1984 年伯克希尔完整年报

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PREM JAIN 36) BERKSHIrE FLATHAWAY ING PURDUE UNIVERSITY OCT 09 1985 KRAI LIBRARY. 1984 ANNUAL REPORT TO THE STOCKHOLDERS REPRINT 1984 bez

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BERKSHIRE HATHAWAY INC. 1984 ANNUAL REPORT TABLE OF CONTENTS Chairman's Letter Business Activities of The Company Accountants Certificate Consolidated Financial Statements Managements Discussion Summarized Financial Statements iParent Company Only 48 Changing Price: Data 49 Annual Report Better m Wesco Financial Corporation 50 Shareholder Designated Contributions 60 Selected Floancial Data 62 Common Stock Data 64 Directors, Officers and Operating Managers Inside Back Cover

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PURDUE UNIVERSITY! OCT 0 9 1985 KRANNERT LIBRARY/ BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Our gain in net worth during 1984 was $152.6 million, or $133 per share. This sounds pretty good but actually it's mediocre. Economic gains must be evaluated by comparison with the capital that produces them. Our twenty-year compounded annual gain in book value has been 22.1% (from $19.46 in 1964 to $1108.77 in 1984), but our gain in 1984 was only 13.6%. As we discussed last year, the gain in per-share intrinsic business value is the economic measurement that really counts. But calculations of intrinsic business value are subjective. In our case, book value and book value increased during 1984 at about the same rate. serves as a useful, although somewhat understated, proxy. In my judgment, intrinsic business value base exerts upon rates of return. Unfortunately, my academic voice is now giving way to a reportorial Using my academic voice, I have told you in the past of the drag that a mushrooming capital (assuming we continue to follow our present dividend policy, about which more will be said later voice. Our historical 22% rate is just that — history. To earn even 15% annually over the next decade in this letter) we would need profits aggregating about $3.9 billion. Accomplishing this will require a few big ideas — small ones just won't do. Charlie Munger, my partner in general management, and (How's that for a strategic plan?) I do not have any such ideas at present, but our experience has been that they pop up occasionally. Sources of Reported Earnings net ownership interest in many of the constituent businesses changed at midyear 1983 when the Blue The table on the following page shows the sources of Berkshire's reported earnings. Berkshire's Chip merger took place. Because of these changes, the first two columns of the table provide the best measure of underlying business performance. All of the significant gains and losses attributable to unusual sales of assets by any of the business entities are aggregated with securities transactions on the line near the bottom of the table, and are not included in operating earnings. (We regard any annual figure for realized capital gains or losses as meaningless, but we regard the aggregate realized and unrealized capital gains over a period of years as very important.) Furthermore, amortization of Goodwill is not charged against the specific businesses but, for reasons outlined in the Appendix to my letter in the 1983 annual report, is set forth as a separate item.

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(000s omitted) Earnings Before Income Taxes Net Earnings After Tax Total Berkshire Share Berkshire Share 1984 1983 1984 Operating Earnings: 1983 1984 1983 Insurance Group: Underwriting Net Investment Income $ (48,060) 68,903 $(33,872) $ (48,060) $ (33,872) $ (25,955) $ (18,400) Buffalo News 43,810 68,903 27,328 19,352 27,328 43,810 16,547 62,059 39,114 Nebraska Furniture Mart" 14,511 13,317 8,832 See's Candies 3,812 26,644 27,411 26,644 11,609 24,526 3,049 5,917 Associated Retail Stores (1,072) 697 (1,072) 697 13,380 1,521 (579) 12,212 Blue Chip Stamps!?) (1,843) 355 Mutual Savings and Loan 1,456 (1,422) (1,843) (1,876) (899) (353) Precision Steel 4,092 3,241 (798) 3,278 1,166 (467) 2,102 3,151 1,696 1,917. Textiles 418 (100) 418 (100) 226 1,136 Wesco Financial 9,777 7,493 7,831 4,844 4,828 (63) Amortization of Goodwill (1,434) (532) (1,434) (563) 3,448 Interest on Debt (14,734) (15,104) (14,097) (1,434) (563) Shareholder-Designated (13,844) (7,452) (7,346) Contributions Other (3,179) 4,932 (3,066) (3,179) (3,066) Operating Earnings 10,121 4,529 9,623 (1,716) 3,476 (1,656) 8,490 Special GEICO Distribution 87,739 61,043 82,021 19,575 51,410 - 19,575 70,015 18,224 48,644 Sales of securities and Special Gen. Foods Distribution . 8,111 7,896 - 7,294 - unusual sales of assets Total Earnings - all entities 104,699 67,260 101,376 65,089 $200,549 $147,878 71,587 45,298 $191,293 $136,074 $148,896 $112,166 '''1983 figures are those for October through December. 12) 1984 and 1983 are not comparable; major assets were transferred in the mid-year 1983 merger of Blue Chip Stamps. Sharp-eyed shareholders will notice that the amount of the special GEICO distribution and its loc ion in the cable have been changed from the presly ot orm lot subsTance the store besid and reduce "accounting" the changes, however, is interesting. the same time, we agreed by written contract to sell GEICO an amount of its shares that would be As reported last year: (1) in mid-1983 GEICO made a tender offer to buy its own shares; (2) at other shareholders; (3) at completion of the tender, we delivered 350,000 shares to GEICO, received proportionately related to the aggregate number of shares GEICO repurchased via the tender from all the tender; (4) GEICO's transaction with us amounted to a proportionate redemption, an opinion $21 million cash, and were left owning exactly the same percentage of GEICO that we owned before rendered us, without qualification, by a leading law firm; (5) the Tax Code logically regards such proportionate redemptions as substantially equivalent to dividends and, therefore, the $21 million we was far less than the previously-undistributed earnings that had inured to our ownership in GEICO received was taxed at only the 6.9% inter-corporate dividend rate; (6) importantly, that $21 million and, thus, from the standpoint of economic substance, was in our view equivalent to a dividend. Because it was material and unusual, we highlighted the GEICO distribution last year to you, emphasized the transaction to our auditors, Peat, Marwick, Mitchell & Co. Both the Omaha office of both in the applicable quarterly report and in this section of the annual report. Additionally, we Peat Marwick and the reviewing Chicago partner, without objection, concurred with our dividend 2

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that General Foods repurchased its stock over a period of time in the open market, whereas GEICO In 1984, we had a virtually identical transaction with General Foods. The only difference was had made a "one-shot" tender offer. In the General Foods case we sold to the company, on each day that it repurchased shares, a quantity of shares that left our ownership percentage precisely unchanged. again the money we received was far less than the retained earnings that had inured to our ownership Again our transaction was pursuant to a written contract executed before repurchases began. And interest since our purchase. Overall we received $21,843,601 in cash from General Foods, and our ownership remained at exactly 8.75%. that it disagreed with the conclusions of the firm's Omaha office and Chicago reviewing partner. The At this point the New York office of Peat Marwick came into the picture. Late in 1984 it indicated New York view was that the GEICO and General Foods transactions should be treated as sales of stock by Berkshire rather than as the receipt of dividends. Under this accounting approach, a portion of the cost of our investment in the stock of each company would be charged against the redemption payment and any gain would be shown as a capital gain, not as dividend income. This is an accounting approach only, having no bearing on taxes: Peat Marwick agrees that the transactions were dividends for IRS purposes. We disagree with the New York position from both the viewpoint of economic substance and proper accounting. But, to avoid a qualified auditor's opinion, we have adopted herein Peat Marwick's 1984 view and restated 1983 accordingly. None of this, however, has any effect on intrinsic business value: our ownership interests in GEICO and General Foods, our cash, our taxes, and the market value and tax basis of our holdings all remain the same. This year we have again entered into a contract with General Foods whereby we will sell them shares concurrently with open market purchases that they make. The arrangement provides that our ownership interest will remain unchanged at all times. By keeping it so, we will insure ourselves dividend treatment for tax purposes. In our view also, the economic substance of this transaction again is the creation of dividend income. However, we will account for the redemptions as sales of stock rather than dividend income unless accounting rules are adopted that speak directly to this point. We will continue to prominently identify any such special transactions in our reports to you. several of them, we view such repurchases as at least equally favorable for shareholders who do not While we enjoy a low tax charge on these proportionate redemptions, and have participated in sell. When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases. (Our endorsement of repurchases is limited to those dictated by price/value relationships and does not extend to the "greenmail" repurchase — a practice we find odious and repugnant. In these third party. The players are: (1) the "shareholder" extortionist who, even before the ink on his stock certificate dries, delivers his "your-money-or-your-life" message to managers; (2) the corporate insiders who quickly seek peace at any price — as long as the price is paid by someone else; and (3) the shareholders whose money is used by (2) to make (1) go away. As the dust settles, the mugging, transient shareholder gives his speech on "free enterprise" ', the muggee management gives its speech on "the best interests of the company", and the innocent shareholder standing by mutely funds the payoff.) repurchases at times when wide discrepancies existed between price and value. As shareholders, we The companies in which we have our largest investments have all engaged in significant stock find this encouraging and rewarding for two important reasons — one that is obvious, and one that is subtle and not always understood. The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended. 3

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rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future intrinsic business value. These prices are entirely rational. Investors should pay more for a business returns from the business. This upward revision, in turn, produces market prices more in line with that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer. (To make the point extreme, how much would you pay to be a minority shareholder of a company controlled by Robert Vesco?) The key word is "demonstrated". A manager who consistently turns his back on repurchases, matter how often or how eloquently he mouths some public relations-inspired phrase such as "maximizing when these clearly are in the interests of owners, reveals more than he knows of his motivations. No shareholder wealth" (this season's favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth — and, after a while, neither will the market. repurchases of GEICO, Washington Post, and General Foods, our three largest holdings. (Exxon, in We have prospered in a very major way — as have other shareholders - by the large share in this case, we have only recently established our position.) In each of these companies, shareholders which we have our fourth largest holding, has also wisely and aggressively repurchased shares but, have had their interests in outstanding businesses materially enhanced by repurchases made at bargain economics combined with shareholder-conscious managements. prices. We feel very comfortable owning interests in businesses such as these that offer excellent exclude the interests attributable to minority shareholders of Wesco and Nebraska Furniture Mart. The following table shows our 1984 yearend net holdings in marketable equities. All numbers No. of Shares Cost - Market 690,975 (000s omitted) 740,400 Affiliated Publications, Inc. 3,895,710 Exxon Corporation American Broadcasting Companies, Inc. $ 3,516 $ 32,908 173,401 44,416 46,738 4,047,191 6,850,000 General Foods Corporation 149,870 175,307 2,379,200 GEICO Corporation 45,713 226,137 555,949 818,872 Handy & Harman 27,318 397,300 Interpublic Group of Companies, Inc. 2,570 38,662 Northwest Industries 26,581 27,242 28,149 2,553,488 1,868,600 Time, Inc. The Washington Post Company 89,327 10,628 109,162 149,955 All Other Common Stockholdings $573,340 $1,231,560 Total Common Stocks ..... 11,634 37,326 $584,974 $1,268,886 both our qualitative standards and our quantitative standards of value versus price. We try to avoid It's been over ten years since it has been as difficult as now to find equity investments that meet compromise of these standards, although we find doing nothing the most difficult task of all. (One inactivity". This is a strategy that is far easier for historians to commend than for participants to English statesman attributed his country's greatness in the nineteenth century to a policy of "masterly follow.) In addition to the figures supplied at the beginning of this section, information regarding the businesses we own appears in Management's Discussion on pages 42-47. An amplified discussion of interesting his comments about conditions in the thrift industry. Our other major controlled businesses Wesco's businesses appears in Charlie Munger's report on pages 50-59. You will find particularly are Nebraska Furniture Mart, See's, Buffalo Evening News, and the Insurance Group, to which we will give some special attention here. 4

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Nebraska Furniture Mart and I understated the case. After another year of observing their remarkable talents and character, I Last year I introduced you to Mrs. B (Rose Blumkin) and her family. I told you they were terrific, can honestly say that I never have seen a managerial group that either functions or behaves better than the Blumkin family. Mrs. B, Chairman of the Board, is now 91, and recently was quoted in the local newspaper as saying, "I come home to eat and sleep, and that's about it. I can't wait until it gets daylight so I can get back to the business". Mrs. B is at the store seven days a week, from opening to close, and probably makes more decisions in a day than most CEOs do in a year (better ones, too). (She's a "fast track" student: not one day in her life was spent in a school room prior to her receipt In May Mrs. B was granted an Honorary Doctorate in Commercial Science by New York University. of the doctorate.) Previous recipients of honorary degrees in business from NYU include Clifton Garvin, Jr., CEO of Exxon Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary, then CEO of IBM; Tom Murphy, then CEO of General Motors; and, most recently, Paul Volcker. (They are in good company.) The Blumkin blood did not run thin. Louie, Mrs. B's son, and his three boys, Ron, Irv, and Steve, best business school of them all - that conducted by Mrs. B and Louie - and their training is all contribute in full measure to NFM's amazing success. The younger generation has attended the evident in their performance. Last year NFM's net sales increased by $14.3 million, bringing the total to $115 million, all from store in the United States. In fact, the gain in sales last year was itself greater than the annual volume the one store in Omaha. That is by far the largest volume produced by a single home furnishings of many good-sized successful stores. The business achieves this success because it deserves this success. A few figures will tell you why. In its fiscal 1984 10-K, the largest independent specialty retailer of home furnishings in the country, Levitz Furniture, described its prices as "generally lower than the prices charged by conventional furniture stores in its trading area". Levitz, in that year, operated at a gross margin of 44.4% (that is, at NFM is not much more than half of that. NFM's low mark-ups are possible because of its exceptional on average, customers paid it $100 for merchandise that had cost it $55.60 to buy). The gross margin 35.6% at Levitz. efficiency: operating expenses (payroll, occupancy, advertising, etc.) are about 16.5% of sales versus is simply extraordinary (and, remember, it all comes from a $500 investment by Mrs. B in 1937). By None of this is in criticism of Levitz, which has a well-managed operation. But the NFM operation unparalleled efficiency and astute volume purchasing, NFM is able to earn excellent returns on capital while saving its customers at least $30 million annually from what, on average, it would cost them to buy the same merchandise at stores maintaining typical mark-ups. Such savings enable NFM to constantly widen its geographical reach and thus to enjoy growth well beyond the natural growth of the Omaha market. These are not very esoteric. All members of the family: (1) apply themselves with an enthusiasm and I have been asked by a number of people just what secrets the Blumkins bring to their business. energy that would make Ben Franklin and Horatio Alger look like dropouts; (2) define with extraordinary (3) ignore even the most enticing propositions falling outside of that area of special competence; and, realism their area of special competence and act decisively on all matters within it; (4) unfailingly behave in a high-grade manner with everyone they deal with. (Mrs. B boils it down 90% of the business: NFM had never had an audit and we did not request one; we did not take an Our evaluation of the integrity of Mrs. B and her family was demonstrated when we purchased inventory nor verity the receivables; we did not check property titles. We gave Mrs. B a check for $55 million and she gave us her word. That made for an even exchange. You and I are fortunate to be in partnership with the Blumkin family.

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1. See's Candy Shops, Inc. Below is our usual recap of See's performance since the time of purchase by Blue Chip Stamps: 52-53 Week Year Ended About Sales OPerating Numbers of. stores Oper Number of December 31 Revenues After Taxes Candy Sold at Year End 1984 $135,946,000 $13,380,000 24,759,000 214 1982 1983 (53 weeks) 133,531,000 13,699,000 24,651,000 207 123,662,000 11,875,000 1981 24,216,000 202 1980 112,578,000 10,779,000 24,052,000 199 1979 97,715,000 7,547,000 24,065,000 191 1978 87,314,000 6,330,000 23,985,000 188 1977 73,653,000 6,178,000 62,886,000 6,154,000 20,921,000 22,407,000 182 1976 (53 weeks) 179 1975 56,333,000 50,492,000 5,569,000 20,553,000 5,132,000 19,134,000 173 1974 172 1973 41,248,000 3,021,000 17,883,000 170 1972 35,050,000 1,940,000 17,813,000 169 31,337,000 2,083,000 16,954,000 167 This performance has not been produced by a generally rising tide. To the contrary, many well- have been marginally profitable. To our knowledge, only one good-sized competitor has achieved high known participants in the boxed-chocolate industry either have lost money in this same period or profitability. The success of See's reflects the combination of an exceptional product and an exceptional manager, Chuck Huggins. During 1984 we increased prices considerably less than has been our practice in recent years: per-pound cost control, an area that has caused us problems in recent years. Per-pound costs — other than those realization was $5.49, up only 1.4% from 1983. Fortunately, we made good progress on for raw materials, a segment of expense largely outside of our control - increased by only 2.2% last year. (measured by pounds, not dollars) on a same-store basis. Total pounds sold through shops in recent Our cost-control problem has been exacerbated by the problem of modestly declining volume This more-shops-to-get-the-same-volume situation naturally puts heavy pressure on per-pound selling years has been maintained at a roughly constant level only by the net addition of a few shops annually. costs. an increase in stores. (Both percentages are adjusted to compensate for a 53-week fiscal year in 1983.) In 1984, same-store volume declined 1.1%. Total shop volume, however, grew 0.6% because of we do 40% of the year's volume and earn about 75% of the year's profits. We also earn significant See's business tends to get a bit more seasonal each year. In the four weeks prior to Christmas, sums in the Easter and Valentine's Day periods, but pretty much tread water the rest of the year. In recent years, shop volume at Christmas has grown in relative importance, and so have quantity orders and mail orders. The increased concentration of business in the Christmas period produces a multitude of managerial problems, all of which have been handled by Chuck and his associates with exceptional skill and grace. Their solutions have in no way involved compromises in either quality of service or quality of product. Most of our larger competitors could not say the same. Though faced with somewhat less extreme peaks and valleys in demand than we, they add preservatives or freeze the finished product opting, in effect, for production headaches rather than product modification. in order to smooth the production cycle and thereby lower unit costs. We reject such techniques,

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competition at non-holiday periods. We need new products to fight back and during 1984 we introduced Our mall stores face a host of new food and snack vendors that provide particularly strong six candy bars that, overall, met with a good reception. Further product introductions are planned. In 1985 we will intensify our efforts to keep per-pound cost increases below the rate of inflation. Continued success in these efforts, however, will require gains in same-store poundage. Prices in 1985 should average 6% - 7% above those of 1984. Assuming no change in same-store volume, profits should show a moderate gain. Buffalo Evening News progress was made in controlling costs. Excluding hours worked in the newsroom, total hours worked Profits at the News in 1984 were considerably greater than we expected. As at See's, excellent decreased by about 2.8%. With this productivity improvement, overall costs increased only 4.9%. This performance by Stan Lipsey and his management team was one of the best in the industry. union contracts that provided for a large "catch-up" wage increase. This catch-up is entirely appropriate: However, we now face an acceleration in costs. In mid-1984 we entered into new multi-year in our success in remaining cost competitive with The Courier-Express. Had we not kept costs down, the cooperative spirit of our unions during the unprofitable 1977-1982 period was an important factor the outcome of that struggle might well have been different. Because our new union contracts took effect at varying dates, little of the catch-up increase was reflected in our 1984 costs. But the increase will be almost totally effective in 1985 and, therefore, our unit labor costs will rise this year at a rate considerably greater than that of the industry. We expect to mitigate this increase by continued small significantly higher wage costs this year. Newsprint price trends also are less favorable now than they gains in productivity, but we cannot avoid were in 1984. Primarily because of these two factors, we expect at least a minor contraction in margins at the News. Working in our favor at the News are two factors of major economic importance: (1) Our circulation is concentrated to an unusual degree in the area of maximum utility to our advertisers. "Regional" newspapers with wide-ranging circulation, on the other hand, have a significant portion of their circulation in areas that are of negligible utility to most advertisers. A subscriber several hundred miles away is not much of a prospect for the puppy you are offering to sell via a classified ad — nor for the grocer with stores only in the metropolitan area. "Wasted" circulation — as the advertisers call it — hurts profitability: expenses of a newspaper are determined largely by gross circulation while advertising revenues (usually 70% - 80% of total revenues) are responsive only to useful circulation; (2) Our penetration of the Buffalo retail market is exceptional; advertisers can reach almost all of their potential customers using only the News. the country, we were then number one, daily, and number three, Sunday, in penetration. The most Last year I told you about this unusual reader acceptance: among the 100 largest newspapers in recent figures show us number one in penetration on weekdays and number two on Sunday. (Even so, the number of households in Buffalo has declined, so our current weekday circulation is down slightly; on Sundays it is unchanged.) unusual quantity of news that we delivered to them: a greater percentage of our paper is devoted to I told you also that one of the major reasons for this unusual acceptance by readers was the was 50.9% (versus 50.4% in 1983), a level far above the typical 35% - 40%. We will continue to news than is the case at any other dominant paper in our size range. In 1984 our "news hole" ratio maintain this ratio in the 50% area. Also, though we last year reduced total hours worked in other departments, we maintained the level of employment in the newsroom and, again, will continue to do so. Newsroom costs advanced 9.1% in 1984, a rise far exceeding our overall cost increase of 4.9%. 7

