BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway Inc. Our gain in net worth during 1999 was $358 million, which increased the pershare book value of both our lass ! and lass " stock b# $%5&% Over the last 35 #ears 'that is, since present management took over( per-share book value has grown from $19 to $3),98), a rate of *+%$& compounded annuall#%,

, !ll figures used in this report appl# to "erkshire-s ! shares, the successor to the onl# stock that the compan# had outstanding before 199.% /he " shares have an economic interest e0ual to 113$th that of the !%

/he numbers on the facing page show 2ust how poor our 1999 record was% 3e had the worst absolute performance of m# tenure and, compared to the 456, the worst relative performance as well% 7elative results are what concern us8 Over time, bad relative numbers will produce unsatisfactor# absolute results% 9ven :nspector louseau could find last #ear-s guilt# part#8 #our hairman% ;# performance reminds me of the 0uarterback whose report card showed four <s and a = but who nonetheless had an understanding coach% >4on,> he drawled, >: think #ou-re spending too much time on that one sub2ect%> ;# >one sub2ect> is capital allocation, and m# grade for 1999 most assuredl# is a =% 3hat most hurt us during the #ear was the inferior performance of "erkshire-s e0uit# portfolio -- and responsibilit# for that portfolio, leaving aside the small piece of it run b# ?ou 4impson of @9: O, is entirel# mine% 4everal of our largest investees badl# lagged the market in 1999 because the#-ve had disappointing operating results% 3e still like these businesses and are content to have ma2or investments in them% "ut their stumbles damaged our performance last #ear, and it-s no sure thing that the# will 0uickl# regain their stride% /he fallout from our weak results in 1999 was a more-than-commensurate drop in our stock price% :n 1998, to go back a bit, the stock outperformed the business% ?ast #ear the business did much better than the stock, a divergence that has continued to the date of this letter% Over time, of course, the performance of the stock must roughl# match the performance of the business% =espite our poor showing last #ear, harlie ;unger, "erkshire-s Aice hairman and m# partner, and : eBpect that the gain in "erkshire-s intrinsic value over the neBt decade will modestl# eBceed the gain from owning the 456% 3e can-t guarantee that, of course% "ut we are willing to back our conviction with our own mone#% /o repeat a fact #ou-ve heard before, well over 99& of m# net worth resides in "erkshire% Ceither m# wife nor : have ever sold a share of "erkshire and -- unless our checks stop

clearing -- we have no intention of doing so% 6lease note that : spoke of hoping to beat the 456 >modestl#%> <or "erkshire, trul# large superiorities over that indeB are a thing of the past% /he# eBisted then because we could bu# both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us toda#% Our optimism about "erkshire-s performance is also tempered b# the eBpectation -- indeed, in our minds, the virtual certaint# -- that the 456 will do far less well in the neBt decade or two than it has done since 198*% ! recent article in <ortune eBpressed m# views as to wh# this is inevitable, and :-m enclosing a cop# with this report% Our goal is to run our present businesses well -- a task made eas# because of the outstanding managers we have in place -- and to ac0uire additional businesses having economic characteristics and managers comparable to those we alread# own% 3e made important progress in this respect during 1999 b# ac0uiring Dordan-s <urniture and contracting to bu# a ma2or portion of ;id!merican 9nerg#% 3e will talk more about these companies later in the report but let me emphasiEe one point here8 3e bought both for cash, issuing no "erkshire shares% =eals of that kind aren-t alwa#s possible, but that is the method of ac0uisition that harlie and : vastl# prefer% !"ides to Intrinsic #al"e : often talk in these pages about intrinsic value, a ke#, though far from precise, measurement we utiliEe in our ac0uisitions of businesses and common stocks% '<or an eBtensive discussion of this, and other investment and accounting terms and concepts, please refer to our Owner-s ;anual on pages 55 - .*% :ntrinsic value is discussed on page .$%( :n our last four reports, we have furnished #ou a table that we regard as useful in estimating "erkshire-s intrinsic value% :n the updated version of that table, which follows, we trace two ke# components of value% /he first column lists our per-share ownership of investments 'including cash and e0uivalents but eBcluding assets held in our financial products operation( and the second column shows our per-share earnings from "erkshire-s operating businesses before taBes and purchase-accounting ad2ustments 'discussed on page .1(, but after all interest and corporate eBpenses% /he second column eBcludes all dividends, interest and capital gains that we realiEed from the investments presented in the first column% :n effect, the columns show how "erkshire would look if it were split into two parts, with one entit# holding our investments and the other operating all of our businesses and bearing all corporate costs% 6re-taB 9arnings '?oss( 6er 4hare

Fear 19.9 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 19)9 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

:nvestments 3ith !ll :ncome from :nvestments 6er 4hare 9Bcluded $ +5 5)) $ +%39 13%$) 1$8%8. '+58%55(

1989 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 1999 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% ),*$$ +),339

Gere are the growth rates of the two segments b# decade8 6re-taB 9arnings 6er 4hare :nvestments 3ith !ll :ncome from 6er 4hare :nvestments 9Bcluded %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *9%$& 11%5& %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *8%)& *3%.& %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *$%)& C%!%

=ecade 9nding 19)9 1989 1999

!nnual @rowth 7ate, 19.9*5%+& C%!% 1999 %%%%%%%%%%%%%%%%% :n 1999, our per-share investments changed ver# little, but our operating earnings, affected b# negatives that overwhelmed some strong positives, fell apart% ;ost of our operating managers deserve a grade of ! for delivering fine results and for having widened the difference between the intrinsic value of their businesses and the value at which these are carried on our balance sheet% "ut, offsetting this, we had a huge -and, : believe, aberrational -- underwriting loss at @eneral 7e% !dditionall#, @9: O-s underwriting profit fell, as we had predicted it would% @9: O-s overall performance, though, was terrific, outstripping m# ambitious goals% 3e do not eBpect our underwriting earnings to improve in an# dramatic wa# this #ear% /hough @9: O-s intrinsic value should grow b# a highl# satisf#ing amount, its underwriting performance is almost certain to weaken% /hat-s because auto insurers, as a group, will do worse in *$$$, and because we will materiall# increase our marketing eBpenditures% !t @eneral 7e, we are raising rates and, if there is no megacatastrophe in *$$$, the compan#-s underwriting loss should fall considerabl#% :t takes some time, however, for the full effect of rate increases to kick in, and @eneral 7e is therefore likel# to have another unsatisfactor# underwriting #ear%

Fou should be aware that one item regularl# working to widen the amount b# which intrinsic value eBceeds book value is the annual charge against income we take for amortiEation of goodwill -- an amount now running about $5$$ million% /his charge reduces the amount of goodwill we show as an asset and likewise the amount that is included in our book value% /his is an accounting matter having nothing to do with true economic goodwill, which increases in most #ears% "ut even if economic goodwill were to remain constant, the annual amortiEation charge would persistentl# widen the gap between intrinsic value and book value% /hough we can-t give #ou a precise figure for "erkshire-s intrinsic value, or even an approBimation, harlie and : can assure #ou that it far eBceeds our $5)%8 billion book value% "usinesses such as 4ee-s and "uffalo Cews are now worth fifteen to twent# times the value at which the# are carried on our books% Our goal is to continuall# widen this spread at all subsidiaries% A $ana%erial Story Yo" Will Ne&er Read Elsewhere "erkshire-s collection of managers is unusual in several important wa#s% !s one eBample, a ver# high percentage of these men and women are independentl# wealth#, having made fortunes in the businesses that the# run% /he# work neither because the# need the mone# nor because the# are contractuall# obligated to -- we have no contracts at "erkshire% 7ather, the# work long and hard because the# love their businesses% !nd : use the word >their> advisedl#, since these managers are trul# in charge -- there are no show-and-tell presentations in Omaha, no budgets to be approved b# head0uarters, no dictums issued about capital eBpenditures% 3e simpl# ask our managers to run their companies as if these are the sole asset of their families and will remain so for the neBt centur#% harlie and : tr# to behave with our managers 2ust as we attempt to behave with "erkshire-s shareholders, treating both groups as we would wish to be treated if our positions were reversed% /hough >working> means nothing to me financiall#, : love doing it at "erkshire for some simple reasons8 :t gives me a sense of achievement, a freedom to act as : see fit and an opportunit# to interact dail# with people : like and trust% 3h# should our managers -- accomplished artists at what the# do -- see things differentl#H :n their relations with "erkshire, our managers often appear to be hewing to 6resident Ienned#-s charge, >!sk not what #our countr# can do for #ouJ ask what #ou can do for #our countr#%> Gere-s a remarkable stor# from last #ear8 :t-s about 7% % 3ille#, Ktah-s dominant home furnishing business, which "erkshire purchased from "ill hild and his famil# in 1995% "ill and most of his managers are ;ormons, and for this reason 7% % 3ille#-s stores have never operated on 4unda#% /his is a difficult wa# to do business8 4unda# is the favorite shopping da# for man# customers% "ill, nonetheless, stuck to his principles -- and while doing so built his business from

