1974 年伯克希尔完整年报

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(25 Pram Jam BERKSHIRE HATHAWAY INC. PURDUE UNIVERSITY 4 1978 KRANNENT LIBRARY 1974 ANNUAL REPORT TO THE STOCKHOLDERS THE HECKMAN BINDERY, INC. N. MANCHESTER,

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PURDUE UNIVERSITY NOV ó 1978 KRANNERT LIBRARY Berkshire Hathaway Inc. 1974 Annual Report to the Stockholders BUSINESS OF THE COMPANY through Cubsidhary ente sal in the ma practure ind sad of resh textile art she United Sate and to in this annual report as the Insurance Group, the Company is engaged in the underwriting of fire and casualty insurance throughout the United States. The Company owns approximately 98% of The Illinois National Bank & Trust Co. of Rockford, Illinois which is engaged in the commercial banking business. The company and subsidiary members of the Insurance Group have significant holdings in Blue Chip CONTENTS And Conant ted Sibe aiding Fisaia Cements of Berkshire Hathaway Inc. Financial Statements - Berkshire Hathaway Inc. and Consolidated Subsidiaries Aconiants Critsate with regar acreal Bank & Trust Co. of Rackford, including Stamps, a California corporation - the businesses of which are more fully described herein. Financial Statements — Berkshire Hathaway Inc. - Insurance Group Management's Discussion and Analysis of the Summary of Operations Five Year Summary of Operations Directors and Executive Officers Chairman's Letter Lines of Business Common Stock Prices Pages 2- 5 7-16 32 33 34-38 39 D

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Best's, the authoritative voice of the insurance industry, estimates that in 1974 all auto insurance premiums in the United States increased only about 2%. Such a growth in the pool of dollars available to pay insured losses and expenses was woefully inadequate. Obviously, medical costs applicable to people injured during the year, jury awards for pain and suffering, and body shop charges for repairing damaged cars increased at a dramatically greater rate during the year. Since premiums represent the sales dollar As this report is being written, such deterioration continues. Loss reserves for many giant companies still appear to be understated by significant amounts, which means that these competitors continue to underestimate their true costs. Not only must rates be increased sufficiently to match the month-by-month increase in cost levels, but the existing expense-revenue gap must be overcome. At this time it appears that insurors must experience even more devastating underwriting results before they take appropriate All major areas of insurance operations, except for the "home state" companies, experienced signifi- The direct business of National Indemnity Company, our largest area of insurance activity, produced an underwriting loss of approximately 4% after several years of high profitability. Volume increased somewhat, but we are not encouraging such increases until rates are more adequate. At some point in the cycle, after major insurance companies have had their fill of red ink, history indicates that we will experience an inflow of business at compensatory rates. This operation, headed by Phil Liesche, a most able underwriter, is staffed by highly profit-oriented people and we believe it will provide excellent Intense competition in the reinsurance business has produced major losses for practically every company operating in the area. We have been no exception. Our underwriting loss was something over 12% - a horrendous figure, but probably little different from the average of the industry. What is even more frightening is that, while about the usual number of insurance catastrophes occurred during 1974, there really was no "super disaster" which might have accounted for the poor figures of the industry. Rather, a condition of inadequate rates prevails, particularly in the casualty area where we have significant exposure. Our reinsurance department is run by George Young, an exceptionally competent and hard- working manager. He has cancelled a great many contracts where prices are totally inadequate, and is making no attempt to increase volume except in areas where premiums are commensurate with risk. Based upon present rate levels, it seems highly unlikely that the reinsurance industry generally, or we, specifically, of economic size. The Texas problem which was commented upon in last year's report seems to be Our efforts to expand Home and Automobile Insurance Company into Florida proved disastrous. The improving. We consider the "home state" operation one of our more promising areas for the future. underwriting loss from operations in that market will come to over $2 million, a very large portion of which was realized in 1974. We made the decision to drop out of the Florida market in the middle of 1974, but losses in substantial amounts have continued since that time because of the term nature of insurance contracts, as well as adverse development on outstanding claims. We can't blame external insurance industry conditions for this mistake. In retrospect, it is apparent that our management simply did not have the underwriting information and the pricing knowledge necessary to be operating in the area. In Cook County, where Home and Auto's volume traditionally has been concentrated, evidence also became quite clear during 1974 that rates were inadequate. Therefore, rates were increased during the middle of the year but competition did not follow consequently, our volume has dropped significantly While the tone of this section is pessimistic as to 1974 and 1975, we consider the insurance business to be inherently attractive. Our overall return on capital employed in this area - even including the poor results of 1974 - remains high. We have made every effort to be realistic in the calculation of loss and and the latter items represent the cost of goods sold, profit margins turned sharply negative. in this area as competitors take business from us at prices that we regard as totally unrealistic. earnings in most future years, as it has in the past. cantly poorer results for the year. will have a profitable year in 1975. Berkshire Hathaway Inc. Operating results for 1974 overall were unsatisfactory due to the poor performance of our insurance business. In last ear's annual report some decline in profitability was predicted but the extent of this decline, which accelerated during the year, was a surprise. Operating earnings for 1974 were $8,383,576, or $8.56 per share, for a return on beginning shareholders' equity of 10.3%. This is the lowest return on equity realized since 1970. Our textile division and our bank both performed very well, turning in improved results against the already good figures of 1973. However, insurance underwriting, which has been mentioned in the last several annual reports as running at levels of unsustainable profitability, turned The outlook for 1975 is not encouraging. We undoubtedly will have sharply negative comparisons in our textile operation and probably a moderate decline in banking earnings. Insurance underwriting is a large question mark at this time - it certainly won't be a satisfactory year in this area, and could be an extremely poor one. Prospects are reasonably good for an improvement in both insurance investment income and our equity in earnings of Blue Chip Stamps. During this period we plan to continue to build financial strength and liquidity, preparing for the time when insurance rates become adequate and we During the first nine months of 1974 textile demand was exceptionally strong, resulting in very firm prices. However, in the fourth quarter significant weaknesses began to appear, which have continued into We currently are operating at about one-third of capacity. Obviously, at such levels operating losses must result. As shipments have fallen, we continuously have adjusted our level of operations downward Our products are largely in the curtain goods area. During a period of consumer uncertainty, curtains may well be high on the list of deferrable purchases. Very low levels of housing starts also serve to dampen demand. In addition, retailers have been pressing to cut inventories generally, and we probably are feeling some effect from these efforts. These negative trends should reverse in due course, and we are attempting In the last few years we consistently have commented on the unusual profitability in insurance underwriting. This seemed certain eventually to attract unintelligent competition with consequent inade- quate rates. It also has been apparent that many insurance organizations, major as well as minor, have been guilty of significant underreserving of losses, which inevitably produces faulty information as to the true cost of the product being sold. In 1974, these factors, along with a high rate of inflation, combined The costs of the product we deliver (auto repair, medical payments, compensation benefits, etc.) are increasing at a rate we estimate to be in the area of 1% per month. Of course, this increase doesn't proceed in an even flow but, inexorably, inflation grinds very heavily at the repair services - to humans and to property - that we provide. However, rates virtually have been unchanged in the property and casualty field for the last few years. With costs moving forward rapidly and prices remaining unchanged, it was can once again aggressively pursue opportunities for growth in this area. to produce a rapid erosion in underwriting results. not hard to predict what would happen to profit margins. dramatically worse as the year progressed. to minimize losses until that time comes. To the Stockholders of Berkshire Hathaway Inc.: so as to avoid building inventory. Textile Operations

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Chairman of the Board administrative expense. Because of accruals, this had a double effect at both the bank and corporate level Under present money market conditions, we expect bank earnings to be down somewhat in 1975 although we believe they still are likely to compare favorably with those of practically any banking During 1974 we increased our holdings of Blue Chip Stamps to approximately 25½% of the outstanding shares of that company. Overall, we are quite happy about the results of Blue Chip and its prospects for the future. Stamp sales continue at a greatly reduced level, but the Blue Chip management has done an excellent job of adjusting operating costs. The See's Candy Shops, Inc. subsidiary had an outstanding year, Your Chairman is on the Board of Directors of Blue Chip Stamps, as well as Wesco Financial Corporation, a 64% owned subsidiary, and is Chairman of the Board of See's Candy Shops, Inc. We expect The annual report of Blue Chip Stamps, which will contain financial statements for the year ended Blue Chip Stamps to be a source of continued substantial earning power for Berkshire Hathaway Inc. March 1, 1975 audited by Price, Waterhouse and Company, will be available in early May. Any shareholder of Berkshire Hathaway Inc. who desires an annual report of Blue Chip Stamps may obtain it at that time by writing Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, As you previously have been informed, the proposed merger with Diversified Retailing Company, Inc. was terminated by the respective Boards of Directors on January 28, 1975. We continue to view such a merger as eventually desirable, and hope to reopen the subject at some future time. and has excellent prospects for the future. Merger with Diversified Retailing Company, Inc. Blue Chip Stamps March 31, 1975 expense reserves. Many of our competitors are in a substantially weakened financial position, and our Investment funds generated from the operation of our insurance companies continued to grow during 1974. Investment income grew correspondingly, and produced overall profitability for the insurance group despite the poor underwriting results. As the insurance group balance sheet shows, we have increased liquidity substantially. This trend has continued since yearend. With poor underwriting and with generally weakened capital ratios throughout the insurance industry, such a higher level of liquidity is appropriate and comforting. It eliminates the possible temptation to write business at any price, simply to maintain Several comments regarding market value of securities may be appropriate. Between the insurance group and the bank, we have approximately $140 million invested in bonds. About $20 million of this investment is in very short-term Treasury securities or commercial paper, neither of which is subject to other than negligible market fluctuation. This leaves about $120 million in bonds of longer maturities, with a very large percentage of this sum in municipal bonds with an average maturity of perhaps twelve to fifteen years. Because of our large liquid position and inherent operating characteristics of our financial businesses, it is quite unlikely that we will be required to sell any quantity of such bonds under disadvantageous conditions. Rather, it is our expectation that these bonds either will be held to maturity However, on any given day the market value of our bond portfolio is determined by yields available on comparable securities. Such market values can swing dramatically. For example, during 1974 a leading index of high-grade municipals increased in yield from a level of 5.18% at the beginning of the year to 7.08% at the end of the year. In the bond market, each 1/100 of 1% change in yield is referred to as a "basis point" and thus, a change of 1% in interest levels is referred to as 100 basis points. As measured by the index, bond yields increased 190 basis points during 1974. On a fifteen-year bond, an increase of 10 basis points translates to about a 1% downward change in market value. On $120 million of such bonds, it is therefore clear that a change of 10 basis points in yields (which easily can happen in one day) changes the market value of our bond portfolio by something over $1 million. Thus, in 1974 our bond portfolio, which probably had a market value roughly approximating its carrying value at the start of the year, had a market value substantially below carrying value at the end of the year. The market value of our bond portfolio will continue to move in both directions in response to changes in the general level of yields but we do not consider such movements, and the unrealized gains and losses that they produce, to be Our stock portfolio declined again in 1974 - along with most equity portfolios - to the point that at yearend it was worth approximately $17 million less than its carrying value. Again, we are under no pressure to sell such securities except at times that we deem advantageous and it is our belief that, over a period of years, the overall portfolio will prove to be worth more than its cost. A net capital loss was realized in 1974, and very likely again will occur in 1975. However, we consider several of our major holdings to have great potential for significantly increased values in future years, and therefore feel quite comfortable with our stock portfolio. At this writing, market depreciation of the portfolio has been reduced There is little new to say about Illinois National Bank and Trust. With Eugene Abegg running the operation, the exceptional has become the commonplace. Year after year he continues to run one of the most profitable banks in the United States, while paying maximum interest rates to depositors, operating Two factors specifically should be noted in looking at the separate income statement of the bank. The effect of filing a consolidated tax return is reflected in their figures, with the tax loss of the insurance operations used to offset the tax liability created by banking operations. Also, a property tax formerly paid by the bank now is assessed to the parent company and is reflected in corporate selling and strong capital picture leaves us prepared to grow significantly when conditions become right. by more than half from yearend figures, reflecting higher general stock market levels. with unusual levels of liquidity, and maintaining a superior level of loan quality. cash flow, which is a major problem faced by many companies. of great importance as long as adequate liquidity is maintained. or sold at times believed to be advantageous. Banking Operations

