1991 年伯克希尔完整年报

P0n. c~i !tff' fin] [\liilitl:C

Business Activities

Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these is the property and casualty insurance business conducted nationwide on both a direct and reinsurance basis through a number of subsidiaries collectively referred to in this report as the Berkshire Hathaway Insurance Group. Investment portfolios of insurance subsidiaries include meaningful equity ownership percentages of other publicly traded companies. Such investments at the end of 1991 included approximately 48 % of the outstanding capital stock of GEICO Corporation, approximately 18 % of the capital stock of Capital Cities/ABC, Inc., approximately 11 % of the capital stock of The Gillette Company, convertible preferred stock of Salomon Inc having approximately 14% of the total voting power of that company, approximately 7 % of the capital stock of The Coca-Cola Company, approximately 15 % of the capital stock of The Washington Post Company, and approximately 10% of the common stock of Wells Fargo Company. Much information about these publicly-owned companies is available, including information released from time to time by the companies themselves. Additionally, Berkshire Hathaway Inc. publishes the Buffalo News, a daily and Sunday newspaper in upstate New York. Other business activities conducted by non-insurance subsidiaries include publication and distribution of encyclopedias and related educational and instructional material (World Book and Chi/dcrafr products), manufacture and marketing of home cleaning systems and related accessories (sold principally under the Kirby name), manufacture and sale of boxed chocolates and other confectionery products (See's Candies), retailing of home furnishings (Nebraska Furniture Mart), manufacture and distribution of uniforms (Fechheimer Bros. Co.) and manufacture, import and distribution of footwear (H.H. Brown Shoe Co.). Berkshire also owns a number of other businesses engaged in a variety of activities, as identified in this Report. Operating decisions for the various Berkshire businesses are made by managers of the business units. Investment decisions and all other capital allocation decisions are made for Berkshire and its subsidiaries by Warren E. Buffett, in consultation with Charles T. Munger. Mr. Buffett is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board of Directors.

BERKSHIRE HATHAWAY INC.

1991 ANNUAL REPORT

TABLE OF CONTENTS

Business Activities ....................................... .Inside Front Cover

Owner-Related Business Principles .......................................... 2

Selected Financial Data At Nine Year Intervals ......................... .4

Chairman's Letter* .............................................................. 5

Independent Auditors' Report ................................................ 20

Consolidated Financial Statements .......................................... 2 I

Selected Financial Data For The Past Five Years .............................................................. 32

Business Segment Data ....................................................... 33

Management's Discussion ..................................................... 36

Shareholder-Designated Contributions ..................................... .48

Combined Financial Statements - Unaudited - for Berkshire Business Groups ........................................... 51

Common Stock Data .......................................................... 59

Tribute to Ike Friedman ...................................................... 60

Directors and Officers of the Company ............. .Inside Back Cover

*Copyright © 1992 By Warren E. Buffett All Rights Reserved

Certain OWNER-RELATED BUSINESS PRINCIPLES were included in the Chairman's letter* to Shareholders of Berkshire Hathaway Inc. in the 1983 Annual Report. Because the material remains topical, it is ceproduced on this and the following page. ,

With so many new shareholders, it's appropriate to summarize the major business principles we follow that pertain to the manager-owner relationship:

• Al though our 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 of our shareholdings we also, are, for better or worse, controlling partners.) We do not view the company itself as the ultimate owner of our business assets but, instead, view the company as a conduit through which our shareholders own the assets.

• In line with this owner-orientation, our directors are major shareholders of Berkshire Hathaway. In the case of at least four, over 50% of family net worth is represented by holdings of Berkshire. We eat our own cooking.

• Our long-term economic goal (subject to some qualifications mentioned later) is to maximize the average annual rate of gain in intrinsic business valu~ on a per-share basis. We do not measure the economic significance or performance of Berkshire by its '~.ie; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future - a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American corporation. I

• Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn. above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability ofbusinesses and the need for insurance capital determine any given year's capital allocation.

• Because of this two-pronged approach to business ownership 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 business we control, numbers we consider of great importance. These figures, along with other information we will supply about the individual businesses, should generally aid you in making judgments about them.

• Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.

• We rarely use much debt and, when we do, we attempt 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 committed unusually large portions of their net worth to our care. (As one of the Indianapolis "500" winners said: "To finish first, you must first finish.")

*Copyright © 1984 by Warren E. Buffett All Rights Reserved

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• A managerial "wish list" will not be filled at shareholder expense. We will not diversify by purchasing entire businesses at control prices that ignore long-term economic consequences to our shareholders. We will only do with your money what we would do with our own, weighing fully the values you can 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 retaining earnings by assessing whether retention, over time, delivers shareholders 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 is more difficult to use retained earnings wisely.

• We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance - not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company - and that is what the issuance of shares amounts to - on a basis inconsistent with the value of the entire enterprise.

• 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 all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital- allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor busine":es can be restored to satl1factory profitability by major capital expenditures. (The projections will be daz"1ing - the advoc~•es will be sincere - but, in the end, major additional investment in a terrible industry usually is about ~:. n:owarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in it.

• We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. Moreover, as a company with a major communications 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 others. We also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private.

• Despite our policy of candor, we will discuss our act1v1t1es in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. Therefore, we normally will not talk about our investment ideas. This ban extends even to securities we have sold (because we may purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny those reports but say "no comment" on other occasions, the no-comments become confirmation.

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BERKSHIRE HATHAWAY INC.

I> A management change occurred at Berkshire Hathaway early in 1965. In order to present data at even intervals following the change, this table utilizes nine-ye~;· spacing.

Selected Financial Data at Nine Year Intervals (dvllars in thousands, except per share amounts)

1964 1973 1982 1991 Revenues: Sales and service revenues .......................... . $ 49,983 $ 33,411 $ 306,564 $ 1,651, 134 Insurance premiums earned ......................... . 52,929 152,945 776,413 Investment income, insurance group .............. . 7,310 41,791 343,442 Realized investment gain ............................. . 1,332 38,717 192,478 Total revenues ............................... ,. ......... . $ 49,98~ $ 95,336 $ 579,589 $ 3,105,996 Earnings (loss): Before realized investment gain .................... . $ (2,824) $ 11,930 $ 31,497 $ 315,753 Realized investment gain ............................. . 930 14,877 ____,¥4. 155 Net earnings (loss) ..................................... . $ 12,860 $ 46,374 $ 439,908 Earnings (loss) per share: Before realized investment gain ................... .. $ (2.41) $ 12.18 $ 3\.93 $ 275.42 Realized investment gain ................ , ............ . .95 t5.08 108.30 Net earnings (lo~s} .................................... . $ (2.41) $ 13.13 $ 47.01 $ 383.72 Year-end data: Total assets ............................................ .. $ 27,887 $196,132 $1,723,993 $14,461,902 Term debt and other borrowings ................... . 2,500 20,599 169,947 1,255,068 Shareholders' equity .................................. . 22, 139 81,155 727,483 7,379,918

Common shares outstanding, in thousands .......................................... . 1,138 980 987 l ,146 Shareholders' equity per outstanding share .................................... . $19 $83 $737 $6,437

The 1964 fiscal year was the 52 week period ended October 3, 1964. The years 1973, and 1982 were fiscal years that ended on Saturday nearest December 31. Data are presented as last reported .

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BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway .Inc.:

Our gain in net worth during 1991 was $2.l billion, or 39.6%. Over the last 27 years (that is, since present management took over) our per-share book value has grown from $19 to $6,437, or at a rate of 23.7 % compounded annually. The size of our equity capital - which now totals $7.4 billion - makes it certain that we cannot maintain our past rate of gain nor, for that matter, come close to doing so. As Berkshire grows, the universe of opportunities that can significantly inlluence the company's performance constantly shrinks. When we were working with capital of $20 million, an idea or business producing $1 million of profit added five percentage points to our return for the year. Now we need a $370 million idea (i.e., one contributing over $550 million of pre-tax profit) to achieve the same result. And there are lnany more ways to make $1 million than to make $370 million. Charlie Munger, Berkshire's Vice Chairman, and I have set a goal of attaining a 15 % average annual increase in Berkshire's intrinsic value. If our growth in book value is to keep up with a 15 % . pace, we must earn $22 billion during the next decade. Wish us luck - we'll need it. Our outsized gain in book value in 1991 resulted from a phenomenon not apt to be repeated: a dramatic rise in the price-earnings ratios of Coca-Cola and Gillette. These two stocks accounted for nearly $1.6 billion of our $2.I billion growth in net worth last year. When we loaded up on Coke three years ago, Berkshire's net worth was $3.4 billion; now our Coke stock alone is worth more than that. Coca-Cola and Gillette are two of the best companies in the world and we expect their earnings to grow at hefty rates in the years ahead. Over time, also, the value of our holdings in these stocks should gm'V in rough proportion. Last year, however, the valuations of these two companies rose far faster than their earnings. In effect, we got a double-dip benefit, delivered partly by the excellent earnings growth and even more so by the market's reappraisal of these stocks. We believe this reappraisal was warranted. But it can't recur annually: We'll have to settle for a single dip in the future.

A Second Job

In 1989 when I - a happy consumer of five cans of Cherry Coke daily - announced our purchase of $1 billion worth of Coca-Cola stock, I described the move as a rather extreme example of_ putting our money where my mouth was. On August 18 of last year, when I was elected Interim Chairman of Salomon Inc, it was a different story: I put my mouth where our money was. You've all read of the events that led to my appointment. My decision to take the job carried with it an implicit but important message: Berkshire's operating managers are so outstanding that I knew I could materially reduce the time I was spending at the company and yet remain confident that its economic progress would not skip a beat. The Blumkins, the Friedman family, Mike Goldberg, the Heldmans, Chuck Huggins, Stan Lipsey, Ralph Schey and Frank Rooney (CEO of H. H. Brown, our latest acquisition, which I will describe later) are all masters of their operations and need no help from me. My job is merely to treat them right and to allocate the capital they generate. Neither function is impeded by my work at Salomon. The role that Charlie and I play in the success of our operating units can be illustrated by a story about George Mira, the one-time quarterback of the University of Miami, and his coach, Andy Gustafson. Playing Florida and near its goal line, Mira dropped back to pass. He spotted an open receiver but found his right shoulder in the unshakable grasp of a Florida line.backer. "'~.~ right-handed Mira thereupon switched the ball to his other hand and threw the only left-handed pas!, Jf his lite - for a touchdown. As the crowd erupted, Gustafson calmly turned to a reporter a11d declared: "Now that's what I call coaching."

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Given the managerial stars we have at our operating units, Berkshire's performance is not affected if Charlie or I slip away from time to time. You should note, however, the "interim" in my Salomon title. Berkshire is my first love and one that will never fade: At the Harvard Business School last year, a student asked me when I planned to retire and I replied, '~bout five to ten years after I die."

Sources of Reported Earnings

The table below shows the major sources of Berkshire's reported earnings. In this presentation, amortization of Goodwill and other major purchase-price accounting adjustments are not charged against the specific businesses to which they apply, but are instead aggregated and shown separately. This procedure lets you view the· earnings of our businesses as they would have been reported had we not purchased them. I've explained in past reports why this form of presentation seems to us to be more useful to investors and managers than one utilizing generally accepted accounting principles (GAAP), which require purchase-price adjustments to iJe made on a business-by-business basis. The total net earnings we show in the table are, of course, identical to the GAAP total in our audited financial statements. A large amount of additional information about these businesses is given on pages 33 - 47, where you also will find our segment earnings reported on a GAAP basis. However, we will not in this letter discuss each of our non-insurance operations, as we have in the past. Our businesses have grown in number - and will continue to grow - so it now makes sense to rotate coverage, discussing one or two in detail each year.

*Excludes interest expense of Scott Fetzer Financial Group and Mutual Savings & Loan.

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"Look-Through" Earnings

We've previously discussed look-through earnings, which consist of: (1) the operating earnings reported in the previous section, plus; (2) the retained operating earnings of major investees that, under GAAP accounting, are not reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of investees had instead been distributed to us. I've told you that over time look-through earnings must increase at about 15 % annually if our il)trinsic business value is to grow at that rate. Indeed, since present management took over in 1965, our look-through earnings have grown at almost the identical 23 % rate of gain recorded for book value. Last year, however, our look-through earnings did not grow at all but rather declined by 14 %. To an extent, the decline was precipitated by two forces that I discussed in last year's report and that I warned you would have a negative effect on look-through earnings. First, I told you that our media earnings - both direct and look-through - were "sure to decline" and they in fact did. The second force came into play on April 1, when the call of our Gillette preferred stock required us to convert it into common. 'Yhe after-tax earnings in 1990 from our preferred had been about $45 million, an amount somewhat higher than the combination in 1991 of three months of dividends on our preferred plus nine months of look-through earnings on the common. Two other outcomes that I did not foresee also hurt look-through earnings in 1991. First, we had a break-even result from our interest in Wells Fargo (dividends we received from the company were offset by negative retained earnings). Last year I said that such a result at Wells was "a low-level possibility

• not a likelihood." Second, we recorded significantly lower - though still excellent - insurance profits.

The following table shows you how we calculate look-through earnings, although I warn you that the figures are necessarily very rough. (The dividends paid to us by these investees have been included in the operating earnings itemized on page 6, mostly under "Insurance Group: Net Investment Income.")

Berkshire's Approximate Berkshire's Share of Undistributed Berkshire's Major Investees Ownership at Yearend Operating fa:rnings (in millions)

1991 1990 1991 1990 Capital Cities/ ABC Inc ................ . 18.1 % 17.9% $ 61 $ 85 The Coca-Cola Company ............ .. 7.0% 7.0% 69 58 Federal Home Loan Mortgage Corp .. . 3.4%<'> 3.2 %'" 15 10 The Gillette Company ................ .. 11.0% 23'" GEICO Corp ........................... .. 48.2% 46.1 % 69 76 The Washington Post Company .... .. 14.6% 14.6% 10 18 Wells Fargo & Company ............ .. 9.6% 9.7% _l!2) 19(3)

Berkshire's share of undistributed earnings of major investees $230 $266 Hypothetical tax on these undistributed investee earnings (30) (35) Reported operating earnings of Berkshire 316 371 Total look-through earnings of Berkshire $516 $602

(1) Net of minority interest at Wesco (2) For the nine months after Berkshire converted its preferred on April l (3) Calculated on average ownership for the year

*~ ** We also believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they bold in

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their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now. An approach of this kind will force the investor to think about long-term business prospects ~ather than short-term stock market prospects, a perspective likely to improve results. It's true, of 'tourse, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.

A Change in Media Economics and Some Valuation Math

In last year's report, I stated my opinion that the decline in the profitability of media companies reflected secular as well as cyclical factors. The events of 1991 have fortified that case: The economic strength of once-mighty media enterprises continues to erode as retailing patterns change and advertising and entertainment choices proliferate. In the business world, unfortunately, the rear-view mirror is always clearer than the windshield: A few years back no one linked to the media business - neither lenders, owners nor financial analysts - saw the economic deterioration that was in store for the industry. (But give me a few years and I'll probably convince myself that I did.) The fact is that newspaper, television, and magazine properties have begun to resemble businesses more than franchises in their economic behavior. Let's take a quick look at the characteristics separating these two classes of enterprise, keeping in mind, however, that many operations fall in some middle ground and can best be described as weak franchises or strong businesses. An economic franchise arises from a product or service that: (!) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis- management. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage. In contrast, "a business" earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management. Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can't expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that's available. The result is that competition has intensified, markets have. frag;uented, and the media industry has lost some - though far from all - of its franchise strength.