$*5$,$$$ of annual sales in 195+, when he took over, to $3+* million in 1999% "ill felt that 7% % 3ille# could operate successfull# in markets outside of Ktah and in 199) suggested that we open a store in "oise% : was highl# skeptical about taking a no-4unda# polic# into a new territor# where we would be up against entrenched rivals open seven da#s a week% Cevertheless, this was "ill-s business to run% 4o, despite m# reservations, : told him to follow both his business 2udgment and his religious convictions% "ill then insisted on a trul# eBtraordinar# proposition8 Ge would personall# bu# the land and build the store -- for about $9 million as it turned out -- and would sell it to us at his cost if it proved to be successful% On the other hand, if sales fell short of his eBpectations, we could eBit the business without pa#ing "ill a cent% /his outcome, of course, would leave him with a huge investment in an empt# building% : told him that : appreciated his offer but felt that if "erkshire was going to get the upside it should also take the downside% "ill said nothing doing8 :f there was to be failure because of his religious beliefs, he wanted to take the blow personall#% /he store opened last !ugust and immediatel# became a huge success% "ill thereupon turned the propert# over to us -- including some eBtra land that had appreciated significantl# -- and we wrote him a check for his cost% !nd get this8 Bill refused to take a dime of interest on the capital he had tied up over the two years% :f a manager has behaved similarl# at some other public corporation, : haven-t heard about it% Fou can understand wh# the opportunit# to partner with people like "ill hild causes me to tap dance to work ever# morning% ,,,,,,,,,,,, ! footnote8 !fter our >soft> opening in !ugust, we had a grand opening of the "oise store about a month later% Caturall#, : went there to cut the ribbon '#our hairman, : wish to emphasiEe, is good for something(% :n m# talk : told the crowd how sales had far eBceeded eBpectations, making us, b# a considerable margin, the largest home furnishings store in :daho% /hen, as the speech progressed, m# memor# miraculousl# began to improve% "# the end of m# talk, it all had come back to me8 Opening a store in "oise had been my idea% The Econo'ics of (ro)erty*Cas"alty Ins"rance Our main business -- though we have others of great importance -- is insurance% /o understand "erkshire, therefore, it is necessar# that #ou understand how to evaluate an insurance compan#% /he ke# determinants are8 '1( the amount of float that the business generatesJ '*( its costJ and '3( most critical of all, the long-term

outlook for both of these factors% /o begin with, float is mone# we hold but don-t own% :n an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes eBtends over man# #ears% =uring that time, the insurer invests the mone#% /his pleasant activit# t#picall# carries with it a downside8 /he premiums that an insurer takes in usuall# do not cover the losses and eBpenses it eventuall# must pa#% /hat leaves it running an >underwriting loss,> which is the cost of float% !n insurance business has value if its cost of float over time is less than the cost the compan# would otherwise incur to obtain funds% "ut the business is a lemon if its cost of float is higher than market rates for mone#% ! caution is appropriate here8 "ecause loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it ver# difficult for investors to calculate a compan#-s true cost of float% 9rrors of estimation, usuall# innocent but sometimes not, can be huge% /he conse0uences of these miscalculations flow directl# into earnings% !n eBperienced observer can usuall# detect large-scale errors in reserving, but the general public can t#picall# do no more than accept what-s presented, and at times : have been amaEed b# the numbers that big-name auditors have implicitl# blessed% :n 1999 a number of insurers announced reserve ad2ustments that made a mocker# of the >earnings> that investors had relied on earlier when making their bu# and sell decisions% !t "erkshire, we strive to be conservative and consistent in our reserving% 9ven so, we warn #ou that an unpleasant surprise is alwa#s possible% /he table that follows shows 'at intervals( the float generated b# the various segments of "erkshire-s insurance operations since we entered the business 33 #ears ago upon ac0uiring Cational :ndemnit# ompan# 'whose traditional lines are included in the segment >Other 6rimar#>(% <or the table we have calculated our float -- which we generate in large amounts relative to our premium volume -- b# adding net loss reserves, loss ad2ustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting agents balances, prepaid ac0uisition costs, prepaid taBes and deferred charges applicable to assumed reinsurance% '@ot thatH( Fearend <loat 'in $ millions( Other Other @eneral 7e 7einsurance 6rimar# *$ +$ 131 )$1 8$) +,$1+ +55

Fear 19.) 19)) 198) 199)

@9: O

*,91)

/otal *$ 1)1 1,5$8 ),38.

1998 3,1*5 1+,9$9 +,3$5 +15 **,)5+ 1999 3,+++ 15,1.. .,*85 +$3 *5,*98 @rowth of float is important -- but its cost is what-s vital% Over the #ears we have usuall# recorded onl# a small underwriting loss -- which means our cost of float was

correspondingl# low -- or actuall# had an underwriting profit, which means we were being paid for holding other people-s mone#% :ndeed, our cumulative result through 1998 was an underwriting profit% :n 1999, however, we incurred a $1%+ billion underwriting loss that left us with float cost of 5%8&% One mildl# mitigating factor8 3e enthusiasticall# welcomed $+$$ million of the loss because it stems from business that will deliver us eBceptional float over the neBt decade% /he balance of the loss, however, was decidedl# unwelcome, and our overall result must be 2udged eBtremel# poor% !bsent a mega-catastrophe, we eBpect float cost to fall in *$$$, but an# decline will be tempered b# our aggressive plans for @9: O, which we will discuss later% /here are a number of people who deserve credit for manufacturing so much >nocost> float over the #ears% <oremost is !2it Dain% :t-s simpl# impossible to overstate !2it-s value to "erkshire8 Ge has from scratch built an outstanding reinsurance business, which during his tenure has earned an underwriting profit and now holds $.%3 billion of float% :n !2it, we have an underwriter e0uipped with the intelligence to properl# rate most risksJ the realism to forget about those he can-t evaluateJ the courage to write huge policies when the premium is appropriateJ and the discipline to re2ect even the smallest risk when the premium is inade0uate% :t is rare to find a person possessing an# one of these talents% <or one person to have them all is remarkable% 4ince !2it specialiEes in super-cat reinsurance, a line in which losses are infre0uent but eBtremel# large when the# occur, his business is sure to be far more volatile than most insurance operations% /o date, we have benefitted from good luck on this volatile book% 9ven so, !2it-s achievements are trul# eBtraordinar#% :n a smaller but nevertheless important wa#, our >other primar#> insurance operation has also added to "erkshire-s intrinsic value% /his collection of insurers has delivered a $19* million underwriting profit over the past five #ears while suppl#ing us with the float shown in the table% :n the insurance world, results like this are uncommon, and for their feat we thank 7od 9ldred, "rad Iinstler, Dohn IiEer, =on /owle and =on 3urster% !s : mentioned earlier, the @eneral 7e operation had an eBceptionall# poor underwriting #ear in 1999 'though investment income left the compan# well in the black(% Our business was eBtremel# underpriced, both domesticall# and internationall#, a condition that is improving but not #et corrected% Over time, however, the compan# should develop a growing amount of low-cost float% !t both @eneral 7e and its ologne subsidiar#, incentive compensation plans are now directl# tied to the variables of float growth and cost of float, the same variables that determine value for owners% 9ven though a reinsurer ma# have a tightl# focused and rational compensation s#stem, it cannot count on ever# #ear coming up roses% 7einsurance is a highl# volatile business, and neither @eneral 7e nor !2it-s operation is immune to bad pricing behavior in the industr#% "ut @eneral 7e has the distribution, the underwriting skills, the culture, and -- with "erkshire-s backing -- the financial clout to become the world-s most profitable reinsurance compan#% @etting there will take time, energ# and

discipline, but we have no doubt that 7on <erguson and his crew can make it happen% !EIC+ ,-./00./12.2345 or !EIC+.co'6 @9: O made eBceptional progress in 1999% /he reasons are simple8 3e have a terrific business idea being implemented b# an eBtraordinar# manager, /on# Cicel#% 3hen "erkshire purchased @9: O at the beginning of 199., we handed the ke#s to /on# and asked him to run the operation eBactl# as if he owned 1$$& of it% Ge has done the rest% /ake a look at his scorecard8 Cew !uto !uto 6olicies Fears 6olicies'1('*( :n-<orce'1( 1993 3+.,88* *,$11,$55 199+ 38+,*1) *,1+),5+9 1995 ++3,539 *,31$,$3) 199. 59*,3$$ *,5+3,.99 199) 8.8,+3$ *,9+9,+39 1998 1,*+9,8)5 3,5.*,.++ 1999 1,.+8,$95 +,3*8,9$$
'1( '*(

