1980 年伯克希尔完整年报

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Prem Jain BERKSHIre HATHAWAY INC. 1980 ANNUAL REPORT TO THE STOCKHOLDERS

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Perkshire Hathaway Inc. 1980 ANNUAL REPORT TABLE OF CONTENTS Chairman's Leller.. 2 Consolidated Financial Statements ..13 Accountants Certificate . ..31 Condensed Financial Statements: Insurance Group Parent Company only ..32 .32 Wesco Financial Corporation ..33 Business Activities of the Company ..34 Management's Discussion ..36 Annual Report Letter: Wesco Financial Corporation Blue Chip Stamps ..52 ..40 Directors and Executive Officers ..54 Common Stock Data ...54 Selected Financial Data ..55

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Berkshire Hathaway Inc. To the Shareholders of Berkshire Hathaway Inc.: beginning equity capital (with securities valued at cost) fell to 17.8% from 18.6%. We believe the latter Operating carnings improved to $41.9 million in 1980 from $36.0 million in 1979. but return on Informed use of that l yardstick to be the most appropriate measure of single-yeas managerial economic pertormance. accounting policies. historical carrying values of assets, financial leverage, and industry conditions. yardstick, however, requires an understanding of many factors, including special attention — one of a positive nature peculiar, to a large extent. to our own operation, and one of In your evaluation of our economic performance, we suggest that two factors should receive your a negative nature applicable to corporate performance generally: Let's look at the bright side first. Non-Controlled Ownership Earnings to that ownership interest must be selected from one of three major categories. The percentege of voting When one company owns part of another company, appropriate accounting procedures pertaining stock that is owned. in large part, determines which category of accounting principles should be utilized. former bank subsidiary) full consolidation of sales, expenses, taxes, and earnings of business holdings Generally accepled accounting principles require (subject to exceptions. naturally, as with car more than 50% owned. Blue Chip Stamps. 60% owned by Berkshire Hathaway ine.. falls into this category. Consolidated Statement of Earnings, with the 40% ownership interest of others in Blue Chip's net Therefore. all Blue Chip income and expense items are included in full in Berkshire's carnings reflected in the Statement as a deduction for "minority interest" 50%, (usually called "investers"), also normally occurs. Earnings from such comparies - for example. Full inclusion of underlying earnings from another class of holdings, companies owned 20%% lo owner's Statement of Earnings. Unlike the over-50% category, all items of revenue and expense are Wesco Financial, controlled by Berkshire but only 48% owned — are included via a one-line entry in the Corporation B. one-third of T's earnings: whether or not distributed by B. will end up in At earnings omitter: just the proportional share of net income is included. Thus, if Corporation A owns one-third of purchase price adjustments, the explanation of which we will save for a later day. (We know you can There are some modifications. both in this and the over-50% category, for intercorporate taxes and hardly wait.) securities. In these cases, accounting rules dictate that the owning companies include in their earnings Finally come hoidings representing less than 20% ownership of another corporation's voting only dividends received from such holdings. Undistributed earnings are ignored. Thus. should we own relatively minor taxes on intercorporate dividends) either (a) S1 million if X declared the full $10 10% of Corporation X with earnings of $10 million in 1980. we would report in our carnings (ignoring million in dividends; (b) $500,000 if X paid oat 50%. or S5 million. in dividends: or (c) zero if X reinvested all earnings. concentration of resources in the insurance field produces a corresponding concentration of its assets in We impose this short - and over-simplified - course in accounting upon you because Berkshire's companies in that third (less than 20% owned) category. Many of these companies pay out relatively small proportions of their carnings in dividends. This means that only a small proportion of their operatin, carnings reflect only the dividends received from such companies, our economic well-being is current earning power is recorded in our own current operating earnings. But, while our reported determined by their earnings, not their dividends. insurance business has prospered and as securities markets have presented particulariy attractive Our holdings in this third category of companies have increased dramatically in recent fears as our earnings experienced by those partially-owne companies, has produced an unusual result; the part of opportunities in the common stock area. The large increase in such holdings. plus the growth of "our" carnings that these companies retained fist year (the part not paid to us in dividends) exceeded the total reported annual operating earnings of Berkshire Hathaway: Thus, conventional accounting only 2

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corporate world such a result is quite rare; in our case it is likely to be recurring. allows less than half of our earnings "iceberg" to appear above the surface, in plain view. Within the principies, particularly when those principles must be applied in a world of high and uncertain rates of Our own analysis of earnings reality differs somewhat from generally accepted accounting problems are monumental.) We have owned 100% of businesses whose reported earnings were not inflation. (But it's much easier to criticize than to improve such accounting rules. The inherent worth close to 100 cents on the dollar to us even though, in an accounting sense, we totally controlled their disposition. (The prospect of earning anything close to a market return on capital.) We have also owned smail fractions of deterioration in the value of ussets already in place would occur. But those reinvested carnings had no businesses witb extraordinary reinvestment possibilities whose retained earnings had an economic: value to us far in excess of 100 cents on the dollar. 50%, 20% or 1% cj the businesses ir. which they reside. Rather, the valee of those retained earnings is The value to Berkshire Hathoway of retained earnings is not determined by whether we orn 100%. usage. This is true whether we determine the usage. or whether managers we did determined by the use to which they are put and the subsequent level of earnings produced by that not hire - but did affected by the inclusion or non-inclusion of those retained earnings in our own reporled operating elect to join — determine that usage. (It's the act that counts, not the actors.) And the value is in no way financial statements. we still own part of the tree. earnings. If a tree grows in a forest partially owned by as, but we don't record the growth in our not get accounting credit put to good use in B 10%-owned company by a management we did not Our view, we warn you. is non-conventional. But we would rather have earnings for which we did potential by another management - even if we are that management. personally hire. than have earnings for which we did get credit put into projects of more dubious with (We can't resist pausing here for a short commercial. One usage of retained earnings we often greet repurchase of their own shares. special enthusiasm when practiced by companies in which we have an investment interest is for far less than intrinsic value, what more certain or more profitable utilization of capital can there be of corporate acquisition activity almost guarantees the payment of a full - frequently more than full — than significant enlargement of the interests of all owners at that bargain price? The competitive nature security markets often allows finely-run companies the opportunity to purchase portions of their own price when a company buys the entire ownership of another enterprise. But the auction nature of businesses at a negotiated acquisition of another enterprise.) price under 50% of that needed to acquire the same earning power through the Long-Term Corporate Results to shareholders' equity with securities valued at cost. Our long-term yardstick oi pe-formance: however. As we have noted, we evaluate single-year corporate performance by comparing operating earnings equity that considerably exceeds the average of our yeariy returns. The major factor causing this includes all capital gains or losses, realized or unrealized. We continue to achieve a long-term return on earlier have been translated into gains in market value. pleasant result is s simple one: the retained carnings of those non-controlled holdings we discussed Of course. this translation of retained earnings into market price appreciation is highly uneven (it goes in reverso some years). unpredictable as to timing. dollar-for-dollar basis. And a silly purchase price for a block of stock in a corporation can negate the and unlikely to materialize on a precise some long-term market recognition of the accumulation of retained earnings almost certainly will occur. effects of a decade of earnings retention be that corporation. But when purchase prices are sensible. Periodi: lly you even will receive some fros'ing on the cake, with market appreciation far exceeding post-py chase retained earnings. share with insurance-held equities valued at market has increased from $19.46 to S400.80, or 20.5*% In the sixteen years since present management assumed responsibility for Berkshire. book value per

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clearly shows that a reasonably competitive corporate batting average can be achieved in spite of a lot of record was achieved despite many mistakes. The list is too painful and lengthy to detail here. But it managerial strikeouts. Our insurance coinpanies will continue to make large investments in well-run. favorably-situated. non-controlled companies that very often will pay out in dividends only small proportions of their returns derived annually from reported operating earnings. Our confidence in this belief can easily be earnings. Following this policy: we would expect our long-term returns to continue to exceed the our reported operating earnings would rise immediately by over S30 million annually. Such a shift quantified: if we were to sell the equities that we hold and replace them with long-term tax-free bonds. tempts us not at all. So much for the good news. Results for Owners variable that determines whether there are any reai earnings for you. the owner. For only gains in Unfortunately: earnings reported in corporate financial statements are no longer the dominant an investment: (b) receive dividends which, after tax. buy two hamburgers; and (c) receive, upon sale of purchasing power represent real earnings on investment. If you (a) forego ten hamburgers to purchase from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won't your holdings. after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income eat richer. least if measured by the criterion of a positive real investment return to owners. This "hurdle rate" — High rates of inflation create & tax on capital that makes much corporate investment unwise - at the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners — has increased dramatically in recent years. The average tax-paying invesior is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil. consistently to do) and distributing it all to individuals in the 50% bracket is chewing up their real For example. in a world of 12% inflation a business earning 20% on equity (which very few manage capital. not enhancing it. (Half of the 20% will go for income tax: the remaining 10% leaves the owners no spent pena here minery ran caring on tip rep wat all t per cent. corporate return into a negative owner return. (Even if there were 90% personal income tax rates on both Explicit income taxes alone, unaccompanied by any implicit inflation fax, never can turn a positive dividends and capital gains. some real income would be left for the owner at a zero inflation rate.) But the inflation tax is not limited by reported income. Inflation rates not far from those recently experienced can turn the level of positive returns achieved by a majority of corporations into negative reached 16%. owners of the 60% plus of corporate Amer.ca earning less than this rate of return would returns for all owners. including those not required tr. pay explicit taxes. (For example. if inflation be realizing a negative real return - even if income taxes on dividends and capital gains were eliminated.) not real. income. Thus you pay income taxes on what would be deficits if returns to stockholders were Of course. the two forms of taxation co-exist and interact since explicit taxes arc levied on nominal. measured in constant dollars. distinguished from tax-free entities such as pension funds. eleemosynary institutions. etc.) should Al present inflation rates. we believe individual owners in medium or high tax brackets (as expect no real long-term return from the average American corporation, even though these individuals corporations is fully offset by the combination of the implicit tax on capital levied by inflation and the reinvest the entire after-tax proceeds from ail dividends they receive. The average return on equity of explicit taxes levied boin on dividends and gains in value produced by retained earnings. year. too.) Inflation does not improve our return on equity. As we said last year. Berkshire has no corporate solution to the problem. (We'll say it again next

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important exceptions) of corporate capital is not even partially indexed. Of course. earnings and Indexing is the insulation that all seek against inflation. But the great bulk (although there are instead of paid as dividends. But that would be true without inflation. A thrifty wage earner. likewise. dividends per share usually will rise if significant earnings are "saved" by a corporation: i.e.. reinvested were willing to take only half of his paycheck in cash (his wage "dividend") and consistently add the could achieve regular annual increases in his total income without ever getting a pay increase — if he stockholder in a high-saving corporation whose annual dividend rate increases while its rate of return other half (his "retained earnings") to a savings account. Neither this high-saving wage earner nor the on equity remains flat is truly indexed. increase in proportion to the increase in the price level without any need for the business to add to For capital to be truly indexed. return on equity must rise. i.e.. business earnings consistently must capital - including working capital - employed. (increased carnings produced by increased investment don't count.) Only a few businesses come close to exhibiting this ability. And Berkshire Hathaway isn't one of them. which has the incidental effect of minimizing the current imposition of explicit laxes on our owners. We, of course. have a corporate policy of reinvesting earnings for growth. diversity and strength. to transfer your investment in Berkshire into another form of investment, or into consumption, you also However, on a day-by-day basis. you will be subjected to the implicit inflation tax, and when you wish will face oxplicit taxes. Sources of Earnings Blue Chip Stamps, which in turn owns 80% of Wesco Financial Corporation. The table shows aggregate The table below shows the sources of Berkshire's reported earnings. Berkshire owns about 60% of significant capital gains and losses attributable to any of the business entities are aggregated in the earnings of the various business entities. as well as Berkshire's share of those earnings. All of the realized securities gains figure at the bottom of the table, and are not included in operating earnings. respect it differs from the presentation in our audited financial statements that includes this item in the Our calculation of operating earnings also excludes the gain from sale of Mutual's branch offices. In this calculation of "Earnings Before Realized Investmen! Gain". Total Earnings Before income Taxes Not Earings After lax Berkshim Share Berkshire Share (in thousands of dollars) $85.945 1980 $68.632 1979 1980 1979 1980 1979 Total Earnings - all entities $70.146 $56,427 $53.122 S42.817 Earnings from Operations: Insurance Group: I inderwriting .. Berkshire-Maurioec Textiles Nat Investment Income $ 6.738 30,939 S 3.742 24.224 $ 6,737 1.723 30.927 $ 3.741 12.785 2.775 2,440 (508) 24.216 $ 3.637 25,607 $ 2.214 See's Candies. Associated Retail Stores 2.440 (508) 1.723 2.775 202 20,106 (2.744) 7.598 1.212 1.169 1,280 848 Blue Chip Stamps - Parent Buffalo Evening News (2.805) 15.031 (4.517) 8.958 Wesco Financial - Parent Illinois National Bank 5.324 7.699 2.397 (1.672) 2.413 5,747 4.588 5,614 1.425 3,060 (816) (1.333) Interest on Debt Precision Steel Mutual Savings and Loan 5.814 2,916 5,200 10.447 1,392 1.01:38 4,731 1.480 4,751 1.044 5.027 2.833 (8.248) 3,254 2,775 1.352 1,974 Other (12,230) 1.342 (9,390) (5.860} 656 1.540 49936 (4.809) 1.253 (2,900) Total Earnings from 2.170 753 Mutual Savings and Loan — Operations $66.361 $57.984 $54.389 $46.813 $41.922 $35.988 Realized Securities Gain sale of branches 13.711 5.873 S85.945 10.648 12.954 2,803 556.427 9.614 9.907 1,293 6.829 Total Earnings -- all entities S68.632 S20.146 553.122 S42.817 5

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both companies, in which they describe 1980 operations. We recommend a careful reading, and suggest pages 40 to 53 of this report we have reproduced the narrative reports of the principal executives of Blue Chip Stamps and Wesco are public companies with reporting requirements of their own. Cn that you particularly note the superb job done by Louie Vincenti and Charlie Munger in repositioning Mutual Savings and Loan. A copy of the full annual report of either company will be mailed to any Berkshire shareholder upon request to Mr. Robert H. Bird for Blue Chip Stamps. 5801 South Fastern 315 East Colorado Boulevard, Pasadena. California 91109. Avenue. Los Angeles. California 90040, or to Mrs. Bette Deckard for Wesco Financial Corporation. important as the reported operating earnings detailed in the preceding table. The distributed portion, of As indicated easler. undistributed earnings in companies we do not control are now fully as course, finds its way into the table primarily through the net inzestment income section of Insurance Group earnings. We show below Berkshire's proportional holdings in those non-controlled businesses for which only distributed earnings (dividends) are included in our own earnings. No. of Shares Cost Market (000s omilted) 464,317 (a) 434,550 (a) Affiliated Publications. Inc. .. S 2,821 $ 12.222 475.217 (b) (eveland-Cliffs iron Company .. Aluminum Company of America 12.942 25.577 15.894 27.685 7.200.000 (a) 1.983.812 (b) General Foods. Inc. ........ 62.507 47,138 105.300 59,889 2.015.000 (a) CHICO Corporation... 711,180 (al Interpublic Group of Companies, Inc. Handy & Harman ......... 21,825 4.531 22,135 58.435 1.211.834 (a) 282,500 (a) Media General..…........ Kaiser Aluminum & Chemical Corp. 20,629 4,545 27.569 881,500 (a) 247.039 (b) National Decoit Corporation. 5,930 6.299 8,334 391,400 (a) National Student Marketing. 5,128 3.709 9,981 5.895 370,04 (r) Picture Wim Tramar Ogilvy & Mather Int'l. Inc. 12.144 8,70% 16,489 1.250.525 (b) 245,700 (b) R. J. Reynolds Industries.. 32.062 45.177 :.2283 151.104 (b] SAFECO Corporation..... 1.868,600 (a) The Times Mirror Company 10.628 4,447 42.277 6,271 667,124 (b) The Washington Post Company .. F. W. Woolworth Company ... 13,583 16.511 $298.848 $497.591 All Other Common Stockholdings 26.313 32,096 Total Common Stocks $325.161 S529.687 (b) Blue Chip andior Wesco own shares of those companies. All numbers represent Berkshire's net interest in the (a) All owned by Berkshire or its insurance subsidiaries. larger gross holdings of the group. differently among industries than would superficially seem the case. For example, our insurance From this table, you can see that our sources of underlying earning power are distributed far subsidiaries own approximately 3% of Kaiser Aluminum, and 14% of Alcoa. Our share of the 1980 earnings of those companies amounts to about $13 million. (If translated dollar for dollar into a significant, but not precisely determinable, amount of tax; perhaps 25% would be a fair assumption.) combination of eventual market value gain and dividends. this figure would have to be reduced by a operating businesses we control and on which we report in more detail. If we maintain our holdings. Thus. we have a much larger economic interest in the aluminum business than in practically any of the than it will by direct operating decisions we make concerning most companies over which we exercise our long-term performance will be more affected by the future economics of the aluminum industry managerial control.

