1987 年伯克希尔完整年报

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BERKSHIRE HATHAWAY INC. 1987 ANNUAL REPORT TO THE STOCKHOLDERS

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BERKSHIRE HATHAWAY INC. 1987 ANNUAL REPORT TABLE OF CONTENTS Selected Financial Data At Five-Year Intervals ...•••.Inside Front Cover Owner-Related Business Principles 2 Business Activities 4 Chairman's Letter* 5 Accountants' Certificate .24 Consolidated Financial Statements . 25 Summarized Financial Statements - Parent Company Only .39 Managements' Discussion .40 Annual Report Letter - Wesco Financial Corporation . 45 Shareholder-Designated Contributions .54 Selected Financial Data For The Past Five Years .56 Directors and Officers of the Company Inside Back Cover Common Stock Data Inside Back Cover " Copyright © 1988 By Warren E. Buffett All Rights Reserved

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BERKSHIRE HATHAWAY INC. OWNER-RELATED BUSINESS PRINCIPLES Reproduced from the Chairman's letter in 1983 Annual Report shareholders as owner-partners, and of ourselves as managing partners. (Because of the size of our • Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our itself as the ultimate owner of our business assets but, instead, view the company as a conduit through shareholdings we also are, for better or worse, controlling partners.) We do not view the company which our shareholders own the assets. • In line with this owner-orientation, our directors are all major shareholders of Berkshire Hathaway. Berkshire. We eat our own cooking. In the case of at least four of the five, over 50% of family net worth is represented by holdings of the average annual rate of gain in intrinsic business value on a per-share basis. We do not measure • Our long-term economic goal (subject to some qualifications mentioned later) is to maximize the economic significance or performance of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future - a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American corporation. that generate cash and consistently earn above-average returns on capital. Our second choice is to • Our preference would be to reach this goal by directly owning a diversified group of businesses own parts of similar businesses, attained by our insurance subsidiaries. The price and availability of businesses and the need for insurance primarily through purchases of marketable common stocks capital determine any given year's capital allocation. • Because of this two-pronged approach to business ownership and because of the limitations of economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major business we control, numbers the individual businesses, should generally aid you in making judgments about them. we consider of great importance. These figures, along with other information we will supply about acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us • Accounting consequences do not influence our operating or capital-allocation decisions. When under standard precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) accounting principles than to purchase $1 of earnings that is reportable. This is frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains. rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This • We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed- our fiduciary obligations to policyholders, depositors, lenders and the many equity holders who have conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering committed unusually large portions of their net worth to our care. (As one of the Indianapolis "500" winners said: "To finish first, you must first finish.") 2

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

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Business Activities diaries engaged in a number of diverse business activities. The most Berkshire Hathaway Inc. is a holding company owning subsi- important of these is the property and casualty insurance business conducted nationwide on both a direct and reinsurance basis through Berkshire Hathaway Insurance Group, Business activities conducted a number of subsidiaries collectively referred to in this report as the by other subsidiaries include publication and distribution of ency- clopedias and related educational and instructional material (World Book and Childcraft products), manufacture and marketing of home Kirby name), manufacture and sale of boxed chocolates and other cleaning systems and related accessories (sold principally under the confectionery products (See's Candies), publication of a daily and Sunday newspaper in upstate New York (the Buffalo News), retailing and distribution of uniforms (The Fechheimer Brothers Company). of home furnishings (the Nebraska Furniture Mart) and manufacture subsidiary of Berkshire, owns a California chartered savings and loan Wesco Financial Corporation, a publicly traded and 80.1% owned company (Mutual Savings and Loan Association, Pasadena, Califor- Berkshire Hathaway Insurance Group) and a steel nia), a property and casualty insurer (which is included in the service center ity that centers in the Berkshire Hathaway Insurance Group. Equity Significant amounts of income are generated by investment activ- companies. Very significant equity investments at present include investments generally are made in the stocks of a limited number of GEICO Corporation, approximately 18% of the capital stock of Capital ownership of approximately 42% of the outstanding capital stock of Cities/ ABC, Inc., $700,000,000 face amount of 9% convertible preferred stock of Salomon Inc having approximately 12% of the total voting power of that company and approximately 13% of the capital stock is available to the public, including considerable information released of The Washington Post Company. Much about these four companies from time to time by the companies themselves. nesses are made by managers of the business units. Investment deci- Operating decisions for the various Berkshire subsidiary busi- and its subsidiaries by Warren E. Buffett, in consultation with Charles sions and all other capital allocation decisions are made for Berkshire T. Munger. Mr. Buffett is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board of Directors. Additionally, Mr. Munger is Chair- man of Wesco's Board of Directors. 4

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BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: since present management took over), our per-share book value has grown from $19.46 to $2,477.47, Our gain in net worth during 1987 was $464 million, or 19.5%. Over the last 23 years (that is, or at a rate of 23.1% compounded annually. cases, a corporation's book value and business value are almost totally unrelated. For example, just What counts, of course, is the rate of gain in per-share business value, not book value. In many values to be $652 million and $397 million, respectively. Conversely, Belridge Oil was sold to Shell before they went bankrupt, LTV and Baldwin-United published yearend audits showing their book in 1979 for $3.6 billion although its book value was only $177 million. business value over the last decade moderately outpacing the growth rate in book value. This good At Berkshire, however, the two valuations have tracked rather closely, with the growth rate in news continued in 1987. remarkable businesses and they are run by even more remarkable managers. Our premium of business value to book value has widened for two simple reasons: We own some that they have assembled a bunch of turkeys to run things. Their reluctance to do so makes for some You have a right to question that second assertion. After all, CEOs seldom tell their shareholders corporate performance that is woefully inadequate. He will nonetheless end with a warm paragraph strange annual reports. Oftentimes, in his shareholders' letter, a CEO will go on for pages detailing you wonder what the other assets can possibly be. describing his managerial comrades as "our most precious asset." Such comments sometimes make understand why, first take a look at page 7, where At Berkshire, however, my appraisal of our operating managers is, if anything, understated. To accounting basis) of our seven largest non-financial units: Buffalo News, Fechheimer, Kirby, Nebraska earnings (on an historical-cost Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, and World Book. In 1987, these seven business units had combined operating earnings before interest and taxes of $180 million. how much total capital - debt and equity - was needed to produce these earnings. Debt plays an By itself, this figure says nothing about economic performance. To evaluate that, we must know insignificant role at our seven units: Their net interest expense in 1987 was only $2 million. Thus, this equity - again on an historical-cost basis - was only $175 million. pre-tax earnings on the equity capital employed by these businesses amounted to $178 million. And would have been approximately $100 million - a return of about 57% on equity capital. You'll seldom If these seven business units had operated as a single company, their 1987 after-tax earnings a benchmark: In its 1988 Investor's Guide issue, Fortune reported that among the 500 largest indus- see such a percentage anywhere, let alone at large, diversified companies with nominal leverage. Here's 30% during the previous decade. The best performer among the 1000 was Commerce Clearing House trial companies and 500 largest service companies, only six had averaged a return on equity of over 5

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returns because, in aggregate, we bought the businesses at a substantial premium to underlying equity Of course, the returns that Berkshire earns from these seven units are not as high as their underlying capital. Overall, these operations are carried on our books at about $222 million above the historical accounting values of the underlying assets. However, the managers of the units should be judged by the returns they achieve on the underlying assets; what we pay for a business does not affect the amount of capital its manager has to work with. (If, to become a shareholder and part owner of Commerce Clearing House, you pay, say, six times book value, that does not change CCH's return on equity.) value of these seven units is far above their historical book value and also far above the value at Three important inferences can be drawn from the figures I have cited. First, the current business run these businesses, they can grow while concurrently making almost all of their earnings available which they are carried on Berkshire's balance sheet. Second, because so little capital is required to for deployment in new opportunities. Third, these businesses are run by truly extraordinary managers. The Blumkins, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph Schey all meld unusual talent, energy and character to achieve exceptional financial results. case, however, our experience has greatly exceeded those expectations. We have received far more For good reasons, we had very high expectations when we joined with these managers. In every expressed upon receiving an acting award: "I don't deserve this, but then, I have arthritis and I don't than we deserve, but we are willing to accept such inequities. (We subscribe to the view Jack Benny deserve that either.") business value well above the net assets employed in it. However, appraising the business value of Beyond the Sainted Seven, we have our other major unit, insurance, which I believe also has a a property-casualty insurance company is a decidedly imprecise process. The industry is volatile, reported earnings oftentimes are seriously inaccurate, and recent changes in the Tax Code will severely hurt future profitability. Despite these problems, we like the business and it will almost certainly remain our largest operation. Under Mike Goldberg's management, the insurance business should treat us well over time. fact, it is probably fair to say that if we did more, less would be accomplished. We have no corporate With managers like ours, my partner, Charlie Munger, and I have little to do with operations. In find such procedures useful at their operating units). After all, what can we tell the Blumkins about meetings, no corporate budgets, and no performance reviews (though our managers, of course, oftentimes home furnishings, or the Heldmans about uniforms? indiscriminate applause of a Pollyanna. Rather it is informed applause based upon the two long Our major contribution to the operations of our subsidiaries is applause. But it is not the careers we have spent intensively observing business performance and managerial behavior. Charlie and I have seen so much of the ordinary in business that we can truly appreciate a virtuoso performance. Only one response to the 1987 performance of our operating managers is appropriate: sustained, deafening applause. Sources of Reported Earnings table, amortization of Goodwill and other major purchase-price accounting adjustments are not charged The table on the following page shows the major sources of Berkshire's reported earnings. In the In effect, this procedure presents the earnings of our businesses as they would have been reported against the specific businesses to which they apply but, instead, are aggregated and shown separately explained why this form of presentation seems to us to be more useful to investors and managers had we not purchased them. In appendixes to my letters in the 1983 and 1986 annual reports, I business basis. The total net earnings we show in the table are, of course, identical to the GAAP than the standard GAAP presentation, which makes purchase-price adjustments on a business-by- figures in our audited financial statements. 6

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In the Business Segment Data on pages 36-38 and in the Management's Discussion section on (000s omitted) Berkshire's Share (after taxes and of Net Earnings Pre-Tax Earnings 1987 minority interests) Operating Earnings: 1986 1987 1986 Insurance Group: Ned avertinen Income .......... .. . .. $(55,429) 152,483 $(55,844) Buffalo News 39,410 107,143 $(20,696) 136,658 $(29,864) Fechheimer (Acquired 6/3/86) 13,332 34,736 21,304 96,440 Kirby 22,408 8,400 12,891 6,580 16,918 Scott Fetzer Mfg. Group Nebraska Furniture Mart 30,591 16,837 20,218 3,792 17,685 17,555 7,554 10,508 See's Candies 31,693 25,358 7,192 World Book Wesco - other than Insurance 25,745 6,209 30,347 17,363 13,354 5,542 15,136 4,978 15,176 Amortization of Goodwill (5,546) (2,862) (2,555) 21,978 5,550 (6,544) (2,862) 11,670 Other Purchase-Price Accounting Adjustments Shareholder-Designated Contributions Interest on Debt and Pre-Payment Penalty (11,474) (10,033) (2,555) 22,460 (4,938) (23,891) (2,963) (5,905) (11,031) Other (3,997) (12,213) Sales of Securities Operating Earnings 280,919 216,242 195,857 20,770 13,696 (2,158) 8.685 Total Earnings - All Entities 27,319 214,745 $412,099 $234,552 19,807 150,897 131,464 $308,238 $282,361 just that it's all two inches lower." As the table shows, during 1987 almost all of our businesses aged Gypsy Rose Lee announced on one of her later birthdays: "I have everything I had last year; it's in a more upbeat way. and exceptional returns usually don't mix. Most investors, of course, behave as if just the opposite There's not a lot new to report about these businesses - and that's good, not bad. Severe change were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses profitability rather than face today's business realities. For such investor-dreamers, any blind date is that hold out the promise of feverish change. That prospect lets investors fantasize about future preferable to one with the girl next door, no matter how desirable she may be. that are doing Experience, however, indicates that the best business returns are usually achieved by companies no argument for managerial complacency. Businesses something quite similar today to what they were doing five or ten years ago. That is product lines, manufacturing techniques, and the like, and obviously these opportunities should be always have opportunities to improve service, seized. But a business that constantly encounters major change also encounters many chances for difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is high returns. two tests of economic excellence - an average return on equity of over 20% in the ten years, 1977 The Fortune study I mentioned earlier supports our view. Only 25 of the 1,000 companies met through 1986, and no year worse than 15%. These business superstars were also stock market superstars: During the decade, 24 of the 25 outperformed the S&P 500. 7

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to their interest-paying capacity. Really good businesses usually don't need to borrow. Second, except The Fortune champs may surprise vou in two respects. First, most use very little leverage compared for one company that is "high-tech" and several others that manufacture ethical drugs, the companies are in businesses that. on balance, seem rather mundane. Most sell non-sexy products or services in or both). The record of these 25 companies confirms that making the most of an already strong business much the same manner as they did ten years ago (though in larger quantities now, or at higher prices, franchise, or concentrating on a single winning business theme, is what usually produces exceptional Berkshire's experience has been similar. Our managers have produced extraordinary results by they control costs, they search for new products and markets that build on their existing strengths doing rather ordinary things - but doing them exceptionally well. Our managers protect their franchises, and they don't get diverted. They work exceptionally hard at the details of their businesses, and Here's an update: one's spouse: "The older you become, the more interested they are in you." It is students of business • Agatha Christie, whose husband was an archaeologist, said that was the perfect profession for management, not archaeologists, who should be interested in Mrs. B (Rose Blumkin), the 94-year-old chairman of Nebraska Furniture Mart. rings around the competition. It's clear to me that she's gathering speed and may well reach her full potential in another five or ten years. Therefore, I've persuaded the Board to scrap our mandatory- retirement-at-100 policy. (And it's about time: With every passing year, this policy has seemed sillier to me.) in the country, and there's nothing like the family Mrs. B has produced to carry on: Her son Louie, Net sales of NFM were $142.6 million in 1987, up 8% from 1986. There's nothing like this store They work as a team and, strong as each is individually, the whole is far greater than the sum of and his three boys, Ron, Irv and Steve, possess the business instincts, integrity and drive of Mrs. B. the parts. NFM's customers. They saved about $30 million in 1987 by buying from NFM. In other words, the The superb job done by the Blumkins benefits us as owners, but even more dramatically benefits goods they bought would have cost that much more if purchased elsewhere. You'll enjoy an anonymous letter I received last August: "Sorry to see Berkshire profits fall in Furniture Mart. You will find that they are leaving 10% to 20% on the table. This additional profit on $140 million of sells (sic) is $28 million. Not small change in anyone's pocket! Check out other you. Isigned/ A Competitor." furniture, carpet, appliance and T.V. dealers. Your raising prices to a reasonable profit will help. Thank the truth." NFM will continue to grow and prosper by following Mrs. B's maxim: "Sell cheap and tell leader in two important ways: (1) its weekday and Sunday penetration rate (the percentage of households • Among dominant papers of its size or larger, the Buffalo News continues to be the national in the paper's primary market area that purchase it); and (2) its "news-hole" percentage (the portion of the paper devoted to news). rich" product makes for broad audience appeal, which in turn leads to high penetration. Of course, It may not be coincidence that one newspaper leads in both categories: an exceptionally "news- freshness and relevance. To be indispensable, a paper must promptly tell its readers many things they quantity must be matched by quality. This not only means good reporting and good writing; it means want to know but won't otherwise learn until much later, if ever. 8

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content. Here's a small example that may surprise you: We redo the obituary page in every edition At the News, we put out seven fresh editions every 24 hours, each one extensively changed in of the News, or seven times a day. Any obituary added runs through the next six editions until the publishing cycle has been completed. But it is also vital for it to do what only a local newspaper can: promptly and extensively chronicle It's vital. of course. for a newspaper to cover national and international news well and in depth. a very broad range of news - and that means lots of space, intelligently used. the personally-important, otherwise-unreported details of community life. Doing this job well requires to a more typical 40%, we would save approximately $4 million annually in newsprint costs. That Our news hole was about 50% in 1987, just as it has been year after year. If we were to cut it interests us not at all - and it won't interest us even if, for one reason or another, our profit margins should significantly shrink. if revenues are Y. but must be reduced if revenues are Y - 5%." Should we really cut our news hole Charlie and I do not believe in flexible operating budgets, as in "Non-direct expenses can be X an institutional advertising campaign or something else that does Berkshire no good simply because during a given year or quarter? Or, conversely, should we add a staff economist, a corporate strategist, the money currently is rolling in? because profits are booming, nor the cutting of essential people or activities because profitability is That makes no sense to us. We neither understand the adding of unneeded people or activities makes sense for Berkshire's customers and employees at all times, and never to add the unneeded. shrinking. That kind of yo-yo approach is neither business-like nor humane. Our goal is to do what ("But what about the corporate jet?" you rudely ask. Well, occasionally a man must rise above principle.) Although the News' revenues have grown only moderately since 1984, superb management by Stan Lipsey, its publisher, has produced excellent profit growth. For several years, I have incorrectly without question, shrink in 1988 and profit may fall as well. Skyrocketing newsprint costs will be predicted that profit margins at the News would fall. This year I will not let you down: Margins will, the major cause. a family. Three generations of Heldmans have for decades consistently built the sales and profits of • Fechheimer Bros. Company is another of our family businesses - and, like the Blumkins, what this manufacturer and distributor of uniforms. In the year that Berkshire acquired its controlling interest in Fechheimer - 1986 - profits were a record. The Heldmans didn't slow down after that. Last year earnings increased substantially and the outlook is good for 1988. Gary, Roger and Fred know the business inside and out, and they have fun running it. We are fortunate There's nothing magic about the uniform business; the only magic is in the Heldmans. Bob, George, to be in partnership with them. • Chuck Huggins continues to set new records at See's, just as he has ever since we put him in under 25 million pounds. For the second year in a row, moreover, same-store sales, measured in charge on the day of our purchase some 16 years ago. In 1987, volume hit a new high at slightly pounds, were virtually unchanged. In case you are wondering, that represents improvement: In each comparisons in the 1987 Christmas season than at any other time of the year. Thus, the seasonal Although we had a particularly strong 1986 Christmas season, we racked up better store-for-store factor at See's becomes even more extreme. In 1987, about 85% of our profit was earned during December. learn, practically no one besides See's has made significant profits in recent years from the operation Candy stores are fun to visit, but most have not been fun for their owners. From what we can one-of-a-kind performance. of candy shops. Clearly, Chuck's record at See's is not due to a rising industry tide. Rather, it is a 9