>Aoluntar#> onl#J eBcludes assigned risks and the like% 7evised to eBclude policies moved from one @9: O compan# to another%

:n 1995, @9: O spent $33 million on marketing and had .5* telephone counselors% ?ast #ear the compan# spent $*+* million, and the counselor count grew to *,.31% !nd we are 2ust starting8 /he pace will step up materiall# in *$$$% :ndeed, we would happil# commit $1 billion annuall# to marketing if we knew we could handle the business smoothl# and if we eBpected the last dollar spent to produce new business at an attractive cost% urrentl# two trends are affecting ac0uisition costs% /he bad news is that it has become more eBpensive to develop in0uiries% ;edia rates have risen, and we are also seeing diminishing returns -- that is, as both we and our competitors step up advertising, in0uiries per ad fall for all of us% /hese negatives are partl# offset, however, b# the fact that our closure ratio -- the percentage of in0uiries converted to sales -- has steadil# improved% Overall, we believe that our cost of new business, though definitel# rising, is well below that of the industr#% Of even greater importance, our operating costs for renewal business are the lowest among broadbased national auto insurers% "oth of these ma2or competitive advantages are sustainable% Others ma# cop# our model, but the# will be unable to replicate our economics% /he table above makes it appear that @9: O-s retention of polic#holders is falling, but for two reasons appearances are in this case deceiving% <irst, in the last few #ears our business miB has moved awa# from >preferred> polic#holders, for whom

industr#wide retention rates are high, toward >standard> and >non-standard> polic#holders for whom retention rates are much lower% '=espite the nomenclature, the three classes have similar profit prospects%( 4econd, retention rates for relativel# new polic#holders are alwa#s lower than those for long-time customers -- and because of our accelerated growth, our polic#holder ranks now include an increased proportion of new customers% !d2usted for these two factors, our retention rate has changed hardl# at all% 3e told #ou last #ear that underwriting margins for both @9: O and the industr# would fall in 1999, and the# did% 3e make a similar prediction for *$$$% ! few #ears ago margins got too wide, having en2o#ed the effects of an unusual and uneBpected decrease in the fre0uenc# and severit# of accidents% /he industr# responded b# reducing rates -- but now is having to contend with an increase in loss costs% 3e would not be surprised to see the margins of auto insurers deteriorate b# around three percentage points in *$$$% /wo negatives besides worsening fre0uenc# and severit# will hurt the industr# this #ear% <irst, rate increases go into effect onl# slowl#, both because of regulator# dela# and because insurance contracts must run their course before new rates can be put in% 4econd, reported earnings of man# auto insurers have benefitted in the last few #ears from reserve releases, made possible because the companies overestimated their loss costs in still-earlier #ears% /his reservoir of redundant reserves has now largel# dried up, and future boosts to earnings from this source will be minor at best% :n compensating its associates -- from /on# on down -- @9: O continues to use two variables, and onl# two, in determining what bonuses and profit-sharing contributions will be8 1( its percentage growth in polic#holders and *( the earnings of its >seasoned> business, meaning policies that have been with us for more than a #ear% 3e did outstandingl# well on both fronts during 1999 and therefore made a profitsharing pa#ment of *8%+& of salar# 'in total, $113%3 million( to the great ma2orit# of our associates% /on# and : love writing those checks% !t "erkshire, we want to have compensation policies that are both eas# to understand and in s#nc with what we wish our associates to accomplish% 3riting new business is eBpensive 'and, as mentioned, getting more eBpensive(% :f we were to include those costs in our calculation of bonuses -- as managements did before our arrival at @9: O -- we would be penaliEing our associates for garnering new policies, even though these are ver# much in "erkshire-s interest% 4o, in effect, we sa# to our associates that we will foot the bill for new business% :ndeed, because percentage growth in polic#holders is part of our compensation scheme, we reward our associates for producing this initiall#-unprofitable business% !nd then we reward them additionall# for holding down costs on our seasoned business% =espite the eBtensive advertising we do, our best source of new business is wordof-mouth recommendations from eBisting polic#holders, who on the whole are pleased with our prices and service% !n article published last #ear b# Kiplinger's Personal Finance Magazine gives a good picture of where we stand in customer satisfaction8 /he magaEine-s surve# of *$ state insurance departments showed that

@9: O-s complaint ratio was well below the ratio for most of its ma2or competitors% Our strong referral business means that we probabl# could maintain our polic# count b# spending as little as $5$ million annuall# on advertising% /hat-s a guess, of course, and we will never know whether it is accurate because /on#-s foot is going to sta# on the advertising pedal 'and m# foot will be on his(% Cevertheless, : want to emphasiEe that a ma2or percentage of the $3$$-$35$ million we will spend in *$$$ on advertising, as well as large additional costs we will incur for sales counselors, communications and facilities, are optional outla#s we choose to make so that we can both achieve significant growth and eBtend and solidif# the promise of the @9: O brand in the minds of !mericans% 6ersonall#, : think these eBpenditures are the best investment "erkshire can make% /hrough its advertising, @9: O is ac0uiring a direct relationship with a huge number of households that, on average, will send us $1,1$$ #ear after #ear% /hat makes us -among all companies, selling whatever kind of product -- one of the countr#-s leading direct merchandisers% !lso, as we build our long-term relationships with more and more families, cash is pouring in rather than going out 'no :nternet economics here(% ?ast #ear, as @9: O increased its customer base b# )..,*5., it gained $59$ million of cash from operating earnings and the increase in float% :n the past three #ears, we have increased our market share in personal auto insurance from *%)& to +%1&% "ut we rightfull# belong in man# more households -ma#be even #ours% @ive us a call and find out% !bout +$& of those people checking our rates find that the# can save mone# b# doing business with us% /he proportion is not 1$$& because insurers differ in their underwriting 2udgments, with some giving more credit than we do to drivers who live in certain geographic areas or work at certain occupations% Our closure rate indicates, however, that we more fre0uentl# offer the low price than does an# other national carrier selling insurance to all comers% <urthermore, in +$ states we can offer a special discount -- usuall# 8& -- to our shareholders% Dust be sure to identif# #ourself as a "erkshire owner so that our sales counselor can make the appropriate ad2ustment% ,,,,,,,,,,,,

:t-s with sadness that : report to #ou that ?orimer =avidson, @9: O-s former hairman, died last Covember, a few da#s after his 9)th birthda#% <or @9: O, =av# was a business giant who moved the compan# up to the big leagues% <or me, he was a friend, teacher and hero% : have told #ou of his lifelong kindnesses to me in past reports% learl#, m# life would have developed far differentl# had he not been a part of it% /on#, ?ou 4impson and : visited =av# in !ugust and marveled at his mental alertness -- particularl# in all matters regarding @9: O% Ge was the compan#-s number one supporter right up to the end, and we will forever miss him% A&iation Ser&ices