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES Financial Statements 1974 and 1973 and unassigned surplus and changes in financial an opinion as to the equity of $1,052,000 Peat Matrick, Mitchell ICo. 31, 1974 and Unaudited earnings earnings and retained earnings consolidated subsidiaries as of December 28, 1974 and 1973 and the statements Blue Chip Stamps, an investee of Berkshire Hathaway Inc., as described in In our opinion, except for the effect of the matter referred to in the determining inventory valuations, as described in note 7 to PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS KIEWIT PLAZA OMAHA, NEBRASKA 68131 We have examined the consolidated balance sheets of Berkshire December 31, 1974 and 1973. Our examination was made in accordance with generally and such other auditing procedures as we considered necessary in the terms of our engagement, we did not examine evidence in support of the unaudited sidiaries at December 28, 1974 and December 29, 1973 and the Berkshire Hathaway Inc. position of the Berkshire Hathaway Inc. - Insurance Group for the years accepted auditing standards, and accordingly included such tests of the equity in earnings of Blue Chip Stamps recorded by Berkshire Hathaway Inc. fairly the financial position of Berkshire Hathaway Inc. and consolidated sub- Insurance Group at December 31, 1974 and 1973 and the results of their operations the period subsequent to the change, with which we concur, made as of January 1, 1973 the changes in their financial position for the respective years then ended in and Stockholders December 29, 1973, the statements of assets and liabilities Insurance Group as of December in financial position of Berkshire Hathaway Inc. for the 52 weeks note 4 to consolidated financial statements, was examined by other accordance with generally accepted accounting principles consistently circumstances except as stated in the following paragraph. for the nine months ended November 30, 1974 was the basis preceding paragraph, the aforementioned consolidated financial Inc.: related consolidated statements of December 28, 1974 and December 29, investment gains (losses), paid-in most recent fiscal year ended March 2, earnings and accordingly do not express in earnings of Blue Chip Stamps for 1974. The Board of Directors Hathaway Hathaway Inc. - Berkshire March 14, 1975

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Dec. 29, 1973 $ 52,929,257 33,410,551 7,378,109 287,017 94,004,934 32,835,798 28,305,725 16,774,167 3,363,223 1,606,313 82,885,226 11,119,708 2,979,016 8,140,692 2,781,900 1,008,000 11,930,592 1,331,550 401,699 929,851 12,860,443 64,024,663 (627,485) $ 76,257,621 $12.18 $13.13 52 weeks ended Dec. 28, 1974 $ 60,573,729 32,591,874 8,029,876 286,307 101,481,786 47,119,846 27,429,277 20,345,744 3,640,720 1,717,944 100,253,531 1,228,255 (2,010,321) 3,238,576 4,093,000 1,052,000 8,383,576 (1,908,093) (567,678) (1,340,415) 7,043,161 76,257,621 $ 83,300,782 $ 8.56 (1.37) $ 7.19 Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS See accompanying notes to consolidated financial statements. Earnings from insurance underwriting and manufacturing operations Earnings before equity in net earnings of other companies and realized Income taxes (credit) applicable to operating earnings (note 12) • Earnings before realized investment gains (losses) In the absence of operating or investment reasons Earnings per share of common stock, based on 979,569 shares outstanding: compelling liquidation, it is inappropriate to reflect in income temporary fluctuations in market values of long- term equity investments. Consequently, investment re- sults exclude unrealized market decreases in investments in preferred and common stocks of unaffiliated compa- nies of $4,356,000 in 1974 and $13,741,000 in 1973 (note 3). Insurance losses and loss adjustment expenses Selling, administrative and other expenses. before applicable income taxes Insurance premiums earned Net sales of textile products Interest and dividend income Cost of textile products sold . Insurance underwriting expenses investment gains (losses) Net realized investment gains (losses) Excess of cost over par value of treasury stock retired in 1973 Earnings before realized investment gains (losses) Equity in net earnings of bank subsidiary. Equity in net earnings of Blue Chip Stamps Real estate income Realized investment gains (losses) Applicable income taxes (credit) . Cost and expense items: Interest expense Net earnings . Retained earnings at beginning of year Realized investment gains (losses) Retained earnings at end of year Net earnings . . . . . . • Income items: Dec. 29, 1973 2,885,645 1,400,435 73,074,026 2,298,348 49,756,778 13,717,274 21,003,034 1,333,832 14,056,574 7,136,676 3,668,005 5,240,000 560,987 $196,131,614 $ 61,675,768 21,281,980 1,318,205 459,609 4,726,609 262,357 3,297,368 598,540 20,000,000 579,070 776,542 114.976,148 4,697,845 76,257,621 81,155,466 5196.131.624 Dec. 28, 1974 4,230,559 11,108,163 71,530,651 2,855,185 50,669,865 16,923,998 22,416,879 1,187,333 2,800,734 17,891,227 5,999,552 3,913,473 4,400,000 285,954 $216,213,573 S 72,761,097 21,704,867 2,857,284 294,101 4,435,325 163,809 3,043,800 555,780 1,274,437 20,000,000 579,070 345,376 128.014,946 4,897,345 83.300,782 86.198.627 5216.213.573 CA at cost - market, 1974- Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY See accompanying notes to consolidated financial statements. U. S. Treasury Bills and other short-term obligations, at cost which approx- Preferred stocks, at cost - market, 1974 - $1,842,817; 1973 - $2,186,960 Real estate, equipment, furniture and leasehold improvements, at cost less Common stock of $5 par value. Authorized 1,100,000 shares; issued and Accounts receivable from customers, agents and others, net (note 6) Excess of net assets of consolidated subsidiaries over cost of investment Bonds, at amortized cost (notes 2 and 3) Common stocks of unaffiliated companies, $34,802,358; 1973 - $37,344,291 (note 3) Common stock of Blue Chip Stamps (note 4) Unconsolidated bank subsidiary (note 5) Other unconsolidated subsidiaries (note 5) allowance for depreciation and amortization (note 8) Deferred insurance premium acquisition costs Total stockholders' equity. imates market Recoverable Federal income taxes Losses and loss adjustment expenses Funds held under reinsurance treaties Amounts due for purchase of securities Accounts payable and accrued expenses 74% debentures due 1987 (note 9) . 8% promissory note due 1988 (note 10) 8% senior notes due 1993 (note 11). outstanding, 979,569 shares. Retained earnings (note 11) Cash. Investments: (note 3) Inventories (note 7) Other assets Unearned premiums Income taxes: Current Deferred Other liabilities Stockholders' equity: Commitment (note 13)