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!. Our news hole policy costs us significant extra money for newsprint. As a result, our news costs (newsprint for the news hole plus payroll and expenses of the newsroom) as a percentage of revenue run higher than those of most dominant papers of our size. There is adequate room, however, for our paper or any other dominant paper to sustain these costs: the difference between "high" and "low" news costs at papers of comparable size runs perhaps three percentage points while pre-tax profit margins are often ten times that amount. Owners, naturally, would like to believe that their wonderful profitability is achieved only because The economics of a dominant newspaper are excellent, among the very best in the business world. they unfailingly turn out a wonderful product. That comfortable theory wilts before an uncomfortable fact. While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better — as long as either class of paper is dominant within its community. Of course, product the News, in very large part because of people such as Alfred Kirchhofer who preceded us. quality may have been crucial to the paper in achieving dominance. We believe this was the case at the paper will be. Good or bad, it will prosper. That is not true of most businesses: inferior quality Once dominant, the newspaper itself, not the marketplace, determines just how good or how bad generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply the level of readership achieved by a first-class product. A poor product, however, will still remain because of its "bulletin board" value. Other things being equal, a poor product will not achieve quite essential to most citizens, and what commands their attention will command the attention of advertisers. Our commitment to an above-average expenditure for news represents an important quantitative Since high standards are not imposed by the marketplace, management must impose its own. standard. We have confidence that Stan Lipsey and Murray Light will continue to apply the far-more- important qualitative standards. Charlie and I believe that newspapers are very special institutions in society. We are proud of the News, and intend an even greater pride to be justified in the years ahead. Insurance Operations Shown below is an updated version of our usual table listing two key figures for the insurance industry: Yearly Change Combined Ratio in Premiums Written (%) after Policy-holder Dividends 1972 10.2 96.2 1974 1973 6.2 8.0 105.4 99.2 1975 1976 ... 11.0 19.8 21.9 107.9 102.4 1977 12.8 97.2 1978 97.5 1979 10.3 100.6 1980 3.9 6.0 103.1 1981 4.4 109.7 106.0 1982 1983 (Revised) 1984 (Estimated) .. 8.1 4.5 111.9 117.7 Source: Best's Aggregates and Averages Best's data reflect the experience of practically the entire industry, including stock, mutual, and compared to revenue emprocal companies. Them reined rati represent total in surance costs losses vited lit, penel above 100 indicates a loss. rom premiums; :

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For a number of years, we have told you that'an annual increase by the industry of about 10% assumed in making that assertion that expenses as a percentage of premium volume would stay per year in premiums written is necessary for the combined ratio to remain roughly unchanged. We relatively stable and that losses would grow at about 10% annually because of the combined influence of unit volume increases, inflation, and judicial rulings that expand what is covered by the insurance policy. Our opinion is proving dismayingly accurate: a premium increase of 10% per year since 1979 identical to the 100.6 of 1979. Instead, the industry had only a 30% increase in premiums and a 1984 would have produced an aggregate increase through 1984 of 61% and a combined ratio in 1984 almost combined ratio of 117.7. Today, we continue to believe that the key index to the trend of underwriting profitability is the year-to-year percentage change in industry premium volume. catastrophes are at a "normal" level, we would expect the combined ratio to begin easing downward It now appears that premium volume in 1985 will grow well over 10%. Therefore, assuming that toward the end of the year. However, under our industrywide loss assumptions (i.e., increases of 10% annually), five years of 15%-per-year increases in premiums would be required to get the combined ratio back to 100. This would mean a doubling of industry volume by 1989, an outcome that seems highly unlikely to us. Instead, we expect several years of premium gains somewhat above the 10% level, followed by highly-competitive pricing that generally will produce combined ratios in the 108-113 range. Our own combined ratio in 1984 was a humbling 134. (Here, as throughout this report, we exclude structured settlements and the assumption of loss reserves in reporting this ratio. Much additional the third year in a row that our underwriting performance has been far poorer than that of the industry. detail, including the effect of discontinued operations on the ratio, appears on pages 42-43). This is We expect an improvement in the combined ratio in 1985, and also expect our improvement to be substantially greater than that of the industry. Mike Goldberg has corrected many of the mistakes I made before he took over insurance operations. Moreover, our business is concentrated in lines that have experienced poorer-than-average results during the past several years, and that circumstance has we were able during the last half of 1984 to raise prices significantly in certain important lines with begun to subdue many of our competitors and even eliminate some. With the competition shaken, little loss of business. For some years I have told you that there could be a day coming when our premier financial strength would make a real difference in the competitive position of our insurance operation. That day may have arrived. We are almost without question the strongest property/casualty insurance operation in the country, with a capital position far superior to that of well-known companies of much greater size. receives only a promise in exchange for his cash. The value of that promise should be appraised Equally important, our corporate policy is to retain that superiority. The buyer of insurance withstand a prolonged combination of depressed financial markets and exceptionally unfavorable against the possibility of adversity, not prosperity. At a minimum, the promise should appear able to underwriting results. Our insurance subsidiaries are both willing and able to keep their promises in any such environment - and not too many other companies clearly are. Our financial strength is a particular asset in the business of structured settlements and loss reserve assumptions that we reported on last year. The claimant in a structured settlement and the we will reinsure our own liabilities.) 9

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i. We have grown in these new lines of business: funds that we hold to offset assumed liabilities to greatly accelerate. To support this projected growth we have added substantially to the capital of grew from $16.2 million to $30.6 million during the year. We expect growth to continue and perhaps Columbia Insurance Company, our reinsurance unit specializing in structured settlements and loss- reserve assumptions. While these businesses are very competitive, returns should be satisfactory. At GEICO the news, as usual, is mostly good. That company achieved excellent unit growth in to be extraordinary. Though underwriting results deteriorated late in the year, they still remain far its primary insurance business during 1984, and the performance of its investment portfolio continued better than those of the industry. Our ownership in GEICO at yearend amounted to 36% and thus well over double our own premium volume. our interest in their direct property/casualty volume of $885 million amounted to $320 million, or exceeded that company's business performance, brilliant as the latter has been. In those years, the I have reported to you in the past few years that the performance of GEICO's stock has considerably in GEICO's intrinsic business value. I warned you that overperformance by the stock relative to the carrying value of our GEICO investment on our balance sheet grew at a rate greater than the growth performance of the business obviously could not occur every year, and that in some years the stock must underperform the business. In 1984 that occurred and the carrying value of our interest in GEICO changed hardly at all, while the intrinsic business value of that interest increased substantially. Since value had a significant impact upon our rate of gain for the year. We are not at all unhappy with 27% of Berkshire's net worth at the beginning of 1984 was represented by GEICO, its static market such a result: we would far rather have the business value of GEICO increase by X during the year, while market value decreases, than have the intrinsic value increase by only ½ X with market value performance. If we are correct in expectations regarding the business, the market eventually will follow soaring. In GEICO's case, as in all of our investments, we look to business performance, not market along. You, as shareholders of Berkshire, have benefited in enormous measure from the talents of GEICO's Jack Byrne, Bill Snyder, and Lou Simpson. In its core business - low-cost auto and homeowners insurance — GEICO has a major, sustainable competitive advantage. That is a rare asset in business generally, and it's almost non-existent in the field of financial services. (GEICO, itself, illustrates this endeavors other than its core business.) In a large industry, a competitive advantage such as GEICO's point: despite the company's excellent management, superior profitability has eluded GEICO in all provides the potential for unusual economic rewards, and Jack and Bill continue to exhibit great skill in realizing that potential. Most of the funds generated by GEICO's core insurance operation are made available to Lou for investment. Lou has the rare combination of temperamental and intellectual characteristics that produce returns that have been by far the best in the insurance industry. I applaud and appreciate the efforts outstanding long-term investment performance. Operating with below-average risk, he has generated and talents of these three outstanding managers. Errors in Loss Reserving Any shareholder in a company with important interests in the property/casualty insurance business should have some understanding of the weaknesses inherent in the reporting of current earnings in as "a first rough draft of history". Unfortunately, the financial statements of a property/casualty insurer that industry. Phil Graham, when publisher of the Washington Post, described the daily newspaper provide, at best, only a first rough draft of earnings and financial condition. The determination of costs is the main problem. Most of an insurer's costs result from losses on claims, and many of the losses that should be charged against the current year's revenue are exceptionally difficult to estimate. Sometimes the extent of these losses, or even their existence, is not known for decades.

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(1) losses that occurred and were paid during the year; (2) estimates for losses that occurred and were dollar costs for losses that occurred during the year but of which the insurer is unaware (termed "IBNR": incurred but not reported); and (4) the net effect of revisions this year of similar estimates for (2) and (3) made in past years. for year X to be misstated must be corrected, whether it is in year X + 1, or X + 10. This, perforce, Such revisions may be long delayed, but eventually any estimate of losses that causes the income injured by one of our insureds in 1979 and we thought a settlement was likely to be made for $10,000. means that earnings in the year of correction also are misstated. For example, assume a claimant was That year we would have charged $10,000 to our earnings statement for the estimated cost of the loss and, correspondingly, set up a liability reserve on the balance sheet for that amount. If we settled the claim in 1984 for $100,000, we would charge earnings with a loss cost of $90,000 in 1984, although that cost was truly an expense of 1979. And if that piece of business was our only activity in 1979, we would have badly misled ourselves as to costs, and you as to earnings. The necessarily-extensive use of estimates in assembling the figures that appear in such deceptively precise form in the income statement of property/casualty companies means that some error must insurers use various statistical techniques to adjust the thousands of individual loss evaluations (called seep in, no matter how proper the intentions of management. In an attempt to minimize error, most case reserves) that comprise the raw data for estimation of aggregate liabilities. The extra reserves created by these adjustments are variously labeled "bulk", "development", or "supplemental" reserves. either slightly too high or slightly too low when all losses that occurred prior to the date of the The goal of the adjustments should be a loss-reserve total that has a 50-50 chance of being proved financial statement are ultimately paid. At Berkshire, we have added what we thought were appropriate supplemental reserves but in errors that have been involved in our reserving. You can thus see for yourselves just how imprecise recent years they have not been adequate. It is important that you understand the magnitude of the the process is, and also judge whether we may have some systemic bias that should make you wary of our current and future figures. you in recent years, and also gives you calculations a year later on an "if-we-knew-then-what-we- include a great many estimates for losses that occurred in the earlier years. However, many claims from the earlier years have been settled so that our one-year-later estimate contains less guess work than our earlier estimate: Underwriting Results Corrected Figures as Reported After One Year's Year to You Experience 1980 $ 6,738,000 $14,887,000 1981 1,478,000 1,118,000) 1982 (21,462,000) (25,066,000) 1983 (33,192,000) 1984 (45,413,000) (50,974,000) table. Important additional information on loss reserve experience appears on pages 43-45. Our structured settlement and loss-reserve assumption businesses are not included in this pre-tax underwriting loss of $45.4 million consists of $27.6 million we estimate that we lost on 1984's To help you understand this table, here is an explanation of the most recent figures: 1984's reported business, plus the increased loss of $17.8 million reflected in the corrected figure for 1983. 11

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and recently have always presented a better underwriting picture than was truly the case. This is a As you can see from reviewing the table, my errors in reporting to you have been substantial source of particular chagrin to me because: (1) I like for you to be able to count on what I say; (2) our insurance managers and I undoubtedly acted with less urgency than we would have had we understood the full extent of our losses; and (3) we paid income taxes calculated on overstated earnings corect themselves, but the delay is long and we don't receive interest on to amounts te overpaid. Because our business is weighted toward casualty and reinsurance lines, we have more problems in estimating loss costs than companies that specialize in property insurance. (When a building that you have insured burns down, you get a much faster fix on your costs than you do when an employer you have insured finds out that one of his retirees has contracted a disease attributable to work he did decades earlier.) But I still find our errors embarrassing. In our direct business, we have far underestimated the mushrooming tendency of juries and courts to make the "deep pocket" pay, regardless of the factual situation and the past precedents for establishment of liability. We also have reinsurance area, where we have had our worst experience in underreserving, our customer insurance underestimated the contagious effect that publicity regarding giant awards has on juries. In the companies have made the same mistakes. Since we set reserves based on information they supply us, their mistakes have become our mistakes. I heard traveling abroad when he received a call from his sister informing him that their father had died a story recently that is applicable to our insurance accounting problems: a man was unexpectedly. It was physically impossible for the brother to get back home for the funeral, but he home he received a bill for several thousand dollars, which he promptly paid. The following month told his sister to take care of the funeral arrangements and to send the bill to him. After returning another bill came along for $15, and he paid that too. Another month followed, with a similar bill. When, in the next month, a third bill for $15 was presented, he called his sister to ask what was going on. "Oh", she said. "I forgot to tell you. We buried Dad in a rented suit."

• this story hurts. We have tried to include all of our "rented suit" liabilities in our current financial

If you've been in the insurance business in recent years - particularly the reinsurance business to report to you the errors, plus or minus, that surface each year. statement, but our record of past error should make us humble, and you suspicious. I will continue results as bad as they have been in recent years - and with managements having as much discretion Not all reserving errors in the industry have been of the innocent-but-dumb variety. With underwriting as they do in the presentation of financial statements - some unattractive aspects of human nature have manifested themselves. Companies that would be out of business if they realistically appraised their loss costs have, in some cases, simply preferred to take an extraordinarily optimistic view about these yet-to-be-paid sums. Others have engaged in various transactions to hide true current loss costs. Both of these approaches can "work" for a considerable time: external auditors cannot effectively police the financial statements of property/casualty insurers. If liabilities of an insurer, correctly stated, would exceed assets, it falls to the insurer to volunteer this morbid information. In other words, the sometimes gives itself the benefit of the doubt. corpse is supposed to file the death certificate. Under this "honor system" of mortality, the corpse In most businesses, of course, insolvent companies run out of cash. Insurance is different: you can be broke but flush. Since cash comes in at the inception of an insurance policy and losses are paid much later, insolvent insurers don't run out of cash until long after they have run out of net worth. In fact, these "walking dead" often redouble their efforts to write business, accepting almost has gambled away his purloined funds, these companies hope that somehow they can any price or risk, simply to keep the cash flowing in. With an attitude like that of an embezzler who the next batch of business and thereby cover up earlier shortfalls. Even if they don't get lucky, the get lucky on meantime, while the losses mount, the managers keep their jobs and perquisites. penalty to managers is usually no greater for a $100 million shortfall than one of $10 million; in the 12

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The loss-reserving errors of other property/casualty companies are of more than academic interest to Berkshire. Not only does Berkshire suffer from sell-at-any-price competition by the "walking dead", but we also suffer when their insolvency is finally acknowledged. Through various state guarantee funds that levy assessments, Berkshire ends up paying a portion of the insolvent insurers' asset deficiencies, swollen as they usually are by the delayed detection that results from wrong reporting. There is even some potential for cascading trouble. The insolvency of a few large insurers and the insurers. Such dangers can be mitigated if state regulators become better at prompt identification and assessments by state guarantee funds that would follow could imperil weak-but-previously-solvent termination of insolvent insurers, but progress on that front has been slow. Washington Public Power Supply System large quantities of bonds of Projects 1, 2, and 3 of Washington Public Power Supply System ("WPPSS"). From October, 1983 through June, 1984 Berkshire's insurance subsidiaries continuously purchased This is the same entity that, on July 1, 1983, defaulted on $2.2 billion of bonds issued to finance partial construction of the now-abandoned Projects 4 and 5. While there are material differences in the obligors, promises, and properties underlying the two categories of bonds, the problems of Projects for the latter issues. In addition, there have been a multitude of problems related directly to Projects 4 and 5 have cast a major cloud over Projects 1, 2, and 3, and might possibly cause serious problems 1, 2, and 3 that could weaken or destroy an otherwise strong credit position arising from guarantees by Bonneville Power Administration. Despite these important negatives, Charlie and I judged the risks at the time we purchased the bonds and at the prices Berkshire paid (much lower than present prices) to be considerably more than compensated for by prospects of profit. As you know, we buy marketable stocks for our insurance companies based upon the criteria we among professional money managers and is scorned by many academics. Nevertheless, it has served would apply in the purchase of an entire business. This business-valuation approach is not widespread its followers well (to which the academics seem to say, "Well, it may be all right in practice, but it will never work in theory.") Simply put, we feel that if we can buy small pieces of businesses with satistactory underlying economics at a fraction of the per-share value of the entire business, something good is likely to happen to us - particularly if we own a group of such securities. tax (via the interest paid on the bonds), and those earnings are available to us currently in cash. We are unable to buy operating businesses with economics close to these. Only a relatively few businesses earn the 16.3% after tax on unleveraged capital that our WPPSS investment does and those businesses, when available for purchase, sell at large premiums to that capital. In the average negotiated business transaction, unleveraged corporate earnings of $22.7 million after-tax (equivalent to about $45 million pre-tax) might command a price of $250 - $300 million (or sometimes far more). For a business we understand well and strongly like, we will gladly pay that much. But it is double the price we paid to realize the same earnings from WPPSS bonds. could be worth nothing within a year or two. There also is the risk that interest payments might be However, in the case of WPPSS, there is what we view to be a very slight risk that the "business" interrupted for a considerable period of time. Furthermore, the most that the "business" could be than the price we paid. worth is about the $205 million face value of the bonds that we own, an amount only 48% higher This ceiling on upside potential is an important minus. It should be realized, however, that the continuously invested in them. That is so because most businesses are unable to significantly improve great majority of operating businesses have a limited upside potential also unless more capital is to automatically raise returns. their average returns on equity - even under inflationary conditions, though these were once thought

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earnings of a 12% bond by using (Let's push our bond-as-a-business example one notch further: if you elect to "retain" the annual bond "business" will grow at a rate comparable to that of most operating businesses that similarly the proceeds from coupons to buy more bonds, earnings of that million will be worth $300 million in 2015. In the second, a $10 million business that regularly earns reinvest all earnings. In the first instance, a 30-year, zero-coupon, 12% bond purchased today for $10 12% on equity and retains all earnings to grow, will also end up with $300 million of capital in 2015. Both the business and the bond will earn over $32 million in the final year.) Our approach to bond investment - treating it as an unusual sort of "business" with special advantages and disadvantages - may strike you staggering errors by investors could have been avoided if they had viewed bond investment with a as a bit quirky. However, we believe that many businessman's perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a "business" that earned and paid 100 cents on the dollar for that abominable business. "book value" (and that, moreover, could never earn a dime more than 1% on book), If an investor had been business-minded enough to think in those terms - and that was the precise reality of the bargain struck - he would have laughed at the proposition and walked away. For, at the same time, businesses with excellent future prospects could have been bought at, or close to, book value while earning 10%, 12%, or 15% after tax on book. Probably no business in America changed hands in 1946 at book value that the buyer believed lacked the ability to earn more than 1% on book. But investors with bond-buying habits eagerly made economic commitments throughout the year on just that basis. Similar, although less extreme, conditions prevailed for the next two decades as bond investors happily signed up for twenty or thirty years on terms outrageously inadequate by business standards. (In what I think is by far the best book on investing ever written - "The Intelligent Investor", by Ben Graham — the last section of the last chapter begins with, "Investment is most intelligent when it is most businesslike." This section is called "A Final Word", and it is appropriately titled.) is also the sort of risk that is difficult to evaluate. Were Charlie and I to deal with 50 similar evaluations We will emphasize again that there is unquestionably some risk in the WPPSS commitment. It the chance to make 50 or even 5 such decisions in a single year. Even though over a lifetime, we would expect our judgment to prove reasonably satisfactory. But we do not get our long-term results why all of these sentences say "Charlie and I", or "we".) may turn out fine, in any given year we run a risk that we will look extraordinarily foolish. (That's Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking- like-an-idiot decision. Their personal gain/loss ratio is all too obvious: if an unconventional decision works out well, they get a pat on the back and, if it works out poorly, they get a pink slip. (Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.) fired, and we receive our rewards as owners, not managers. Thus we behave with Berkshire's money Our equation is different. With 47% of Berkshire's stock, Charlie and I don't worry about being as we would with our own. That frequently leads us to unconventional behavior both in investments and general business management. companies, We remain unconventional in the degree to which we concentrate the investments of our insurance insurance business is conducted from a position of exceptional financial strength. For almost all other including those in WPPSS bonds. This concentration makes sense only because insurers, a comparable degree of concentration (or anything close to it) would be totally inappropriate. investment opportunity might appear when analyzed. on the basis of probabilities. Their capital positions are not strong enough to withstand a big error, no matter how attractive an