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affection for the customer. Chuck is 100% customer-oriented, and his attitude sets the tone for the His achievement requires an excellent product - which we have - but it also requires genuine rest of the See's organization. and also cull a few to keep our product line at about 100 varieties. Last spring we selected 14 items Here's an example of Chuck in action: At See's we regularly add new pieces of candy to our mix letting us know what they thought of our judgment: "A pox on all in See's who participated in the for elimination. Two, it turned out, were badly missed by our customers, who wasted no time in abominable decision..;" "May your new truffles melt in transit, may they sour in people's mouths, may your costs go up and your profits go down ...;" "We are investigating the possibility of obtaining a mandatory injunction requiring you to supply ..." You get the picture, In all. we received many hundreds of letters. who had written got a complete and honest explanation in return. Said Chuck's letter: "Fortunately, Chuck not only reintroduced the pieces, he turned this miscue into an opportunity. Each person when I make poor decisions, good things often happen as a result ..." And with the letter went a special gift certificate. more, though still moderately. To date, sales have been weak and it may be difficult for See's to See's increased prices only slightly in the last two years. In 1988 we have raised prices somewhat improve its earnings this year. of Ralph Schey. And what a lucky thing for us that they are. I told you last year that Scott Fetzer • World Book, Kirby, and the Scott Fetzer Manufacturing Group are all under the management purchase. Results in 1987 were even better. Pre-tax earnings rose 10% while average capital employed performance in 1986 had far exceeded the expectations that Charlie and I had at the time of our declined significantly. also attracted some outstanding managers to run them. We would love to find a few additional units Ralph's mastery of the 19 businesses for which he is responsible is truly amazing, and he has that could be put under Ralph's wing. one of our favorites: At the end of 1987, World Book introduced its most dramatically-revised edition The businesses of Scott Fetzer are too numerous to describe in detail. Let's just update you on revised; 840 new contributors were added. Charlie and I recommend this product to you and your since 1962. The number of color photos was increased from 14,000 to 24,000; over 6,000 articles were family, as we do World Book's products for younger children, Childcraft and Early World of Learning. International sales and profits also grew substantially. The outlook is good for Scott Fetzer operations In 1987, World Book unit sales in the United States increased for the fifth consecutive year. in aggregate, and for World Book in particular. Insurance Operations industry: Shown below is an updated version of our usual table presenting key figures for the insurance Yearly Change Combined Ratio Statutory in Premiums After Policyholder Yearly Change Dividends in Incurred Inflation Rate 1981 Written (%) Measured by 1982 1983 4.4 3.8 106.0 Losses (%) GNP Deflator (%) 1984 9.2 4.6 109.8 6.5 112.0 8.4 9.6 1985 1986 (Rev.) 22.1 117.9 6.8 6.4 1987 (Est.) 22.2 116.3 16.9 3.8 8.7 108.0 16.1 3.7 104.7 13.5 3.2 Source: Best's Insurance Management Reports 6.8 3.0 2.6 10

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The combined ratio represents total insurance costs (losses incurred plus expenses) compared to indicates a loss. When the investment income that an insurer earns from holding on to policyholders' revenue from premiums: A ratio below 100 indicates an underwriting profit, and one above 100 funds ("the float") is taken into account, a combined ratio in the 107-111 range typically produces an overall breakeven result, exclusive of earnings on the funds provided by shareholders. when the industry's annual gain in revenues (premiums) pokes along at 4% or 5%, underwriting losses The math of the insurance business, encapsulated by the table, is not very complicated. In years are sure to mount. That is not because auto accidents, fires, windstorms and the like are occurring are the major culprits; the cost of entering a courtroom has simply ballooned. Part of the jump in more frequently, nor has it lately been the fault of general inflation. Today, social and judicial inflation cost arises from skyrocketing verdicts, and part from the tendency of judges and juries to expand the about 10% annually for it to just hold its own in terms of profitability, even though general inflation may be running at a considerably lower rate. performance in 1987 and, indeed, it was a banner year. But the news soured as the quarters rolled The strong revenue gains of 1985-87 almost guaranteed the industry an excellent underwriting by: Best's estimates that year-over-year volume increases were 12.9%, 11.1%, 5.7%, and 5.6%. In 1988, the revenue gain is certain to be far below our 10% "equilibrium" figure. Clearly, the party is over. policies are written for a one-year term, higher or lower insurance prices do not have their full impact However, earnings will not immediately sink. A lag factor exists in this industry: Because most on earnings until many months after they go into effect. Thus, to resume our metaphor, when the major natural catastrophe, we predict a small climb for the industry's combined ratio in 1988, followed party ends and the bar is closed, you are allowed to finish your drink. If results are not hurt by a by several years of larger increases. poor long-term outlook: hundreds of competitors, ease of entry, and a product that cannot be differ- The insurance industry is cursed with a set of dismal economic characteristics that make for a entiated in any meaningful way. In such a commodity-like business, only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels. enjoyed that kind of climate for a while but it is now gone. One of the ironies of capitalism is that When shortages exist, however, even commodity businesses flourish. The insurance industry most managers in commodity industries abhor shortage conditions - even though those are the only circumstances permitting them good returns. Whenever shortages appear, the typical manager simply can't wait to expand capacity and thereby plug the hole through which money is showering upon "What we learn from history is that we do not learn from history." him. This is precisely what insurance managers did in 1985-87, confirming again Disraelis observation: differentiate our product by our financial strength, which exceeds that of all others in the industry. At Berkshire, we work to escape the industry's commodity economics in two ways. First, we This strength, however, is limited in its usefulness. It means nothing in the personal insurance field: The buyer of an auto or homeowners policy is going to get his claim paid even if his insurer fails complicated claim is finally resolved. (Out of sight, out of mind - and, later on, maybe out-of-pocket.) Periodically, however, buyers remember Ben Franklin's observation that it is hard for an empty financial strength. It is then that we have a major competitive advantage. When a buyer really focuses sack to stand upright and recognize their need to buy promises only from insurers that have enduring on whether a $10 million claim can be easily paid by his insurer five or ten years down the road, and when he takes into account the possibility that poor underwriting conditions may then coincide with depressed financial markets and defaults by reinsurers, he will find only a few companies he can trust. Among those, Berkshire will lead the pack. 11

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In 1989, we will be perfectly willing to write five times as much business as we write in 1988 - or Our second method of differentiating ourselves is the total indifference to volume that we maintain. control market prices. If they are unsatisfactory, we will simply do very little business. No other major only one-fifth as much. We hope, of course, that conditions will allow us large volume. But we cannot insurer acts with equal restraint. First, market share is not an important determinant of profitability: In this business, in contrast to Three conditions that prevail in insurance, but not in most businesses, allow us our flexibility. the newspaper or grocery businesses, the economic rule is not survival of the fattest. Second, in many sectors of insurance, including most of those in which we operate, distribution channels are not year. Third, idle capacity - which in this industry largely means people - does not result in intolerable proprietary and can be easily entered: Small volume this year does not preclude huge volume next costs. In a way that industries such as printing or steel cannot, we can operate at quarter-speed much of the time and still enjoy long-term prosperity. shareholders. But we're happy to report that it is also pro-social. This policy means that we are always We follow a price-based-on-exposure, not-on-competition policy because it makes sense for our available, given prices that we believe are adequate, to write huge volumes of almost any type of property-casualty insurance. Many other insurers follow an in-and-out approach. When they are "out" others are panting to do business we are also available - but at such times we often find ourselves

• because of mounting losses, capital inadequacy, or whatever - we are available. Of course, when

standby capacity. priced above the market. In effect, we supply insurance buyers and brokers with a large reservoir of One story from mid-1987 illustrates some consequences of our pricing policy: One of the largest family-owned insurance brokers in the country is headed by a fellow who has long been a shareholder of Berkshire. This man handles a number of large risks that are candidates for placement with our New York office. Naturally, he does the best he can for his clients. And, just as naturally, when the insurance market softened dramatically in 1987 he found prices at other insurers lower than we were more stock in Berkshire. Had we been really competitive, he said, we would have gotten his insurance willing to offer. His reaction was, first, to place all of his business elsewhere and, second, to buy business but he would not have bought our stock. discussed earlier. Our combined ratio (on a statutory basis and excluding structured settlements and Berkshire's underwriting experience was excellent in 1987, in part because of the lag factor it was 103, our profitability improved materially in 1987 because we had the use of far more float. financial reinsurance) was 105. Although the ratio was somewhat less favorable than in 1986, when This trend will continue to run in our favor: Our ratio of float to premium volume will increase very significantly during the next few years. Thus, Berkshire's insurance profits are quite likely to improve during 1988 and 1989, even though we expect our combined ratio to rise. years. Mike Goldberg, its manager, has assembled a group of talented professionals to write larger Our insurance business has also made some important non-financial gains during the last few risks and unusual coverages. His operation is now well equipped to handle the lines of business that will occasionally offer us major opportunities. Our loss reserve development, detailed on pages 41-42, looks better this year than it has previously. years to resolve. Examples would be product liability, or directors and officers liability coverages. But we write lots of "long-tail" business - that is, policies generating claims that often take many With a business mix like this, one year of reserve development tells you very little. You should be very suspicious of any as we have unfortunately proved to you in the past). The record of the last decade shows that a great earnings figures reported by insurers (including our own, many of our best-known insurers have reported earnings to shareholders that later proved to be wildly erroneous. In most cases, these errors were totally innocent: The unpredictability of our legal system makes it impossible for even the most conscientious insurer to come close to judging the eventual cost of long-tail claims. 12

[PAGE 15]

opinions unqualifiedly state that these figures "present fairly" the financial position of their clients. Nevertheless, auditors annually certify the numbers given them by management and in their that the numbers so certified The auditors use this reassuring language even though they know from long and painful experience Despite this history of error, investors are likely to differ dramatically from the true earnings of the period. declaration saying that "the statements present fairly" hardly sounds equivocal to the non-accountant. understandably rely upon auditors' opinions. After all, a language represents improvement, but falls far short of describing the limitations of a casualty-insurer The wording in the auditor's standard opinion letter is scheduled to change next year. The new audit. If it is to depict the true state of affairs, we believe the standard opinion letter to shareholders management in respect to the liabilities shown for losses and loss adjustment expenses, the estimate of a property-casualty company should read something like: "We have relied upon representations of of which, in turn, very materially affects the earnings and financial condition herein reported. We our opinion, etc." can express no opinion about the accuracy of these figures. Subject to that important reservation, in will definitely say something of that sort in court anyway. Why should they not be forthright about If lawsuits develop in respect to wildly inaccurate financial statements (which they do), auditors their role and its limitations from the outset? loss reserves (and therefore earnings). We fault them only for failing to publicly acknowledge that We want to emphasize that we are not faulting auditors for their inability to accurately assess they can't do this job. by others that are deliberate. Various charlatans have enriched themselves at the expense of the From all appearances, the innocent mistakes that are constantly made in reserving are accompanied the auditors' willingness to confidently certify those figures as if they had the expertise to do so. We investing public by exploiting, first, the inability of auditors to evaluate reserve figures and, second, a pen, the dishonest will gather. For them, long-tail insurance is heaven. The audit wording we suggest will continue to see such chicanery in the future. Where "earnings" can be created by the stroke of would at least serve to put investors on guard against these predators. upon enactment of the Tax Reform Act of 1986 - took a further turn for the worse at the end of The taxes that insurance companies pay - which increased materially, though on a delayed basis, that substantially increased 1987 reported 1987. We detailed the 1986 changes in last year's report. We also commented on the irony of a statute their long-term earnings potential and their business value. At Berkshire, the temporarily-helpful "fresh earnings for insurers even as it materially reduced both start" adjustment inflated 1987 earnings by $8.2 million. industry over the past decade. The 1987 Bill further reduced the intercorporate dividends-received In our opinion, the 1986 Act was the most important economic event affecting the insurance least 20% of an investee. credit trom 80% to 70%, effective January 1, 1988, except for cases in which the taxpayer owns at investment companies have always been disadvantaged in comparison to those owning the same Investors who have owned stocks or bonds through corporate intermediaries other than qualified securities directly. The penalty applying to indirect ownership was greatly increased by the 1986 Tax Bill and, to a lesser extent, by the 1987 Bill, particularly in instances where the intermediary is an that a given set of pre-tax investment returns will now translate into much poorer after-tax results insurance company. We have no way of offsetting this increased level of taxation. It simply means for our shareholders. The immediate outlook is for substantially lower volume but reasonable earnings improvement. The All in all, we expect to do well in the insurance business, though our record is sure to be uneven. expires in 1989. decline in premium volume will accelerate after our quota-share agreement with Fireman's Fund opportunities, for which we are now much better prepared than we were in 1985. At some point, likely to be at least a few years away, we may see some major 13

[PAGE 16]

Marketable Securities - Permanent Holdings arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private Whenever Charlie and 1 buy common stocks for Berkshire's insurance companies (leaving aside the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing business. We look at the economic prospects of the business, the people in charge of running it, and to hold a stock indefinitely satisfactory rate. When investing, we view ourselves as business analysts - not as market analysts, so long we expect the business to increase in intrinsic value at a not as macroeconomic analysts, and not even as security analysts. watering opportunities. But by no means is it essential: a prolonged suspension Our approach makes an active trading market useful, since it periodically presents us with mouth- securities we hold would not bother us any more than does the lack of daily quotations on World of trading in the business we own, whether our ownership is partial or total. Book or Fechheimer. Eventually, our economic fate will be determined by the economic fate of the fluctuations that I believe to be most conducive to investment success. He said that you should imagine Ben Graham, my friend and teacher, long ago described the mental attitude toward market market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable Even though the business that the two of you own may have economic characteristics that are emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see very low price, since he is terrified that you will unload your interest on him. nothing but trouble ahead for both the business and the world. On these occasions he will name a Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation your option. Under these conditions, the more manic-depressive his behavior, the better for you. is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins that you will find useful. If he shows up some day in a particularly foolish mood, you are free to Indeed, it you aren't certain that you understand and can value your business far better than Mr. either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy." professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most in such matters is understandable, since techniques shrouded in mysterly clearly have value to the simply advising "Take two aspirins"? purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by The value of market esoterica to the consumer of investment advice is a different story. In my flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good opinion, investment success will not be produced by arcane formulae, computer programs or signals business judgment with an ability to insulate his thoughts and behavior from the super-contagious useful to keep Ben's Mr. Market concept firmly in mind. emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly 14

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results - not by their daily, or even yearly, price quotations - whether our investments are successful. Following Ben's teachings, Charlie and I let our marketable equities tell us by their operating the short run, the market is a voting machine but in the long run it is a weighing machine." The The market may ignore business success for a while, but eventually will confirm it. As Ben said: "In speed at which a business's success is recognized, furthermore, is not that important as long as the company's intrinsic value is increasing al a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price. facts would indicate it is. In such a case, we will sell our holdings. Sometimes, also, we will sell a Sometimes, of course, the market may judge a business to be more valuable than the underlying investment or one we believe we understand better. security that is fairly valued or even undervalued because we require funds for a still more undervalued or because we have held them for a long time. (Of Wall Street maxims the most foolish may be "You We need to emphasize, however, that we do not sell holdings just because they have appreciated can't go broke taking a profit.") We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business. even though they became far overpriced in the market. In effect, we view these investments exactly However, our insurance companies own three marketable common stocks that we would not sell like our successful controlled businesses - a permanent part of Berkshire rather than merchandise to be disposed of once Mr. Market offers us a sufficiently high price. To that, I will add one qualifier: of our holdings to pay extraordinary insurance losses. We intend, however, to manage our affairs so These stocks are held by our insurance companies and we would, if absolutely necessary, sell portions that sales are never required. of personal and financial considerations. To some, our stand may seem highly eccentric. (Charlie and A determination to have and to hold, which Charlie and I share, obviously involves a mixture I have long followed David Oglivy's advice: "Develop your eccentricities while you are young. That Wall Street of recent years, our posture must seem odd: To many in that arena, both companies and way, when you get old, people won't think you're going ga-ga.") Certainly, in the transaction-fixated stocks are seen only as raw material for trades. once said, Our attitude, however, fits "You shape your houses and then they shape you." We know the manner in which we our personalities and the way we want to live our lives. Churchill wish to be shaped. For that reason, we would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones. And we will never find people we like and admire more than some of the main participants at the three companies - our permanent holdings - shown below: No. of Shares Cost Market 3,000,000 Capital Cities/ABC, Inc. $517,500 (000s omitted) 6,850,000 GEICO Corporation 45.713 $1,035,000 1,727,765 The Washington Post Company 9,731 323,092 756.925 and the purchase of marketable holdings such as these. In each case we try to buy into businesses We really don't see many fundamental differences between the purchase of a controlled business with favorable long-term economics. Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow's ears, we fail. how important it was to buy good businesses. In the interim, I searched for "bargains" - and had (It must be noted that your Chairman, always a quick study, required only 20 years to recognize the misfortune to find some. My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers.) 15

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we will encounter problems whether that business is a wholly-owned subsidiary or a marketable Of course, Charlie and I may misread the fundamental economics of a business. When that happens, security, although it is usually far ensier to exit from the latter. (Indeed, businesses can be misread: Witness the Buropean reporter who, after being sent to this country to profile Andrew Carnegie, cabled his editor, "My God, you'll never believe the sort of money there is in running libraries.") In making both control purchases and stock purchases, we try to buy not only good businesses, we link up with, the controlled company offers a certain advantage because we have the power to but ones run by high-grade, talented and likeable managers. If we make a mistake about the managers couldn't be in better hands. company we get to allocate capital, whereas we are likely to have little or nothing to say about this I would say that the controlled company offers two main advantages. First, when we control a process with marketable holdings. This point can be important because the heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration - or, sometimes, institutional politics. decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch Once they become CEOs, they face new responsibilities. They now must make capital allocation the point, it's as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve. The lack of skill that many CEOs have at capital allocation is no small matter: After ten years s the deployment of more than 0o% of al to apt at were the busine. compensate by turning to their staffs, management consultants, or investment bankers. Charlie and I CEOs who recognize their lack of capital-allocation skills (which not all do) will often try to accentuate the capital-allocation problem than to solve it. have frequently observed the consequences of such "help." On balance, we feel it is more likely to In the end, plenty of unintelligent capital allocation takes place in corporate America. (That's that are our major non-controlled holdings, capital has generally been well-deployed and, in some why you hear so much about "restructuring. ") Berkshire, however, has been fortunate. At the companies cases, brilliantly so. Berkshire, as a corporate holder, absorbs some significant tax costs through the ownership of partial The second advantage of a controlled company over a marketable security has to do with taxes. positions that we do not when our ownership is 80% or greater. Such tax disadvantages have long As a consequence, a given business result can now deliver Berkshire financial results that are as much been with us, but changes in the tax code caused them to increase significantly during the past year. as 50% better if they come from an 80%-or-greater holding rather than from a lesser holding. Occasionally the stock market offers us the chance to buy non-controlling pieces of extraordinary The disadvantages of owning marketable securities are sometimes offset by a huge advantage: that transfer control. For example, we purchased our Washington Post stock in 1973 at $5.63 per businesses at truly ridiculous prices - dramatically below those commanded in negotiated transactions share, and per-share operating earnings in 1987 after taxes were $10.30. Similarly, our GEICO stock earnings per share last year were $9.01. In cases such as these, Mr. Market has proven to be a mighty was purchased in 1976, 1979 and 1980 at an average of $6.67 per share, and after-tax operating good friend. 16

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controlled companies An interesting accounting irony overlays a comparison of the reported financial results of our those three stocks have a market value of over $2 billion. Yet they produced only $11 million in with those of the permanent minority holdings listed above. As you can see, reported after-tax earnings for Berkshire in 1987.