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taxes are provided for with respect to undistributed carnings of Blue Chip under the assumption that such earnings will ultimately be distributed as tax- able dividends. Blue Chip determines income on the earnings of Blue Chip on the basis of that company's twelve months ending on or about November 30. Insurance premiums are recognized as revenues rata- bly over the terms of the policies. Unearned pre- miums are computed on the monthly pro rata basis and are stated after deduction for reinsurance placed with insurers in the amount of $4,583,628 at December 31, 1974 and $3,281,480 at December 31, 1973. Premium acquisition costs such as commis- sion, premium taxes and certain other underwriting expenses are, pursuant to statutory insurance ac- counting rules, charged against income when in. curred. However, for financial statement purposes. a portion of such costs are deferred and charged against income as the related premiums are earned. The Insurance Group provides for losses and loss adjustment expenses based upon (1) aggregate case basis estimates for losses reported, in respect to direct premiums written, (2) estimates of unreported losses based upon past experience, (3) estimates received relating to assumed reinsurance, and (4) deduction of amounts for reinsurance placed with reinsurers in the amount of $5,518,385 at December (e) Losses and Loss Adjustment Expenses 31, 1974 and $4,421,537 at December 31, 1973. The Insurance Group does not provide a reserve for catastrophe losses. The Financial Accounting Stan- dards Board in cooperation with industry repre- sentatives is working toward the development of a definitive statement as to the appropriate account- ing for catastrophe losses and resolution may lead to changes in the accounting practices being fol- (g) Real Estate, Equipment, Furniture and Leasehold These items of property (including significant better- ments and renewals) are carried at cost depreciated (d) Insurance Premiums (f) Catastrophe Reserves lowed. Improvements Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 28. 1974 and December 29, 1973 11 Summary of Significant Accounting Policies and The accounts of Berkshire Hathaway Inc., the parent Company, are consolidated with the accounts of Badian tell sales sada diary, whole accout Cat subsidiary insurance companies (The "Insurance Group"), wholly-owned by Berkshire Hathaway Inc. Certain 1973 amounts have been reclassified to The parent Company's investment in The Illinois Na- tional Bank & Trust Co. of Rockford is accounted for Immaterial subsidiaries are not consolidated and in- vestments therein are carried at cost less dividends There subtry are ma Comine and i bass of a fiscal year ending on the Saturday nearest to De- cember 31, while the accounts of the Insurance Group are maintained on the basis of the calendar (b) Investment in Securities, Other than Affiliates Investments in bonds are stated at amortized cost, while investments in preferred and common stocks other than affiliates are carried at cost. The aggregate market values of these investments, at both De- cember 31, 1974 and December 31, 1973 were sub- stantially less than their cost. The Company gener- ally intends to hold the bonds to maturity and does not expect to realize significant losses from disposi- tion of bonds. The investment in equity securities are held by the Insurance Group and generally con- sist of a relatively few issues acquired with a general view to holding as long-term investments. In view of the fact that market value quotations fluctuate daily, management considers the cost method as most appropriate for such long-term investments in the absence of operating reasons compelling their liquidation, and in the absence of evidence support- ing a conclusion that their net cost will not eventu- The investment in Blue Chip Stamps ("Blue Chip") is accounted for on the equity basis. Deferred income received from such subsidiaries. (c) Investment in Blue Chip Stamps Dec. 29, 1973 $ 12,860,443 (530,444) (900,000) (481,767) 519,608 1,400,750 (2,557,417) 360,360 (1,202,693) (309,633) 384,000 (3,230,468) 342,851 (27,860) (6,232,713) 6,627,730 20,000,000 2,112,580 $ 28.740.310 (2,189,809) (11,965,977) (643,904) 32,344,998 1,529,878 75,000 19,150,186 547,364 9,042,760 $ 28.740.310 52 weeks ended Dec. 28, 1974 $ 7,043,161 (1,406,345) (889,410) (442,153) 11,085,329 422,887 1,539,079 (3,834,653) 1,137,124 840.000 (352,116) (2,800,734) (291,284) (329,243) 5,216,544 12,259,705 191,500 1,305,623 $ 13,756,828 9,707,728 (1,985,528) 556,837 913,087 2,317,313 45,000 11,554,437 783,531 73,946 1,344.914 $ 13,756,828 Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT'S OF CHANGES IN FINANCIAL POSITION See accompanying notes to consolidated financial statements. 10 Increase in accounts receivable from customers, agents and others Charges (credits) to earnings not requiring (providing) funds: Equity in undistributed earnings of bank subsidiary Equity in undistributed earnings of Blue Chip Stamps Decrease in deferred insurance premium acquisition costs . Increase (decrease) in accounts payable and accrued expenses … Increase in unpaid losses and loss expense. Increase (decrease) in unearned premiums. Increase in funds held under reinsurance treaties Additions to real estate, equipment, furniture and leasehold improvements Accretion of discount on bonds. Depreciation and amortization . Decrease (increase) in inventories . Decrease in liability for income taxes Increase in recoverable income taxes. . Funds provided from operations. . U.S. Treasury Bills and other short-term obligations Dividends received from unconsolidated subsidiary Common stocks of unaffiliated companies Proceeds from issuance of long-term debt Common stock of Blue Chip Stamps Investment in unconsolidated subsidiary From operations: Net earnings Other, net Net purchase (sale) of investments: Preferred stocks. Repayment of long-term debt. Decrease in cash Funds provided: Bonds Increase in cash Funds used:

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(Uncudited) $ 3.322 97,072 16,083 14,140 8,736 708 26,053 270-00 $ 71.705 1,805 11,585 27,200 6,504 63,307 $182,106 (Unaudited) $ 28,476 9,620 39,259 9,747 $ 87,102 8,035 1.55 7,178 1.39 Mo. 200 0.30.1074 (so mita weeks Mar. 2. 1974 Nov. 30, 1974 $ 3.013 132,743 10,355 8,913 10,454 982 17,416 16.311 $200.220 $ 78.776 8,881 11,004 8,672 59,887 $200,220 52 weeks S 51,375 6,261 8,803 $102,219 8,190 1.58 8,005 1.55 vember 30, 1974 and for the 52 weeks then ended (unaudit- BLUE CHIP STAMPS Consolidated Balance Sheets BLUE CHIP STAMPS Consolidated Earnings Summaries ed) reflect the following: Assets Marketable securities, at cost (mar- ket March 2 - S128,654; November Properly, fixtures and equipment. Unamortized debenture discount .. Investment in Wesco Financial Cor- Excess of cost over equity in net assets of consolidated subsidiary stibitire quiry Liability for unredeemed trading Current portion of long-term debt. Other current liabilities...... Note payable to bank, less current o posiobordinated debentures due Inventories... Other current assets. net ....... stamps….••• 1978, less current portion Total revenues .... Earnings before securities losses and Stockholders' equity .. Stamp service revenues. Incentive sales.. Candy sales .. Other revenues ... extraordinary credit Per share. Per share. 30 - $73,040) . Net earnings .... Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1973 289,483 220500 December 31, $16.923.998 $13.717,274 1.325.233 25.6% 870,603 13.954,715 of acquisition, plus equity in undistributed earnings. De- ferred taxes of $191,800 and $100,000 at December 31, 1974 and 1973, respectively, have been provided with respect to the equity in undistributed carnings assuming their ulti- The investment in Blue Chip is summarized as follows: acquisition ................... $13,084,112 $ 9,115,779 The excess of cost over equity in net assets is being amortized over eight years from the beginning of 1972. Amortization was $384,200 for 1974 and $480,000 for 1973. Blue Chip, a California corporation, is engaged primarily in the business of furnishing a trading stamps service to retail merchants and their customers in the states of Cali- fornia, Nevada and Oregon. A separate division of Blue Chip, on a nationwide basis, develops incentive programs for all types of businesses and also programs under which oil companies and other large issuers of credit cards can offer merchandise to their credit card holders. A subsidiary of Blue Chip, See's Candy Shops, Incorporated, manufac- tures candies in its kitchens located in Los Angeles and South San Francisco. The candies are sold through com- pany-operated stores, approximately 170 in number, locat- ed in nine western states including Hawaii. Blue Chip also controls Mutual Savings and Loan Association through its ownership of approximately 64% of the outstanding capital stock of Wesco Financial Corporation, a registered savings and loan holding company. Mutual's head office is in Pasa- dena, California, and its approximately 15 other locations holdings plus holdings of other persons who may be con- sidered affiliates aggregate over 50% of Blue Chip's out- The financial statementsof Blue Chip as of March 2, 1974, and for the 52 weeks then ended (audited), and as of No- mate distribution as a taxable dividend. Percentage of total outstanding shares Underlying net asset values at dates of Net excess cost, less amortization of S1,179,873, 1974 and $795,673, 1973. Equity in post-acquisition undistributed Shares owned Cost, represented by: Market $ 2,186,960 37,344,291 539,531,251 1973 Cost $ 2,298.348 49,756,778 $52.055.126 (a) The aggregate market value for the bond portfolio as of December 31, 1973 was not specifically deter- mined. Management believed that the aggregate cost as of that date approximated market valuation. Market $ 1,842,817 34,802,358 $36,645,175 The excess of cost over quoted market value of invest- ments in preferred and common stocks of unaffiliated com- panies increased by $4,355,950 in 1974 and $13,741,037 in 1973, and aggregated $16,879,857 at December 31, 1974. While the timing and extent of a recovery in the market prices of these stocks cannot be predicted, management noted a recovery exceeding $10,000,000 in the quoted mar- ket value of its equity securities during the first ten weeks of 1975, and does not believe that the excess of cost over market value at December 31, 1974 represents a decline In the first ten weeks of 1975, the Company realized losses of approximately $1,500,000, net of income tax credit appli- cable to such losses, from sales of securities. However, management believes that over the long term, no significant net loss to the Company will result from its continued holding or sale of the securities which constituted its port- The carrying value of the investment in Blue Chip Stamps ("Blue Chip") represents the cost, less amortization of the net excess of cost over equity in net assets at dates which justifies a write-down in carrying values. Cost •.. S 2,855,185 50,669,865 S53,525,050 (4) Investment in Blue Chip Stamps folio at December 31, 1974. Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 12 apportioned Federal lax over their useful lives estimated at the date of ac- quisition. The double-declining balance method is used to calculate depreciation of new items of textile properties acquired after 1965; the straight-line method is applied for other items. Maintenance, repairs and renewals of a minor nature are generally Inventories relate to the textile operation and are stated at cost determined under the last-in, first-out A consolidated Federal income tax return is filed by the parent Company and its eligible subsidiaries. The recoverable amount or liability for current in- come taxes reflected in the consolidated balance amounts of the companies whose accounts are con- A provision for deferred taxes is made in recognition of timing differences created by the manner in which the Insurance Group accounts for certain income and expense items for financial reporting purposes and the accounting treatment of these items for Investment tax credits on qualifying property and equipment acquisitions are applied as a reduction charged to operations as incurred. of income tax expense in the year realized. Bonds with amortized cost of $15,294,910 and $13.932,645 at December 31, 1974 and 1973, respectively, were deposited in trust with various regulatory authorities or others in accordance with the terms of certain reinsur- (3) Investments in Securities of Unaffiliated Companies A summary of the aggregate cost and approximate market value of investments in securities of unaffiliated companies at December 31, 1974 and 1973 is as follows: income tax purposes. (2) Bonds Deposited with Others (h) Inventories ance treaties.