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GEICO Corp. equity interest. Normally: an interest of this magnitude (over 20%) would qualify as an Our largest non-controlled holding is 7.2 million. shares of GEICO Corp.. equal to aboul a 33% "investee" we purchased our GEICO stock pursuant to special orders of the District of Columhia and New York holding and would require us to reflect a proportionate share of GEICO's earnings in our own. However. Insurance Departments, which required that the right to voir the stock be placed with an independent party. Absent the vote. our 33% interest does not qualify for investee treaiment. (Pinkerton's is a similar operating earnings figure has nothing to do with their economic value to us, or to you as owners of Of course. whether or not the undistributed earnings of GEICO are picked up annually in our Berkshire. The value of these retained carrings will be determined by the skill with which they are put to use by GEICO management. the coupling of a very important and very hard to duplicate business advantage with an extraordinary On this score. we simply couldn't feel better. GEICO represents the beet of all investment worlds — management whose skills in operations are matched by skills in capital allocation. and most of the remainder invested in 1980. Al the present dividend rate, our reported earnings from As you can see, our holdings cost us S47 million, with about half of this amount invested in 1976 GEICO amount to a little over $3 million annually. But we estimate our share of its earning power is on the order of $20 million annually. Thus. undistributed earnings applicable to this holding alone may $17 million of earnings applicable to our ownership as we would if that sum were in our own hanus. In We should emphasize that we feel as comfortable with GEICO management retaining an estimated just the last two years GEICO. through repurchases of its own stock. has reduced the share equivalents i? in a business that simply can't be replicated. The owners could not have been better served. has outstanding from 34.2 million to 21.d million, dramatically enhancing the interests of shareholders operation of "turnaround" businesses. Literally hundreds of turnaround possibilities in dozens of We have written in past reports about the disappointments that usually result from purchase and tracked performance against expectations. Our conclusion is that, with few excoptions, whear a industries have been described to us over the years and, either as participants or as observers, we have management with a reputation for brilliance tackles a business with a reputation for poor fundamental in 1975. It certataly is true that managerial brilliance was needed for its resuscitation, and that Jack GEICO may appear to be an exception. having been turned around from the very edge of bankruptcy Byrne. upon arrival in that year, supplied that ingredient in abundance. hat previously had produced staggering success - was still intact within the company. althougl ut it giso is true that the fundamental business advantage that GEICO had enjoyed — an arivantag submerged in a sea of financial and operating troubles. populated largely by companies whose marketing structures restricted adaptation. Run as designed, it GEICO was designed to be the low-cost rperation in an enormous marketplace (auto insurance) been run in just this manner. Its troubles in the mid-70s were not produced by any diminution or could offer unusual value to its customers while earning unusual returns for itself. For decades it had following the salad oil scandal. Both were one-of-a-kind companies. temporarily reeling from the effects GEICO's problems at that time put it in a position analogous to that of American Express in 1964 of a fiscal blow that did not destroy their exceptional underlying economics. The GEICO and American Express situations. extraordinary business franchises with a localized excisable cancer (needing. to be sure. a skilled surgeon), should be distinguished from the true "turnaround" situation in which the managers expect - and need — to pull off a corporate Pygmalion.

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million. To buy a similar $20 million of earning power in a business with firsi-class economic Whatever the appellation, we are delighted with our GEICO holding which, as noted. cost us $47 industries) if it had to be accomplished through negotiated purchase of an entire company. A 100% characteristics and ! tight prospects would cost a minimum of $200 million (much more in some interest of that kind gives the owner the options of leveraging the purchase. changing managements. directing cash flow, and selling the business. It may also provide some excitement around corporate headquarters (less frequently mentionedi. many Jack Byrnes in the manageriai world. or GEICOs in the business world. What could be better than buying into a partnership with both of thin? Irisurance Industry Conditions the combined ratio (see definition on page 37) rising from 100.6 in 1979 to an estimated 103.5 in 1980. It The insurance industry's underwriting picture continues to unfold about as we anticipated, with is virtually certain that this trend will continue and that industry underwriting losses will mount. excellent analysis of property-casualty competitive dynamics done by Barbara Stewart of Chubb Corp. in significantly and progressiveiy: in 1981 and 1982. To understand why. we recommend that you read the an October 1980 paper. (Chubb's annual report consistently presents the nost insightful. candid and Stewart's analysis may not be cheerful, but we think it is very likely to be accurate. well written discussion of industry conditions: you should get on the company's mailing list.) Mrs. intensify the coming industry agony. It is not oni! likely to keep many insurers scrambling o: business And. unfortunately, a largely unreported but particularly pernicious problem may well prolong and when underwriting losses hit record levels — it is likely to cause them at such a time to redouble their efforts. allows companies to carry bonds at amortized cost. egardless of market value. Many insurers own This problem arises from the decline in bond prices and the insurance accounting convention that tong-term bonds that. al amortized cost, amount to twp to three times net worth. If the level is three tires, of course. a one-third shrink from cost in bond prices - if it were to be recognized on the books

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out net worth. And shrink they have. Some of the largest and best known property-casualty companies currently find themselves with nominal, or even negative, net worth when conceivably even fuliy, restoring the integrity of stated net worth. Or they could fall further. (We believe bond holdings are valued at market. Of course their bonds could rise in price, thereby partially. or that short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.) portfolio falls sufficiently in price to reduce net worth significantly, but that an even greater decline in It might strike some as strange that an insurance company's survival is threatened when its stock bond prices produces no reaction al all. The industry would respond by pointing out that, no matter what the current price. the bonds will be paid in full at maturity, thereby eventually eliminating any interim price decline. It may take twenty, thirty, or even forty years, this argument says, but, as long as the bonds don't have to be sold. in the end they'll all be worth face value. Of coursc. if they are sold — immediately. And, just as promptly, published net worth must be adjusted downward by the amount of even if they are replaced with similar bonds offering better relative value - the loss must be booked the loss. example. when large underwriting losses are in prospect, it may make excellent business logic for some Under such circumstances, a great many investment options disappear, perhaps for decades. For insurers to shift from tax-exempt bonds into taxable bonds. Unwillingness to recognize major bond the immobilization of investment intellect. For the source of funds to purchase and hold those bonds is But the full implications flowing from massive unrealized bond losses are far more serious than just a pool of money derived from policyholders and claimants (with changing faces) - money which, in 8

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5 effect, is ter porarily on deposit with the insurer. As long as this pool retains its size, no bonds must be sold. if the pool of funds shrinks - which it will if the volume of business declines significantly — assets must be sold to pay off the liabilities. And if those assets consist of bonds with big unrealized losses, such losses will rapidly become realized. derimating net worth in the process. which there are now many! and also faced with inadequate rate levels that are sure to deteriorate further Thus. an insurance company with a bond market value shrinkage approaching stated net worth (of has two options. One option for management is to tell the underwriters to keep pricing according to the exposure involved — "be sure to get a dollar of premium for every dollar of expense cost plus expectable loss cost". renewable annually, many policies presently on the books will be lost to competitors in rather short The consequences of this directive are predictable: (a) with most business both price sensitive and liabilities (unearned premiums and claims payable): (c) asse's (bonds) must be sold to match the order; (b) as premium volume shrinks significantly, there will be a lagged but corresponding decrease in partially recognized (depending upon the extent of such sales) in the insurer's published finan- decrease in liabilties: and (d) the formerly unrecognized disappearance of net worth will beconne cial statements. some companies at (c) •vould be to sell either stocks that are already carried at market values or recently Variations of this depressing sequence involve a smaller penalty to stated net worth. The reaction of purchased bonds involving less severe losses. This ostrich-like behavior — selling the better assets and keeping the biggest losers — while less painful in the short term. is unlikely to be a winner in the long term. whopping prospective underwriting losses, thereby maintaining the present levels of premiums, assets The second option is much simpler: just keep writin:, business regardless of rate leveis and and liabilities - and thin pray for a better day. either for underwriting or for bond prices. There is prospective underwriting losses in order to obtain funds to invest at current high interest rates. This much criticisin in the trade press of "cash flow" underwriting: i.e.. writing business regerdless of second option night properiy be termed "asset maintenance" underwriting — the acceptance of terrible business just to keep the assets you now bayse insurers feel compelled to choose that second option, there will be no better day for anderwriting. For if Of course you know which option will be selected. And it also is clear that as long as many large insurers will have to come close to meeting those prices. Right behind having financial problems much of the industry feels it must maintain premium volume levels regardless of price adequacy, all yourself. the next worst plight is to have a large group of competitors with financial problems that they can defer by a "seli-at-any-price" policy. including public reaction, institutional pride. or protection of stated net worth — to sell bonds at price We mentioned earlier that companies that were unwilling - for any of a number of reasons. decade or longer. But, as noted, that's only half of the problem. Companies that hove made extensive: levels forcing recognition of major losses might find themselves frozen in investment posture for a commitments to iong-term bonds may have lost. for a considerable period of lime, not ouly many of their investment options, but many of their underwriting options as well. insurers at amortized cost. is the strongest relative to premium volume among Our own position in this respect is satisfactory. We believe our net worth, valuing bonds of all all large property-casualty stockholder-owned groups. When bonds are valued at market, our relative strength becomes far more dramatic. (But lest we get too puffed up. we remind ourselves that our asset and liability maturities still are far more mismatched than we would wish and that we, too. lost important sums in bonds because your Chairman was talking when he should have been acting.) most sense during ihe prospective extended period of inadequate pricing. But troubles for the industry Our abundant capital and investment flexiblity will enable us to do whatever we think makes the now enveloping the entire property-casualty insurance industry. It just gives us more staying power and mean troubles for us. Our financial strength doesn't remove us from the hostile pricing enviroament more options.

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Insurance Operation- Miller and Bill Lyons, outdid themselves in 1980. While volume was fat, underwriting margins relative The National Indemnity managers, led by Phil Liesche with the usual able assistance of Roland to the industry were at an all-time high. We expect decreased volume from this operation in 1981. But suffer. We enormously admire ihe National Indemnity underwriting discipline —- embedded from origin its managers will hear no complaints from corporate headquarters, nor will employment or salaries by the founder. Jack Ringwalt - and know that this discipline, if suspended. probably could not be fully regained. member of puto policies with volume from less competitive lines, primarily small-premium general John Seward at Home and Auto continues to make good progress in replacing a diminishing liability: Operations are being slowly expanded. both geographically and by product line, as warranted by underwriting results. Werse yet. it has the potential for magnifying such excesses. Reinsurance is characterized by extreme The reinsurance business confinues to reflect the excesses and problems of the primary writers. ease of entry, large premium payments in advance. and much-delayed loss reports and loss payments. Initially, the morning mail brings jots of cash and few claims. This state of affairs can produce a blissful. almost euphoric. feeling akin to that experienced by an innocent upon receipt of his first credit cari. high interest rates. is transforming the reinsurance market into "amateur night". Without a super The magnetic lure of such cash-gene ting characteristics, currertly enhanced by the presener of catastrophe, industry underwriting will be poor in the next few years. If we experience such a catastrophe, there could be a bloodbath with some companies not able to live up to contractual investment income included, have been reasonably profitable. We will retain an active reinsurance Yeung continues to do a first-rlass job for us in this business. Results. with presence but, for the foreseeable future, we expect no premium growth from this activity. an outstanding job but our underwriting record elsewhere is considerably below average. Our poorest We continue to have serious problems in the Homestate operatien. Floyd Taylor in Kansas has done _performer bes boon losurance Company of lowa, at which large losses have been sustained annually since its founding in 1973. Late in the fall we abandoned underwriting in that state. and have merged needs to be done in order to realize it. the corvoany into Cornhusker Casualty. There is potential in the homestate concept, but mur, work of National Indemnity. Dan Grossman. who originally brought Frank to us. stepped in immediately after Frank's death to continue that operation, which now utilizes Redwood Fire and Casualty, another continues its ouistanding record. Year after year Milt. like Phil Liesche, runs an underwriting opi ration Our major Workers Compensation operation, Cypress Insurance Company, run by Milt Thornton. that far outpaces his competition. In the industry he is admired and copied, but het matched. underwriting result. We expect underwriting experience somewhat superior to that of the industry - Overell. we look for a significan! decline in insurance volume in 1981 along with a poorer but, of course, so does most of the industry. There will be some disappointments. Textile a Retail Operations Mills have been terminated, reluctantlv but necessarily. Some equipment was transfirred 1o New During the past year we have cut back the scope of our textile business. Oporations at Warmbec in! not facing the realities of this situation sooner. Bedford but most has been sold. or will be, along with real estate. Your Chairman made a costly make some high-volume lines in which product differentiation was insignificant. Even assuming: ever thing A: New Bedford we have reduced the number of looms operated by about one-third, abandoing 10

[PAGE 12]

investment. And. over a full industry cycle. losses were the most likely result. went right - which it seldom did - these lines could not generate adequate returns related to division, each free to do business independent of the other. Thus, distribution strengths and mill Our remaining textile operation. still sizable. has been divided into a manufacturing and a sales capabilities will not be wedded to cach other. We have more than doubled capacity in our most indicate another tough year in textiles. but with substantially less capital employed in the operation. profitable textile segment through a recent purchase of used 130-inch Saurer looms. Current conditions Associated's earnings continued excellent — and those earnings all were translated into cash. On March Ben Rosner's record at Associated Retail Stores continues to amaze us. In a poor retailing year. 7. 1981 Associated will celebrate its 50th birthday. Ben has run the business (along with Leo Simon, his partner from 1931 io 1966) in each of those fifty years. Disposition of Illinois National Bank and Trust of Rockford (which owns 97.7% of Illinois National Bank) for a like number of shares of Berkshire Hathaway Inc. On December 31, 1980 we completed the exchange of 41.086 shares of Rockford Bancorp Inc. in the Bank (except for me; I was permitted 80% of my proportional share). They were thus guaranteed Our method of exchange allowed all Berkshire shareholders to maintain their proportional interest spinoff approach. Twenty-four shareholders (of our approximate 1300) chose this proportional an ownership position identical to that they would have attained had we followed a more conventional exchange option. thereby increasing their ownership in the Bank and decrcasing their proportional ownership in We also allowed overexchanges. and thirty-nine additional shareholders accepted this option. 1200-plus holders of Berkshire who elecled not to part with any Berkshire shores at all. As the these thirty-nine holders was just slightly less than the number left available by the remaining rectived from my basic exchange allotment (80% of nermal, gavo me a slightly reduced proportional exchanger of last resort. I took the small balance (3% of Bancorp s stock). These shares, added to shares I interest in the Bank and a slightly enlarged proportional interest in Berkshire. uncomplicated helding company owned by 55 shareholders. And all of those shareholders will have Management of the Bank is pleased with the outcome. Bancorp will operate as an inexpensive and become Bancorp owners through a conscious affirmative decision. Financing In August we sold $€0 million of 12¾% notes due August 1. 2005, with a sinking fund to begin in 1991. Bill Fisher, and Chiles, Heider & Company. Inc., represented by Charlie Heider, did an absolutely The managing underwriters. Donaldson, Lufkin & Jenrette Securities Corporation, represerted by Unlike most businesses. Berkshire did not finance because of any specific immediate needs. Rather, to have plenty of financial firepower. inflation intensifies, more and more companies find that they must spend ell funds they generate Our acquisition preferences run toward businesses that generate cash. not those that consume it. As internally just to maintain their existing physical volume of business. There is a certain mirage-like quality to such operations. However attractive the earnings numbers. we remain leery of businesses that never seem able to convert such pretty numbers into no-strings-attached cash. 11

[PAGE 13]

acquisitions; only a handful would have been of interest to us.) And logical expansion of our present Businesses meeting our standards are not easy to find. (Each year we read of hundreds of corporate operations is not easy to impiement. Bat we"ll continue to utilize both avenues in our attempts to further size and properly structured. and with an abandance of capital strength. Our return on equity is Under all circumstances we plan to operate with plenty of liquidity, with debt that is moderate in penalized somewhat by this conservative approach. but it is the only one with which we

• °

4 • a friend, banker and citizen, he was unsurpassed. Gene Abegg. founder of our long-owned bank in Rockford, died on july 2. 1980 at the age of 82. As to run it as an employee rather than as an owner. Before the purchase the seller knows the business You learn a great deal about a person when yun purchase a business from him and he then stays on intimately, whereas you start from scratch. The seller has dozens of opportunities to mislead the buyer

• through omissions, ambiguities, and misdirection. After the check has changed hands subtle (and

courtship-marriage sequence, disappointments are not infrequent. not so subtle) changes of attitude can occur and implicit understandings can evaporate. As in the within him. At the outset of negotiations, he laid all negative factors face up on the table; on the ether From the time we first met. Gene shot straight 100% of the time - the only behavior pattern he had hand. for years after the transaction was completed he would tell me periodically of some previously undiscussed items of value that had come with our purchase. harder for us than be had for himself. He never delayed reporting a problem for a minute, but problems Though he was already 71 years of age when he sold us the Bank. Gene subsequently worked other people's money. Though this fiduciary attitude was always dominant, his superb managerial skills 1933, had enough cash on the premises to pay all depositors in full? Gene never forgot he was handling enabled the Bank to regularly achieve the top position nationally in proîtability. lifetime of cur country. George Mead, a wealthy industrialist, brought him in from Chicago to open a Gene was in charge of the Illinois National for close to fifty years — almost one-quarter of the new bank after a number of other banks in Rockford had failed. Mr. Mead put up the moncy and Gene ran the show. His talent for leadership soon put its stamp on virtually every major civic activity cases this help was financial; in all cases it involved much wisdom, empathy and friendship. He always Dozens of Rockford citizens have told me over the years of help Gene extended to them. In some offered the same to me. Because of our respective ages and positions I was sometimes the junior partner. sometimes the senior. Whichever the relationship, it always was a special one, and I miss it. Warren E. Buffett February 27, 1981 Chairman of the Board 12

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Berkshire Hathaway Inc. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) ASSETS Jan. 3. 1981 Cash 9,993 Der. 29.1972 $ 14.924 investments, other than investments in affiliates Bonds at amortized cost (market valur: lan. 5. 1981 -- $159,512: Marketable equity spcurities (Notes 2 and 3) Drc.. 29. 1979 -- $171.466) 187,802 Invested cash, U.S. Treasury bills and other short-term investmen's. 525.9-7 411,358 185.564 at cost which approximates market 505-1 18.172 Total investments, other than affiliatrs 761.295 615.034 Investments in affiliates: The Illinois National Bank & Trust Co. of Rockford (Nose 4) Other unconsolidated subsidiaries. Wesco Financial Corporation (Note 5) 63.0-0 28,785 56,750 1.187 1.377 Accounts receivable from customers, agents and others (Not: 6) Total investments in affiliates 154.227 49.861 86.912 Real estate, equipment, furniture and leasehold improvements, al Inventories (Notr 7) 23.802 52.231 25.704 Deferred insurance premium acquisition costs cost less allowance for depreciation and amortization (Note B) 14,163 51.481 13.652 = 1.743 Other assets 32.756 33.155 51.010.581 $ 892.201 Losses and loss adjustment expenses LIABILITIES AND STOCKHOLDERS EQUITY $ 199.128 73,281 $ 197,697 Liability for unredeemed trading stamps Unearned premiums 73002 64,053 67.524 73.604 Current income taxes Accounts payable, accruals and other liabilities 13.329 7.91" 38,792 10.411 Term debt payable (Note 9) Deferred income taxes 10-1.3--2 52.079 55.099 Mincrity stareholders" interests 615.367 59.051 52.092 547.303 Stockholders' equity: Common stock of $5 par value. Authorized 1.250.000 shares: Capital in excess of par value issued 1.214.283 shares. 3.517 6.071 6.071 3.517 Unrealized appreciation of marketable equity securities, net of Rotained earnings (Notes ! and 10) . provision for deemed applicable income taxes. ... 291.159 135,010 238.332 108.913 436.052 356.833 Less common shares; Dec. 20. 1979 - 187,138 shares) ... lock in treasury, at cost fan. 3. 1981