• which are little more than nominal - rather than our share of their earnings, which in 1987

Accounting rules dictate that we take into income only the dividends these companies pay us amounted to well over $100 million. On the other hand, accounting rules provide that the carrying value of these three holdings - owned, as they are, by insurance companies - must be recorded on worth the up-to-date underlying values of the businesses we partially own, but does not let us reflect our balance sheet at current market prices. The result: GAAP accounting lets us reflect in our net their underlying earnings in our income account. in our income account but never change asset values on our balance sheet, no matter how much the In the case of our controlled companies, just the opposite is true. Here, we show full earnings value of a business might have increased since we purchased it. solely on the future earning power of both our controlled and non-controlled businesses. Using this Our mental approach to this accounting schizophrenia is to ignore GAAP figures and to focus approach, we establish our own ideas of business value, keeping these independent from both the foolish market on our partially-owned companies. It is this business value that we hope to increase accounting values shown on our books for controlled companies and the values placed by a sometimes- at a reasonable (or, preferably, unreasonable) rate in the years ahead. Marketable Securities - Other securities in our insurance companies. In selecting these, we can choose among five major categories: In addition to our three permanent common stock holdings, we hold large quantities of marketable (1) long-term common stock investments, (2) medium-term fixed-income securities, (3) long-term fixed- income securities, (4) short-term cash equivalents, and (5) short-term arbitrage commitments. search among them for the highest after-tax returns as measured by "mathematical expectation," limiting We have no particular bias when it comes to choosing from these categories. We just continuously ourselves always to investment alternatives we think we understand. Our criteria have nothing to do with maximizing immediately reportable earnings; our goal, rather, is to maximize eventual net worth. but little net movement: The Dow advanced 2.3% for the year. You are aware, of course, of the roller • Let's look first at common stocks. During 1987 the stock market was an area of much excitement coaster ride that produced this minor change. Mr. Market was on a manic rampage until October and then experienced a sudden, massive seizure. turmoil. Instead of focusing on what businesses will do in the years ahead, many prestigious money We have "professional" investors, those who manage many billions, to thank for most of this managers now focus on what they expect other money managers to do in the days ahead. For them, stocks are merely tokens in a game, like the thimble and flatiron in Monopoly. strategy that many leading investment advisors embraced in 1986-1987. This strategy - which is An extreme example of what their attitude leads to is "portfolio insurance," a money-management increasing portions of a stock portfolio, or their index-future equivalents, be sold as prices decline. simply an exotically-labeled version of the small speculator's stop-loss order - dictates that ever- The strategy says nothing else matters: A downtick of a given magnitude automatically produces a this hair trigger in mid-October of 1987. huge sell order. According to the Brady Report, $60 billion to $90 billion of equities were poised on If you've thought that investment advisors were hired to invest, you may be bewildered by this technique. After buying a farm, would a rational owner next order his real estate agent to start selling off pieces of it whenever a neighboring property was sold at a lower price? Or would you sell your house sold for less than it would have brought on the previous day? house to whatever bidder was available at 9:31 on some morning merely because at 9:30 a similar 17

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When it owns a portion of enterprises such as Ford or General Electric. The less these companies are Moves like that, however, are what portfolio insurance tells a pension fund or university to make being valued at, says this approach. the more vigorously they should be sold. As a "logical" corollary, the approach commands the institutions to repurchase these companies - I'm not making this up managers following such Alice-in-Wonderland practices, is it any surprise that markets sometimes

• once their prices have rebounded

significantly. Considering that huge sums are controlled by behave in aberrational fashion? They are fond of saying that the small investor has no chance in a market now dominated by the Many commentators, however, have drawn an incorrect conclusion upon observing recent events: investor - small or large - so long as he sticks to his investment knitting. Volatility caused by erratic behavior of the big boys. This conclusion is dead wrong: Such markets are ideal for any to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either money managers who speculate irrationally with huge sums will offer the true investor more chances financial or psychological pressures, to sell at untoward times. At Berkshire, we have found little to do in stocks during the past few years. During the break in October, a few stocks fell to prices that interested us, but we were unable to make meaningful purchases before they rebounded. At yearend 1987 we had no major common stock investments (that is, over $50 million) other than those we consider permanent or arbitrage holdings. However, Mr. Market will offer us opportunities - you can be sure of that - and, when he does, we will be willing and able to participate. limited virtues I explained in last year's annual report. Though we both bought and sold some of • In the meantime, our major parking place for money is medium-term tax-exempt bonds, whose these bonds in 1987, our position changed little overall, holding around $900 million. A large portion exempt. Bonds currently purchased by insurance companies are not. of our bonds are "grandfathered" under the Tax Reform Act of 1986, which means they are fully tax- served us well. They have produced substantial extra income for us and are currently worth a bit As an alternative to short-term cash equivalents, our medium-term tax-exempts have — so far - above our cost. Regardless something better comes along. of their market price, we are ready to dispose of our bonds whenever by not disliking medium-term bonds as well). Bonds are no better than the currency in which they • We continue to have an aversion to long-term bonds (and may be making a serious mistake are denominated, and nothing we have seen in the past year - or past decade - makes us enthusiastic about the long-term future of U.S. currency. Our enormous trade deficit is causing various forms of "claim checks" - U.S. government and corporate bonds, bank deposits, etc. - to pile up in the hands of foreigners at a distressing rate. By of A Streetcar Named Desire, who said, "I have always depended on the kindness of strangers." In detault, our government has adopted an approach to its finances patterned on that of Blanche DuBois, this case, of course, the "strangers" plunging dollar has already made that proposition expensive for them. are relying on the integrity of our claim checks although the irresistible. For the debtor government, the weapon of inflation is the economic equivalent of the "H" bomb, and that is why very few countries have been allowed to swamp the world with debt denominated in their own currency. Our past, relatively good record for fiscal integrity has let us break this rule, but the generosity accorded us is likely to intensify, rather than relieve, the eventual pressure on us who will sufter. It will be all of us as well. to inflate. If we do succumb to that pressure, it won't be just the foreign holders of our claim checks debtor gets out of hand. (In that respect, the falling dollar will help, though unfortunately it will hurt Of course, the U.S. may take steps to stem our trade deficit well before our position as a net in other ways.) Nevertheless, our government's behavior in this test of its mettle is apt to be consistent with its Scarlett O'Hara approach generally: "I'll think about it tomorrow." And, almost inevitably, procrastination in facing up to fiscal problems will have inflationary consequences. 18

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Both the timing and the sweep quantify or time the risk does not mean we should ignore it. While recognizing the possibility that of those consequences are unpredictable. But our inability to we may be wrong and that present interest rates may adequately compensate for the inflationary risk, we retain a general fear of long-term bonds. we linger horn die in aspec a modente we have a significant edge in a specific security. That willingness explains our holdings of the We are, however, willing to invest a moderate portion of our funds in this category if we think added to our WPPSS position during 1987. At yearend, we had holdings with an amortized cost of Washington Public Power Supply Systems #1, #2 and #3 issues, discussed in our 1984 report. We $240 million and a market value of $316 million, paying us tax-exempt income of $34 million annually. on a very limited • We continued to do well in arbitrage last year, though - or perhaps because - we operated scale. We ourselves to large transactions that have been publicly announced. We do not participate in situations enter into only a few arbitrage commitments each year and restrict in which green-mailers are attempting to put a target company "in play." been quite good. Though we've never made an exact calculation, I believe that overall we have We have practiced arbitrage on an opportunistic basis for decades and, to date, our results have averaged annual pre-tax returns of at least 25% from arbitrage. I'm quite sure we did better than that in 1987. But it should be emphasized that a really bad experience or two - such as many arbitrage operations suffered in late 1987 - could change the figures dramatically. a cost of $76 million and a market value of $78 million. Our only $50 million-plus arbitrage position at yearend 1987 was 1,096,200 shares of Allegis, with categories. One was various Texaco, Inc. bonds with short maturities, all purchased after Texaco went • We had two other large holdings at yearend that do not fit precisely into any of our five it would be inappropriate for us to buy defaulted bonds. At prices prevailing after Texaco's bankruptcy into bankruptcy. Were it not for the extraordinarily strong capital position of our insurance companies, to us. filing, however, we regarded these issues as by far the most attractive bond investment available worth about what we paid for them. On a worst-case basis with respect to the Pennzoil litigation, we felt the bonds were likely to be the bonds to be worth considerably more. At yearend our Texaco bonds were carried on our books Given a sensible settlement, which seemed likely, we expected at $104 million and had a market value of $119 million. Salomon Inc 9% preferred stock. This preferred is convertible after three years into Salomon common By far our largest - and most publicized - investment in 1987 was a $700 million purchase of stock at $38 per share and, if not converted, will be redeemed ratably over five years beginning securities category. In addition, we have an interesting conversion possibility. October 31, 1995. From most standpoints, this commitment fits into the medium-terin fixed-income banking. By their nature, the economics of this industry are far less predictable than those of most We, of course, have no special insights regarding the direction or future profitability of investment other industries in which we have major commitments. This unpredictability is one of the reasons why our participation is in the form of a convertible preferred. Salomon Inc. Charlie and I like, admire and trust John. We first got to know him in 1976 when he What we do have a strong feeling about is the ability and integrity of John Gutfreund, CEO of played a key role in GEICO's escape from near-bankruptcy. Several times since, we have seen John steer clients away from transactions that would have been unwise, but that the client clearly wanted a large fee. Such service-above-self behavior is far from automatic in Wall Street. to make - even though his advice provided no fee to Salomon and acquiescence would have delivered 98% of par, $14 million less than our cost. However, we believe there is a reasonable likelihood that For the reasons Charlie outlines on page 50, at yearend we valued our Salomon investment at a leading, high-quality capital-raising and market-making operation can average good returns on equity. If so, our conversion right will eventually prove to be valuable. 19

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Two further comments about our investments in marketable securities are appropriate. First, we without notice. give vou our usual warning: Our holdings have changed since yearend and will continue to do so The second comment is related: During 1987, as in some earlier years, there was speculation in the press from time to time about our purchase or sale of various securities. These stories were sometimes true, sometimes partially true, and other times completely untrue. Interestingly, there has been no correlation between the size and prestige of the publication and the accuracy of the report. leading publication misled its readers by writing about an arbitrage position as if it were a long-term One dead-wrong rumor was given considerable prominence by a major national magazine, and another investment commitment. (In not naming names, I am observing the old warning that it's not wise to pick fights with people who buy ink by the barrel.) true or false. If we were to deny the incorrect reports and refuse comment on the correct ones, we You should understand that we simply don't comment in any way on rumors, whether they are would in effect be commenting on all. telling potential competitors what we are doing except to the extent required by law. We certainly In a world in which big investment ideas are both limited and valuable, we have no interest in don't expect others to tell us of their investment ideas. Nor would we expect a media company to disclose news of acquisitions it was privately pursuing or a journalist to tell his competitors about stories on which he is working or sources he is using. it has been reported - incorrectly - that Berkshire is a buyer. However, I do not set them straight. 1 find it uncomfortable when friends or acquaintances mention that they are buying X because If they want to participate in whatever Berkshire actually is buying, they can always purchase Berkshire stock. But perhaps that is too simple. Usually, I suspect, they find it more exciting to buy what is being talked about. Whether that strategy is more profitable is another question. Financing mature in 2018 and will be retired at an even pace through sinking fund operations that begin in Shortly after yearend, Berkshire sold two issues of debentures, totaling $250 million. Both issues 1999. Our overall interest cost, after allowing for expenses of issuance, is slightly over 10%. Salomon was our investment banker, and its service was excellent. it is likely that Berkshire could improve its return on equity by moving to a much higher, though Despite our pessimistic views about inflation, our taste for debt is quite limited. To be sure, still conventional, debt-to-business-value ratio. It's even more likely that we could handle ratio, without problems, under economic conditions far worse than any that have prevailed since the early 1930s. certain. Thus we adhere to policies - both in regard to debt and all other matters - that will allow But we do not wish it to be only likely that we can meet our obligations; we wish that to be results under a normal range of conditions. us to achieve acceptable long-term results under extraordinarily adverse conditions, rather than optimal with no aid from leverage. Therefore, it seems to us to be both foolish and improper to risk what is Good business or investment decisions will eventually produce quite satisfactory economic results, employees) for some extra returns that are relatively unimportant. This view is not the product of important (including, necessarily, the welfare of innocent bystanders such as policyholders and either our advancing age or prosperity: Our opinions about debt have remained constant. than debt.) We are willing to borrow an amount that we believe - on a worst-case basis - will pose However, we are not phobic about borrowing. (We're far from believing that there is no fate worse no threat to Berkshire's well-being. Analyzing what that amount might be, we can look to some 20

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important strengths that would serve us well if major problems should engulf our economy: Berkshire's much capital investment; what debt we have is structured well; and we maintain major holdings of earnings come from many diverse and well-entrenched businesses; these businesses seldom require liquid assets. Clearly, we could be comfortable with a higher debt-to-business-value ratio than we prefer to finance in anticipation of need rather than in reaction to it. A business obtains the best One further aspect of our debt policy deserves comment: Unlike many in the business world, we financial results possible by managing both sides of its balance sheet well. This means obtaining the if opportunities for intelligent action on both fronts coincided. However, reason tells us that just the highest-possible return on assets and the lowest-possible cost on liabilities. It would be convenient opposite is likely to be the case: Tight money conditions, which translate into high costs for liabilities, the sky. Our conclusion: Action on the liability side should sometimes be taken independent of any will create the best opportunities for acquisitions, and cheap money will cause assets to be bid to action on the asset side. ability to forecast interest rates and - maintaining our usual open-minded spirit - believe that no Alas, what is "tight" and "cheap" money is far from clear at any particular time. We have no one else can. Therefore, we simply borrow when conditions seem non-oppressive and hope that we most likely to pop up when conditions in the debt market are clearly oppressive. Our basic principle will later find intelligent expansion or acquisition opportunities, which - as we have said - are is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun. we are now earning about 6½% on the $250 million we recently raised at 10%, a disparity that is Our fund-first, buy-or-expand-later policy almost always penalizes near-term earnings. For example, currently costing us about $160,000 per week. This negative spread is unimportant to us and will not right sort of business elephant within the next five years or so, the wait will have been worthwhile. cause us to stretch for either acquisitions or higher-yielding short-term instruments. If we find the Miscellaneous help. If you have a business that fits the following criteria, call me or, preferably, write. We hope to buy more businesses that are similar to the ones we have, and we can use some Here's what we're looking for: (1) large purchases (at least $10 million of after-tax earnings), (2) demonstrated consistent earning power (future projections are of little interest to us, nor are "turnaround" situations). (3) businesses earning good returns on equity while employing little or no debt, (4) management in place (we can't supply it), (5) simple businesses (if there's lots of technology, we won't understand it), (6) an offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown). fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very for cash, but will consider issuing stock when we receive as much in intrinsic business value as we 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. 21