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With our financial strength we can own large blocks of a few securities that we have thought "If you have a harem of forty women, you never get to know any of them very well.") Over time our hard about and bought at attractive prices. (Billy Rose described the problem of over-diversification: policy of concentration should produce superior results, though these will be tempered by our large was committed on the same basis as yours. size. When this policy produces a really bad year, as it must, at least you will know that our money We made the major part of our WPPSS investment at different prices and under somewhat different factual circumstances than exist at present. If we decide to change our position, we will not inform read this.) The buying and selling of securities is a competitive business, and even a modest amount shareholders until long after the change has been completed. (We may be buying or selling as you of added competition on either side can cost us a great deal of money. Our WPPSS purchases illustrate this principle. From October, 1983 through June, 1984, we attempted to buy almost all the bonds that we could of Projects 1, 2, and 3. Yet we purchased less than 3% of the bonds outstanding. Had we faced even a few additional well-heeled investors, stimulated to buy because they knew we were, we could have ended up with a materially smaller amount of bonds, purchased at a materially higher price. (A couple of coat-tail riders easily could have cost us $5 million.) For this reason, we will not else — unless legally required to do so. comment about our activities in securities - neither to the press, nor shareholders, nor to anyone bonds under most circumstances and have bought very few in recent years. That's because bonds are One final observation regarding our WPPSS purchases: we dislike the purchase of most long-term as sound as a dollar — and we view the long-term outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation. Such a possibility may seem absurd, considering the rate to which inflation has dropped. But we believe that present fiscal policy — featuring a huge deficit — is both extremely dangerous and difficult is so big that it can't be run away from.") Without a reversal, high rates of inflation may be delayed to reverse. (So far, most politicians in both parties have followed Charlie Brown's advice: "No problem (perhaps for a long time), but will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral. While there is not much to choose between bonds and stocks (as a class) when annual inflation is in the 5%-10% range, runaway inflation is a different story. In that circumstance, a diversified stock portfolio would almost surely suffer an enormous loss in real value. But bonds already outstanding out" risk, and we require any purchase of long-term bonds to clear a special hurdle. Only when bond would suffer far more. Thus, we think an all-bond portfolio carries a small but unacceptable "wipe- purchases appear decidedly superior to other business opportunities will we engage in them. Those occasions are likely to be few and far between. Dividend Policy something like, "Our goal is to pay out 40% to 50% of earnings and to increase dividends at a rate Dividend policy is often reported to shareholders, but seldom explained. A company will say at least equal to the rise in the CPI". And that's it — no analysis will be supplied as to why that particular policy is best for the owners of the business. Yet, allocation of capital is crucial to business the circumstances under which earnings should be retained and under which they should be distributed. and investment management. Because it is, we believe managers and owners should think hard about The first point to understand is that all earnings are not created equal. In many businesses — earnings to become ersatz. The ersatz portion — let's call these earnings "restricted" - cannot, if the particularly those that have high asset/profit ratios — inflation causes some or all of the reported business is to retain its economic position, be distributed as dividends. Were these earnings to be its unit volume of sales, its long-term competitive position, its financial strength. No matter how paid out, the business would lose ground in one or more of the following areas: its ability to maintain conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused. 15

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Restricted earnings are seldom valueless to owners, but they often must be discounted heavily. In effect, they are conscripted by the business, no matter how poor its economic potential. (This ironic way by Consolidated Edison a decade ago. At the time, a punitive regulatory policy was a retention-no-matter-how-unattractive-the-return situation was communicated unwittingly in a marvelously a dollar of earnings was retained for reinvestment in the business, that dollar was transformed into major factor causing the company's stock to sell as low as one-fourth of book value; i.e., every time the business rather than paid to owners. Meanwhile, at construction and maintenance sites throughout only 25¢ of market value. But, despite this gold-into-lead process, most earnings were reinvested in New York, signs proudly proclaimed the corporate slogan, "Dig We Must".) Restricted earnings need not concern us further in this dividend discussion. Let's turn to the much-more-valued unrestricted variety. These earnings may, with equal feasibility, be retained or owners of the business. distributed. In our opinion, management should choose whichever course makes greater sense for the unrestricted, readily distributable earnings from shareholders - to expand the corporate empire over This principle is not universally accepted. For a number of reasons managers like to withhold believe there is only one valid reason for retention. Unrestricted earnings should be retained only which the managers rule, to operate from a position of exceptional financial comfort, etc. But we by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least when there is a reasonable prospect - backed preferably by historical evidence or, when appropriate, one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors. To illustrate, let's assume that an investor owns a risk-free 10% perpetual bond with one very unusual feature. Each year the investor can elect either to take his 10% coupon in cash, or to reinvest the coupon in more 10% bonds with identical terms; i.e., a perpetual life and coupons offering the same cash-or-reinvest option. If, in any given year, the prevailing interest rate on long-term, risk-free bonds is 5%, it would be foolish for the investor to take his coupon in cash since the 10% bonds he choose would be worth considerably more than 100¢ on the dollar. Under these bonds circumstances, the investor wanting to get his hands on cash should take his coupon in additional taken his coupon directly in cash. Assuming all bonds were held by rational investors, no one would and then immediately sell them. By doing that, he would realize more cash than if he had opt for cash in an era of 5% interest rates, not even those bondholders needing cash for living purposes. at 10%. Instead, the investor would choose to take his coupon in cash, even if his personal cash If, however, interest rates were 15%, no rational investor would want his money invested for him bonds with market value far less than the cash he could have elected. If he should want 10% bonds, needs were nil. The opposite course — reinvestment of the coupon - would give an investor additional he can simply take the cash received and buy them in the market, where they will be available at a large discount. thinking about whether a company's unrestricted earnings should be retained or paid out. Of course, An analysis similar to that made by our hypothetical bondholder is appropriate for owners in the analysis is much more difficult and subject to error because the rate earned on reinvested earnings is not a contractual figure, as in our bond case, but rather a fluctuating figure. Owners must guess as outcome of reinvestment. should distribute earnings to their parent company. At that level, the managers have no trouble Many corporate managers reason very much along these lines in determining whether subsidiaries story. Here managers frequently have trouble putting themselves in the shoes of their shareholder- thinking like intelligent owners. But payout decisions at the parent company level often are a different owners. 16

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whose earnings on incremental capital may be expected to average 5%, to distribute all available With this schizoid approach, the CEO of a multi-divisional company will instruct Subsidiary A, earnings in order that they may be invested in Subsidiary B, whose earnings on incremental capital long-term record with incremental capital is 5% — and market rates are 10% — he is likely to impose are expected to be 15%. The CEO's business school oath will allow no lesser behavior. But if his own a dividend policy on shareholders of the parent company that merely follows some historical or industry-wide payout pattern. Furthermore, he will expect managers of subsidiaries to give him a full account as to why it makes sense for earnings to be retained in their operations rather than distributed to the parent-owner. But seldom will he supply his owners with a similar analysis pertaining to the whole company. In judging whether managers should retain earnings, shareholders should not simply compare total incremental earnings in recent years to total incremental capital because that relationship may a core business characterized by extraordinary eçonomics can use small amounts of incremental capital be distorted by what is going on in a core business. During an inflationary period, companies with in that business at very high rates of return (as was discussed in last year's section on Goodwill). large amounts of excess cash. If a company sinks most of this money in other businesses that earn But, unless they are experiencing tremendous unit growth, outstanding businesses by definition generate low returns, the company's overall return on retained capital may nevertheless appear excellent because core business. The situation is analagous to a Pro-Am golf event: even if all of the amateurs are of the extraordinary returns being earned by the portion of earnings incrementally invested in the hopeless duffers, the team's best-ball score will be respectable because of the dominating skills of the professional. Many corporations that consistently show good returns both on equity and on overall incremental capital have, indeed, employed a large portion of their retained earnings on an economically unattractive, even disastrous, basis. Their marvelous core businesses, however, whose earnings grow year after year, camouflage repeated failures in capital allocation elsewhere (usually involving high-priced acquisitions of businesses that have inherently mediocre economics). The managers at fault periodically report on the lessons they have learned from the latest disappointment. They then usually seek out future lessons. (Failure seems to go to their heads.) In such cases, shareholders would be far better off if earnings were retained only to expand the increases the owners' interest in the exceptional business while sparing them participation in sub- high-return business, with the balance paid in dividends or used to repurchase stock (an action that par businesses). Managers of high-return businesses who consistently employ much of the cash thrown off by those businesses in other ventures with low returns should be held to account for those allocation decisions, regardless of how profitable the overall enterprise is. to quarter with each wiggle in earnings or in investment opportunities. Shareholders of public Nothing in this discussion is intended to argue for dividends that bounce around from quarter corporations understandably prefer that dividends be consistent and predictable. Payments, therefore, long-term corporate outlook changes only infrequently, dividend patterns should change no more should reflect long-term expectations for both earnings and returns on incremental capital. Since the often. But over time distributable earnings that have been withheld by managers should earn their keep. If earnings have been unwisely retained, it is likely that managers, too, have been unwisely retained. Let's now turn to Berkshire Hathaway and examine how these dividend principles apply to it. one dollar of market value for every dollar retained. Under such circumstances, any distribution would Historically, Berkshire has earned well over market rates on retained earnings, thereby creating over have been contrary to the financial interest of shareholders, large or small. 17

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In fact, significant distributions in the early years might have been disastrous, as a review of our Hathaway Inc., Diversified Retailing Company, Inc., and Blue Chip Stamps (all now merged into our starting position will show you. Charlie and I then controlled and managed three companies, Berkshire present operation). Blue Chip paid only a small dividend, Berkshire and DRC paid nothing. If, instead, now - and perhaps no capital as well. The three companies each originally made their money from the companies had paid out their entire earnings, we almost certainly would have no earnings at all a single business: (1) textiles at Berkshire; (2) department stores at Diversified; and (3) trading stamps at Blue Chip. These cornerstone businesses (carefully chosen, it should be noted, by your Chairman and Vice Chairman) have, respectively, (1) survived but earned almost nothing, (2) shriveled in size while incurring large losses, and (3) shrunk in sales volume to about 5% its size at the time of our entry. (Who says "you can't lose 'em all"?) Only by committing available funds to much better Clearly, diversification has served us well. businesses were we able to overcome these origins. (It's been like overcoming a misspent youth.) though, as we've pointed out, our returns from these efforts will surely be below our historical returns. We expect to continue to diversify while also supporting the growth of current operations — But as long as prospective returns are above the rate required to produce a dollar of market value below that point, we will distribute all unrestricted earnings that we believe can not be effectively per dollar retained, we will continue to retain all earnings. Should our estimate of future returns fall our year-to-year results are inherently volatile, we believe a five-year rolling average to be appropriate used. In making that judgment, we will look at both our historical record and our prospects. Because for judging the historical record. companies. Most of our competitors are in weakened financial condition and reluctant to expand Our present plan is to use our retained earnings to further build the capital of our insurance well over $15 billion in 1985 versus less than $5 billion in 1983. These circumstances could produce substantially. Yet large premium-volume gains for the industry are imminent, amounting probably to major amounts of profitable business for us. Of course, this result is no sure thing, but prospects for Miscellaneous This is the spot where each year I run my small "business wanted" ad. In 1984 John Loomis, one of our particularly knowledgeable and alert shareholders, came up with a company that met all of our tests. We immediately pursued this idea, and only a chance complication prevented a deal. Since our ad is pulling, we will repeat it in precisely last year's form: We prefer: (1) large purchases (at least $5 million of after-tax earnings), (2) demonstrated consistent earning power (future projections are of little interest to us, nor are "turn-around" situations), (3) businesses earning good returns on equity while employing little or no debt, (5) simple businesses (if there's lots of technology, we won't understand it, (4) management in place (we can't supply it), (6) an offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown). We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy for cash, but will consider issuance of stock when we receive as much in intrinsic business value as we give. We invite potential sellers to check us out by contacting people with whom we have done business in the past. For the right business — and the right people — we can provide a good home.

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contributions program. Total contributions made through this program were $3,179,000, and 1,519 A record 97.2% of all eligible shares participated in Berkshire's 1984 shareholder-designated charities were recipients. Our proxy material for the annual meeting will allow you to cast an advisory vote expressing your views about this program — whether you think we should continue it and, if for an advisory vote in which management seeks the opinions of shareholders about owner-related so, at what per-share level. (You may be interested to learn that we were unable to find a precedent corporate policies. Managers who put their trust in capitalism seem in no hurry to put their trust in capitalists.) We urge new shareholders to read the description of our shareholder-designated contributions urge that you immediately make sure that your shares are registered in the name of the actual owner, program that appears on pages 60 and 61. It you wish to participate in future programs, we strongly not in "street" name or nominee name. Shares not so registered on September 30, 1985 will be ineligible for the 1985 program. meetings are a waste of time, both for shareholders and for management. Sometimes that is true Our annual meeting will be on May 21, 1985 in Omaha, and I hope that you attend. Many annual because management is reluctant to open up on matters of business substance. More often a non- productive session is the fault of shareholder participants who are more concerned about their own moment on stage than they are about the affairs of the corporation. What should be a forum for business discussion becomes a forum for theatrics, spleen-venting and advocacy of issues. (The deal year to year as the antics of those interested in themselves discourage attendance by those interested world should be run.) Under such circumstances, the quality of the meeting often deteriorates from in the business. Berkshire's meetings are a different story. The number of shareholders attending grows a bit each a wide variety of thoughtful questions about the business. Because the annual meeting is the time year and we have yet to experience a silly question or an ego-inspired commentary. Instead, we get cannot, however, respond to written or phoned questions at other times of the year; one-person-at-a- and place for these, Charlie and I are happy to answer them all, no matter how long it takes. (We time reporting is a poor use of management time in a company with 3000 shareholders.) The only business matters that are off limits at the annual meeting are those about which candor might cost our company real money. Our activities in securities would be the main example. We always have bragged a bit on these pages about the quality of our shareholder-partners. Come to the annual meeting and you will see why. Out-of-towners should schedule a stop at Nebraska Furniture Mart. If you make some purchases, you'll save far more than enough to pay for your trip, and you'll enjoy the experience. Warren E. Buffett February 25, 1985 Chairman of the Board Subsequent Event: On March 18, a week after copy for this report went to the typographer but Inc. at $172.50 per share. Our purchase is contingent upon the acquisition of American Broadcasting shortly before production, we agreed to purchase three million shares of Capital Cities Communications, Companies, Inc. by Capital Cities, and will close when that transaction closes. At the earliest, that will be very late in 1985. Our admiration for the management of Capital Cities, led by Tom Murphy and Dan Burke, has been expressed several times in previous annual reports. Quite simply, they are tops in both ability and integrity. We will have more to say about this investment in next year's report. 19 1n

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BUSINESS ACTIVITIES OF THE COMPANY AND ITS SUBSIDIARIES BERKSHIRE HATHAWAY INC. December 29, 1984 The activities of the Parent company, which was incorporated in Massachusetts in 1889 and consisted of the manufacture and sale of woven textile products. reincorporated in Delaware in 1973, were originally centered in New England and for several decades manufacturing activities, the Company acquired two entities that were engaged in the property and In 1967, after discontinuance from time to time of certain of the Company's unprofitable textile were shrunk further, and controlling interests in several other businesses were acquired. casualty insurance business. Thereafter, the insurance operations were expanded, the textile operations succeeded to ownership of that company's apparel retailing business as well as its property/casualty At the end of 1978, Berkshire merged into it Diversified Retailing Company, Inc. and thereby insurance business. An important combined holding of the two parties to this merger was a majority company operating a conventional trading stamp business. Blue Chip also owned interests in other ownership interest (about 58% of the common stock) of Blue Chip Stamps, a Los Angeles based unrelated businesses. In mid 1983, Berkshire acquired, by merger of Blue Chip, the then outstanding minority interest in Blue Chip. Also in 1983, after the Blue Chip merger, Berkshire purchased controlling interest in Nebraska Furniture Mart, Inc., a major home furnishings retailing operation. Berkshire's present diverse activities substantially-wholly-owned subsidiaries. Four major business activities so conducted are: now principally conducted through wholly-owned or (b) Candy production and sale at retail (a) Underwriting of property and casualty insurance (c) Newspaper publishing (d) Retailing of home furnishings These major business activities of Berkshire are described below and on the following page. referred to in this report as the "Insurance Group", provide insurance coverages with respect to (a) Underwriting of Property and Casualty Insurance. Several Berkshire subsidiaries, collectively property and casualty insurance risks both on a direct and reinsurance basis. ("Reinsurance" agreements relate to assumption by one insurance company of obligations originally undertaken by another Indemnity Company of Minnesota), specialize primarily in the underwriting on a direct basis of non- own subsidiary insurance companies (e.g., National Indemnity Company of Florida and National standard commercial motor vehicle (e.g., long haul trucks) and general liability insurance. subsidiaries formed for that purpose in Colorado, Kansas and Nebraska. Other Berkshire subsidiaries Standard multiple line property and casualty insurance is presently underwritten by "Home-state" have specialized in the underwriting of workers' compensation coverages. Such operations were is a Berkshire subsidiary that continues to specialize in this line of insurance. discontinued in 1984 by two Berkshire subsidiaries. Cypress Insurance Company, Pasadena, California

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BERKSHIRE HATHAWAY INC. BUSINESS ACTIVITIES OF THE COMPANY AND ITS SUBSIDIARIES (Continued) Insurance Company. These operations include conventional risk-sharing arrangements with unrelated The Insurance Group's reinsurance operations are conducted by National Indemnity and Columbia nsurance companies as well as assumption of liabilities of such other companies with respect to eriodic payment ("structured settlement") obligations and loss portfolio obligations. Significantl extended settlement periods are a feature of both of the latter type of obligations, so that the above competing for these types of reinsurance agreements. average financial strength of the Berkshire subsidiaries is believed to work to their advantage in from capital funds committed to the operations and from policyholders' funds derived from unearned Significant amounts of investment income are generated by Berkshire's insurance business, both premiums and loss reserves. at December 31, 1984. Approximately 560 employees were engaged in the conduct of Berkshire's insurance businesses. 1983 through the merger of Blue Chip Stamps. See's produces boxed chocolates and other confectionery (b) The Candy Business. See's Candy Shops, Incorporated became wholly-owned by Berkshire in products of high quality in two large kitchen facilities in California. See's is believed to be one of the largest candy manufacturers distributing at retail through its own chain of stores. It now has 214 retail shops in thirteen western and midwestern states including Hawaii. Five full-time quantity order seasonal requirements in the fourth quarter of 1984. centers are in operation; seventeen additional such centers were in temporary operation to serve peak A significant degree of seasonality exists in this business. About 50% of each year's unit sales volume is generated during the last two months of the year, when quantity sales at reduced prices the number of See's employees peaks at about three times the full-time base of approximately 1,500. to businesses and other organizations augment the extremely high December shop volume. At Christmas, assets of the entity were purchased by Blue Chip Stamps in April, 1977. It then published in Buffalo, (c) The Newspaper Business. This business is operated by the Buffalo Evening News, Inc. The New York an evening and Saturday edition of its newspaper. In October, 1977 it introduced a Sunday edition, whereupon it became a defendant in quite costly and prolonged litigation brought by its principal competitor. The competitor ceased publication in September, 1982, whereupon the News began publishing a morning edition. Later in September, 1982, the litigation was dismissed with prejudice pursuant to a stipulation of the parties. The Buffalo News is now the only daily newspaper daily newspapers in daily circulation. serving the entire Buffalo metropolitan area. In February, 1985, it ranked 25th among the nations Stamps. The Buffalo Evening News, Inc. became wholly-owned in 1983 through the merger of Blue Chip The News employs about 1,000 persons on a full-time basis. 90% ownership of which was acquired by Berkshire on September 30, 1983. Its store in Omaha, (d) Retailing of Home Furnishings. This business is conducted by Nebraska Furniture Mart, Inc., Nebraska is believed by Berkshire management to be the largest single furniture retail store in the United States. It has sizeable warehousing facilities near its retail outlet permitting it to serve a trade area within a radius of about 300 miles from Omaha. Local consumer preference studies indicate Nebraska Furniture Mart to be the leading retailer of its products in its marketing area. The business is operated by members of the family from whom Berkshire purchased its interest therein, and who retain a minority ownership interest. As stated, Berkshire's ownership interest in the business is 90%, but as a result of options outstanding to key managers of the operation, Berkshire's interest in the earnings of the business is 80%. An important feature of the business is its ability to control its costs and realize highly satisfactory earnings while offering significant value to its customers. Nebraska Furniture Mart employs about 500 persons. 21 * 21

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BERKSHIRE HATHAWAY INC. BUSINESS ACTIVITIES OF THE COMPANY AND ITS SUBSIDIARIES (Continued) Associated Retail Stores, Inc. with headquarters and warehouse in Long Island City, New York is a wholly-owned subsidiary of Berkshire. Associated operates a chain of about 90 retail apparel stores located in New York City, Chicago, Philadelphia and at various other locations in midwest and northeast states. It employs approximately 1,000 persons on a full-time basis. Blue Chip Stamps, with coast trading stamp business from its Los Angeles headquarters. about 140 employees at December 31, 1984 is also wholly-owned by Berkshire. It operates a west

• * *

chartered savings and loan company with 80 employees, and Precision Steel Warehouse Inc., Franklin subsidiaries of Wesco include Mutual Savings and Loan Association, Pasadena, California, a state Park, Illinois and Charlotte, North Carolina. Precision operates a metals service center business and employs about 265 persons. * * * approximately 450 persons are employed. Berkshire is also directly engaged in the manufacture and Berkshire continues to operate a textile weaving mill in New Bedford, Massachusetts, in which sale of branded ("K & W") chemical products used in the automotive after-market. This business employs 35 persons and operates from Los Angeles, California and Bloomington, Indiana.

