of Year

• per Share

Eligibie* Shares 1987 Participating_ Amount Contributed No. of 1982 $1 $2 95.6% Charities 1983 95.8% 1,783,655 890,948 675 1984 $3 $3 96.4% 3,066,501 704 1985 $4 90.8% 97.2% 3,179.049 1.353 1986 $4 4,006,260 1,519 37.1% 3,996,820 1,724 1,934 *Shares registered in street name are not eligible to participate. subsidiaries made certain contributions pursuant to local lavel decisions of operating managers of the In addition to the shareholder-designated contributions summarizod above, Berkshire and its businesses. eductions - or none at all. In those years we will not effect our shareholder designated charitable There may be an occasional year when contributions by Berkshire will produce substandard tax program. In all othar years we expect to inform you about October 10th of the amount per share that you may designate. A reply form will accompany the notice, and you will be given about six weeks replies received after that deadline are not processed.

• or unti! about November 30 -- to respond with your designation. Shareholders should note that

Shareholders should also note the fact that shares held in street name are not eligible to participate in the program. To qualify, your shares must be registered in your own name or the name of an 30th, or the Friday preceding if such date fulls on a Saturday or Sunday. owning trust, corporation, partnership or estate, if applicable, on our stockholder list of September 59 2

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BERKSHIRE HAXHAWAY INC. (dollars in thousands - except per share amounts) Selected Financial Data for the Past Five Years 1962 1983 Hevenues of consolidated companies: 1984 1985 1986 Insurance premiums earned Sales and service revenues ...... $ 306,564 Interst and dividend imcome.... 152,945 $ 381,674 $ 500,219 • $ 508,704 $1,225,290 58,003 152,480 64.903 140,242 317,059 823,884 84.161 07,66 118,429 Earnings: Realized investrent gain Before realizec investment geir •••• $ 31,497 14,077 $ 48,644 $ 70,201 Net earnirigs 63,522 $ 78,694 34.867 92,94B § 131,464 150,897 46.374 $. 112.166 $ 148.895 S 435,815 $ 282,361 Common shares outstanding average in thousands 987 1.067 _1,147

• 1,147

Earnings per share: Before realized investment gain... Not earnings. 31.93 $ 45.60 47.01 $ 61.21 105.15 $ 81.04 $ 114.62

• 129.82

379.99 246.19 Year-end sata Term debt and other borrowings Total assets $1.514,431 $1,837,543 169,947 128,984 $2.035,203 127,104 $3,180,718 117,879 $4,441,655 Sockholders' equity -- total ...... Minority shaisholders' interest .... 101,177 17,990 22,299 34,360 94,923 727,483 1,119,193 1,271,761 43,289 1.885,330 2,377,797 Shares of common stock cutstanding — in thousands ….... 987 1,147 1,147 1,147 1,147 Stockholders' equity - per outstanding share $ 73726 § 975.76 9 1,108.72 $ 1,643.71 $ 2,073.06 122 60

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BERKSHIRE HATHAWAY INC. DIKECTORS AND OFFICERS OF THE COMPANY WARREN E. BUIFETT, Director and Chairman of the Board, Chief Executive Officer CHARLES T. MUNGER, Director and Vice Chairman of the Board KENNETH V. CHACE, Directo: Retired, Former Chief Ciperating Officer of the Textile Operations MALCOLM C. CHACE, JR., Director Retired, Former Chairman of the Board of Directors J. VERNE MCKENZIE, Director Vice President, Secretary and Treasurer ROBERT H. BIRD, Vice President MICHAEL A. GULDBERG, Vice President DANIEL J. JAKSICH, Controller 1. WILLJAM SCoT . Vice President • C: MMON STOCK DATA Sh -eholders .!!' Company nad approximately 4,100 record holders of its common stock aï March 10, 1987. Market Prices quotations are reported through the National Association of Securitics Dealers Automated Quotation The common stock of Berkshire Hathaiay Inc. is traded in the over the counter market and price National Market System ("NMS"). Thus, the following information includes bid quotations for 1985 System ("NASDAQ") under the symbol BKHT. On April 16, 1985, Berkshire was entered in NASDAQ's (through April 16) which represent prices between dealers and do not include retail markup, markdown into the NMS are high and low sale prices. or commission. They do not represeat actual transactions. Quotations subsequent to Berkshire's entry 1986 High First Quarter .. Low Second Quarter $3,250 1985 3,160 $2,220 Higin Third Quarter 3,100 2,640 Second Quarier First Quarter ... Low $1,930 Fourth Quarter 2,525 ....• 2,160 $1,275 1,725 2,925 2,620 Thur Quater 20730 2,005 2,075 Dividends Berkshire has not declared a cash dividend since 1967. Stock Transfer Agent The First National Bank of Boston, P.O. Bux 644, Boston, MA 02102 serves as Transfer Agent for the Company's common stock. Certificates to be transferred should be railed directly to the Transfer Agent, preferably by registered mail. Certificates to be transferred should not be mailed to the Company 123 ceot

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BESH TTE END FILMED APRIl. 1987 BECHTEL Information Services "This microfiche, including titla information and format is @ 1986 Bechtel Information Services. All rights reserved."