The industry's weakened franchise has an impact on its value that goes far beyond the immediate effect on earnings. For an understanding of this phenomenon, let's look at some much over-simplified, but relevant, math. A few years ago the conveni;vnal wisdom held that a newspaper, television or magazine property would forever increase its earnings at 6 % or so annually and would do so without the employment of additional capital, for the. reason that depreciation charges would roughly match capital expenditures and working capital requirements would be minor. Therefore, reported earnings (before amortization of intangibles) were also freely-distributable earnings, which meant that ownership of a media property could be construed as akin to owning a perpetual annuity set to grow at 6% a year. Say, next, that a discount rate of 10% was used to determine the present value of that earnings stream. One could then calculate that it was

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appropriate to pay a whopping $25 million for a property with current after-tax earnings of $1 million. (This after-tax multiplier of 25 translates to a multiplier on pre-tax earnings of about 16.) Now change the assumption and posit that the $1 million represents "normal earning power" and that earnings will bob around this figure cyclically. A "bob-around" pattern is indeed the lot of most businesses, whose income stream grows only if their owners are willing to commit more capital (usually in the form of retained earnings). Under our revised assumption, $1 million of earnings, discounted by the same IO%, translates to a $10 million valuation. Thus a seemingly modest shift in assumptions reduces the property's valuation to 10 times after-tax earnings (or about 6'h times pre-tax earnings). Dollars are dollars whether they are derived from the operation of media properties or of steel mills. What in the past caused buyers to value a dollar of earnings from media far higher than a dollar from steel was that the earnings of a media property were expected to constantly grow (without the business requiring much additional capital), whereas steel earnings clearly fell in the bob-around category. Now, however, expectations for media have moved toward the bob-around model. And, as our simplified example illustrates, valuations must change dramatically when expectations are revised. We have a significant investment in media - both through our direct ownership of Buffalo News and our shareholdings in The Washington Post Company and Capital Cities/ABC - and the intrinsic value of this investment has declined materially because of the secular transformation that the industry is experiencing. (Cyclical factors have also hurt our current look-through earnings, but these factors do not reduce intrinsic value.) However, as our Business Principles on pages 2 - 3 note, one of the rules by which we run Berkshire is that we do not sell businesses - or investee holdings that we have classified as permanent - simply because we see ways to use the money more advantageously elsewhere. (We did sell certain other media holdings sometime back, but these were relatively small.) The intrinsic value losses that we have suffered have been rn.Qderated because the Buffalo News, under Stan. Lipsey's leadership, has done far better than most newspapers and because both Cap Cities and Washington Post are exceptionally well-managed. In particular, these companies stayed on the sidelines during the late 1980's period in which purchasers of media properties regularly paid irrational prices. Also, the debt of both Cap Cities and Washington Post is small and roughly offset by cash that they hold. As a result, the shrinkage in the value of their assets has not been accentuated by the effects of leverage. Among publicly-owned media companies, our two investees are about the only ones essentially free of debt. Most of the other companies, through a combination of the aggressive acquisition policies they pursued and shrinking earnings, find themselves with debt equal to five or more times their current net income. The strong balance sheets and strong managements of Cap Cities and Washington Post leave us more comfortable with these investments than we would be with holdings in any other media companies. Moreover, most media properties continue to have far better economic characteristics than those possessed by the average American business. But gone are the days of bullet-proof franchises and cornucopian economics.

Tuenty Years in a Candy Store

We've just passed a milestone: Twenty years ago, on January 3, i972, Blue Chip Stamps (then an affiliate of Berkshire and later merged into it) bought control of See's Candy Shops, a West Coast manufacturer and retailer of boxed-chocolates. The nominal price that the sellers were asking - calculated on the 100 % ownership we ultimately attained - was $40 million. But the company had $10 million of excess cash, and therefore the true offering price was $30 million. Charlie and I, not yet fully appreciative of the value of an economic franchise, looked at the company's mere $7 million of tangible net worth and said $25 million was as high as we would go (and we meant it). Fortunately, the sellers accepted our offer. The sales of trading stamps by Blue Chip thereafter declined from $102.5 million in 1972 to $1.2 million in 1991. But See's candy sales in the same period increased from $29 million to $196 million. Moreover, profits at See's grew even faster than sales, from $4.2 million pre-tax in 1972 to $42.4 million last year.

For an increase in profits to be evaluated properly, it must be compared with the incremental capital investment required to produce it. On this score, See's has been astounding: The company now operates comfortably with only $25 million of net worth, which means that our beginning base of '$7 million has had to be supplemented by only $18 million of reinvested earnings. Meanwhile, See's remaining pre-tax profits of $410 million were distributed to Blue Chip/Berkshire during the 20 years for these companies to deploy (after payment of taxes) in whatever way made most sense. In our See's purchase, Charlie and I had one important insight: We saw that the business had untapped pricing power. Otherwise, we were lucky twice over. First, the transaction was not derailed by our dumb insistence on a $25 million price. Second, we found Chuck Huggins, then See's executive vice-president, whom we instantly put in charge. Both our business and personal experiences with Chuck have been outstanding. One example: When the purchase was made, we shook hands with Chuck on a compensation arrangement - conceived in about five minutes and never reduced to a written contract - that remains unchanged to this day. In 1991, See's sales volume, measured in dollars, matched that of '1990. In pounds, however, volume was down 4%. All of that slippage took place in the last two months of the year, a period that normally produces more than 80% of annual profits. Despite the weakness in sales, profits last year grew 7 %, and our pre-tax profit margin was a record 21.6 %. Almost 80% of See's sales come from California and our business clearly was hurt by the recession, which hit the state with particular force late in the year. Another negative, however, was the mid-year initiation in California of a sales tax of 7%-8% (depending on the county involved) on "snack food" that was deemed applicable to our candy. Shareholders who are students of epistemological shadings will enjoy California's classifications of ~'snack" and "non-snack" foods:

Taxable "Snack" Foods Non-Taxable "Non-Snack" Foods

Ritz Crackers Soda Crackers Popped Popcorn U npopped Popcorn Granola Bars Granola Cereal Slice of Pie (Wrapped) Whole Pie Milky Way Candy Bar Milky Way Ice Cream Bar What - you are sure to ask - is the tax status of a melted Milky Way ice cream bar? In that androgynous form, does it more resemble an ice cream bar or a candy bar that has been left in the sun? It's no wonder that Brad Sherman, Chairman of California's State Board of Equalization, who opposed the snack food bill but must now administer it, has said: "I came to this job as a specialist in tax law. Now I find my constituents should have elected Julia Child." Charlie and I have many reasons to be thankful for our association with Chuck and See's. The obvious ones are that we've earned exceptional returns and had a good time in the process. Equally important, ownership of See's has taught us much about the evaluation of franchises. We've made significant money in certain common stocks because of the lessons we learned at See's.

H. H. Brown

We made a sizable acquisition in 1991 - the H. H. Brown Shoe Co. - and behind this business is an interesting history. In 1927 a 29-year-old businessman named Ray Heffernan purchased the company, then located in North Brookfield, Massachusetts, for $10,000 and began a 62-year career of running it. (He also found time for other pursuits: At age 90 he was still joining new golf clubs.) By Mr. Heffernan's retirement in early 1990 H. H. Brown had three plants in the United States and one in Canada; employed close to 2,000 people; and earned about $25 million annually before taxes.

lO

Along the way, Frances Heffernan, one of Ray's daughters, married Frank Rooney, who was sternly advised by Mr. Heffernan before the wedding that he had better forget any ideas he might have about working for his father-in-law. That was one of Mr. Heffernan's few mistakes: Frank went on to become CEO of Melville Shoe (now Melville Corp.). During his 23 years as boss, from 1964 through 1986, Melville's earnings averaged more than 20% on equity and its stock (adjusted for splits) rose from $16 to $960. And a few years after Frank retired, Mr. Heffernan, who had fallen ill, asked him to run Brown. After Mr. Heffernan died late in 1990, his family decided to sell the company - and here we got lucky. I had known Frank for a few years but not well enough for him to think of Berkshire as a possible buyer. He instead gave the assignment of selling Brown to a major investment banker, which failed also to think of us. But last spring Frank was playing golf in Florida with John Loomis, a long-time friend of mine as well as a Berkshire shareholder, who is always on the alert for something that might fit us. Hearing about the impending sale of Brown, John told Frank that the company should be right up Berkshire's alley, and Frank promptly gave me a call. I thought right away that we would make a deal and before long it was done. Much of my enthusiasm for this purchase came from Frank's willingness to continue as CEO. Like most of our managers, he has no financial need to work but does so because he loves the game and likes to excel. Managers of this stripe cannot be "hired" in the normal sense of the word. What we must do is provide a concert hall in which business artists of this class will wish to perform. Brown (which, by the way, has no connection to Brown Shoe of St. Louis) is the leading North American manufacturer of work shoes and boots, and it has a history of earning unusually fine margins on sales and assets. Shoes are a tough business - of the billion pairs purchased in the United States each year, about 85 % are imported - and most manufacturers in the industry do poorly. The wide range of styles and sizes that producers offer causes inventories to be heavy; substantial capital is also tied up in receivables. In this kind of environment, only outstanding managers like Frank and the group developed by Mr. Heffernan can prosper. A distinguishing characteristic of H. H. Brown is one of the most unusual compensation systems I've encountered - but one that warms my heart: A number of key managers are paid an annual salary of $7,800, to which is added a designated percentage of the profits of the company after these are reduced by a charge for capital employed. These managers therefore truly stand in the shoes of owners. In contrast, most managers talk the talk but don't walk the walk, choosing instead to employ compensation systems that are long on carrots but short on sticks (and that almost invariably treat equity capital as if it were cost-free). The arrangement at Brown, in any case, has served both the company and its managers exceptionally well, which should be no surprise: Managers eager to bet heavily on their abilities usually have plenty of ability to bet on.

It's discouraging to note that though we have on four occasions made major purchases of companies whose sellers were represented by prominent investment banks, we were in only one of these instances contacted by the investment bank. In the other three cases, I myself or a friend initiated the transaction at some point after the investment bank had solicited its own list of prospects. We would love to see an intermediary earn its fee by thinking of us - and therefore repeat here what we're looking for:

(1) Large purchases (at least $10 million of after-tax earnings), (2) Demonstrated consistent earning power (future projections are of little interest to us, nor are "turnaround" situations), (3) Businesses earning good returns on equity while employing little or no debt, (4) Management 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 (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

11

We will not engage in unfriendly takeovers. We can pro:nise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. (With Brown, we didn't even need to take five.) We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. Our favorite form of purchase is one fitting the pattern through which we acquired Nebraska Furniture Mart, Fechheimer's and Borsheim's. In cases like these, the company's owner-managers wish to generate significant amounts of cash, sometimes for themselves, but often for their families or inactive shareholders. At the same time, these managers wish to remain significant owners who continue to run their companies just as they have in the past. We think we offer a particularly good fit for owners with such objectives and we invite potential sellers to check us out by contacting people with whom we have done business in the past. Charlie and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll know it's me." Besides being interested in the purchase of businesses as described above, we are also interested in the negotiated purchase of large, but not controlling, blocks of stock comparable to those we hold in Capital Cities, Salomon, Gillette, USAir, Champion, and American Express. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.

Insurance Operations

Shown below is an updated version of our usual table presenting key figures for the property-casualty insurance industry:

Yearly Change Combined Ratio Yearly Change /11jlatio11 Rate in Premiums After Policyholder in Incurred Measured by Written (%I Dividends Losses (%) GDP Deflator (%)

The combined ratio represents total insurance costs (losses incurred plus expenses) compared to revenue from premiums: A ratio below 100 indicates an underwriting profit, and one above JOO indicates a loss. The higher the ratio, the worse the year. When the investment income that an insurer earns from holding policyholders' funds ("the float") is taken into account, a combined ratio in the 107 - 111 range typically produces an overall break-even result, exclusive of earnings on the funds provided by shareholders. For the reasons laid out in previous reports, we expect the industry's incurred losses to grow at close to IO% annually, even in periods when general inflation r:ms considerably lower. (Over the last 25 years,

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incurred losses have in reality grown at a still faster rate, 11%.) If premium growth meanwhile materially lags that 10% rate, underwriting losses will mount. However, the industry's tendency to under-reserve when business turns bad may obscure the picture for a time - and that could well describe the situation last year. Though premiums did not come close to growing 10%, the combined ratio failed to deteriorate as I had expected but instead slightly improved. Loss-reserve data for the industry indicate that there is reason to be skeptical of that outcome, and it may turn out that 199l's ratio should have been worse than was reported. In the long run, of course, trouble awaits managements that paper over operating problems with accounting maneuvers. Eventually, managements of this kind achieve the same result as the seriously-ill patient who tells his doctor: "I can't afford the operation, but would you accept a small payment to touch up the x-rays?" Berkshire's insurance business has changed in ways that make combined ratios, our own or the industry's, largely irrelevant to our performance. What co,ims with us is the "cost of funds developed from insurance," or in the vernacular, "the cost of float." Float - which we generate in exceptional amounts - is the total of loss reserves, loss adjustment expense reserves and urearned premium reserves minus agents' balances, prepaid acquisition costs and deferred charges ap1Jlicable to assumed reinsurance. And the cost of float is measured by our underwriting loss. The table below shows our cost of lloat since we entered the business in 1967.

(I) (2) Yearend Yield Underwriting Approximate on Long-Term Loss Average Float Cost of Funds Govt. Bonds (In S Millions) (Ratio of l to 2)

1967 ............................. .. profit $17.3 less than zero 5.50<;( 1968 .............................. . profit 19.9 less than zero 5.90% 1969 .............................. . profit 23.4 less than zero 6.79'ii: 1970 .............................. . S0.37 32.4 1.14% 6.25% 1971 .............................. . profit 52.5 less than zero 5.81 % 1972 .............................. . profit 69.5 less than zero 5.82% 1973 .............................. . profit 73.3 less than zero 7.27</r 1974 ............................. .. ?.36 79.1 9.30% 8.13% 1975 .............................. . l l .35 87.6 12.96% 8.03% 1976 .............................. . profit 102.6 less than zero 7.30% 1977 .............................. . profit 139.0 less than zero 7.97% 1978 ............................. .. profit 190.4 less than zero 8.93% 1979 .............................. . profit 227.3 less than zero 10.08% 1980 ............................. .. profit 237.0 less than zero I l.94% 1981 .............................. . profit 228.4 less than zero 13.61 'lc 1982 .............................. . 21.56 220.6 9.77% 10.64% 1983 .............................. . 33.87 231.3 14.64% 11.84% 1984 .............................. . 48.06 253.2 18.98% l l.58% 1985 ............................. .. 44.23 390.2 11.34% 9.34% 1986 ······························· 55.84 797.5 7.00% 7.60% 1987 .............................. . 55.43 l ,266.7 4.38% 8.95% 1988 ............................. .. l l .08 l,497.7 0.74% 9.00% 1989 .............................. . 24.40 1,541.3 1.58% 7.97% 1990 ............................. .. 26.65 1,637 .3 1.63% 8.24% 1991 .............................. . 119.6 1,895.0 6.31 % 7.40%

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As you can see, our cost of funds in 1991 was well below the U.S. Government's cost on newly-issued long-term bonds. We have in fact beat the government's rate in 20 of the 25 years we have been in the insurance business, often by a wide margin. We have over that time also substantially increased the amount of funds we hold, which counts as a favorable development but only because the cost of funds has been satisfactory. Our float should continue to grow; the challenge will be to garner these funds at a reasonable cost. Berkshire continues to be a very large writer - perhaps the largest in the world - of "super-cat" insurance, which is coverage that other insurance companies buy to protect thert:selves against major catastrophic losses. Profits in this business are enormously volatile. As I mentioned last year, $100 million in super-cat premiums, which is roughly_ our annual expectation, could deliver us anything from a $!00 million profit (in a year with no big catastrophe) to a $200 million loss (in a year in which a couple of major hurricanes and/or earthquakes come along). We price this business expecting to pay out, over the long term, about 90% of the premiums we receive. In any given year, however, we are likely to appear either enormously profitable or enormously unprofitable. That is true in part because G-\AP accounting does not allow us to set up reserves in the catastrophe-free years for losses that are certain to be experienced in other years. In effect, a one-year accounting cycle is ill-suited to the nature of this business - and that is a reality you should be aware of when you assess our annual results. Last year there appears to have been, by our definition, one super-cat, but it will trigger payments from only about 25 % of our policies. Therefore, we currently estimate the 1991 underwriting profit from our catastrophe business to have been about $11 million. (You may be surprised to learn the identity of the biggest catastrophe in 1991: It was neither the Oakland fire nor Hurricane Bob, but rather a September typhoon in Japan that caused the industry an insured loss now estimated at about $4-$5 billion. At the higher figure, the loss from the typhoon would surpass that from Hurricane Hugo, the previous record-holder.) Insurers will always need huge amounts of reinsurance protection for marine and aviation disasters as well as for natural catastrophes. In the 1980's much of this reinsurance was supplied by "innocents"

• that is, by insurers that did not understand the risks of the business - but they have now been

financially burned beyond recognition. (Berkshire itself was an innocent all too often when I was personally running the insurance operation.) Insurers, though, like investors, eventually repeat their mistakes. At some point - probably after a few catastrophe-scarce years - innocents will reappear and prices for super-cat policies will plunge to silly levels. As long as apparently-adequate rates prevail, however, we will be a major participant in super-cat coverages. In marketing this product, we enjoy a significant competitive advantage because of our premier financial strength. Thinking insurers know that when "the big one" comes, many reinsurers who found it easy to write policies will find it difficult to write checks. (Some reinsurers can say what Jackie Mason does: ''I'm fixed for life - as long as I don't buy anything.") Berkshire's ability to fulfill all its commitments under conditions of even extreme adversity is unquestioned. Overall, insurance offers Berkshire its greatest opportunities. Mike Goldberg has accomplished wonders with this operation since he took charge and it has become a very valuable asset, albeit one that can't be appraised with any precision.