• * *

Investment activities and decisions and all other capital allocation decisions are made for Berkshire and its subsidiaries by Warren E. Buffett in consultation with Charles T. Munger, Chairman and Vice by the managers of Berkshire's operating units. Chairman, respectively, of Berkshire's Board of Directors. Operating decisions, by contrast, are made Berkshire's executive offices are in Omaha, Nebraska.

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PEAT Peat, Marwick, Mitchell & Co. MARWICK Certified Public Accountants Thirty-Sixth and Farnam Street Kiewit Plaza Building Omaha, Nebraska 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway Inc. and consolidated 1983 and the related consolidated statements of earnings and changes in subsidiaries as of December 29, 1984 and Decamber 31, financial position for each of the years in the three-year period ended Decenber 29, 1984. Our examinations were made in accordance with generally accounting records accepted auditing standards and, accordingly, Included such tests of the and such other auditing procedures as we considered necessary in financial the We did not examine the consolidated statements of Blue Chip Stamps and Wesco Financial Corporation for the year ended January 1, 1983, which statements reflect total revenues cial constituting 49 percent of the related consolidated totals. These finan- have been furnished to us statements were examined by other auditors whose reports thereon Blue Chip Stamps and Wesco Financial Corporation prior to and our opinion expressed herein, insofar as January 1, 1983, 1s based solely upon the reports of the other auditors. In auditors, our opinion, based upon our examinations and the reports of other the aforementioned consolidated fairly the financial position of Berkshire Hathaway Inc. and consolidated financial statements present subsidiaries at December 29, 1984 and December 31, 1983 and the results of their operations and the changes in their financial position for each of with generally accepted accounting principles applied on the years in the three-year period ended December 29, 1984, in conformity a consistent basis. La Manie, Mith lo. March 13, 1985, except as to note 21 which is as of March 18, 1985 23

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L. BERKSHIRE HATHAWAY INC. CONSOLIDATED BALANCE SHEETS and Consolidated Subsidiaries (dollars in thousands) Dec. 29, 1984 Dec. 31, 1983* Cash ASSETS Investments, other than investments in affiliates: ...... $ 3,682 $ 6,161 Fixed maturities, principally bonds (market value: Dec. 29, 1984 — $317,734; Dec. 31, 1983 - $204,801) Invested cash, represented by various short-term investments Marketable equity securities (Notes 3, 4 and 5) 303,928 208,245 1,235,903 1,232,150 at adjusted cost which approximates market 170,039 75,343 Total investments, other than affiliates 1,709,870 1,515,738 Investment in Mutual Savings and Loan Association (Note 6) Accounts receivable from customers, agents and others (Note 7) 32,927 Inventories (Note 8) 88,489 27,004 72,813 Real estate, equipment, furniture and leasehold improvements, at 41,332 37,516 Goodwill of acquired businesses cost less allowance for depreciation and amortization (Note 9) 67,919 Other assets 77,269 69,749 13,715 79,327 29,235 $2,035,203 $1,837,543 Losses and loss adjustment expenses LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 243,298 $ 212,706 Liability for unredeemed trading stamps 49,099 Current income taxes Accounts payable, accruals and other liabilities 58,957 60,669 55,783 73,346 58,094 Deferred income taxes (Note 10) 11,432 8,511 Minority shareholders' interests Term debt and other borrowings (Notes 11 and 12) 127,104 177,907 175,613 22,299 128,984 17,990 763,442 718,350 Stockholders' equity (Notes 12, 13 and 14): Common stock of $5 par value. Authorized 1,500,000 shares; issued 1,375,183 shares, including shares Capital in excess of par value .... held in treasury........ 6,876 6,876 Unrealized appreciation of marketable equity securities, net of 157,377 157,377 Retained earnings provision for deemed applicable income taxes 486,953 661,493 483,280 512,598 Less common stock in treasury, at cost (228,274 shares) ........ 1,312,699 40,938 1,160,131 40,938 Total stockholders' equity .... ...... 1,271,761 1,119,193 Commitments (Note 15), Subsequent event (Note 21) $2,035,203 $1,837,543 *Certain 1983 items are reclassified to conform to 1984 presentation. See accompanying Notes to Consolidated Financial Statements 24

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BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENTS OF EARNINGS and Consolidated Subsidiaries (dollars in thousands except per share amounts) Fiscal Year Ended Saturday nearest December 31, 1984 1983* 1982 Income items: Insurance premiums earned Sales and service revenues $ 140,242 $ 152,480 $152,945 Interest and dividend income .. 500,219 381,674 306,564 84,161 64,903 58,003 Equity in earnings excluding realized investment gain of Mutual Savings and Loan Association 4,557 3,669 3,960 729,179 602,726 521,472 Cost and expense items: Insurance losses and loss adjustment expenses 141,550 134,109 121,996 Cost of products and services sold 296,770 138,875 46,752 214,362 177,508 Selling, general and administrative expenses Insurance underwriting expenses 52,243 52,508 122,023 110,021 Interest and financing costs 14,734 15,104 14,995 638,681 537,841 477,028 Earnings from operations including minority interest in consolidated subsidiaries, before applicable income taxes and before realized investment gain Income taxes applicable to above (Note 16) .. 16,420 90,498 64,885 44,444 8,904 2,524 74,078 55,981 41,920 Minority interest applicable to above 3.877 7,337 10,423 Earnings before realized investment gain 70,201 48,644 31,497 Realized investment gain, net (Note 17) 78,694 63,522 14,877 Net earnings .. $ 148,895 $ 112,166 $ 46,374 Average shares outstanding 1,146,909 1,066,709 986,509 Per share: Earnings before realized investment gain Net earnings '........... $ 61.21 45.60 129.82 105.15 $ 31.93 47.01 *1983 is restated — See Note 1(b) See accompanying Notes to Consolidated Financial Statements 25

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! BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (dollars in thousands) Fiscal Year Ended Funds provided: Saturday nearest December 31, From operations: 1984 1983* 1982 Net earnings Minority interest in earnings ..• $148,895 $112,166 $ 46,374 ... 5,131 8,801 20,609 Earnings including minority interest •.. 154,026 120,967 66,983 Charges or credits not requiring (not providing) funds: Equity in undistributed earnings of unconsolidated subsidiaries Depreciation and amortization of property, plant •.. (5,299) (3,046) (534) and equipment, including leaseholds of prodesty, plant Decrease (increase) in accounts receivable 8,764 (15,676) 57,972 7,953 7,092 Decrease (increase) in inventories :. (3,816) (58,756) Increase in unpaid losses and loss (3,871) 3,063 Decrease in unearned premiums adjustment expenses .. 30,592 19,229 2,507 Increase (decrease) in liability for unredeemed (6,684) (2,631) (3,855) Increase in liability for income taxes trading stamps (1,712) 429 (4,022) Increase (decrease) in accounts payable, applicable to earnings and other liabilities accruals 6,276 4,934 7,620 Other 15,252 (999) (3,892) 2,744 (7,401) (7,906) Funds provided from operations .. 30,441 72,569 (58,683) Proceeds from issuance of debt, net of expense 184,467 42 193,536 8,300 Change in Wesco's savings account 41,900 maintained at Mutual Issuance of common stock in Blue Chip merger 14,624 - (7) 154,665 (12,204) Decrease in cash 2,480 1,913 - Funds used: $201,613 $350,107 $ 37,996 Purchase of minority shareholders' interest in net Purchase of majority interest in net tangible assets of tangible assets of Blue Chip Stamps 5- $108,987 Goodwill - excess of purchase cost over value of net Nebraska Furniture Mart, Inc. •• - 35,045 tangible assets acquired .. Net assets of acquired businesses 66,682 - Repayment of debt Additions to property, plant and equipment, net 210,714 1,922 7,069 6,210 822 40,963 9,229 Dividends paid to minority stockholders 890 1,210 2,245 Cost of net purchases (sales) of investments: Bonds and other fixed maturity securities Marketable equity securities 95,683 18,611 Short-term investments 1,142 (16,748) Unconsolidated subsidiaries 94,696 68,999 49,663 Net purchase of investments 279 3,720 (7,865) Increase in cash 191,800 91,330 25,050 262 *1983 is restated - See Note 1(b) $201,613 $350,107 $ 37,996 See accompanying Notes to Consolidated Financial Statements 2.6

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BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Consolidated Subsidiaries (dollars in thousands except per share amounts) December 29, 1984 (1) Significant Accounting Policies and Practices (a) Basis of Consolidation Consolidated financial position and results reflect those of companies engaged in a number of diverse businesses. See Note 20. (b) Restatement of 1983 Consolidated Statement of Earnings In 1983, Berkshire subsidiaries received $21,000 from GEICO Corporation in an unusual transaction. The transaction was structured as a redemption by GEICO of shares of its Berkshire subsidiaries, GEICO repurchased additional shares of its own stock tendered to common stock held by Berkshire subsidiaries. Simultaneously with the repurchase from it by other GEICO shareholders. Pursuant to contractual arrangements between GEICO and Berkshire subsidiaries, the number (350,000) of GEICO shares redeemed from Berkshire subsidiaries was determined by the number of shares repurchased by GEICO from its red diribud y CEC0 to Bank tie elities in the tom o redemption. The proceeds distributed by GEICO to Berkshire subsidiaries in the form of redemption of GEICO shares were, economically to Berkshire subsidiaries, substantially form principle in accounting for the proceeds received as dividend income. 1983 reported equivalent to dividend income. In prior reports, Berkshire applied the substance-over- income was not reduced for the original cost of the redeemed shares, but rather Berkshire's original cost of its investment in GEICO was deemed unchanged. Berkshire's independent accountants subsequently advised the Company that its substance- over-form view does not provide, in the accountants' judgment, a proper basis under generally accepted accounting principles to account for the proceeds as dividend income. Berkshire's 1983 Consolidated Statement of Earnings is accordingly restated to reflect the GEICO share redemption proceeds, after reduction by cost of shares redeemed, as a realized investment gain. The effect of the change is to reduce 1983 net earnings from those previously reported by $1,327 ($1.25 per share). The carrying value in Berkshire's Consolidated Balance Sheet of Berkshire's investment in GEICO is market value of the shares. Accordingly, there is no change in total stockholders' equity at December 31, 1983 from that previously reported. (c) Accounting Period Accounts of Berkshire and certain of its subsidiaries are maintained on the basis of a 52- for See's candy business consisted of 53 weeks. The calendar year is the annual accounting 53 week fiscal year ending with respect to December 31. For 1983, the accounting period period of the insurance subsidiaries, the newspaper subsidiary, the home funishings subsidiary and certain other of the consolidated companies. (d) Investments in Securities, Other Than Affiliates Investments in obligations with fixed dates of maturity - bonds and redeemable preferred stocks — and in short-term investments are stated at cost, adjusted where appropriate for accretion of discount or amortization of premium. 27

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BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 Significant Accounting Policies and Practices (Continued) Investments in marketable equity securities held by members of the Insurance Group are and by consolidated subsidiaries which are not members of the Insurance Group are carried at market value. Investments in marketable equity securities held by Berkshire carried at the lower of aggregate cost or market. (e) Inventories Inventories are stated at cost, determined principally under the first-in, first-out ("FIFO"), or average cost method, but in part under the last-in, first-out ("LIFO") method. (f) These items of property (including significant betterments and renewals) are carried at cost teal Estate, Equipment, Furniture and Leasehold Improvements charged to operations as incurred (h) Premium Acquisition Costs For financial reporting purposes, premium acquisition costs such as commissions, premium taxes and a portion of certain other underwriting costs are deferred, subject to ultimate recoverability generally estimated on a company by company basis without regard to income in subsequent periods when the related premiums are earned. For statutory anticipated investment income; such deferred costs are charged against financial statement insurance accounting and income tax reporting purposes, premium acquisition costs are charged against income when incurred. (i) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses for unsettled cases based on estimates of ultimate liability with respect to reported cases, plus estimates of aggregate liability with respect to incurred but not reported losses. Estimates of liability insurers. The liability provision is reduced for amounts recoverable on account of reinsurance relating to assumed reinsurance are based on loss reports received from the primary ceded; these reductions amounted to $10,531 and $10,115 at December 31, 1984 and 1983, respectively. An aggregate liability amounting to $15,944 and $8,182 at December 31, 1984 and December 31, 1983, respectively, was additionally established at present value on a contract-by- contract basis with respect to periodic payment obligations ("Structured Settlements") assumed by members of the Insurance Group. The range of interest rates used to discount those liabilities, for financial reporting purposes, ranged from 92% to 15%, with a weighted average of approximately 12%. The specific rate applicable to a given contract is dependent and tax reporting purposes, these liabilities were discounted at a rate of 7% as prescribed upon market rates at the inception date of the contract. For statutory insurance accounting by regulatory authority. Additionally at December 31, 1984 and December 31, 1983, an aggregate liability amounting obligations assumed by Columbia Insurance Company, a member of the Berkshire Insurance to $14,712 and $8,055, respectively, was established with respect to portfolio reinsurance Incurred losses and loss adjustment expenses in the accompanying Consolidated Statements of Earnings are net of recoveries of salvage and subrogation collected or in process of collection in accordance with statutory accounting requirements for insurance companies. 28

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BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (1) Significant Accounting Policies and Practices (Continued) relating principally to automobile physical damage coverages, are not recognized as they Any additional amounts that may be recoverable as salvage or on account of subrogation, are considered immaterial in the aggregate. (k) Insurance Premiums Insurance premiums are recognized as revenues ratably over the terms of the policies. Dividends to policyholders, primarily relating to workers compensation coverages, are reflected in the accompanying Consolidated Statements of Earnings as a deduction from earned 1982. premiums. This reduction amounted to $3,110 for 1984, $4,955 for 1983, and $3,262 for (m) Stamp Service Accounting Trading stamp revenues and related redemption costs of Blue Chip Stamps, a consolidated stamp issuance. (n) Income Taxes Income taxes reflected in the Consolidated Financial Statements represent those of the Mutual is a non-consolidated subsidiary for financial reporting, but it is included in Company and those of its subsidiaries that are consolidated for financial reporting purposes. Berkshire's consolidated U.S. Federal income tax return. Certain items of income and deductions which are recognized in the financial statements returns filed for the companies give rise to recognition in the financial statements of in time periods that differ from those in which they are recognized in the income tax deferred or prepaid income taxes. (2) Corporate Changes in 1983 During 1983, Blue Chip Stamps ("Blue Chip") was merged with and into the Company. For several In the merger, Berkshire issued shares of its common stock and provided for payment of cash in lieu years prior to the merger, Berkshire owned approximately 59.6% of Blue Chip's outstanding shares. of issuance of fractional shares for the 40.4% of Blue Chip's outstanding shares not already owned by Berkshire. The Company accounted for the transaction as a purchase of the minority interest in Blue Chip's net assets. In the merger, subsidiaries of the merged Blue Chip became subsidiaries of Berkshire, directly or benefically, to the same extent as previously owned by the merged Blue Chip. Thus, See's Candy Financial Corporation and wholly-owned subsidiaries of Wesco became 80.1% beneficially owned by Shops, Incorporated and the Buffalo Evening News became wholly-owned by Berkshire, and Wesco Berkshire. of Nebraska Furniture Mart, Inc., a corporation engaged in the business of retailing of home funishings. On September 30, 1983, Berkshire purchased for cash the majority of the outstanding capital stock Results of operation of the business from the date of purchase are reflected in the accompanying Consolidated Statements of Earnings. 29

[PAGE 34]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Consolidated Subsidiaries BERKSHIRE HATHAWAY INC. (dollars in thousands except per share amounts) December 29, 1984 (3) Investments in Marketable Equity Securities Aggregate data with respect to the consolidated investment in marketable equity securities is shown below as of the dates for which consolidated balance sheets are presented herein. See Note 1(d) as to methods applied to determine carrying value of these securities. December 29, 1984 Unrealized Cost Gain Market Carrying Value Common stock of: GEICO Corporation Exxon Corporation $150,370 45,713 $ 1,586 $ 151,956 $ 151,959 General Foods Corporation 351,587 397,300 397,300 153,964 78,914 All Others The Washington Post Company 10,628 139,327 232,878 221,189 201,168 114,670 149,955 149,955 315,838 315,500 $561,843 $686,084 $1,247,927 $1,235,903 December 31, 1983 Cost Unrealized Gain Market Carrying Value Common stock of: GEICO Corporation General Foods Corporation $ 45,713 168,273 $352,443 $ R. J. Reynolds Industries, Inc. 260,210 67,215 398,156 $ 398,156 71,620 235,488 197,543 All Others The Washington Post Company 10,628 126,247 331,830 302,140 75,877 124,973 200,850 136,875 136,875 197,436 $560,701 $742,498 $1,303,199 $1,232,150 The $686,084 net excess of aggregate market value over aggregate cost of marketable equity securities at December 29, 1984 represented unrealized gains of $686,522 less an unrealized loss of (4) Investment in GEICO Corporation, and special share redemption in 1983 shares of common stock of GEICO Corporation. The shares possessed approximately 362% of the Subsidiaries of Berkshire, at both December 29, 1984 and at December 31, 1983, owned 6,850,000 voting rights of all GEICO shares outstanding at December 29, 1984, but Berkshire holds the shares subject to an Order of the Superintendent of Insurance of the District of Columbia, the corporate Berkshire must maintain an independent proxy arrangement for voting of these shares and prohibits domicile of GBICO, which prohibits Berkshire from exercising such rights. The Order provides that Berkshire from seeking or causing to change the independent proxy. Also, under the Order, no officer or director of Berkshire or of any affiliate or subsidiary of Berkshire is permitted to serve as a director of GEICO. As a result of the Order, which divests Berkshire of its voting rights with respect to its GEICO holdings, Berkshire does not use the equity method of accounting for its investment in GEICO. in GEICO shares amounted to $6,028 in 1984, $5,121 in 1983, and $4,032 in 1982. Additionally in Dividends declared by GEICO and received by Berkshire subsidiaries with respect to their investments of their shareholdings of GEICO. That transaction was structured so as to result in no decrease in the prior year (1983) Berkshire subsidiaries received $21,000 from GEICO in redemption of a portion Berkshire's percentage ownership of GEICO. In Berkshire's restated 1983 Consolidated Statement of gain after reduction for cost of the shares redeemed and for applicable income taxes. The redemption Earnings — see Note 1(b) hereinbefore — the redemption proceeds are included in realized investment of the GEICO shares contributed $18,224 ($17.08 per share) to Berkshire's restated net earnings for 1983. 30