Our two aviation services companies -- <light4afet# :nternational '><4:>( and 9Becutive Det !viation '>9D!>( -- are both runawa# leaders in their field% 9D!, which sells and manages the fractional ownership of 2et aircraft, through its CetDetsL program, is larger than its neBt two competitors combined% <4: trains pilots 'as well as other transportation professionals( and is five times or so the siEe of its nearest competitor% !nother common characteristic of the companies is that the# are still managed b# their founding entrepreneurs% !l Keltschi started <4: in 1951 with $1$,$$$, and 7ich 4antulli invented the fractional-ownership industr# in 198.% /hese men are both remarkable managers who have no financial need to work but thrive on helping their companies grow and eBcel% /hough these two businesses have leadership positions that are similar, the# differ in their economic characteristics% <4: must la# out huge amounts of capital% ! single flight simulator can cost as much as $15 million -- and we have ***% Onl# one person at a time, furthermore, can be trained in a simulator, which means that the capital investment per dollar of revenue at <4: is eBceptionall# high% Operating margins must therefore also be high, if we are to earn a reasonable return on capital% ?ast #ear we made capital eBpenditures of $*15 million at <4: and <light4afet# "oeing, its 5$&owned affiliate% !t 9D!, in contrast, the customer owns the e0uipment, though we, of course, must invest in a core fleet of our own planes to ensure outstanding service% <or eBample, the 4unda# after /hanksgiving, 9D!-s busiest da# of the #ear, strains our resources since fractions of 1.9 planes are owned b# 1,+1* customers, man# of whom are bent on fl#ing home between 3 and . p%m% On that da#, and certain others, we need a suppl# of compan#-owned aircraft to make sure all parties get where the# want, when the# want% 4till, most of the planes we fl# are owned b# customers, which means that modest pre-taB margins in this business can produce good returns on e0uit#% urrentl#, our customers own planes worth over $* billion, and in addition we have $+%* billion of planes on order% :ndeed, the limiting factor in our business right now is the availabilit# of planes% 3e now are taking deliver# of about 8& of all business 2ets manufactured in the world, and we wish we could get a bigger share than that% /hough 9D! was suppl#-constrained in 1999, its recurring revenues -- monthl# management fees plus hourl# flight fees -- increased +.&% /he fractional-ownership industr# is still in its infanc#% 9D! is now building critical mass in 9urope, and over time we will eBpand around the world% =oing that will be eBpensive -- ver# eBpensive -- but we will spend what it takes% 4cale is vital to both us and our customers8 /he compan# with the most planes in the air worldwide will be able to offer its customers the best service% >"u# a fraction, get a fleet> has real meaning at 9D!% 9D! en2o#s another important advantage in that its two largest competitors are

both subsidiaries of aircraft manufacturers and sell onl# the aircraft their parents make% /hough these are fine planes, these competitors are severel# limited in the cabin st#les and mission capabilities the# can offer% 9D!, in contrast, offers a wide arra# of planes from five suppliers% onse0uentl#, we can give the customer whatever he needs to bu# -- rather than his getting what the competitor-s parent needs to sell% ?ast #ear in this report, : described m# famil#-s delight with the one-0uarter '*$$ flight hours annuall#( of a Gawker 1$$$ that we had owned since 1995% : got so pumped up b# m# own prose that shortl# thereafter : signed up for one-siBteenth of a essna A Kltra as well% Cow m# annual outla#s at 9D! and "orsheim-s, combined, total ten times m# salar#% /hink of this as a rough guideline for #our own eBpenditures with us% =uring the past #ear, two of "erkshire-s outside directors have also signed on with 9D!% ';a#be we-re pa#ing them too much%( Fou should be aware that the# and : are charged eBactl# the same price for planes and service as is an# other customer8 9D! follows a >most favored nations> polic#, with no one getting a special deal% !nd now, brace #ourself% ?ast #ear, 9D! passed the ultimate test8 Charlie signed up. Co other endorsement could speak more elo0uentl# to the value of the 9D! service% @ive us a call at 1-8$$-8+8-.+3. and ask for our >white paper> on fractional ownership% Ac7"isitions of -888 !t both @9: O and 9Becutive Det, our best source of new customers is the happ# ones we alread# have% :ndeed, about .5& of our new owners of aircraft come as referrals from current owners who have fallen in love with the service% Our ac0uisitions usuall# develop in the same wa#% !t other companies, eBecutives ma# devote themselves to pursuing ac0uisition possibilities with investment bankers, utiliEing an auction process that has become standardiEed% :n this eBercise the bankers prepare a >book> that makes me think of the 4uperman comics of m# #outh% :n the 3all 4treet version, a formerl# mild-mannered compan# emerges from the investment banker-s phone booth able to leap over competitors in a single bound and with earnings moving faster than a speeding bullet% /itillated b# the book-s description of the ac0uiree-s powers, ac0uisition-hungr# 9Os -- ?ois ?anes all, beneath their cool eBteriors -- promptl# swoon% 3hat-s particularl# entertaining in these books is the precision with which earnings are pro2ected for man# #ears ahead% :f #ou ask the author-banker, however, what his own firm will earn ne t month, he will go into a protective crouch and tell #ou that business and markets are far too uncertain for him to venture a forecast% Gere-s one stor# : can-t resist relating8 :n 1985, a ma2or investment banking house undertook to sell 4cott <etEer, offering it widel# -- but with no success% Kpon reading of this strikeout, : wrote 7alph 4che#, then and now 4cott <etEer-s 9O, eBpressing

an interest in bu#ing the business% : had never met 7alph, but within a week we had a deal% Knfortunatel#, 4cott <etEer-s letter of engagement with the banking firm provided it a $*%5 million fee upon sale, even if it had nothing to do with finding the bu#er% : guess the lead banker felt he should do something for his pa#ment, so he graciousl# offered us a cop# of the book on 4cott <etEer that his firm had prepared% 3ith his customar# tact, harlie responded8 >:-ll pa# $*%5 million not to read it%> !t "erkshire, our carefull#-crafted ac0uisition strateg# is simpl# to wait for the phone to ring% Gappil#, it sometimes does so, usuall# because a manager who sold to us earlier has recommended to a friend that he think about following suit% 3hich brings us to the furniture business% /wo #ears ago : recounted how the ac0uisition of Cebraska <urniture ;art in 1983 and m# subse0uent association with the "lumkin famil# led to follow-on transactions with 7% % 3ille# '1995( and 4tar <urniture '199)(% <or me, these relationships have all been terrific% Cot onl# did "erkshire ac0uire three outstanding retailersJ these deals also allowed me to become friends with some of the finest people #ou will ever meet% Caturall#, : have persistentl# asked the "lumkins, "ill hild and ;elv#n 3olff whether there are an# more out there like #ou% /heir invariable answer was the /atelman brothers of Cew 9ngland and their remarkable furniture business, Dordan-s% : met "arr# and 9liot /atelman last #ear and we soon signed an agreement for "erkshire to ac0uire the compan#% ?ike our three previous furniture ac0uisitions, this business had long been in the famil# -- in this case since 19*), when "arr# and 9liot-s grandfather began operations in a "oston suburb% Knder the brothers- management, Dordan-s has grown ever more dominant in its region, becoming the largest furniture retailer in Cew Gampshire as well as ;assachusetts% /he /atelmans don-t 2ust sell furniture or manage stores% /he# also present customers with a daEEling entertainment eBperience called >shoppertainment%> ! famil# visiting a store can have a terrific time, while concurrentl# viewing an eBtraordinar# selection of merchandise% /he business results are also eBtraordinar#8 Dordan-s has the highest sales per s0uare foot of an# ma2or furniture operation in the countr#% : urge #ou to visit one of their stores if #ou are in the "oston area -particularl# the one at Catick, which is Dordan-s newest% "ring mone#% "arr# and 9liot are class# people -- 2ust like their counterparts at "erkshire-s three other furniture operations% 3hen the# sold to us, the# elected to give each of their emplo#ees at least 5$M for ever# hour that he or she had worked for Dordan-s% /his pa#ment added up to $9 million, which came from the /atelmans- own pockets, not from "erkshire-s% !nd "arr# and 9liot were thrilled to write the checks% 9ach of our furniture operations is number one in its territor#% 3e now sell more furniture than an#one else in ;assachusetts, Cew Gampshire, /eBas, Cebraska, Ktah and :daho% ?ast #ear 4tar-s ;elv#n 3olff and his sister, 4hirle# /oomim, scored two ma2or successes8 a move into 4an !ntonio and a significant enlargement of 4tar-s