[PAGE 24]

meeting our tests: new ventures, turnarounds, auction-like sales, and the ever-popular (among brokers) On the other hand, we frequently get approached about acquisitions that don't come close to T'm-sure-something-will-work-out-if-you-people-get-to-know-each-other." None of these attracts us in the least. interested in the negotiated purchase of large, but not controlling, blocks of stock comparable to those Besides being interested in the purchases of entire businesses as described above, we are also we hold in Cap Cities and Salomon. We have a special interest in purchasing convertible preferreds as a long-term investment, as we did at Salomon. * 1969 in a liquidating distribution from Buffett Partnership, Ltd. Some of these former partners will And now a bit of deja vu. Most of Berkshire's major stockholders received their shares at yearend remember that in 1962 I encountered severe managerial problems at Dempster Mill Manufacturing Co., a pump and farm implement manufacturing company that BPL controlled. In my 1962 annual letter to partners, I named Harry "Man of the Year." April 23 he was in Beatrice, Nebraska, running Dempster. Our problems disappeared almost immediately. automotive compounds. For years K & W did well, but in 1985-86 it stumbled badly, as it pursued Fade to 24 years later: The scene is K & W Products, a small Berkshire subsidiary that produces the unattainable to the neglect of the achievable. Charlie, who oversees K & W, knew there was no the inevitable. He didn't wait long. In 1987 K & W's profits set a record, up more than 300% from need to consult me. Instead, he called Harry, now 68 years old, made him CEO, and sat back to await 1986. And, as profits went up, capital employed went down: K & W's investment in accounts receivable and inventories has decreased 20%. If we run into another managerial problem ten or twenty years down the road, you know whose phone will ring. * * butions program. Contributions made through the program were $4.9 million, and 2,050 charities About 97.2% of all eligible shares participated in Berkshire's 1987 shareholder-designated contri- were recipients. butions made by directors (sometimes by a factor of three to one). In effect, these representatives of A recent survey reported that about 50% of major American companies match charitable contri- preferences. (I wonder how they would feel if the process were reversed and shareholders could the owners direct funds to their favorite charities, and never consult the owners as to their charitable to give to C and A is a legislator, the process is called taxation. But when A is an officer or director invade the directors' pockets for charities favored by the shareholders.) When A takes money from B of a corporation, it is called philanthropy. We continue to believe that contributions, aside from those rather than those of officers and directors. with quite clear direct benefits to the company, should reflect the charitable preferences of owners program that appears on pages 54 and 55. If you wish to participate in future programs, we strongly We urge new shareholders to read description of our shareholder-designated contributions un stret you inmediately make sure your shares are registered in the name of the actual nwner, not for the 1988 program. name or nominee name. Shares not so registered on September 30, 1988 will be ineligible

• * *

22

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they asked were, as Last year we again had about 450 shareholders at our annual meeting. The 60 or so questions because exhibitionists turn it into a sideshow. Ours, however, is different. It is informative for always, excellent. At many companies, the annual meeting is a waste of time shareholders and fun for us. (At Berkshire's meetings, the exhibitionists are on the dais.) meeting provides the forum for you to ask any owner-related questions you may have, and we will This year our meeting will be on May 23, 1988 in Omaha, and we hope that you come. The have been dealt with. keep answering until all (except those dealing with portfolio activities or other proprietary information) Furniture Mart. Your actions demonstrated your good judgment: You snapped up about $40,000 of Last year we rented two buses - for $100 - to take shareholders interested in the trip to the bargains. Mrs. B regards this expense/sales ratio as on the high side and attributes it to my chronic me another chance and we will again have buses available following the meeting. Mrs. B says you inattention to costs and generally sloppy managerial practices. But, gracious as always, she has offered must beat last year's sales figures, and I have told her she won't be disappointed. Warren E. Buffett February 29, 1988 Chairman of the Board

[PAGE 26]

Touche Ross & Co. 2000 First National Center A Touche Ross March 8, 1988 Io the Board of Directors and Stockholders Berkshire Hathaway Inc. Inc. and consolidated We have examined the consolidated balance sheets of Berkshire Hathaway related consolidated statements of earnings and changes in financial subsidiaries as of December 31, 1987 and 1986, and the examinations were made in for each of the three fiscal years in the period ended December 31, 1987. accordance with generally accepted auditing standards and, such other auditing procedures as we considered necessary in the circumstances. accordingly, included such tests of the accounting records and present fairly In our opinion, the consolidated financial statements referred to above the financial consolidated subsidiaries as of December 31, 1987 and 1986, and the results of position of Berkshire Hathaway Inc. their operations and the changes in their financial position for each of the three fiscal years in the period ended December 31, 1987, in conformity with Tankerla 24 Touche Ross International

[PAGE 27]

BERKSHIRE HATHAWAY INC. CONSOLIDATED BALANCE SHEETS and Consolidated Subsidiaries (dollars in thousands except per share amounts) December 31, 1987 1986 ASSETS Investments, other than investments in Cash and temporary cash investments affiliates: $ 154,933 $ 292,473 Obligations with fixed maturities, at cost (market value: Marketable equity securities 1987 - $2,046,534, 1986 - $1,274,342) 1,940,714 Accounts receivable from customers, agents others• 2,328,766 1,871,933 1,124,389 273,855 7 *Properties and equipment inventories 154,288 434,703 200,643 212,211 159,660 > Other assets Goodwill of acquired businesses

• 124,195

219,329 126,957 202,341 $5,379,735 $4,441,655 Losses and loss adjustment expenses LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums cine $1,260,422 $ 860,228 Accounts payable, accruals and other liabilities • I int 252,353 341,344 414,986 _Income taxes 505,921 414,275 236,157 Term debt and other borrowings 132,165 94,923 2,492,205 2,020,569 Minority shareholders' interests 45,871 43,289 Stockholders' equity: Common stock of $5 par value. Authorized 1,500,000 shares; Capital in excess of par value issued 1,375,183 shares, including shares held in treasury 6,876 Retained earnings Unrealized appreciation of marketable equity securities, net 1,104,123 157,377 157,377 6,876 874,813 1,614,221 1,379,669 Less common stock in treasury, at cost (228,274 shares) 2,882,597 40,938 2,418,735 40,938 Total stockholders' equity .. ... (2,841,659) <.2,377,79Z> $5.379,735 $4,441.655 See accompanying Notes to Consolidated Financial Statements 25

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BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENTS OF EARNINGS and Consolidated Subsidiaries (dollars in thousands except per share amounts) Fiscal Year Ended December 31, 1987 1986 Dec. 28, 1985 Income items: Sales and service revenues Interest and dividend income Insurance premiums earned $1,332,840 $1,225,290 824,895 823,884 $ 508,764 Other .... 163,341 118,429 317,059 ... 16,598 9,062 107,662 6,379 2,337,674 2,176,665 939,864 Cost and expense items: Insurance losses and loss adjustment expenses Cost of products and services sold 705,203 651,717 Insurance underwriting expenses 661,146 223,970 655,758 280,249 285,925 Interest and financing costs Selling, general and administrative expenses .. 219,178 459,617 425,562 81,040 11,474 23,892 150,423 14,415 Earnings from operations including minority 2,056,618 1,980,899 812,052 interest in consolidated subsidiaries, realized investment gain before applicable income taxes and before Income taxes applicable to above ... 281,056 60,154 195,766 59,152 127,812 Minority interest applicable to above 220,902 31,271 Realized investment gain, net Earnings before realized investment gain 6,156 136,614 5,150 96,541 214,746 3,593 Net earnings 19,806 150,897 131,464 342,867 92,948 $ 234,552 $ 282,361 $ 435,815 Average shares outstanding Per share: 1,146,909 1,146,909 1,146,909 Net earnings Earnings before realized investment gain $ 187.24 $ 114.62 204.51 246.19 $ 379.99 81.04 See accompanying Notes to Consolidated Financial Statements 26

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BERKSHIRE HATHAWAY INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION and Consolidated Subsidiaries (dollars in thousands) Fiscal Year Ended December 31, 1987 1986 Dec. 28, 1985 Changes during the year resulted from: Consolidated assets at beginning of year $4,441,655 $3,180,718 $2,035,203 Net increase in losses, loss adjustment expenses Net earnings expenses and 234,552 282,361 435,815 Net increase (decrease) in other consolidated unearned premiums of insurance subsidiaries 326,552 634,469 348,348 liabilities arising from operations Increases essentially from operations ... ... (11,995) (76,999) 109,779 549,109 839,831 893,942 Net increase in unrealized carrying value of marketable equity securities appreciation included in 349,147 (12,833) 291,811 50,075 (69,097) 248,810 Repayment of debt (9,298) Additional borrowings Net increase in minority interests .... Obligations to which assets of purchased businesses 2,582 5,682 12,061 were subject, when acquired: Term debt and other borrowings Other liabilities .. . . 146,569 46,141 Total increases . . . . = 938,080 1,260,937 1,145,515 Consolidated assets at end of year $5.379,735 $4,441,655 $3,180,718 See accompanying Notes to Consolidated Financial Statements 27

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BERKSHIRE HATHAWAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Consolidated Subsidiaries (dollars in thousands except per share amounts) December 31, 1987 (1) Significant Accounting Policies and Practices The accompanying Consolidated Financial Statements include the accounts of Basis of Consolidation Berkshire diaries except as indicated in the immediately following paragraph. Consolidated sub- Hathaway Inc. (the "Company" or "Berkshire") consolidated with accounts of its subsi- sidiaries include companies engaged in a number of diverse businesses. See Note 15. (b) Unconsolidated Subsidiaries indirectly wholly owned by Berkshire. SFFG provides financing to purchasers of World SFFG. formerly World Book Finance, Inc., acquired by Berkshire on January 6, 1986, is equity method. Statement of Financial Accounting Standards No. 94, issued in October, 1987, requires, effective for financial statements for fiscal years ending after December 15, 1988, con- with the majority owner. If these requirements were applied as of December 31. 1987, solidation of all majority owned subsidiaries unless control is temporary or does not rest Berkshire's total consolidated assets and liabilities would each be greater by approximately $475,000. Consolidated net earnings and stockholders' equity would be unchanged from that reported herein. (c) Accounting Period In 1986, Berkshire adopted the calendar year as its annual accounting period. For years nearest December 31. With the exception of See's Candies, who continues to employ a prior to 1986, Berkshire used a 52-53 week accounting period that ended on the Saturday 52-53 week subsidiaries employed the calendar year for 1987 and for prior years. respect to December 31, all of Berkshire's significant (d) Investments in Securities, Other Than Affiliates Investments in obligations with fixed dates of maturity - bonds and redeemable preferred stocks - are stated at cost, adjusted where appropriate for accretion of discount or amortization of premium. Investments in fixed maturities marketable equity securities - common stocks and preferred stocks without carried at market value.

• held by members of the Berkshire Hathaway Insurance Group are

Investments in at the lower of their aggregate cost or market. marketable equity securities held by non-insurance subsidiaries are carried A 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. (e) Goodwill and Negative Goodwill of Acquired Businesses The difference between purchase cost and the lair value of the net assets of acquired businesses is amortized on a straight line basis over forty years. 28

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(1) Significant Accounting Policies and Practices (Continued) (f) Insurance Premium Acquisition Costs For financial reporting purposes, certain costs of acquiring insurance premiums are deferred, subject to ultimate recoverability, and charged to income as the premiums are earned. received under major quota-share reinsurance contracts, the account investment income anticipated to be earned on funds held subject to the contracts. computation of ultimate recoverability of the directly related acquisition costs takes into Otherwise, ultimate recoverability of premium acquisition costs is determined without regard to investment income. (g) Liability for losses and loss adjustment expenses is determined on the basis of estimates Losses and Loss Adjustment Expenses Provisions are intended to cover ultimate payment amounts, less amounts recoverable on of unpaid amounts with respect to both reported and incurred but not reported losses. account of reinsurance, except that provisions for periodic payment obligations ("structured settlements") are established at discounted present value of expected ultimate payment amounts. Present value of expected ultimate payment amounts for structured settlements was deter- as of December 31, 1986 applying, as present value discount rates, the market interest mined for financial reporting purposes to be $66,285 as of December 31, 1987 and $52,029 rates December 31, 1987. Present value of liabilities for structured settlements was determined at contract inception dates - the weighted average of which was 10.9% as of for statutory and tax reporting purposes to be $110,010 and $83,968, respectively as of authority - 5% for contracts incepting in 1987 and 7% for those incepting prior thereto. December 31, 1987 and 1986, applying discount rates prescribed by insurance regulatory (h) Insurance Premiums Insurance premiums Unearned premiums are computed on a monthly or daily pro rata basis and are stated recognized as revenues ratably over the terms of the policies. after deduction of unearned premiums ceded to reinsurers. Policyholder dividends incurred with respect to participating policies are reflected in the accompanying Consolidated Statements of Earnings as a deduction from earned premiums. (j) Income Taxes Certain items of income and deductions are recognized in the financial statements in time federal income tax returns, giving rise to recognition in the financial statements of deferred periods that differ from those in which they are recognized in the Company's consolidated and prepaid income taxes. The liability for income taxes in the Consolidated Balance Sheets also includes taxes deemed securities. Such taxes were applied at a rate of 34% relative to increases in unrealized applicable to unrealized appreciation included in carrying value of marketable equity appreciation during 1987 and at the rate of 28% relative to such appreciation that arose in years prior to 1987. In December 1987, the Financial Accounting Standards Board issued Statement No. 96 which requires a change in accounting for income taxes. This Statement must be implemented implementing the changes, and Berkshire management has not determined precisely when no later than 1989. Uncertainties exist with respect to the most appropriate means of or how it will accomplish the newly prescribed methods. Berkshire management believes income taxes deemed applicable to unrealized appreciation of marketable equity securities. 29

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Notes to Consolidated Financial Statements (Continued) (dollars in thousands except per share amounts) (2) Pro Forma Data The Scott & Fetzer Company, acquired January 6, 1986, and The Fechheimer Brothers Company, assets. The following sets forth on an unaudited pro forma basis certain Consolidated Statement of acquired in June, 1986 were each acquired for cash in transactions accounted for as purchases of Earnings information for 1985, as if those businesses were acquired at the beginning of 1985. Total income items .. $1,709,893 Net earnings • S 447,817 Net earnings per share ..$ 390.46 at the very beginning of the year, would not materially differ from that reflected in the accompanying Similar information developed on a pro forma basis for 1986, as if those businesses were acquired Consolidated Statement of Earnings for 1986. (3) Investment in Cumulative Convertible Preferred Stock of Salomon Inc ssue of 9% Cumulative Convertible Preferred Stock of Salomon Inc ("Salomon") at a cost of on On October 1, 1987 consolidated subsidiaries of Berkshire purchased 674,000 shares thousand dollars per share and $674,000 in the aggregate. That investment is reflected in Berkshire's consolidated investment in obligations with fixed maturities as of December 31, 1987. As part of the subsidiary of Berkshire, purchased 26,000 of these Salomon preferred shares. Each share of the issue same purchase transaction and upon the same terms a subsidiary of Mutual Savings, an unconsolidated is entitled to 26.31579 votes on all matters submitted to a vote of stockholders of Salomon, with the number of shares outstanding immediately after the transaction, the voting rights of the preferred preferred shares voting together as one class with the common shares of Salomon. Based on the shares represented approximately 12% of the voting rights of the class. On October 31, 1990, each on each October 31, commencing in 1995, Salomon will redeem at cost 140,000 of the shares (or such preferred share becomes convertible into 26.31579 fully paid common shares of Salomon. Annually fewer number as then outstanding). (4) Investments in Marketable Equity Securities shown below as of the dates indicated. See Note 1(d) as to methods applied to determine carrying Aggregate data with respect to the consolidated investment in marketable equity securities is value of these securities. December 31, 1987 Cost Unrealized Gain Market Carrying Value Common stock of: Capital Cities/ABC, Inc. $517,500 The Washington Post Company GEICO Corporation 45,713 $ 517,500 711,212 $1,035,000 756,925 $1,026,375 191,832 313,361 30,601 323,092 756,925 9,731 222,433 222,374 323,092 All other marketable equity securities $764,776 $1.572.674 $2.337.450 $2.328,766 December 31, 1986 Cost Unrealized Gain Market Carrying Value Common stock of: GEICO Corporation Capital Cities/ABC, Inc. $517,500 $ 286,875 $ 804,375 The Washington Post Company 45,713 9,731 259,800 629,012 674,725 $ 799,594 674,725 269,531 269,531 All other marketable equity securities 84,145 43,938 128,083 128,083 $657.089 $1,219,625 $1,876,714 $1.871,933 unrealized losses at December 31, 1986. At December 31, 1987, unrealized gains were net of unrealized losses of $3,940. There were no 30

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Investment in shares of Capital Cities/ABC, Inc. note possessed approximately 18.5% of the voting rights of all Capital Cities shares outstanding at The 3,000,000 common shares of Capital Cities/ABC, Inc. ("Capital Cities") reflected in the preceding December 31, 1987. Berkshire subsidiaries hold the shares subject to an Agreement the terms of which, otherwise governs until January 3, 1997 the manner by which the shares may be sold or transferred. among other provisions, grant to Capital Cities a right of first refusal to purchase the shares and to these shares in favor of Thomas S. Murphy so long as he shall be the chief executive officer of Also, Berkshire and its subsidiaries have delivered to Capital Cities irrevocable proxies with respect to vote the shares at any and all meetings of shareholders of Capital Cities. The proxies expire on Capital Cities, or Daniel B. Burke, so long as he shall be the chief executive officer of Capital Cities, January 2, 1997 or at the earlier date when neither of such persons is chief executive officer of Capital (6) Investment in GEICO Corporation shares of common stock of GEICO Corporation. The shares possessed approximately 42% of the voting Subsidiaries of Berkshire, at both December 31, 1987 and at December 31, 1986, owned 6,850,000 rights of all GEICO shares outstanding at December 31, 1987, but Berkshire maintains an independent supervisory authority. The Order, dating from Berkshire subsidiaries' major purchase of the shares in arrangement for voting of the shares as required by Order of GEICO's domiciliary insurance 1976, prohibits Berkshire from seeking or causing to change the independent proxy. Also, under the Order, no officer or director of Berkshire or of any affiliate or subsidiary of Berkshire is permitted to to its GEICO holdings, Berkshire does not use the equity method of accounting for its investment as a director of GEICO. Because the Order divests Berkshire of its voting rights with respect Accounts receivable from customers, agents and others were made up of the following: Dec. 31, ( Trade accounts receivable, net of allowances for 1987 Dec. 31, 1986 Agents' balances and doubtful accounts Reinsurance recoverable on loss payments premiums in course of collection $142,733 80,976 $128,800 Investment income due and accrued 902 116,415 Amounts due from sale of securities 43,975 2,056 5,269 145,244 42,188 $273.855 $434,703 31