Marketable Common Stocks

On the next page we list our common stock holdings having a value of over $100 million. A small portion of these investments belongs to subsidiaries of which Berkshire owns less than JOO%.

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12131191 Shares Company Cost Market (OOOs omitted) 3,000,000 Capital Cities/ ABC, lnc ............................................. . $ 517,500 $ l ,3.00,500 46,700,000 The Coca-Cola Company ............................................ . 1,023,920 3,747,675 2,495,200 Federal Home Loan Mortgage Corp ............................. . 77,245 343,090 6,850,000 GEICO Corp ........................................................... . 45,713 l,363, 150 24,000,000 The Gillette Company ................................................ . 600,000 1,347,000 31,247,000 Guinness PLC .......................................................... . 264,782 296,755 1,727,765 The Washington Post Company ................................... . 9,731 336,050 5,000,000 Wells Fargo & Company ........................................... . 289,431 290,000

As usual the list reflects our Rip '.'an Winkle approach to investing. Guinness is a new position. But we held the other seven stocks a year ago (making allowance for the conversion of our Gillette position from preferred to common) and in six of those we hold an unchanged number of shares. The exception is Federal Home Loan Mortgage ("Freddie Mac"), in which our shareholdings increased slightly. Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient. (With tongue only partly in check, I suggest that recent events indicate that the much-maligned "idle rich" have received a bad rap: They have maintained or increased their wealth while many of the "energetic rich" - aggressive real estate operators, corporate acquirers, oil drillers, etc. - have seen their fortunes disappear.) Our Guinness holding represents Berkshire's first significant investment in a company domiciled outside the United States. Guinness, however, earns its money in much the same fashion as Coca-Cola and Gillette, U.S.-based companies that garner most of their profits from international operations. Indeed, in the sense of where they earn their profits - continent-by-continent - Coca-Cola and Guinness display strong similarities. (But you'll never get their drinks confused - and your Chairman remains unmovably in the Cherry Coke camp.) We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn't guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach - searching for the superstars - offers us our only chance for real success. Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting. from flower to flower. Indeed, we believe that according the name "investors" to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic. If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long-term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. Why, then, should Berkshire take a different tack when dealing with the larger universe of public companies? And since finding great businesses and outstanding managers is so difficult, why should we discard proven products? (I was tempted to say "the real thing.") Our motto is: "If at first you do succeed, quit trying." John Maynard Keynes, whose brilliance as a practicing investor matched his brilliance in thought, wrote a letter to a business associate, F. C. Scott, on August 15, 1934 that says it all: "As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.... One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence."

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Mistake Du Jour

In the 1989 annual report I wrote about "Mistakes of the First 25 Years" and promised you ~n update in 2015. My experiences in the first few years of this second "semester" indicate that my backlog Of matters to be discussed will become unmanageable if I stick to my original plan. Therefore, I will occasionally unburden myself in these pages in the hope that public confession may deter further bumblings. (Post- mortems prove useful for hospitals and football teams; why not for businesses and investors?) Typically, our most egregious mistakes fall in the omission, rather than the commission, category. That may spare Charlie and me some embarrassment, since you don't see these errors; but their invisibility does not reduce their cost. In this mea culpa, I am not talking about missing out on some company that depends upon an esoterfo invention (such as Xerox), high-technology (Apple), or even brilliant merchandising (WalMart). We will never develop the competence to spot such businesses early. Instead I refer to business sLuatkms that Char!ie and I can understand and that seem clearly attractive

• but in which we nevertheless end up sucking our thumbs rather than buying.

Every writer knows it helps to usr striking examples, but I wish the one I now pre~ent w~sn't quite so dramatic: In early 1988, we decided to buy 30 ;ni!!ion shares (adjusted for a subsequent split) of Federal National Mortgage Association (Fannie Mae), which would have been a $350-$400 million investment. We had owned the stock some years earlier and understood the company's business. Furthermore, it was clear to us that David Maxwell, Fannie Mae's CEO, had dealt superbly with some problems that he had inherited and had established the company as a financial powerhouse - with the best yet to come. J visited David in Washington and confirmed that he would not be uncomfortable if we were to take a large position. After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying (a mistake that, thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program). In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned. I wish I could give you a halfway rational explanation for my amateurish behavior vis-a-vis Fannie Mae. But there isn't one. What I can give you is an estimate as of yearend 1991 of the approximate gain that Berkshire didn't make because of your Chairman's mistake: about $1.4 billion.

Fixed-Income Securities

We made several significant changes in our fixed-income portfolio during 1991. As I noted earlier, our Gillette preferred was called for redemption, which forced us to convert to common stock; we eliminated our holdings of an RJR Nabisco issue that was subject to an exchange offer and subsequent call; and we purchased. fixed-income securities of American Express and First Empire State Corp., a Buffalo-based bank holding company. We also added to a small position in ACF Industries that we had established in late 1990. Our largest holdings at yearend were: (000s omitted) Cost of Preferreds and Issuer Amortized Value of Bonds Market ACF Industries ........................... . $ 93,918<2) $118,683 American Express ....................... . 300,000 263 ,265(1)(2) Champion International ................. . 300,000(2) 300,000(() First Empire State ...................... . 40,000 50,000(ll(2\ RJR Nabisco ............................ .. 222, 148'2) 285,683 Salomon ................................... . 700,000<2) 714,000(ll USAir ...................................... . 358,000'2J 232,700«l Washington Public Power Systems .. . 158,553<'> 203,071

(I) Fair value as determined by Charlie and me (2) Carrying value in our financial statements

16

Our $40 million of First Empire State preferred carries a 9 % coupon, is non-callable until 1996 and is convertible at $78.91 per share. Normally I would think a purchase of this size too small for Berkshire, but I have enormous respect for Bob Wilmers, CEO of First Empire, and like being his partner on any scale. Our American Express preferred is not a normal fixed-income security. Rather it is a "Pere;' which carries a fixed dividend of 8.85 % on our $300 million cost. Absent one exception mentioned later, our preferred must be converted three years after issuance, into a maximum of 12,244,898 shares. If necessary, a downward adjustment in the conversion ratio will be made in order to limit to $414 million the total value of the common we receive. Though there is thus a ceiling on the value of the common stock that we will receive upon conversion, there is no floor. The terms of the preferred, however, include n provision allowing us to extend the conversion date by one year if the common stock is below $24.50 on the third anniversary of our purchase. Overall, our fixed-income investments have treated us well, both over the long term and recently. We have realized large capital gains from these holdings, including about $152 million in 1991. Additionally, our after-tax yields have considerably exceeded those earned by most fixed-income portfolios. Nevertheless, we have had some surprises, none greater than the need for me to involve myself personally and intensely in the Salomon situation. As I write this letter, I am also writing a letter for inclusion in Salomon's annual report and I refer you to that report for an update on the company. (Write to: Corporate Secretary, Salomon Inc, Seven World Trade Center, New York, NY 10048.) Despite the company's travails, Charlie and I believe our Salomon preferred stock increased slightly in value during 1991. Lower interest rates and a higher price for Salomon's common produced this result. Last year I told you that our USAir investment "should work out all right unless the industry is decimated during the next few years." Unfortunately 1991 was a decimating period for the industry, as Midway, Pan Am and America West all entered bankruptcy. (Stretch the period to 14 months and you· can add Continental and TWA.) The low valuation that we have given USAir in our table reflects the risk that the industry will remain unprofitable for virtually all participants in it, a risk that is far from negligible. The risk is heightened by the fact that the courts have been encouraging bankrupt carriers to continue operating. These carriers can temporarily charge fares that are below the industry's costs because the bankrupts don't incur the capital costs faced by their solvent brethren and because they can fund their losses - and thereby stave off shutdown - by selling off assets. This burn-the-furniture-to-provide-firewood zpproach to fare-setting by bankrupt carriers contributes to the toppling of previously-marginal carriers, creating a domino effect that is perfectly designed to bring the industry to its knees. Seth Schofield, who became CEO of USAir in 1991, is making major adjustments in the airline's operations in order to improve its chances of being one of the few industry survivors. There is no tougher job in corporate America than running an airline: Despite the huge amounts of equity capital that have been injected into it, the industry, in aggregate, has posted a net loss since its birth after Kitty Hawk. Airline managers need brains, guts, and experience - and Seth possesses all three of these attributes.

Miscellaneous

About 97.7 % of all eligible shares participated in Berkshire's 1991 shareholder-designated contributions program. Contributions made through the program were $6.8 million, and 2,630 charities were recipients. We suggest that new shareholders read the description of our shareholder-designated contributions program that appears on pages 48 - 49. To participate in future programs, you must make sure your shares are registered in the name of the actual owner, not in the nominee name of a broker, bank or depository. Shares not so registered on August 31, 1992 will be ineligible for the 1992 program.

17

In addition to the shareholder-designated contributions that Berkshire distributes, managers of our operating businesses make contributions, including merchandise, averaging about $1.5 million annually. These contributions support local charities, such as The United Way, and produce roughly commensurate benefits for our businesses. However, neither our operating managers nor officers of the parent company use Berkshire funds to make contributions to broad national programs or charitable activities of special personal interest to them, except to the extent they do so as shareholders. If your employees, including your CEO, wish to give to their alma maters or other institutions to which they feel a personal attachment, we believe they should use their own money, not yours.

The faithful will notice that, for the first time in some years, Charlie's annual letter to Wesco shareholders is not reprinted in this report. Since his letter is relatively barebones this year, Charlie said he saw no point in including it in these pages; my own recommendation, however, is that you get a copy of the Wesco report. Simply write: Corporate Secretary, Wesco Financial Corporation, 315 East Colorado Boulevard, Pasadena, CA 91101.

Malcolm G. Chace, Jr., now 88, has decided not to stand for election as a director this year. But the association of the Chace family with Berkshire will not end: Malcolm III (Kim), Malcolm's son, will be nominated to replace him. In 1931, Malcolm went to work for Berkshire Fine Spinning Associates, which merged with Hathaway Manufacturing Co. in 1955 to form our present company. Two years later, Malcolm became Berkshire Hathaway's Chairman, a position he held as well in early 1965 when he made it possible for Buffett Partnership, Ltd. to buy a key block of Berkshire stock owned by some of his relatives. This purchase gave our partnership effective control of the company. Malcolm's immediate family meanwhile kept its Berkshire stock and for the last 27 years has had the second-largest holding in the company, trailing only the Buffett family. Malcolm has been a joy to work with and we are delighted that the long- running relationship between the Chace family and Berkshire is continuing to a new generation.

The annual meeting this year will be held at the Orpheum Theater in downtown Omaha at 9:30 a.m. on Monday, April 27, 1992. Attendance last year grew to a record 1,550, but that still leaves plenty of room at the Orpheum. We recommend that you get your hotel reservations early at one of these hotels: (I) The Radisson- Redick Tower, a small (88 rooms) but nice _hotel across the street from the Orpheum; (2) the much larger Red Lion Hotel, located about a five-minute walk from the Orpheum; or (3) the Marriott, located in West Omaha about 100 yards from Borsheim's and a twenty minute drive from downtown. We will have buses at the Marriott that will leave at 8:30 and 8:45 for the meeting and return after it ends. Charlie and I always enjoy the meeting, and we hope you can make it. The quality of our shareholders is reflected in the quality of the questions we get: We have never attended an annual meeting anywhere that features such a consistently high level of intelligent, owner-related questions. An attachment to_ our proxy material explains how you can obtain the card you will need for admission to the meeting. With the admission card, we will enclose information about parking facilities located near the Orpheum. If you are driving, come a little early. Nearby lots fill up quickly and you may have to walk a few blocks.

As usual, we will have buses to take you to Nebraska Furniture Mart and Borsheim's after the meeting and to take you from there to downtown hotels or the airport later. I hope that you will allow plenty of time to fully explore the attractions of both stores. Those of you arriving early can visit the Furniture Mart any day of the week; it is open from 10 a.m. to 5:30 p.m. on Saturdays and from noon to 5:30 p.m. on Sundays. While there, stop at the See's Candy Cart and find out for yourself why Americans ate 26 million pounds of See's products last year. Borsheim's normally is closed on Sunday, but we will be open for shareholders and their guests from noon to 6 p.m. on Sunday, April 26. Borsheim's will also have a special party the previous evening at which shareholders are welcome. (You must, however, write Mrs. Glauys -1\aiser at our office for an invitation.) On display that evening will be a 150-year retrospective of the most exceptional timepieces made by Patek Philippe, including watches once owned by Queen Victoria, Pope Pius IX, Rudyard Kipling, Madame Curie and Albert Einstein. The centerpiece of the exhibition will be a $5 million watch whose design and manufacture required nine years of labor by Patek Philippe craftsmen. Along with the rest of the collection, this watch will be on display at the store on Sunday

• unless Charlie has by then impulsively bought it.

Nicholas Kenner nailed me - again - at last year's meeting, pointing out that I had said in the 1990 annual report that he was 11 in May 1990, when actually he was 9. So, asked Nicholas rather caustically: "If you can't get that straight, how do I know the numbers in the back [the financials] are correct?" I'm still searching for a snappy response. Nicholas will be at this year's meeting - he spurned my offer of a trip to Disney World on that day - so join us to watch a continuation of this lop-sided battle of wits.

Warren E. Buffett February 28, 1992 Chairman of the Board

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Deloitte& Touche 2000 First National Center Telephone: (402) 346-7788 Omaha, Nebraska 68102-1578 Facsimile: (402) 346-0711 (402) 344-0372

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders Berkshire Hathaway Inc.