[PAGE 35]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands except per share amounts) December 29, 1984 (5) Investment in General Foods Corporation, and special share redemptions in 1984 General Foods Corporation. At the end of 1983, Berkshire and its consolidated subsidiaries owned Subsidiaries of Berkshire at December 29, 1984 owned 4,167,830 shares of common stock of 4,583,700 such shares. At both dates, the holdings represented approximately 8.75% of all General Foods outstanding shares. by General Foods with respect to these shareholdings, in 1984 Berkshire subsidiaries received $21,844 In addition to receipt of proceeds representing regular quarterly cash dividends declared and paid share redemption proceeds from General Foods. The share redemptions were structured so as to result in no change in Berkshire's percentage ownership of General Foods, since the number of shares time to time during the year by General Foods from other of its shareholders. The share redemption redeemed from the Berkshire subsidiaries were determined by the number of shares redeemed from proceeds are included in realized investment gain in the accompanying 1984 Consolidated Statement of Earnings after reduction for the cost of the shares redeemed, for applicable income taxes and for the interest of minority shareholders of Wesco. The redemption of the General Foods shares contributed $7,294 ($6.36 per share) to Berkshire's net earnings for 1984. Dividends declared and paid by General Foods and received by Berkshire companies with respect to their investments in General Foods shares amounted to $10,923 in 1984, $9,428 in 1983, and $5,673 in 1982. These figures are stated on a pre-tax basis and are reflected in the accompanying Consolidated Statements of Earnings in the income item captioned "Interest and dividend income". (6) Investment in Mutual Savings and Loan Association Berkshire's carrying value of its investment in Mutual represents the original cost of the investment adjusted for amortization of negative goodwill that arose at the various dates of acquisition. The equity in underlying net assets of Mutual, measured at book value at the dates of acquisition, exceeded the the end of 1984 ($17,558 at the end of 1983). amounts then paid for acquired interest. The unamortized excess (negative goodwill) was $16,934 at Summarized financial information of Mutual is as follows: • Balance Sheet Data December 31 1984 1983 Cash and marketable securities Assets Loans receivable, net $188,851 95,120 $143,461 11,071 106,831 Other assets 15,944 $295,042 $266,236 Liabilities and Shareholders' Equity Other liabilities Savings accounts* $227,585 5,906 $203,284 7,547 Total liabilities Shareholders' equity, substantially restricted 233,491 61,551 210,831 55,405 $295,042 $266,236 *Included in Mutual's liability for savings accounts is $403 at December 31, 1984 and $15,025 at December 31, 1983, representing an account maintained for Wesco Financial Corporation, a consolidated subsidiary of Berkshire that is Mutual's parent company. Earnings Statement Data 1984 1983 1982 Total revenues $26,887 $22,741 $23,360 Net income $ 6,844 $ 3,047 $ 910 31

[PAGE 36]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (7) Receivables Accounts receivable from customers, agents and others were made up of the following: Dec. 29, 1984 Dec. 31, 1983 Trade accounts receivable, net of allowances for doubtful accounts … Agents' balances and premiums in course of collection $ 47,647 Reinsurance recoverable on loss payments 19,935 $ 42,390 nvestment income due and accrued 522 20,856 mounts due from sales of securities 18,342 9,014 324 Total receivables ........... ... .. 2,043 229 $ 88,489 $ 72,813 (8) Inventories Inventories of the various consolidated businesses as follows: at the end of the current and prior year were Dec. 29, 1984 Dec. 31, 1983 Candy business Retailing of home furnishings $ 7,110 $5,724 Retailing of apparel 5,249 9,728 7,964 Steel service business 5,850 Textile business 7,690 6,411 5,144 5,424 6,893 Other 5,661 $41,332 $37,516 $7,731 and $7,078 less than their aggregate replacement cost at year-end 1984 and 1983 respectively. The carrying amounts for inventories determined under the LIFO method were approximately (9) Real Estate, Equipment, Furniture and Leasehold Improvements past two years is shown below: The composition of property, plant and equipment, on a consolidated basis, at the end of the Dec. 29, 1984 Dec. 31, 1983 Land Buildings $ 7,486 Machinery and equipment 39,418 $ 7,486 Furniture, fixtures and leasehold improvements 60,821 61,236 37,758 32,040 30,720 Less accumulated depreciation and amortization 139,765 137,200 .... 71,846 67,451 $ 67,919 $ 69,749 32

[PAGE 37]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) December 29, 1984 (10) Deferred Income Taxes at December 29, 1984, and $188,071 at December 31, 1983 which amounts are deemed appličable to The liability for deferred income taxes shown in the Consolidated Balance Sheets includes $186,198 those in which they are recognized for income tax reporting purposes. A summary follows of prepaid/ deferred taxes arising from timing differences. Item Giving Rise To Prepaid (Deferred) Taxes Prepaid/Deferred Taxes At Dec. 29, 1984 Dec. 31, 1983 Structured settlements and portfolio reinsurance Trading stamp liability $15,839 $17,519 Deferred premium acquisition costs .. (5,471) Depreciation of property, plant & equipment (3,423) (2,267) State income and franchise taxes (1,622) (4,295) All other Unearned carrying charges 1,008 (1,160) 950 1,060 805 1,010 796 $ 8,291 $12,458 (11) Revolving Credit and Term Loan Agreements In February, 1984, Berkshire entered into Revolving Credit and Term Loan Agreements with banks. The revolving credit period under the Agreements extends to January 31, 1987. During this period, the banks will make loans to Berkshire, at Berkshire's request, aggregating up to $175,000 outstanding. For borrowings during the revolving credit period, Berkshire will pay interest at not more than the fees at the per annum rate of ¼ of 1%. Any borrowings outstanding under the Agreements at January respective bank's prime rate. For unused portions of the commitments, Berkshire will quarterly pay may borrow specified amounts within the aggregate limits of the Agreements for a specified term of 31, 1987 will be repayable in sixteen equal quarterly installments commencing April 30, 1987. Berkshire tor, Sable to the exite toni up to one year at interest rates which may be less than the prime rate but fixed for the specified term. Subject to the expiration of the term periods with respect to any such borrowings, Berkshire may at any time, without penalty, terminate the Agreements upon repayment of borrowings thereunder. repayment of borrowings thereunder in twelve equal quarterly installments if Warren E. Buffett ceases The Agreements provide for optional termination by either bank of its commitment and require to act as chairman and the chief executive officer of the Company or if total borrowings of the Company and its consolidated subsidiaries exceed a formula amount, generally 35% of Capitalization as defined. There were no outstanding borrowings under these agreements at December 29, 1984. 33

[PAGE 38]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (12) Term Debt Payable and Other Borrowings Consolidated term debt and other borrowings were as follows: Dec. 29, 1984 Dec. 31, 1983 Berkshire: 8% Senior Notes maturing through March 1, 1993 94% Senior Notes maturing March 1, 1985 to at $1,143 annually ... $ 13,142 $ 14,285 March 1, 1993 at $777 annually .... 2¾% debentures maturing from August 1, 1991 throug 7,000 7,000 August 1, 2005 at $4,004 annually .. 8% debentures due 1985, with 1% additional 60,000 60,000 Other notes, debentures and capitalized lease participating interest .... 6,600 6,600 obligations maturing through 1992 in varying varying from 7½% to 17½% .. annual installments, with interest at rates 1,324 1,560 Consolidated Subsidiaries: 88,066 89,445 10% notes maturing in June, 1991 ... 94% note, secured by land, bulding and assignment of leases, 25,000 25,000 due in monthly installments through March, 2007 5,098 Notes and capitalized lease obligations maturing through 2006 5,166 in varying installments, with interest at rates varying from 6% to 15% …...... Total consolidated term debt ...... 8,940 9,373 $127,104 $128,984 consolidations, and allow the noteholders to demand prepayment at par within 60 days of notice Berkshire's Senior Note Agreements include limiting terms relating to sales of assets, mergers and that of certain family affiliates, has decreased to less than 15% of the Company's outstanding capital has deceased to tas than i gotch em stock. Among the covenants of Berkshire's various borrowing agreements, the Senior Note Agreements include the most limiting of provisions restricting retained earnings. Thereunder, retained earnings of approximately $233,000 as of December 29, 1984 were free of restriction, the balance is restricted. succeeding five years as follows: Principal payments on term debt outstanding at December 29, 1984 are required during the 1985 1986 • $9,288 1987 2,853 1988 2,749 1989 2,818 2,508 34

[PAGE 39]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (13) Stockholders' Equity Accounts Changes in Stockholders' Equity accounts during the most recent three years were as follows: Net Unrealized Appreciation Retained Earnings Increase during 1982 in unrealized appreciation included Balance at January 2, 1982 .... $196,475 $354,058 $40,658 Change during 1982 in deemed applicable in carrying value of marketable equity securities ....• 224,509 income taxes (62,863) Net earnings 1982 46,374 Increase during 1983* in unrealized appreciation included Balance at January 1, 1983 ...•• 358,121 400,432 40,658 in carrying value of marketable equity securities Change during 1983* in deemed applicable ....• 174,058 Net earnings 1983* income taxes (48,899) 112,166 Value of 500 treasury shares acquired in Blue Chip merger 280 Increase during 1984 in unrealized appreciation included Balance at December 31, 1983* •..•• 483,280 512,598 40,938 Change during 1984 in deemed applicable in carrying value of marketable equity securities ...•. 2,612 income taxes 1,061 Net earnings 1984 148,895 Balance at December 29, 1984 $486,953 $661,493 $40,938 *1983 is restated — see Note 1(b). shares of its $5 par value shares for the 40.4% in Blue Chip's net assets that it did not already own On July 28, 1983, Berkshire increased by $805 its issued common stock when it exchanged 160,900 Additionally in recording this transaction $153,860 was credited to capital in excess of par value. (14) Dividend Restrictions - Insurance Subsidiaries regulations, to the extent that not more than approximately $131,000 could be paid to the Company Payments of dividends by Insurance Group members are restricted by insurance statutes and in 1985 by insurance subsidiaries of the Company, without prior regulatory approvals. (15) Lease Commitments to real estate occupied under agreements classified as operating leases, minimum rentals under which Berkshire and subsidiaries of Berkshire have significant commitments outstanding with respect were as follows at December 29, 1984: Year Total 1985 1986 $ 8,891 1987 7,538 1988 6,401 1989 4,276 5,715 Thereafter 12,820 Total rental expense, including equipment rentals, charged to consolidated earnings was $12,332 for 1984, $12,477 for 1983, and $12,809 for 1982; such figures include contingent real estate rentals in excess of stated minimums amounting to $3,186 for 1984, $3,412 for 1983, and $3,265 for 1982. 35

[PAGE 40]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (16) Income Taxes earnings and to realized investment gain as shown below. The Consolidated Statements of Earnings reflect charges for income taxes applicable to operating Applicable to Applicable income taxes Operating earnings 1984 1983 1982 Realized investment gain of consolidated companie: $ 16,420 Realized investment loss Mutual Savings 31,221 $ 8,904 21,849 $ 2,524 13,734 80) $ 47,641 $ 30,753 These taxes are comprised of: $16,178 Federal State $ 39,128 8,455 $ 26,728 3,920 $11,854 Foreign 58 105 4,293 $ 47,641 $ 30,753 $16,178 Charges for income computed at the Federal statutory rate. taxes are reconciled in the table which follows to hypothetical amounts Net earnings including minority interest, 1984 1983 1982 before applicable income taxes Hypothetical amounts applicable to above $203,031 $151,720 $83,161 Decreases, resulting from: computed at the Federal statutory rate (46%) $ 93,394 $ 69,791 $38,254 Tax-exempt interest income .. 85% dividends received deduction relating to (10,992) (4,310) (3,722) dividend income reported herein Rate differentials relating to realized (16,408) (17,714) (13,873) State income taxes, less Federal income investment gains (21,209) (19,391) (5,384) tax benefit Net other differences 4,636 Total income taxes ....... (1,780) 2207 (1,716) 2,619 ...... $ 47,641 $ 30,753 $16,178 Total income taxes for 1984 included approximately $43,268 current expense plus net prepaid/ reporting purposes was insubstantial, so that total income taxes for those years as shown above deterred taxes of $4,373. For 1982 and 1983, the net change in prepaid/deferred taxes for financial essentially represent current income tax expense. 36

[PAGE 41]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) December 29, 1984 (17) Realized Investment Gain following table: A summary of net realized investment gain for each of the past three years is presented in the 1984 1983* Special share redemption proceeds received from 1982 in 1983, less cost of shares redeemed General Foods Corporation in 1984 and GEICO Corporation Pre-tax net gain realized on See Notes 4 and 5 ... consolidated companies sales of securities by .. . .. $ 8,111 $19,575 $ - Applicable minority interest Applicable income taxes 101,692 (31,221) 67,260 (21,849) 41,143 (2,035) (1,464) (13,734) (11,454) Equity in net realized gain (loss) of Mutual Savings 76,547 63,522 15,955 and Loan Association, an unconsolidated subsidiary Realized investment gain, net ... 2,147 -(1,078) ... . . $ 78,694 $63,522 $14,877 *1983 is restated — see Note 1(b). of GNMA backed real estate mortgage certificates. The Company's equity in such loss (net of applicable In February 1982, Mutual Savings and Loan Association sustained a loss of $2,426 on the sale minority interests and income taxes) was approximately $1,078. The cost of securities sold is usually determined on a first-in, first-out basis; occasionally, when specific identification of securities sold results in lower applicable income tax, identified cost is used. (18) Pension Plans are covered under either employer-sponsored or union-sponsored pension plans. Total pension expense Employees of Berkshire and its consolidated subsidiaries who meet certain eligibility requirements includes, as to certain of the plans, amortization of prior service costs over a 30-year period. Berkshire charged to consolidated earnings was $2,455 for 1984, $2,362 for 1983, and $2,636 for 1982, which and its subsidiaries generally fund pension costs as accrued. its consolidated subsidiaries were last performed as of various dates from January 1, 1983 to June 1, The latest actuarial evaluations of employer-sponsored defined benefit plans of the Company and ranging from 6% to 10%, segregated as between overfunded and underfunded plans, together with 1984. The actuarial present values determined for accumulated benefits, using interest assumptions assets available for benefits as of that date, are presented in the following table. Overfunded plans Underfunded Actuarial present value of accumulated benefits: plans Not vested Vested $26,844 Total 1,380 $5,533 379 $28,224 $5,912 Assets available for benefits $38,883 $3,681 27

[PAGE 42]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands except per share amounts) December 29, 1984 (19) Quarterly Data information is unaudited. Information for the third quarter of 1983 is restated from that previously A summary of earnings by quarter for the past two years is presented in the following table. This presented, reflecting a changed accounting treatment of GEICO share redemption proceeds received in that period. See Note 1(b). Information for the second and third quarter of 1984 is restated from that previously published, reflecting a changed accounting treatment of General Foods share redemption proceeds received during those periods. See below. 1984 1st 3rd 4th Income items Quarter Quarter Quarter Quarterial $164,580 $179,208 $160,509 Realized investment gain Earnings before realized investment gain . $224,882 13,001 21,446 14,648 Net earnings 21,670 13,870 17,654 28,682 17,924 $ 34,447 $ 36,318 $ 31,524 $ 46,606 Per average outstanding share: Net earnings Earnings before realized investment gain $ 11.34 $ 12.77 $ 30.03 31.67 12.09 $ 25.01 27.49 40.63 Income items 1983 $130,875 $138,039 $123,326 Earnings before realized investment gain . $210,486 Realized investment gain 9,254 Net earnings 10,120 8,554 20,938 8,334 29,550 22,502 2,914 $ 19,374 $ 29,492 $ 37,884 $ 25,416 Per average outstanding share: Net earnings Earnings before realized investment gain $ 9.38 $ 19.64 8.67 $ 29.90 33.03 7.26 $ 19.62 22.16 ta Candy business revenues and earnings are significantly higher in the fourth quarter of the year compared to earlier quarters. More than half of See's Candies annual sales are normally recorded in the fourth quarter. Newspaper revenues and earnings also peak in the fourth quarter of the year. respectively, representing proceeds from redemption by General Foods Corporation of its shares owned In the second and third quarters of 1984, Berkshire subsidiaries received $8,892 and $7,299, by Berkshire subsidiaries. The proceeds were received pursuant to contractual arrangements whereby the redemptions kept unchanged the Berkshire subsidiaries' ownership percentages of total General Foods outstanding shares. The proceeds distributed by General Foods to Berkshire subsidiaries in the form of redemption of General Foods shares were, economically to Berkshire subsidiaries, substantially equivalent to dividend income. In its 1984 second and third quarter financial reports previously as dividend income. Income previously reported for 1984 interim periods was not reduced for the published, Berkshire applied the substance-over-form principle in accounting for the proceeds received cost of the redeemed shares. Berkshire's independent accountants subsequently advised the Company that its substance-over-form view does not provide, in the accountants' judgment, a proper basis under generally accepted accounting principles to account for the proceeds as dividend income. Earnings data for the second and third quarters of 1984 are accordingly restated in the above summary to realized investment gain. The effect of the change is to reduce earnings from amounts previously reflect the General Foods share redemption proceeds, after reduction for cost of shares redeemed, as reported for the second quarter by $5,376 ($4.69 per share), and for the third quarter by $4,099 ($3.58 per share). The related changes to previously published interim balance sheets are insignificant. 38

[PAGE 43]

BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and Consolidated Subsidiaries (dollars in thousands) December 29, 1984 (20) Business Segment Data business segments. The tables below reflect data for each of the three most recent fiscal years, broken down as to Revenues 1984 1983 1982 Insurance Newspaper Candy $209,523 $196,729 .... 136,053 $194,736 Retailing of home furnishings 101,639 133,616 Steel service center 118,176 90,161 123,770 Textiles Retailing of apparel 55,305 28,910 63,630 41,966 41,997 46,266 37,483 Revenues not identified with segments 32,444 26,611 21,755 42,609 34,073 38,436 37,489 $729,179 $602,726 $521,472 Operating Profit Before Taxes 1984 1983 Insurance 1982 Candy $ 20,843 Newspaper 25,669 $ 26,697 9,938 $ 20,062 23,440 Retailing of home furnishings 26,729 19,039 (1,244) Steel service center 14,044 4,092 3,642 Textiles Retailing of apparel (1,072) 3,241 697 703 418 (100) 914 Pre-tax operating profits not identified with Corporate expenses segments 19,230 21,173 19,227 (1,545) Interest expense Shareholder designated contributions (1,543) (3,178) (3,066) (1,272) (1,227) (891) (14,734) _(15,104) (14,995) $ 90,498 $ 64,885 $ 44,444 Amounts are stated before deduction of any applicable minority interest. Charges or credits for depreciation and amortization of tangible and intangible assets have been taken into account. See below. Realized investment gains are not reflected. Capital Expenditures 1984 1983 1982 Insurance Candy $ 3,727 441 $ 282 623 734 2,406 $ 342 Newspaper 788 2,711 Retailing of home furnishings 2,931 Steel service center 409 - 612 159 - Retailing of apparel Other 720 320 1,269 315 Textiles 470 2,588 720 972 $ 7,586 358 $ 6,346 $ 9,965 Excludes expenditures which were part of business acquisitions. 29

[PAGE 44]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) December 29, 1984 (20) Business Segment Data (continued) Depreciation and Amortization of Tangible Assets Insurance 1984 1983 1982 Candy $ 2,386 492 $ 2,264 550 $ 2,087 651 Newspaper Steel service center Retailing of home furnishings 2,592 922 2,557 228 2,354 Textiles Retailing of apparel 633 400 633 - 457 248 614 Other 662 620 689 610 632 $528 $ 8,764 $ 7,953 $ 7.092 Amortization of Intangible Assets 1984 1983 1982 Candy Newspaper $ 975 599 $ 714 314 $ 444 Mutual Retailing of home furnishings 467 29 Other (624) 128 (624) (624) 17 $ 1,434 $ 532 $ (151) Identifiable Assets At Year-End 1984 1983 1982 Identified with segments: Insurance Candy - tangible assets $1,615,274