store in !ustin% /here-s no operation in the furniture retailing business remotel# like the one assembled b# "erkshire% :t-s fun for me and profitable for #ou% 3% % <ields once said, >:t was a woman who drove me to drink, but unfortunatel# : never had the chance to thank her%> : don-t want to make that mistake% ;# thanks go to ?ouie, 7on and :rv "lumkin for getting me started in the furniture business and for unerringl# guiding me as we have assembled the group we now have% ,,,,,,,,,,,, Cow, for our second ac0uisition deal8 :t came to us through m# good friend, 3alter 4cott, Dr%, chairman of ?evel 3 ommunications and a director of "erkshire% 3alter has man# other business connections as well, and one of them is with ;id!merican 9nerg#, a utilit# compan# in which he has substantial holdings and on whose board he sits% !t a conference in alifornia that we both attended last 4eptember, 3alter casuall# asked me whether "erkshire might be interested in making a large investment in ;id!merican, and from the start the idea of being in partnership with 3alter struck me as a good one% Kpon returning to Omaha, : read some of ;id!merican-s public reports and had two short meetings with 3alter and =avid 4okol, ;id!merican-s talented and entrepreneurial 9O% : then said that, at an appropriate price, we would indeed like to make a deal% !c0uisitions in the electric utilit# industr# are complicated b# a variet# of regulations including the 6ublic Ktilit# Golding ompan# !ct of 1935% /herefore, we had to structure a transaction that would avoid "erkshire gaining voting control% :nstead we are purchasing an 11& fiBed-income securit#, along with a combination of common stock and eBchangeable preferred that will give "erkshire 2ust under 1$& of the voting power of ;id!merican but about ).& of the e0uit# interest% !ll told, our investment will be about $* billion% 3alter characteristicall# backed up his convictions with real mone#8 Ge and his famil# will bu# more ;id!merican stock for cash when the transaction closes, bringing their total investment to about $*8$ million% 3alter will also be the controlling shareholder of the compan#, and : can-t think of a better person to hold that post% /hough there are man# regulator# constraints in the utilit# industr#, it-s possible that we will make additional commitments in the field% :f we do, the amounts involved could be large% Ac7"isition Acco"ntin% Once again, : would like to make some comments about accounting, in this case about its application to ac0uisitions% /his is currentl# a ver# contentious topic and, before the dust settles, ongress ma# even intervene 'a trul# terrible idea(%

3hen a compan# is ac0uired, generall# accepted accounting principles '>@!!6>( currentl# condone two ver# different wa#s of recording the transaction8 >purchase> and >pooling%> :n a pooling, stock must be the currenc#J in a purchase, pa#ment can be made in either cash or stock% 3hatever the currenc#, managements usuall# detest purchase accounting because it almost alwa#s re0uires that a >goodwill> account be established and subse0uentl# written off -- a process that saddles earnings with a large annual charge that normall# persists for decades% :n contrast, pooling avoids a goodwill account, which is wh# managements love it% Cow, the <inancial !ccounting 4tandards "oard '><!4">( has proposed an end to pooling, and man# 9Os are girding for battle% :t will be an important fight, so we-ll venture some opinions% /o begin with, we agree with the man# managers who argue that goodwill amortiEation charges are usuall# spurious% Fou-ll find m# thinking about this in the appendiB to our 1983 annual report, which is available on our website, and in the Owner-s ;anual on pages 55 - .*% <or accounting rules to mandate amortiEation that will, in the usual case, conflict with realit# is deepl# troublesome8 ;ost accounting charges relate to what-s going on, even if the# don-t precisel# measure it% !s an eBample, depreciation charges can-t with precision calibrate the decline in value that ph#sical assets suffer, but these charges do at least describe something that is trul# occurring8 6h#sical assets invariabl# deteriorate% orrespondingl#, obsolescence charges for inventories, bad debt charges for receivables and accruals for warranties are among the charges that reflect true costs% /he annual charges for these eBpenses can-t be eBactl# measured, but the necessit# for estimating them is obvious% :n contrast, economic goodwill does not, in man# cases, diminish% :ndeed, in a great man# instances -- perhaps most -- it actuall# grows in value over time% :n character, economic goodwill is much like land8 /he value of both assets is sure to fluctuate, but the direction in which value is going to go is in no wa# ordained% !t 4ee-s, for eBample, economic goodwill has grown, in an irregular but ver# substantial manner, for )8 #ears% !nd, if we run the business right, growth of that kind will probabl# continue for at least another )8 #ears% /o escape from the fiction of goodwill charges, managers embrace the fiction of pooling% /his accounting convention is grounded in the poetic notion that when two rivers merge their streams become indistinguishable% Knder this concept, a compan# that has been merged into a larger enterprise has not been >purchased> 'even though it will often have received a large >sell-out> premium(% onse0uentl#, no goodwill is created, and those pesk# subse0uent charges to earnings are eliminated% :nstead, the accounting for the ongoing entit# is handled as if the businesses had forever been one unit% 4o much for poetr#% /he realit# of merging is usuall# far different8 /here is indisputabl# an ac0uirer and an ac0uiree, and the latter has been >purchased,> no matter how the deal has been structured% :f #ou think otherwise, 2ust ask emplo#ees severed from their 2obs which compan# was the con0ueror and which was the con0uered% Fou will find no confusion% 4o on this point the <!4" is correct8 :n most mergers, a purchase has been made% Fes, there are some true >mergers of e0uals,> but

the# are few and far between% harlie and : believe there-s a realit#-based approach that should both satisf# the <!4", which correctl# wishes to record a purchase, and meet the ob2ections of managements to nonsensical charges for diminution of goodwill% 3e would first have the ac0uiring compan# record its purchase price -- whether paid in stock or cash -- at fair value% :n most cases, this procedure would create a large asset representing economic goodwill% 3e would then leave this asset on the books, not re0uiring its amortiEation% ?ater, if the economic goodwill became impaired, as it sometimes would, it would be written down 2ust as would an# other asset 2udged to be impaired% :f our proposed rule were to be adopted, it should be applied retroactivel# so that ac0uisition accounting would be consistent throughout !merica -- a far cr# from what eBists toda#% One prediction8 :f this plan were to take effect, managements would structure ac0uisitions more sensibl#, deciding whether to use cash or stock based on the real conse0uences for their shareholders rather than on the unreal conse0uences for their reported earnings% ,,,,,,,,,,,, :n our purchase of Dordan-s, we followed a procedure that will maBimiEe the cash produced for our shareholders but minimiEe the earnings we report to #ou% "erkshire purchased assets for cash, an approach that on our taB returns permits us to amortiEe the resulting goodwill over a 15-#ear period% Obviousl#, this taB deduction materiall# increases the amount of cash delivered b# the business% :n contrast, when stock, rather than assets, is purchased for cash, the resulting writeoffs of goodwill are not taBdeductible% /he economic difference between these two approaches is substantial% <rom the economic standpoint of the ac0uiring compan#, the worst deal of all is a stock-for-stock ac0uisition% Gere, a huge price is often paid without there being an# step-up in the taB basis of either the stock of the ac0uiree or its assets% :f the ac0uired entit# is subse0uentl# sold, its owner ma# owe a large capital gains taB 'at a 35& or greater rate(, even though the sale ma# trul# be producing a ma2or economic loss% 3e have made some deals at "erkshire that used far-from-optimal taB structures% /hese deals occurred because the sellers insisted on a given structure and because, overall, we still felt the ac0uisition made sense% 3e have never done an inefficientl#structured deal, however, in order to make our figures look better% So"rces of Re)orted Earnin%s /he table that follows shows the main sources of "erkshire-s reported earnings% :n this presentation, purchase-accounting ad2ustments are not assigned to the specific businesses to which the# appl#, but are instead aggregated and shown separatel#% /his procedure lets #ou view the earnings of our businesses as the# would have been reported had we not purchased them% <or the reasons discussed on page .1, this form

of presentation seems to us to be more useful to investors and managers than one utiliEing generall# accepted accounting principles '@!!6(, which re0uire purchasepremiums to be charged off business-b#-business% /he total earnings we show in the table are, of course, identical to the @!!6 total in our audited financial statements% !in millions" Berkshire's #hare of $et %arnings !after ta es and Pre&'a %arnings minority interests" ())) ())* ())) ())* Operating 9arnings8 :nsurance @roup8 Knderwriting -$'1,++$( 7einsurance %%%%%%%%%%%%%%%%%%%% Knderwriting -*+ @9: O %%%%%%%%%%%%%%%%%%%%%%%%%% Knderwriting -- Other ** 6rimar# %%%%%%%%%%%%%%%%% Cet :nvestment *,+8* :ncome %%%%%%%%%%%%%%%%%%%%%%%%%%%% "uffalo 55 Cews %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% <inance and <inancial 6roducts 1*5 "usinesses <light **5 4ervices %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% Gome )9 '*( <urnishings %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% :nternational =air# 5. Nueen %%%%%%%%%%%%%%%%%%%%%%%% Dewelr# %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 51 %%%%% 4cott <etEer 'eBcluding finance 1+) operation( 4ee-s )+ andies %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 4hoe 1) @roup %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 6urchase-!ccounting ')39( !d2ustments %%%%%%%%% :nterest 9Bpense '1$9( '3( %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 4hareholder-=esignated '1)( ontributions %%%%

$'*1( *.9 1) 9)+ 53 *$5 181 )* 58 39 13) .* 33 '1*3( '1$$( '1)(

'1(

$'9*)( 1. 1+ 1,).+ 3+ 8. 13* +. 35 31 9* +. 11 '.+8( ')$( '11(

'*(

$'1+( 1)5 1$ )31 3* 133 11$ +1 35 *3 85 +$ *3 '118( '.3( '11(

'1(

Other %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 33 %%%%% Operating 1,$85 9arnings %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% apital @ains from 1,3.5 :nvestments %%%%%%%%%%%%%%%%% /otal 9arnings - !ll $*,+5$ 9ntities %%%%%%%%%%%%%%%%%%%%%%% OOOOO
!("

.$ 1,899 *,+15 $+,31+ OOOOO

'+(

*$ .)1 88. $1,55) OOOOO

+5 1,*)) 1,553 $ *,83$ OOOOO

'+(

+ncludes % ecutive ,et from -ugust ./ ())*.