We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries as of December 31, 1991 and 1990; and the related consolidated statements of earnings and cash flows for each of the three years in the period ended December 31, 1991. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conduct'?d our audits in accordance with generally accepted auditing standards. Thuse standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Berkshire Hathaway Inc. and subsidiaries as of December 31, 1991 and 1990, and the results of their operations and their cash flows for each of the three years in the period ended, December 31, 1991, in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE

March 9, 1992

......International Member iii'i i

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

December 31, 1991 1990 ASSETS Cash and cash equivalents ......................................................... . $ 762,000 $ 247,024 Investments: Obligations with fixed maturities ........................................... . 2,337,954 3,084,802 Marketable equity securities ................................................. . 9,182,524 5,685,983 Loans and accounts receivable ................................................... . 904,471 681,922 Inventories ............................................................................. . 256,473 203,795 Properties and equipment .......................................................... . 222,139 209,870 Other assets ........................................................................... . 796 341 557,027 $14,461,902 $10,670,423

LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses ........................................... . $ 2,849,089 $ 2,050,305 Unearned premiums ................................................................. . 152,490 126,381 Savings accounts ..................................................................... . 286,904 286,093 Accounts payable, accruals and other liabilities ............................. . 492,177 475,873 Income taxes .......................................................................... . 1,929,074 1,111,783 Term debt and other borrowings ................................................ . 1,255,068 1,239,358 6,964,802 5,289,793

Minority shareholders' interests .................................................. . 117,182 93 176

Shareholders' equity: Common stock of $5 par value. Authorized 1,500,000 shares; issued 1,375,202 shares, including shares held in treasury ...... .. 6,876 6,876 Capital in excess of par value .............................................. . 157,377 157,377 Unrealized appreciation of marketable equity securities, net. ....... . 3,962,989 2,310,433 Retained earnings .............................................................. . 3,294,969 2,855,061 7,422,211 5,329,747 Less common stock in treasury, at cost (228,761 shares) ................ . 42,293 42,293 Total shareholders' equity .............................................. . 7,379,918 5,287,454 $14,461,902 $10,670,423

See accompanying Notes to Consolidated Financial Statements

21

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

Net earnings per share .......................................... . $384 $344 $390

See accompanying Notes to Consolidated Financial Statements

22

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

Year Ended December 31, 1991 1990 1989 Cash flows from operating activities: Net income ......................................................... . $ 439,908 $ 394,093 $ 447,477 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization ............................... . 37,175 34,083 32,107 Realized investment gain ..................................... . (192,478) (33,989) (223,810) Investment purchase price discount accretion less premium amortization ................. . (26,931) (58,648) (3,663) Accretion of issue discount on zero coupon notes .... . 23,881 22,618 5,683 Minority interests ............................................... . 11,020 10,326 10,460 Increase .in liability for losses and loss adjustment expenses ...................................... . 798,784 613,994 29,122 Increase in deferred charges re reinsurance assumed .................................. . (178,328) (350,787) Increase (decrease) in unearned premiums ............... . 26,109 (17,250) (98, 187) (Increase) decrease in accounts receivable ............... . (177,043) (133,809) 8,923 Increase (decrease) in accounts payable, accruals and other liabilities ........................................•..... (6,067) 32,271 118,088 Increase (decrease) in income taxes currently payable .. (31, 173) 12,766 (9,852) Other .............................................................. . (15,684) (3,100) 13,858 Net cash flows from operating activities .............. . 709,173 522,568 330,206 Cash flows from investing activities: Purchases of fixed maturity investments .................... . (377,332) (287,700) (1,468, 157) Purchases of marketable equity securities ................... . (809,633) (729,352) (739,932) Proceeds from sales of fixed maturity investments ....... . 292,010 61,035 519,470 Proceeds from redemptions and maturities of fixed maturity investments ........................................... . 399,120 21,457 28,985 Proceeds from sales of marketable equity securities ..... . 522,701 261,923 821,656 Acquisition of businesses ....................................... . (161,043) Loans originated in finance businesses ...................... . (163,803) (132,313) (133,546) Principal collection on loans ................................... . 124,760 110,415 109,830 Other ................................................................. . (11,266) 11,762 (57,174) Net cash flows from investing activities ............... . (184,486) (682,773) (918,868) Cash flows from financing activities: Proceeds from borrowings ...................................... . 455,972 785,818 1,172,356 Repayments of borrowings ..................................... . (464,913) (576,634) (650,019) Other ................................................................. . (770) (7 ,082) 6 371 Net cash flows from financing activities .............. . (9,711) 202, 102 528,708 Increase (decrease) in cash and cash equivalents .... . 514,976 41,897 (59,954) Cash and cash equivalents at beginning of year ............ . 247,024 205,127 265,081 Cash and cash equivalents at end of year .................... . $ 762,000 $ 247,024. $ 205,127 Other cash flow information: Income taxes paid ................................................ . $ 183,097 $ 113,860 $ 181,468 Interest paid ........................................................ . 93,951 79,857 70,191

See accompanying Notes to Consolidated Financial Statements

23

BERKSHIRE HATHAWAY INC. and Subsidiaries NOfES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1991

(1) Significant accounting policies and practices (a) Basis of .co11so/idation The accompanying Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. (the "Company" or "Berkshire") consolidated with accounts of all its subsidiaries. Intercompany accounts and transactions have been eliminated. (b) Cash equiva/ems Cash equivalents consist of funds invested in money market accounts and in investments with a maturity of three months or less when purchased. · (c) l11vestments Investments in obligations with fixed maturities are carried at cost. Marketable equity securities held by members of the Berkshire Hathaway Insurance Group are carried at market value, marketable equity securities held by the Company and by non-insurance subsidiaries are carried at the lower of aggregate cost or market. (d) Cost of investme/l/s sold Cost of investments sold is usually determined on a first,in, first-out basis. Occasionally, when specific identification results in lower applicable income taxes, identified cost is used. (e) Goodwill and 11egative goodwill of acquired businesses The difference between purchase cost and the fair value of the net assets of acquired businesses is amortized on a straight line basis over forty years. The net unamortized balance is carried in other assets. (j) Insurance pre111iunz acquisition costs For financial reporting purposes, certain costs of acquiring insurance premiums are deferred, subject to ultimate recoverability, and charged to income as the premiums are earned. With respect to premiums received under major quota-share reinsurance contracts, the computation of ultimate recoverability of the directly related acquisition cost 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 regard to investment income. (g) Deferred charges re reinsura11ce assumed The excess of estimated liabilities for claims and claim costs ultimately payable by the Insurance Group over consideration received with respect to retroactive property/casualty reinsurance contracts that provide for indemnification of insurance risk, other than structured settlements, is established as a deferred charge at inception of such contracts. The deferred charges are subsequently amortized using the interest method over the periods that the liabilities for the claims and claim costs are expected to be outstanding. At December 31, 1991 and 1990, deferred charges re reinsurance assumed in the amounts of $529,U5,000 and $350,787,000 are included in other assets. (h) Losses and loss adjustme111 expense Liability for losses and loss adjustment expenses represents the aggregat.~ of such obligations of members of the Insurance Group with respect to: (a) prospective property/casualty insurance and reinsurance contracts, (b) retroactive property/casualty reinsurance contracts that provide for indemnification of insurance risk, other than .structured settlements, and (c) contracts providing for periodic payments with respect to settled claims ("structured settlements"). Except for structured settlement liabilities which are stated at discounted present values, the liability for losses and loss adjustment expenses is at the aggregate of estimated ultimate payment amounts less amounts recover~ble on account of reinsurance. Ultimate payment amounts with respect to prospective contracts are determined from (i) individual case estimates, (ii) estimates of incurred but not reported losses, based on past experience, and (iii) reports of losses from ceding insurers.

24

(1) Significant accounting policies and practices (Continued) -, (h) Losses and loss adjustment expense (continued) Ultimate payment amounts with respect to retroactive reinsurance contracts that provide for indemnification of insurance risk, other than structured settlements, are established for financial reporting purposes at maximum limits of indemnification under the contracts. This liability at December 31, 1991 was $1,296,875,000 and at December 31, 1990 was $737,524,000 of which, respectively $529,115,000 and $350,787,000 were established for financial reporting purposes as deferred charges re reinsurance. See also l(g) above. For statutory reporting purposes, liabilities under these contracts are established, not at worst-case maximum loss limits, but at best estimates of claims and claim costs ultimately payable thereunder. These "best estimates" yielded respectively as of December 31, 1991 and December 31, 1990 liabilities of $911,829,000 and $425,595,000. Underwriting losses reported with respect to these contracts in the accompanying financial statements were $26 million for 1991 (representing in its entirety, amortization of the related deferred charge re reinsurance) and zero for 1990, whereas for statutory reporting purposes the corresponding figures were $184 million and $68 million. Liabilities under structured settlement contracts are established on a contract-by-contract basis when the contracts are entered into, at the then present value of the actuarially determined ultimate payment amount discounted at the market interest rate. Thereafter, annual accretions to the liabilities are charged to losses incurred. The aggregate of these liabilities for financial reporting purposes at December 31, 1991 was $276,996,000. For statutory and tax reporting purposes, where the liabilities are determined using discount rates mandated by Insurance Regulatory authorities (5 % for contracts incepting after 1986 and 7 % with respect to contracts dated prior to 1987), the aggregate of structured settlement liabilities was $361,116,000. (j) Insurance premiwn< Insurance premiums for prospective insurance and reinsurance policies are recognized as revenues ratably over their terms with unearned premiums computed on a monthly or daily pro rata basis. Consideration received for indemn;,tication of risk under retroactive reinsurance contracts, including structured settlements, are accounted for as premiums earned at the inception of the contracts. Both earned and unearned premiums are stated net of amounts ceded to reinsurers. (k) Income taxes Certain items of income and deductions are recognized in the financial statements in time periods that differ from those in which they are recognized in the Company's consolidated Federal income tax returns, giving rise to recognition in the financial statements to deferred and prepaid income taxes. The liability for income taxes in the Consolidated Balance Sheets includes deferred taxes deemed applicable to unrealized appreciation included in carrying value of marketable equity securities. Such taxes were accrued at a rate of 34 % relative to increases in unrealized appreciation that arose subsequent to 1986 and at the rate of 28 % relative to appreciation that arose in years prior to 1987. In February, 1992 the Financial Accounting Standards Board ("FASB") issued Statement No. 109 ''Accounting for Income Taxes". The statement requires the "liability method" of accounting for income taxes with a balance sheet focus superseding requirements for the "deferred method" with an earnings statement focus. Implementation of the statement is now required in financial statements for years beginning after December 15, 1992. The Company has not yet implemented the statement's provisions. If the current provisions of Statement No. 109 were to be given effect in Berkshire's consolidated balance sheet as of December 31, 1991, a reduction to shareholders' equity of no more than $70 million would result. The precise amount of the reduction is dependent upon Berkshire's selection between alternative means of implementation. (m) Postretirement benefits other than pensions In December, 1990, the FASB issued Statement No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement alters generally accepted accounting principles with respect to employers' costs of providing retiree healthcare and other postretirement benefits other than pensions. The Company believes that the provisions of this statement will not have a material effect on Berkshire's financial position or results of operations.

25

Notes to Consolidated Financial Statements (Continued)

(2) Investments in obligations with fixed maturities The amortized cost and estimated market value as of December 31, 1991 and 1990 of investments in obligations with fixed maturities are as follows:

Dcc••mber 31, 1991 '.\ -- ; r' f, Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Bonds: U.S. Treasury securities and obligations of U.S. government corporations and agencies ...•........ .,. ............ . $ 2,429,000 $ 66,000 $ $ 2,495,000 Obligations of states, municipalities and political subdivisions ......... . 531,418,000 90,664,000 (412,000) 621,670,000 Corporate bonds ....................... . 316,070,000 88,301,000 404,371,000 Redeemable preferred stocks .......... . 1,358,527 ,000 14,273,000 (125,300,000) 1,247 ,500,000 Mortgage-backed securities ............ . 129,510,000 2,669,000 132,179,000 $2,337 ,954,000 $195,973,000 $(125,712,000) $2,408,215,000

December 31, 1990

Bonds: U.S. Treasury secunt1es and obligations of U.S. government corporations and agencies ......................... . $ 6,665,000 $ 84,000 $ $ 6,749,000 Obligations of states, municipalities and political subdivisions ......... . 576,588,000 87,622,000 (551,000) 663,659,000 Corporate bonds ....................... . 514,547,000 13,787,000 (I 1,888,000) 516,446,000 Redeemable preferred stocks .......... . 1,963,275,000 120,141,000 (143,307 ,000) 1,940, 109,000 Mortgage-backed securities ............ . 23,727,000 890,000 24,617,000 $3,084,802,000 $222,524,000 $(155,746,000) $3, 151,580,000

Shown below are the amortized cost and estimated market values of the above obligations at December 31, 1991, by contractual maturity dates. Actual maturities will differ from contractual maturities because issuers of certain of the obligations retain early call or prepayment rights.

Estimated Amortized Market Cost Value Due in one year or less .................................. . $ 134, 102,000 $ 154,327 ,000 Due after one year through five years ............... . 572,871,000 645,362,000 Due after five years through ten years ............... . 1,466,214,000 l ,433,299,000 Due after ten years ........................................ . 35,257,000 43,048,000 2,208,444,000 2,276,036,000 Mortgage-backed securities ............................... . 129,510,000 132,179,000 $2,337 ,954,000 $2,408,215,000

During 1991 gross gains of $139,700,000 were realized and during 1990, gross gains of $3,098,000 and gross losses of $1,468,000 were realized on sales and redemptions of obligations with fixed maturities.

26

(3) Investments in marketable equity securities Aggregate data with respect to the consolidated investment in marketable equity securities is shown below as of the dates indicated. See Note l(c) as to methods applied to determine carrying value of these securities.

(a) Common shares of Capital Cities/ABC, Inc. ("Capital Cities") <>nofled by Berkshire subsidiaries possessed approximately 18% of the voting rights of all Capital Cities s/,iares outstanding at December 31, 1991. T71e shares are held subject to an Agreemelll, the terms of wf.ich gra/11 to Capital Cities a right of first refusal to purchase the shares and othenvise govern ulllil January 3, 1997 the manner by which the shares may be sold or transferred. Also, Berkshire and its subsidiaries have delivered to Capital Cities irrevocable proxies with respect to these shares in favor of T710mas S. Murphy or Daniel B. Burke, so long as either shall be the chief executive officer of Capital Cities, to vote the shares at any and all meetings of shareholders of Capital Cities. T71e proxies expire on January 2, I997 or at the earlier date when neither of such persons is chief executive officer of Capital Cities.

(b) Subsidiaries of Berkshire, at both December 31, 1991 and at December 3I, 1990, owned 6,850,000 shares of common stock of GEICO Corporation. 171e shares possessed approximately 48% of the voting rights of all GEICO shares outstanding at December 3I, 1991, but Berkshire mailllains an independe/11 proxy arrangeme/11 for voting of the shares as required by Order of GEICO 's domiciliary insurance supervisory authority. 171e Order, dating from Berkshire subsidiaries' major purchase of the shares in 1976, prohibits Berkshire from seeking or causing to change the independem proxy. Also, under the Order, no officer or director of Berkshire or of any affiliate or subsidiary of Berkshire is pennitted to serve as a director of GEICO. Because the Order divests Berkshire of its voting rights with respect to the shares, Berkshire does not use the equity method of accoullling for its investmellt in GEICO.

(c) Common shares of The Gillette Company were acquired April 1, 1991 through conversion of the previously- he/d issue of Gillette convenible preferred shares.

(d) Represe/lls gross unrealized gains $673,177,000, less gross unrealized losses $38,860,000.