• goodwill

28,631 $1,322,160 $1,059,670 Newspaper - tangible assets 34,497 35,472 27,791 28,757 Retailing of home furnishings

• goodwill

22,907 37,653 37,292 37,703 12,802 23,506 930

• tangible assets

Steel service center

• goodwill

40,560 18,182 19,807 35,165 20,274 Retailing of apparel 17,672 Textiles 13,186 13,435 15,337 Other 16,085 14,789 16,002 9,487 10,575 90,261 12,878 Not identified with segments: 1,856,269 1,558,131 1,274,340 Investment in unconsolidated subsidiaries Corporate cash and marketable securities of 33,235 27,216 24,065 parent and non-insurance subsidiaries 145,699 252,196 234,879 $2,035,203 $1,837,543 $1,533,284 40

[PAGE 45]

BERKSHIRE HATHAWAY INC. and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 29, 1984 (dollars in thousands except per share amounts) (20) Business Segment Data (continued) Revenues of the Insurance Segment 1984 1983 Premiums written 1982 $133,558 $149,849 $149,091 Premiums earned: Workers' Compensation* Specialized auto and general liability 64,003 22,665 68,148 69,026 18,849 Reinsurance 16,066 26,889 15,951 Structured settlements and Home State multiple lines 32,598 27,408 35,328 37,552 portfolio reinsurance 4,910 3,266 3,008 Investment income Total premiums earned 140,242 69,281 152,480 152,945 44,249 41,791 $209,523 $196,729 $194,736 *Workers' Compensation coverage written by the Home State Companies, as part of their multiple line business, is not disaggregated from their total earned premiums. Insurance Segment Operating Profit Before Taxes 1984 1983 1982 Underwriting gain (loss): • Specialized auto and general liability Workers' Compensation $(16,049) Reinsurance (12,703) (12,560) $(14,880) $(12,647) (1,091) (8,387) (7,524) 2,658 Home State multiple lines (4,101) (8,834) (3,949) Subtotal - conventional insurance operations (45,413) Structured settlements and portfolio (33,192) (21,462) reinsurance transactions (2,647) (680) (96) Net investment income Total underwriting (loss) (48,060) (33,872) (21,558) 68,903 43,810 41,620 $ 20,843 $ 9,938 $20,062 from such transactions was recorded until 1984. Portfolio reinsurance obligations were first assumed near the end of 1983 and no gain or loss (21) Subsequent Event Cities") three million shares of that company's common stock at a per-share price of $172.50, if and On March 18, 1985, Berkshire agreed to purchase from Capital Cities Communications, Inc. ("Capital when Capital Cities purchases American Broadcasting Companies, Inc. ("ABC"). Capital Cities and ABC have publicly announced a plan whereby the latter would be acquired by the former upon their consummated pursuant to this plan, and Berkshire's purchase of the Capital Cities shares, would most obtaining the necessary shareholder and regulatory approvals. Capital Cities' acquisition of ABC, if likely not occur until after the end of the third calendar quarter of 1985. Berkshire's contingent purchase commitment amounts to $517,500, and Berkshire's investment in Capital Cities stock if made Cities' outstanding shares. Capital Cities is a publicly owned corporation that is presently extensively pursuant to this proposal would represent immediately after the transaction about 18% of Capital engaged in radio and television broadcasting, in publishing and in the operation of cable television systems. 41

[PAGE 46]

! :. BERKSHIRE HATHAWAY INC. Financial Condition and Results of Operations Management's Discussion and Analysis of Results of Operations Berkshire's operations are diverse. For purposes of this discussion, results are disaggregated to permit separate discussion of the more significant sources. Extensive data with respect to the various Berkshire operations appears in Note 20 (the "Segment Note") to the Consolidated Financial Statements appearing elsewhere herein. This discussion should be read in conjunction with that data. detailed. The impact of income taxes is somewhat uneven as to the various line items. Consolidated In the Segment Note, the operating profit before taxes of the various Berkshire businesses is after-tax earnings for the past three years are summarized by principal source in the following table: Source Net After-Tax Earnings (Loss) 000s Omitted 1984 1983 1982 Insurance underwriting ... $ (25,955) $ (18,400) Candy business 12,406 $ (11,345) Newspaper business 11,498 6,470 12,7177 Retailing of home furnishings 5,451 1,352 8,518 (255) Interest and dividend income 71,0177 53,341* 43,789 - Interest and financing costs Other operating items, net (7,452) 2,017 (7,346) (319) (6,951) (211) Earnings before realized investment gain 70,201 48,644* Realized investment gain, net 78,694 63,522* 14,877 31,497 Net earnings $148,895 $112,166* $ 46,374 *1983 is restated — see Note 1(b) Insurance underwriting company members of the Insurance Group is presented below, on the basis of generally accepter A summary of the combined underwriting results of the several property/casualty insurance accounting principles ("GAAP"), for the past three years, with dollars in thousands 1984 1983 1982 Amount % Amount % Amount % Premiums written $133,558 XX Premiums earned ..... $149,849 XX $149,091 XX 140,242 100.0 152,480 100.0 152,945 100.0 Losses and loss expenses Underwriting expenses 141,550 100.9 134,109 87.9 121,996 79.8 46,752 33.4 52,243 34.3 52,507 34.3 188,302 134.3 186,352 122.2 174,503 114.1 Underwriting loss — pre-tax Applicable income tax credit (48,060) (33,872) 22,105 15,472 (21,558) 10,213 After-tax loss $ (25,955) $(18,400) $ (11,345) 42

[PAGE 47]

BERKSHIRE HATHAWAY INC. MANAGEMENT'S DISCUSSION (Continued) to premiums earned (hereafter, the "loss and expense ratio") is comparable but not identical to the The percentage figure shown in the above table representing the ratio of total losses and expenses "combined ratio" that is computed for companies in the industry based on data assembled for statutory reporting purposes. Of course, GAAP underwriting results are profitable to the extent that the loss and expense ratio is less than 100% and unprofitable to the extent that the ratio exceeds 100%. Disaggregated Insurance Group comparative data is shown in the last two tables of the Segment Note. The last of such tables indicates that significant underwriting losses were recorded in each of the past three years for each subsegment of Berkshire's insurance business. The dollars of underwriting loss recorded for reinsurance activities with respect to structured settlements and loss portfolio assumptions were $2,647,000 — 1984, $680,000 — 1983 and $96,000 effect on the loss and expense ratio of the Group for each of the past three years.

• 1982. These reinsurance activities, data for which is reflected in the table first above, had a negligible

peratons not dine nine an the petity with raped to return aroman operations, which appeared to lack potential for necessary improvement, were discontinued. The discontinued operations were not sold, but their activities were wound-down. Additional losses were amounted o st 1 mion be pa, 573, aton or 83 am 24 mind for 1982. These losses, because they compare to relatively low levels of premiums earned by the operations, had an adverse effect on the loss and expense ratios shown above for the Group. The data for discontinued operations increased that ratio for 1984 by 4.9 percentage points, for 1983 by 6.4 points and for 1982 by 1.2 points. operations have been sizeable — amounting to $35.3 million in 1984, $20.1 million in 1983 and $19 Obvious from the above is that underwriting losses of Berkshire's continuing conventional underwriting million in 1982. For several years, price competition has been intense in the property/casualty insurance business. As the duration of time extended during which inadequate pricing practices were the rule, their adverse effect on industry profits became more pervasive and underwriting losses increased. Some improvement in industry pricing appeared in the last half of 1984. However, the forward-pricing nature of the insurance business results in delays between the date that higher prices are initiated and the date they are reflected in the underwriting results. And, the need for higher prices was of such magnitude that there is virtually no way that the industry can record an underwriting profit in the near future. As to Berkshire's continuing insurance operations, it is management's view that the worst of their highly likely that losses will be recorded in 1985 with respect to Berkshire's discontinued insurance underwriting losses are in the past but that an underwriting loss will be recorded for 1985. It is also operations, but their extent will be determined by their loss reserve developments. Loss Reserve Developments Significant adverse loss development was recorded by Berkshire's Insurance Group in 1984. The term "loss development" refers to changes in estimates of total losses incurred with respect to loss occurrences in years prior to the current year. Figures relating to the specialized reinsurance arrangements their inclusion would not be informative. Summaries of loss and loss expense data for the conventional

• periodic payments and portfolio reinsurance — are excluded in the data presented below because

insurance and reinsurance operations for the past three years are shown in the following table. 43

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BERKSHIRE HATHAWAY INC. MANAGEMENT'S DISCUSSION (Continued) Loss Reserve Developments (Continued) 000s Omitted 1984 Incurred losses recorded: Unpaid losses and loss expense at beginning of year 1983 1982 $196,468 $189,911 $190,970 Current year occurrences All prior years' occurrences 116,441 17,770 126,634 115,775 3,604 Payments with respect to: 134,211 2,596 130,238 118,371 Current year occurrences All prior years' occurrences 40,820 77,216 52,240 46,496 71,441 72,934 118,036 Unpaid losses and loss expense at end of year $212,643 123,681 119,430 $196,468 $189,911 occurrences". They represent charges against the given year's results that, based on information that Loss development is represented by the figures for incurred losses captioned "All prior years' came to light in that given year with respect to prior years' loss occurrences, should have been charged to prior years' results. Loss development recorded in a given year is an indication of the estimation in making the revised estimate, additional information may still become available and events may subsequently occur that influence the actual loss amounts ultimately incurred with respect to the prior years' occurrences. It literally takes years to determine the precise amount of estimation error because it is stale, may tend to be less than useful. One-year developments, as presented above, have that existed in an original estimate, and when the ultimate determination is made, the information, the advantage of revealing the effect on reported income of any given year of the estimation error recognized in that year. is 12.7% of premiums earned in 1984. It is of such magnitude that further explanation follows. More The estimation error recognized in 1984 for Berkshire's Insurance Group was $17,770,000 which than 50% of the total, or $9.7 million, was recorded for Berkshire's reinsurance operations. As to reinsured business, the reinsurers (the Berkshire Insurance Group members, in this case), in establishing their estimates of unpaid amounts, must rely upon the estimates of the ceding insurers (the "Cedents") that are themselves directly liable. In fairness to Berkshire's Cedents, it must be pointed out that many of the cases with respect to which Berkshire's reinsurance operations recorded 1984 adverse loss development were in long-tail lines (auto liability, general liability, medical malpractice), where the them to then make more accurate estimates. This adverse development recorded in Berkshire's reinsurance Cedents themselves did not have available one year earlier the information that would have permitted operations relates to loss occurrences in years in which Berkshire's reinsurance volume was considerably higher than for 1984. The effect of the latter is a slightly negative influence on the determination of the Insurance Group's 1984 loss and expense ratio. For that computation, the numerator (losses plus (premiums earned) does not, of course, include any of the higher prior year premium income. expenses incurred) includes the adverse loss development relating to prior years, while the denominator workers' compensation. That line produced adverse development to Berkshire of $6.2 million, of which Most of the remainder of Berkshire's 1984 adverse loss development was in another long-tail line, $1.8 million represents that of operations that were discontinued by Berkshire at the end of 1984. Adverse development recorded in 1984 by Cypress Insurance Company amounted to $4.2 million. Underreserving was not a previously revealed characteristic at that operation, which had produced results in each of several prior years that were considered by Berkshire's management as quite satisfactory. The extent of Cypress' 1984 adverse development was an unhappy surprise. It is unfortunately yet in 1984 resulted from applying inadequate estimation methods, or whether the errors resulted from too early to tell whether the underestimation of Cypress's 1983 yearend reserves that were revealed events of an unpredictable nature that precluded more accurate estimation. 44

[PAGE 49]

.: - BERKSHIRE HATHAWAY INC. MANAGEMENT'S DISCUSSION (Continued) Loss Reserve Developments (Continued) It a company underestimates its costs, it is more likely to underprice its product. If an insurance Acceptance of business at inadequate prices tends to accompany underestimation of unpaid losses. company underestimates its unpaid losses, it will also pay income taxes on amounts that weren' really income. For several reasons, Berkshire's management is genuinely concerned about the underestimation of its 1983 yearend loss reserves that was revealed in 1984. Candy Business A summary of results to Berkshire from the candy business for the past three years is as follows: 000s omitted Profit Applicable Applicable income minority Net before taxes taxes interest earnings 1984 $25,670 $13,264 $- $12,406 1983 26,697 13,712 1,487 11,498 1982 23,440 12,178 4,792 6,470 Stamps. Prior to that merger it was for some time approximately 60% beneficially owned by Berkshire. This business became wholly-owned by Berkshire in 1983 as a result of the merger of Blue Chip The elimination, ettective for the last halt of 1983 and thereafter, of the minority interest in See's business had a pronounced effect on Berkshire's earnings for 1983 versus 1982, as indicated above, and a somewhat lesser effect on the comparisons between 1984 and 1983. declining somewhat on Unit volume (pounds of candy sold) has been relatively static in the past three years, actually a store-for-store basis. Increased selling prices in 1983 overcame increased costs in 1983, each as compared to the prior year. However, in 1984, the nominal increases in selling prime were somewhat less than increases in cost so that profit before taxes in 1984 declined slightly Newspaper Business Berkshire's results from operation of the Buffalo News for the past three years is as follows: 000s omitted Applicable Applicable Net Profit (loss) income minority before taxes taxes interest earnings (loss) 1984 $26,728 $14,011 $ $12,717 1983 19,039 9,000 1,521 8,518 1982 (1,244) (765) (224) (255) merger of Blue Chip Stamps. It is now 100% owned by Berkshire. The News was 59.6% beneficially owned by Berkshire in earlier years and until the mid-1983 of publication of the competing Buffalo Courier-Express. Both advertising and circulation revenues of A dramatic turnaround to profitability of the Buffalo News resulted in 1983 after the 1982 cessation the News increased significantly in 1983, as unit volume and prices both increased. Also of benefit in 1983 was an unanticipated decline in newsprint prices. Advertising and circulation revenues both increased in 1984 from 1983 levels. Total revenues in the News' profit before taxes to increase as shown above. Only nominal state income taxes were 1984 increased about 12% over 1983 amounts. A lesser rate of increase in costs in 1984 permitted incurred in 1983 as a result of applicable net operating loss carryovers. Income of the News in 1984 was fully subject to both state and federal income taxes. 45

[PAGE 50]

MANAGEMENT'S DISCUSSION (Continued) BERKSHIRE HATHAWAY INC. Retailing of Home Furnishings the below table compares data for the full 1984 year to that for only the last three months of 1983. Berkshire purchased its controlling interest in this business on September 30, 1983. Therefore, 000s omitted Profit before Applicable income Applicable taxes taxes minority Net - interest earnings 1983(3 months) .. 1984 $14,044 3,642 $7,064 1,909 $1,529 381 $5,451 1,352 expectations. The rewarding results of this business for 1984 compare favorably to Berkshire management's Interest and Dividend Income This income is largely earned by the Insurance Group. Wesco and certain other consolidated issued by non-affiliates. subsidiaries and, from time to time, Berkshire also retain investments in income producing securities A summary of this category of income for the past three years follows: 000s omitted Profit Applicable income Applicable before taxes taxes minority interest Net 1984 $84,161 $11,802 earnings 1983 (Restated*) 64,903 8,018 $1,342 3,544 $71,017 1982 58,003 8,906 53,341 5,308 43,789 *See Note 1(b) portion represents dividend income of which only 15% is taxable at the full Federal corporate rate. of this income is received with respect to tax-exempt obligations, and a significant Total interest and dividend income has increased as the amount of investments has increased. Tax exempt interest income increased significantly from $8,091,000 in 1982 to $9,677,000 in 1983, and to $23,896,000 in 1984. That increase resulted from an increased investment in Washington Public Power Supply System bonds. Realized Investment Gain This component of Berkshire's net earnings for 1984 and 1983 (as restated) includes proceeds received from investees in transactions that kept unchanged Berkshire's proportionate ownership interest in the investees. The net gain in the transactions ($7,294,000 for 1984 and $18,224,000 for cost of the redeemed shares. Berkshire's management believes that a more appropriate financial 1983) was determined for current financial reporting purposes after deducting from the proceeds the following the substance-over-form principle. Berkshire's management does not consider that Berkshire presentation would result if the proceeds were reflected as dividend-equivalent special distributions, Foods in 1984, and it views the redemption proceeds it received from those entities in the same light "sold" any part of its ownership interest in GEICO in 1983 nor of its ownership interest in General as it views dividend income. Accounting otherwise for the transactions, as is reflected in the accompanying consolidated financial statements, in management's view obscures the underlying economic reality of 46

[PAGE 51]

BERKSHIRE HATHAWAY INC. MANAGEMENT'S DISCUSSION (Continued) Realized Investment Gain (Continued) This part of the discussion in recent years included a recitation to the effect that a significant appreciated securities were sold, that management's decision to sell any of Berkshire's investments is component of Berkshire's net earnings has historically resulted from realized gains recorded when and that the amount of earnings that Berkshire may derive from realized investment gains, if any, based on a number of factors, but the impact of the decision on reported earnings is not a consideration, tends to fluctuate significantly from period to period. That recitation was and still is totally appropriate, irrespective of the accounting treatment afforded to proportionate redemption proceeds. Liquidity and Capital Resources Berkshire's consolidated balance sheet at December 29, 1984 reflects continuing significant liquidity. subsidiaries, to savers of Blue Chip's trading stamps and its other obligations requires maintenance In management's opinion, the fiduciary nature of obligations to policyholders of Berkshire's insurance of high liquidity; management expects to continue to meet this requirement with a significant margin of safety. Maintenance of liquidity considerably above industry norms is intended to permit Berkshire's insurance subsidiaries to perform their underwriting function without a view towards cash flow. It also permits quick response to business acquisition opportunities, such as occurred in 1983 when control of the Nebraska Furniture Mart became available. reinvestment in property, plant and equipment. Generally, management tends to avoid deployment Berkshire's businesses are not capital-intensive; i.e., they do not require significant investment or of assets in businesses of such a nature. On the contrary, Berkshire desires to own companies engaged in businesses that produce positive cash flow. It retains funds and obtains credit with a view towards strength creates competitive advantage to them. acquiring more such operations or expanding existing operations into areas where above-average capital Berkshire's total equity capital has more than doubled over the past three years, from approximately to $752 million. About $155 million of the increase resulted from Berkshire's issuance of shares of $519 million at the end of 1981 to over $1.2 billion at the end of 1984, the net increase amounting its common stock to acquire the outstanding minority interest of Blue Chip Stamps. Realized and unrealized securities gains during the three years represent approximately $447 million of the increase and reinvested operating earnings in the three years were about $150 million. Debt is used by Berkshire in relatively modest amounts, and management does not expect Berkshire to rely upon a high degree of leverage in its financing at any time in the foreseeable future. Management is averse to reliance on any significant amount of short-term debt. Berkshire has outstanding $60 million 12¾% debentures issued in a public offering in 1980, repayable in the years 1991 through 2005. Berkshire put into place on February 22, 1984, $175 million Revolving Credit and Term Loan Agreements with banks. It is thus in position to acquire significant business interests should an opportunity arise to do so. Inflation businesses. Generally, Berkshire receives current revenues in any year which have substantially the Berkshire's management does not believe that, to date, inflation has seriously affected Berkshire's same purchasing power as the dollars which represent its current costs. Very few of Berkshire's costs are stated in dollars which are other than current dollars. Berkshire's insurance business, particularly since premium rates are 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. 47

[PAGE 52]