!1"

!0"

% cludes interest e pense of Finance Businesses.

!3"

+ncludes ,ordan's Furniture from $ovem2er (0/ ())).

+ncludes 4eneral 5e operations for ten days in ())*.

!lmost all of our manufacturing, retailing and service businesses had eBcellent results in 1999% /he eBception was =eBter 4hoe, and there the shortfall did not occur because of managerial problems8 :n skills, energ# and devotion to their work, the =eBter eBecutives are ever# bit the e0ual of our other managers% "ut we manufacture shoes primaril# in the K%4%, and it has become eBtremel# difficult for domestic producers to compete effectivel#% :n 1999, approBimatel# 93& of the 1%3 billion pairs of shoes purchased in this countr# came from abroad, where eBtremel# low-cost labor is the rule% ounting both =eBter and G% G% "rown, we are currentl# the leading domestic manufacturer of shoes, and we are likel# to continue to be% 3e have lo#al, highl#skilled workers in our K%4% plants, and we want to retain ever# 2ob here that we can% Cevertheless, in order to remain viable, we are sourcing more of our output internationall#% :n doing that, we have incurred significant severance and relocation costs that are included in the earnings we show in the table% ! few #ears back, GelEberg-s, our *$$-store 2ewelr# operation, needed to make operating ad2ustments to restore margins to appropriate levels% Knder Deff omment-s leadership, the 2ob was done and profits have dramaticall# rebounded% :n the shoe business, where we have Garold !lfond, 6eter ?under, <rank 7oone# and Dim :ssler in charge, : believe we will see a similar improvement over the neBt few #ears% 4ee-s andies deserves a special comment, given that it achieved a record operating margin of *+& last #ear% 4ince we bought 4ee-s for $*5 million in 19)*, it has earned $85) million pre-taB% !nd, despite its growth, the business has re0uired ver# little additional capital% @ive the credit for this performance to huck Guggins% harlie and : put him in charge the da# of our purchase, and his fanatical insistence on both product 0ualit# and friendl# service has rewarded customers, emplo#ees and owners% huck gets better ever# #ear% 3hen he took charge of 4ee-s at age +., the

compan#-s pre-taB profit, eBpressed in millions, was about 1$& of his age% /oda# he-s )+, and the ratio has increased to 1$$&% Gaving discovered this mathematical relationship -- let-s call it Guggins- ?aw -- harlie and : now become gidd# at the mere thought of huck-s birthda#% ,,,,,,,,,,,, !dditional information about our various businesses is given on pages 39 - 5+, where #ou will also find our segment earnings reported on a @!!6 basis% :n addition, on pages .3 - .9, we have rearranged "erkshire-s financial data into four segments on a non-@!!6 basis, a presentation that corresponds to the wa# harlie and : think about the compan#% 9ook.Thro"%h Earnin%s 7eported earnings are an inade0uate measure of economic progress at "erkshire, in part because the numbers shown in the table presented earlier include onl# the dividends we receive from investees -- though these dividends t#picall# represent onl# a small fraction of the earnings attributable to our ownership% Cot that we mind this division of mone#, since on balance we regard the undistributed earnings of investees as more valuable to us than the portion paid out% /he reason for our thinking is simple8 Our investees often have the opportunit# to reinvest earnings at high rates of return% 4o wh# should we want them paid outH /o depict something closer to economic realit# at "erkshire than reported earnings, though, we emplo# the concept of >look-through> earnings% !s we calculate these, the# consist of8 '1( the operating earnings reported in the previous section, plusJ '*( our share of the retained operating earnings of ma2or investees that, under @!!6 accounting, are not reflected in our profits, lessJ '3( an allowance for the taB that would be paid b# "erkshire if these retained earnings of investees had instead been distributed to us% 3hen tabulating >operating earnings> here, we eBclude purchaseaccounting ad2ustments as well as capital gains and other ma2or non-recurring items% /he following table sets forth our 1999 look-through earnings, though : warn #ou that the figures can be no more than approBimate, since the# are based on a number of 2udgment calls% '/he dividends paid to us b# these investees have been included in the operating earnings itemiEed on page 13, mostl# under >:nsurance @roup8 Cet :nvestment :ncome%>(

"erkshire-s ;a2or :nvestees

"erkshire-s !pproBimate Ownership at Fearend'1(

"erkshire-s 4hare of Kndistributed Operating 9arnings 'in millions('*(

!merican 9Bpress ompan# %%%%%%%%%%% /he oca- ola ompan# %%%%%%%%%%%%%%% <reddie ;ac %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% /he @illette ompan# %%%%%%%%%%%%%%%%%%%% ;5/ "ank %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% /he 3ashington 6ost ompan# %%%%% 3ells <argo 5 ompan# %%%%%%%%%%%%%%%

11%3& 8%1& 8%.& 9%$& .%5& 18%3& 3%.&

$**8 1++ 1*) 53 1) 3$ 1$8

"erkshire-s share of undistributed earnings of ma2or investees G#pothetical taB on these undistributed investee earnings'3( 7eported operating earnings of "erkshire /otal look-through earnings of "erkshire

)$) '99( 1,318 $ 1,9*. OOOOO

'1( =oes not include shares allocable to minorit# interests '*( alculated on average ownership for the #ear '3( /he taB rate used is 1+&, which is the rate "erkshire pa#s on the dividends it receives In&est'ents "elow we present our common stock investments% /hose that had a market value of more than $)5$ million at the end of 1999 are itemiEed% (160(6)) Cost7 ;arket !dollars in millions" $1,+)$ $ 8,+$* 1,*99 11,.5$ *9+ *,8$3 .$$ 3,95+ 11 9.$ 3+9 *,391 +,18$ .,8+8

#hares Company

5$,53.,9$$ *$$,$$$,$$$ 59,559,3$$ 9.,$$$,$$$ 1,)*),).5 59,13.,.8$

!merican 9Bpress ompan# %%%%%%% /he oca- ola ompan# %%%%%%%% <reddie ;ac %%%%%%%%%%%%%%%% /he @illette ompan# %%%%%%%%%% /he 3ashington 6ost ompan# %%%%%%% 3ells <argo 5 ompan# %%%%%%%% Others %%%%%%%%%%%%%%%%%%%%%%