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Notes to Consolidated Financial Statements (Continued) (dollars in thousands except per share amounts) (8) Investment in Mutual Savings and Loan Association subsidiary of Berkshire. Summarized consolidated financial information of Mutual Savings is as follows: Mutual Savings is wholly owned by Wesco Financial Corporation, an 80.1% beneficially owned Balance Sheet Data 1987 December 31, Cash and marketable securities Assets 1986 Convertible Preferred Stock $173,396 $253,828 Loans receivable, net of Salomon Inc .. 26,000 Other assets .. .....• 139,427 $347,556 8,733 78,613 9,759 $342,200 Savings accounts Liabilities and Shareholder's Equity Other liabilities .... $287,126 3,871 $282,441 4,996 Shareholder's equity, substantially restricted 56,559 54,763 $347,556 $342,200 Total revenues Earnings Statement Data $26,576 1987 1986 1985 $25,140 $38.798 Net income $ 1,796 $ 4,684 $ 9,330 December 31, 1987. That figure Berkshire's carrying value, in other assets, for the investment in Mutual Savings was $30,240 at equity less $15,062 unamortized negative goodwill. represents Berkshire's 80.1% share of Mutual Savings' shareholder's (9) Investment in Scott Fetzer Financial Group, Inc. acquisition of The Scott & Fetzer Company. SFG and its subsidiaries provide consumer financing, Scott Fetzer Financial Group, Inc. ("SFF") was acquired by Berkshire in its January 6, 1986 assets in the Consolidated Balance Sheets. Summarized financial information of SFFG is as follows: principally for World Book and Kirby products. Berkshire's investment in SFFG, is reflected in other December 31, Balance Sheet Data Assets 1987 1986 Finance receivables, net of allowance for Cash and cash equivalents $ 42,244 $ 43,572 Other assets credit losses 164,949 6,222 170,289 5,514 $213,415 $219.375 Accounts payable and other liabilities Liabilities and Shareholder's Equity Term debt $ 13,424 $ 13,472 Shareholder's equity 157,721 42,270 165,247 40,656 $213.415 $219,375 Earnings Statement Data Total revenues 1987 1986 Net income $44,286 $37,233 $ 4,614 $ 5,367 consolidated net income to be at least a minimum amount (by payment to SFF of a facilitating fee, Berkshire has agreed with SFFG among other things, that Berkshire will (1) cause SFFG's quarterly if required), (2) cause SFF to maintain not less than a specified amount represented by shareholder's all of the capital stock of SFFG. The agreement was made to accommodate the continuing financing equity plus debt to Berkshire and Berkshire affiliates, and (3) continue, directly or indirectly, to own needs of SFFG. There has been no requirement to-date for payment by Berkshire to SFFG of any facilitating fees, nor is any such need contemplated. 32

[PAGE 35]

(10) Income Taxes The liability for income taxes as reflected in the accompanying Consolidated Balance Sheets represents estimates of liabilities as follows: Dec. 31, 1987 Dec. 31, Payable currently: Deferred, relating to unrealized appreciation**** $ 33,854 $ 10,999 1986 Deferred, net of prepaid, arising from of marketable equity securities 459,707 339,869 12,360 63,407 $505.921 $414,275 The Consolidated Statements of Earnings reflect charges for income taxes applicable to operating earnings and to realized investment gain as shown below: 1987 1986 1985 Operating earnings ... Applicable to Realized investment gain ........................... $60,154 $ 68,239 8,085 $ 59,152 $126,108 66,956 $ 31,271 $172,217 140,946 These taxes are comprised of: Federal Foreign State .. $ 54,982 11,866 $112,313 $ 68,239 1,391 12,845 $158,603 $126,108 950 13,593 $172,217 21 Increase (decrease) in net deferred taxes Taxes payable currently $119,286 $ 68,239 (51,047) $106,107 $126,108 20,001 $137,689 $172,217 34,528 The increase (decrease) in net deferred taxes represent the tax effects of timing differences as follows: Applicable to .$ (13,577) 1987 1986 Discounting of loss and loss adjustment expense reserves 4,714 $ 12,778 1985 Structured settlements and Deferred insurance premium acquisition costs .. portfolio reinsurance liabilities Other, net Deferred gross profit on installment sales (37,692) 2,255 $ 20,207 7,640 (8,745) $ (51,047) 4,253 (2,836) $ 20,001 7,804 $ 34.528 6,681 Charges for income taxes are reconciled in the table which follows to hypothetical amounts computed at the Federal statutory rate: 1987 1986 1985 Net earnings including minority interest, before applicable income taxes .$309,211 $414.533 $620,035 $190,685 $285,216 Decreases resulting from: (40% in 1987 and 46% in 1986 and 1985) ... $123,684 Dividends received deduction Tax-exempt interest income (39,692) Rate differentials relating to realized investment gains (9,498) (33,112) (3,079) (31,878) (6,963) (16,826) (86,828) (13,340) Fresh start adjustment related to discounting of State income taxes, less Federal income tax benefit loss and loss adjustment expense reserves (8,241)* 7,120 Net other differences ................ (2,055) 6,937 439 (3,345) 7,340 Total income taxes ...$ 68,239 $126,108 3172.217 computation on a discounted basis, for income tax reporting purposes, of insurance subsidiaries loss and loss expen onsolidated income tax expense for the vear ended December 31, 1987 was reduced by $8,241 as the result of ti reserves as of January 1, 1987 (the so-called "fresh start" adjustment). 33

[PAGE 36]

Notes to Consolidated Financial Statements (Continued) (dollars in thousands except per share amounts) (11) Term Debt and Other Borrowings amount includes $50,000 borrowed on November 3, 1987 and repayable in full on November 3, 1988. Outstanding term debt of the Parent Company at December 31, 1987, amounted to $63,565. Such is a $25,000 issue of 9½% Notes payable $2,500 annually through 1998, and $25,000 of 10%% Notes Outstanding term debt of consolidated subsidiaries at December 31, 1987 amounted to $68,600. Included maturing in 1991. are not materially restrictive. Covenants of various borrowing Agreements, to which the Company or its subsidiaries are parties, succeeding five years as follows: Principal payments on borrowings outstanding at December 31, 1987 are required during the 1988 1989 $57,295 1990 • 5,159 1991 ....30,107 .. 5,116 1992 ... 5,129 debentures bear interest at per annum rates of 9¾% ($100,000) and 10% ($150,000) and are redeemable Berkshire issued a total of $250,000 face amount of debentures during January, 1988. These through operation of sinking funds which call for annual repayments of $12,500 beginning in 1999. Final maturity of the obligations is January, 2018. Proceeds of the borrowings were contributed to equity capital of insurance subsidiaries. (12) Stockholders' Equity Changes in Stockholders' Equity accounts during the most recent three years were as follows: Unrealized Net Appreciation Retained Balance at December 29, 1984 $ 486,953 Earnings. Increase during 1985 in unrealized appreciation included $ 661,493 Change during 1985 in deemed applicable in carrying value of marketable equity securities 248,978 Increase in minority shareholders' interest income taxes (71,217) Net earnings 1985 in net unrealized appreciation (7) Balance at December 28, 1985 1,097,308 435,815 Increase during 1986 in unrealized appreciation included 664,707 Change during 1986 in deemed applicable in carrying value of marketable equity securities 291,804 Decrease in minority shareholders' interest in income taxes (81,705) Net earnings 1986 .... net unrealized appreciation 7 Increase during 1987 in unrealized appreciation included Balance at December 31, 1986 874,813 1,379,669 282,361 Change during 1987 in deemed applicable in carrying value of marketable equity securities .. 349,147 Net earnings 1987 .... income taxes (119,837) Balance at December 31, 1987 $1,104,123 $1.614,221 234,552 34

[PAGE 37]

(13) Interest and Dividend Income Consolidated interest and dividend income for each of the past three years was comprised of the following: 1987 1986 1985 Dividends: Capital Cities/ABC, Inc. .. . .. $ 600 $ 600 $ GEICO Corporation .... 9,316 General Foods Corporation 7,398 6,850 7,727 Salomon Inc 15,165 The Washington Post Company 2,212 1,935 All Others ...••••• 5,058 7,875 17,815 1,726 Total dividends ..... 32,351 17,808 34,118 Interest substantially exempt from Federal income taxes ... . . 102,210 71,982 36,579 Other interest ... .. 28,780 28,639 36,965 Interest and dividend income $163.341 $118.429 $107.662 (14) Quarterly Data A summary of earnings by quarter for the past two years is presented in the following table. This information is unaudited 1st 2nd 3rd 4th 1987 Quarter Quarter Quarter Quarter Earnings before realized investment gain Income items $607,670 $560,145 $551,387 $618.472 57,219 45,880 360 49,239 11,917 62,408 Realized investment gain 3,255 4,274 Net earnings $ 60,474 $ 46,240 $ 61,156 $ 66,682 Per outstanding share: Earnings before realized investment gain $ 49.89 $ 40.00 $ 42.93 $ 54.42 Net earnings 52.73 40.31 53.32 58.15 1986 Income items $542,229 $496,307 $533,710 $604,419 Realized investment gain Earnings before realized investment gain 46,832 39,437 94,756 28,421 33,320 30,286 2,761 6,548 Net earnings $ 86,269 $123,177 $ 36,081 $ 36,834 Per outstanding share: Net earnings....... Earnings before realized investment gain $ 34.39 $ 24.78 $ 29.05 $ 26.40 75.22 107.40 31.46 32.11 also tend to increase fourth quarter earnings recorded for the Buffalo News. A non-seasonal factor to the process of determining liabilities for unpaid losses of insurance subsidiaries, can be relatively that may influence Berkshire's interim consolidated financial statements is that estimation error, inherent Variations in amount and timing of realized securities gains or losses cause significant variations in periodic net earnings. 35

[PAGE 38]

(dollars in thousands except per share amounts) Notes to Consolidated Financial Statements (Continued) (15) Business Segment Data below reflect data for those segments for each of the three most recent years. Berkshire's principal business segments are briefly described at page 4 of this report. The tables Revenues Insurance 1987 1986 1985 Candy $ : 977,890 Newspaper 157,391 $ : 931,379 Encyclopedias, other reference materials Retailing of home furnishings 145,997 122,955 114,267 151,861 $412,481 145,103 Revenues not identified with segments Home cleaning systems 129,678 325,772 285,356 135,501 123,292 107,864 477,991 126,812 431,489 $2,337.674 $2.176.665 151,124 $939,864 Operating Profit Before Taxes Insurance 1987 1986 1985 Newspaper Candy ... $ 97,054 $ 51,299 29,373 $ 50,987 30,718 Encyclopedias, other reference materials Retailing of home furnishings 38,811 34,137 28,014 20,534 17,176 29,322 16,328 Home cleaning systems 25,494 12,177 Pre-tax operating profits not identified with segments ...... ••• 23,325 Corporate expenses 69,118 20,019 53,864 Shareholder designated contributions (3,380) (2,748) 27,458 Interest expense (11,474) (4,938) (23,891) (3,997) (4,006) (1,725) (14,415) $281,056 $195.766 $127.812 depreciation and amortization of tangible and intangible assets have been taken into account. See Amounts are stated before deduction of any applicable minority interest. Charges or credits for following page. Realized investment gains are not reflected. Capital Expenditures 1987 1986 $ 1985 Insurance 804 $ 1,266 4,758 607 $ 623 Candy 4,138 Retailing of home furnishings ....... Encyclopedias, other reference materials ...................... 3,103 764 3,756 Newspaper Home cleaning systems 376 3,771 3,602 Other ... . ................ 1,320 307 1,665 5,722 8,447 1,562 2,077 $17.349 $19,596 $11.723 Expenditures which were part of business acquisitions are excluded. 36

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[PAGE 40]

Notes to Consolidated Financial Statements (Continued) (dollars in thousands except per share amounts) (15) Business Segment Data (continued) Revenues of the Insurance Segment 1987 1986 1985 Premiums written ..••• $751,253 $1,009,430 $497,400 Premiums earned: Primary or direct insurance Reinsurance assumed settlements and portfolio reinsurance excluding structured ...•• $441,635 $ 463,117 $184,333 372,763 344,385 Subtotal 814,398 807,502 82,877 10,497 16,382 267,210 Investment income Total premiums earned 824,895 823,884 49,849 107,495 317,059 152,995 95,422 $977,890 $ 931,379 $412.481 Insurance Segment Operating Profit Before Taxes 1987 1986 1985 Underwriting gain (loss): Reinsurance assumed excluding structured Primary or direct insurance operations $ (2,715) $ 3,538 $ • (8,147) settlements and portfolio reinsurance ... (27,745) (49,355) (29,973) Structured Subtotal (30,460) (45,817) (24,969) (10,027) (38,120) (6,110) Net investment income Total underwriting (loss) (55,429) (55,844) 107,143 (44,230) $ 97,054 152,183 95,217 $ 51,299 $ 50,987 (16) Dividend Restrictions - Insurance Subsidiaries regulations. In 1988 Berkshire can receive up to approximately $278,000 as its proportionate share of Payments of dividends by Insurance Group members are restricted by insurance statutes and dividends paid by Insurance Group members without prior regulatory approval. ing rules (Statutory Surplus as Regards Policyholders), was approximately $2,800,000 and $2,100,000 Combined stockholder's equity of insurance subsidiaries, determined pursuant to statutory account- at December 31, 1987 and 1986, respectively. These amounts exceeded the corresponding amounts December 31, 1987 and $275,000 at December 31, 1986. The principle difference is represented by determined on the basis of generally accepted accounting principles by approximately $400,000 at reporting purposes. deferred income tax liabilities established for financial reporting purposes but ignored for statutory 38 -

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BERKSHIRE HATHAWAY INC. PARENT COMPANY - SUMMARIZED FINANCIAL STATEMENTS (dollars in thousands) Financial Statements of Berkshire Hathawav Inc. and consolidated subsidiaries and the notes thereto. These summarized financial statements should be read in conjunction with the Consolidated Balance Sheets 1987 December 31, Cash and invested cash Assets 1986 Investment in subsidiaries (including unrealized appreciation $ 4,711 $ 9,151 subsidiaries, net of taxes, amounting to $1,104,123 and of marketable equity securities owned by insurance $874,813 at Dec. 31, 1987 and 1986 respectively) Other assets 2,914,556 6,297 2,393,873 $2,925,564 2,102 $2,405,126 Liabilities and Stockholders' Equity Term debt and other borrowings Accounts payable and accrued expenses $ 2,523 Income taxes 17,817 63,565 $ 16,949 2,244 Stockholders' 83,905 8,136 equity (See Consolidated Balance Sheets) 2,841,659 2,377,797 27,329 $2,925,564 $2,405,126 Statements of Earnings 1987 1986 1985 Income items: From subsidiaries: Interest $ Dividends 186 Undistributed earnings 164,010 $ 299 $ 72,611 (134,773) 427,546 86,094 507 355,396 Interest and dividends - other investments 236,807 Income tax credit Other income 1,686 293,072 598 1,263 441,997 4 1,276 2,904 962 8,207 4,529 240,053 302,546 450,706 Cost and expense items: Corporate administration 3,380 2,748 Textile business expenses** Shareholder Designated Contributions* = 867 1,725 805 Interest expense ..... 1,474 1,850 2,121 15,096 10.511 5,501 20,185 14,891 Net earnings $234,552 $282,361 $435.815 *Shareholder designated contributions were made by wholly-owned subsidiaries in full in 1987 and in major part in 1986 and 1985. selling expenses of the business. Textile business expenses for 1986 represent costs associated with other income for 1985. Textile business expenses reflected for 1985 represent administrative and properties previously used in the business. In 1987 the properties were contributed to a wholly- abandonment of the business, net of rental income received from leasing portions of the real owned subsidiary formed to conduct the rental activities. 39

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Financial Condition and Results of Operations Management's Discussion and Analysis of BERKSHIRE HATHAWAY INC. Results of Operations be referenced in connection with this discussion. Note 15 to the Consolidated Financial Statements (the "Segment Note"), at pages 36 to 38 should past three years for each significant Berkshire business segment. A meaningful portion of the Insurance The Segment Note reflects, among other information, operating profit before taxes for each of the in 1987 vs. 28% in 1986 and 1985) applicable to realized securities gains differ from rates applicable Group's investment income is largely free of Federal income taxes. Federal capital gains tax rates (34% to ordinary income (40% in 1987 vs. 46% in 1986 and 1985). After-tax net earnings are disaggregated income taxes. in the following table, thus reflecting results after giving effect to these differing rates of applicable After-Tax Earnings (Costs) 000s Omitted 1987 1986 1985 Manufacturing, Insurance $115,962 $ 66,576 $ 56,147 Interest and financing costs merchandising and services 109,681 80,743 (5,905) (4,992) (12,213) 47,184 Other unallocated corporate costs (3,642) (7,288) (3,095) Earnings before realized investment gain Realized investment gain 214,746 19,806 150,897 131,464 342,867 92,948 Net earnings $234.552 $282,361 $435.815 Insurance The figures shown above for the Insurance segment reflect the following: 1987 1986 1985 Underwriting gains (losses): Primary or Direct Insurance Operations Reinsurance Assumed, excluding Structured $ (2,715) $ 3,538 $ (8,147) Structured Settlements and Portfolio Reinsurance Settlements and Portfolio Reinsurance (27,745) (24,969) (49,355) (10,027) (29,973) Applicable income tax credit Underwriting loss - pretax (55,429) (6,110) 34,461* (55,844) Applicable minority interest 309 25,688 (44,230) 20,346 292 315 After-tax net investment income After-tax underwriting loss (20,659) 136,621 (29,864) (23,569) 96,440 79,716 Net earnings $115,962 $ 66,576 $ 56,147 *The "fresh start" credit (discussed elsewhere herein) accounted for approximately $8 million of the Insurance Group's 1987 income tax credit applicable to underwriting losses. Discussions of underwriting results which follow deal with specified subsegments of Berkshire's insurance business. One such subsegment is described as "Primary or direct insurance operations". directly subject to the risks insured against. The term is used to distinguish such business from that That term includes those operations where insurance policies are issued to named insureds that are of reinsurance assumed activities that involve insuring other insurers. 40

[PAGE 43]