(e) Represe/lls gross unrealized gains $413,255,000, less gross unrealized losses $11,063,000.

27

'"

Notes lo Consolidated Financial Statements (Continued)

(4) Income taxes The liability for income taxes as reflected in the accompanying Consolidated Balance Sheets represent estimates of liabilities as follows:

Dec. 31, Dec. 31, 1991 1990 Payable currently ............................................ . $ 18,499,000 $ 49,672,000 Deferred, relating to unrealized appreciation of marketable equity securities ........................ . 1,944,311,000 1,085,342,000 Net prepaid arising from timing differences ....................................... .. (33,736,000) (23,231,000) $1,929,074,000 $1,111,783,000 The Consolidated Statements of Earnings reflect charges for income taxes as shown below:

1991 1990 1989 Federal ................................................................... . $120,121,000 $ 94,713,000 $142,996,000 State ....................................................................... . 20,281,000 16,779,000 15,514,000 Foreign ................................................................... . l,656,000 555,000 777,000 $142,058,000 $112,047,000 $159,287,000 Current provision ...................................................... . $152,563,000 $126,626,000 $171,616,000 Increase in prepaid taxes ............................................ . (10,505,000) (14,579,000) (12,329,000) $142,058,000 $112,047,000 $159,287,000 The increase in prepaid taxes represents the tax effects of timing differences as follows:

Applicable to: 1991 1990 1989 Deferred insurance premium acquisition costs .................. . $ 3,392,000 $ (549,000) $ (10,363,000) Losses and loss adjustment expenses, net ...................... .. (4,940,000) (5,719,000) 2,019,000 Unearned premiums .................................................. .. (5,414,000) (3,679,000) 1,913,000 Deferred gross profit on installment receivables .............. .. (9,598,000) (7,752,000) Other, net. ............................................................... . (3,543,000) 4,966,000 1,854,000 $ (10,505,000) $ {14,579,000) $ (12,329,000) Charges for income taxes are reconciled, in the table which follows, to hypothetical amounts computed at the Federal statutory rate: 1991 1990 1989

Net earnings before income taxes ................................. . $592,986,000 $516,466,000 $617,224,000 Hypothetical amounts applicable to above computed at the Federal statutory rate ........................ . $201,615,000 $175,598,000 $209,856,000 Decreases, resulting from: Tax-exempt interest income ....................................... . (18,637,000) (19,744,000) (26,735,000) Dividends received deduction .................................... .. (54,923,000) (53,901,000) (36,065,000) State income taxes, less Federal income tax benefit. ......... . 13,385,000 11,073,000 10,240,000 Net other differences .................................................. . 618,000 (979,000) 1,991,000 Total income taxes .................................................... . $142,058,000 $112,047;000 $159,287,000

28

(5) Term debt and other borrowings

Liabilities reflected for this balance sheet captions are as follows: Dec. 31, Dec. 31, 1991 1990 Term debt .......................................................................... . $ 861,153,000 $ 914,557,000 Borrowings under investn1ent agreements .................................. . 393,915.000 324,801,000 $1,255,068,000 $1,239 ,358,000 Giving effect to planned issuer-optional redemptions of term debt in 1992, payments in redemption of amounts outstandinJ at December 31, 1991 are expected to be required no earlier than as follows: Borrowings under investment Term debt agreements Total

1992 ································································ $161,439,000 $100,415,000 $261,854,000 1993 ································································ 1,924,000 3,976,000 5,900,000 1994 ............................................................... . 18,049,000 7,708,000 25,757,000 1995 ································································ • 872,000 9,203,000 10,075,000 1996 ............................................................... . 120,025,000 10,482,000 130,507,000 After 1996 ........................................................ . 558,844,000 262,131,000 820,975,000 Borro1vings under invest1ne11t agrce1nents These borrowings, made pursuant to contracts with terms ranging from three months to forty years and calling for interest payable, normally L:miannually, at rates ranging from 3 1/2 % to 9 % per annum, are senior unsecured debt obligations of the Company. Tenn debt Dec. 31, Dec. 31, Co111panv 19.'il 1990 Zero Coupon Convertible Subordinated Notes Due 2004 ............. .. $ 452, 182,000 $ 428,301,000 10% Debentures, of which $150,000,000 was issued in 1988. The issue was redeemed at the company's option - $50,000,000 at the end of 1991 and $100,000,000 in February 1992 .............................. . 100,000,000 150,000,000 9 3/4% Debentures, of which $100,000,000 was issued in 1988. $22,000,000 of the issue was repurchased in 1991 and in Febiuary 1992, an additional $13,000,000 was optionally redeemed .......... . 78,000,000 100,000,000 Other notes, payz.ble th,·ough 1993 .......................................... . 5,554,000 7,475,000 n35, 736,ooo 685, 776,000 Subsidiaries 8.125% Notes, payable in 1996 .............................................. . 120,000,000 120,000,000 10% Notes, for which redemption in 1992 is planned ................. . 18,500,000 21,125,00() 9 1/2 % Notes, for which redemption in 1992 is plan.1ed .......... :o".. 17,500,000 20,000,000 8 7/8% Notes, payable in 1999 .............................. ,................ . 30,000,000 30,000,000 Federal Home Loan Bank advance, due August 1994, · bearing interest at 8.73% .................................................... . 16,900,000 16,900,000 Other notes maturing through 2014 ......................................... . 22,517,000 20,756,000 Total term debt $ 861, 153 ,000 $ 914,557,000 The Zero Coupon Convertible Subordinated Notes Due 2004 were issued on September 28, 1989 at 44.314% of their face value which tofu!ed $902,640,000. The issue price reflected an original issue discount rate and yield to maturity of 5.5% per annum; there are no periodic payments of interest, Each $10,000 face amount note may be converted at any time prior to redemption into 0.45i5 shares of common stuck. A holder otherwise entitled upon conversion to a fractional share of common stock shall receive cash in lieu thereof. The Company may redeem the notes for cash at any time after September 28, 1992. A holder may require the Company to purchase any of its holdings on September 28, 1994 and again on September 28, 1999. The price at which notes will be purchased or redeemed will be issue price plus accrued original issue discount to the date of purchase or redemption. No materially restrictive covenants are included in any of the various debt agreements.

29

Notes to Consolidated Financial Statements (Continued)

(6) Shareholders' equity accounts Changes in Shareholders' Equity accounts during the most recent three years were as follows:

Net Unrealized Retained Aee.reciation Earning_s Balance at December 31, 1988 ................................................ . $1,274,657 ,000 $2,013,491,000 Increase during 1989 in unrealized appreciation included in carrying value of marketable equity securities .................................................................. . 1,623,462,000 Change during 1989 in deemed applicable income taxes ...................................................................... . (552,314,000) Increase in minority shareholders' interest in unrealized appreciation .................................................... .. (3,607,000) Net earnings 1989 ................................................................. . 447,477,000 Balance December 31, 1989 ................................................... .. 2,342, 198,000 2,460,968,000 Decrease during 1990 in unrealized appreciation inducted in carrying value of marketable equity securities ................................................................. .. (45,636,000) Change during 1990 in deemed applicable income taxes ...................................................................... . 15,441,000 Increase in minority shareholders' interest in unrealized appreciation ..................................................... . (1,570,000) Net earnings 1990 ................................................................. . 394,093,000 Balance December 31, 1990 .................................................... . 2,310,433,000 2,855,061,000 Increase during 1991 in unrealized appreciation included in carrying value of marketable equity securities .................................................................. . 2,526,248,000 Change during 1991 in deemed applicable income taxes ...................................................................... . (858,969,000) Increase in minority shareholders' interest in unrealized appreciation ..................................................... . (14,723,000) Net earnings 1991 ................................................................ .. 439,908,000 Balance December 31, 1991 ................................................... .. $3,962,989,000 $3,294,969,000

(7) Interest pn(i dividend income Interest and dividend income for each of the past three years were comprised of the following:

1991 1990 1989 Infc"est earned with respect to: Investment securities .......................................... . $164,894,000 $132,694,000 $114,928,000 Loans and financed receivables ............................ . 56,398,000 53,985,000 50,904,000 Dividends with respect to: Fixed maturity preferred stocks ............................ . 138,900,000 176,742,000 102,181,000 Marketable equity securities ................................. . 121,601,000 86,874,000 63,439,000 $481,793,000 $450,295,000 $331 ,452,00Q

30

\.,;.

(8) Interest expense Interest expense is comprised of interest on savings accounts of Mutual Savings and Loan Association ("Mutual") plus interest on debt and other borrowings as follows: 1991 1990 1989 Savings accounts of Mutual. ................................... . $ 18,311,000 $ 21,975,000 $ 21,261,000 Debt of Mutual ................................................... . 1,475,000 1,475,000 599,000 Debt of Scott Fetzer Financial Group ...................... . 12,811,000 12,868,000 13,325,000 Other debt and borrowings .................................... . 89,250,000* 76,374,000 42,389,000 $121,847,000 $112,692,000 $ 77 ,574,000

• Includes redemption premiums of $5,661,000 - see note 5.

(9) Dividend Restrictions - Insurance Subsidiaries Payments of dividends by Insurance Group members are restricted by insurance statutes and regulations. Without prior regulatory approval in 1992, Berkshire can receive up to approximately $292,000,000 as dividends from insurance subsidiaries. Combined sh&reholders' equity of insurance subsidiaries determined pursuant to statutory accounting rules (Statutory Surplus as Regards Policyholders) was approximately $8,700,000,000 at December 31, 1991. This amount exceeded by approximately $1,400,000,000 the corresponding amount determined on the basis of generally accepted accounting principles; the difference is principally represented by deferred income tax liabilities recognized for financial reporting purposes but not for statutory reporting purposes.

(10) Quarterly data A summary of revenues and earnings by quarter for each of the last two years is presented in the following table. This information is unaudited. Dollars are in thousands, except per share amounts.

!ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 1991 1990 1991 1990 1991 1990 1991 1990

Revenues $694,419 $590,776 $673,781 $545,310 $662,006 $525,965 $1,075,790 $997,421

In varying degree from year to year, revenues and earnings from marketing of World Book products are concentrated in the first quarter. See's Candy sales peak at Easter and more notably so in the fourth quarter when more than one-half of annual revenues for that business are normally recorded. A non-seasonal factor that may influence Berkshire's interim consolidated financial statements is that estimation error, inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries, can be relatively more significant to results of interim periods than to results for a full year. Variations in amount and timing of realized securities gains or losses cause significant variations in periodic net earnings.

(11) Business segment data See pages 33 - 35.

31

BERKSHIRE HATHAWAY INC.

Selected Financial Data for the Past Five Years (dollars in thousands, except per share data)

1987 1988 1989 1990 1991

Revenues; Sales .rind service revenues ................. $1,326,829 $1,407,642 $1,526,459 $ 1,580,074 $ 1,651,134 Insurance premiums earned ................. 824,895 584,235 394,279 591,540 776,413 Interest and dividend income .............. 237 ,319 314,251 331,452 450,295 481,793 Realized investment gain .................... 28,838 131,671 223,810 33,989 192,478 Sundry ........................................... 13,901 27,094 7,892 3,574 4,178 Total revenues ................................. $2,431,782 $2,464,893 $2,483,892 $ 2,659,472 $ 3, 105,996 Earnings: Before realized investment gain ........... $ 214,746 $ 3)3,441 $ 299,902 $ 370,745 $ 315,753 Realized investment gain .................... 19,806 85,829 147,575 23,348 124,155 Net earnings ................................... $ 234,552 $ 399,270 $ 447,477 $ 394,093 $ 439,908 - Earnings per share: Before realized investment gain ........... $ 187.24 $ 273.37 $ 262.46 $ 323.39 $ 275.42 Realized investment gain .................... 17.27 74.86 127.55 20.36 108.30 Net earnings ................................... $ 204.51 $ 348.23 $ 390.01 $ 343.75 $ 383.72 Year-end data: Total assets ..................................... $5,863,235 $6,816,848 $9,459,594 $10,670,423 $14,461,902 Term debt and other borrowings ......... 289,886 480,009 1,007,516 1,239,358 1,255,068 Shareholders' equity .......................... 2,841,659 3,410, 108 4,925, 126 5,287,454 7,379,918 Common shares outstanding, in thousands ................................. 1,147 1,146 1,146 1,146 1,146 Shareholders' equity per outstanding share .. , ........................ $ 2,477 $ 2,975 $ 4,296 $ 4,612 $ 6,437

32

., ,-\

BERKSHIRE HATHAWAY INC. Business Segment Data

Berkshire identified eight business segments for purposes of 1991 reporting, pursuant to Financial Accounting Standards Board Statement No. 14. These include the property and casualty insurance and reinsurance business (The Insurance Segment) plus seven separately conducted non-insurance businesses as follows:

Business identity and headquarters Product Activity See's Candies Candy Manufacture and distribution at retail South San Francisco, CA and by catalog solicitation

Buffalo News Newspaper Publication of a daily and Sunday ne\vspaper. Buffalo, NY

Nebraska Furniture Mart Home furnishings Retailing Omaha, NE

World Book Encyclopedias and Publication and marketing, Chicago, IL other reference materials principally by the direct sales n1ethod.

Kirby and Douglas Products Divisions of The Scott Fetzer Company Home cleaning systems Manufacture and sale principally to distributors Cleveland, OH

Fechheimer Bros. Co. Uniforms Manufacture and distribution at wholesale Cincinnati, OH and retail.

H. H. Brown Shoe Co. Shoes Manufacture, importing and wholesale Greenwich, CT distribution.

The business segments identified above were responsible in 1991 for more than 78 % of Berkshire's consolidated revenues and more than 84 % of Berkshire's , r·u·;olidated operating profits before taxes.

Other businesses activities that contributed for 1991, in the aggregate, 17% of Berkshire's consolidated revenues and 8 % of Berkshire's consolidated operating profits before taxes, were as follows:

Business identity Product/Service/Activity Ada/et Conduit fittings, explosion proof fittings, junction box.es BHR Real estate management Blue Chip Sta111ps Marketing motivational services Borsheini 's Retailing fine jewelry Campbell Hausfeld Air compressors and accessories, painting systems Carefree Ro11-up awnings, other RV accessories France Appliance controls, ignition and sign transformers Ha/ex Zinc and aluminum die cast fittings K&W Products Automotive compounds Merian1 Pressure and flow measurement devices Mutual Savings Savings & loan association Nelv A111erica Electric Electrical equipment Northland Fractional horsepower motors Powenvinch Boat winches, windlasses Precision Steel service center Quikut Varieties of cutlery Scott Fetzer Financial Group Consumer finance companies Scot Labs Cleaning and maintenance chemicals Stahl Custom sieel services bodies and tool boxes for uucks Hilyne Honie Equipn1e11t Furnace burners; sump, utility and sewage pumps Hi?sco Financial Real estate management Ui>stem Enterprises Compressed gas fittings and regulators Hf?stem Plastics Molded plastic components

33

Business S.egment Data (Continued)

A disaggregation of Berkshire's consolidated data for each of the three most recent years is presented in the tables. which follow on this and the following page. Amounts are in thousands.

• Amounts of imerest expense represent those for term debt and other borrowings exclusive of that of Scott Fetzer

Financial Group and of Mutual Savings. See note 8 to Consolidated Financial Statements.

Non-Insurance Business Segments Revenues Operating profit before taxes 1991 1990 1989 1991 1990 1989

Other Than Identified Segments Revenues Operating profit before taxes 1991 1990 1989 1991 1990 1989

34

Business Segment Data (Continued)

• Expenditures lVhich \\!ere part of business acquisitions are excluded.