• 228,224

40.838 11.871 Total stockholders' equity... 395,214 344.962 Commitment and contingent liability (Notes 13 and 15) 51.010.581 892.265 See ercompanying Notes to Consolidated Financial Statements 13

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BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED SUBSIDIARIES ¡dollars in thousands except per shar amounisi Saturday nearest December 31. Fiscal Year Ended 1980 1979* 1978* Income items: Insurance premiuons earned $183.187 259.200 S181.949 38.160 247.952 $186.073 Net sales and service revenues 30.440 235.576 Interest and dividend income.. 24.293 Equity in earnings excluding realized investrent gain of Visco Financial Corporation (Note 5) . 492.157 8./90- 469.125 8.78- 453.359 7.+17 Ces! and expense items: Insurance losses and loss adjustment expenses . 160.261 118,230 120.337 60.219 158,710 132.263 Cost or roducts and services sold 84.188 57.870 151.52: Ins. : underwriting expenses 9.185 79.839 50.01v Sellin general and administrative expenses 5,729 71.172 Interest and financing, costs. 5.058 432.083 422.485 410.824 Earnings from continding operations including minorit! interest in consolidated subsidiaries. before applicable income taxes and realized Income taxes appliceble to above investment gain 60.074 13.943 45.010 42.535 46.131 9.796 2.647 36.844 10.735 5.883 31,800 Minority interest applicable to above 6.058 Karaings from continning operations before Equity in earnings before securities losses tentined investmont gain 38.484 30.961 25.742 of unconsolidated banking subsidiary: divested as of Dec. 31. 1980 (Note 4) 4.731 4.960 4.242 Realized investment gain — continuing operations. Earnings before realized investment gain • 43.215 35.921 29.984 Equity in securities losses of unconsolidated banking net (Now 12) 10.790 6.896 9.258 subsidiary: divested as of Dec. 31. 1980 (Note 4) . (883) Not earnings $ 53.122 $ 42.817 S 39.242 Averaxe shares outstanding 1.027.145*• 1.027.145 1.028.684 Per share: Earnings from continuing operations before Earnings before realized investment gain realized investment gain $ 37.47 42.07 30.14 Net earnings 51.72 41.68 34.97 25.02 38.15 29.15 • 1978 and 1979 restated as the result of divestiture at Dec. 3i. 1980 of banking subsidiary: See Note (4). •*Shares reacquired at Dec. 31. 1980, in bank divestiture transaction, are deemed nutstanding for the full year Ser accompanting Votes to Consolidated Financial Stotements 14

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BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) Capital in C'arealizre Balance at December 31. 1977 Par Value- Apportation": Reteined Tota S 52,171 S(11.297) Fornings Stockholders Brusty $156.273 S206.735 Net earnings 1978 39,242 39.242 Change in net unrealized appreciation 8.763 8.763 Treatary shares reacquired in 1978 Balance at December 30. 1978 6.071 3.517 60.934 (11.871) (574) 254.166 1574) 195.515 Net earnings 1979 42.817 42.817 Change in net unrealized Balance at December 29. 1979 appreciauon... 47.979 +7.979 6.071 3.517 :08.913 (11.871) 238,332 344,962 Net earnings 1980 33.122 53.122 Change in net unrealized appreciation. 26.097 26.097 Treasury shares reacquired in 1980 (28.967) Balance at January 3. 1981 S6.071 23.517 S135:010 S(40.838) $291.454 $395.21+ (28.967) •Common stock represents the aggregate par value of 1.214.283 issued shares of the Corpany's common stock. $5 par value per share. Issued shares include shares held a: Treasury stock. • Net unrealized appreciation represents the excess of carrying value of marketable equity securities over their • Treasury stock reflects the cost of racquired shares of the Company's issued common stock. AT December 31. cost. less deemed applicable income taxes, adjusted for applicable minority interest, if any: 1977. 183.696 shares of the Company's issued common stock were held as Treasury stock, of which the Company held 133.105 shares, and insurance subuidiaries of the Company held 50.501 shares. In 1978 the Company acquired 3.532 shares. On December 31. 1980 the Company acquired 41.086 shares in an exchange shares of the Company's issued common stock were held as Treasury stock, of which 177.723 bares were held transaction whereby the Company divested of its banking subsidiary. See Note (4). Ai January 3. 1981. 228.224 by the Company and 50.501 shares were held by insurance subsidiaries of the Company. See accomponying Notes to Consolidoted Financial Statements. 15

[PAGE 17]

12 Berkshire Hathaway Inc. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION AND CONSOLIDATED SUBSIDIARIES (dollors in thousands) Saturday nearest December 31.._ Fiscal lear Ended 1980 1979 1978 Funds provided: From operations: Minority interest in earnings Net earnings 53,122 2,256 42.817 6.403 39.242 6.37: Charges (credits) to earnings not requiring (providing) funds: Earnings including minority interest 61.378 43.220 45.613 Increase in unpaid insurance losses and loss Equity in undistributed earnings of unconsolidated subsidiaries (6.473) (9.019) 16.712) Increase (decrease) in unearned insuranc adjustment expenses.... 1.431 16.827 4,236 11,409 Depreciation and amortization of property. piant "remiums (323) i2,240 Decrease (increase) in deferred insurance premium and equipment, including leasel:olds. 5.144 4.651 4,602 Decrease (increase) in accounts receivable acquisition costs 2.370 (511) (6.948) 194 (7.274) (2,994) Increase (decrease) in liability for income taxes Decrease (increase) in inventories 1.902 (2.675) 747 Increase: (decrease) in Hebrity for unredeemed trading stamps applicable to carnings (3.471) (861) (518) 4.809 692 6,366 Increase (decrease) in accounts payable. 3.952 (1.001) 623 Reduction in carrying value of unconsolidated Other. subsidiary net of income tax benchit 495 400 11.675 (574) 46.669 11.3391 4,055 Proceeds from issuance of debt. net of expense Funds provided from operations 59.992 65.433 60.895 92.282 4.791 Decrease in cash $130,356 4.931 $ $8.068 995 $ 60.895 Funds used: Repayment of debt ... Additions to property, plant and equipment, net of disposals 10.857 6,835 6.507 502 1.972 2.824 5,450 Dividends paid to minority stockholders. 2.233 520 4.891 S64 Purchase of treasury stock ... Purchase of shares of Blue Chip Stamps from minority 574 Cost of net purchases (sales) of investments: Bonds U.S. Treasury bills and short-term obligations 32.374 78.343 705 (42.884) 26.735 25.326 740 63.929 23.722 Marketable equity securities (100) 32.867 Unconsolidated subsidiaries 150) Net purchase of investments 112.162 47.680 01.765 Increase in cash $ 60.895 1,923 $130.356 $ 98.068 See accompanying Notes to Consolidated Financial Statements 16

[PAGE 18]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED SUBSIDIAKIES (dollars in thousands) January 3. :981 (1) Summary of Significant Accounting Policies and Practices The Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. ("Berkshire") and the accounts of all significant majority-owned subsidianes except the illinois National Bank & Trust Co. of Rockford ("Bank"). control of which was divested on December 31. 1980 (Note 4). Subsidiaries which are (1) whol!y-owned companies Group). textile products manufacturing. and apparel retailing. engaged in the business of propertyicasualty insurance (the Insurance (2) Blue Chip Stamps ("Blue ('hip"), a California corporation engaged directly in the promotional services (3) Blur Chip's wholly-owned subsidiaries, of which one. Buffaio Evening News (News) is engaged ir the business, approximately 60% oned by the Company and its wholly-owned subsidianes, and newspaper business and others of which are ‹ gaged in the candy besiness (See's). Berkshire's investment in the Bank was accounted to r by the equity method of accounting. Clue Chip owns approximately 80% of the oustanding capital stock of Wesco Financie! Corporation ("Wesco' ). Berkshire's beneficial ownership of Wesco represents slightly less than 50% of that company: accordingly. the the equiry method of accounting. investment in Wesco is accoited for in the accompanying Consolidated Pinancial Statements pursuaril fo Accounts of subsidiaries engaged in the property and casualty insurance business are maintained on the are maintained on the basis of a 52-53 week fiscal year ending with respect to December 31 The '980 basis of a calendar vear. Accounts of Berkshire, is featile and retailing subsidiaries. Blue Chip and lee's operatiens of the textile and apparel retailing businesses covered the 53 weeks ended Jangary 3. 1281 The of the News are maintained on ihe basis of a calendar year. 1980 opezations of Blue Chip and See's covered the 52 week period ended December 27. 1990. Accents (b) Investments in Securities, Other Than Affiliates Investments in bonds, including convertible bonds, are stated at amortized rost. Investments in marketable equity securities held by members of the Insurance Group are carried at market value. Investments in marketable equity securities held by Berkshire and by subsidiaries of Berkshire which are not members of the insurance Group are carried at the lower of aggregate cost or market. Blue Chip. at both December 27. 1980 and at December 29. 1979 held an investment in non-voting stork of trading market for this stock. Mid's principal assets ace equity securities of Pinkerton's. Inc. (PI). Blue Pinkerton Holding Corporation (PHC) which is reflected in other assets at its cost of $4.163. There is no securities. Blue Chip's interest in Pl. both direct and indirec: (thre gh PHC). represents a beneticia! Chip also holds non-voting -ecurities of Pl. the cost of which ($19.201) is included in marketabie equity ownership in the equity of Pl of approximately 35% at December 27, 1180 (34% "! December 23. 379). bu: because this interest is represented by non-voting stock. Blue Chip does not account for this interest to approximately 21% at January 3. 1981. taking into account the minority interest of Blue Chip which pursuant to the rquity method of accounting. Berkshire's economic interest in the equity of PI is reduced is outstanding. (c) Insurance Premiums Insurance premiums are recognized es revenues ratably over the terms of the policies. Uncaren preniums are computed on a monthly or laily pro rata basis and are stated afier deduction for reinsurance. placed with reinsurers in the amount of $2.140 at December 31. 1980 and $1.530 at December 31. 1979. Premium pursuant to statutory insurance accounting rules, charged against income when incurred. However for acquisition costs such as commissions. premium taxes and certain other underwriting expenses are. financial statement purposes. i portion of such cosis are deferred and charged agains. income as the related premiums are carner. Dividends to policyholders, primarily relating to workers' compensation coverages, are reflected in the accompanying staternents of earnings as a deduction from written and carned premiums: this reduction amounted to $2.405 for 1980, $2.221 for 1979 and S1.344 for 1978. 17

[PAGE 19]

14 Berkshire Hathaway inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (January 3, 1981) (dollars in thousands) (d) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses based on (1) aggregate case basis reported losses. and (3) estimates received from primary insurers v.ith respect to assumed reinsurance. estimates for losses reported, relating to direct premiums written. (2) estimates uf incurred but not to $4.742 at December 31. 1980 and $5.532 at December 31. 1979. Incurred losses and lors adjustment The resulting liability provision is reduced for amounts recoverable on account of reinsurance amounting accordance with statutory requirements: additional amcunts recuverable as salvage or on account of expenses are net of recoveries of salvage and subrogation collected or in process of collection in subrogation, relating principaliy to automobile physical damage covcrages, are not recognized as they are considered immaterial in the aggregate. (e) Stamp Service Accounting Blue Chip recognizes stamp revenues and related redemption costs upon issuance ci is trading stamps. A the future cost of redemption merchandise and service: ihe estimates are periodica..y evaluated. As of liability account for unredeemed trading stamps is maintained consisting of manegument's estimates of was decreased, and to the estimated redemption service cost. which was increased. The effect of th • i 980 December 27. 1980. the evaluation resulted in revisions to both the estimated rat? o: redemptica. which revisions was to increase Berkshire's 1980 net earnings by approximately $970 (94 cents per shar:). (f) Real Estate. Equipinent, Furniture and Leosehold Improvem nts These items of property (including significant betterments and renewals) are corried at cost depreciated orer calculate depreciation of new items of textile propertie, acquired after 1965. and selected new items their useful lives estimated at the date cí acquisition. The double-declining bilance rethod is used to acquired by other businesses: the straight-line method is applied for other items. Maintenance. repairs and renewals of a minor nature are generally charged to operations as incurred!. (g) Inventories Inventories are stated at cost, determined for Berkshire and for Blue Chip's newspaper subsidiary under the last-in, first-out ("L'FO") method. Inventories of other members consolidated are stated at the lower of cost or market. wilt. (ast determined under the first-in, first-out or average cost methods. (h) Income Taxes Berkshire and its eligible (over 80% owned domestic) subsidiaries tile a consolidated Foderal income tax included in the consolidated balance sheets for current Federal income taxes payable cr. ecoverable return. Blue Chip and its subsidiaries also file a consolidated Federal income tax return. Amounts include the direct or apportioned Federal taxes of the companies whose accounts are consolidated. Provision has been made for deferred taxes with respect to equity of Berkshire and its wholly-owned subsidiaries in undistributed earnings of Blue Chip. on the assumption that such earnings will eventualiy 1981 and $2.773 at December 29. 1979. be distributed. tuxable as dividend income. The cumulative amount so provided was Si.560 at January 3. Deferred or prepaid income taxes are recugnized in the accompanying consolidated financial stateinents time periods that differ from those in which they are included in the income tax returns filed for the with respect to certain items of income and deductions which are recognized in the finanial statements in companies. The principal such "timing difference." for which deferred income taxes of S6.515 st January (see note 1(c) above). Other assets include prepaid income taxes of Blue Chip amounting to $11.211 at 3. 1981 and S6.280 at December 29. 1979 are recognized. is deferred insurance premium acquisition. costs December 27. 1980 and $12.358 at December 29. 1979 primarily in recognition of timing differences with respect to stamp redemption expenses. The liability for deferred income taxes reflected in the consolidated balance sheets also includes $52.504 at January 3. 1981 and S42.355 at December 29. 1979. representing amounts computed at capital gain rates on the net excess of market value over cost of marketable equity securities held by members of the Insurance Group. 18

[PAGE 20]

15 Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cortinued) AND CONSOLIDATED SUBSIDIARIES Idollars in thousands! January 3. 1961 (2) Investments in Marketable Equity Securities securities is as follows: A summary of the aggregate cost and aggregair approximate market value of investments in marketable equity January J. 1981 Insurance Group Held by Cost Market Carrying Value Blur Chip Stamps and its wholly-owner subsidiaries Berkshire $237.016 79.891 21.526 S424.530 22,407 $424.530 25.017 79.891 21.526 S338.433 $541.954 $525.947 December 29. 1979 Held by Cost Market Carrying Value Insurance Group Blue Chip Stamps and its whollv-moned subsidiaries $185.413 74.678 $336.680 86,386 $336,680 74.678 S260.0911 $423.066 $411.358 1981 represented unrealized gains less unrealized losses as follows: The net excess of aggregate market value over aggregate cost of marketable equity securities held at January 3. Berkshirr. instrance Blue Chip and Group. owned subsidlaries its wholly- Combined Total Unrealized losses Unrealized gains $190,225 2711 $ 17.516 1.509 $207.741 4,220 Net excess of gains S187.214 $ 16.007 $203.521 (3) Investment in GEICO Corporation common shares of GEICO Corporation, the approximate market valur of which was $105.300 and the approximate Included in marketable equity securities hell by the Insurance Group at December 31. 1980 are 7.200.000 outstanding at December 31. 1980. With respect to these shares of GEICO held by members of the Insurance Group. cost of which was $47.000. The shares possessed approximately 33% of the voting rights of al! GRICO shares corporate domicile of GBICO. to maintain on independent proxy arrangement. I is prohibited from seeking or Berkshire is required. pursuant to Order of the Superintendent of Insurance of the District of Columbia, 'he or subsidiary of Berkshire, is permitted to serve as » director of GICO. As a result of the Order, Berkshire is causing to change the independent procy. Also, under the Order. no officer or director of Berkshire, or any affiliate divested of its voting rights witt respect to its holdings of GRICO and. accordingly, does not use the equity method of accounting for this investment. 19

[PAGE 21]

16 Berkshire Hathaway Inc. NOTLS TO CONSCLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dullars in thousands) January 3. 1981 (4) Investment in the Illinois National Bank and Trust Co. of Rockford stock of the Illinois National Bank and Trust Co. of Rockford, a national bank conducting a commercial banking Fron April 1. 1969 to December 31. 1980. the Company owned approximately 98% of the outstanding capital operation in Rockford. Illinois. The Federal Bank Holding Company Act. as amended. required the Company to reacquired from its shareholders 41.086 shares of its issued common stock in exchange for its interest in the bank. divest of control of the bank prior to January 1. 1981. Accordingly as of December 31. 1980, the Company thereby accomplishing the required divestiture. The Company's carrying value of its investment in the hank at the date of divestiture was 528.967, representing the originai cost of the investment plus equity in um"stributed exchange transaction. which become Treastry Stock. earnings of the bank since the date of acquisition: such amount was deemed the cost of the shares reacquired in the bank became earnings from "discontinued operations": statements of earnings for years prior to 1980 have been Upon divestiture of the bank. that portion of the Company's earnings representing equity in earnings of the restated accordingly. (5) Investment in Wesco Financial Corporation Wesco is stated at Blue Chip's cost plus Blue Chip's equity in Wesco's undistributed earnings since date of Wesco is a savings and loan holding company. approximately 80% owned by Blue Chip. The investment in S19.430 at the end of 1980 and $20.069 at the end of 1979. This excess is being amortized by Blue Chip over +0 acquisition. The unamortized excess of Blre Chip's equity in net assets of Wesco over its carrying value was yeers: annual amortization (S624) is reflected under the caption "equity in operating earnings of unconsolidated the steel products service business. Wesco and its consolidated subsidiaries hold investments in marketable subsidiaries" in the Statement of Earnings for each of the past three years. Wesco also has subsidiaries engaged in securities which at December 31. 1980 had a cost of $82.024 and a market value of $91.940. Summarized consolidated financial information of Wesco and its subsi liaries on page 33 of this report. fifteen branches. The transaction involved transfer to he buyer of (1) savings account liabilities of the branches On December 1, 1980. Wesco's savings and loan subsidiary consummated the previously announced saie of its offices. Blue Chip's equity in the net after tax gain recorded by Wesco from this transaction was approximately (approximately $307 mi'lion). (2) mortgage loans of an equal amount. and (3) the physical assets of the branch $2.332. which amount is included for 1980 in the item captioned "Equity in earnings excluding realized investment gain of Wesco Financial Corporation" in the accompanying consolidated Statements of Earnings. Net earnings for benefited approximately $1.293 ($1.26 per share) from the transaction. Berkshire for 1980. after taking into account the minority interest in Blue Chip and additional Berkshire taxes. 20