[PAGE 9]

S(2,010,321) 112,090 (567,678) S(2105,909) (567.678) (2,212,341) 91,800 75.632 (421,000) (253,568) S(2.165.909) $177,530 315300 $177,530 mately S$25,000,000 as of December 28, 1974 and $21,000,000 as of December 29, 1973 are unrestricted by this provision: The loan agreement also contains limiting terms relating to sales of the Company's assets, mergers and consoli- dations, and allows the noteholders to demand prepay- ment, at par, within 60 days of notice that, during the lifetime of Warren E. Buffett, stock ownership in the parent Company by Warren E. Buffett and the members of his immediate family, including certain trusts and charitable organizations, has decreased to less than 15% of the out- Net recoverable income taxes credited to 1974 earn- Federal 112,090 (567,678) ......• $(2,187,851) 5(2,643.439) (567,678) (2,389,871) 91,800 (421,000) (253,568) S(2.643.439) standing capital stock of the parent Company. the remainder is restricted. ings were made up as follows: (Credit) charge applica- ble to operating earn- ings........ Charge applicable to eq- uity in earnings of Blue Chip Stamps ... (Credit) applicable to realized investment losses............. From carryback of rea- lized investment losses Total current ....• Deferred expense (credit): On equity in undistri- buted earnings of Blue Chip Stamps ......• On net accreted dis- count on bonds ..... Credit for tax effect of reduction in deferred insurance premium acquisition costs.... Total difermd.* credits.....• (12) Income Taxes Totals: Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued amount of the debentures, Debentures bear interest at the rate of 74% payable February 1 and August 1 and will be due on August 1, 1987. The debentures are not secured by any lien and are not convertible; they are subordinated to senior indebtedness which includes indebtedness of the parent Company for money borrowed. The debentures may be redeemed at par at the Company's option. The indenture under which the debentures were issued requires the parent Company to through a sinking fund, annually on August 1 to and in- The parent Company issued in May 1974 a promissory note in the principal amount of $1,305,623, repayable in monthly installments of $13,071 including interest at 8% per proceeds was used to repay S9,000,000 of outstanding bank notes; the remainder of the proceeds was used for addi- tional capital contributions to the Insurance Group. The notes call for mandatory annual prepayments of $1,143,000 on March 1 in each of the years from 1979 to 1992, inclusive. Optional prepayments are permitted without premium up to the amount of the required prepayments in each of the years 1979 to 1992; this right is not cumulative. Additionally, the parent Company may also prepay the notes at any time, in full or in part, at a premium of 8% in the twelve months commenced March 1, 1973; the premium declines ratably to par in 1992. The parent Company agreed it will not affect any optional prepayment prior to March 1, 1983 from proceeds of any refunding operation involving the incurring of any indebtedness at an effective annual In the note instruments the parent Company agreed, among other things, as to both the parent Company and restricted subsidiaries, as defined, to limitations as to per- missible outstanding funded debt and subordinated fund- ed debt and to a limitation on mortgage debt except as to after-acquired property. Further, the parent Company covenanted that it would not make "restricted payments", which term includes dividends or other equity distribu- tions plus investment in unrestricted subsidiaries (those not bound by the terms of the loan agreement), in excess of stated formula amounts. Retained earnings of approxi- 74% Subordinated Debentures (10) 8% Promissory Note Due 1988 annum, through February 1988. (11) 8% Senior Notes Due 1993 Dec. 29, 1973 $ 1,047,827 1,604,824 4,484,025 S 7,136,676 Total 168,707 3,663,577 12,734,171 1.888,372 18,454,827 14,541,354 $ 3.913.473 1,529,645 17,675,900 14,007,695 $ 3.668,005 Dec. 28, 1974 832,210 1,425,670 3.741.672 $ 5,999,552 810,996 $1,580,594 666,325 $1.805.172 Effective with the year ended December 29, 1973, the Company changed its method of determining inventory valuations to cost determined on a basis of last-in, first-out (LIFO). This change was made because management be- lieves the use of LIFO will reduce the effect of inflation on stated earnings; current cost will generally be more nearly matched against current revenues in the statements of earnings and retained earnings. The change had the effect of reducing inventories at December 29, 1973 by S588,348 and net earnings by $294,174 ($0.30 per share) for the 52 (8) Real Estate, Equipment, Furniture and Leasehold Im- The composition of plant and equipment is shown 13.730,358 $ 2,332,879 13,341,570 $ 2.062,833 A summary of inventories follows: Raw materials and supplies.. (7) Inventories Stock in process..... Griege and finished cloth ciation and amortiza- Machinery and equipment Furniture and fixtures and leasehold improvements Less accumulated depre- ciation and amortiza- Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 14 1973 107,765 8.908,335 5,148,239 524.056.574 December 31. 31,955 13.513,303 4,377,918 S17.891,227 Blue Chip financial statements for their fiscal year ended March 2, 1974 (and for certain prior years) revealed signifi- cant litigation proceedings against the Company. The Company stated with regard to certain of these proceedings that a possible result could be "a materially adverse effect on revenues and earnings and under existing market con- ditions might have a materially adverse effect on its ability to continue its trading stamp business." Additional pro- ceedings involve substantial contingent liabilities; the ac- countants opinion covering the financial statements of Blue Chip Stamps as of March 2, 1974 and for the fiscal year then ended, as well as that for certain preceding years, was given subject to the effect, if any, of the legal proceedings The investment in the unconsolidated bank subsidiary represents approximately 98% of the outstanding stock of The Illinois National Bank & Trust Co. of Rockford. The equity method is used in accounting for this investment. See note 13 regarding divestiture of this investment. Finan- cial statements of The Illinois National Bank & Trust Co. of Rockford and subsidiary are presented elsewhere herein. The carrying values of $23,604,212 at December 28, 1974 and $22,336,866 at December 29, 1973 for all unconsolidated subsidiaries were approximately $2,500,000 in excess of the parent Company's equity in the net assets as reflected in the financial statements of the subsidiaries at those dates. This excess cost originated prior to November 1, 1970 and is not being amortized since it is considered by management Accounts receivable from customers, agents and (5) Investments in Unconsolidated Subsidiaries to have continuing value over an indefinite period. course of collection ............. $ 9,583,769 others was made up of the following: Agents' balances and premiums in Investment income due and accrued Reinsurance recoverable on loss pay- Amounts due from sale of securities Textile business trade accounts receiv- able (less allowance for doubtful ac- counts, 1974-S331.394: 1973-$332,679) (6) Receivables Insurance Group:

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Berkshire Hathaway Inc. INSURANGE GROUP Financial Statements 1974 and 1973 Total (186,716) 83,284 $3,496,715 Amount $ 7,851,000 (2,304,000) (1,335,000) (542,000) (655,000) 290,000 191,715 $ 3.496,715 Foreign state and local $214,064 U.S. Federal -(186,716) 83,284 $3,282,651 Total income tax expense of $3,496,715 is less than the amount of $7,851,000 computed by applying the U.S. Fed- eral income tax rate of 48% to income before taxes. The Consolidated income tax returns of the Company have been examined through 1970 by the Internal Revenue Ser- The Company is a bank holding company under Fed- eral legislation enacted in 1970. It has filed with the Federal Reserve Board an irrevocable election to divest of its hold- ings in The Illinois National Bank & Trust Co. of Rockford prior to January 1, 1981. No determination has been made as to how it will effect such divestiture, and so long as the Company controls the bank it is subject to the restrictions The Company, as a result of its investment in Blue reasons for this difference for 1973 were as follows: 100% exclusion relating to equity in earnings of The On dividends from unaffiliated companies. On equity in earnings of Blue Chip Stamps Amortization of excess of cost over net assets of subsidiary and investee (not deductible for tax imposed upon it by the Bank Holding Company Act. (13) "One-Bank Holding Company" Status (14) "Savings and Loan Holding Company" Status Chip Stamps which in turn holds controlling interest in a California savings and loan association, is a savings and loan holding company under the Savings and Loan Holding Company Amendments of 1967. As such, the Company is subject to the restrictions and regulatory requirements imposed upon it by the Savings and Loan Holding Com- Credit for tax effect of reduc- tion in deferred insurance premium acquisition costs Total deferred Total income tax expense Tax expense at statutory rate Increases (decreases) resulting from: Tax-exempt interest .... Illinois National Bank... 85% dividends received credit: Total income tax expense.. vice and deficiencies have been paid. purposes).... Miscellaneous . Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 16 Amount $ 2,197,000 (2,082,000) (1,965,000) (1,065,000) (632,000) 343,000 620,000 (111,909) $(2,465,909) Total 116,000 $01,699 401,699 100,000 170,000 5214,064$2,979,016 524,064 50.498.715 214,064 3,413,431 Foreign state and Total net income in 1974 after taking into account rea- Total income tax expense for 1973 is made up of the U.S. Federa! 116,000 401,699 lized investment losses, but before income taxes, was S4,577,252. Income tax expense of approximately $2,197,000 would result if computed by applying the statutory U.S. Federal income tax rate of 48% to income before taxes. A $3.282.651 facturing operations...... S2,781,668 S214,064 $2,995,732 16,000 401,699 3.199,967 100,000 170,000 reconciliation of the difference is as follows: 100% exclusion relating to equity in earnings of The On dividends from unaffiliated companies..... On equity in earnings of Blue Chip Stamps Amortization of excess of cost over net assets of subsidiary and investee (not deductibie for tax Capital loss rate differential (30% vs. 48%) .. Tax benefits to unconsolidated subsidiary. Equity in eatings of Blue 32706.952 Tax expense at statutory rate Increases (decreases) resulting fron Tax-exempt interest income Illinois National Bank. 85% dividends received credit: purposes) Miccellaneous ...... Net income tax credits Fartings to an ance ac Chip Stamps.......... Realized investment gains .. On earnings from insurance underwriting and manu- On dividends from Blue Chip stanized investment gains Current tax expense: Total current ..... Deferred tax expense (credit): On equity in undistributed earnings of Blue Chip Stamps.... On accreted discount on following: Totals applicable to: bonds ..