35

BERKSHIRE HATHAWAY INC. Management's Discussion and Analysis of Financial Condition and Results of Operation

Jn the above table, interest expense incurred by Consu111er Finance co1npanies and by Mutual Savings and Loan Association is not reflected as ''Interest erpense'' but instead is reflected in a1nounts sho1vn for ''Other businesses':

The business segment data on the preceding pages of this report should be read in conjunction with this discussion.

Insurance Underwriting The after-tax figures shown above for Insurance underwriting derive from the following: _ _ (dollars in millions) _ _ 1991 1990 1989 Underwriting gain (loss): Primary or Direct Insurance .......................................................... . $ (2.5) $ 0.5 $ 4.2 Reinsurance Assumed ................................................................... . (117.1) (27.2) (28.6) Underwriting loss - pre-tax ....................................................... . (119.6) (26. 7) (24.4) Applicable income tax credit ......................................................... . 42.2 11.6 11.8 Applicable minority interest ........................................................... . 0.2 ~ _Q]_ After-tax underwriting loss ............................................................... . $ (77.2) $(14.9) $(12.3)

The Berkshire Hathaway Insurance Group engages in both insurance and reinsurance of property/casualty risks. In its insurance activities, as distinguished from its reinsurance activities, its members assume risks of loss from persons primarily and directly subject to the risks. In its reinsurance activities, the members assume defined portions of similar or dissimilar risks to which other insurers and reinsurers have subjected themselves in their own insuring activities.

In each of the past two years, the premiums that the Berkshire Hathaway Insurance Group earned in its reinsurance business have increased significantly from the preceding year, while premiums earned in its primary or direct business have shown year-to-year decreases for each of the past 5 years.

36

Insurance U11denvriti11g (co11ti11ued) A significant marketing strategy followed by all Insurance Group members is the maintenance of above average capital strength. Statutory surplus as regards policyholders of the Berkshire Hathaway Insurance Group increased to approximately $8.7 billion at year-end 1991. This unique capital strength creates opportunities for Berkshire Group members to negotiate and enter into contracts of insurance specially designed to meet unique needs of sophisticated insurance and reinsurance buyers. Reinsurance Assumed Underwriting results, stated on the basis of generally accepted accounting principles ("GAAP"), with respect to the reinsurance assumed business for the past three years are summarized in the following table. (dollars in millions) 1991 1990 1989 Amount ~ Amount % Amount ~ Premiums written ............................................... . $ 667.0 $ 435.2 $ 126.4 Pren1iums earned ................................................ . $ 635.4 100.0 $ 437.5 100.0 $ 205.4 100.0 Losses and loss expenses ..................................... . 731.9 115.2 432.2 98.8 183.5 89.4 Underwriting expenses ......................................... . 20.6 3.2 32.5 7.4 50.5 24.5 Total losses and expenses .................................... . 752.5 118.4 464.7 106.2 234.0 113.9 Underwriting (loss) - pre-tax ............................... . ${117.1) $ (27 .2) $ (28.6)

Disaggregated data follows for these activities. _ _ _ _ _ _ _ _ _ _ (dollars in millions) _ _ _ _ _ _ _ _ __ Premiums Earned Underwriting Gain (Loss) --'Y'-'e"'a"-r--=E"'n-=d-'R""e"'s"'e'-'rv"'e""s*__ 1991 1990 1989 1991 1990 1989 1991 1990 1989

Retroactive reinsurance and structured settlements .......... . $ 363.2 $423.7 $ 57.4 $ (49.0) $(21.7) $(16.1) $1,573.9 $1,002.2 $246.4 Major quota share reinsurance .. 130.6 30.6 (9.0) 248.1 332.6 411.9 Other reinsurance ... ............... . 272.2 -13.8

17.4 (98. 7) ~ __Q_,iJ 460.2 128.9 138.9 $ 635.4 $437 .5 $205.4 $(117.1) $(27.2) $(28.6) $2,282.2 $1,463.7 $797.2

*Unpaid losses and loss adjustment expenses Premiums Earned As shown, premiums earned from reinsurance assumed activities grew significantly from 1989 to 1990 and again from 1990 to 1991. The growth from 1989 to 1990 came from premiums earned in 1990 amounting to $370 million with respect to retroactive reinsurance - coverages for past loss events. A relatively insignificant amount of premiums were received for such business prior to 1990. Premiums earned in 1991 for such coverages amounted to $362 million. The increase in "other reinsurance" premiums earned from 1990 to 1991 came from (i) finite-risk type coverages, for which 1991 earned premium amounted to $197 million, plus (ii) premiums earned in 1991 from significantly increased issuances of catastrophe excess-of-loss coverages to other insurers and reinsurers. Underwriting Gain (Loss) The 1991 underwriting loss from retroactive reinsurance was $26.2 million, representing amortization of deferred charges re reinsurance, an account first established at the end of 1990. See Note l(h) to the Consolidated Financial Statements for information with respect to this charge. The underwriting loss with respect to structured settlement liabilities was $22.8 million for 1991, $21.7 million for 1990 and $16.1 million for 1989. Such amounts represent accretion of liabilities with respect to all structured settlement contracts.

37

Management's Discussion (collfinued) /11sura11ce U11denvriti11g (co11ti11ued) Reinsurance Assumed (continued) Favorable development in the amount of $30.6 million was recorded in 1991 with respect to liabilities under pre-1990 major quota share reinsurance contracts. No development with respect to those contracts was recorded in 1990. For 1989, losses under the contracts were estimated in an amount that exceeded by $9 million the premiums earned with respect thereto. It should be noted that estimated unpaid losses and loss adjustment expenses with respect to these contracts amounted to $248.l million at December 31, 1991 and there will be additional development - which may be either favorable or unfavorable - recorded in future years as these contracts are run-off.

Gross losses and expenses of approximately $295 million were recorded for 1991 with respect to the finite-risk type contracts referred to in the third preceding paragraph. That amount exceeded by $98 million the related premiums earned, and that difference comprised virtually all of the 1991 underwriting loss from the category of "other reinsurance" shown in the disaggregated data above. These contracts provide casualty-type coverages of sizeable but limited amounts per contract.

The concept of the time-value-of-money is taken into account in pricing of virtually all insurance products, but the concept is a more important consideration in the pricing of reinsurance products than in the pricing of direct business due to the more extended claims payment period - or "tail" - attached to reinsurance business. Thus, the premium charged per dollar of expected loss and expense for reinsurance coverage is normally less than for direct coverage in the same line of business. Further, the concept of the time-value-of-money is a more important consideration in pricing of certain lines, e.g., workers' compensation and general liability, than for other lines, e.g., auto physical damage, whether it be direct insurance or reinsurance. Recognition of the concept, through discounting liabilities for unpaid losses to present value, is pem1itted by insurance regulatory authorities of a few states, usually only for some lines of insurance and reinsurance. Nebraska, the state of domicile for National Indemnity Company and several other members of the Berkshire Hathaway Insurance Group, pem1its discounting only for structured settlement liabilities. The extreme difficulty in estimating the amount of unpaid losses plus the added difficulty of projecting the time of their payment may justify the mandated, conservative approach that treats all liabilities as equal for accounting purposes, i<respective of differences in their projected payment date.

Discounting is not pem1itted with respect to the Group's unpaid losses and loss expenses in the category of "other reinsurance," and a large portion of this business is in long-tail lines. Thus, a large portion of the $272 million premiums earned for this category in 1991 was priced based in significant part on time-discounting of expected losses where the effects of such discounting are very meaningful. However, the related losses and loss expenses charged against those premiums in the Statement of Earnings are stated on an undiscounted basis. The resulting substantial underwriting loss does not reflect management's view of the economics of the underlying arrangements.

The (i) deferred charge and its amortization that arise from the accounting treatment afforded to retrospective reinsurance, as well as (ii) the periodic accretion of structured settlement liabilities, are accounting procedures that apply the concept of the time-value-of-money. However, the amortization and accretion are charged as losses incurred in periods subsequent to the periods when related premiums are earned, and thus reflect themselves as underwriting losses in the subsequent periods. Accretion and amortization charges referred to in this paragraph, charged as loss costs in periods when there is no directly related credit for premium income, amounted to $49 million for 1991 and are expected to approxin1ate $70 rniliion for 1992.

Berkshire's management is not recommending a changed accounting model for insurance companies. These comments, regarding the mismatch in the Statement of Earnings of premiums earned and related loss costs, are instead intended as an aid to shareholders' and others' understanding of the data reported above.

38

I11sura11ce U11denvriti11g (co11ti11ued) Primarv or Direct Insurance Undenvriting A summary follows of the combined underwriting results, stated on a GAAP basis, of the Berkshire Hathaway Insurance Group's primary or direct insurance operations. _ _ _ _ _ (dollars are in millions), _ _ _ __ l 1991 1990 1989 Amount 2-- Amount 2-- Amount 2-- Premiums written ..................................... $ 135.5 $ 139.1 $ 169.7 Premiums earned ...................................... $ 141.0 100.0 $ 154.0 100.0 $ 188.9 100.0 Losses and loss expenses ........................... 95.2 67.5 102.0 66.2 125.9 66.6 Underwriting expenses ............................... 48.3 34.3 51.5 33.4 58.8 31.1 Total losses and expenses .......................... 143.5 101.8 153.5 99.6 184.7 97.7 Underwriting gain (loss) - pre-tax .............. $ (2.5) $ 0.5 $ 4.2

Favorable development, discussed on the following page, of beginning-of-the-year loss reserves represented respectively, 16.9%, 11.9%, and 10.6% of premiums earned in 1991, 1990 and 1989. Without such credits, total losses and expenses as a percentage of premiums earned were: 1991 - 118.7 %, 1990

• lll.5%, and 1989 - 108.3%.

The number of risks accepted in Berkshire's primary or direct insurance operations peaked in 1986 and has declined each succeeding year. The declines have been shared by each of the underwriting units that produce the Group's direct business, as reflected in the following table of premiums earned for the past five years: (dollars in millions) Underwriting Unit 1991 1990 1989 1988 1987 Traditional motor vehicle/general liability operations ............................. . $ 89 $ 94 $113 $168 $268 N.Y. commercial casualty/professional liability/specialty risk operations .... . 14 18 20 54 93 Homestate companies/Cypress Insurance Co ........................................ . 38 42 56 _]Q 80 Total premiums earned ......................................................... _. ...... . $141 $154 $189 $292 $441

The "traditional" business, written through general agents located nationwide directed from National Indemnity's Omaha offices, represents principally casualty coverages for commercial accounts. The operations are termed internally as those of the "National Indemnity primary group." Historically from the founding of National Indemnity Company fifty years ago, the volume of business written by this group varied significantly from year to year, increasing during periods of limited industry insuring capacity and decre.!lsing when industry capacity expanded. When capacity was adequate, much of the business was written by competing insurers (i) charging prices lower than those acceptable to National Indemnity, and/or (ii) applying less stringent underwriting guidelines than those applied by National Indemnity. Those lower prices continued until the resulting unacceptable losses caused voluntary or involuntary exits from the market. At such point in the cycle, offerings increased to National Indemnity Company and its affiliated Insurance Group members at prices they believed to be adequate. In recent years, the group has experienced the down-side of this cycle. The upside, evidenced by increased offerings meeting the Group's acceptance standards, has not yet been observed. Disciplined underwriting is also practiced by the Group's New York City underwriting units that commenced operations in 1985. Earned premiums from policies underwritten from these offices peaked at $93 million in 1987 and then declined each year, totalling $18 million in 1990 and $14 million in 1991. The commercial casualty/professional liability and special risks underwriting units enter into "tailored" insurance contracts for insureds presenting risks unusual in nature and/or unusually large. Many standard carriers decline to provide such coverages when their capacity can be fully employed in providing standard coverages for standard risks, i.e., in tight markets such as those of 1985 and 1986, but they have increasingly competed for, and written much of this business in the 1988-1991 period.

39

Management's Discussion (continued) Insurance Undenvriting (continued) Primary or Direct Insurance Undenvriting (continued) The Homestate companies of the Berkshire Hathaway Insurance Group - in Colorado, Kansas and Nebraska - reduced their premium writings in each of the past three years. Their disciplined underwriting approach in a soft market environment resulted in loss of market share. Cypress Insurance Company underwrites primarily workers' compensation risks in a highly competitive market environment in California.

The preceding discussion is given to explain the downward trend in dollar amount of premiums. It should be understood that no management judgments with respect to the Insurance Group's operations are based on volume of business done. Instead, members are encouraged to reject underpriced risks without regard to volume.

Summarized below is loss and loss expense data from i:-· hnary or direct insurance underwriting:

_ _ (dollars in millions) _ _ .B!l_ 1990 1989 Unpaid losses and loss expenses at beginning of year. ....... . $586.6 $639.2 $667.6 Incurred losses recorded: Current yeflr occurrences ................. , ........................ . 119.0 120.3 145.9 All prior years' occurrences ...................................... . ~ _j_!§.d) (20.0) ~ 102.0 125.9 Payments with respect to: Current year occurrences .......................................... . 23.3 21.7 27.6 All prior years' occurrences ...................................... . ~ 132.9 126.7 114.9 154.6 154.3 Unpaid losses and loss expenses at end of year ............... . $566.9 $586.6 $639.2

Credits against incurred losses were recorded in each of the last three years for "all prior years' occurrences." They are corrections of estimati>~n error that are credited or charged to earnings in the year made. Relating these credits for each year to the related estimated unpaid amounts at the beginning of the respective year, the "savings" were: 1991 - 4.1%, 1990 - 2.9%, and 1989 - 3.0%. 1991 was the fifth consecutive year of favorable development, which might be viewed as somewhat comforting. But additional cases of an unknowable number and magnitude for pre-1992 losses are certain to be reported. A provision for late reported cases is, of course, included in the $566.9 million 1991 year-end provision for unpaids. But, that total amount is subject to the favorable or unfavorable development that will be recorded in future years.

The favorable development recorded in each of the most recent three years related principally to the traditional commercial automobile business of the primary group.

Insurance Segment Investment Income Following is a summary of Insurance Group net investment income for the past three years;

(dollars in millions) Investn1ent Investment Income Applicable Applicable Income After Before Incon1e Minority Taxes and Taxes Taxes Interest Minorit}' Int. 1991 ................................................ . $331.8 $ 43.8 $ 2.9 $285.1 1990 ................................................ . 327.0 41.2 3.2 282.6 1989 ........................:: ... ,.,"················ 243.6 26.8 3.2 213.6

Invested assets increased in each of the past three years. In the three-year period, Berkshire contributed approximately $625 million additional capital to the Group, and reinvested earnings of the Group for that period amounted to approximately $800 million. Contributing to a further increase in invested assets was about $525 million increase during the past two year period in the amount of "float" from policyholder funds. That term denotes the sum of unpaid losses, unpaid Joss adjustment expenses and unearned premiums, less the aggregate of agents' balances receivable, amounts recoverable as reinsurance on paid losses, deferred policy acquisition costs and deferred charges re reinsurance. The net amount of float was approximately $1.54 billion at the end of 1989 - unchanged during that year, $1.63 billion at the end of 1990, and $2.07 billion at the end of 1991.

The Insurance· 'Group received dividends in the prior year of $52.5 million with respect to the Group's investment in Gillette convertible preferred stock that was converted on April 1, 1991 into common stock. 1991 dividends received from Gillette with respect to such common stock plus the !st quarter dividend on the preferred totalled $24.3 million. The comparative decrease is one reason why the increase in 1991 investment income over 1990 was Jess than the 1990 increase over 1989. Another is that the timing of Berkshire capital contributions to the Group influenced the year-to-year comparison more in 1990 than in 1991.

Non-Insurance Business Segments

A summary follows of results to Berkshire from these identified business segments for the past three years.