[PAGE 22]

17 Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (6) Receivables Accounts receivable from customers, agents and others was made up of the following: Jan. 3. 1981 Der. 29. 1979 Insurance Group: Investment income due and accrurd Agents' balances and premiums in course of collection $ 21,759 Reinsurance recoverable on loss payments. 5.273 $ 20.5-46 Amounts due from sales of securities 5.665 4.244 603 5.965 $ 33.300 S 33.520 2.765 Trade accounts receivable of other businesses: Retailing business Textile business 7,620 473 10,291 Candy business 1,187 1.064 555 Promotional services business Newspaper business 2.093 5,503 5.015 Other. 17.322 446 2,069 477 Less allowance for doubtful accounts 761 19.471 18,711 760 16,561 Total receivables. S 19.221 $ 52.231 (7) Inventories A summary of inventories follows: lan. 3. 1981 Dre. 29. 1979 Textile business $ 7,700 Candy business Retailing business 5,612 11.761 6,260 5,177 Promotional services business Newspaper business 966 5.153 Other. 2.764 695 468 2.485 433 S 73.802 $ 25.704 which were determined under the LIFO method were approximately $2.426 and $1.871 less than their aggregato The carrying amounts for inventories at Berkshire's trxtile business and of Blue Chip's netspaper business replacement cost at year-end 1980 and 1979 resprotively 21

[PAGE 23]

18 Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (8) Real Estate. Equipment, Furniture and Leasehold! Improvements The composition of property, plant and equipment at the end of the past two years is shown below: Jan. 3. 1981 Dec. 29. 1979 Land $ 3.957 Buildings 19,248 3.806 Machinery and equipment Furniture, fixtures and leasehold improvements. 11.391 59,840 56.085 18,576 9.869 Less accumulated depreciation and amortizition 42.952 94.436 38.543 88,336 351.484 $ 49.793 (9) Term Debt Payable At the end of the past two years Berkshire's consolidated ter: debt payable was as follows: _1981 lan. 3. Dec. 29. 1979 Berkshire: 8% Senior Notes maturing through March 1. 1993 at $1.143 annually 124% debentures maturing from August 1. 1991 through 94% Senior Notes maturing March 1, 1985 to March 1, 1993 at S777 annually S 17.714 7.000 $ 18.857 7.000 8% debentures due 1985. with 1% additional participating interest contingently payable August 1. 2005 at $4.004 annually ...... 60.000 Other notes and debentures maturing through 1992 in varying annual 5.600 6.600 installments, with interest at rates varying from 6% to 9% 3.035 3.956 94,349 36.413 Consolidated Subsidiaries: Term loan payable to bank by Blud Chip Stampr maturing April 30. 1983. Other notes maturing through 2006 in varying installments. bearing interest at rates based on prime and Eurodollar rates. 5.000 13.500 with interest at rates varying from 6% to 15% 4.995 5.186 S104.344 $ 55.099 22

[PAGE 24]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) January 3. 1981 (9) Term Debt Payable (Continued) Blue Chip's bank term loan is collateralized by all of the shares of its candy and newspaper subsidiaries. assets. mergers and consolidations, and allow the noteholders to demand prepayment at par within f0 days of The Senior Note Agreements include debt limitation provisions, as well as limiting terms relating to sales of notice that. during the lifetime of Warren E. Buffett. his ownership of stock of the Company, together with that of certain family affiliates. has decreased to less than 15% of the Company's outstanding capital stock. investments by Berkshire in subsidiaries not bound by the terms oi the Agreements, dividends and other rquity The Senior Note Agreements impose a limitation upon "restricted payments" by Berkshire. That term includes Agreements. Retained carnings of approximately $62.117 as of january 3. 1981 were free of restriction by distributions. Berkshire's investment in Blue Chip Stamps is a "restricted payment" under the derms of the this provision. Principal payments on outstanding term debt at January 3. 1981 are required as follows: 1981. 1983 1982 2,176 1.547 6,536 1985. 1984 1.479 Thereafter 83.743 8.863 $104,344 with the bank of 5% of the line plus 10% of outstanding borrowings under the line. The line was not used in 1980. The Company has a $10,000 line of credit with a bank for which it has agreed to maintain average balances $500 and collateral of at least 150% of outstanding borrowings. Interest rates are at either 2% above Eurodollar rate. Blue Chip has a line of credit arrangement of $10.000 with another bank requiring compensating balances of or at prime. (10) Dividend restrictions — Insurance subsidiaries since date of acquisition of members of the Insurance Group. Payments of dividends by Insurance Group members Retained carnings at January 3. 1981 includes approximately $167 million representing undistributed earnings are restricted by insurance statutes and regulations. to the extent that not more than approximately S49 million of dividends could be paid in 1981 by insurance subsidiaries to the Company, without prior regulatory approvals. 23

[PAGE 25]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (anllars in thousaris) lanuary 3. 1981 (11) Income Taxes The consolidated statements of earnings reflects charges for income taxes: Applicable to: 1980 1979 1978 Operating earnings Realized investment gain Securities loss of bank

• continuing operations

$13.9:3 4.401 $ 9,796 S17.909 (345) 2.703 $10.735 4.415 $12.499 $15.151 These taxes are comprised of: Federal Foreign State $15.348 2.489 S10,786 $17.999 162 1,583 $13.418 130 1,625 108 S12.499 $15.151 amounts computed at the Federal statutory rates of 46 for 1980 and 1979 and 48% for 1978. Income taxes applicable to operating earnings are reconciled in the table which follows to hypothetical 1980 1979 1978 Earnings from consolidated operations including minority interests. before applicable income taxes and realized investment gain $64.805 $:1.600 546.770 Hypothetical amounts applicable to above computed at Decrease. resulting from: Federal statutory rates S29.810 $23.736 $22.453 85% dividends received credit Tax-exempt interest income . (3.042) 100% exclusion relating to equity in me earnings of: (8,640) (2.747) {6.012) (4.829) (2.652) Illinois National Bank Benefits from unconsolidated subsidiaries Wesco (4.050) (2.175) (2.282) (5:30) (÷.342) (2.036) (3.560) Increases, resulting from: State income taxes. less Federal incomr tax Provision relating to consolidated operating incomr benefit. plus Canadian income taxes ... 1.378 951 911 Net other differences of Blue Chip Stamps noi distributed. 777 416 580 (38) 522 (74) Total income taxes applicable to operating carings S13.943 S 9.796 S10.735 previously considered prepaid or deferred as follows: Tüe above income tax expense represents amounts assessed currently. adjusted for changes in amounts 1980 1979 1978 Current Change in prepaid S11.702 Change in deferred liability arising from operations 1.094 1.147 $ 9,339 431 $ 8.702 26 2.252 (219) $13.943 $ 9,796 S10.735 redemption expenses. The change in the deferred liability arising from operations relates to the following: The change in prepaid income taxes relates to timing differences primarily in reporting Blue Chip's stamp 1980 1979 1978 Undistributed income of flue Chip Stamps Deferred insurance premium acquisition costs S 777 Policyholder dividends and unbilled revenues Accretion of discount on bonds 235 580 120) 102 (366) 522 318 1.437 $ 1.094 (506) 266 2.252 27 Federal statutory rate of 28% (1980 and 1979) and 30% (1978) applicable to long-term capital gains. Income taxes deemed applicable to realized investment gain are essentially equal to amounts computed at the 24

[PAGE 26]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (12) Realized Investment Gain - Continuing Operations A summary of net realized investment gain - continuing operations — for each of the past three years is presented in the following table. 1980 1979 197B_ Pre-tax net gain realized by the Applicable income taxes... Company and consolidated subsidiaries. $15.33- (4.401) $ 9,385 Applicable minority interest (609) (2.702) $13.987 10.924 6,497 (196) (4.416) 9,258 (313) Equity in net realized gain (loss) of Wesco Financial Corporation, an unconsolidated subsidiary • (134) 409 Realized investment gain - continuing operations. net $10,790 $ 6,896 $ 9.258 identification of securities sold resuits in lower applicable incore tax. identified cost is used. The cost of securities sold is usually determined on a first-in first-out basis; occasionally. when specific (13) Lease Commitments significant leass commitments outstanding, the minimum rentals under which were as follows at Jane*:: 3, 1981: Berkshire s retailing subsidiary (Associated Retail Stores Inc.) and Blue Chip and its subsidiaries had Yrar Associated Blue Chip Total 1981 1982 $1,359 1.026 $3.218 198:3 8983 2.149 2.652 $4.577 3.678 3.047 *1184 6:37 LBB¿ 2,519 1985 486 1.477 1,963 Thereafter 1,546 5.664 7,210 leases: there were no capital lease commitments perlaining to real property: any such commitments with respect to Leases of Berkshire and its consolidated subsidiaries in effect at January 3, 1981 are classified as operating equipment leases entered into are considered immaterial. Total rental expense charged to consolidated net earnings stated minimum amounting to $2.726 for 1980, S2.699 for 1979 and $2.157 for 1978. was $10.145 for 1980. $9.026 for 1979 and $7.486 for 1978. including contingent real estate rentals in excess of (14) Pension Plans under either emp! cer-sponsored or union-sponsored pension pians. Total pension expense charged to consolidated Employees of Berkshire and its consolidated subsidiaries who meet certain eligibility requirements are covered earnings nas $1.917 for 1980, $2.454 for 1979 and S2.587 for 1978, which includes, as to certain of the plans. amortization of prior service costs over a 30-year period. Berkshire and its subsidiaries generally fund pension costs as accrued consolidated subsidiaries were last performed as of January 1. 1980. The actuarial present values determined for The latest actuaria! evaluations of employer-sponsored defined benefit plans of the Company and its underfunded plans, together with assels available for benefits as of that date. arr presented in the following table. accumulated benefits, using interest assumptions sanging from 6% to 7%%. segregated us between everfunded and Ourrfunded plans Underfunded plans Actuarial present valur of accumulated benefits Vrstei..... Not vester $ 6.317 $19,331 326. 530 Total $ 6,543 $19.861 Assets available for benefits $12,179 $16,720 25

[PAGE 27]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (15) Litigation Evening News. Inc., filed an action against such subsidiary in the United States District Court under Federal On October 28. 1977 the Buffalo Courier-Express. Inc.. a principal competitor of Blue Chip's subsidiary, Buffalo initiation of the Sunday edition in place of its Saturday weekend edition and publication of Saturday and holiday antitrust laws seeking to enjoin certain practices allegedly engaged in by the News in connection with the proposed editions. thus providing competition for the existing Sunday edition c! !he Courier-Express. In addition to seeking an injunction. the complaint seeks treble damages in an unspecified amount. atiorneys' fees and costs. The News unspecified amount. injunction, attorney's fees and costs against the Courier-Express on the ground, among others. has filed an answer and counterclaim denying all liability and seeking affirmative relief of treble damages in an violation of the Federal antitrust laws. The Courier-Express was sold to the Minneapolis Star and Tribune Co. in tha: the Courier-Express seeks to monopolize the Sunday newspaper business in the Buffalo metropolitan area in 1979 and the litigation has been relatively dormant since that time. The company is presently unable to predict kinds of perinanent injunctions it is seeking. the News probably will be forced to cease operations and liquidate: what effect. if any. this transaction will have on the lawsuit. If the Courier-Express is successful in obtaining the is uncertain. however, with discovery incomplete. the outcome of the action and the News' potential exposure. if any. materially adverse effect on the consolidated financial position of Berkshire, notwithstanding its potentially severe It is the opinion of management of Berkshire that the ultimate outcome of this litigation will not have a impact upon .le News. 25

[PAGE 28]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands except per shar amounts) january 3. 1981 {16) Quarterly Results A summary cf earnings by quarter for the past two years is presented in the following table. This information is unaudited. 1980 Quarter 1st Quarter 2nd Quarter 3rd Quarter* 4th Income items S116.914 $112.662 S104.781 $149.755 Earnings from continuing operations before Equity in earnings - before securities realized investment gain.. $ 8.956 $ 9.001 $ 6,193 $ 14.324 losses — Illinois National Bank (Divested December 31. 1980)* ...... 10.255 1.289 1.078 7,271 10.079 1.055 1.819 7.248 1.309 Realized investment gain, net - continuing operations Earnings before realized investment gain .... 1.343 15.633 357 Equity in securities losses of Illinois National Bank' ...... (709) $ 17.526 $ 11.189 $ (88) (86) Net earnings 8.503 $ 15.904 Per share: Earnings from continuing operations Earnings before realized investment gain. before realized investment gain" ....... 9.98 8.73 9.81 8.76 $ 6.03 17.00 10.89 7.06 $ 13.95 8.28 15.48 15.22 Net earnings 19/9 Income items $103.015 $116.432 $107.193 $142.481 Earnings from continuing operations before Equity in earnings of Illinois Nationa! Bank realized investment gain... 6.841 9,845 5.42 8.852 (Divested December 31, 1980)* ........ 1.254 Earnings before realized investmen: gain .. 8,095 1.191 1.253 1.117 6.676 10.114 1.262 Realized inve tment gain ....... 1.306 11.036 841 3.632 Net earnings ... 9.401 $ 11.877 7.793 $ 13.746 Per share: Farnings from continuing operations Earnings before realized investment gain .... before realized investment gain'... S 6.66 9.15 7.88 10.74 9.58 S 5.28 11.56 6.50 $ 8.62 7.59 13.38 9.85 Net earnings *Upor: divestiture of the Illinois National Bank as of December 31. 1980. that portion of the Company's earnings representing equity in earnings of the bank became earnings from "discontinued operations": figures in the above tabulation for all quarters prior to the 4th quarter 1980 have been restated accordingly. **In addition to the normal seasonally higher candy business earnings in the fourth quarter of 1980. marnings for such period include (1) a benefit of approximately $970 (94 cents per share) resulting from revisions to estimation factors applied in computing Blue Chip's liability for unredeemed trading stamps (See note 1(e) to Ce -lidated to sale by Wesco's savings and loan subsidiary of its fifteen branches. (See Note (5) to Consolidated Financial Financial Statements). and (2) the Company's equity of approximately $1.293 ($1.26 per share) aid butable Statements). 27

[PAGE 29]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollors in thousands) January 3. 1981 (17) Segment Data The tables below reflect data for each of the three most recent fiscal years, broken down as to business segments. I. Revenues of Consolidated Companies Fiscal Year 1980 1979 1978 Textiles.. Insurance* S216.298 Retailing 44,432 $206.356 Promotional services Candy. 44.374 49.862 S205.017 98,600 42,709 52.674 Newspaper 25.637 88,189 40.762 Other ... 49.977 23.628 73.954 4.035 46.414 24.841 3,183 41.791 2.903 Total revenues of consolidated companies S483.353 $460.341 S445.942 • Revenues of the insurance segment includes investment income of the Insurance Group. See table VI below: II. Operating Profit Before Taxes identified Operating profit is total revenue less total expense identified with cach segment. In computing operating profit corporate level and not derived from operations of any industry segment, general corporate expenses. interest with segments. none of the following items have been added or deducted: revenue earned at the expense. domestic and foreign income taxes, equity in income or loss from unconsolidated subsidiaries and other unconsolidated investees, minority interest and realized investment gain. Fiscal Year 1980 1979 1978 Textiles.. Insurance* $ 37,677 Retailing (508) $ 27.966 Candy.. 2,440 1,723 $ 22.706 Newspaper Promotional services 15.031 2.775 2.916 7.699 12.785 2.757 Other (2,805) 2,397 12.482 1.814 (4.617) 2.151 Operating profit before taxes identified with. segments $ 61,348 $ 44.232 1.203 (2.913) $ 41.249 1,150 • See table VII below. 28

[PAGE 30]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (17) Segment Data (Continued) III. Identifieble Assets End of Fiscal Year 1980 1979 1978 Identified with segments: Insurance. Textiles.. 693,859 Candy.. Retailing 13,295 19.388 $585.103 25,139 $470.023 94.761 53,178 14,520 22,606 Newspaper Promotional services 47,923 14.235 34.215 93.646 84.783 44.177 Other 2.215 35.663 910.911 804,240 2.245 38.542 676.513 2.147 Not identified with segments: Investment in Illinois National Bank. investment in Wesco 63.040 28,785 Corporate cash and marketable securities Investment in unconsolidated subsidiaries 35.443 1,187 56,750 49,370 27.146 1.377 $1.010.581 1.113 1,477 3.106 Combined and consolidated assets.. SB92.265 3757.612 IV. Capital Expenditures Fiscal Year 1980 1979 1978 Textiles. Insurance 1.019 653 $ 1.1:3 5,116 199 1,116 450 897 Candy Retailing 3,250 279 2.777 247 Promotional services 338 Other Newspaper 346 642 355 1,131 130 45 18 Total capital expenditures 7.716 $ 6,793 $ 5,640 V. Depreciation and Amortization of Property, Plant and Equipment. Including Leasehelds Fiscal Year 1980 1979 1978 Textiles.. insurance 500 535 $ 459 Candy. Retailing 164 486 $ 455 305 Newspaper Promotional services 1,486 151 174 1,199 1.007 135 Other ... 2,230 146 55 2.i9) 2,554 96 50 Total depreciation and amortization 5.144 S 4,651 51 .... 4.602 29

[PAGE 31]

Berkshire Hathaway Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) AND CONSOLIDATED SUBSIDIARIES (dollars in thousands) January 3. 1981 (17) Segment Data (Continued) VI. Revenues of the Insurance Segment Fiscal Year Premiums carned: 1980 1979 1978 Specialized auto and general liability $ 88.404 Reinsurance .. Workers' Compensation" 19.890 $ 90.646 Home State multiple lines 43.089 33.804 30.864 19,350 $ 96,126 29.893 Investment income.. Total premiums earned 185.187 41.089 30,160 31.111 181,949 29.894 24.407 186.073 19.944 Insurance segment revenues $216,298 $206.356 $206.017

• Workers' Compensation coverage written by the Home State Companies, as part of their multiple lines business. is

not disaggregated from their total earned premiums. VII. Insurance Segment Operating Profit Fiscal Year 1980 1979. 1978 Underwriting gain (loss): Specialized auto and general liability ..