Insurance (continued) Primary or Direct Insurance Underwriting accepted accounting principles ("GAAP"), of the Berkshire Hathaway Insurance Group's primary or A summary follows of the combined underwriting results, determined on the basis of generally direct insurance operations. Dollars are in thousands. 1987 1986 1985 Amount % Amount % Amount % Premiums written $412.748 $594.607 $269.057 Premiums earned 441,635 _100.0 463,117 100.0 184.333 100.0 Losses and loss expenses 338,575 76.7 347,468 75.0 140,029 76.0 Underwriting expenses .. 105,775 23.9 112,111 24.2 52.451 28.4 Total losses and expenses 444,350 100.6 459,579 99.2 192,480 104.4 Underwriting gain (loss) - pre-tax $ (2,715) $ 3,538 $ (8.147) in considerably fewer risk acceptances in Berkshire's primary or direct insurance operations in 1987 Price competition intensified during 1987 in the property/casualty insurance industry. This resulted as compared with 1986. The extraordinary growth in earned premiums that occurred in 1986 resulted by this subsegment declined in the most recent year by about 30% from the prior year. Changes in from an increased number of risks underwritten at notably higher premium rates. Premiums written are virtually certain to decline substantially from 1987/86 levels. The underwriting expense written premium foretell changes in earned premium, and premiums earned in 1988 by this subsegment ratios shown above of 23.9% for 1987 and 24.2% for 1986 were well below the comparable 28.4% ratio for represented those earned with respect to policies issued by the Group's Special Risks and Commercial 1985 principally because a greater portion of the premiums earned in the most recent two years those that prevail for small-premium policies. Casualty divisions. These are usually large-premium policies with commission rates considerably below Summarized below is loss and loss expense data for this business. 000s Omitted 1987 1986 1985 Unpaid losses and loss expenses at beginning of year .. $429,505 $209,236 $164,776 Incurred losses recorded: Current year occurrences All prior years' occurrences 348,010 338,575 (9,435) 331,463 16,005 139,966 63 347,468 140,029 Payments with respect to: Current year All prior years' occurrences occurrences 44,856 53,086 35,419 95,147 74,113 60,150 Unpaid losses and loss expenses at end of year 140,003 127,199 95,569 $628.077 $429,505 $209,236 loss development of $9,435,000. The favorable loss development recorded in 1987 was slightly over Reflected in the 1987 underwriting results of the primary or direct insurance operations is favorable 2% of the unpaid losses and loss expenses at the beginning of the year. In contrast, development recorded in 1986 represented about 8% of the outstanding loss reserves at the beginning adverse loss error in the beginning-of-the-year stated liability. Additional information will become available and of that year. The amount of "development" recorded in a given year is a recognition of estimation with respect to the prior years' occurrences. Thus, one-year development data does not speak to the events will subsequently occur that will influence the loss amounts incurred and ultimately recorded reveals the effect on reported income of any given year of the estimation error recognized in that of adequacy of an insurer's loss reserving practices. However, such data is useful in that it year. 41

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Insurance (continued) Management's Discussion (continued) Reinsurance Assumed, excluding Structured Settlements and Portfolio Reinsurance The combined underwriting results, determined on a GAAP basis, with respect to the reinsurance following table, with dollars in thousands. assumed business, other than structured settlements and portfolio reinsurance, are summarized in the 1987 1986 1985 Premiums written Amount % Amount % Amount % Premiums earned $328.011 $398,416 $178,502 Losses and loss expenses 372,763 _100.0 344,385 100.0 82,877 Underwriting expenses... 287,638 77.2 282,563 Total losses and expenses 112,870 30.2 111,177 32.3 82.0 27,180 85,670 100.0 103.4 _32.8 Underwriting (loss) - 400,508 107.4 393,740 114.3 112,850 136.2 pre-tax $ (27.745) $ (49,355) $ (29,973) from major quota share reinsurance contracts. One of the contracts is a four year, 7% quota share Premiums earned by this subsegment in each of the past three years were principally derived from this contract were $254 million, $233 million and $70 million respectively, in 1987, 1986, and treaty with Fireman's Fund Insurance Companies, effective until September 1, 1989. Earned premiums 1985. Another major quota share reinsurance contract has been in force for the past two years, from contract expired at the end of 1987, was not renewed and unearned premiums of $27,924,000 were which earned premiums were approximately $88 million in 1987 and $85 million in 1986. That returned with respect thereto as of December 31, 1987. Berkshire remains liable for future payments against its quota share of losses incurred during 1987 and 1986 in that reinsured book of business. three years. Loss and loss expense data with respect to the above business is summarized below for the past 000s Omitted 1987 Unpaid losses and loss expenses at beginning of year 1986 1985 Incurred losses recorded: $319,989 $114,191 $ 47,867 All prior years' occurrences Current year occurrences 283,151 4,487 261,554 66,228 21,009 19,442 287,638 Payments with respect to: 282.563 85,670 All prior years' occurrences Current year occurrences 74,328 45,201 43.711 5,155 33.054 14,191 Unpaid losses and loss expenses at end of year 119.529 76.765 19,346 ••. $488.098 $319.989 $114,191 with respect to the major quota share reinsurance contracts. Adverse development of $4,487.000, as Insignificant amounts of either tavorable or adverse loss development have been recorded to date in 1985 and 1986. shown above for 1987, was recorded principally with respect to surety reinsurance loss occurrences 42

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Insurance (continued) Structured Settlements and Portfolio Reinsurance are not meaningful because, at inception of these contracts, it is predictable that subsequent underwriting Analyses of loss developments for the Structured Settlements and Portfolio Reinsurance business losses will result in varying amounts that are reasonably estimable. Acceptance of the business nevertheless occurs after appraisal on a proposal-by-proposal basis of the value of funds expected to be generated thereby. Insurance Segment Investment Income nd reduced to after-tax income, in thousands of dollars, in the following table let investment income earned by the Insurance Group for each of the past three years is summarize Income Applicable 1pplicable Before Income Minority Income After Taxes Taxes Interest Taxes 1987 1986 $152,483 107,143 $13,670 $2,192 9,094 1,609 $136,621 96,440 1985 95,217 15,257 244 79,716 Manufacturing, merchandising and services summarized in the following table, in thousands of dollars: Results of operations for the past three years of Berkshire's diverse non-insurance businesses are 1987 1986 1985 Costs and Revenues $1,359,784 expenses 1,155,990 $1,245,286 1,070,183 $527,383 430,412 Earnings before income taxes 203,794 175,103 96,971 Applicable income taxes (89,497) (90,180) (45,818) Applicable minority interest (4,616) (4,180) (3,969) Net earnings $ 109,681 80,743 $ 47.184 approximately 9% in 1987 over 1986, after more than doubling in 1986 over 1985. The latter resulted Revenues of Berkshire's group of non-insurance businesses, on a combined basis, increased from the addition to the group in 1986 of the Scott Fetzer and Fechheimer businesses. Combined to soup in ate i ton earnings before income taxes increased approximately 16% in 1987 over 1986. Such figures do not to the shareholder designated contribution program, nor for interest expense, consistent with the reflect any charge or apportionment of Berkshire corporate expenses, nor contributions made pursuant presentation in the Segment Note. five non-insurance business segments indentified in that Note, with the increases ranging from 2.3% Reference to the Segment Note will reveal that 1987 revenues increased over 1986 for each of each of these segments also increased in 1987, with the exception of the Nebraska Furniture Mart for the home cleaning systems segment to 14.2% for the World Book operations. Pre-tax profits of to decline slightly. where lower gross margins were realized in 1987 than in 1986, causing that segments pretax profits of lower rates of income taxes than in 1986. This reflects provisions of the 1986 Tax Reform Act. But, As shown above, aggregate after tax earnings of the Group were enhanced in 1987 by application income taxes, relating to unrealized gross profit on installment sales, into current income taxes. provisions of that Act also accelerated approximately $9 million of World Book's otherwise deferred Interest and Financing Costs 1987 versus 1986. This principally resulted from the fact that Berkshire incurred interest expense with Interest and financing costs decreased approximately $12.4 million, before income tax effect, in respect to $60 million face amount of 12¾% debentures outstanding from 1980 until December 1986 million was incurred in 1986 with respect to prepayment, as described in the prior year report. when such debt obligations were called for prepayment. A call premium cost of approximately $5.3 43

[PAGE 46]

Management's Discussion (continued) Realized Investment Gain Realized investment gain has been an element of Berkshire's net earnings for each of the past several years. The amount of this gain - recorded by Berkshire when appreciated securities are sold net earnings is evident on the face of the Consolidated Statements of Earnings. The amount of realized

• tends to fluctuate significantly from period to period. The varying effect upon Berkshire's consolidated

investment gain for any period has no predictive value, and variations in amount from period to period have no practical analytical value, given the preexistence of substantial unrealized price appreciation in Berkshire's consolidated investment portfolio. Liquidity and Capital Resources Berkshire's Consolidated Balance Sheet as of December 31, 1987 reflects continuing capital strength. approximately $2.8 billion at December 31, 1987. In that three-year period, realized and unrealized Berkshire shareholders' equity has increased from approximately $1.3 billion at December 31, 1984 to securities gains increased equity capital by approximately $1.1 billion, and reinvested earnings, other than realized securities gains, were approximately $400 million. Significantly increased liabilities over the three year period arose from increased funds held for the benefit of Berkshire Hathaway Insurance Their total increased approximately $1.3 billion during the three years. Berkshire's financial practices Group policyholders - unpaid losses, loss adjustment expenses and unearned insurance premiums. are directed so as to continuously provide wide margins of safety, in the form of significant financial of the Berkshire Hathaway Insurance Group is significantly higher than normal in the property and strength and ample liquidity, in support of the Company's financial obligations. The capital strength (0.27:1, 0.48:1 and 0.30:1 for 1987, 1986 and 1985, respectively), is useful as a marketing tool, in that casualty insurance industry. This strength, reflected in the Group's ratios of premiums to surplus members of the Group are thereby meaningfully distinguished from their competitors. The aggregate- premium to aggregate-surplus ratio for the industry for all recent years has approximated 1.9:1. Company's long-term debt to AAt, the second highest rating it assigns that category of obligations. During 1987, Standard & Poor's Corporation increased the credit rating it has assigned to the In January, 1988 Berkshire issued $250,000,000 face amount of 30 year debentures, redeemable through of the Insurance Group. Final maturity of the obligations, which bear interest at approximately 10% sinking funds commencing in 1999. Proceeds from the issue were contributed to the equity capital per annum, is in January, 2018. It seems probable that Berkshire will be unable to employ the funds acquisition opportunities as they arise. 44

[PAGE 47]

stockholders from the Chairman of the Company. The 1987 Annual Report of Wesco Financial Corporation included the following letter to Wesco WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated "normal" operating income (i.e., before all unusual operating income and all net gains from sales of securities) for the calendar year 1987 the previous year. increased to $16,612,000 ($2.33 per share) from $11,934,000 ($1.68 per share) in Consolidated net income (i.e., after unusual operating losses and all net gains from sales of securities) decreased to $15,213,000 ($2.14 per share) from $16,524,000 ($2.32 per share) in the previous year. Wesco has three major subsidiaries, Mutual Savings, in Pasadena, Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses, and Wesco-Financial Insurance Company, headquartered in Omaha and currently engaged in the reinsurance business. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per- share amounts) (1): December 31, 1987 Year Ended Wesco Per December 31, 1986 Per Amount Share Amount Share Wesco "Normal" net operating income (loss) of: Mutual Savings Precision Steel's businesses $ 2,895 $ .41 $ 2,159 Wesco-Financial insurance business - 2,450 .34 $ 30 1,701 .24 Underwriting Investment activity. (1,394) (.19) 10,853 1.52 (1,469) (.21) 8,084 1.14 9,459 1.33 6,615 .93 All other "normal net operating income (2) 1,808 .25 16,612 2.33 1,459 11,934 21 Writeoff by Mutual Savings of prepaid FSLIC 1.68 insurance premiums(3) Flood loss at Precision Steel .... ..•• (1,935) (.27) - (672) (.09) ...• 1,208 .17 4,590 - - Net gains on sales of securities... - Wesco consolidated net income .... $15,213 $2.14 .64 $16,524 $2.32 1) All figures are net of income taxe ) After deduction of interest and other corporate expenses. Income was from ownership of the Mutual Savings headquarter office building, primarily leased to oulside marketable securities owned outside the savings and loan and insurance subsidiaries. tenants, and (3) Necessitated by the Federal Home Loan Bank's elimination of the savings and loan industry's nearly $1-billion secondary interest and dividend income trom cash equivalents and insurance reserve, consisting of deposit insurance premiums prepaid to FSLIC, the U.S agency which insures accounts in savings and loan associations. audited financial statements which follow standard accounting convention. The This supplementary breakdown of earnings differs somewhat from that used in supplementary breakdown is furnished because it is considered useful to shareholders. 45

[PAGE 48]

Reproduced from 1987 Annual Report of Wesco Financial Corporation Mutual Savings Mutual Savings' "normal" net operating income of $2,895,000 in 1987 repre- sented an increase of 34% from the $2,159,000 figure the previous year. However, this "normal" figure of $2,895,000 for Mutual Savings' 1987 earnings is created by ignoring as abnormal an after-tax charge of $1,935,000 from writeoff of prepayments of deposit-insurance premiums. The premiums had been prepaid in previous years to FSLIC, the U.S. agency which insures accounts in savings and loan associations. Since FSLIC has been grievously impaired by widespread failure of insured associations and continues to be insolvent, and since its long-term source of support is collection of premiums which the savings and loan industry is compelled to pay, it may well be questioned whether FSLIC-related charges far in excess of past experience should on that account now be excluded from the "normal" as we do in this explanatory letter. Mutual Savings' position, relative to FSLIC, is like that of the owner of a concrete pier, mostly underwater, compelled to buy fire insurance on a pooled-rate basis with a group of oily-rag collectors, many of whom have already had but not reported their fires, with the result that no provision for such fires has yet been made in pooled-basis premium rates. Such an owner probably has not yet had his last unpleasant surprise from his insurance costs. Even so, we chose "unusual" classification for the FSLIC special charge in 1987, because it is not certain to be repeated. Separate balance sheets of Mutual Savings at yearend 1986 and 1987 are set forth at the end of this annual report. They show (1) total savings accounts rising to $287 million from $282 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 association), (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 $139 million at the end of 1987, up 76% from the $79 million at the end of 1986. The loan portfolio at the end of 1987, although containing almost no risk of loss from defaults, bore an average interest rate of only 8.38%, probably near the lowest among U.S. savings and loan associations, but up sharply from 7.48% at the end of 1986. There is now no significant unrealized depreciation in the loan portfolio, while unrealized appreciation in Mutual Savings' interest-bearing securities and preferred stocks at December 31, 1987 was about $9 million. As pointed out in Note 10 to the accompanying financial statements, the book value of Wesco's equity in Mutual Savings ($56.6 million at December 31, 1987) overstates the amount realizable, after taxes, from sale or liquidation at book value. If all Mutual Savings' assets, net of liabilities, were to be sold, for the $56.6 million reported as book value, the parent corporation would receive much less than $56.6 million after substantial income taxation imposed because about $47 million of what is designated shareholders' equity for accounting purposes is considered bad debt reserves for most tax purposes. 46

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Reproduced from 1987 Annual Report of Wesco Financial Corporation Mutual Savings has not only a buried plus value in unrealized appreciation of hand (mostly 22 largely oceanfront acres in Santa Barbara) has become worth over a securities, but also a buried plus value in real estate. The foreclosed property on long holding period much more than its $2.0 million balance sheet carrying cost. Reasonable, community-sensitive development of this property has been delayed report, grading is now actually under way on the property for an authorized over 12 years in the course of administration of land-use laws. But, miraculous to development into 31 houses interspersed with large open areas. Mutual Savings plans to make the development first rate in every respect, and unique in the quality of its landscaping. The buried plus value in real estate is limited by the small number of houses allowed (31) and by the fact that only a minority of such houses (11) will have any significant ocean view. Additional limitation will come from prospective high cost of private streets, sewage and utility improvements and connections, and landscaping. And, most important of all, various charges and burdens, including heavy archaeo- logical obligations imposed by governmental bodies, will drastically reduce our potential recovery from what it would have been had the zoning and development climate of the early 1970s continued into 1988. Mutual Savings is now a "qualified thrift lender" under the Federal regulatory definition requiring 60% of assets in various housing-related categories. Substantially all loans receivable have either short expected lives or bear interest rates which fluctuate with the market to 25% per annum or more. While the "spread" between Mutual Savings' average interest rates paid on savings and received on loans remains too low to provide respectable profits, such spread is improving. Moreover, the disadvantage from inadequate spread continues to be offset to a considerable degree by the effect of various forms of tax-advantaged investment, primarily preferred stock. The negative side of this tax-advantaged antidote to inadequate interest rate margin on loans is the risk that preferred stock, income to cover Mutual Savings' interest costs, if the general level of interest rates with its fixed dividend and long life, will decline in value and not provide enough should sharply rise. In view of this risk, Mutual Savings' total commitment to preferred stock is kept conservative, relative to the amount of its net worth. is both (1) improving slightly and (2) expected to produce an average return of at All in all, Mutual Savings continues to be a mediocre business, albeit one which least 10% per annum on the after-tax proceeds which could be realized from its liquidation. And, of course, we are making needed loans in our community while we institution may find a bigger role as the years go by. try to behave as if there were no federal deposit-insurance system. Such an Precision Steel The businesses of Wesco's Precision Steel subsidiary, located in the outskirts of Chicago at Franklin Park, Illinois, contributed $2,450,000 to "normal" net operating income in 1987, up 44% compared with $1,701,000 in 1986. The increase in 1987 47