_______ (dollars in millions) _ _ _ _ _ __ Operating Net after-tax earnings profit Minority Berkshire Revenues before taxes share share

The businesses that produced the above results numbered seven in 1991, versus six in both 1990 and 1989.

On July 1, 1991, Berkshire purchased for cash all of the capital stock of H. H. Brown Shoe Co. ("Brown"), the business of which is the manufacturing, importing and marketing of work, safety, outdoor, western and casual footwear. Its operations for the last six months of 1991 accounted for approximately $7 .5 million of Berkshire's 1991 after-tax earnings, and that figure more than accounts for the $4.1 million increase, 1991 vs 1990, in Berkshire's aggregate net earnings from these business segments.

Operations of each of the non-insurance business segments are dealt with in the following paragraphs.

41

Management's Discussfon (continued) No11-/11sura11ce Busi11ess Segments (co11ti11ued) Candy - See's Candies _ _ _ _ _ (dollars in millions) _ _ _ __ Operating Net profit after-tax Revenues before taxes earnings

1991 VS 1990 In 1991, unit sales of .See's candies at retail - stated on the basis of an equival!!nt number of shops - decreased from 1990 byabout 5 %, and the physical volumt> of shipments in respo'Ii'le to quantity orders was approximately 3 % lower than in the previous year. Virtually all of the year-to-year decrease was experienced in the last two months - the critical selling season for See's. Price increases that were initiated on January 1 permitted 1991 sales revenues to equal those of 1990, a year when See's high;;;;\-ever revenues were recorded. Fortunately, 1991 cost and expense increases - at a rate of just over 2% on a per-pound sold basis - were lower than anticipated by the price increase. The 1991 raw material component of·cost was actually less than in 1990, and See's after-tax profits for 1991 were higher by approximately $1. 7 million than for the preceding year.

See's management believes that two factors were largely responsible for its decreased unit sales volume in 1991. First, as of July 15, 1991, the State of California imposed a sales tax on "candy and snack foods". The rate of tax is 8.5 % in most metropolitan areas and because of See's heavy presence in California it applies to about 80% of See's sales. A second factor in management's view was the major decline in consumer confidence that commenced in mid-1990 and then intensified through the last quarter of 1991. Those factors may continue to adversely affect the business '• 1992.

1990 VS 1989 Physical volume in 1990 was up over 1989, but by less than 1 %. An increase of approximately 4.5 % in pounds sold in response to quantity orders was largely offset by a decrease of about 2 % in pounds sold from the retail stores. A slowing in 1990 retail store volume was particularly notable in the last quarter of the year when West Coast mall stores of all types saw less traffic. A selling price increase of about 5 % , initiated at the beginning of the ·year, together with the slight increase in physical volume of sales, resulted in a $10. 1 million, 5.4% increase in sales revenue and a $3.2 million, 16% year-to-year increase in after-tax profits.

Horne Furnishings - Nebraska Furniture Mart

• - - - - - - (dollars in millions)_ _ _ _ _ __

Operating Net after-tax earnings profit Minority 'i:lerkshire Revenues before taxes share share

The Nebraska Furniture Mart's sales and other revenues increased from the preceding year by just over 4% in both 1991 and 1990. The 1991 increases over 1990 were achieved in a retailing economy that was sluggish for the entire year, and in the face of some heightened competition. In 1990, the influence of a slowing economy revealed itself in the fourth quarter, when sales increases over the 1989 fourth

42

No11-I11s11ra11ce Business Segments (co11tin11ed) Home Furnishings - Nebraska Furniture Mart (colllinued) quarter, at about I%, were below the !lverage increase for the year. The percentage increase in sales revenues for 1991 over 1990 came from increased sales of furniture, appliances, electronics and carpet. On the other hand, the increased 1990 sales over 1989 came primarily from electronics and appliances.

In 1991, in order to protect and reinforce its image as a low-cost supplier and to fulfil its customers' low-price expectations, the Mart's management priced its goods at levels that resulted in lower gross margins on sales. In addition to accepting lower gross margins in 1991, the Mart also increased expenditures for advertising. In both 1991 and 1990, additional payroll costs were incurred for added point-of-sale personnel.

The Mart added personal computers and 35mm cameras to its product line in the last half of 1991 and devoted space to a "new life St'Jle furniture" facility called Trends. To enl~rge its position as a provider of commercial carpet, in the fourth quarter of 1991, the Nebraska Furniture Mart purchased a small business located 50 miles away in Lincoln, Nebraska, that is engaged in that line of business.

Management at the Mart are hopeful that some increase in sales can be achieved in 1992, but expect it to be at a continuing cost of lower profit margins. Lower advertising costs may offset those cost pressures and permit modestly improved earnings for 1992.

Newspaper - 17ze Buffalo News (dollars in millions)- - - - - Operating Net profit after-tax Revenues before taxes earnings

1991 vs 1990 During the first nine months of 1991, newspaper revenues and profits continued the decline that started in the last quarter of 1990, as the demand for print advertising declined dramatically. Revenues at the News stabilized in the fourth quarter of 1991 and were at approximately the same level as for the fourth quarter of 1990. However, pre-tax profits continued to slide and for the quarter were about 5 % lower than for the fourth quarter of the prior year. For the full year 1991, newspaper revenues of $130.3 million were 3.7% less than for the full year 1990, anci :·1fter-tax earnings of $21.3 million were 16.4% le;" than for the preceding year.

1990 VS 1989 A marked decline occurred in virtually every category of advertising lineage and revenue in the fourth quarter of 1990. Largely as a result, newspaper revenues for the year declined slightly from their 1989 level and after-tax earnings declined about 6 %.

1992 prospects Downward pressure on newspaper profitability from two trends is expected to continue. They are (i) increasing competition from direct mail, and (ii) an increasing tendency on the part of the retailing sector to rely less on newspaper advertising. Also, the trend in cost of newsprint is likely to reverse in the near term from its downward direction of the past three years. A buy-out offer made to printers and pressmen in early 1992 will result in at least $2 million of additional expense for the News. Thus, some further decline in earnings from the News may be in prospect for 1992.

43

Management's Discussion (continued) No11-Jnsurance Busi11ess Segments (contillued) E11cyc!opedias, Other Reference Materials - U!Jrld Book _____ (dollars in millions)_ _ _ __ Operating Net profit after-tax Revenues before taxes earnings

1991 vs 1990 Revenues for this segment hi 1991 were below 1990's all time record high level by $31.4 million. The 9% decline resulted largely from a disappointing 15% drop in unit sales in the Parent & Teacher market for World Book encyclopedias, Childcraft and Early World of Learning products. A part of the decline in revenues in 1991 is believed to reflect recessionary pressures in the domestic economy; a larger part may reflect some internal inefficiencies resulting from changes made during the year in the World Book marketing organization. World Book's marketing effort is accomplished by a geographically dispersed, very sizeable group of persons. While r1;organizational steps taken to date are believed to have adversely affected the immediate selling effort, r(.anagement believes that after related additional planned steps are accomplished, the restructuring's influence upon longer term results wiII be favorable. Improved capability to serve what is believed to be an increasing market for World Book products may be demonstrated in 1993 and beyond, but meaningful improvement in 1992 financial results over 1991 is not anticipated.

The decrease in earnings in 1991 from the prior year is attributable to the lower 1991 revenues.

1990 vs 1989 Revenues were about 1 % higher for 1990 than for 1989. International sales increased as did domestic sales of publications other than encyclopedias. Revenues from domestic sales of the latter declined. Response to domestic special promotions of the encyclopedias was disappointing in 1990, believed to relate to earlier inadequate recruitment of sales representatives.

Profits of the segment in 1990 increased over 1989 as shown above. Among other factors contributing to this increase were lower costs in 1990 than in 1989 relating to relocating activities of the segment away from Chicago's Merchandise Mart to suburban and other locations. Such costs incurred were $6.9 million in 1989 versus $1.5 miilion in 1990. Also, foreign currency exchange gains of approximately $700,000 were recorded for the segment in 1990 contrasted to foreign exchange losses of approximately $550,000 in 1989.

Non-I11sura11ce Business Segments (continued) Home Cleaning Systems _ _ _ _ _ (dollars in millions) _ _ _ __ Operating Net profit after-tax Revenues before taxes earnings

Revenues of this segment derive from sales to distributors of Kirby home cleaning systems and accessories, sales to retailers or others of specialty vacuum cleaners such as electric as well as cordless hand-held vacuum cleaners, and sales of vacuum cleaner brushes to other manufacturers.

1991 revenues were $3.7 million more than in 1990. 77% of that increase, $2.8 million, represents the year-to-year increase in sales revenues from Kirby cleaners. The remainder of the increase came from higher sales in 1991 of handheld brush vacuums, essentially resulting from a single large quantity order from a buyer that used the product as a promotional item. Kirby's new Generation III model cleaner, introduced in late 1989 as a replacement for its Legend II, represented about 99% of domestic unit sales in 1991, versus about 82% in 1990. The newer cleaner, with its power drive, is larger, is somewhat more costly to produce, commands a higher unit selling price and yields a somewhat higher profit margin than the Legend II.

In 1990, the first full introductory year for the Generation III, unit sales of Kirby cleaners increased 8% domestically and 20% internationally over 1989. In 1991, unit sales declined slightly from the prior year, both in the domestic and international market. (International sales comprised about one-third of Kirby sales in both 1991 and 1990).

The higher sales revenues mentioned above, and somewhat higher profit margin realized on sales, in both 1991 and in 1990, each as compared to the immediately preceding year, contributed largely to the earnings increases shown above. In addition, the Kirby operation was burdened with somewhat less start-up costs in 1991 than in 1990 with respect to the new product.

U11ifon11s - Fechheimer Bros. Co. _ _ _ _ _ _ _ (dollars in millions), _ _ _ _ __ Operating Net after-tax earnings profit Minority Berkshire Revenues before taxes share share

This operation achieved a 6% increase in revenues in 1991 over 1990, greater than the 1% increase in the prior year over 1989. The current year's increase came largely from growth in retail operations and in part from its new fire-protective clothing line. Sales of marching band uniforms were also higher in 1991 than in 1990.

Levels of profitability of this segment gradually improved in 1991 as problems gradually decreased in integrating into its operations store acquisitions and start-ups from the late 1980' s as well as a manufacturing facility acquired in 1989. 1992 is Fechheimer's 150th anniversary, and its managers are cautiously optimistic that earnings results for the year can somewhat exceed the level of recent years.

45

Management's Discussion (continued) Non-Insurance Business Segments (continued) Shoes - H. H. Brown _____ (dollars in millions) _ _ __ Operating Net profit after-tax Revenues before taxes earnings

1991 ...................................... . $ 104.0 $ 12.5 $ 7.5

H. H. Brown Shoe Co. (unrelated t.O another Brown Shoe operation in St. Louis) was purchased for cash by Berkshire as of July I, 1991, and the results of its operations after that date, above, are included in Berkshire's consolidated results. The business manufactures, imports and markets work, safety, outdoor, western and casual footwear.

Brown's profit results for the last six months of the year were better than might have been projected earlier. In the domestic leather market where Brown's purchases its major raw material, prices were lower than at any time in the past seven years. Pairs of shoes and boots from this operation sold in the last six months of 1991 were somewhat fewer than in the corresponding period of 1990, when it was under previous ownership, but increased sales of western boots, combined with other changes in product mix and some increase in prices resulted in a higher dollar volume of sales from the operation than for the corresponding six month period of the prior year. That, combined with a decrease in raw material cost for manufactured products and lower promotional costs, resulted in earnings at a very respectable level for the six month 1991 period of Berkshire ownership.

The good start under Berkshire ownership means that a comparable or a better level of results should not be anticipated for 1992, particularly in view of the now-firming leather market.

Businesses Other Than Identified Segments _______ (dollars in millions) _ _ _ _ _ __ Operating Net after-tax earnings profit Minority Berkshire Revenues before taxes share share

The above represent aggregate data for businesses that numbered 23 in 1991. Berkshire management believes that narrative discussion of the results of the constituent businesses wouid not yield significant benefit to investors or others, particularly in view of the relative consistency of the year-to-year aggregate data.

:·,

Interest Expense Interest expense was higher in 1991 than in 1990 partly because the average amount of Berkshire's borrowings under investment agreements was higher in 1991 than in 1990. Also, in 1991, debt of $72 million was redeemed prior to scheduled maturity (in 2018) and the early redemption premium amounting to $5.7 million that was incurred in the redemption transactions was charged to 1991 interest experc<;e.

Interest expense was higher in 1990 than in 1989 partly because accretion for all of 1990 amounting to $22.6 mi.Ilion with respect to Berkshire's zero coupon convertible subordinated notes was greater than the $5.7 million charge with respect thereto for the last quarter of 1989 following their issue. Also in 1990, borrowings by Berkshire under investment agreements were more than in 1989.

Realized l11vest111e11t Gain Realized investment gain has been a recurring element in Berkshire's net earnings for many years. The amount - recorded when appreciated securities are sold - tends to fluctuate significantly from period to period, with a meaningful effect upon Berkshire's consolidated net earnings. But, the amount of realized investment gain for any given period has no predictive value, and variations in amount from period to period have no practical analytical value, particularly in view of the billions of dollars now reflected for unrealized price appreciation in Berkshire's consolidated investment portfolio.

Liquidity and Capital Resources Berkshire's Consolidated Balance Sheet as of December 31, 1991, reflects continuing capital strength. In the past three years, Berkshire shareholders' equity has more than doubled from approximately $3.41 billion at December 31, 1988 to approximately $7.38 billion at December 31, 1991. In that three-year period, realized and unrealized securities gains increased equity capital by approximately $3 billion, and reinvested earnings, other than realized securities gains, were nearly $1 billion. The rate of increase in net worth is certain to decline in future years because of its current magnitude. But, creditors and customers can continue to benefit from Berkshire's capital adequacy.

47

BERKSHIRE HATHAWAY INC.

SHAREHOLDER-DESIGNATED CONTRIBUTIONS

The Company has conducted this program of corporate giving during each of the past eleven years. On October 14, 1981, the Chairman sent to the shareholders a letter* explaining the program. Portions of that letter follow: "On September 30, 1981 Berkshire received a tax ruling from the U.S. Treasury Department that, in most years, should produce a significant benefit for charities of your choice. "Each Berkshire shareholder - on a basis proportional to the number of shares of Berkshire that he owns - wiJI be able to designate recipients of charitable contributions by our company. You'll name the charity; Berkshire will write the check. The ruling states that there will be no personal tax consequences to our shareholders from making such designations. "Thus, our approximately 1500 owners now can exercise a perquisite that, although routinely exercised by the owners in closely-held businesses, is almost exclusively exercised by the managers in more widely-held businesses. "In a widely-held corporation the executives ordinarily arrange all charitable donations, with no input at all from shareholders, in two main categories: (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 effects 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, because not many gifts can be shown to produce roughly commensurate direct benefits to Berkshire. "In the second category, Berkshire's charitable gifts have been virtually nil, because I am not comfortable with ordinary corporate practice and had no better practice to substitute. What bothers me about ordinary corporate practice is the way gifts tend to be made based more on who does the asking and how corporate peers are responding than on an objective evaluation of the donee's activities. 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 pressures on him. Frequently there is an added incongruity; many corporate managers deplore governmental allocation of the taxpayer's dollar 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 your personal judgments by writing checks on my bank account for charities of your choice, I feel it inappropriate to write checks on your corporate "bank account" for charities of my choice. Your charitable preferences are as good as mine and, for 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 hands. "Under such circumstances, I believe Berkshire should imitate more closely-held companies, not larger public companies. If you and I each own 50% of a corporation, our charitable decision making would be simple. Charities very directly related to the operations of the business would have first claim on our available charitable funds. Any balance available after the "operations- related" contributions would be divided among various charitable interests of the two of us, on a basis roughly proportional to our ownership interest. If the manager of our company had some suggestions, we would listen carefully - but the final decision would be ours. Despite our corporate form, in this aspect of the business we probably would behave as if we were a partnership.