$8,*$3 $3),$$8 OOOOO OOOOOO , 7epresents taB-basis cost which, in aggregate, is $.91 million less than @!!6 cost% 3e made few portfolio changes in 1999% !s : mentioned earlier, several of the companies in which we have large investments had disappointing business results last #ear% Cevertheless, we believe these companies have important competitive advantages that will endure over time% /his attribute, which makes for good long-term investment results, is one harlie and : occasionall# believe we can identif#% ;ore often, however, we can-t -- not at least with a high degree of conviction% /his eBplains, b# the wa#, wh# we don-t own stocks of tech companies, even though we share the general view that our societ# will be transformed b# their products and services% Our problem -- which we can-t solve b# stud#ing up -- is that we have no insights into which participants in the tech field possess a trul# dura2le competitive advantage% Our lack of tech insights, we should add, does not distress us% !fter all, there are a great man# business areas in which harlie and : have no special capital-allocation eBpertise% <or instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes or geological prospects% 4o we simpl# don-t get into 2udgments in those fields% :f we have a strength, it is in recogniEing when we are operating well within our circle of competence and when we are approaching the perimeter% 6redicting the longterm economics of companies that operate in fast-changing industries is simpl# far be#ond our perimeter% :f others claim predictive skill in those industries -- and seem to have their claims validated b# the behavior of the stock market -- we neither env# nor emulate them% :nstead, we 2ust stick with what we understand% :f we stra#, we will have done so inadvertentl#, not because we got restless and substituted hope for rationalit#% <ortunatel#, it-s almost certain there will be opportunities from time to time for "erkshire to do well within the circle we-ve staked out% 7ight now, the prices of the fine businesses we alread# own are 2ust not that attractive% :n other words, we feel much better about the businesses than their stocks% /hat-s wh# we haven-t added to our present holdings% Cevertheless, we haven-t #et scaled back our portfolio in a ma2or wa#8 :f the choice is between a 0uestionable business at a comfortable price or a comfortable business at a 0uestionable price, we much prefer the latter% 3hat reall# gets our attention, however, is a comfortable business at a comfortable price% Our reservations about the prices of securities we own appl# also to the general level of e0uit# prices% 3e have never attempted to forecast what the stock market is going to do in the neBt month or the neBt #ear, and we are not tr#ing to do that now% "ut, as : point out in the enclosed article, e0uit# investors currentl# seem wildl# optimistic in their eBpectations about future returns% 3e see the growth in corporate profits as being largel# tied to the business done in the countr# '@=6(, and we see @=6 growing at a real rate of about 3&% :n addition, we have h#pothesiEed *& inflation% harlie and : have no particular conviction about

/otal ommon 4tocks %%%%%%%%%%%%%

the accurac# of *&% Gowever, it-s the market-s view8 /reasur# :nflation-6rotected 4ecurities '/:64( #ield about two percentage points less than the standard treasur# bond, and if #ou believe inflation rates are going to be higher than that, #ou can profit b# simpl# bu#ing /:64 and shorting @overnments% :f profits do indeed grow along with @=6, at about a 5& rate, the valuation placed on !merican business is unlikel# to climb b# much more than that% !dd in something for dividends, and #ou emerge with returns from e0uities that are dramaticall# less than most investors have either eBperienced in the past or eBpect in the future% :f investor eBpectations become more realistic -- and the# almost certainl# will -- the market ad2ustment is apt to be severe, particularl# in sectors in which speculation has been concentrated% "erkshire will someda# have opportunities to deplo# ma2or amounts of cash in e0uit# markets -- we are confident of that% "ut, as the song goes, >3ho knows where or whenH> ;eanwhile, if an#one starts eBplaining to #ou what is going on in the trul#manic portions of this >enchanted> market, #ou might remember still another line of song8 ><ools give #ou reasons, wise men never tr#%> Share Re)"rchases 7ecentl#, a number of shareholders have suggested to us that "erkshire repurchase its shares% Ksuall# the re0uests were rationall# based, but a few leaned on spurious logic% /here is onl# one combination of facts that makes it advisable for a compan# to repurchase its shares8 <irst, the compan# has available funds -- cash plus sensible borrowing capacit# -- be#ond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservativel#-calculated% /o this we add a caveat8 4hareholders should have been supplied all the information the# need for estimating that value% Otherwise, insiders could take advantage of their uninformed partners and bu# out their interests at a fraction of true worth% 3e have, on rare occasions, seen that happen% Ksuall#, of course, chicaner# is emplo#ed to drive stock prices up, not down% /he business >needs> that : speak of are of two kinds8 <irst, eBpenditures that a compan# must make to maintain its competitive position 'e%g%, the remodeling of stores at GelEberg-s( and, second, optional outla#s, aimed at business growth, that management eBpects will produce more than a dollar of value for each dollar spent '7% % 3ille#-s eBpansion into :daho(% 3hen available funds eBceed needs of those kinds, a compan# with a growthoriented shareholder population can bu# new businesses or repurchase shares% :f a compan#-s stock is selling well below intrinsic value, repurchases usuall# make the most sense% :n the mid-19)$s, the wisdom of making these was virtuall# screaming at managements, but few responded% :n most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued% :ndeed, during

the 19)$s 'and, spasmodicall#, for some #ears thereafter( we searched for companies that were large repurchasers of their shares% /his often was a tipoff that the compan# was both undervalued and run b# a shareholder-oriented management% /hat da# is past% Cow, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason8 to pump or support the stock price% /he shareholder who chooses to sell toda#, of course, is benefitted b# an# bu#er, whatever his origin or motives% "ut the continuing shareholder is penaliEed b# repurchases above intrinsic value% "u#ing dollar bills for $1%1$ is not good business for those who stick around% harlie and : admit that we feel confident in estimating intrinsic value for onl# a portion of traded e0uities and then onl# when we emplo# a range of values, rather than some pseudo-precise figure% Cevertheless, it appears to us that man# companies now making repurchases are overpa#ing departing shareholders at the eBpense of those who sta#% :n defense of those companies, : would sa# that it is natural for 9Os to be optimistic about their own businesses% /he# also know a whole lot more about them than : do% Gowever, : can-t help but feel that too often toda#-s repurchases are dictated b# management-s desire to >show confidence> or be in fashion rather than b# a desire to enhance per-share value% 4ometimes, too, companies sa# the# are repurchasing shares to offset the shares issued when stock options granted at much lower prices are eBercised% /his >bu# high, sell low> strateg# is one man# unfortunate investors have emplo#ed -- but never intentionall#P ;anagements, however, seem to follow this perverse activit# ver# cheerfull#% Of course, both option grants and repurchases ma# make sense -- but if that-s the case, it-s not because the two activities are logicall# related% 7ationall#, a compan#-s decision to repurchase shares or to issue them should stand on its own feet% Dust because stock has been issued to satisf# options -- or for an# other reason -- does not mean that stock should be repurchased at a price above intrinsic value% orrespondingl#, a stock that sells well below intrinsic value should be repurchased whether or not stock has previousl# been issued 'or ma# be because of outstanding options(% Fou should be aware that, at certain times in the past, : have erred in not making repurchases% ;# appraisal of "erkshire-s value was then too conservative or : was too enthused about some alternative use of funds% 3e have therefore missed some opportunities -- though "erkshire-s trading volume at these points was too light for us to have done much bu#ing, which means that the gain in our per-share value would have been minimal% '! repurchase of, sa#, *& of a compan#-s shares at a *5& discount from per-share intrinsic value produces onl# a Q& gain in that value at most -- and even less if the funds could alternativel# have been deplo#ed in value-building moves%( 4ome of the letters we-ve received clearl# impl# that the writer is unconcerned about intrinsic value considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise 'or 0uit going down(% :f the writer wants to sell

tomorrow, his thinking makes sense -- for himP -- but if he intends to hold, he should instead hope the stock falls and trades in enough volume for us to bu# a lot of it% /hat-s the onl# wa# a repurchase program can have an# real benefit for a continuing shareholder% 3e will not repurchase shares unless we believe "erkshire stock is selling well below intrinsic value, conservativel# calculated% Cor will we attempt to talk the stock up or down% 'Ceither publicl# or privatel# have : ever told an#one to bu# or sell "erkshire shares%( :nstead we will give all shareholders -- and potential shareholders -- the same valuation-related information we would wish to have if our positions were reversed% 7ecentl#, when the ! shares fell below $+5,$$$, we considered making repurchases% 3e decided, however, to dela# bu#ing, if indeed we elect to do any, until shareholders have had the chance to review this report% :f we do find that repurchases make sense, we will onl# rarel# place bids on the Cew Fork 4tock 9Bchange '>CF49>(% :nstead, we will respond to offers made directl# to us at or below the CF49 bid% :f #ou wish to offer stock, have #our broker call ;ark ;illard at +$*-3+.1+$$% 3hen a trade occurs, the broker can either record it in the >third market> or on the CF49% 3e will favor purchase of the " shares if the# are selling at more than a *& discount to the !% 3e will not engage in transactions involving fewer than 1$ shares of ! or 5$ shares of "% 6lease be clear about one point8 3e will never make purchases with the intention of stemming a decline in "erkshire-s price% 7ather we will make them if and when we believe that the# represent an attractive use of the ompan#-s mone#% !t best, repurchases are likel# to have onl# a ver# minor effect on the future rate of gain in our stock-s intrinsic value% Shareholder.:esi%nated Contri;"tions !bout 9)%3& of all eligible shares participated in "erkshire-s 1999 shareholderdesignated contributions program, with contributions totaling $1)%* million% ! full description of the program appears on pages )$ - )1% umulativel#, over the 19 #ears of the program, "erkshire has made contributions of $1+) million pursuant to the instructions of our shareholders% /he rest of "erkshire-s giving is done b# our subsidiaries, which stick to the philanthropic patterns that prevailed before the# were ac0uired 'eBcept that their former owners themselves take on the responsibilit# for their personal charities(% :n aggregate, our subsidiaries made contributions of $13%8 million in 1999, including in-kind donations of $*%5 million% 'o participate in future programs/ you must own Class - shares that are registered in the name of the actual owner/ not the nominee name of a 2roker/ 2ank or depository. #hares not so registered on -ugust 0(/ 1888/ will 2e ineligi2le for the 1888 program. 9hen you get the contri2utions form from us/ return it promptly so that it does not get put aside or forgotten. :esignations received after the due date will not 2e honored.