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$ 50,371,841 2,557,416 52,929,257 32,835,798 20,093,459 11,033,458 2,323,863 1,060,329 1,972,517 384,000 16,774,167 3,319,292 5,621,743 1,688,024 287,017 7,596,784 313,894 7,282,890 10,602,182 322,287 10.279,895 2,346,719 7,933,176 1,008,000 8,941,176 1,331,550 401,699 929,851 9.871,027 Year ended December 31, $ 60,996,616 (422,887) 60,573,729 47.119,846 13,453,883 13,016,977 2,816,024 1,396,162 2,276,581 840,000 20,345,744 (6,891,861) 5,103,543 2,811,980 286,307 8,201,830 322,010 7,879,820 987,959 95,708 892,251 (2,184,761) 3,077,012 791,985 3,868,997 (1,908,093) (567,878) (1,340,415) 2,528,582 Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF INCOME AND REALIZED INVESTMENT GAINS (LOSSES) See accompanying notes to financial statements. 19 Income before income taxes, equity in earnings of Blue Chip Stamps Income before equity in earnings of Blue Chip Stamps and realized Dividends on stock (other than from Blue Chip Stamps) (Increase) decrease in unearned premiums Net premiums written Premiums earned Losses and loss expenses incurred Commissions and brokerage Salaries and other compensation Taxes, licenses and fees. Other underwriting expenses. Decrease in deferred acquisition costs Profit from underwriting and investm and realized investment gains (losses) Income before realized investment gains (losses) Net underwriting gain (loss) Applicable income taxes (credit) (note E) . . . Net investment income investment gains (losses) . Equity in earnings of Blue Chip Stamps (note C) Net realized investment gains (losses) Underwriting income: Underwriting expenses: Interest on bonds . Real estate income Realized investment gains (losses) Applicable income taxes (credit) Net income. Investment income: Investment expenses Other expense. $ 73,074,026 2,298,348 49,756,778 52,055,126 1400,435 13,717,274 1,605,172 1,465,359 6,891,777 498,924 1,409,869 107,765 373,525 5,240,000 $157,839,252 $ 61,675,768 21,281,980 1,318,205 916,341 442,302 3,297,368 459,609 745,361 90,136,934 5,500,000 2,500,000 20,601,250 39,101,068 S7,702.318 $157,839,252 December 31, 1974 $ 71,530,651 2,855,185 50,669,865 53,525,050 9,138,663 14,370,980 1,580,594 1,513,636 2,600,734 9,583,769 2,459,093 1,438,492 31,955 164,605 4,400,000 $172,338,222 $ 72,761,097 21,704,867 2,857,284 1,328,944 3,034,000 259,476 161,654 102,107,322 5,500,000 2,500,000 20,601,250 41,629,650 70,230,900 $172,338,222 Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF ASSETS AND LIABILITIES ASSETS LIABILITIES, CAPITAL STOCK AND SURPLUS See accompanying notes to financial statements. 18 Common stock of National Indemnity Company of $10 par value. Autho- Common stock of National Fire & Marine Insurance Company of $100 par Preferred stocks (market, 1974 - $1,842,817; 1978 - $2,186,960) Common stocks (market, 1974 - $34,802,358; 1973 - $37,344,291) Investments in stocks of unaffiliated companies, at cost: Total common and preferred stocks U.S. Treasury Bills, at cost which approximates market Agents balances and premiums in course of collection rized 750,000 shares; issued 550,000 shares . . . value. Authorized 50.000 shares; issued 25,000 shares Total capital stock and surplus . . . . . . Investment in Blue Chip Stamps (note C) • Real estate, furniture and equipment (note 8) Funds held under reinsurance treaties . . . . . Amounts due for purchase of securities::: Reinsurance recoverable on loss payments Bonds, at amortized cost (note 2) Recoverable Federal income taxes Investment income due and accrued Amounts due from sale of securities . Losses and loss adjustment expenses Capital stock and surplus (note D): Unassigned surplus (note 11) . Cash and bank deposits Deferred acquisition costs Unearned premiums Paid-in surplus . . Other assets Accrued expenses Income taxes: Deferred Other liabilities

[PAGE 12]

1973 9.871.027 (900,000) (481.767) 128,689 1,400,750 (2,557,417) 360,360 (511) (221.183) 384,000 (2,615,563) (62,460) (4,565,102) 5.305,925 12,250,000 1.579,008 19.134933 (2.189,809) (11,965,977) (643,904) 32,344.998 1,529,878 19.075,186 59,747 $ 19.134.933 Year ended December 31, es! 1974 2.528.582 (653,706) (442,153) 147,972 11.085.329 422,887 1,539,079 (2,691,992) (1,960,169) 840,000 (705,670) (2,600,734) (115,130) 4,865,713 7,394.295 7.394.295 7,738,228 (1,985,528) 556,837 913,087 7.222.624 123,394 48,277 $ 7.394,295 Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION See accompanying notes to financial statements. Increase in agents' balances and premiums in course of collection Charges (credits) to income not requiring (providing) funds: Equity in undistributed earnings of Blue Chip Stamps Increase in unpaid losses and loss expense. Increase (decrease) in unearned premiums. Increase in funds held under reinsurance treaties Increase in reinsurance recoverable on loss payments Accretion of discount on bonds. Decrease in deferred acquisition costs Decrease in liability for income taxes Increase in recoverable income taxes. Funds provided from operations Additional capital paid in by shareholders • Common stocks of unaffiliated companies Common stock of Blue Chip Stamps Purchase of real estate, furniture and equipment Depreciation From operations: Net income. Other, net Nei purchase (sale) of investments: U.S. Treasury Bills • Preferred stocks. Decrease in cash Bonds Increase in cash Funds provided: Funds user! 1973 9,851,250 9,750,000 1,000.000 S 20,601,250 $ 29.230,041 9,871.027 $ 39,101,068 Year ended December 31, 1974 $ 20,601,250 $ 20,601,250 $ 39,101,068 2.528,582 5 41,629,650 Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF PAID-IN AND UNASSIGNED SURPLUS PAID-IN SURPLUS UNASSIGNED SURPLUS See accompanying notes to financial statements. Excess of proceeds over par value of capital stock issued Beginning of year Contribution from parent End of year. Beginning of year Net income End of year.

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100,000 170,000 (186.716 83,284 S2,864418 1973 (2,304,000) (542,000) (655,000) 290,000 (237,000) 199,418 1974 82,000 75,632 $ (60,000) $ 6,113,000 (221.000) (263,368) $(2.653,239) 1974 (2,082,000) 1,065,000) (561,000) 277,000 620,000 S(2,653,239) 52,804,418 343,000 (125,239) Total net income (loss) after taking into account rea- lized investment losses, but before income taxes, was ($124,657) for 1974 and $12,735,445 for 1973. In- come tax expense (credit) of approximately ($60,000) for 1974 and $6,113,000 for 1973 would result if com- puted by applying the statutory U.S. Federal income tax rate of 48% to income (loss) before taxes. A reconciliation of the differences are as follows: Deferred tax expense (credit) relating to: Equity in undistributed earnings of Blue Chip Stamps .............• Accreted discount on bonds ....... Credit for tax effect of reduction in Total income tax expense (credit) Tax expense at statutory rate........ Increase (reduction) in income taxes re- 85% dividends received credit relat- Dividends received from unaf- Tax-exempt interest. filiated companies Equity in earnings of Blue Chip Stamps...... deferred acquisition costs Total deferred ....... Amortization of excess of cost over net assets of subsidiary and in- vestee (not deductible for tax .... Capital gains tax rate differential Tax benefit to affiliate sulting from: ing to: Miscellaneous .. Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued 1973 116,000 101,699 $2,864,418 $2,363,135 16,000 401,699 2.781.134 Company, $10 par value $(2,184,761) $2,346,719 1974 99,200 (567.678) S2.658. 239) $(1,839,393) 17,200 (567,678) (2.389,871) December 31, 1973, for their holdings of Blue Chip Stamps. The company does not believe that the stat- utory valuation is indicative of the fair market value of the substantial block of Blue Chip shares repre- sented by the Berkshire Hathaway holdings of which See also note 4 to consolidated financial statements of Berkshire Hathaway Inc. and consolidated sub- The following additional common stock was issued during the two years ended December 31, 1974: March 1973 - 150,000 shares of $11,250,000 Surplus is restricted for dividend purposes by the in- surance departments of the states in which the com- Federal income tax expense (credit) is made up of the these are a part. National Indemnity sidiaries. (D) Stockholders' Equity common stock: panies do business. Federal Income Taxes (Credit) charge applicable to operat- Charge applicable to equity in carn- ings of Blue Chip Stamps.. (Credit) charge applicable to realized Current tax expense (credits) relating lo: Earnings (net operating loss) of insur- ance underwriting operations Dividends received from Blue Chip Realized investment gains (losses) following: ing earnings investment losses Stamns. Total current Totals: 1973 S8,893,491 (384,000) 900,000 (125,180) 586,716 S9.871,027 1973 1974 S2,354,072 (840,000) 653,706 (93,886) 454,690 December 31. $2,528,582 Statutory net income is reconciled to GAAP net in- The investment in Blue Chip Stamps by the companies comprising the Insurance Group represented 989,483 shares, or approximately 19% of that company's total outstanding shares at the end of both 1974 and 1973. The carrying value was comprised of the following: The excess cost over underlying net assets is being amortized over eight years from the beginning of 1972. Amortization charged against earnings of the Insurance Group was $484,180 in 1974 and $480,000 The National Association of Insurance Commissioners assigned per share valuation of $5.25 at December 31, 1974 and $7.25 at December 31, 1973 to the stock of Blue Chip Stamps which is publicly traded in the over-the-counter market. Accordingly, on these bases, the insurance subsidiaries reported in their Convention statements filed with the various state insurance departments an aggregate "market value" of $5,194,784 at December 31, 1974 and S7,171.502 at come as follows: Decrease in deferred acquisition costs. Equity in undistributed earnings of Blue Chip Stamps, net of amortization of Statutory net income ....... Amortization of excess cost of invest- ment in Home and Automobile Insur- Investment in Blue Chip Stamps Income tax effects and adjustments Underlying net asset values at dates of Exces cost, net of amorization of S1,279,853, 1974 and $795.673, 1973. Equity in post-acquisition undistributed excess cost. ance Company GAAP net income Cost, represented by: earnings... Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS December 31, 1974 and 1973 22 1073 12,523.925 6,545.772 5,240,000 1,469,116 1.483,393 977,590 (2,133,000) December 31, 16.449.675 9,176,194 1:80000 1,788,012 1,042,892 (1,678,310) Numerical note references are to the notes to consoli- dated financial statements of Berkshire Hathaway Inc. and consolidated subsidiaries. Note 1 to such statements includes a summary of significant ac- counting policies and practices of the Insurance The financial statements of Berkshire Hathaway Inc.