• Reinsurance ....

Workers' Compensation....... $ 7,395 4,870 $ 7,845 Home State multiple lines ... (5,294) (233) (4,338) 5.130 $ 11.543 (3,944) Net investment income Total underwriting gain (loss) 30.939 6,738 (4.895) (2,443) 24.224 3.742 (2.155) 19.705 3.001 Insurance segment operating profit before taxes $ 37.677 $ 27,966 $ 22.706 30

[PAGE 32]

Certified Public Accountants Thirty-Sixth and Farnam Streets Kiewit Plaza Building Peat, Marwick, Mitchell& Co. Omaha, Nebraska 68131 Berkshire Hathaway The Board of Directors and Stockholders Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway Inc. and consolidated subsidiaries as of January 3, 1981 and December 29, 1979 ard changes and the related in financial position for each of the years in the three year consolidated statements of earnings, stockholders' equity, period ended January 3, 1981. Our examinations were made in accordance with generally accepted auditing standards, and accordingly Included such tests of the accounting records such other auditing procedures as we considered necessary in the circumstances. of Biue Chip Stamps, 1980, 1979 and 1978, and Wesco Financial Corporation, We did not examine the financial stitements panying consolidated financial 1980 and 1979 only, the assets relating to such as reflected in the accom- of the consolidated totals for" 1980 and 1979, and total revenues constituting statements constitute 24 percent and 26 percen: 37 percent: 35 percent and 32 percent of the consolidated totals for 1980, whose report thereon has been furnished to us and our opinion expressed 1979 and 1978, respectively. These statements were examined by other auditors herein, insofar as and Wesco Financial Corporation (1980 and 1979 only), Is based solely upon it relates to the amounts included for Blue Chip Stamps the report of the other auditors. the aforementioned In our opinion, based consolidated financial statements present fairly the finat- upon our examinations and the report of other auditors, January 3, 1981 and December 29, 1979 and the results of their operations and cial position of Berkshire Hathaway Inc. and consolidated subsidiaries at year period ender January 3, 1981, in conformity with generally accepted the changes in their financial position for each of the years in the three accounting principles applied on a consistent basis. Ren, Maliet, Mrcent C. February 27, 1981 31

[PAGE 33]

Berkshire Hathaway Inc.—Parent Company Only CONDENSED FINANCIAL STATEMENTS (dollars in thousands) Balance Sheets Jan. 3. 1980 Dec. 29. Assets: 1979 Statements of Earnings 1980 19791978 Investment in subsidiaries (inciudes Income: unrealized appreciation of by insurance subsidiaries) marketable equity securities held Cash dividends and interest iovestment in marketable Cash and U.S. Treasury bills .. $445.063 13.917 $367.747 from subsidiaries … 1.113 Dividends from subsidiaries S 5.841 $ 8.395 $ 9.387 in form of shares of Blue Accounts receivable and inventories equity securities 21.526 - Chip Stamps stock.. business of parent company's textile Equity in undistributed 21.955 - - Other assets 13.196 5497.744 4.042 14.853 earnings of subsidiaries 32.071 36.267 31.804 $386.796 3.083 Gross profit from textile Other income .. product sales. 3,157 276 1.838 107 $.141 Liabilities and stockholders' equity: Accounts payable and accrued 31 Term debt payable expenses.. $ 7,553 Current and deferred income taxes 94.349 $ 4.558 63,300 49.607 15.363 628 36.413 863 Costs and expenses: Administrative and selling Stockholders' equity (See Consoli- 102.530 41.834 expense.. 4.087 6.078 3.172 3.591 2.740 3.628 dated Balance Sheet. page 13) .. interest expense. 355.214 Income taxes (credit) 5497.744 344.962 13 27 (247) $386.796 10.178 6.790 Net earnings _5.121 $53.122 S42.817 $39.242 Berkshire Hathaway Inc. Insurance Group CONDENSED COMBINED FINANCIAL STATEMENTS (dollars in thousands) Balance Sheets 1980 December 31. 1979 Statements of Income Assets: 1980 19791978 Investment other than in affiliates: Underwriting: Marketable equity securities. Bonds, at amortized cost $187,802 $185.564 Premiums carned ......... Short term debt obligations. at market...... 424,530 336.680 Losses and expenses incurred $185.187 S181.950 $186.073 178.149 1.8,207 183.072 at cost Investment income. Underwriting gain.. 6.778 3.743 3.001 639.387 27.055 9.05+ Investment. Blue Chip 32.272 531.298 30.939 37.677 24.224 27.967 19.705 Cash Accounts receivable from agents. 3.895 35,355 22,706 3.128 Applicable income taxes. 4.85% 5.405 _ 1.68: Property and equipment. net ... reinsurers and others 33.299 14.163 3,388 33,520 Earnings before items below 3,386 $729,673 3.269 13.652 Equity in net earnings of Blue 32.823 22.562 18.025 Other assets .. Deferred premium acqusition costs S623.421 3.082 Chip Stamps .. 4.+88 3.960 3.230 Earnings before realized gain Liabilities, capital stock and surplus: on investments... 37.311 26.522 21 255 Losses and loss adjustment Unearned premiums xpne.... S199.128 Deferred income taxes Current income taxes 73.281 $197.698 Realized gain on investments. 3,521 73,604 net of income taxes ... 10.588 6.241 8.873 Other liabilities 61.155 5.006 351,360 14,275 50.696 Net income S 47.899 5 32.763 5_30.128 340.574 13.570 Net unrealized appreciation of Capital stock and surplus .. marketable equity securities 243.303 135.010 173.934 108.913 $729.673 $623.421 ire wholly-owned or substantially wholly-owned subsidiaries of Berkshire Hathaway Inc fembers of the Insurance Group, engaged in propertylcasualty insurance undenvriting 32

[PAGE 34]

Wesco Financial Corporation CONDENSED CONSOLIDATED FINANCIAL. STATEMENTS (dollars in thousands) Assets: Balance Sheets 1980 December 31. 1979 aments of Income _1080

• 107"

1978 Financial: Financial resenuns Cash and temporary cash Investments, at cost investments $ 54.972 164.648 105.875 $ 50,387 Interest on loans, lean fores mans receivable 100.623 Intranst and lividends and service charges $45.241 545.190 $35.774 (ther assets 342.338 16.343 -22.5:38 506.224 Cinin on sale of branches frown investments 19,200 5,87.1 14,056 13.140 Steel service: 679,772 Other time luding Cash and tempor ry cash Accounts receivable and Investments 1,695 1.413 srcuritics gain). 2.911 1.62 Property, plant and equipme inventories. Other assets not 11.151 105.73:1 12.127 31019 6.175 19.187 166 Finencial expenses S361.525 S696.665 16,893 Interest on notes payable Interest on savings deposits 41.283 7,180 37,028 7.100, 31.018 b.516 6.136 2.722 linbilition and storkholders' equity: Income taxes Conreal and administrative Financial liabilities: Savings deposits Other liabilities, including Notes payable. $168,366 73,719 $508,912 -1.10 -2454 79.010 Not income from financial 58212 32221 12310 income ayes 254.133 12.048 598.348 10.420 operations 1541 - 0.81. -2.101 Strel service liabilitins: Other liabilitirs, including Note payable 2,188 307 Steal service incotne axes 2.247 600,761 2.413 2.106 Revenues Costs and expenses, Including 41.074 37,883 Storkholders equity Total ilbilities 258,568 4.4.35 Income loxrs $261.523 102.957 S696.665 95.90- Not ine otor from steel service operations -1.501 1.707 Not income. 510,045 $11.110 S 8.481 income including securities goins of Wesco was $8.804 - 1980, SH.784 - 1979, and S7.417 - 1978. Wesco is on opproximotely 80% owned subsidiory of Blue Chip Stomps Blue Chip srquily in net assets over the cost of Blue Chip's investment in Wesen. Thr Compony's pronomie interest in including for rach year $624 amorization of the exress of Blur Chip': equity in Wesco's not Wesco is less than Blur Chips interest, toking into account the outstanding minority interest in Blur Chip. 33

[PAGE 35]

88 Berkshire Hathaway Inc. BUSINESS ACTIVITIES OF THE COMPANY AND ITS SUBSIDIARIES outstanding capital stock of the Illinois National Bank and Trust Co. of Rockford. Illinois. a commercial bank. (a) Banking. From April 1. 1969 until December 31. 1980. the Company owned approximately 98% of the December 31. 1980. the Compary divested. through an exchange with electing shareholders. of the Company's Federal statute required the Company in divest of control of this entity prior to january 1. 1981. Accordingly: as of interest in the bank in return for shares of the Company s issued common stock. The Company no longer has any interest in the bank, and the number of outstanding common shares of the Company was reduced by the 41.086 Treasury shares reacquired in the transaction. Company: companion carriers sharing a home office in Omaha. Nebraska. and specializing in non-standard and through Columbia Insurance Company. a Nebraska domiciled insurer. "Home state" multiple line property ind automobile and general liability insurance. A reinsurance operatien is also conducted through National Indem sity casualty insurance operations are conducted through subsidiaries forne ' for that purpose in Colorado. Kanses. fourth quarter of 1980. Workers' compensation coverages are provided by other subaidiaries of the Company: Minnesola. Nebraska and Texas. Underwriting operations of a similar company in lowa were discontinued in the Insurance Company, a Pasadena. California based insurer purchased in late 1977. Redwood Fire and Casualty Currently the most significant workers' compensation insurance prorider owned by the Company is Cypress Insurance Company. Los Angels. California and Southern Casualty Insurance Company: Alexandria. Lovisiana, are succeeded in 1980 to the business formerly conducted by a branch office of National Indemnity. Home and additional subsidiaries of the Company underwriting primarily workers' compensation coverages Redwood automobile and general liability insurance. Automobile Insurance Company: based in Chicago. is a subsidiary of the Company which underwrites non-standard committed to the operations and from policyholders' funds derived from unearned premiums and loss reserves. The insurance business generates significant amounts of investment income, both from capital iunds Massachusetts, and maintains sales offices in New York City and Los Angeles: a Canadian subsidiary maintains a (c) Manufacturing and selling of woven textile products. The company owns a weaving mill 1. New Bedford. textile products sales office and warehouse in Toronto. Canada. In 1980. operation., of a subsidiary textile operation in Manchester. New Hampshire. purchased in 1975. were discontinued. Sales are through employees to home fabric jobbers and converters. menswear converters. industrial fabrics and Products of the textile business include curtain and bedspread materials. apparel fabrics and industrial fabrics. apparel fabrics converters. custom and ready-made curtain manufacturers. bedspread manufacturers. retail chain and department stores and mail order houses. conducted through Associated Retail Stores. Inc.. a wholly-owned subsidiary: Associated's headquarters and central (d) Retailing of popularly priced women's and children's apparel. The Company's retailing business is square feet to 60.000 square feet of selling and non-selling floor area. located in eight midwestern and north- warehouse are in Long Island City. New York: it had 73 retail outlets at January 3. 1981. ranging in :.: from 2.000 engaged directly in the promotional services business, and wholly-owned subsidiaries of Blue Chip are engaged in (e) Blue Chip Stamps. Blue Chip is an approximately 60% owned subsidiary of the Company. Blue Chip is thi cantu business — See's Candy Shops. Incorporated. and the newspaper business - Buffalo Evening News. Inc. 34

[PAGE 36]

California-Nevada area. However. revenues have declined from their historical peuk of S124 million for the Blue Chip's trading stamp service continues to be the pre-eminent trading stamp operation in the fiscal year ended February 28. 1970 to S17 million in 1980. Practically ali of the decline occurred in the early 1970's when many supermarket operators converted to discount merchandising and service stations were faced 1980. From inception. Blue Chip has not required customers to enter into agreements binding them to use Blue with their first maior shortage of gasoline. One customer accounted for approximately 45% of stamp volume in Chip stamps for specified periods of time. One customer which accounted for about 9% of 198G stamp volume discontinued use of the program at the end of August. 1980. 41 at present. Funds held for future redemption of stamps are invested in marketable securities. Over the past nine years. Blue Chip has reducer the number of its redemption outlets from a peak of 30 to of high quality in two large kitchen facilities in California. See's is believed to be one of the largest candy (ii) See's Candy Shops, Incorporated. See's produces boxed chocolates and other confectionery products manufacturers distributing through its own chain of retail shops: * now has 191 in eleven continental western and midwestern states plus Hawaii. generated during the Thanksgiving-Christmas season, when high shop volume is augmented to an increasing A significant degree of seasonality exists in this business; a substantial portion of each year's candy sales is degree by quantity sales to organizations at reduced prices. Blue Chip in 1977. It publishes a daily newspaper in Buffalo. New York. Advertising revenues of the News. (iii) Buffalo Evening News. Inc. The assets of this entity, subject to certain liabilities, were purchased by representing most of its revenues, peak during the fourth quarter of the year due to holiday advertising. The News is involved in litigation proceedings. See Note (15) to the accompanying Consolidated Finan- cial Statements. Corporation, through Blue Chip's ownership of approximately 80% of the outstanding stock of Wesco. In the In addition to the above businesses, the Company has approximately 48% economic interest in Wesco Financial Company's Consolidated Financial Statements included in this report. the equity method of accounting is reflected outstanding stock of Mutual Savings and Loan Association. Pasadena. California ("Mutual"'). Wesco also owns 100% for Blue Chip's investinent in Wesco. Wesco invests in marketable securities and real estate. and owns all of the steel and other metal, at its facilities in lilinois and North Carolina it cuts the metals to the order of. and sells the of Precision Steel Warehouse. Inc. which is primarily engaged in the steel service center business. It buys specialty

• finished pieces to & wide variety of customers.

consummated the sale of all of its offices except its Pasadena headquarters office and a satellite office in a new On December 1. 1980. Mutal. which had been operating at seventeen locations in southern California. shopping mall across the street. The financial leverage of Mutual was greatly reduced by the sale of its branches since, in the transaction. Mutual eliminated savings account liabilities of the branches of approximately $307 intends to continue in the savings and loan business. and until other businesses are acquired by Wesco. that million (against which it transferred a like amount of its highest yielding mortgage loans receivable). Mutual business plus the specialty steel business will be Wesco's primary sources of income. 35

[PAGE 37]

Berkshire Hathaway Inc. FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF Results of Operations Consolidated Financial Statements and notes thereto appearing elsewhere in this report. In particular, This discussion should be read in conjunction with the Selected Financial Data and with the business segment data for the pasi three years are presented in Note (17) to Consolidated Financial such Segment Note. The impart of income taxes is not proportional to the pre-tax income of the Statements (the "Segment Note"). Operating profit before taxes is presented in Table Il and Tablr. VII of segments because of the tax-free nature of municipal bond interest income and the virtually tax-free segments is significant. Therefore, presented below is a summary of net earnings — after giving effect to nature of dividend income earned by certain segments. Also, the minority interest in Blue Chip's income taxes and after deduction of the applicable minority interest - for the past three years. Berkshire's Net Earnings 1980 (dollars in thousands! Insurance: 1979 1978 Underwriting gain Net investment income $ 3.637 Sub-total - Insurance 25.607 $ 2.214 29.244 20.106 $ 1,560 16.400 22,320 17.960 Equity in operating earnings' of: Wesco Financial Corporation? Blin Chip Stamps and its wholly-owned subsidiaries 6.456 Textiles and retailing 4.885 3,739 41.956 1.371 4,793 3.693 3.775 (2.019) 32,980 2,128 27.946 2.518 Net unallocated costs - principally interest' (3.472) (2.20-) Earnings from continuing operations before Equity in earnings (before securities losses realize ' investrent gain.. 38.484 30.961 25.742 in 1980) of Illinois National Bank Realized investment gain. net* Earnings before realized investment kain. 43.215 4.731 4,960 9.907 35.921 4.242 6,896 29.984 9,258 Net carnings $53,122 S42,817 $39.242 '''Operating earnings" of Blue Chip has been computed before deduction of is interest expense, net of lax effect. computation of "operating earnings" of these subsidiaries. Any significant realized gain or loss from sale of securities by Blue Chip and Wisco is excluded from the :"Operating earnings" of Wesco for 1980 include gain from sale of Mutual Savings and Loan Association's fifteen branches. Berkshire's share of such gain included in the abovr lable was S1.293.000 in 1980. 'Net unallocated costs include Berkshire's proportionate share of Blue Chip's interest expense. net of tax effect. *Realized investment gain includes Berkshir's proportionate share of any significant net securities gains or losses of Blue Chip. Tiesco and the Illinois National Bank. created the tax or generated the benefit; amounts so assigned may differ from amounts allocated to the Income taxes have been assigned in the above tabulation to the income or deduction items which various legal entities in accordance with tax sharing agreements effective as between the entities. 36

[PAGE 38]