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Reproduced from 1987 Annual Report of Wesco Financial Corporation profit occurred in spite of only a modest increase in revenues (up 5% to $54,843,000). The "normal" net operating income figure does not include the adverse effect of an after-tax charge of $672,000 from a flood loss following a severe rainstorm in August, during which nine inches of rain fell in a twenty-four hour period. We consider such a flood a once-in-a-hundred-years type of occurrence, and have no hesitation as we exclude the item from "usual" results in our explanatory letter. Under the skilled leadership of David Hillstrom, Precision Steel's businesses in 1987 provided an extraordinary return even without taking into account the financial leverage put into Wesco's consolidated picture incident to their acquisition. The good financial results have an underlying reason. Precision Steel's busi- nesses, 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 remem- brance when supplies are short, rightly believe that they have no fully comparable alternative in Precision Steel's market area. Indeed, many customers at locations Steel's service. remote from Chicago and Charlotte (for instance, Los Angeles) seek out Precision Wesco-Financial Insurance Company A new business was added to the Wesco group in 1985, in co-venture with Wesco's 80% owner and ultimate parent corporation, Berkshire Hathaway Inc. With the enthusiastic approval of all Wesco's directors, including substantial Wesco shareholders in the Peters and Caspers families, without whose approval such action would not have been taken, Wesco in 1985 invested $45 million in cash equivalents in a newly organized, wholly owned insurance company, Wesco- Financial Insurance Company ("Wes-FIC"'). Another $45 million was invested in 1986 and 1987. The new subsidiary, Wes-FIC, has reinsured, through another Berkshire Hathaway insurance company subsidiary as intermediary-without-profit, 2% of the entire book of insurance business of the long-established Fireman's Fund Corp. (listed on the NYSE). Wes-FIC thereby assumed the benefits and burdens of Fireman's Fund's prices, costs and losses under a contract covering all insurance premiums earned by Fireman's Fund during a four-year period commencing Septem- ber 1, 1985. The arrangement puts Wes-FIC in almost exactly the position it would have been in if it, instead of Fireman's Fund, had directly written 2% of the business. Differences in results should occur only from the investment side of insurance, as share of premiums earned in 1987 exceeded $73 million. Wes-FIC, instead of Fireman's Fund, invests funds from "float" generated. Wes-FIC's Wes-FIC's net income for 1987 was $9,468,000, versus $6,967,000 for 1986. The net income figures included securities gains, net of income taxes, of $9,000 in 1987 and $352,000 in 1986. Wes-FICs 1987 net income benefitted by about 48

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Reproduced from 1987 Annual Report of Wesco Financial Corporation the Tax Reform Act of 1986. $1 million because of an unusual adjustment to its income tax provision caused by It is in the nature of even the finest casualty insurance businesses that in keeping their accounts they must estimate and deduct all future costs and losses from statements more mere "best honest guesses" than is typically the case with accounts premiums already earned. Uncertainties inherent in this undertaking make financial of non-insurance-writing corporations. And the reinsurance portion of the casualty insurance business, because it contains one or more extra links in the loss-reporting chain, usually creates more accounting uncertainty than the non-reinsurance portion. Wesco shareholders should remain aware, not only of the inherent imperfections of Wes-FIC's accounting, but also of the inherent cyclicality of its business. However, Wesco hopes for: (1) a reasonable return on its investment over the four years of the Fireman's Fund reinsurance contract, and (2) possible future reinsurance contracts with other insurers. All Other "Normal" Net Operating Income All other "normal" net operating income, net of interest paid and general corporate expenses, increased to $1,808,000 in 1987 from $1,459,000 in 1986. Wesco's Pasadena office building block (predominantly leased to outsiders although Sources were (1) rents ($2,272,000 gross, excluding rent from Mutual Savings) from Mutual Savings is the ground floor tenant) and (2) interest and dividends from cash equivalents and 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, decreased to $1,208,000 in 1987 from $4,590,000 in 1986. Bowery Savings Bank Wesco's directors in the same manner as the Wes-FIC co-venture, joined a group In 1985 Wesco, in another co-venture with its parent corporation, approved by which invested $100,000,000 cash in a newly organized, New York-chartered insolvent Bowery Savings Bank in the city of New York. The takeover received (1) savings bank. The new bank then took over the name, assets and liabilities of the deposits in banks, and (2) the blessing of New York bank regulators. Wesco much needed assistance from FDIC, the federal agency, akin to FSLIC, which insures invested $9,000,000, other Berkshire Hathaway subsidiaries invested $12,384,000, and other unrelated investors invested the balance of the $100,000,000. The terms of the FDIC assistance were extremely complex but can be fairly summarized as far from adequate to assure that the investors would make a profit. This is as it should be when $100 million buys a highly-leveraged residual equity position in a $5 billion bank, albeit one with many problems. The investment continued to be carried at cost in Wesco's accompanying year- end financial statements, but it was sold, as part of a friendly acquisition of Bowery 49

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Reproduced from 1987 Annual Report of Wesco Financial Corporation by a large and reputable company, on January 31, 1988, at an after-tax profit for Wesco of about $5 million. Richard Ravitch was the organizing leader in the group which revitalized Bowery Savings Bank, acted as its CEO and negotiated its sale. We take this opportunity to doff our hat to him for a job well done. We have similar admiration for our other co- investors, particularly the Tisch family and Richard Rosenthal. Mr. Rosenthal was a former Salomon partner (see below) who died in a tragic air crash in the midcourse of our venture. Salomon Inc On October 1, 1987 Wesco and certain of its wholly owned subsidiaries purchased 100,000 newly issued shares of Series A Cumulative Convertible Preferred Stock, without par value, of Salomon Inc ("Salomon"), at a cost of $100 million. Salomon's primary business is transacted by its subsidiary, Salomon Brothers, a leading securities firm. Our investment was part of a $700 million transaction in which other subsidiaries of Berkshire Hathaway Inc., Wesco's parent, invested $600 million. Principal terms of the transaction include the following: (1) the new preferred stock will pay dividends at the annual rate of 9%; (2) each preferred share, purchased at a cost of $1,000, will be convertible into 26.31579 shares of Salomon common stock on or after October 31, 1990, or earlier if certain extraordinary events occur; and (3) the preferred stock is subject to mandatory redemption provisions requiring the retirement, at $1,000 per share plus accrued dividends, of 20% of the issue on each October 31, beginning in 1995, so long as any shares of preferred stock remain outstanding. At the stated conversion price of the preferred stock, a profit (subject to certain procedural requirements) will be realizable whenever, after October 31, 1990, the common stock of Salomon (listed NYSE) trades at over $38 per share. At the time of our commitment to buy the new preferred, the common stock of Salomon was selling in the low 30s. However, shortly after the ink dried on Wesco's new stock certificates, the October 19, 1987 "Black Monday" stock market crash occurred, which caused temporary but substantial operating losses plus a lowered credit rating at Salomon. Although Salomon, among securities firms, suffered only its rough share of the general debacle, its common stock at one time after the crash traded as low as 16%. Fortunately, as the conversion privilege we had bargained for declined in value along with the price of Salomon common stock, interest rates also declined, which made our fixed 9% annual preferred stock dividend more valuable. We believe that, all factors considered, at December 31, 1987 our $100 million investment in preferred stock of Salomon was still worth about $98 million. We much admire the way Salomon and its leader, John Gutfreund, are adjusting operations to cope with new and adverse conditions. They seem ahead of the game to us, compared with competitors, and they work from the sound base of an honored name, affixed to an organization deep in talent and known for hard work. 50

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Reproduced from 1987 Annual Report of Wesco Financial Corporation Berkshire Hathaway's Chairman, Warren Buffett, and the undersigned joined the board of Salomon on October 28, 1987, and are very pleased with the new association. 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 slow pace of acquisition of additional businesses because few are found available, despite constant search, at prices deemed rational from the standpoint of Wesco shareholders. As indicated on the accompanying consolidated balance sheet, the aggregate market value of Wesco's marketable equity securities was higher than their aggregate carrying value at December 31, 1987 by about $6 million, down significantly from about $13 million one year earlier. The consolidated aggregate market value of all marketable securities, including bonds and other fixed-income securities, exceeded aggregate carrying value by about $12 million. As earlier noted, about $9 million of this unrealized appreciation lies within the savings and loan subsidiary. Wesco's Pasadena real estate, a full block (containing (1) about 125,000 first- class net rentable square feet, including Mutual Savings' space, in a modern office carrying value ($3,164,000) in Wesco's balance sheet at December 31, 1987, and (2) substantial current net cash flow (about $1 million per year) to Wesco after debt service on the mortgage. The modern office building is 99% rented, despite a glut of vacant office space in Pasadena. We charge just-below-standard rents and run the building as a sort of first-class club for tenants we admire. With these practices, a prime location and superior parking facilities, we anticipate future increases in cash flow, but at no better rate than the rate of inflation. Wesco remains in a prudent position when total debt is compared to total shareholders' equity and total liquid assets. Wesco's practice has been to do a certain amount of long-term borrowing in advance of specific need, in order to have maximum financial flexibility to face both hazards and opportunities. in due course be used in one or more business extensions. The extension activity, It is expected that the balance sheet strength of the consolidated enterprise will however, requires patience, as suitable opportunities are not always present. As indicated in Schedule I accompanying Wesco's financial statements, invest- ments, both those in the savings and loan and reinsurance subsidiaries and those held temporarily elsewhere pending sale to fund business extension, tend to be concentrated in very few places. Through this practice of concentration of invest- ments, better understanding is sought with respect to the few decisions made. 51

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Reproduced from 1987 Annual Report of Wesco Financial Corporation The ratio of Wesco's annual reported consolidated net income to reported consolidated shareholders' equity, about 15% in 1985-87, was dependent to a very large extent on securities gains, irregular by nature. This recent ratio is almost certain to continue to decline, probably sharply, as it did in 1987. Neither possible future acquisitions of other businesses nor possible future securities gains appear likely to help much in the short term. The business acquisition game continues to be crowded with optimistic players who usually force prices for low-leverage acquirers like Wesco to levels where return-on-investment prospects are modest. And future securities gains are likely to prove harder to come by for very simple reasons. Because securities generally traded lower several years ago than they do now, relative to the intrinsic values of the businesses represented by the securities, creating more obviously sound investments then than now, and because prospects for above-average returns tend to go down as assets managed go up, it is now, early in 1988, even easier than it was early in 1986, to predict less desirable future results. It is also easy for any sophisticated Wesco shareholder, reviewing either (1) this virtual reprint of last year's letter or (2) Wesco's marketable securities disclosed herein, to diagnose (correctly) that the decision-makers are now even more dry of good ideas than they were two years earlier. The considerable, and higher than desired, liquidity of Wesco's consolidated financial position as this is written does not result from our forecast that business conditions are about to worsen, or that interest rates are about to rise, or that common stock prices are about to fall. Wesco's condition results, instead, from our comfortable. simply not finding opportunities for more aggressive use of capital with which we are Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric (including much modern "strategic planning" and "portfolio theory"). Such an approach, while it has worked fairly well on average in the past and will probably work fairly well over the long-term future, is bound to encounter periods of dullness and disadvantage as it limits action. Moreover, our approach is being applied to no great base position. Wesco has only a tiny fraction of its total intrinsic value in businesses with enough commercial advantage in place to assure permanent high future returns on capital employed. In its intrinsic value in durable high-return businesses. contrast, Berkshire Hathaway, Wesco's parent corporation, has a larger proportion of Some historical explanation for the current situation becomes appropriate here. When Wesco's parent corporation acquired control, Wesco's activities were almost entirely limited to holding (1) some surplus cash, plus (2) a multi-branch savings and loan association which had many very long-term, fixed-rate mortgages, offset by interest-bearing demand deposits. The acquisition of this intrinsically disadvanta- geous position was unwisely made, alternative opportunities considered, because the acquirer was overly influenced by a price considered to be moderately below liquidating value. Under such circumstances, acquisitions have a way of producing, on average, for acquirers who are not quick-turn operators, low to moderate long- term results. This happens because any advantage from a starting "bargain" gets 52

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Reproduced from 1987 Annual Report of Wesco Financial Corporation swamped by effects from change-resistant mediocrity in the purchased business. Such normal effects have not been completely avoided at Wesco, despite some successful activities, including recent investment in General Foods. Over the long term, a corporation like Wesco, with no significant proportion of intrinsic value in great businesses, is like a tortoise in a race of hares. And, as noted above, this particular tortoise faces the race with an unoriginal and conservative approach. However, there are respectable precedents for our approach. The novelist Hardy, who believed that the natural outcome of ambition was getting clobbered, advocated the logical preventative of aiming low. And people known for outcomes far too good to have been expected by Hardy have mined a branch of the same vein. Consider this statement from Newton: "If I have seen further than other men, it is by standing on the shoulders of giants". And this from Mozart (as approvingly quoted anything original in my life". by the distinguished advertising creator, David Ogilvy): " never tried to compose It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares which seek originality or don't wish to be left tortoise stumbles on some particularly effective way to apply the best previous work, out of some crowd folly which ignores the best work of the past. This happens as the or simply avoids standard calamities. Anyway, we hope so. And so should recent purchasers of Wesco stock who have not only bet on a tortoise but also, by paying prices in the mid forties, given odds. On January 28, 1988, Wesco increased its regular quarterly dividend from 17½ cents per share to 18½ cents per share, payable March 15, 1988, to shareholders of record as of the close of business on February 26, 1988. Exchange Commission, and includes detailed information about Wesco and its This annual report contains Form 10-K, a report filed with the Securities and subsidiaries as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T manger Charles T. Munger Chairman of the Board February 26, 1988 53

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BERKSHIRE HATHAWAY INC. SHAREHOLDER-DESIGNATED CONTRIBUTIONS 1981, the Chairman sent to the shareholders a letter giving the reasons for the program. Portions of The Company has conducted this program of corporate giving for seven years. On October 14, that letter follow: in most years, should produce a significant benefit for charities of your choice. "On September 30, 1981 Berkshire received a tax ruling from the U.S. Treasury Department that, he owns - will be able to designate recipients of charitable contributions by our company. You'll "Each Berkshire shareholder — on a basis proportional to the number of shares of Berkshire that name the charity; Berkshire will write the check. The ruling states that there will be no personal tax consequences 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. a widely-held corporation the executives ordinarily arrange all charitable donations, with no input at all from shareholders, in two main categories: (1) Donations considered to benefit the corporation directly in an amount roughly (2) Donations considered to benefit the corporation indirectly through hard-to-measure, long- commensurate with the cost of the donation; and delayed feedback effects of various kinds. charitable donations in the first category. However, the aggregate level of giving in such category has "I and other Berkshire executives have arranged in the past, as we will arrange in the future, all been quite low, and very likely will remain quite low, because not many gifts can be shown to produce roughly commensurate direct benefits to Berkshire. "In the second category, Berkshire's charitable gifts have been virtually nil, because I am not comfortable with ordinary corporate practice and had no better practice to substitute. What bothers me about ordinary corporate practice is the way gifts tend to be made based more on who does the Conventionality often overpowers rationality. asking and how corporate peers are responding than on an objective evaluation of the donee's activities. "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 manager, who usually is heavily influenced by specific social pressures on him. 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 interests in a tax-deductible manner reside largely at the corporate level rather than in our own hands. charitable preferences are as good as mine and, for both you and me, funds available to foster charitable larger public companies. If you and I each owned 50% of a corporation, our charitable decision making "Under such circumstances, I believe Berkshire should imitate more closely-held companies, not claim on our available charitable funds. Any balance available after the "operations-related' contributions would be simple. Charities very directly related to the operations of the business would have first to our ownership interest. If the manager of our company had some suggestions, we would listen would be divided among various charitable interests of the two of us, on a basis roughly proportional business we probably would behave as if we were a partnership. carefully - but the final decision would be ours. Despite our corporate form, in this aspect of the operate through a large, fairly widely-held corporation. Our Treasury ruling will allow such partnership- "Wherever feasible, I believe in maintaining such a partnership frame of mind, even though we like behavior in this area... 54

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long-term owner's perspective ... end of each year more than 98% of our shares are owned by people who were shareholders at the "Our own shareholders are a different breed. As 1 mentioned in the 1979 annual report, at the as your manager, 1 intend to acknowledge in all feasible ways. The designated contributions policy beginning of the year. This long-term commitment to the business reflects an owner mentality which, is an example of that intent."

• *

* The history of contributions made pursuant to this program since its inception follows: Percent of Specified Amount Eligible* Shares Amount Year per Share Participating_ Contributed No. of 1,783,655 Charities 1981 $2 95.6% 1982 $1 95.8% 3,066,501 890.948 704 675 1983 1984 $3 $3 97.2% 96.4% 4,006,260 3,179.049 1,519 1,353 1985 S4 96.8% 1986 S4 97.1% 4,937,574 3,996,820 1,934 1,724 1987 $5 97.2% 2,050 *Shares registered in street name are not eligible to participate. ubsidiaries made certain contributions pursuant to local level decisions of operating managers of th In addition to the shareholder-designated contributions summarized above, Berkshire and it businesses.

• *

* 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 you may designate. A reply form will accompany the notice, and you will be given about six weeks replies received after that deadline are not processed.

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

Shareholders should also note the fact that shares held in street name are not eligible to participate in the program. To qualify, your shares must be registered in your own name or the name of an 3oth, or the Friday preceding if such date falls on a Saturday or Sunday. owning trust, corporation, partnership or estate, if applicable, on our stockholder list of September 55

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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 CHARLES T. MuNGer, Director and Vice Chairman of the Board KENNETH V. CHACE, Director Retired, Former Chief Operating Officer of the Textile Operations MALCOLM G. CHACE, JR., Director Retired, Former Chairman of the Board of Directors J. VERNE MCKENZIE, Director Vice President and Secretary ROBERT H. BIRD, Vice President MICHAEL A. GOLDBERG, Vice President MARC D. HAMBURG, Treasurer DANIEL J. JAKSICH. Controller J. WILLIAM SCOTT. Vice President GENERAL COUNSEL STEVEN T. ATKINS COMMON STOCK DATA Stock Transfer Agent the Company's common stock. Certificates to be transferred should be mailed directly to the Transfer The First National Bank of Boston. P.O. Box 644. Boston. MA 02102 serves as Transfer Agent for Agent, preferably by registered mail. Certificates to be transferred should not be mailed to the Company. Shareholders The Company had approximately 4,900 record holders of its common stock at March 5, 1988. Market Prices the National Association of Securities Dealers Automated Quotation ("NASDAQ"/National Market The common stock of Berkshire Hathaway Inc. is traded in the over the counter market through ystem under the symbol BKHT. The following high and low selling prices for the shares during eac Association of Securities Dealers, Inc. uarter of 1987 and 1986 were taken from quotations provided to the Company by the Nationa 1987 First Quarter ........ S3.630 High Low 1986 High Low Third Quarter second Quarte 3.530 $2,800 Fourth Quarter 4.220 3.330 First Quarter .........$3.250 1.270 3.420 Second Quarter ..... $2,220 3,160 Dividends 2,550 Third Quarter ....... 3,100 2,525 2,640 Fourth Quarter ...... 2,925 2,620 Berkshire has not declared a cash dividend since 1967.