The Ann"al $eetin% /his #ear-s 3oodstock 3eekend for apitalists will follow a format slightl# different from that of recent #ears% 3e need to make a change because the !ksarben oliseum, which served us well the past three #ears, is graduall# being closed down% /herefore, we are relocating to the ivic !uditorium 'which is on apitol !venue between 18th and 19th, behind the =oubletree Gotel(, the onl# other facilit# in Omaha offering the space we re0uire% /he ivic, however, is located in downtown Omaha, and we would create a parking and traffic nightmare if we were to meet there on a weekda#% 3e will, therefore, convene on 4aturda#, !pril *9, with the doors opening at ) a%m%, the movie beginning at 883$ and the meeting itself commencing at 983$% !s in the past, we will run until 383$ with a short break at noon for food, which will be available at the ivic-s concession stands% !n attachment to the proB# material that is enclosed with this report eBplains how #ou can obtain the credential #ou will need for admission to the meeting and other events% !s for plane, hotel and car reservations, we have again signed up !merican 9Bpress '8$$-)99-..3+( to give #ou special help% :n our normal fashion, we will run buses from the larger hotels to the meeting% !fter the meeting, the buses will make trips back to the hotels and to Cebraska <urniture ;art, "orsheim-s and the airport% 9ven so, #ou are likel# to find a car useful% 3e have scheduled the meeting in *$$* and *$$3 on the customar# first 4aturda# in ;a#% :n *$$1, however, the ivic is alread# booked on that 4aturda#, so we will meet on !pril *8% /he ivic should fit our needs well on an# weekend, since there will then be more than ample parking in nearb# lots and garages as well as on streets% 3e will also be able to greatl# enlarge the space we give eBhibitors% 4o, overcoming m# normal commercial reticence, : will see that #ou have a wide displa# of "erkshire products at the ivic that #ou can purchase% !s a benchmark, in 1999 shareholders bought 3,$59 pounds of 4ee-s cand#, $1.,155 of 3orld "ook 6roducts, 1,9*8 pairs of =eBter shoes, 895 sets of Nuikut knives, 1,)5* golf balls with the "erkshire Gathawa# logo and 3,++. items of "erkshire apparel% : know #ou can do better% ?ast #ear, we also initiated the sale of at least eight fractions of 9Becutive Det aircraft% 3e will again have an arra# of models at the Omaha airport for #our inspection on 4aturda# and 4unda#% !sk an 9D! representative at the ivic about viewing an# of these planes% =air# Nueen will also be on hand at the ivic and again will donate all proceeds to the hildren-s ;iracle Cetwork% ?ast #ear we sold +,58. =ill#L bars, fudge bars and vanilla1orange bars% !dditionall#, @9: O will have a booth that will be staffed b# a number of our top counselors from around the countr#, all of them read# to suppl# #ou with auto insurance 0uotes% :n most cases, @9: O will be able to offer #ou a special shareholder-s discount% "ring the details of #our eBisting insurance, and check

out whether we can save #ou some mone#% <inall#, !2it Dain and his associates will be on hand to offer both no-commission annuities and a liabilit# polic# with 2umbo limits of a siEe rarel# available elsewhere% /alk to !2it and learn how to protect #ourself and #our famil# against a $1$ million 2udgment% C<;-s newl# remodeled compleB, located on a )5-acre site on )*nd 4treet between =odge and 6acific, is open from 1$ a%m% to 9 p%m% on weekda#s and 1$ a%m% to . p%m% on 4aturda#s and 4unda#s% /his operation offers an unrivaled breadth of merchandise -- furniture, electronics, appliances, carpets and computers -- all at can-t-be-beat prices% :n 1999 C<; did more than $3$$ million of business at its )*nd 4treet location, which in a metropolitan area of .)5,$$$ is an absolute miracle% =uring the /hursda#, !pril *) to ;onda#, ;a# 1 period, an# shareholder presenting his or her meeting credential will receive a discount that is customaril# given onl# to emplo#ees% 3e have offered this break to shareholders the last couple of #ears, and sales have been amaEing% :n last #ear-s five-da# >"erkshire 3eekend,> C<;-s volume was $)%98 million, an increase of *.& from 1998 and 51& from 199)% "orsheim-s -- the largest 2ewelr# store in the countr# eBcept for /iffan#-s ;anhattan store -- will have two shareholder-onl# events% /he first will be a champagne and dessert part# from . p%m%-1$ p%m% on <rida#, !pril *8% /he second, the main gala, will be from 9 a%m% to . p%m% on 4unda#, !pril 3$% On that da#, harlie and : will be on hand to sign sales tickets% 4hareholder prices will be available /hursda# through ;onda#, so if #ou wish to avoid the largest crowds, which will form on <rida# evening and 4unda#, come at other times and identif# #ourself as a shareholder% On 4aturda#, we will be open until ) p%m% "orsheim-s operates on a gross margin that is full# twent# percentage points below that of its ma2or rivals, so be prepared to be blown awa# b# both our prices and selection% :n the mall outside of "orsheim-s, we will again have "ob Gamman -- the best bridge pla#er the game has ever seen -- available to pla# with our shareholders on 4unda#% 3e will also have a few other eBperts pla#ing at additional tables% :n 1999, we had more demand than tables, but we will cure that problem this #ear% 6atrick 3olff, twice K4 chess champion, will again be in the mall pla#ing blindfolded against all comers% Ge tells me that he has never tried to pla# more than four games simultaneousl# while handicapped this wa# but might tr# to bump that limit to five or siB this #ear% :f #ou-re a chess fan, take 6atrick on -- but be sure to check his blindfold before #our first move% @orat-s -- m# favorite steakhouse -- will again be open eBclusivel# for "erkshire shareholders on 4unda#, !pril 3$, and will be serving from + p%m% until about midnight% 6lease remember that #ou can-t come to @orat-s on 4unda# without a reservation% /o make one, call +$*-551-3)33 on !pril 3 '2ut not 2efore(% :f 4unda# is sold out, tr# @orat-s on one of the other evenings #ou will be in town% : make a >0ualit# check> of @orat-s about once a week and can report that their rare /-bone 'with a double order of hash browns( is still une0ualed throughout the countr#%

/he usual baseball game will be held at 7osenblatt 4tadium at ) p%m% on 4aturda# night% /his #ear the Omaha @olden 4pikes will pla# the :owa ubs% ome earl#, because that-s when the real action takes place% /hose who attended last #ear saw #our hairman pitch to 9rnie "anks% /his encounter proved to be the titanic duel that the sports world had long awaited% !fter the first few pitches -- which were not m# best, but when have : ever thrown m# bestH -- : fired a brushback at 9rnie 2ust to let him know who was in command% 9rnie charged the mound, and : charged the plate% "ut a clash was avoided because we became eBhausted before reaching each other% 9rnie was dissatisfied with his performance last #ear and has been stud#ing the game films all winter% !s #ou ma# know, 9rnie had 51* home runs in his career as a ub% Cow that he has spotted telltale weaknesses in m# deliver#, he eBpects to get R513 on !pril *9% :, however, have learned new wa#s to disguise m# >flutterball%> ome and watch this matchup% : should add that : have eBtracted a promise from 9rnie that he will not hit a >come-backer> at me since : would never be able to duck in time to avoid it% ;# refleBes are like 3ood# !llen-s, who said his were so slow that he was once hit b# a car being pushed b# two gu#s% Our proB# statement contains instructions about obtaining tickets to the game and also a large 0uantit# of other information that should help #ou en2o# #our visit in Omaha% Doin us at the apitalist aper on apitol !venue% 3arren 9% "uffett hairman of the "oard

;arch 1, *$$$