: BERKSHIRE HATHAWAY INC. PARENT COMPANY ONLY - SUMMARIZED FINANCIAL STATEMENTS (dollars in thousands) Financial Statements of Berkshire Hathaway Inc. and consolidated subsidiaries and the notes thereto, These summarized financial statements should be read in conjunction with the Consolidated presented elsewhere herein. Balance Sheets Assets Dec. 29, Cash and invested cash 1984 Dec. 31, 1983 Investment in marketable equity securities at (market: Dec. 31, 1983 — $188,056) .... cost $ 9,036 $ 4,492 Investment in subsidiaries (including unrealized appreciation of *** - 139,976 net of taxes, amounting to $486,953 at Dec. 29, 1984 and marketable equity securities owned by insurance subsidiaries, Accounts receivable and inventories of parent $483,280 at Dec. 31, 1983) 1,335,349 1,062,695 Other assets company's textile business 11,020 12,367 10,039 3,821 $1,367,772 $1,221,023 Liabilities and Stockholders' Equity Accounts payable and accrued expenses Term debt and other borrowings ......... $ 7,945 Current and deferred income taxes 88,066 $ 10,291 89,445 2,094 Stockholders' equity (See Consolidated Balance Sheets) 1,271,761 96,011 101,830 1,119,193 $1,367,772 $1,221,023 Income items: Statements of Earnings From subsidiaries: 1984 1983 1982 Interest ... Dividends $ 470 Undistributed earnings 121,990 24,732 $ 347 105,414 $ 440 12,139 Interest and dividends - other investments 147,192 2,673 44,926 Other income Gross profit from textile products sales 3,626 108,434 7,736 57,505 2,862 5,205 1,992 2,120 Income tax credit 8,430 882 2,190 6,352 1,176 164,300 129,719 61,683 Cost and expense items: Administrative and selling expenses of textile business Interest expense Corporate administration* 2,279 2,352 2,147 4,338 2,005 2,486 10,774 11,068 10,818 Net earnings 15,405 17,553 15,309 $148,895 $112,166 _$46,374 *Corporate administration costs include Parent's contributions pursuant to Berkshire's shareholder subsidiary in 1984 and 1982.) designated contributions program. (Additional such contributions were made by a wholly-owned 48

[PAGE 53]

SUPPLEMENTAL INFORMATION ON THE EFFECTS OF CHANGING PRICES BERKSHIRE HATHAWAY INC. (dollars in thousands except per share amount) This information is unaudited. Historical figures shown herein have been determined on the basis of current consolidation practices. The Financial Accounting Standards Board ("FASB") requires disclosure by certain companies of supplementary data intended to reflect the effects of inflation on portions of the financial statements. The method of measuring the impact from inflation is in the development stage and conceivably subject to future changes. Therefore, evaluation of the data presented should be made with caution and only with reference to other financial data. Selected Financial Data as Reported and as Adjusted for General Inflation constant dollars. The latter is determined by the Consumer Price Index. This table presents certain prescribed data as reported* and then as adjusted to average 1984 Fiscal Year Ended Saturday nearest December 31, 1984 1983 Total revenues: 1982 1981 1980 As reported* As adjusted $ 729,179 729,179 $ 602,726 628,378 $521,472 $529,234 561,155 604,644 $536,414 676,169 Earnings from continuing investment gain: operations before realized Total as reported* $ Total as adjusted 70,201 $ 48,614 $ 31,497 70,201 50,683 $ 39,723 33,894 45,383 $ 38,484 48,510 Per share as adjusted Per share as reported* $ 61.21 61.21 $ 47.51 45.57 $ 31.93 34.36 $ 40.27 37.47 46.01 $ 47.23 Stockholders' equity: As adjusted As reported* $1,271,761 1,271,761 $1,119,193 $727,483 $519,463 1,166,826 782,843 593,481 $395,214 498,181 Market price per common share at year end: Historical amount As adjusted $ 1,275.00 $ 1,310.00 $ 775.00 1,275.00 1,366.00 834.00 $ 560.00 $ 425.00 640.00 536.00 Average consumer price index (1967 = 100) 311.1 298.4 289.1 272.3 246.8 *Or as would have been reported following current consolidation practices. Gain in Purchasing Power from Holding Net Monetary Items or payable are "monetary items". At the end of each of the last six years, Berkshire held, on a In general, assets or liabilities which are fixed in terms of the amount of cash held, receivable exceeded consolidated monetary items which were assets. In an inflationary period, a gain in purchasing consolidated basis, net monetary liabilities, i.e., consolidated monetary items which were liabilities resulting from this calculation, as to Berkshire and its consolidated subsidiaries for each of the past five years - stated in average 1984 dollars - is as follows: 1984 1983 $ 6,935 1982 8,830 1981 6,750 1980 14,424 P.49 18,562 Additional FASB Requirements and depreciation thereon, and reporting the net effect on reported net income of these restatements. Another FASB requirement is for restating at "current cost" inventories, assets used in production information has been omitted. Since these items are not relatively material to Berkshire's operating income or financial position, this

[PAGE 54]

The 1984 Annual Report of Wesco Financial Corporation included the following letter to Wesco stockholders from the Chairman of the Company. To Our Shareholders: Consolidated "normal" operating income (i.e., before all unusual operating income and all net gains from sales of securities) for the calendar year 1984 increased to $10,060,000 ($1.42 per share) from $8,507,000 ($1.20 per share) in the previous year. Consolidated net income (i.e., after unusual operating income and all net gains from sales of securities), increased to $23,656,000 ($3.32 per share) from $10,553,000 ($1.48 per share) in the previous year. Despite the high numbers reported, 1984 was a so-so year in terms of real gain in income was swollen in a major way only because of an unusual item of operating strength. While "normal" net operating income increased satisfactorily, total net income and the cashing in of some unrealized appreciation in marketable securities which had occurred in earlier years. Wesco has two major subsidiaries, Mutual Savings, in Pasadena, and Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty breaks down as follows (in 000s except for per-share amounts)": metal products businesses. Consolidated net income for the two years just ended Net Operating "Normal" Income of Mutual Precision "Normal" Net All Other December 31, 1984 Savings Businesses Steel Income(2) Operating Certicates Securities(3) Celiamed December 31, 1983 Per Wesco share $3,476 .49 $2,034 Per Wesco share 3,046 .29 $4,550 3,839 .64 $458 .06 $13,138 .54 - 1.84 $23,656 .43 1,622 3.32 .23 - 2,046 .28 10,553 1.48 (2) After deduction of interest and other corporate expenses. Income was from ownership of the Mutual Savings' headquarters (1) All figures are net of income taxes. securities owned outside the savings and loan subsidiary. office building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable (3) Interes income cat (01 and sh)ine, asic by 51,765,00 5.25 pershare see unusuat come and Certain Acted ting Quirks in 1984 Reporting" below. The foregoing breakdown (of the same aggregate earnings) differs somewhat from that used in audited financial statements, which follow standard accounting convention as interpreted from time to time by Wesco's outside auditor. The supplementary breakdown of earnings is furnished because it is considered useful to shareholders. Much of this letter is a word-for-word repeat of last year's letter with updated numbers. The repetition of wording occurs because it is believed (1) that the duplicated material remains correct and is worth repeating, and (2) that in Wesco's case any time and money required to change wording would be better spent elsewhere. 50

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Reproduced from 1984 Annual Report of Wesco Financial Corporation Parsimony, however, does not wholly predominate. So much kidding occurred concerning the 1960s automobiles in the old photograph of the Mutual Savings' build- ing, which was used in last year's annual report to avoid incurring the cost of a new photograph, that the purse has been opened a little. Shareholders comparing the new photograph (on the inside tront cover of this report) with the old will note that the trees have grown a lot in the intervening years. Fortunately, so has the value of the building. See the last section of this letter. The building, which works very well and attracts high quality tenants regarded as friends, is a constant reminder of the good sense of Louis R. Vincenti and Richard D. Aston, the Wesco executives responsible for its creation. Mutual Savings Mutual Savings' "normal" net operating income of $3,476,000 in 1984, represented an increase of 14.1% from the $3,046,000 figure the previous year. In both years such "normal" net operating income, while economically real and probably of at least average quality as reported savings and loan industry incomes go, was below the top quality possible because such earnings came entirely or partly from income tax savings obtained through inclusion of Mutual Savings in the consolidated income tax return of a parent corporation. Earnings so derived from income tax savings are not of the top quality possible because they can be impaired by future changes in tax laws and have less cushion in reserve against future adversity than earnings from ordinary operating income on which income taxes have been paid in full in cash at the highest corporate rate and are recoverable from the I.R.S. in the event of future operating losses. Separate balance sheets of Mutual Savings at yearend 1983 and 1984 are set forth at the end of this annual report. They show (1) total savings accounts rising to $228 million from $203 million the year before, (2) a very high ratio of shareholders' equity to savings account liabilities (probably the highest for any mature U.S. savings and loan associa- tion), (3) a substantial portion of savings account liabilities offset by cash equivalents and marketable securities, and (4) a loan portfolio (mostly real estate mortgages) of about $95 million at the end of 1984, down 11% from the $107 million at the end of 1983. The loan portfolio at the end of 1984 bore a fixed average interest rate of only 7.63%, probably the lowest for any U.S. savings and loan association and tar below the average interest rate which now must be paid to hold savings accounts. The capital-rich, mortgage-loan-interest-rate-poor position of Mutual Savings came from (1) success many years ago as a construction lender at above-average interest rates, plus (2) sale in 1980 by Mutual Savings of all branch offices (except for one satellite office in a major shopping center across the street from the Pasadena headquarters) under terms where only the lowest-yielding mortgage loans from its large portfolio were the sale of its branch offices, plus (4) profits in every recent year, no matter how high retained, plus (3) drastic curtailment by Mutual Savings of mortgage lending following interest rates went. Mutual Savings has remained profitable because the adverse effects from its old low-yielding, fixed-rate mortgage loan portfolio are more than offset by favorable effects from its large shareholders' equity and a tax-equivalent yield on its marketable securities (utility preterred stocks, tax-exempt bonds and common stocks) considerably higher than that prevailing on the mortgage loan portfolio of a typical savings and loan association. The old low-yielding, fixed-rate mortgage loan portfolio has shrunk from pay-backs at 9.8% per year over the last three years, and the shrinkage is expected to 51

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Reproduced from 1984 Annual Report of Wesco Financial Corporation continue at about the same rate. With portfolio shrinkage, loan credit quality problems have been reduced to a meaningless trace, because the old mortgages have large real estate equities supporting secured credit extended. And the foreclosed property on hand (mostly 22 vacant, largely oceanfront, acres in Santa Barbara) over a long holding carrying cost. period has plainly become worth considerably more than its $2 million balance sheet It should be noted, however, that Mutual Savings' total mortgage loan portfolio did not, in substance as distinguished from accounting form, decrease in 1984 by the 11% mentioned above, determined by comparing audited year end balance sheet totals for loans. Mutual Savings has agreed to buy in 1986 U.S. Government guaranteed mortgage equivalents (GNMA certificates) at a price of about $19 million and has pre-funded this forward commitment by buying U.S. Treasury Notes maturing near the time the certifi- cates will be purchased. After taking into account this forward commitment to purchase increased by about 7% in 1984. GNMA certificates, Mutual Savings' total mortgage loan portfolio has, in substance, The 1984 increase in substance of mortgages owned reflects Mutual Savings' intention to keep at least 60% of assets in mortgages or mortgage equivalents, exactly as the Federal Home Loan Bank Board wisely exhorts the savings and loan industry to do if it expects to remain under a regulatory system separate from that of banks. And as a result of anticipated steady shrinkage through repayment of remaining old 7.63% earnings so long as interest rates on savings accounts do not greatly increase. The GNMA certificates purchased for 1986 delivery at a price of about $19 million are expected to yield about 15% on such price, getting under way the process of "blending" the mortgage loan portfolio yield to a higher average level. Mutual Savings has adapted in its own way to the dramatic changes which have savings and loan industries. At Mutual Savings, as well as the rest of the savings and loan occurred in recent years in interest rates and the regulatory structure of the banking and industry, the standard practice used to be to borrow short from savers while lending long on fixed-rate mortgages, to have high financial leverage for shareholders' equity and to grant mortgagors easy prepayment terms. I he practice was protitable for decades but always involved something like a "hurricane risk," and the equivalent of a hurricane came in 1981-82 as interest rates rose to unprecedented levels and caused widespread losses. Results were good for shareholders before 1981-82 only because interest rates were stable or rose slowly as mortgage-loan portfolios steadily and rapidly expanded under a regulatory structure which both fostered growth and protected operating margins by requiring that on all insured savings accounts fixed rates be paid that were slightly higher than the low rates specified for banks. Thus a small deposit-attracting rate oressure was dampened for both types of institution. advantage over banks was given to savings and loan associations, while competitive Although interest rates have subsided from the 1981-82 peak, the low and slowly changing interest rates of former years are plainly gone with the wind, as are the former government-decreed limits on interest rate competition tor savings accounts and the favoritism for savings and loan associations over banks. But an agency of the U.S. Government (FSLIC) continues to insure savings accounts in the savings and loan 52

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Reproduced from 1984 Annual Report of Wesco Financial Corporation industry, just as it did before. The result may well be bolder and bolder conduct by many savings and loan associations. A sort of Gresham's law (bad loan practice drives out good") may take effect for fully competitive but deposit-insured institutions, through increased copying by cautious institutions of whatever apparent-high-yield loan and investment strategies seem to allow competitors to bid away their savings accounts and yet report substantial earnings. If so, if "bold conduct drives out conservative conduct," there eventually could be widespread insolvencies caused by bold credit extensions come to grief. And if serious credit-quality troubles come to the savings and loan industry, they will merely add to troubles from the borrowed-short, lent-long-at-fixed-rates problem, which is far from completely removed, and which destroys shareholder wealth at startling speed whenever interest rates are rising rapidly, even when the credit quality of mortgagors or other borrowers is excellent. The Federal Home Loan Bank Board, under its current Chairman Edwin R. Gray, shares Wesco's concerns. Wesco approves its attempts by regulation and by "jaw- boning" to limit follies to come from (1) sharing the U.S. Government's credit with optimistic new entrants to the savings and loan business, often coming from the real estate development and stock brokerage businesses, given ample scope to venture under widened investment authority, and (2) high financial leverage throughout the savings and loan industry, combined with continuing maturity mismatch of fixed rate assets and liabilities. Logic and history would suggest that Mr. Gray is right to pull on the reins, but this is an unpopular task since many powerful activity-cravers feel the bit and create political heat in opposition to even limited (and almost surely inadequate) nancial dıscipline which would protect the federal deposit-insurance svstem bv demanding a signiticant margin-ot-satety tactor in tinancial institutions, just as ir bridges. Wesco is not optimistic either that the present rules of the savings and loan game will stand the test of time or that drastic changes in the rules will occur until huge future trouble comes, sooner or later. Developing a short-term operating plan for Mutual Savings which would sharply increase its reported earnings next year would be a near-absolute cinch. For instance, savings accounts could be expanded greatly by paying a high rate of interest on "jumbo" deposits in $100,000 multiples, and proceeds plus cash equivalents on hand could be placed in long-term mortgages at a substantial current interest spread while, in addition, some origination fees could be "front-ended" into income. However, taking long-term risks into account, it is much harder to find a sound operating plan. Money is the ultimate fungible commodity. In the new order of things, an association is not only in a tough, competitive, commodity-type business on the lending side but also finds that, with decontrol of government-insured rates paid savers, every competitive association has virtually unlimited credit to fund increased lending, by paying premiums over interest rates generally prevailing on savings accounts. Under such conditions, when all risks are considered, including those. created by that portion of competitors motivated primarily by short-term effects, it is quite naturally difficult to earn over a long period an attractive return on shareholders' equity. How could it be otherwise? A few years ago, about the time Mutual Savings reacted to new conditions by curtailing lending and financial leverage, most other associations decided instead to keep lending aggressively but under new adjustable-rate mortgages under which some portion (but far from all) of the interest-rate-fluctuation risk is shifted to the homeowner.

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Reproduced from 1984 Annual Report of Wesco Financial Corporation Despite widespread use of these new adjustable-rate mortgages, savings and loan industry earnings remain dependent to a material extent, as they always were, on an interest rate spread attributable to: (1) borrowing short while lending long, and/or (2) making loans which can be priced high enough to provide a profit only because they involve a very material credit risk, compared to the risk of owning government-backed securities of comparable maturity. Under present conditions of strong competition from bold competitors accom- panied by high interest-rate-fluctuation risk, the result tends to be that each year of reported attractive earnings in the savings and loan industry occurs only in the absence of two now much more likely events: (1) sharply rising interest rates, and (2) widespread credit losses. Thus, each good year reported is a lot like the year when a Texas hurricane insurer reports satisfactory earnings because there have been no hurricanes. Mutual Savings has a considerable share of this uncomfortable position and will continue to have it. It has not yet developed a long-term operating strategy with which it is satisfied, and it continues to seek one. Just as Mutual Savings has been idiosyncratic in the past as it sold branch offices in 1980 (a practice since adopted to some extent by other savings and loan associations and major banks), it will probably be idiosyncratic in the future. It will seek some non-standard way of rendering socially constructive service while operating with acceptable profits accompanied by an acceptable level of risk for shareholders' capital, likely gains considered. Eventually, by maintaining unusual capital strength and liquidity, and by having a parent corporation which does likewise, Mutual Savings hopes to stand in particular favor with federal and state regulatory authorities and be in a position soundly to expand again, perhaps dramatically, and perhaps involving additional shareholder investment in Mutual Savings by the parent corporation. Recent growth in savings accounts, considered on an incremental-effects basis, constitutes loss business, because Mutual Savings has incurred in interest and other expense more than it has received from employing proceeds in short-term interest- bearing investments far above regulatory requirements for liquidity. Moreover, some of the attendant expense may not have hit the books. In due course (starting in 1985) Mutual Savings, which with its large ratio of shareholders' equity to total liabilities imposes a virtually zero risk on FSLIC (the U.S. agency which insures safety of accounts in savings and loan associations), will be required to pay to FSLIC extra insurance premiums, based on Mutual Savings' gross size, to help fund FSLIC's protection of account holders in other savings and loan associations finally recognized as insolvent. In this process Mutual Savings, in effect, will retroactively pay extra interest-equivalent expense by reason of having attracted new savings. Mutual Savings' position at the moment is like that of a sober and careful automobile driver of 2000 miles per year, disadvantaged by his limited activity, yet forced to pay mutualized, standardized insur- ance premiums so long as he lives based on inclusion in a liability insurance pool (1) which is composed almost entirely of much worse risks, (2) which contains a considera- ble number of traveling salesmen previously convicted of drunk driving, and (3) which discovers liabilities, partly through institutional design, long after their occurrence. Deliberate growth in savings, under such conditions, reflects considerable optimism, perhaps Micawberish, that Mutual Savings will eventually have better ideas and oppor- tunities and that its officers (including the Chairman) will make fewer of the sort of mistakes in which they participated in the past, leading to difficulties now decried.