• Insurance Group include the accounts of wholly-

owned subsidiaries of Berkshire Hathaway Inc. which are engaged in fire and casualty insurance underwriting. The statements are presented on a transactions and balances eliminated, and in accor- dance with generally accepted accounting principles (GAAP) which differ in some respects from princi- ples prescribed or permitted by insurance regulatory authorities (statutory methods) in accordance with which the companies maintain their records. A rec- onciliation of the aggregate capital stock and surplus ("Surplus as regards Policyholders") as determined under the statutory method to that determined and reported herewith in accordance with GAAP is as holders... $37.201,793 $41.595.522 Capital stock and surplus - GAAP $70.230.900 $67.702,318 Statutory surplus as regards Policy- Excess of cost over NAIC market valua- tions of investments in equity securi- ties (excluding stock of Blue Chip Excess of carrying value of investment in Blue Chip Stamps (determined under GAAP pursuant to the equity method over NAIC market valuation Deferred insurance premium acquisi- Net recaverable from matthorized. Income tax effects and adjustments... (A) Note References Sundry nonadmitted assets. Stamps) tion costs.. reinsurers..

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford Financial Statements 1974 and 1973 Peat, Marwick, Mitchell + Co. PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS 206 WEST STATE STREET, SUITE 700 ROCKFORD. ILLINOIS G101 We have examined the consolidated balance sheets National Bank & Irust Co. Of Rockford and subsidiary as of December 31, 1974 and 1973, and the related consolidated statements of income, changes in stockholders' equity and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting xee ria and such other auditing procedures as ve consiered necessary in ments present badly toe shanatal pestion othe dato is National Bane- for the years then ended, in conformity with generally accepted accounting 24 The Board of Directors The Illinois National Bank & Trust Co. of Rockford: January 17, 1975

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1973 $ 5,316,152 236,853 47,904 584,272: 2,795,721 342,642 9,323,544: 450,529- 129,500 499,862 10,403,135 4,295,303 55,303 4.350,606 1,508,374 262.878. 417,739 252,709 16,100 766,862 7,570,268 2,833, 167 61,196 2,772,031 30,477 2,805,508 42,717 $ 2,848,225 Years ended December 31, 1974 $ 6,607,862 361,452 42,986 898,579. 2,797.632 264.283 10,992,794 434,201 139.060 559,578 12,125,633 4,954,302 14,106 4,963.408 1,551,511 246.573 257,229 248,078 7,883,542 4,242,091 220,256 4.021,835 166,022 4,189,857 5 4,189,857 Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME See accompanying notes to consolidated financial statements of bank subsidiary. Income before income taxes, securities gains and extraordinary Income before securities gains and extraordinary item Securities gains, net of related taxes of $7,001 in 1974 and $33,939 in 1973 United States Government obligations. Obligations of states and political subdivisions United States Government agencies. Income before extraordinary item. Total interest income Interest and fees on loans Income on Federal funds sold Service charges on deposit accounts Total operating income. Total operating expenses Gain on sale of real estate, net of related taxes of $19,305 Interest and dividends on: Other securities Interest on borrowed money.. Employee benefits (note 7) . Furniture and equipment (note 4) Provision for loan losses (note 6) Operating income: Trust fees. Other Operating expenses: Interest on deposits Occupancy, net (note 4) Applicable income taxes, net (note 5) Net income 1973 $ 26,683,653 804,781 10.550,049 47,712,563 3,358,350 66,022,357 1,116,504 1,549,003 607.074 S158,404,334 S 55,716.465 81,450.028 137,160,493 835,154- 138.001,647 1.163.658 5,000,000 5.000,000 8,238,029 1,001.000 19,239,029 S158,404,334 Years ended December 31, $ 21,543,577 555.107 10.050,113 15,857,638 3.845,970 5,000,000 70.853.542 1,008,749 1,812.021 1,044,645 $161.581.362 $ 53.177.813 85,519,225 138.697,038 1,005,234 139,702,272 1,251,163 5,000,000 5,000,000 9,626.927 1,001,000 20,627,927 $161.561.302 Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS LIABILITIES RESERVE FOR LOAN LOSSES AND STOCKHOLDERS EQUITY See accompanying notes to consolidated financiai stutements of bank subsidiáry. 26 Common stock of s20 par value. Authorized and issued 250,000 shares ::. Obligations of states and political subdivisions United States Government obligations United States Government agencies Accrued taxes and other liabilities (note 5) : Total stockholders equity. Bank premises and equipment (note 4) Total deposits Total liabilities Cash and due from banks. Investment securities (note 2): Other securities Accrued interest receivable. Demand deposits: . Federal funds sold Time deposits Reserve for loan losses (note 6) Loans (note 3) Stockholders' equity: Undivided profits :: Reserve for contingencies Other assets Liabilities: Surplus

[PAGE 16]

December 31. 1973 815 $ 805 $ 818 1973 10.550 10,550 10.599 S30,150,101 16,206,182 5,312,806 14,353,268 S60.022,357 48,136 47,713 52,057 Pot Took Warhet Pat Thank Market S35,706.525 15.042,339 6.211.502 13,893,176 value value valus, value value value. 10,056 43.778 50.02 230 2300375024052157 S70,853.542 Deferred taxes are provided in recognition of timing experience. Pursuant to regulations of the Comp- troller of the Currency, the Bank adopted in 1969 the five-year historical moving average method to de- termine the minimum annual provision for loan A summary of investments by major classifications is The market value decline in investment securities is Decomber 31, 1924 10,050 45,858 considered to be a temporary condition in view of the fact that management presently intends to hold the securities to maturity or until they can otherwise be disposed of Investment securities with a book value of $7,575,779 and $9,530,567 at December 31, 1974 and 1973, respectively, were pledged to secure public deposits and for other purposes. A summary of the major classifications of loans at losses charged to operating expense. ment-direct $ 565 $ 565 $ 567 $ 46,474 December 31, 1974 and 1973 is as follows: Consumer credit loans (ess unearned discount of $2.722.089 in 1974 and differences. (2) Investment Securities U. S. Govern- Govern- cies 10.050 ment-agen- State and local municipalities without significant loss. U. S. Other. I Loans Commercial loans. $2,786,609 in 1973) as follows: Floor plan loans .. Real estate loans.. Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1974 and 1973 The accounting policies of The Illinois National Bank & Trust Co. of Rockford (a 97.7% owned subsidiary of Berkshire Hathaway Inc.) and its wholly-owned sub- sidiary, Brown Building Corporation, conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description Thee Bank and is wholy one albiday. Al sit reclassified to conform with 1974 presentation. Investment securities are stated at cost, adjusted for amortization of premium. Accretion of discount is not reflected in the accompanying statements and would not be material. Gains or losses on sales of investment securities are recognized only upon re- alization and are shown separately in the statements Installment loans are generally made on a discount basis. Unearned discount is taken into income over the terms of the respective loans using a method that Bank premises and equipment are stated at cost less accumulated depreciation based on the estimated useful life of each asset. Depreciation is computed on the straight-line method for building and auto- mobiles, and on an accelerated method for im- provements, equipment, and drive-in and parking Costs of major additions and improvements are capi- talized. Expenditures for maintenance and repairs are charged against operations as incurred. Taxable income is determined using the cash basis of accounting whereas the accrual method of account- ing is used in preparation of financial statements. Significant Accounting Policies of the more significant accounting policies: approximates straight-line. Bank Premises and Equipment Consolidation Investment Securities Installment Loans Federal Income Taxes Reserve for contingencies $1,001,000 1,001,000 $1.001,000 1973 2,848,225 (2,300,000) (106,545) 441,680 4,478,197 454,209 6.130.441 $ 11,504,527 6.919,649 53,592 76,500 (117,392) 6,932,349 4,572,178 $ 11,504,527 Undivided profits $ 7,796,349 2,848,225 (2,300,000) (106,545) 8,238,029 4,189,857 2,750,000) (50,959) Years ended December 31, $ 9,626,927 1974 4,189,857 (2,750,000) (50,959) 1.388,898 1,530,545 545,570 2,106.915 5,571,928 9,872,360 44,891 263.018 531,735 10,712,004 (5,140,076) 5,571,928 jj0s} Surplus $5,000,000 5,000,000 $5,000.000 Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common stock $5,000,000 5,000,000 35,000,000 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION See accompanying notes to consolidated financial statements of bank subsidiary. net of Net change in stockholders' equity Transfer to reserve for loan losses, net of Decrease in investment securities • . . • Additions to bank premises and equipment Increase (decrease) in cash and due from banks Transfer to reserve for loan losses. Increase in accrued interest receivable Balance December 31, 1972 tax of $4,440 (note 6) Net income.. Cash dividends Balance December 31, 1973 tax of $51,122 (note 6) Net income.. Cash dividends Balance December 31, 1974 Stockholders' equity: Net income. Cash dividends Other, net . Deposits Other, net . Total Increase in loans Total Funds provided: Increase in: Funds used: Other, net .