Berkshire Hathaway Inc. MANAGEMENT DISCUSSION (Continued) Insurance the "combined ratio." which is the sum of the ratio of losses and loss adjustment expenses to premiums Underwriting results for property/casualty insurance companies are most commonly measured by 100 indicates an underwriting profit: above 100 indicates an underwriting loss. The combinad ratio of earned plus the ratio of statutory underwriting expenses to premiums written. A combined ratio below our Insurance Group was 98.2 for 1978. 97.1 for 1979 and 96.5 for 1980. 1979 and 1980. compared to a sizable loss in 1978. The results benefited in both 1979 and 1980 from Table VII in the Segment Note reveals sizable workers' compensation underwriting profits in both favorable development of loss reserves previously established (principally those established in 1978) for ratios for the Insurance Group excluding results from National Indemnity's workers' National Indemnity Company's workers' compensation claims in southern California. The combined underwriting are possibly more meaningfui: such ratios were 94.8 for 1978. 99.6 for 1979 and 98.3 compensation for 1980. earned on higher levels of investment. Insurance Group investments in non-affiliates — stated at their Net investment income of the Insurance Group. in both 1979 and 1980. reflects increased yields approximately $380 miilion at the end of 1979, and further to approximately S450 million at the end of cost — have increased from an aggregate of approximately S335 million at the beginning of 1979 to 1980; the additional funds for investment were derived principally from operations, but also from The funds contributed by Berkshire represented part of the proceeds from Berkshire's public offering in $28.750.000 cash contribution in the last half of 1980 by Berkshire to the equity capital of the Group. August, 1980 of its 12¾% debentures due 2005. Blue Chip and its Wholly-Owned Subsidiaries operating earnings of Blue Chip Stamps and its wholly-owned subsidiaries resulted from improved The significant increase in 1980 from 1979 reflected in the above table for Berkshire's equity in results recorded by each of Blue Chip's three constituent business segments, as summarized below: Berkshire's Equity in Operating Earnings 1980 {dollars in thousands! 1979 See's Candies 4.212 3.448 Buffalo Evening News 3,060 (816) (1.333) 1.624 3.049 Promotional services 1,382 (738) 6.456 3.739 3.693 Berkshire's ownership of Blue Chip averaged approximately 55.5% in 1978. 59% in 1979 and 59.6% in 1980. were virtually unchanged from 1978. (Berkshire's increased ownership in 1979 caused an increase in its Earnings of See's candy business increased about 20% in 1980 over 1979: See's carnings in 1979 equity in such carnings.) The dollar volume of candy revenues in 1980 exceeded those of 1979 by revenue increases were not totally offset by cost increases. In 1979. candy revenues increased from 1978 approximately 12% due almost completely to price increases and, in contrast to the prior year, the by a higher percentage amount (19%). but just over half of the 1979 increase resulted from price increases, and the revenue increases were almost totally offset by cost increases. two years due to an increase in Blue Chip's portfolio of investment securities. particularly in 1979 and marketed to a financial institution in 1980. Dividend and interest income increased in each of the past from improved vield on the portfolio, particularly in 1980. Promotional services carnings in 1980 benefited from revisions to Blue Chip's liability for redemption of trading stamps; approximately S970 of Berkshire's 1980 equity in Blue Chip's earnings resulted from those revisions. of the prior two years; however, the litigation in which the News is involved (see Note (15) to the Blue Chip's newspaper subsidiary, the Buffalo Evening Nows, recorded a loss for 1980 and for cach Consolidated Financial Statements) was less active and costly in 1980. permitting that business to record a decreased loss. 37

[PAGE 39]

MANAGEMENT DISCUSSION (Continued) Berkshire Hathaway Inc. Wesco Financiai Corporation Company's equity in earnings of Wesco Financial Corporation, As shown in the table presented at the beginning of this discussion of results of operations. the approximately the same in 1980 as it was in 1979. However, the 1980 figure of $4.885 includes $1.293 80% owned by Blue Chip. was equity in Wesco's earnings from sources other than the sale of branches was $3.592 compared to $4.793 gain recorded by Wesco's savings and loan subsidiary from sale of its branches. so that Berkshire's i"80 reflected for 1979 and $3.775 for 1978. The profits of Mutual Savings, the principa! Wesco operation. are under pressure from both high interest rates - reducing its net interest margin - and from competitive Joan associations. by removal, in part. of the distinctions between banks and savings and Textiles and Retailing 1979 from 1978 in carnings from textiles and retailing reflects deterioration in the textile operations: textile sales. margins and profit declined. Additional competitive, ressures resulted in further deterioration in textile results in 1980. The Company's textile manufacturing and finist.ing operations in Manchester were discontinued in the last half of the year for lack of profitability. Net Unallocated Costs m. lion 124% debentures due 2005, and to a lesser degree trom higher interest rates paid by Blue Chip. Interest expense increased in 1980 as a result of the issuance in August. 1980 by Berkshire of is $60 Liquidity and Capital Resources management's opinion, the fiduciary nature of obligations to policyholders of Berkshire's insurance Berkshire's consolidated balance sheet at January 3. 1981 reflects significant liquidity. In Management expects to meet this requirement with a significant margin of satety. Maintenance of subsidiaries and to savers of Blue Chip's trading stamps reguires maintenance of high liquidity: liquidity considerably above industry norms in Berkshire's insurance subsidiaries allows those they are not forced to accept premiums to maintain positive cash flow. operations to perform their underwriting function with a sole view towards underwriting profitability: reinvestment in property, plant and equipment. Generally, management tends to avoid deployment of Berkshire's businesses are not capital-intensive; i.e.. they do not require significant investment or assets in businesses of such a nature: on the contrary. Berkshire desires to own companies engaged in businesses that produce positive cash flow. stockholders' equity at September 30. 1965 was approximately $24.5 million. Increases in that time Berkshire's total equity capital has increased about sixteen-fold over the past fifteen years. Total frame came from retained earnings and unrealized increases in the market value of investments in management does not expect the Company to rely upon a high degree of leverage in its financing at any marketable equity securities. Debt has been used by Berkshire in relatively modest amounts, and time in the foresecable future. Management is averse to reliance on any significant amount of short-term principal amount of which is repayabie through operation of a sinking fund in the years 1991 through debt. In August. 1980. Berkshire issued, in a public offering. $60 million 12%% debentures, the place when attractive opportunities arise to profitably use the funds. Management believes that such 2005. Berkshire did not undertake this financing because of any specific needs. but rather to have it in opportunities may present themselves when credit is extremely expensive or even unavailable. its own cash The Parent company is largely dependent upon dividends received from its subsidiaries io provide subsidiaries are subject to regulatory restrictions; the possibility that such restrictions may significantly requirements including debt service requirements. Dividend payments by insurance of five of its insurance subsidiaries (so that a limitation as to one company would not be a limitation as restrict dividend paments to the Parent is provided for (1) by retaining direct ownership by the Parent to all). (2) by direct ownership by the Parent of shares of Blue Chip Stamps, and (3) by retention of significant liquid assets at the Parent company level.

[PAGE 40]

MANAGEMENT DISCUSSION (Continued) Berkshire Hathaway Inc. Inflation businesses. Generally. Berkshire receives current revenues in any year which have substantially the Berkshire management does not believe that, to date, inflation has seriously affected Berkshire's stated in dollars which are other than current dollars. same purchasing power as the dollars which represent its current costs. Very few of Berkshire's costs are Berkshire's insurance businesses, particularly since premium rates ere established well in advance of Very large changes in the rate of inflation that were not anticipated could seriously impact incurrence of the related costs. Management believes that to date, however, underwriting results have not been impacted materially by inflation or changes in inflation rates. 39

[PAGE 41]

The 1980 Annual Report of Blue Chip Stamps included the following letter to Blue Chip stockholders from the Chairman and the President of that Company To Our Shareholders assets) for the caiendar year 1980 increased to $16,564,000 ($3.20 per share) from $14.312,000 ($2.76 per Consolidated operating income (i.e., betore all net yains from sales of corporate securities and imporiant fixed snare! in the previous year. increased to $20.389.000 ($3.94 per share) from $15.526.000 ($3.00 per share) in the previous year. Consolidated net income (i.e, after net gains from sale of corporate securities and important fixed assets) (80%-owned), Precision Steel (80%-owned), and Buffalo Evening News. I:c. (100%-owned), in addition to the We have four major subsidiaries, See's Candy Shops, Incorporated (100%-owned), Mutual Savings wasic business (primarily trading stamps) operated by the parent company. Our consolidated income for our two reporting years just ended treaks down as follows (in 000s except for per-share amounts): Blue Chip's equity in Net operating income (loss) of Year ended abou: See s* Savings®? Mutual Business Steel Evening News*3 Buffalo All other net sales of secunties Net gains on operating and important Blue Chip income"* fixed assets's consolidated net income December 31, 1980 December 31. 1979 Per Blue Chip share $7.270 1.40 54,181 $1,205 Per Blue Chip share .. 5,997 .81 .23 S(1,472) $5,380 2,554 1.04 $3,825 .74 $20,389 1.16 6,804 1.31 1,367 (.28) 26 (2,410) .49 1.214 3.94 .24 15.526 (.46) 3.00 •After reciucing income by amortization of intangibles arsing from purchase of See's at a large premium over its boris value •After increasing income by amortization of the discount from Mutual book value at which the interest was acquired •After deduction of interest and oiner corporate expenses in each year there was an operating loss from promotional services activities •After reducing income by amortization of relatively minor intang bies arising at acquisition of the newspaper. betore ensig al consondated net income was credited with (1) dividends and interest resulting from investment of the funds available dividends in computing ederal income taxes. plus (!!.) Blue Chip's share of dividends, interest and rent from securries and real estate through ""cat caused by trading stamps issued bu! not yet redeemed, plus (il) income tax benefit caused by 85% exclusion of held by ine Wenco Financial Corporation group ouiside is savings and loan and steel service activities, pius (iv) in 1980 a net under "Promotional Services Business and Miscellaneous Sources o! Operating income." adiustment of Biue Chio's stamp fabity account in the amount o! $1.747 or $ 34 per Blue Chip share, net of taxes, as explained beiow *The 1930 igures comprise $2,332 or S 45 per Blue Chip share atributabie to Mutuat sale of 15 branch offices, as explained below under Mutuai Savings and Loan Association," and S1,493 or S 29 per Blue Chip share of net securities gains realized by the various entities inc'uding Mutual, net of taxes and mingrily interes!. The 1979 Igures reiate solely to such net securies gains. 1o shareholders iast year, and (2) our audited financial statements. The foreguing breakdown (of the same aggregate earnings) differs somewhat from that used in (1) our letter because we believe it better explains what is really happening than does our accompanying consolidated We have taken the pains to prepare our unconventional breakdown of earnings and tu furnish it in this ietter income statement in conventional form. Generally, we are trying to improve our annual letler to shareholders each year so as better to disciose the things we would want to be told it the roles were reversed and we were passive investors. SEE'S CANDY SHOPS, INCORPORATED The earnings of our 100%-owned subcidiary, See's Candy Shops, Incorporated, increased 19.7% last year. This Comparative figures ior See's for the last four years are set forth below: was a welcome change from tne nominal increases in earnings which occurred in the two previous years. 40 1 Part Il. Item 8

[PAGE 42]

Reproduced from 1980 Annual Report of Blue Chip Stamps. Profits Number of pounds of Number of Year ended about Sales after taxes' candy sold stores open at yearend December 31, 1980 $97.715.000 $7.747,000 24,065,000 191 December 31. 1979 87,314,000 6.473,000 23,985,000 188 December 31, 1978 73.653,00C 6,289,000 22.407.000 182 December 31, 1977 62.886,000 6.262,000 20,921.000 179 "These earings figures are a littie higher than Blue Chip Starps' share of See's earnings shown in the tabie above because Blue Chip's (r) amortization o! intangibles arsing from purchase o! See's stock at a large premium over book value, and (i) state income taxes on share reflects (i) deduction of the approximately 1% share of See's earnings owned by minority stockholders o! See's prior to June, 1978. See's dividends received by Blue Chip these cost pressures it never knows whether consumer resistance wili cause net profits to fall instead of rise. candy-store business remains subject to extraordinary cost pressures. When Sec's increases prices to reflect Boxed chocolate consumption per capita in the United States continues to be essentially static, and the moderate rate, but a continuation of this state of afairs lugically cannot continue forever if See's costs keep Thus far. consumers have been willing to keep buy.ng in the amounts required io keep See's profits rising at a increasing faster than the general rate of inflation. See's seasonal sales peak becomes more extreme each year, causing many operating problems and a growing Perhaps because price increases deter purchases for personal consumption more than purchases for gifts. moderate average yeariy progress under its outstanding leader. Charles Huggins. concentration of See's net income into the single month o! December Nonetheless, See's continues to make it remains quite profitable at See's, despite all the problems. for the simple reason that both new and old So far as we know the candy-store business continues to be terrible to meaiocre for all other companies, yet high level c: retailing service which characte izes its distribution. This customer enthusiasm is caused by a customers have a pronounced tendency to prefer the taste and lexiure of its candy, as well as the extremely virtually fanatic insistence on expensive natural candy ngredients plus expensive mant icturing and distributing extraordinary sales per square foot in the stoies, frequently two to three times those of competitors, and by a methods that ensure rigorous quality control and cheerful retali service. These qualities are rewarded by truly preference by gift recipients for See's chocolates, even when measured against much more expensive brands. interest in See's were valued at the same price per share, such interest at that time would have had a total value In 1978 we paid $55 per See's share to acquire a tiny minorty interest in See's. If our previously owned 99% approximately $25 million more than its aggregate amortized cost in our consolidated financial statements. Our guarded forecast is that See's earnings will increase at least modestly in 1981. MUTUAL SAVINGS AND LOAN ASSOCIATION In last year's letter to shareholders we made the following prediction regarding our 80%-owned subsidiary. Mutual Savings: higher interest rates to hold savings accounts while assets consis: primarily of low-turnover portíclios of 'Prospects for 1980 appear poor. The entire savings and loan industry is now required to pay much guess is that Mutual Savings' er nings will decline sharply from the record level of 1979." long-ierm mortgages at fixed or slowly changing interest rates below current market. Thus our best We also reported last year that Mutual Savings had contracted to sell, io Brentwood Savings and Loan Association, all its offices except its headquarters office and sateilite thereto direcily across the street. in 1980 to $4,181,000 from $6,804,000 in the previous year. As predicted, and for the reason predicted, our equity in Mutual Savings' operating income declined sharply been obtained. pursuant to the contract with Brentwood Savings The sale of Mutual Savings' branch oftices closed December 1, 1980. after all regulatory approvals had 2 41

[PAGE 43]

Reproduced from 1980 Annual Report of Blue Chip Stamps. marketable securities, were greatly reduced by the sale of the branch offices. These changes are evident when The financial leverage of Mutual Savings, and the proportion of its assets not in cash and equivalents and one compares the condensed balance sheets of Mutual Savings at December 31, 1980, and at December 31. 1979. set forth below: ASSETS December 31. 1980 December 31. 1979 Cash Interest-bearing cash equivalents Receivables, including accruals 2,580,000 2,182.000 $ 2,744,000 Loans on real estate, including participations Marketable securities 27.395.000 73,982,000 481,395,000 45,118,000 54,239,000 6,070,000 Other assets Office property 156,438,000 9,630,000 291,000 3,361,000 2,679,000 $272,498,000 $601,606,000 LIABILITIES AND NET WORTH Accounts payable, including accruals Savings accounts, net of loans on the security thereof to savers*, $ 11,422,000 Notes payable to Federal Home Loan Bank 169,237,000 $ 11,318,000 43,382,000 484,925.000 48,626,000 Total capital and surplus (virtually all in reserves, wihdrawal of 224,041,000 544,869,000 which would cause imposition of income taxes) *2 48,457,000 56,737,000 $272,498,000 $601,606,000 •The lower capital and surplus in 1980 results from dividends pard to the raren: company 'Includes $8,944,000 deposited by parent company in 1980 and $1.667.000 in 1979 approximately 9.33%. Late in December, after the sale, the average annual interest rate being earned on the Real estate loans, before the sale of branch offices were earning at an average annur' interest rate of retained residue of real estate loans had been reduced to approximately 7.68%. The reduciion occurred because most of the loans sold were from the highesi-earning part of the pre-existing pontolio. their current level, will be more than offset by the income-increasing effects of (1) the high after-tax yields from The income-reducing effects of these low-interest-rate retained loans, so long as interest rates are roughly at result that both Mutual Savings' average gross return on assets and its net earnings should be a little higher than other retained assets and (2) the elimination of all revenues and costs attributable to the branch offices, with the they would have been had no sale of branch offices occurred. be much lower than would have been reported without the sale of branch offices. On the other hand, if, some However, if interest rates decline significantly and more or less permanently, aggregate future earnings will time within the next few years, inflation and interest rates rise significantlv and more or less permanently, the sale to protect itself from adverse effects of high inflation rather than action to position itself for maximum profit from of branch offices will much improve aggregate future earnings. Thus Mutual Savings has taken action designed low inflation. The action taken was not based on the belief that high inflation and high interest rates in the future considerations intrinsic in engineering and still appropriate, we think, in financial institutions, to restructure are inevitable. or even more likely than not. Instead the action reflects a desire, motivated by the margin-or-satety Mutual Savings so that a sort of "earthquake risk" was reduced. operating losses might be created by a negative spread between interest rates on old, fixed-interest mortgage This "earthquake risk" was that at some future time interest rates would rise to such an extent that net industry, with Mutual Savings inciuded, has traditionally "lent long and borrowed short," to an extreme degree. loans and the interest rates which would have to be paid to hold savings accounts. The savings and | an lesson earlier. The extremism worked well tor decades but has not been wise in recent years. We should have learned this 42 3