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Reproduced from 1984 Annual Report of Wesco Financial Corporation The foregoing comments, designed to communicate reality for Wesco share- holders as it appears to Wesco management, should not be taken as criticism of FSLIC management. In recent years FSLIC management has bordered on heroic, considering economic and legal changes, political pressures, extraordinary work burden, novel problems and limited resources. Precision Steel Wesco's Precision Steel subsidiary, located in the outskirts of Chicago at Franklin Park, Illinois, was acquired for approximately $15 million on February 28, 1979. The price was roughly book value for a company which carried its inventories on a con- servative LIFO accounting basis and which contained significant cash balances. More important, it had reached its position from a modest beginning through maintenance of sound, customer-oriented business values inculcated over a long time by a gifted founder and his successors. Precision Steel owns a well-established steel service center business and a subsidiary engaged in the manufacture and distribution of tool room supplies and other specialty metal products. Precision Steel's businesses contributed $2,034,000 to "normal" net operating income in 1984, up 25% compared with $1,622,000 in 1983. Such a sharp increase in 1984 profit was not anticipated and was largely attributable to (1) increased sales (up 20% to $55,098,000) and (2) some favorable quantity-order prices on steel purchased. Under the leadership of David Hillstrom, Precision Steel's businesses are now quite satisfactory, taking into account the financial leverage put into Wesco's consolidated picture incident to their acquisition. The 1984 year could be a hard act to follow. Shortly after Wesco's purchase of Precision Steel, a substantial physical expansion of steel warehousing facilities was authorized, involving a new building in Charlotte, North Carolina. The new building and the whole North Carolina operation are now very successful, contributing $8,589,000 to sales in 1984 at a profit percentage higher than has prevailed in the long-established Chicago headquarters' facility. Precision Steel's businesses, despite their mundane nomenclature, are steps advanced on the quality scale from mere commodity-type businesses. Many customers of Precision Steel, needing dependable supply on short notice of specialized grades of high-quality, cold-rolled strip steel, reasonable prices, technical excellence in cutting to order, and remembrance when supplies are short, rightly believe that they have no fully comparable alternative in Precision Steel's market area. Indeed, many customers at locations remote from Chicago and Charlotte (for instance, Los Angeles) seek out Precision Steel's service. Wesco remains interested in logical expansion of Precision Steel's businesses, using liquid assets available. All Other "Normal" Net Operating Income All other "normal" net operating income, net of interest paid and general corporate expenses, rose to $4,550,000 in 1984 from $3,839,000 in 1983. Sources were (1) rents ($2,078,000 gross, excluding rent from Mutual Savings) from Wesco's Pasadena office building block (predominantly leased to outsiders although Mutual Savings is the ground floor tenant) and (2) interest and dividends from cash equivalents and

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Reproduced from 1984 Annual Report of Wesco Financial Corporation marketable securities held by Precision Steel and its subsidiaries and at the parent company level. Net Gains on Sales of Securities Wesco's aggregate net gains on sales of securities, combined, after income taxes, increased to $13,138,000 in 1984 from $2,046,000 in 1983. The large 1984 gains do not indicate special acumen or good fortune in 1984. It merely happened that in 1984 unrealized appreciation occurring in previous years was cashed in. A $1,080,000 portion of 1984 securities gains, if a different accounting treatment had been used, would have been both: (1) shifted to a different income category and (2) increased by $1,765,000. See next section. Unusual Income and Certain Accounting Quirks in 1984 Reporting Wesco's consolidated audited figures for net earnings contained in this Annual Report are lower by $1,328,000 in aggregate ($.19 per share) with respect to the nine • in gregate 15,19 persia months ended September 30, 1984, than the figures contained in Wesco's previously- issued quarterly reports covering such nine months. The downward restatement of earlier reported earnings occurred because, after the close of the year, Wesco's outside auditor made an unanticipated interpretation of generally accepted accounting principles applicable to an unusual business transaction. The unusual business transaction was cash paid by General Foods for transfer of General Foods' stock trom Wesco to General Foods under a written arrangement with General Foods, specifying intention to create an exact dividend-equivalent, which kept Wesco's percentage ownership of General Foods the same at all times. Under such circumstances, income tax law quite naturally treats all proceeds of the in-form "sale" of General Foods stock as a dividend, which is the I.R.S. view as well as Wesco's view of the underlying economic substance. Last year, in a virtually identical case, Wesco's outside auditor approved, for the consolidated group of which Wesco is a part, financial statements including accounting treatment in conformity with in-substance dividend reporting to the I.R.S. and Wesco's 1984 quarterly reports of earnings followed this precedent with no objection. But, after much deliberation, the outside auditor's opinion early in 1985 came down in favor of treating the 1984 transactions with General Foods as sales instead of dividend-equivalents, except that income tax provision continued to be computed on the in-substance dividend basis. From the Wesco shareholders' vantage point the result from the outside auditing decision made is that the error, if any, existing in the audited accounts by reason of the Wesco-auditor disagreement is now on the side of underreporting income. Wesco's audited net income for the full year 1984 is now lower by $1,765,000 ($.25 per share) than would have been reported if all proceeds of the 1984 business transaction with General Foods had been reported as unusual dividends or dividend-equivalents, fol- lowing Wesco's view of substance. Either way, any income from the Wesco-General Foods business transaction is reported as "unusual" or from an irregular source (securities gains), and, either way, the 1984 year end balance sheet is exactly the same, except that in one case (Wesco's view) the after-tax balance sheet carrying cost would have been $1,765,000 higher for an identical number of General Foods' shares owned, with the $1,765,000 increase augmenting book net worth of Wesco. 56

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Reproduced from 1984 Annual Report of Wesco Financial Corporation While Wesco disagrees with its outside auditor on the accounting issue, Wesco can find something to applaud in (1) a de-emphasis of year-to-year consistency in search for an answer best in the auditor's latest view and (2) an auditor's favoring of a decision, where it has any doubt, which may err on the side of under-reporting income, consider- inga common tendency of corporate clients to favor decisions in the opposite direction. Were Wesco running a national accounting partnership it would want a system where a high-ranked partner, free of business-retaining pressure, could reverse account- ing decisions urged by field partners, so Wesco can hardly complain about the inconsis- tent messages from an audit-management system which forced Wesco in 1984 to change at year end quarterly income figures earlier reported. However, in this murky case, where we happen to know that one of the country's most eminent accountants agrees with the Wesco view, we must admit to minor irritation with the fates. Wesco makes special effort aimed at high-quality reporting to shareholders. (For instance, only with respect to competitively proprietary information, such as transactions in marketa- ble securities, does Wesco consciously keep communication with shareholders to the legal minimum.) Thus when the audit quality-control system of its outside C.P.A. firm selects Wesco for forced restatement of numbers previously given shareholders, we feel much as if we were a duty-obsessed engineering student at Brigham Young University, accidentally tear-gassed by the national guard in a necessary program to control campus The subject of this restatement of a small part of Wesco's earnings is covered at length here only because, much more often than not, it is a bad sign for shareholders when a full year-end audit decreases income reported as earned in previous quarterly reports. A full explanation is therefore appropriate. The inconsistency between quarterly and final income figures is not the only accounting quirk in Wesco's audited 1984 financial statements. It seems odd, as high- lighted above in the unconventional breakdown of earnings, that unrealized apprecia- tion of $458,000 in a forward commitment to buy mortgage-equivalents was taken into Mutual Savings' income in 1984, which happened because the commitment was made in a futures market on a commodities exchange. A forward commitment to buy the same mortgage equivalents, made in some other manner, for instance by simple contract, would not, under the applicable accounting rules, result in the same unrealized appre- ciation's being reported as income. And, even though the unrealized appreciation is recognized as income in the 1984 earnings statement, shareholders must look deep into a footnote to the audited 1984 financial statements to find the only reference to the mortgage equivalents which produced the appreciation. The balance sheet standing alone discloses only short-term investments (U.S. Treasury Notes in this instance) the proceeds of which will be used in 1986 to close the forward commitment to buy the mortgage equivalents. It also seems odd, in view of the substantial additional costs FSLIC membership will in the near future impose on Mutual Savings, that prepaid FSLIC premiums amounting to $3,146,000 are included in the audited consolidated balance sheet, without offset for anticipated new cost of sharing FSLIC liabilities. We do not object to the accounting convention at work. All complexities and interests considered, the accounting profes- sion is doing all right by the civilization; the FSLIC relationship has long been a valuable asset in the savings and loan industry, with its mutualized nature of no practical adverse consequence; and both accounting and public-policy considerations disfavor quick invention of new accounting convention to anticipate in current financial statements future increases in burden from FSLIC membership by reason of facts already known. 57

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Reproduced from 1984 Annual Report of Wesco Financial Corporation But quirks (at least as diagnosed by Wesco) required (probably wisely, on balance) by accounting convention, do contribute to causing Wesco to break down and discuss its earnings unconventionally in its management letter and also to call shareholders' attention to audit footnotes. The use of both footnotes and letter is needed for a best- feasible understanding of economic reality as it appears to Wesco management. It is recognized, of course, by most certified public accountants as well as by Wesco then odited sonic rents lone,ennes ascent ani the in lettering by accomments convention, is an improperly incomplete form of annual communication with corporate owners. There is a limit to the communication which properly standardized accounting can create, and Wesco's outside auditors (and its parent companies' auditors) over the years have been quite supportive of Wesco's approach to expanding numerate com- munication in the management letter, even though outside auditing jurisdiction. Written arrangements creating the issue of unusual dividend-equivalent income, of the type which caused reporting quirks in 1984 as a result of transactions with General Foods, can hardly be expected to be made year after year. However, Wesco does anticipate, based on an agreement already signed, that in 1985 more of the same sort of amount than in 1984. transactions will occur with General Foods, probably somewhat smaller in aggregate Consolidated Balance Sheet and Related Discussion Wesco's consolidated balance sheet (1) retains a strength befitting a company whose consolidated net worth supports large outstanding promises to others and (2) reflects a continuing failure to acquire additional businesses, because none are found shareholders is taken into account. available, despite constant search, at prices deemed rational when the interest of Wesco As indicated in Note 2 to the accompanying financial statements, the aggregate market value of Wesco's marketable equity securities was higher than their aggregate cost at December 31, 1984 by about $13 million, down sharply from about $29 million one year earlier. Wesco's Pasadena office building block (containing about 165,000 net rentable square feet including Mutual Savings' space) has a market value substantially in excess of carrying value, demonstrated by (1) mortgage debt ($5,182,000 at 9.25% fixed) against this real property now exceeding its depreciated carrying value ($3,069,000) in Wesco's balance sheet at December 31, 1984, and (2) substantial current net cash flow to Wesco after debt service on the mortgage. holders' equity and total liquid assets. Wesco's practice has been to do a certain amount Wesco remains in a prudent position when total debt is compared to total share- flexibility to face both hazards and opportunities. of long-term borrowing in advance of specific need, in order to have maximum financial It is expected that the balance sheet strength of the consolidated enterprise will in due course be used in one or more business extensions. The extension activity, however, requires some patience, as suitable opportunities are not always present. 58

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Reproduced from 1984 Annual Report of Wesco Financial Corporation As indicated in Schedule I accompanying Wesco's financial statements, common stock investments, both those in the savings and loan subsidiary and those held temporarily elsewhere pending sale to fund business extension, tend to be concen- trated in a very few companies. Through this concentration practice better understand- ing is sought with respect to the few decisions made. The ratio of Wesco's annual reported consolidated net income to reported consoli- dated shareholders' equity, about 13% in 1982-84, (1) was dependent to a considerable extent on securities gains, irregular by nature, and (2) nonetheless leaves something to be desired from the Wesco shareholders' point of view. Wesco began life as a savings and loan holding company in what became a very tough industry in which the real value, as distinguished from the reported book value, of most shareholders' equity became impaired, particularly in 1981-82. Damaged along with the rest of its industry, Wesco has been proceeding slowly under shortened sail, while it assesses damage and repairs the ship, instead of trying to make fast time by getting all canvas aloft. However, progress ultimately helpful to shareholders has not been restricted to what has shown up neatly in the income account covering this period. Increases over recent years in both (1) aggregate reported shareholders' equity and (2) the percentage of such equity outside Wesco's savings and loan segment are expected to be useful in the future. On January 24, 1985, Wesco increased its regular quarterly dividend from 14½ cents per share to 15½ cents per share, payable March 7, 1985 to shareholders of record as of the close of business on February 19, 1985. This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidi- aries as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charks T manger Charles T. Munger Chairman of the Board February 12, 1985 59

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BERKSHIRE HATHAWAY INC. SHAREHOLDER-DESIGNATED CONTRIBUTIONS of shareholder-designated contributions. Portions of that letter follow: On October 14, 1981 a letter was sent to shareholders giving the reasons for initiation of a program "On September 30, 1981 Berkshire received a tax ruling from the U.S. Treasury Department that, in most years, should produce a significant benefit for charities of your choice. "Each Berkshire shareholder — on a basis proportional to the number of shares of Berkshire that he owns — will be able to designate recipients of charitable contributions by our company. You'll name the charity; Berkshire will write the check. The ruling states that there will be no personal tax consequences to our shareholders from making such designations. exercised by the owners in closely-held businesses, is almost exclusively exercised by the managers "Thus, our approximately 1500 owners now can exercise a perquisite that, although routinely in more widely-held businesses. input at all from shareholders, in two main categories: "In a widely-held corporation the executives ordinarily arrange all charitable donations, with no (1) Donations considered to benefit the corporation directly in an amount roughly commensurate with the cost of the donation; and (2) Donations considered to benefit the corporation indirectly through hard-to-measure, long- delayed feedback effects of various kinds. "I and other Berkshire executives have arranged in the past, as we will arrange in the future, all charitable donations in the first category. However, the aggregate level of giving in such category has been quite low, and very likely will remain quite low, because not many gifts can be shown to produce roughly commensurate direct benefits to Berkshire. "In the second category, Berkshire's charitable gifts have been virtually nil, because I am not comfortable with ordinary corporate practice and had no better practice to substitute. What bothers asking and how corporate peers are responding than on an objective evaluation of the donee's activities. me about ordinary corporate practice is the way gifts tend to be made based more on who does the ot the corporate manager, who usually is heavily influenced by specific social pressures on him. "A common result is the use of the stockholder's money to implement the charitable inclinations Frequently there is an added incongruity; many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar. "For Berkshire, a different model seems appropriate. Just as I wouldn't want you to implement it inappropriate to write checks on your corporate "bank account" for charities of my choice. Your your personal judgments by writing checks on my bank account for charities of your choice. I feel charitable preferences are as good as mine and, for both you and me, funds available to foster charitable interests in a tax-deductible manner reside largely at the corporate level rather than in our own hands. "Under such circumstances, I believe Berkshire should imitate more closely-held companies, not larger public companies. If you and I each owned 50% of a corporation, our charitable decision making would be simple. Charities very directly related to the operations of the business would have first claim on our available charitable funds. Any balance available after the "operations-related' contributions to our ownership interest. If the manager of our company had some suggestions, we would listen would be divided among various charitable interests of the two of us, on a basis roughly proportional carefully - but the final decision would be ours. Despite our corporate form, in this aspect of the business we probably would behave as if we were a partnership. "Wherever feasible, I believe in maintaining such a partnership frame of mind, even though we like behavior in this area ... operate through a large, tairly widely-held corporation. Our Treasury ruling will allow such partnership- 60

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"I am pleased that Berkshire donations can become owner-directed. It is ironic, but understandable, that a large and growing number of major corporations have charitable policies pursuant to which they will match gifts made by their employees (and — brace yourself for this one - many ever waters. san understandable because toch of the stage, many an machina bailable gifts be vners. I sav "understandable b a "revolving door" basis by institutions that have short-term investment horizons, and that lack a long-term owner's perspective ... "Our own shareholders are a different breed. As I mentioned in the 1979 annual report, at the is an example of that intent." ** * Contributions were $2 per share in 1981, $1 per share in 1982, and $3 per share in both 1983 deductions — or none at all. In those years we will not effect our shareholder-designated charitable There may be an occasional year when contributions by Berkshire will produce substandard tax program. In all other years we expect to inform you about October 10th of the amount per share that to respond with your designation. To qualify, your shares must be registered in your own name or you may designate. A reply form will accompany the notice, and you will be given about three weeks of September 30th, or the Friday preceding if such date falls on a Saturday or Sunday. the name of an owning trust, corporation, partnership or estate, if applicable, on our stockholder list 61

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BERKSHIRE HATHAWAY INC. (dollars in thousands Selected Financial Data

• except per share amounts)

Fiscal Year 1964 1969 1974 1979 Revenues of consolidated companies: Sales and service revenues Insurance premiums earned $ $25,258 Interest and dividend income 49,983 40,427 $ 60,574 $181,949 2,052 32,592 286,493 8,030 32,890 Earnings (loss): Earnings (loss) from continuing operations before realized investment gain or loss* $(2,824) Earnings from discontinued operation** Realized investment gain (loss), net .......... $ 2,698 - 4,090 $ 4,290 (1,340) $ 30,961 1,165 4,093 6,896 4,960 Net earnings (loss) $ (2,824) $ 7,953 $ 7,043 $ 42,817 Average shares of common stock outstanding - in thousands 1,171 985 980 1,027 Earnings (loss) per share: Earnings (loss) from continuing operations Net earnings (loss) before realized investment gain or loss $(2.41) (2.41) 2.74 8.07 $ 4.38 $ 30.14 7.19 41.68 Balance Sheet items (at end of Fiscal Year): Total assets ... Term debt and other borrowings $ 27,887 2,500 $ 95,746 $216,214 $933,288 Minority shareholders' interest 7,419 21,830 85,790 Shareholders' equity - total 22,139 43,918 59,891 Shares of common stock 88,199 344,962 Shareholders' equity — outstanding - in thousands 1,138 980 980 1,027 per outstanding share 19.46 44.83 90.04 335.85 nearest December 31. Data have been restated if required to conform to current consolidation practices. The 1964 fiscal year ended October 3, 1964. All other years presented ended on the Saturday Data have not been restated, with respect to years prior to the merger of Diversified Retailing Company, Inc., to give retroactive effect to the poolings of interests concept applied in accounting for the merger. An increase of 56,470 outstanding Berkshire shares resulted from that transaction in 1978. properties subsequently sold or abandoned. *The loss for 1964 includes a write-down of $3,000 recognized in that year with respect to textile The Company's equity in earnings of that former subsidiary for years prior to 1981 is reflected above **The Company divested of its interest in the Illinois National Bank as of December 31, 1980. as earnings from discontinued operation. 62

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COMMON STOCK DATA Shareholders The Company had approximately 3,125 record holders of its common stock at March 6, 1985. Market Prices The common stock of Berkshire Hathaway Inc. is traded in the over the counter market and is regularly quoted in the NASDAQ System under the symbol BKHT. The per-share high and low bid prices in each quarter of 1984 and 1983 are set forth in the following table. The quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not represent actual transactions. 1984 High Low 1983 High Low First Quarter Second Quarter • 1,360 1,240 First Quarter ..... 995 775 Third Quarter 1,345 Fourth Quarter 1,305 1,220 Second Quarter ... 1,305 1,265 1,230 Third Quarter 985 890 ... 1,245 905 Fourth Quarter 1,385 1,240 Dividends Berkshire has not declared a cash dividend since 1967. Stock Transfer Agent The First National Bank of Boston, P.O. Box 644, Boston, MA 02102 serves as Transfer Agent for the Company's common stock. Certificates to be transferred should be mailed directly to the Transfer Agent, preferably by registered mail. Certificates to be transferred should not be mailed to the Company. 64

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BERKSHIRE HATHAWAY INC. DIRECTORS AND OFFICERS OF THE COMPANY WARREN E. BUFFETT, Director and Chairman of the Board, Chief Executive Officer KENNETH V. CHACE, Director CHARLES T. MUNGER, Drector and Vice Chairman of the Board MALCOLM G. CHACE, JR. Director Retired, Former Chief Operating Officer of the Textile Operations J. VERNE MCKENZIs, Director Retired, Former Choirman of the Board of Directors Vice President Secretary and Treasurer ROBERT H. BIRD, Vice Fresident MICHAEL A. GOLDBERG, Vice President DANIEL J. JAKSICH, Controller 1. WILLIAM ScoTT. Vice President OPERATING MANAGERS DIVISIONS OF THE COMPANY Page E. Golsan, ill President Garry W. Morrison President K & W Products Division INSURANCE GROUP Textile Products Division 8319 So. Allport Ave, Santa Fe Springs, CA 90670 Joseph W. Elliott 59 Cove Steel, New, Bedford, MA: 02744 Brunhilde Hufnagl President Manager General Cornhusker Casualty Company Reinsurance Division 9140 West Dodge Road, Omaha, NE 68114) Roland D. Miller Thomas H. Rowley President National Indemnity Gompany/Columbla Insurance Company National Indemnity Company/National Fire & Marine Ins Co 2 Penn Center Plaza, Suite 1400, Philadelphia. PA 19102 Floydy, Taylor President 3024 Harney, Street, Omaha, NE 58131 Milton 1. Thornton President Continental note Ave: Com 0 be. Bralewood, CO 80111 Donald Ewurster President Kansas Fire & Casualty Company Cypress Insurance Company 400 Kansas Ayenue, Topeka, KS. 66601 Manager General Structured Settlements and Loss Portfolie Assumptions 1017, South Fair Oaks Ave, Pasadena, CA 91105 OTHER SUBSDIARY OPERATIONS Loul Blumkin National Indemnity Company/Columbia Insurance Company 3024 Harney Street, Omaha, NE 68131 Hate R. Dettmanm President Dayi President Nebraska Furniture Mart, Inc. 700 South 72 Street, Omaha, NE 68114 Cha President Mutual Savings & Loan Association Precision Steel Warehouse, Inc: 315 East Coforado Blyd./ Pasadena, CA 91109 See's Candy Shops, Incorporated 3500 North Wolf Road, Franklin Park, IL 60131 Blue Chip Stamps 210 El Camino Real, South San Francisco, CA 94080 Associated Retail Stores, Inc. 5801 SouthEastern Avenue, Los Angeles, CA 90040 Buffalo News 50-01 Northern Boulevard, Long Island City, NY 1110* One News Plaza, Buffalo, NY 14240-

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BERKSHIRE HATHAWAY INC Executive Offices .1440, Kiewit Plaza, Omaha, Nebraska 68131

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