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

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BERKSHIRE HATHAWAY INC. 1440 Kiewit Plaza Omaha, Nebraska 68131 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MAY 23, 1988 To THE STOCKHOLDERS: Inc. will be held at the Witherspoon Auditorium, Joslyn Art Museum, 2200 Dodge Street, Notice is hereby given that the Annual Meeting of the Stockholders of Berkshire Hathaway Omaha, Nebraska, on Monday, May 23, 1988 at 9:30 o'clock in the forenoon for the following purposes:

1. To fix the number of directors at five and to elect directors.
2. To consider and act upon any other matters which may properly come before the

meeting or any adjournment or adjournments thereof. date for determining the stockholders having the right to vote at this meeting or any adjournment The Board of Directors has fixed the close of business on March 24, 1988 as the record for examination by any stockholder for any purpose germane to the meeting during ordinary or adjournments thereof. A list of stockholders entitled to vote at the meeting will be available business hours at 1401 Kiewit Plaza, Omaha, NE during the ten days prior to the meeting. Board of Directors of the Corporation and will be voted as indicated in the accompanying You are requested to date, sign and return the enclosed proxy which is solicited by the proxy statement and proxy. A return envelope is provided which requires no postage if mailed By order of the Board of Directors Omaha, Nebraska J. VERNE MCKENZIE, Secretary March 30, 1988 We hope that you will be able to attend this meeting in person, but if you cannot

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BERKSHIRE HATHAWAY INC. 1440 Kiewit Plaza Omaha, Nebraska 68131 PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS MAY 23, 1988 Hathaway Inc. (hereinafter "Berkshire" or the "Corporation") of proxies in the accompanying form for the This statement is furnished in connection with the solicitation by the Board of Directors of Berkshire adjournments thereof. Annual Meeting of the Stockholders to be held on Monday, May 23, 1988, and at any adjournment or This proxy statement and the enclosed form of proxy were first sent to stockholders on or about March 30, 1988. be revoked at any time prior to exercise by filing an instrument revoking it or a duly executed proxy If the form of proxy which is enclosed herewith is executed and returned as requested, it may nevertheless bearing a later date. Solicitation of proxies will be made solely by mail at the Corporation's expense. The Corporation will reimburse brokerage firms, banks, trustees and others for their actual out-of-pocket expenses in forwarding proxy material to the beneficial owners of its common stock. which on March 24, 1988, 228,541 shares were held by Berkshire as Treasury shares and 850 outstanding Issued common stock of the Corporation consists of 1,375,183 shares, par value $5 per share, of shares were held by the First National Bank of Boston as Agent for holders of unexchanged shares of Blue Chip Stamps. The remaining 1,145,792 outstanding shares are those eligible to be voted at this meeting. Holders of record thereof as of March 24, 1988 will be entitled to one vote per share. and withdraw their proxies or may allow their proxies to be voted with the similar proxies sent in by other Stockholders who send in proxies, but attend the meeting in person, may vote directly if they prefer

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1. ELECTION OF DIRECTORS At the meeting, the number of directors is to be fixed and a Board of Directors is to be elected, each director to hold office in accordance with the By-Laws until the next annual meeting of the stockholders, The By-Laws of the corporation provide that a board of not more than nine nor less than one director shall or special meeting of the stockholders held in place thereof, and until his successor is chosen and qualified be elected at the annual meeting of the stockholders, by such stockholders as have the right to vote at such election, and that the number of directors for each corporate year shall be fixed by vote at the meeting at which they are elected. in accordance with the directions indicated thereon, or if no direction is indicated the shares will be voted When the accompanying proxy is properly executed and returned, the shares it represents will be voted in favor of fixing the number of Directors at five and for the election of the five nominees identified below. The Corporation expects each of the nominees named below to be able to accept such nomination. If any nominee is unable to accept such nomination, proxies will be voted in favor of the remainder of those nominated and may be voted to fix the number of directors at such lesser number as will equal the number of nominees who are able to serve, or be voted for such substitute nominee as the present Board of Directors may designate. Certain information with respect to nominees for election as directors is contained in the following table: WARREN E. BUFFETT Mr. Buffett is 57 years old, has been a director of the Corporation since 1965 and has been its Chairman and Chief Executive Officer since 1970. Mr. Buffett is a controlling person of the Corporation. He is a director of Capital Cities/ ABC, Inc. which is engaged in television and radio broadcasting, publishing of newspapers and other publications, program distribution and programming for new video technologies. Also, Mr. Buffett is a director of Salomon Inc, a holding company whose operating units engage woridwide in diversified financial services including investment banking, commodities trading, and commercial financing. KENNETH V. CHACE since 1965. He was President of the Corporation and the chief operating officer Mr. Kenneth V. Chace is 71 years old. He has been a director of the Corporation these positions in 1984. of the textile division of the Corporation from 1965 until his retirement from MALCOLM G. CHACE, JR. the Corporation since 1943. He was formerly Chairman of the Board of Directors Mr. Malcolm G. Chace, Jr., age 84, a private investor, has been a director of of the Corporation. J. VERNE MCKENZIE Corporation and has been a director since 1973. Mr. McKenzie is 59 years old. He is Vice President and Secretary of the CHARLES T. MUNGER Mr. Munger, age 64, has been a director of the Corporation since 1978, serving since then as Vice-Chairman of the Corporation's Board of Directors. Mr. Munger imately 80%-owned by the Corporation. Wesco is engaged through subsidiaries is Chairman of the Board of Directors of Wesco Financial Corporation, approx- in the savings and loan business, in the insurance business, in the steel service center business, and in the manufacturing and distribution of tool-room specialty items. Mr. Munger is also Chairman of the Board of Directors of Daily Journal Corporation, a publisher of specialized newspapers in California. He is a director of Salomon Inc, a brief description of the businesses of which was included with information above with respect to Mr. Buffett. nominees and any other officer of the Corporation. There is no family relationship between any of the nominees for directors, nor between any of such DIRECTORS MEETINGS Directors' written consents to six actions. Except for one meeting at which neither Kenneth V. Chace nor During 1987, the Board of Directors met on three occasions. Additionally recorded in 1987 were Malcolm G. Chace, Jr. participated, all Directors participated in all actions. There are no standing committees of the Board of Directors. 2

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EXECUTIVE COMPENSATION to Executive Officers of the Corporation. The following table shows the cash compensation for 1987 paid by the Corporation or its subsidiaries or Number in Group Name of Individual Warren E. Buffett Chairman of the Board, Chief Executive Officer Capacities in Which Served Cash Compensation of Berkshire 100,275 Michael A. Goldberg Vice President of Berkshire J. Verne McKenzie 3,064,300 Secretary of Berkshire Vice President, Chief Financial Officer, and 255,825 Charles T. Munger Vice Chairman of the Board of Berkshire, Chairman of the Board of certain 102,500 All executive officers of Berkshire subsidiaries listed above Berkshire (4 persons, each $3,522,900 fees for attendance at directors meetings. Other directors receive a fee of $900 for each meeting attended Directors of the Corporation who are employees of the Corporation or its subsidiaries do not receive in person and $300 for participating in any meeting conducted by telephone connection. Directors are reimbursed for their out-of-pocket expenses incurred in attendance at meetings of directors or stockholders. Bonus Arrangement — Mr. Goldberg bonus compensation in addition to his regular base pay. For 1987, Mr. Goldberg earned bonus compensation The terms of Mr. Goldberg's employment with the Corporation provide that he may receive annual in the amount of $2,954,000. His bonus compensation is based upon results of certain operations of the (i) in large part by the level of underwriting profits, (i) in part by the level of investable funds generated Corporation's insurance subsidiaries for which he is responsible. The annual bonus, if any, is determined by the insurance operations, and (iii) in part by market interest rates at which such funds could hypothetically be invested. TERMINATION OF PENSION PLANS employees of the Corporation, including officers, meeting certain eligibility requirements. Under this plan The Company has terminated the non-contributory defined benefit pension plan which previously covered years of participation. Benefits under the plan ceased to accrue to employees on October 10, 1987, and in eligible employees accrued annual retirement benefits the amounts of which were based upon earnings during purchase annuities that will provide the accrued benefits. The following table sets forth information concerning January, 1988 assets of the Trust maintained to fund plan benefits were applied to the extent required to such annuities for the individuals listed in the cash compensation table above, other than Mr. Munger, who is discussed separately below. Cost of Annual Normal Retirement Name of Individual Annuity Benefit* Date Warren E. Buffett $ 68,716 $16,587 September 1, 1995 Michael A. Goldberg 19,801 15,852 May 1, 2011 J. Verne McKenzie 101,556 21,146 January 1, 1994

• The Annual Benefit is stated in terms of an annual amount payable in monthly installments commencins at nor re

retirement date and continuing for the lifetime of the annuitant. Optional forms of benefit of actuarial equivalence ure available to each person. covered by a Blue Chip Stamps non-contributory defined benefit pension plan. Blue Chip Stamps has also Mr. Munger is an employee of Blue Chip Stamps, a subsidiary of the Corporation. As such he was terminated its pension plan, allowing covered employees to elect whether to receive an annuity providing benefits. Pursuant to his election, Mr. Munger received a lump-sum payment of $101,062. retirement benefits under the plan, or to receive a lump-sum payment equal to the present value of the 3

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT is the only person known to the Corporation to be the beneficial owner of more than 5% of the Corporation's Warren E. Buffett, whose address is 1440 Kiewit Plaza, Omaha, NE 68131, a nominee for director, common stock as of March 5, 1988. Beneficial ownership of the Corporation's common stock on such date by Mr. Buffett and by other executive officers and directors of the Corporation is shown in the following Warren E. Butfett Name Amount and Nature of Percent of 1,147,000 479,342 shares — sole investment and voting power (1) Beneficial Ownership Shares Outstanding 37.004 shares - shared investment and voting power (2) 41.79 3.23 Kenneth V. Chace .276 shares — sole investment and voting power (3) .02 Malcolm G. Chace, Jr. .10.209 shares - sole investment and voting power (4) .89 Michael A. Goldberg .250 shares — sole investment and voting power .02 J. Verne McKenzie 200 shares - sole investment and voting power (5) .02 Charles T. Munger ...22.529 shares — sole investment and voting power (6) 50 shares — shared investment and voting power (7) 1.97 .00 All executive officers and cach listed above) .......512.806 shares - sole investment and voting power (8) directors as a group (6 persons. 44.71 37,054 shares - shared investment and voting power 3.23 (1) Includes 474.998 shares (41.41%) owned directly and beneficially by Mr. Buffett, and 4.344 shares (0.38%) owned by a trust of which Mr. Buffett is sole trustee but with respect to which Mr. Buffett disclaims any beneficial economic interest. (2) Owned by Susan T. Buffett, wife of Warren E. Buffet. (3) Does not include 431 shares (0.04%) owned by Jessie Chace, wife of Kenneth V. Chace. (4) An additional 2.707 shares (0.24%) are held in trusts in which Malcolm G. Chace, Jr. has a beneficial economic interest, but with respect to which Mr. Chace has no investment or voting power. (5) Does not include 175 shares (0.01%) owned by Janet McKenzie, wife of J. Verne McKenzie. (6) Includes 22,435 shares (1.96%) owned directly and beneficially by Mr. Munger, and 94 shares (0.01%) owned by a trust of which Mr. Munger is sole trustee but with respect to which Mr. Munger disclaims any beneficial economic interest. (7) Owned by a charitable foundation of which Mr. Munger is a Trustee. include shares enumerated in (3), (4) and (5) above, which aggregate 3,313 shares (0.29%). 4

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2. OTHER MATTERS the meeting which is not referred to in the accompanying notice, other than the approval of the minutes of As of the date of this statement your management knows of no business which will be presented to the last stockholders meeting, which action will not be construed as approval or disapproval of any of the matters referred to in such meeting, it is intended that proxies, properly executed and returned, unless authority is withheld on the minutes. As to other business, if any, which may properly come before the returned form of proxy, will be voted in respect thereof at the discretion of the persons voting the proxies. from Touche Ross & Co. will be present at the annual meeting of stockholders, will be given the opportunity Touche Ross & Co. served as the Corporation's independent public accountants for 1987. Representatives to make a statement if they so desire, and will be available to respond to any appropriate questions. The Directors to make such selection after mid-year. Corporation has not selected auditors for the current year, since its normal practice is for the Board of ANNUAL REPORT a part of the proxy soliciting material. The Annual Report to the Stockholders for 1987 accompanies this proxy statement, but is not deemed A copy of the 1987 Form 10-K report to the Securities and Exchange Commission, exeluding Secretary, Berkshire Hathaway Inc., 1440 Kiewit Plaza, Omaha, Nebraska 68131. Such requests must exhibits, will be mailed to stockholders without charge upon written request to: J. Verne McKenzie, beneficial owner of common stock of the Corporation on March 24, 1988. Exhibits to the Form 10-K set forth a good-faith representation that the requesting party was either a holder of record or a will be mailed upon similar request and payment of specified fees. PROPOSALS OF STOCKHOLDERS at the 1989 Annual Meeting must be received by the Corporation by December 1, 1988. The proposal must Any stockholder proposal intended to be considered for inclusion in the proxy statement for presentation under the Securities Exchange Act of 1934. It is suggested the proposal be submitted by certified mail - be in accordance with the provisions of Rule 14a-8 promulgated by the Securities and Exchange Commission return receipt requested. By order of the Board of Directors Omaha, Nebraska J. VERNE MCKENZIE, Secretary March 30, 1988 5

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BERKSHIRE HATHAWAY INC. OMAHA, NEBRASKA 08131 1440 KIEWIT PLAZA TELEPHONE (402) 046-1400 WARREN E. BUFFETT, CHAIRMAN August 5, 1988 To the Shareholders of Berkshire Hathaway Inc.: which we believe will be granted. who each own 100 shares or more. The purpose of this rule is to insure that NYSE-listed companies Up to now, the Exchange has required newly-listed companies to have a minimum of 2,000 shareholders to the trading unit ("round lot") for all common stocks now listed on the Exchange. enjoy the broad investor interest that facilitates an orderly market. The 100-share standard corresponds Because Berkshire has relatively few shares outstanding (1,146,642), it does not have the number of represents a significant investment commitment. In fact, ten Berkshire shares have a value greater than 100-share-or-more holders that the Exchange has required. A ten-share holding of Berkshire, however, trade in ten-share "round lots." that of 100 shares of any NYSE-listed stock. The Exchange, therefore, is willing to have Berkshire shares holders of 100 shares or more to one measured by holders of a round lot or more. Berkshire can easily The Exchange's proposed rule simply changes the 2,000 shareholder minimum from one measured by meet this amended test. Charlie Munger, Berkshire's Vice Chairman, believe this move will benefit our shareholders. We have two criteria by which we judge what mar- and I are delighted at the prospect of listing, since we rationally related to its intrinsic business value. If it does, the investment result achieved by each ketplace would be best for Berkshire stock. First, we hope for the stock to consistently trade at a price shareholder will approximate Berkshire's business result during his period of ownership. Such an outcome is far from automatic. Many stocks swing between levels of severe undervaluation and overvaluation. When this happens, owners are rewarded or penalized in a manner wildly at variance results. Our goal is to have our shareholder-partners profit from the achievements of the business rather with how the business has performed during their period of ownership. We want to avoid such capricious than from the foolish behavior of their co-owners. Consistently rational prices are produced by rational owners, both current and prospective. All of our policies and communications are designed to attract the business-oriented long-term owner and to filter in this attempt, and Berkshire shares have consistently sold in an unusually narrow range around out possible buyers whose focus is short-term and market-oriented. To date we have been successful intrinsic business value. We do not believe that a NYSE listing will improve or diminish Berkshire's a good result whatever the marketplace. prospects for consistently selling at an appropriate price; the quality of our shareholders will produce

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is important. Though we want to attract shareholders who will stay around for a long time, we also But we do believe that the listing will reduce transaction costs for Berkshire's shareholders - and that aggregate pre-tax rewards to our owners will equal the business gains achieved by the company less want to minimize the costs incurred by shareholders when they enter or exit. In the long run, the net realized spreads of market-makers. Overall, we believe these transaction costs will be reduced the transaction costs imposed by the marketplace - that is, commissions charged by brokers plus the materially by a NYSE listing. As we pointed out in the 1984 Annual Report, transaction costs are very heavy for active stocks, often om outers, albeit one based on individual decisions panchantease cos ana besta to the financial community rather than to Washington. Our policies and your investment attitude change chairs" and one that is paid companies. A NYSE listing should further reduce this cost for Berkshire's owners by narrowing the have reduced this "tax" on Berkshire owners to what we believe is the lowest level among large public market-maker's spread. elected in May, only Malcolm Chace, Jr. meets their test of independence. Under NYSE rules we must have at least two independent directors. Among the Board of Directors you Jr., CEO of Peter Kiewit Sons', Inc. has joined the Berkshire board. PKS is one of the remarkable business But from this deficiency comes a good result. Charlie and I are pleased to inform you that Walter Scott, that I'm not going to recite it for fear of stirring unrest among our shareholders. Throughout his lifetime, stories of our time. The company, which is employee-owned, has a long-term financial record so good Pete Kiewit ran the company as a strict meritocracy and it was in this tradition that he picked Walter to succeed him upon his death. Walter instinctively thinks like an owner and he will feel at home on One final comment: You should clearly understand that we are not seeking a NYSE listing for the sell, on the NYSE at prices similar to those it would have commanded in the over-the-counter market, purpose of achieving a higher valuation on Berkshire shares. Berkshire should sell, and we hope will given similar economic circumstances. The NYSE listing should not induce you to buy or sell; it simply should cut vour costs somewhat should you decide to do either. Warren E. Buffett Chairman of the Board