[PAGE 17]

1973 262,783 166,380 S1.163,656 $ 719,919S 734,195 1974 313,743 217.302 $1,251.163 The components of the reserve for loan losses as of The Bank has a noncontributory pension plan and a profit-sharing plan for all officers and employens with two full years ol service. The total expense was $128,247 for 1974 Based upoo the most recent actuarial report available (as of January 1,1974), the pension fund assets excooded the actuarial computed value of vested benefits; and there was December 31. 1974 and 1973 are as follows: Valuation (asailable for charging off Pension and Profit-Sharing Plan no unfunded past service cost lability. loan losses) ...... Contingency (undivided profits) Deferred taxes. and $144,550 for 2973. Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trusi Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1973 S1.024.601 29.1-3 100,545 4,1-10 1,180,829 17.121 51,168.656 1074 • $1,163,050 7,399 19,300 50,959 51,122 1.292,338 41.172 $1,25L.163 The following schedule summarizes the changes in the reserve for loan losses for the vears ended December 31, The portion of the reserve which was availableto absorb possible loan losses was $719,919 at December 31, 1974 and Reserve for Loan Losses Recoveries on loans previonsly charged Balance at beginning of year. Provisions charged to: Operating expenses Undivided profits Deferced income taxes $734,495 at December 31, 1973. 1974 and 1973: Less loans charged off Balance at end of year (5) 1973 92,268 112,632 (38,208) 39,956 1,748 S114,340 S101,402 (10-4,094) 4,440 of pretax income 48.0% (47.1) 2.4 4.0% 1974 121.091 (9,600) 222,635 14,282 236,917 5227,237 1974 S156,825 28,970 51,122 Amount 48.0% S1.308.778 (1,341,916) 68.756 ...18,792 515S S116300 The sources of timing differences resulting in deferred income taxes and the tax effect of each were as follows: Total tax expense amounted to S227.257 (an effective rate Parcast (30.4) 1.6 (14.1) of 5.1%) in 1974. and $114.380 (an elfective rate of 4.0%) in 1973. a total less than $2,120,215 and $1,368,778 for 1974 and 1973. respectively, computed by applying the United States Federal income tax rate of 48% to income before tax. The 1974 Total currently payable (receiv- Applicable income taxes, net ... Net increase in accrued income laken on cash hasis on tax return and on secro- Net (increase) decrease in accrued ex- penses taken on cash basis on tax re- furn and accrual basis for books... Loan loss deduction on tax return in excess of the amount charged to reasons for these differences are as follows: Anaunt 72,365 (621,052)

• (1.309)

able) Deferred income taxes: al basis for books ...... Stale... Federai.. State.... operating expenses….. beta treatin) 2 120215 tecest ........ (1.3+2,863) income pense...... 5_22T251 Tax expense al stat- in taxes resulting Tax-exempt in- taxes, net of Federal income lax benefits... Tax benefit from from: State parent Other-nel ..... Actual tax ex- Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued S 61,136 33.039 112205 1073 $ 20.354 $759,029 38,380 539,673 81.379 S436.201 405,701 134,351 621.052 (134,351) Bank premises and equipment are recorded at cost less accumulated depreciation of $1.919,822 and $1,777.091 at December 31, 1974 and 1973, respectively. Depreciation expense totaled $146,576 for 1974 and $108,552 for 1973. Accred taxes and other liabilities and the reserve for loan losses in the accompanying balance sheets include deferred taxes of S542,869 and $305.952 at December 31, 1974 and 1973, respectively. Such deferred taxes resuit from timing differences arising from reporting laxable income on the cash basis. The Bank and its subsidiary join in the filing of a consolidated Federal income tax return with the parent company, Berkshire Hathaway Inc. The tax benefit of deductions by the parent has been passed to the Bank, Taxes applicable to net income were as follows: The components of consolidated income tax expense are (1) Bank Premises and Equipment as shown in the following schedules. Tax provision applicable in securities Less tax benefit from parent corporation Income before securities gains Securities gains ................ Applicable income taxes, net Less tax benefit fom parent applica- Taxes currently payable......... Recovery of prior taxes paid through net operating loss carry- back…........... Total henefit from parent .... dinary item ... applicable to: *Rederat only payabile as follows: ble to:

[PAGE 18]

$60,574 32,592 8,030 (6,892) 5,163 1,718 (2,010) 3,239 4,093 1,052 8,383 (1,340) 7,043 979,569 8.56 7.19 $52,929 33,411 7,378 3,319 5,105 1,605 2,979 8,141 929 12,860 12.18 13.13 (Dollars in thousands, except por stare mounts) $59,627 27,742 6,648 1,284 3,241 2,700 111 11,198 12,126 979,569 11.43 12.38 $60,867 26,011 5,043 2,566 1,245 4,712 2,192 6,967 719 7,686 979,569 7.11 7.85 Berkshire Hathaway Inc. FIVE YEAR SUMMARY OF OPERATIONS $39,172 24,569 2,942 (331) 2,349 581 387 1,675 2,973 4,648 (301) 4,565 979,715 4.74 4,66 33 Lines enced alcate merance underwriting and textile operations…. Net earnings from insurance underwriting and textile operations....... Equity in net earnings of bank subsidiary.. Equity in net earnings of Blue Chip Stamps arise bed extraordinary emment gains Realized investment gains (losses) net of in- Average shares outstanding ......... Earnings before realized investment gains (losses) and extraordinary items ....... Insurance premiums earned... Net sales of textile products Interest and dividend income. come taxes Net earnings ... Net earnings ..... Per share: 1974 $ 68,776 32,706 $101,482 $ 892 2,660 4,093 1,164 (2,324) (1,908) 4.577 (2,466) $7,043 $60,526 33,479 $94.005 S10,249 2,837 2,782 (1,966) 1,331 16.357 3,497 512,860 $66,556 27.772 $94.328 197 Thousands of Dollars) $10,701 1,697 2,700 142 (770) 1,359 15,825 3,703 $12,126 $66,050 26.092 $92,142 $6,372 2,192 (648) 1,028 9245 1559 $7,686 Berkshire Hathaway Inc. LINES OF BUSINESS Revenues reflected in the consolidated financial statements include those from (1) premiums earnings and investment income of the Insurance Group, plus (2) sales revenues from the textile business of the Company. The Yoinding Cand summaries for the past ive years the total revenues derived from these $42,249 24,629 $66,878 1970 $2,639 104 2,973 (581) 282 5,116 551 34.565 two categories for the past five years, in thousands of dollars: item, were as follows for the past five years: Unconsolidated bank subsidiary ..... Interest and corporate administrative Sources of Revenues: Sources of Net Income: Blue Chip Stamps ........ expenses........ Realized investment gain (loss) ... Net Earnings. Teria. .. Texance

[PAGE 19]

GAAP $(1,939) (2,068) (2,183) (702) $(6,892) 1974 Statutory $(2,119) (1,470) (1,761) (702) $(6.052) CAAP $4,409 353 (878) (565) $3,319 (Thousands of Dollars) 1973 statutory $4,623 715 (834) (801) 53.703 The combined loss and expense ratio is the traditional measure of underwriting results of property and casualty companies. In any year when that ratio exceeds 100, it generally indicates that unprofitable The total underwriting gain or loss for the Insurance Group for the past three years is shown in the GAAP $4,329 561 62 (667) $4,285 The only difference between the Statutory and GAAP underwriting results is the change in amount of premium acquisition costs (underwriting expenses, i.e., commissions, etc.) which is deferred under GAAP. In each of the above years, the amount of such costs deferred at year-end decreased from the preceding year-end. The decrease of $840,000 in deferred acquisition costs in 1974 was generally in recognition of unfavorable underwriting results expected from certain portions of the in-force book of business, plus, in the case of Home and Auto, where no costs were deferred at December 31, 1974, a recognition of substantially reduced premium volume without yet having achieved commensurate reduc- The premium rates at which the Insurance Group wrote its business in 1974 proved inadequate. Premium rate increases lagged the rate of inflation in both 1973 and 1974, and, while the industry in general and the Berkshire Insurance Group in particular escaped the expected consequences in 1973, they suffered In addition to the negative influence on the Insurance Group of inadequate rates to cover inflating claim costs, the reinsurance operations in 1974 sustained what management considers to have been an above average number of catastrophe loss occurrences related to the April tornadoes in the country. In contrast, management believes that its catastrophe loss occurrences in 1973 were below average in number. The "Urban Auto" business referred to above, conducted by Home and Automobile Insurance Company ("Home and Auto") differs from that of National Indemnity and National Fire & Marine principally in that rates and other aspects of Home and Auto's business are based almost entirely upon the loss experienced in the limited urban area in which it operates. These operations were limited to the Chicago area until 1973 when a similar operation was begun in the Miami area. Premium volume from this Florida operation was only nominal in 1973, but approximated $1,700,000, or 25% of Home and Auto's 1974 net written premiums. This proved unprofitable, a statutory underwriting loss of approximately $1,600,000 was sustained in 1974 on this Florida business, and underwriting in Florida by Home and Auto was terminated in 1974. Losses incurred there are still in process of settlement. Home and Auto's un- derwriting loss in 1973 was attributable to its Cook County, Illinois business which had historically been profitable. Premium rate increases were effected for the Chicago area writings in the fourth quarter of 1974. This resulted in somewhat lower premium writings in this traditional area of Home and Auto's business in 1974, and it is expected that a significantly lower level of premiums will be written in all of Efforts to optimize product sales mix have been continuously underway during the last five years in the textile operations. These efforts tend to be most rewarding when demand for all products is strong as it was in 1972, 1973 and during the first three quarters of 1974. The lack of availability of certain desired 35 Statutory $5,530 614 86 (798) $5.432 Net Sales and Gross Profit from Sales of Textile Products business has been underwritten. Specialized auto, general liability following table: Home state companies tion in operating expenses. and other Reinsurance Urban Auto quite badly in 1974. 1974 $36,738 34,436 12,204 12,938 6,613 7,902 5,442 5,298 $60,997 $60.574 Expenses 100.3 97.1 91.7 94.5 109.8 (Thousands of Dollars) $28,617 29,969 10,184 11,996 6,571 6,120 5,000 4,844 $50,372 $52,920 Underwriting Expenses/ Written Prem. 31.7 30.1 29.7 32.5 32.0 $35,354 37,950 11,436 11,699 6,874 7.092 4,286 2,886 $57,950 $59.627 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS The following table sets forth the net premiums written and earned by the Insurance Group in each (1) National Indemnity Company and National Fire & Marine Insurance Company less the Reinsurance