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Reproduced from 1980 Annual Report of Blue Chip Stamps. the buyer at their current market value, which exceeded Mutual Savings' leprecialed cost. Our equity in the As part of the sale of the branch offices, the fixed assets (primarily real estaie) of such offices were sold to under the heading "Net Gains From Sales of Securities and Important Fixed Assets." capital gain thus created was $2,332,000 and is included in the portion of earnings designated in this letter shareholders and a desire to retain unquestioned financial strength, to sull off its carefully devaloped branc It is not pleasant work for a savings and loan association, motivated by a prudent concern for its office network and see many of its iong-term employees leave, even when they join a high-class organization like Brentwood Savings. Louis Vincenti, long-time chief executive of Mutual Savings, performed this unpleasant duty we!!, as he has every ether duty in a long and successful career. leadership so long as he is willing to serve. The savings and loan business is currently in considerable turmoil, Mutual Savings plans to continue indefinitely in the savings and loan business, under Mr. Vincenti's able not oniy because of generally pror operating results att ibutable to a combination of a high interest-rate savings and loan associations are being reduced and the regulatory framework revised to increase competitive environment with a borrowed short, lent-long positich, out also because the distinctions between banks and presently predictable, which could even include eventual re-expansion by ac:, sisition. pressures. We expect Mutual Savings to adapt successfully to the new environment in some manner not PRECISION STEEL WAREHOUSE, INC. acquired for approximately S15 miilion on February 28, 1979. It owns a long-established steel service center Our 80%-owned Precision Steel subsidiary, located in tne outskirts of Chicago at Franklin Park, Illincis, was business and a subsidiary engaged in distribution of tool room supplies and other products sold under its own 1980 from 12 months uf operation compared with $1,367,000 in 1979 from 10 months of operation. The decline brand names. Precision Steel's operating businesses contributed $1,205,000 to our consolidated net inconie in in earnings was roughiy consonant with generai conditions in the steel industry. Financial Corporation, a public cumpany with shares traded on the American Stock Exchange. For more Boih Mutual Savings and Precision Steel are owned by Blue Chip Stamps through 80% controi oí Wesco complete information, we encourage Blue Chip shareholders to obtain a copy of Wesco's 1980 annual report Simply make your request to: Wesco Financia' Corporation Pasadena, California 91109 315 East Colorado Boulevard Attention: Mrs. Bette Deckard. Secretary & Treasurer BUFFALO EVENING NEWS, INC. $34 million. It now constitutes only approximately $29 million of our consolidated net worth, as a result of about Our 100%-owned subsidiary. Buffalo Evening News, Inc.. was acquired in April 1977 for approximately $5 million of aggregale after-tax operating losses after acquisition. This translates roughly into $10 million of aggregate operating losses before taxes. to $2.805,000 from $4,617,000 in the previous year. However, the operating loss, before taxes, of the News in 1980 was lower than that of 1979, having declined litigation expenses. increased depreciation and extraordinary expenses of ly-outs rom labor contract In our letter to shareholders las" year we reported that "financial results continue to be adversely affecteu by provisions made in order to allow the News to benefit from equipment moderrization," and that "we now believe that the worst may be behind us in Buftalo... losses in previous years, plus two new factors: (1) Buffalo's greater-than proportionate share of the national In 1980 the Buffalo Evening News experienced a continuation of all the above-listed factors which caused

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Reproduced from 1980 Annual fieport of Blue Chip Stamps. economic recession and (2) the first labor strike at the News since 1970, when publication was very briefly can remember. Nonetheless, the operating loss did decrease as predicted and as above noted interrupted by a labor dispute, creating the only such interruption before iasi year which anyone now at the News in Buffalo, and comment extensiveiy concerning successes. We recommend exactly the opposite emphasis to It is, of course, a temptation when writing an annual letter to shareholders to gloss over difficulties, like those we re-tell and extend the history of the News, creating the largest single section of our annual letter. This year will business managers who report to us. and we believe in practicing what we preach. Accordingly, year after year, be no exception. published without opposition on Sundays. As we explained in detail in our 1977 through 1979 annual reports, the The News had no Sunday edition when acquired. The principa! competito:, the Buffalo Courier-Express. long-term survivai of the News clearly required that it inaugurate a Sunday edition. [Of that there was simply no question. Real trouble has been the invariable eventual outcome for every other daily newspaper in the United States, no matter how extreme its past record of prosperity and popularity, which relied overlong, in an important In fact, only three other "no.Sunday" city. exclusively on weekday publication while a significant seven-day competitor enjoyed a Sunday moncpoly. survived as late as 1977, even though many such "no-Sunday" papers once had long histories of profitability papers, competing against such "with-Sunday" papers in important cities. Moreover, the three other survivors all were in serious trouble in 1977. And since then one of the three survivor: derived from dramatic advantages in weekday circulation and advertising over their "with-Sunday" competitors. the Cincinnati Post, has been peserved, after incurring huge losses, only through the grace of its competitor's the Federal Newspaper Preservation Act of 1970. A second of these "no-Sunday" survivors of 1977, the absorbing it into a minority share of a joint operation with approval of the U.S. Attorney General as required by newspaper-chain owner (Scripps-Howard). under distress conditions, to a wealthy Cleveland man who forthwith Cleveland Press, after also incurring huge losses, was recentiy sold by its experienced Ohio-based announced that his resuscitation program included a plan to expend many millions of dollars in an attempt to Cleveland Press appears almost surely doomed, despite its belated recognition of the cause of its difficulty, as publish Sundays as well as weekdays. Because of continuing and apparently irreversible operating losses, the wnen this last survivor disappears, the "no-Sunday" paper, compating in an important American city against a does what will shartly be the only remaining "no-Sunday" survivor, the New York Post. And, within a few years. "with-Sunday" competitor, will be as extinct as the dodo bird.) it cared at all about its long-term future. In response, an antitrust lawsuit was filed by the competing paper which Under such circumstances, the News commenced publishing Sundays late in 1977, as it plainly had to do if in some interlocutory (i.e., temporary and not final) injunctions which, among other things, created severe for the first time faced the prospect of competition on Sundays as well as weekdays. The lawsuit, in turn, resulted disruptions in normal circulation procedures under midwinter conoitions and resiricted certain business aggressive practices of the competing paper were not prohibited. promotion practices of the News, commonplace within the newspaper industry, while similar but more for reversal of the injunctions, the Federal Court of Appeas reasoned that the generally pro-competitive antitrust These interlocutory injunctions against the News were reversed on appet! in 1979. In its unanimous decision used by the News. in the course of normal competition such as inauguration of a Sunday edition. laws should not be used in an anti-competitive fashion by enjoining normal promotional practices, such as those circulation and advertising linage of the News' Sunday edition. Success in the market had to be won slowly, if it Of course, the elimination of the harmful interlocutory injunctions did nc: automatically improve the could be won at all, through & eating a desirable value for customers. Moreover, achieving succass was made suffered by the News as a result of the interiocutory injunctions and accompanying publicity. Damage inflicted more difficult by the fact that it was beyond the power of the appellate court to reverse certain material damage cn an infant at birth impairs its subsequent life even after the people in charge of the operating room have decided that different delivery procedures would have been appropriate has been recognized by subscribers for editoral mert and rewarded by steady circulation growth, needed Despite the damage at birth, there was a gradual trend toward success. The Sunday edition of the News Murray Light, Editor of the News, and other editors and reporters, for consistent delivery of a product which considering the substantial Sunday-circulation lead of its principal competitor. Great credit must be given to 44 5

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Reproduced from 1980 Annual Report of Blue Chip Stamps. deserves and has received increased acceptance by the Greater Buffalo community. The circulation of the weekday Courier-Express by both readers and advertisers. also increased in 198G, as it did in 1979, and the weekday News continues to be greatly preferred to the not accompanied by declines in either the weekday or the Sunday cirsulation of the competing Courier-Express. However, the 1980 gains which occurred in both the Sunday and the weekday circulation of the News were both of which also increased. Thus Buffalo, suffering more than its share of a national recession, nonetheless • ctiy as one might expect in a boom city in an oil-saturated Sunbelt state like Texas. The twin gains on Sunday saw circulation of every edition published by its two competing major newspaper operations increase last year. in the future if such growth remains inconsistent, as it was last year, with national and regiona! trends. Aggregate were particularly impressive. This every-edition-of-each-paper circulation growth obviously can't occur each year weekday circulation in Buffalo may well decline at some point as circulation prices increase a d/or promotional increase, rellecting the overwhelming and growing relative importance of Sunday newspapers. efforts decrease in response to business conditions. Aggregate Sunday circulation is likely 1o continue to very slightly in 1980, to about 59.6%. The increase in the News' share would have been greater, except for its The News' share of the futal advertising linage of the two major newspaper operations in Buffalo increased strike which prevented publication and shifted business to its competitor on two big advertising days shortly before Christmas substantial increases in prices forced by economic pressure. Overall, this situation is not desirable for The News, and presumably the competing Courier-Express as well, lost money last yuar despite very employees or shareholders. And labor relations are affected in a none-ioo-predictable fashion when employers are unable to incur additional costs without bearing unacceptable losses. bargained settlements over many years have helped create collective bargaining agreements some of which Approximately 83% of the News' employees are members of its 13 different labor unions which through in recent years. as each new collective bargaining agreement was negotiated the union involved sought to contain provisions, designed to save jobs, which prevent technological change. With occasional exceptions, all improve, from its own point of view, on the expiring collective bargaining agreement, with the net effect that (1) the newspaper was often left weaker on account of inefficient operations and (2) there was often some economic advaniage leapfrogging of benefits, gıving a particular union more than its proportionate share of aggregate available at the Courier-Express and ihe general state of the newspaper business in Buffalo, had greatly reduced profits of By the time Blue Chip Stamps purchased the News in 1977, this process, combined with a similar process and the leapfrogging process ended in favor of conservative pattern settlements, one of the two major both newspapers. In fact, profits were so minimal that unless more rapid technological progress were allowed newspapers eventually would be forced to cease publication, as has happened in response to similar pressures years immediately preceding 1977 obtained needed union concessions and suffered no strikes. it major city alter major city, on both sides of the Allantic. In recognition of ihese facts, the Courier-Express in the purchased the News that the enterprise-destroying pattern of labor relations which had killed so many There were also grounds for optimism concerning labor relations at the News. We believed in 1977 when we metropolitan newspapers was unlikely to kill the Ne: s in Buffalo. For one thing, the News had an fair-minded and constructive and perceived as likely to be so regarded by union members at the News. For up-from-the-ranks labor-relations executive, Richaru Feather, whom we instantly admired and trusted as counsel, and they likewise impressed us favorably. Further, we noticed a great professionalism in employees at another, we made a point, before clusing the acur sition, of meeting some of the union leaders and their that they would care similarly about the security and continuation of a common enterprise. Still further, we the News. Production people and reporters alike cared about the quality of their product, causing us to conciude indeed, the enterprise is so old and its jobs so well regarded that jobholders of all kinds have for decades urged perceived a high level of friendship and communication among employees of the News, across craft-union lines something more like a family business than might seem possible to anyone not familiar with it. Finally, we had their relatives and friends to join the News, often in different craft unions, creating as the years went by 6 45

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Reproduced from 1980 Annual Report of Blue Chip Stamps. enjoyed constructive relations with diverse and major labor unions e'sewhere and did not enter Buffalo with any "buy-outs" to make some particularly important reductions in future costs. All these factors, together with the plan to seek destruction of long-established benefits, although we did hope to use negotiated voluntary other prospective buyers, perhaps more fearful of the risks from having an unusually large number of separate News' long history of labor peace, contributed to our willingness to purchase the News, although at least two unions, had refused to pay the asking price for the paper. which frequently caused operating losses for the News and disappointing wage and salary increases for union Until 1980 the long no-strike history continued much as we expected, despite economic forces and troubles members and other employees. requires that 14 different groups (the News' management plus all 13 unions), without any exception, understand However, with 13 different unions and serious external pressures from c.:mpetition and inflation, labor peace well the common danger, and, even if moving backward in inflation-adjusted economic terms, be wise and peace at the News, such unanimous wisdom and restraint are a lot to expect, giver (1) the limitations of human considerate of one another at all times. Even in the presence of the unusually favorable conditions for labor nature, including that on management's side of the table, (2) the tradition, carried over from a different era, at each union that its main preoccupation should be vigorously to enhance and protect the interests of its own members, and (3) the fact that technological changes do not arrive at a steady pace and with effects allocated insert new manning requirements, and new requirements of pay for work even if not performed, into its collective The long labor peace ended in December 1980, when one small union group went on strike in an effort to striking union group's demands, ignored a picket line and reported for work, but, finally, most of the News' bargaining agreement. Most of the other uliuns' members, recognizing the pattern-breaking nature of the pressmen refused to continue working, and the News was unabie to continue publishing. be overstated. An area-wide metropolitan newspaper which is closed down by a strike while a similar competitor The gravity of the strike, its harmful effect on the potentiality for continued existence of the News, can hardly continues publishing does not merely lose a lot of money while the strike goes on and then return to publishing at circulation rapidly during the strike, the ciosed-down paper usually suffers such a loss of competitive position approximately the same annual profit (or loss) as before. Instead, because the competing paper gains the overwhelmingly dominant English-language newspaper recently lost many millions of dollars, before its that it fairly soon reaches a point where it is unwise to reopen at all. For instance, in Montreal what had long been main competitor continued to publish. ultimate expiration, in a fruitless and foolish attempt to reopen after a strike of several months during which its except to prepare to face rationally whatever degree of impaired position resulted from the strike. Clearly, if the Such being the facts of life, the News had no practicable alternative, when its strike occurred last year. to settle its disagreement with the striking union group in any manner unfair to other unions involved, under strike was an extended one, the sensible decision would be not to renew publication. Nor was the News willing to unions which had settled earlier would lead to a ruinous resumption of leapfrogging to the ultimate detriment conditions of common external hazard, in serial bargaining of union contracts. A resolution of the dispute unfair of the News and a!l its employees, including those attempting to take the first jump. cause the strike to end in two days without, in the News' view, unfairness to unions which had settled earlier. Fortunately, the amount of good will and good sense at the News was sufficient, as the matter worked out, to small loss of competitive position. Both economic results, of course, diminish the capacity of the News to However, the strike augmented the News' pre-lax losses by several hundred thousand dollars and also caused a shareholders. compensate its employees in the future as well as its prospects for beginning to pull its economic weight for on Sundays, remains pending. However, the litigation has been less active and costly in 1980, following The litigation against the News, filed by the Courier-Express in 1977 when the News commenced publishing purchase of the Courier-Express by the Minneapolis Star and Tribune Company, which has a history of preferring the exercise of business and journalistic skills over court battles. On the other hand, possibly as a result of this preference, the Courier-Express is now a more effective competitor than it was under its former owners. 46

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Reproduced from 1980 Annual Report of Blue Chip Stamps. economy, we expect a further improvement in operating results in 1981. Moreover, because we own what we Encouraged by the News' reduced operating loss in 1980, despite the strike and Buffalo's depressed we still hope and expect that the News in due course will earn annual profits consistent with its value to Buffalo believe to be one of society's best service institutions and much the better of Buffalo's two major newspapers. and appropriate to our level of investment. Our policy remains to improve and hold the News and not to sell it. advertising is stable-to-inching-ahead, and we could easily improve our consolidated operating earnings and the The News remains a salable property, even with its current troubles, so long as its share of circulation and percentage return we earn on our shareholders investment by selling the News and reinvesting the proceeds. conviction that the proper course is to stay with the News Until ii either expires, or, much more likely, becomes a after tax effects, in profit-earning assets. That we are not even slightly tempted to do so demonstrates our solid earner and employer. appropriate based on the record to date and the nature of the situation. We therefore repeat to our shareholders Despite our confidence in the probable long-term success of the News, a certain caution is probably our warning in previous years regarding what we now believe are unlikely contingencies: "If the litigation Court of Appeals and in obtaining the kinds of injunctions it is seeking, or if any extended strike shuts down the continues and if the competing paper succeeds in somehow changing the law as enunciated by the Federal could exceed $10 million." Buffalo Evening News, it will probably be forced to cease operations and liquidate, at an after-tax cost which PROMOTIONAL SERVICES BUSINESS AND MISCELLANEOUS SOURCES OF OPERATING INCOME The final components of our consolidated net operating income last year were provided by (1) operating interest and other general parent company expense, plus (2) our share of operating earnings, after deduction of earnings from our promotional services (mainy trading stamp and motivation) business, after deduction of savings and loan and steel service activities of its subsidiaries. interest and other Wesco general corporate expense, from securities and real estate held by Wesco outside the interest and other general expense and taxes, last year, up to S4,293,000 from $1,932,000 after (properly) giving The promotional services business operated at a sharply increased operating profit, after parent company it credit for the entire income (dividends and interest, plus income tax benefits caused by dividends) from shareholders should not be much impressed by most of the increase in operating profit, which was attributabie investment of the funds available through "float" caused by trading stamps issued but not yet redeemed. Our primarily to revisions in our estimates of our liability to redeem outstanding trading stamps. The revisions, which income was also increased by $721,000 through changing our motivation business from a loss to a profit by their nature will not trequently recur, increased 1980 operating income by $1,747,000. However, operating position, a condition we hope will recur indefinitely. $15,967,000 in the previous year. Motivation business revenues increased to $2,771,000 from $2,310,000. Trading stamp service revenues increased by a minor amount to $16.672,000 last year compared with was many times greater than the current level - is large in relation to current issuances. (Trading stamp Is our trading stamp business our "float" - resulting from past issuance of trading stamps when volume revenues peaked at $124,180,000 in fiscal 1970, and our 1980 revenues of $16,672,000 therefore represented a will decline greatly. The decline in "float" in recent years, however, has proceeded at an extremely siow rate, and decline of 87% from peak volume.) Eventually, unless stamp issuances improve, earnings from investing "float" our "float" was $64,053,000 at yearend 1980. shareholders to review. accounting for trading stamp redemption liability (which involves estimating the number As discussed extensively in previous annual reports (particularly for fiscal 1976), which we urge circumstances, but particularly so in an inflationary economy and when stamp issuances decline by a large of stamps that will ultimately be redeemed and the cost per stamp) is a difficult process under any 8 47