•copyright © 1981 By Warren E. Buffett All Rights Reserved

11 "Wherever feasible, I believe in maintaining such a partnership frame of mind, even though we operate through a large, fuir)y widely-held corporation. Our Treasury ruling will allow such partnership- like behavior in this area . . . "I am pleased tb,a~ Berkshire donations can become owner-directed. It is ironic, but understandab!e, that ;;, large and growing nulnbcr of major corporations have cf(aritable policies pursuant to which_ .. they yl1ill match gifts made by their employees (and - brace yourself for this one - many ewL. - match\·gifts made by directors) but none, to my knowledge, has a plan matching charitable gifts by owriers. I say "understl\ndable" because much of the stock of many large corporations is owned on 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 breed. As I mentioned in the 1979 annual report, at the end of each year more than 98 % of our shares are owned by people who were shareholders at the beginning of the year. This long-term commitment to the business reflects an owner mentality which, as your manager, I 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 program since its inception follows:

• Shares registered in street name are not eligible to participate.

In addition to the shareholder-designated contributions summarized above, Berkshire and its subsidiaries have made certain contributions pursuant to local level decisions of operating managers of the businesses.

• * *

The program may not be conducted in the occasional year, if any, when the contributions would produce substandard or no tax deductions. In other years Berkshire expects to inform shareholders of the amount per share that may be designated, and a reply form will accompany the notice allowing shareholders to respond with their designations. If the program is conducted in 1992, the. notice will be mailed on or about September 15 to shareholders of record reflected in our Registrar's records as of the close of business August 31, 1992, and shareholders will be given until November 15 to respond.

Shareholders should note the fact that shares held in street name are not eligible to participate in the program. 1b qualify, shares must be registered on August 31 in the owner's individual name(s) or the name of an owning trust, corporation, partnership or estate, as applicable.

49

Berkshire's consolidated data b rearranged in the presentations on the

f{)lJo\ving \even pag:l.!s into four categories. corresponding to the \vay

Mr. Buffett and Mr. Munger think about Berbhirc\ businesses. Tl'~

presentations may be helpful to readers in making estimates of Berkshire\

intrinsic value.

The presentations in this section do not conform in all respects to generally

accepted accounting principles. Principle Jepartures from GAAP relate

to accounting treattnent fo1· asset~ acquir. . U in business acquisitions.

altlmugh students and practitioners of accounting will recognize others.

Opinions of Berkshire's independent auditors were not soliciteo for

this data. The four-category presentations in no way fell within their

purview.

51

BERKSHIRE HATHAWAY INC.

INSURANCE GROUP

Berkshire's insurance business is conducted by 12 separate subsidiaries, headed by National Indemnity Company headquartered in Omaha, Nebraska. The members underwrite multiple lines of principally casualty coverages for primarily commercial accounts, providing, for example, liability coverages for truck and bus operators, and casualty coverages for especially large or unusual risks. The Commercial Casualty Division and the Professional Liability and Spe'~ial Risk Division, each with offices in New York City, solicit and underwrite th~; special large risks. Member companies domiciled in the states of Colorado, Kansas and Nebraska provide standard multiple-line property/casualty insurance to ''homestat.e" residents. A California domiciled men1ber provides principally \Yorkers' con1pensation insurance to e1nployers in that state. A Reinsurance Division in New York City provides treaty reinsurance to other property/casualty insurers and reinsurers. This division is currently one of the leading providers in the world of finite-risk reinsurance and property/ catastrophe retrocessional protection (i.e., reinsurance for reinsurers). The Berkshire Hathaway Insurance Group maintains capital strength at unparalleled high levels, significantly higher than normal in the industry. This strength differentiates Group members from their competitors. For example, the Group's net premiums written in 1991 were approximately 10% of the Group's year-end statutory surplus. That compares to an industry average premiums-to- surplus ratio of about 157% (for 1990). The obvious margins of safety thus provided to insureds of the Group are particularly persuasive in marketing of individuaJ!y negotiated insurance and reinsurance contracts. '-·' Combined financial statements of the Berkshire Hathaway Inc. Insurance Group - unaudited and not fully adjusted to conform to Generally Accepted Accounting Principles - are presented on the following two pages. .• <;)

52

BERKSHIRE HATHAWAY INC.

INSURANCE GROUP

Balance Sheets (dollars in millions)

December 31. 1991 1990 Assets Invest111cnts: Fixed nlaturities at amortized cost: Bonds: RJR Nabisco ....................................................................... .. $ 98.9 $ 187.7 Wash. Pub. Power Supply System ...................................•......... 158.6 188.9 Other .................................................................................. . 367.0 377.4 Preferred stocks: Champion International .......................................................... .. 279.0 279.0 Salomon Inc. ···········H••·························································· 650.0 637.0 USAir ................................................................................. . 348.0 348.0 Other .................................................................................. . 0.5 0.7 Equity Securities at market: Common stocks: Capital Cities/ABC, Inc .......................................................... . 1,278.8 1,354.4 Coca-Cola Company .............................................................. . 3,738.0 2,166.0 GEICO ............................................................................... . 1,363.2 !,I 10.6 Gillette ................................................................................ . 1,347.0 600.0 Guinness PLC ..................................................................... .. 296.8 Washington Post .................................................................. .. 336.0 342.1 Wells Fargo Company ............................................................ . 279.3 278.7 Other .................................................................................. . 91.9 232.9 Preferred stocks: American Express Company .................................................... . 247.5 First Empire State Corp ......................................................... . 50.0 Other. ........................................... , ..................................... . 44.2 72.6 10,974.7 8,176.0

~rhcsc statcrncnts do not conforrn to c;,\,\P in all respects 1'hcsc statcrncnts arc unauclitcd

53

BERKSHIRE HATHAWAY lNC.

INSURANCE GROUP

Statement~ of Earnings (dollars in 111illio11s)

1991 1990 1989 Premiums \vrirtcn ..................................................... H ••••• $ 802.5 s 574.3 ~ 296.l

Statements of Net fnvestmcnt Income (dollars in 111illio11s)

1991 1990 1989 Interest: Substantially exempt from Federal income taxes: Wash. Pub. Power Supply System ............................... .. $ 25.0 $ 27. l $ 27.3 Other ...................................................................... . 29.6 30.5 51.6 Taxable: · RJR Nabisco ............................................................ . 21.7 27.0 3.4 Other ...................................................................... . 22.4 6.6 18.5 98.7 91.2 100.8

These statement' do not conform to GAAP in all respects ·rhcse stutcrnents arc unaudited

54

BERKSHIRE HATHAWAY INC.

MANUFACTURING, PUBLISHING AND RETAILING BUSINESSES

Combined financial statements of Berkshire"s Manufacturing. Publishing ~-,d Retailing businesses - unaudited and not fully adjusted to conform to Generally Accepted Accounting Principles - arc presented on the following page. T~e operations whose data have been combined in these presentations include the following:

·;Jperation ProductISen'ice!Acti l'i11•

Ada/et Conduit fittings. explosion proof fittings, junction boxes Blue Chip Stamps :t\.1arketing 1notivational services Bcn:tlzei;n ~r Retailing fine jewelry Buffalo Ne1vs Daily and Sunday newspaper Campbell Hausfdd Air compressors and accessories, painting systems Carefree Roll-up awnings, other RV accessories C/el'eland Hvod Products Vacuun1 cleaner brushes

Douglas Products Hand-held electric and cordless vacuum cleaners Ferhheimer Bros. Co. Unifonns and accessories France Appliance controls. ignition and sign transforn1ers R H. Brmrn Shoe Ca. Work shoes. boots anl' 'asual footwear Hale.r Zinc and alu1ninum die cast fittings K&W Products Automotive compounds Kirby Home cleaning systems Meria111 Pressure and flow 1ncasurement devices Nebraska Furniture Mart Retailing home furnishings /\11!11' A1nerica Electric Electrical equipment Nonh/and Fractional horsepower motors Boat \vinches, \vindlasses Precision Steel Products Steel service center Quikw Varieties of cutlery See's Candies Boxed chocolates and other confectionery products Scot Labs Cleaning and n1aintenancc chemicals Stahl Custom steel services bodies and tool boxes for true;• Uizyne Honte Equip111e11t Furnace burners; sump, utility and sewage pumps Hi?stern Ente1prises Compressed gas fittings and regulators fl1istem Plastics Molded plastic components Hvrld Book Encyclopedias and other reference materials

55

BERKSHIRE HATHAWAY INC.

lHANUFACTURING, PUBLISHING and RETAILING BUSINESSES

Balance Sheets (dollars in 111il/io11s)

December 31,

Statements of Earnings (dollars !11 111illio11s)

Purchase price accounting adjus1n1e11ts, i11c/11di1tg ,r:ood11•i//, arising fro111 Berkshire's busiuess acquisitions are not reflected in these s1a1e111en1s, but instead are reflected in the statenzents of 11011~opera1i11g aclivities at page 58.

"l'hc~c statcrncnt~ do not co11for1n lo (iA1\l> in all respects 'fhesc statcrncnl.~ arc unaudited

56

BERKSHIRE HATHAWAY INC.

FINANCE-TYPE BUSINESSES

M111ual Sal'ings and Loan Associaiion and its subsidiary and Scott Fetzer Financial Group, Inc. and its subsidiaries make up Berkshire's finance-type operations.

These statements do not conform lo GAAP in all respects rfhcse statcn1cnts arc unaudited

57

BERKSHIRE HATHAWAY INC.

NON-OPERATING ACTIVITIES These statements reflect the consolidated financial statement values for assetS, liabilities, shareholders' equity, revenues and expenses that were not assigned to any Berkshire operating group in the unaudited, and not fully GAAP- adjusted group financial statements heretofore presented (pages 51 to 57). Statements of Net Assets (dollars in millions) December 31, 1991 1990 Assets Cash and cash equivalents ................................................................ . $ 205.6 $ 29.9 Invesunents: Fixed 1naturities: Bonds: RJR Nabisco ......................................................................... . 123.3 252.6 ACF Industries ....................................................................... . 87.9 58.0 Other ................................................................................... . 16.3 Preferred stocks ........................................................................ . 81.0 81.0 Equity securities .......................................................................... . 38 . .1 2.0.l Property account adjustments *......................................................... .. 78.2 73.6 Unamortized goodwill *.................................................................... 179.0 136.5 Prepaid income taxes ....................................................................... . 7.0 8.0 Other .................................................... ········································ 40.9 32.8 $ 841.0 $ 708.8 Liabilities Accounts payable, accruals and other .................................................. . $ 34.5 $ 33.8 Income taxes ................................................................................. . (3.3) (7.8) Term debt and other borrowings ....................................................... .. 1,065.0 1,046.2 1.096.2 1,072.2 Equity Minority shareholders' ..................................................................... . 17.7 15.0 Berkshire shareholders' .........................•........................................... (272.9) (378.4) (255.2) (363.4) $ 84L.0 $ 708.8 Statements of Earnings (dollars in 111i/lio11s) 1991 1990 1989 Revenues: Interest and dividend income ..................................... . $ 60.1 $ 41. I $ 7.2 Realized investn1tnt gain ........................................... . 69.5 18.2 3.8 Sundry income ........................................................ . 4.4 2.0 5.5 134.0 61.3 16.5 Expenses: Corporate administration ............................................ . 5.6 4.1 3.4 Shareholder designated contributions ........................... .. 6.8 5.8 5.9 Amortization of goodwill * ....................................... . 4.0 3.5 3.4 Property account adjustments * .................................. . 6.0 6.0 6.0 Interest on debt ...................................................... . 84.5 71.3 37.3 Other costs and expenses ......................................... .. 0.9 0.6 0.9 107.8 91.3 56.9 Earnings (loss) before income taxes ............................ . 26.2 (30.0) (40.4) Income tax credit (c.•pense) ...................................... .. (12.7) 7.6 9.8 13.5 (22.4) (30.6) Minority interest ..................................................... . 1.5 1.1 0.6 Net earnings (loss) ................................................. .. $ 12.0 $ (23.5) $ (31.2)

• ';Property account adjust111ents" (llld goodu•ill arose in accounti11g for business acquisitions.

These ~taterncnls do not conforr11 to (;At\P in all respects 'fhcsc statcrncnts arc unaudited

58

;. BERKSHIRE HATHAWAY INC. !(

COMMON STOCK

Stock Transfer Agent The Bank of Boston Shareholder Services Division, P.O. Box 644, Boston, MA 02102 serves as Transfer Agent and Registrar for the Company's common stock. Correspondence with the Division may be directed to Customer Service Section, Mail Stop 45-02-09. Certificates for re-issue or transfer should be directed to the Transfer Processing Section, Mail Stop 45-01-05. Certificates should not be mailed to the Company.

Shareholders The Company had approximately 6,900 record holders of its common stock at March 2, 1992. Record owners included nominees holding at least 170,000 shares on behalf of beneficial-but-not-of-record owners. Management believes that the Company has more than 15,000 beneficial owners.

Price Range of Common Stock The Company's Common Stock is listed for trading on the New York Stock Exchange, trading symbol: BRK. The following table sets forth the high and low sales prices per share, as reported on the New York Stock Exchange Composite List during the periods indicated:

1991 High Low 1990 High Low First Quarter ................. $8,275 $6,550 First Quarter ................. $8,725 $6,675 Second Quarter .............. 8,750 7,760 Second Quarter .............. 7,675 6,600 Third Quarter ................ 9,000 8,325 Third Quarter ................ 7,325 5,550 Fourth Quarter ............... 9,125 8,150 Fourth Quarter ............... 6,900 5,500

Dividends Berkshire has not declared a cash dividend since 1967.

IKE FRIEDMAN 1924-1991

My friend and partner, Ike Friedman, CEO of Borsheim's, died last September.

Ike was a business genius and showman, and these qualities enabled him to take a

hole-in-the-wall store that his family purchased in 1948 and from it build a retailing

phenomenon of national renown. His most outstanding attribute, however, was a big,

warm heart that will forever be remembered by all who knew him.

60

BERKSHIRE HATHAWAY INC.

DIRECTORS WARREN E. BUFFETT, Chair111a11 Chief Erecurh·e Officer of Berkshire CHARLES T. MUNGER, Vice Chair111a11 of Berkshire SUSAN T. BUFFETT MALCOLM G. CHACE, JR. Retired, Fonner Chair11u111 of Berkshire's Board J. VERNE McKENZIE Chief Financial Officer of Berkshire WALTER SCOTT, JR. Chairnzan and Chief £recuth•e Officer of Peter Kiewit Sons: Inc., engaged worldwide in constntctio11, 11li11i11g, packaging and ti111berla11ds.

OFFICERS WARREN E. BUFFETT, Chair111a11 a11tl CEO CHARLES T. MUNGER, Vice Chair111a11 ROBERT H. BIRD, Vice Presitlem MICHAEL A. GOLDBERG, Vice Presidem STANFORD LIPSEY, Vice Presitlem J. VERNE McKENZIE, Vice Presitlem, Sw·etwy MARC D. HAMBURG, Treas11rer DANIEL J. JAKSICH, Comrol/er

ROBERT M. FITZSIMMONS, Director of !11ter11a/ Auditing JERRY W. HUFTON, Director of Taxes J. WILLIAM SCOTT, Director of Financi~ll Assets

Two compilations of letters from earlier Annual Reports are available upon request. One is from reports for 1977 through 1986, the other, from reports for 1987 through 1990. Single copies are furnished without charge in response to requests received by the Company at 3555 Farnam St., Suite 1440, Omaha, NE 68131.