• Corporal and pranized in the offle in oNly as Mice inta, Texas and lowa underwiting

Le, Sitenandar me ph writer a mobile in one it a mobile veins, singer to ince. alo underviten by National In this hieray Competire are, is the be of naral demity declined from the preceding year by approximately 51 million in both 1973 and 1974. This decline in 1974 was offset by increased writings of workmen's compensation coverages. Private passenger and commercial auto underwritings declined by approximately S7 million from 1972 to 1973; this loss in volume was Combined loss and expense ratios (which are the sum of the ratio of losses and loss expenses incurred to premiums earned plus the ratio of underwriting expenses to premiums written) have been as follows Losses and Loss Adi. Exp./ Earned Prem. 68.6% 67.0 62.0 62.0 77.8 34 . Written Earned Warner Written Earned Earned Written Earned Insurance Premiums Earned and Insurance Underwriting Gain (Loss) (2) Reinsurance Department of National Indemnity. $39,172 60,867 59,627 52,929 60,574 Department of National Indemnity. (3) Home and Automobile Insurance Company. for the Insurance Group for the past five years. NET PREMIUMS Writin thousa Earned Specialized Auto, General Liability and Other(1) • Home State Companies(4) substantially recovered in 1974. $45,086 66,455 57,950 50,372 60,997 of the past three years: Operational Area Reinsurance(2) Urban Auto(3) Totals 1970 1971 1972 1973 1974

[PAGE 20]

17.9 14.2 21.1 4.9 18.2 (9.5) 19.7 Change Amount $1,669 618 1,051 53 1,104 (305) $1,409 $1,548 (112) (384) 51,052 S9,324 4,351 4,973 3,220 $2,833 (Amounts in Thousands) $1,605 (116) 1,080 6,053 (481) $1,008 1974 $10,993 4,969 6,024 1,133 7,157 2,915 $ 4,242 $458 (31) (316) $111 from the fact that a considerable portion of income of the Insurance Group is produced by tax exempt bonds. For 1974, these items exceeded the pre-tax earnings from insurance underwriting and manufacturing operations and all other items of taxable income so that a "net operating loss", as defined by the Internal Revenue Code, was reported for tax purposes. Berkshire Hathaway Inc. and its includible subsidiaries join in the filing of a consolidated Federal income tax return, and the 1974 consolidated net operating loss can be carried back to recover income taxes paid by members of the group for 1971 and 1972. Consequently, an income tax credit to earnings for 1974 appears in the summary of earnings, compared Berkshire's equity in net earnings of the illinois National Bank and Trust Co. of Rockford, a 98% owned subsidiary of Berkshire, increased to $4,093,000 in 1974, an increase of $1,311,000, or 47%, over the $2,782,000 recorded for 1973. The bank incurred no current Federal income tax expense for 1974, benefiting, as a member of the group for which Berkshire files a consolidated Federal income tax return, from the net operating losses sustained by other members of the group. Increases in the banks pre-tax earnings thus Income of the bank before income taxes and before securities transactions increased $1,409,000, or Loan demand continued strong throughout the year and was accompanied by record high interest rates. Accordingly, interest income increased as a result of increased volume of earning assets and a higher yield thereon. Increased reliance on interest bearing time deposits as a source of funds and an increased Non-interest expense items declined in total primarily as the result of a change instituted by local taxing authorities in assessing to Berkshire, as a shareholder of the bank, certain capital stock taxes previously assessed to the bank. While bank earnings increased as a result of this action by the taxing authorities, the net effect of this change was of no benefit to Berkshire, since taxes not heretofore paid by Berkshire amounting to approximately $260,000 appear as part of Berkshire's 1974 selling and adminis- Equily in he 5 riy or Blueachings of Blue Chip Stamps as computed by the equity method for each 49.7%, over 1973. The sources of this change were as follows (dollars in thousands): Income before taxes and before securities average rate paid thereon caused the rise in interest expense. Amortization of excess of cost over equity in net to an income tax expense for preceding years. Equity in Net Earnings of Bank Subsidiary virtually became increases in its net earnings. of the past three years has been as follows: Equity in net earnings Applicable income taxes set equiry in earnings. Net interest earnings Non-interest expenses . • • Interest income Interest expense Non-interest income transactions trative expenses. Average Per Cent Earned 5.72 6.37 6.44 6.28 6.11 Total 51,422 79,117 103,217 117,516 131,347 8,030 Preferred and common stocks (In Thousands of Dollars) 9,700 Patel Interest and Dividend Income 2,942 5,043 6,648 7,378 10,211 16,042 36,205 52,790 raw materials was a minor deterrent to these efforts in early 1974. The shortages were, we believe, attributable to distortions existing in the economy generally and have not persisted. In late 1974 demand for our products fell to depressed levels; the major impact of this will be reflected in lower sales and gross 1973 compared to 1972: Total sales of textile products in 1973 increased over 1972 by approximately 20% measured in dollars, and 14% measured in yards. The increase in unit sales was achieved in a profitable area and this, combined with inflation, caused stated gross profits in 1973 to increase by 25% over 1972. See Note 7 to the consolidated financial statements which discloses the effect on 1973 earnings of the change 1974 compared to 1973: In 1974, unit sales of textile products declined approximately 14% from 1973; but improved product mix and higher selling prices influenced in large part by inflation allowed dollar Interest and dividend income is earned almost entirely by the Insurance Group. The continuing increase in this category of income is the result of increased investments. Interest and dividend income is related to average investments for the past five years in the following table, which excludes the investment in and dividends received from Blue Chip Stamps, which is accounted for by the equity method. (Amounts in Thousands) investment in pe pered and coed on ind relate an ezerage revelt ne he bones he ne average on the bonds tends to exceed that on the stocks. Investments for the past five years are categorized in The significant increase in interest expense in 1973, as compared to 1972, is attributable to the increase in indebtedness outstanding as a result of issuance in March of 1973 of $20,000,000 8% Senior Notes due the following table, at the average of their carrying values at the beginning and end of each year: 1993. Part of the proceeds of that financing was used to repay $9,000,000 of bank notes which were Tacome year Care is priate terence de vengeta mad me epo rept ratie hancil statements, and income subject to tax. The difference arises principally from certain dividends received credits and 36 outstanding in 1972, with respect to which the effective interest rate had been less than 7%. Average Investments 51.422 79,117 103,217 117,516 131,347 Bill To ser short-term obligations 41,722 68,906 87,175 81,311 78,557 in that year to the LIFO basis of determining cost of inventories. sales and gross profits to remain almost level with 1973. Interest and Dividend Income 1970 1971 1973 1974 1970 1971 1972 1973 1974 profits in 1975. Interest Expense

[PAGE 21]

LOw High The common stock of Berkshire Hathaway Inc. is traded in the over the counter market. The high and low bid President of the Company and Chief Operating Officer of the DIRECTORS AND EXECUTIVE OFFICERS WARREN E. BuFFETT, Director and Chairman of the Board Retired, Former Chairman of the Board of Directors Vice President, Secretary and Treasurer of the Company prices for the stock in each quarter of 1973 and 1974 is set forth in the following table: The Company has not paid a dividend in the past two years. Chief Executive Officer of the Company Berkshire Hathaway Inc. Textile Operations of the Company KENNETH V. CHACE, Director MALCOLM G. CHACE, IR., Director J. VERNE MCKENZIE, Director COMMON STOCK PRICES 1973 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1974 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter $1.35 (10) SO.92 1973 $1.72 (12) (52) $1.08 1972 $0.99 (.07) _(.68) $0.24 The number of shares of Blue Chip Stamps owned by Berkshire has increased in each of the past three years. Average shares owned in 1972, 1973 and 1974 were, respectively, 464,527, 934,000, and 1,144,670. Realized investment losses in 1974 aggregated $1,908,000 with a tax carryback credit of $568,000 reducing the after-tax realized investment loss to $1,340,000. In 1973 and 1972 realized investment gains before taxes were, respectively, $1,332,000 and $1,359,000; after taxes, $929,000 and $928,000. Realization of investment gains or losses is determined by prevailing investment strategy as applied under changing Unrealized market value decreases in investments in preferred and common stocks of unaffiliated companies amounted to $4,356,000 in 1974 and $13,741,000 in 1973, contrasted with a nominal $272,000 increase in 1972. In the absence of operating or investment reasons compelling liquidation, we consider it inappropriate to reflect in income the results of temporary fluctuations in market value of investments; During the first ten weeks of 1975, the company realized investment losses of approximately $1,500,000, net of applicable tax credit. Also during the first ten weeks of 1975 management noted a recovery exceeding $10,000,000 in market value of its preferred and common stock portfolio. Neither the lasting effect, total timing nor extent of this recovery in market values can be predicted, but management believes that over the long term, no significant net loss to the company will result from its continued holding or sale of the consequently, unrealized investment losses or gains do not appear in the summary of earnings. Stated on the basis of per-average-share-owned, the above table is as follows: Amortization of excess of cost over equity in net securities which constituted its portfolio at December 31, 1974. Equity in net earnings Applicable income taxes Net equity in earnings. Realized Investment Gains (Losses) assets. economic conditions.

[PAGE 22]

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