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Reproduced from 1980 Annual Report of Blue Chip Stamps. percentage. We periodically revise our estimated future redemption liability as conditions warrant. In 1980 we made revisions increasing operating income as above described, as explained in detail in Note 2 to our accompanying financial statements. service, operate unusually successful supermarkets, bowling alleys and other businesses, and we belleve thai, We intend to remain in the trading stamp business. Many of our present customers, aided by our stamp given the opportunity, we Cail also provide very useful service to new customers. deduction of interest and other Wesco general corporate expense, from securities and real estate held by Wesco One final item augments our consolidated net operating income. Our share of operating earnings, after outside the savings and loan and steel service activities of its subsidiaries, amounted to $695,000 in 1980, compared with $492,000 in the previous year. NET GAINS ON SALES OF CORPORATE SECURITIES AND IMPORTANT FIXED ASSETS than might be expected in a consolidated enterprise of our size at the close of 1980, as we report consolidated In our total assets, located among our five operating businesses, we hold considerably more corporate securities revenues of $219 million and consolidated net worth of $146 million (see Note 3 to our accompanying consolidated financial statements). in which they are owned. For instance, the trading stamp business owns liquid assets to provide for ultimate Most of these holdings of corporate securities are held because of the very nature of the particular business redemption of stamps, and the savings and loan business holds liquid assets to provide for repayment of savings account holders. The remaining securty holdings exist temporarily. primarily in Wesco Financial Corporation, pending their disposition to provide funds for use in buying additional businesses. preferred stocks. Most holdings, therefore, are of common stocks. Our reported operating earnings incide only Only Mutual Savings, which is barred by law from owning most common stocks, has significant holdings of also have and reinvest earnings not paid out as dividends, a process which ultimately raises market value of the the dividends from our stockholdings, after taxes. And, because the corporations whose common stock we own stock we own, we also realize irregularly net capital gains from sales of portions of our holdings. such businesses adjust to changing conditions. In 1980 the sale of branch office facilities by Mutual Savings fell In addition, our various businesses occasionally sell important buildings, machinery or other fixed assets, as into this category. total share of the net gains from sale of corporate securities was $1.493,000. Our aggregate share of both types In 1980 our share of the gain from sale of Mutual Savings' branch office facilities was $2,332,000, and our of capital gains combined was $3.825,000. compared with $1.214,000 in the previous year. PINKERTON'S, INC. national security and investigation service company. At yearend 1980 we owned non-viting stock reprodenting 35% of the equity in Pinkerton's, Inc., the leading rather buy stock we can t or won't vote than alsolute control. We think the rationality of use-of-capital decisions Our ownership of this non-voting interest demonstrates that, when all factors are considered. we often would is improved when the repertoire of a corporate manager includes purchases of business interests which do not low interest among corporate managers in passive investments, even when available at much better augmen! the number of people to whom the manager can give orders. However, we have generally observed a positions is ordinarily justified by (1) expected improvements from a change in control based on a high appraisal price/earnings and price/book value ratios than controlling positions. The strong preference for controlling 48 9

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Reproduced from 1980 Annual Report of Blue Chip Stamps. investee and (2) a low appraisal of the likelihood that the managers of the corporate investee, if free to act of the business skills of the managers of the corporate investor compared to the managers of the corporate independently, will make decisions which best serve the interests of ultimate shareholders. Our view is different. and, although we expect always to concentrate our activities primarily in operating businesses, we also have an uncommon interest in passive positions for the following reasons: (1) We know that our business skills are frequently inferior by a wide margin to those of others, as we can prove from comparative figures and our audited record rellecting gross errors: (2) We believe that many corporate managers can be trusted to serve the shareholders' interests even when the sharehoiders have no practical power to control or replace management, (3) We think the advantage of buying at a non-premium price, because control is absent, often counterbalances the disadvantage, if any, from lack of control; (4) Our consolidated enterprise includes operating businesses required by their nature to own significant passive investments. businesses and to altract other offerings like that wnich produced our Pinkerton's holding. And we are sure. We hope to become better known for our uncommon willingness to own "non-voting-partnership" interests in based on five years' observation from our non-yoting position, that Pinkerton's wouldn't have been managed one whit better or one whit more in its shareholders' interests if we had purchased voting control. constituting marketable securities, is substantially below current market value. See Note 3 to our accompanying Our total investment in Pinkerton's at cost was $23.364,000 which, with respect to the major portion thereof financial statements. Only the dividends we receive from Pinkerton's are included in our reported income. These heading: "Promotional Services Business and Miscellaneous Sources of Operating Income." The part created by dividends have increased regularly in recent years. creating part of the income reported above under the Pinkerton's dividends was $1.429,000 in 1980 and $1.201,000 in 1979 CONSOLIDATED BALANCE SHEET AND OTHER DATA large outstanding promises to others. As emplained in Note 3 to the accompanying financial statements, the Our consolidated balance sheet retains a strength befitting a company whose consolidated net worth supports aggregate market value of our marketable securities was higher than their aggregate cost at December 27. 1980. We remain in a prudent position when tota! debt is compared to total net worth and total liquid assets. When combined with our practice of doing a certain amount of long-term borrowing in advance of specific need. Retaining the impeccable bank credit facilitated by a prudent balance sheet position is very important to us it gives us maximum financial flexibility to face both hazards and opportunities. and Analysis" are presented beginning on page 13. We invite your careful attention to these items and to our Sections entitled "Principal Business Activities." "Selected Financial Data" and "Management's Discussion audited financial statements. A LOOK BACK AND A LOOK AHEAD its former size, and a portfolio of securities, offsetting stamp redemption liabilities, which had been selected by We began the 1970s with a single business, trading stamps, which was destined to decline to a small fraction of instance, contained a substantial amount of very-long-term, iow-coupon municipal bonds of issuers with previous owners and would have led to a disastrous result if held through to the present time. (The portfoiio, for declining credit ratings.) 10

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Reproduced fran 1980 Annual Report of Blue Chip Stamps. (1) trading stamps and other promotional services, (2) See's Candy Shops, Incorporated, (3) Mutual Savings. We began the 1980s with five constituent businesses instead of one. In order of acquisition they are: (4) Buffalo Evening News, and (5) Precision Steel. Our five constituent businesses have more in common than might be noted by a casual observer: (1) They are all high-grade operatins, manned by high-grade people operating within a long tradition emphasizing reliable and effective service, and (2) When functioning properly each business will usually generate substantial amounts of cash not new businesses or debt repayment. claimed by compulsory reinvestment in the same business and therefore available for purchases: The second of these two common characteristics needs additional explanation. Many businesses, ence good even when physical volume is constant. Any such business, always cash-starved even while reporting investments when inflation was low, are now, under inflationary conditions, unable to produce much, if any, cash of ours. apparently satisfactory profits, is not a candidate, absent some special factor, to become a new subsidiary sheet net worth had increased to approximately $146 millic::, up 240% in ten years. At February 27. 1971 our Our balance sheet net worth at February 27, 1971 was about $43 million. By the end of 1980 our balance equity was worth about $25.6 million more than balance sheet cost. Our average annual total percentage return equity in aggregate securities was worth about $5 million less than balance sheet cost. At the end of 1980 our earned on shareholders investment over the ten years ending December 27. 1980 was approximately 15% per securities. The percentage return earned was acceptable in a moderate-inflation environment, considering the annum, without counting the favorable swing from unrealized loss to unrealized profit in our equity in marketable headwinds in our initial trading stamp business. was approximately 16%. This percentage return fluctuates from year to year, depending upon various factors In 1980, the year just ended, our total percentage return on the beginning investment of our shareholders including changes in amounts of capital gains realized. The percentage return figure for any one year is not very importance. significant, although the average figure over a period of years, and the trend in such average figure, are of vital investment in the future than we have in the past. Our total percentage return on shareholders' investment is now We hope to earn a higher average (though fluctuating) annual total percentage return on shareholders' depressed by our substantial commitment to the Buffalo Evening News. producing losses instead of profits. We will produce higher returns than the assets disposed of to fund their purchase. are trying to correct this condition. Moreover, we expect from time to time to acquire additional businesses which investment (no sure thing), our performance as a company may not do very much for our shareholders as However, even if we succeed in increasing our average annual total percentage return on shareholders' investors if inflation continues at the present rate. As we stated last year, "A 16% return on equity obviously won': taxes imposed on owners who must report taxable 'profits' while only maintaining their position on the do much in real terms for shareholders if the inflation rate is 16%, or even 11% when we also allow for income purchasing-power treadmill." know of no adequate countermeasure, generally available to corporate managers who wish to protect Inflation is a very effective form of indirect taxation on capital represented by holdings of common stock. We shareholders, to this form of indirect taxation. But, even so, we think a habit of always thinking about on shareholders, is quite useful and may fairly be expected of corporate managements. We make a very shareholders interests in real terms, instead of rationalizing growth of managed assets regardless of real effects conscious effort, perhaps with occasional inadvertent lapses, to have and reinforce this habit. 50 11

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Reproduced from 1980 Annual Report of Blue Chip Stamps. shareholder interests, have intensified our resistance to most proposals that we issue new common siock. We For one example, low stock prices, caused by inflation, together with our preoccupation with real cannot get as much intrinsic value as they give when new common stock is issued. Our corporation is no haven't issued a new share, ior any reason. for a long time. With rare excuptions American corporations now through new stock issuances, the value underlying each outstanding share. Our unwillingness to accept any exception. And, quite clearly, a corporation can't further ts own shareholders' long-term interests by diluting. such dilution explains our long-unchanged common stock capitalization. to issue new stock and (3) strong balance sheet position are all likely to enjoy increased recognition in future We believe that our (1) heavy emphasis on the cash-generating characteristics of businesses. (2) reluciance years as qualities to be emphasized by selectors of common stocks for investment. Cordially yours. Charks T Manger Amale a Kagos Charles T. Munger Donald A. Koeppe! February 25, 1981 Chairman of the Board President 12 51

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Louis R. Vincenti, Chairman of the Board and President of Wesco The 1980 Annual Report of Wesco Financial Corporation included the following letter from TO THE STOCKHOLDERS OF WESCO FINANCIAL CORPORATION poration Consolidated and its net income of Wesco Financial Cor- sold, shortly prior to the sale of its branches, approxi- $10,045,000 ($1.41 per share) compared to $11,140,000 subsidiaries mately $24.000,000 in public utility preferred stocks at a (51.56 per share) in 1979, a decrease of 10%. Sources loss after taxes of $2.057.000 in order to reitivest in other of net income are as follows: preferred accomplished after the sale as regulations limit the pur- stocks. This switch could not have been chase of preferred stocks to an amount equal to 5% Mutual Savings assets at the time of purchase. If there had been no sale of branches and no switching of preferred stocks, the 3.802,000 consolidated earnings for 1980 would have been $10.045.000 $11,140,000 3,437,000 ($1.56 per share) actually reported for 1979. 59,191,000 ($1.29 per share) compared with S11,140,000 the previously announced sale of all its offices, except On December 1, 1980, Mutual Savings consummated a new shopping mall across the street, to Brentwood its Pasadena headquarters office and a satellite office in significantly higher interest rates during 1980. Mutual The Association experienced extremely Corporation. This transaction Savings and Loan Association, a subsidiary of lim Walter impacted by these high interest rates. Savings' operating carnings for the year were severely related taxes and expenses of $2,911,000 (S.41 per share). resulted in a gain net of to 8.75% in 1980. This increase is due not only to the average cost of savings increased from 7.40% in 1979 facilities of the Under terms of the salc, Mutual Savings sold the physical deposits approximately branches $307,000,000) and transferred net branch shift of the savings portfolio to interest-sensitive accounts higher level of interest rates, but also to the continuing 2mount of mortgage loans with an average yield of and an equal Savings accounts which reflect market rates increased from annual yield of the real estate loan portfolio was reduced approximately 10%% to Brentwood Savings. The average 11% of total savings accounts at December 31, 1978 to 31, 1980. Excluding the deposits at branches transferred 30% at December 31, 1979, and to 38% at December from 9.3% to 7.7%. to Brentwood Savings, total deposits in Mutual Savings proportion of assets not in cash and marketable securi- of Mutual Savings, creased $12,109,000 in 1980 compared to an increase credited to savings accounts) de- offices. While interest rates are at their approximate were greatly reduced by the sale of the branch of $20,584,0C7 in 1979. yield from retained loans is more than offset by income- current level, the income-reducing effect of the low $13,618,000, During 1980, real estate loan disbursements were addition, participation loans purchased were $19.000,000 compared with $54,157,000 in 1979. In increasing effects of the high after-tax yields of other Mutual Savings in 1980 compared with $50,002,000 in 1979. In December in participation loans purchased carlier in the year. 1980 Mutual Savings sold, at book value, the $19,000,000 higher than if no sale had occurred. reported without the sale of the branch offices. If infla- less than the amount which would have been decline significantly, future earnings 1980 are carried at a cost basis of $1,582,000 and consist Properties acquired by foreclosure at December 31, branch offices will improve future earnings. lion and interest rates rise significantly, the sale of the principally of 22 acres of vacant land on the ocean front carried at $1,113,000. A planned development of single- Biltmore Hotel in Santa Barbara, California, to protect itself from the adverse effects of high inflation the branch offices was accomplished by Mutual Savings family residences is being processed and will require favorable action by the County of Santa Barbara and ihe The savings and loan industry, including Mutual Savings. extreme degree. This worked well for many years, has traditionally "lent long and borrowed short" to an such processing is indeterminate. We believe, that sub- California Coastal Commission. The required has not been wise in recent years. What the future holds ject to successful processing. a substantial profit would he realized at the time of any disposition. The remainder, is yet to be determined. carried at $469,000, consists principally of a commercial In January 1980, Mutual Savings sold its remaining development of nine retai! stores in a shopping center in Upland, California. All of the shops are presently (FNMA) at a profit rented. We plan to hold this property for a substantial of $269,000 on the sale of FNMA stock. Mutual Savings Savings' earnings in 1979 inclured a profit net of taxes Profits derived from sale of foreclosed property are not period as prospects for an increase in its value are good subject to Federal or State income taxes. 52

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Reproduced from 1980 Annual Report of Wesco Financial Corporation erable turmoil with poor operating results attributable to The savings and loan husiness is currently in consid- As a result of net sales of common and preferred the removal, in part, high interest rates. There are many problems becaust of stocks in 1980, Wesco's consolidated holdings in such and savings and loan associations, which has increased of the distinctions between banks investments decreased $94,546,000) at December to $84,631,000 market value 31, 1980 from $93,953,000 competitive pressures. Because of many uncertainties and (market value S104,644,000) at December 31, 1979. lending. Mutual Savings at the present time is not active acceptable variable-rate instrument for Mutual Savings increased its investment in municipal compared with Só,670,000 at December 3i. 1979. obligations to S21.244,000 at December 31. 1980, as in real estate lending. Participation in mortgage banking expect to successfully adapt to whatever new environ- cant holdings of preferred stock, which heidings it will Only Wesco's savings and loan subsidhary has signifi- so is presenily not predictable. The net worth of Mutual ment may exist in the future, but the manner of doing probably relain. It is expected that the common stock Savings is many times greater than that of other savings held outside the savings and loan subsidiary will be and loan associations and will assur its ability to produce businesses when suitable oportunities orcur. Until other sold to provide with which to acquire other continued substantial earnings. continue to depend primarily on carings from the businesses are acquired, consolidated me: income will on the sale of its stock in Knight-Ridder Newspapers, In 1980, Wesco made a profit of $910,000 net of taxes savings and loan and steel businesses. realized on the sale of Detroit International Bridge while in 1979 a profit after was Discussion and Analysis of Financial Condition Later in this report, under the headings "Management's Results of Operations" and "Selected Financial Data," is and Company stock. Wesco and its subsidiaries. Of particular interest is the provided more detailed information as to the results of subsidiary located in Franklin Park, Illinois, include ten The earnings of Precision Steei, Wesco's wholly-owned table of tax equivalent yields on investments, and the months of operations in 1979 from its February 28, 1979 spreads using that basis, between combined yields on decline in Precision Steel's earnings from $1,707,000 in acquisition, and twelve months in and borrowings. These figures give recognition io the loans and investments and combined costs of savings general recessionary conditions of the economy on the 1979 to $1,504,000 in 1980 reflects the impact of the advantage obtained by investments in common and pre- fact that only 15% of the income from stocks is subject ferred stocks and in municipal bonds, by reason of the to federal income tax, and all of the income from muni- cipal bonds is exempt therefrom. The increase from 1979 to 1980 in the net profit of the other than Mutual dividend from $.10½ per share to $.11% per share On January 28, 1981, Wesco increased its regular cash Savings, which occurred despite the lower earnings of Precision Steel, is due to the advantageous temporary close of business on February 23, 1981. payable March 17, 1981 to shareholders ost record at the use by Wesco of (1) the sum of S2,700,000 received in tional dividends of $9,600,000 and $2,400,000 were paid January 1980 as a dividend from Mutual Savings (addi- in December 1980 and January 1981, respectively) and cision Steel for $15,000,000, of the successful June 1979 (2) the net proceeds, after purchase of the assets of Pre- Note offering in the amount of $25,000,000 at 10%%. LOUIS R. VINCENTI Chairman of the Board and President 53

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Berkshire Hathaway Inc. DIRECTORS AND EXECUTIVE OFFICERS WARREN E. BuFFEtt, Director and Chairman of the Board Chief Executive Officer of the Company KENNETH V. CHACE, Director Textile Operations of the Company President of the Company and Chief Operating Officer of the MALCOLM G. CHACE. JR.. Director Retired, Former Chairman of the Board of Directors of the Company J. VERNE MCKENZE, Director Vice President, Secretary and Treasurer of the Company CHARLES T. MUNGER. Directur Chairman of the Board of Blue Chip Stamps Vice Chairman of the Board of the Company COMMON STOCK DATA Shareholders The Company had approximately 1.350 record holders of its common stock at February 27, 1981. Market Prices in the NASDAQ System under the symbol BKHT. The high and low bid prices for stock in each quarter of 1980 and The common stock of Berkshire Hathaway Inc. is traded in the over the counter market and is regularly quoted 1979 is set forth in the following table. The quotations represent prices between dealers and do not include retail markup, markdowli or commission. They do not represent actual transactions. 1986 High Low 1979 High Second Quarter First Quarter 320 340 260 245 First Quarter.. Third Quarter 400 300 Third Quarter. Second Quarter 215 185 Low 154 Fourt:: Quarter 475 375 Fosa. Duarter 335 350 215 185 240 Dividends investing its earnings in expansion of its businesses rather than prying orch dividends. Berkshire has not declared a cash dividend since 1967. No change is contemplated in Berkshire's policy of 54

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"i y 1980 56

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BERKSHIRE HATHAWAY INC. Executive Offices - 97 Cove Street, New Bedford, Massachusetts 02744 1980