1976 年伯克希尔完整年报

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PURDUE UNIVERSITY APR 1 5 1977 KRANNERT LIBRARY 27 Prem Jain BERKSHIRE J HATHAWAY INC. 1976 ANNUAL REPORT TO THE STOCKHOLDERS

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Berkshire Hathaway Inc. 1976 Annual Report to the Stockholders BUSINESS OF THE COMPANY The Company is engaged directly and through subsidiaries in the manufacture and sale of woven textiles in the United States and through a subsidiary in the sale of textile products in Canada. Through the underwriting of fire and casualty insurance throughout the United States. In January 1976, a newly subsidiaries collectively referred to in this annual report as the Insurance Group, the Company is engaged in formed subsidiary of the Company acquired the assets comprising a relatively smaller business engaged in the manufacture of branded (K & W) chemical products distributed nationwide for use in the automotive Illinois which is engaged in the commercial banking business. The Company and subsidiary members of the dermarket. The Company owns approximately 98% of The Illinois National Bank & Trust Co. of Rockford, Insurance Group have significant holdings in Blue Chip Stamps, a California corporation - the businesses of which are more fully described herein. CONTENTS Pages 2-5 6 Chairman's Letter Accountants' Certificate Regarding Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries and Insurance Group 7-19 Financial Statements — Berkshire Hathaway Inc. and Consolidated Subsidiaries 20-25 Financial Statements - Berkshire Hathaway Inc. - Insurance Group 26 Accountants' Certificate Regarding Financial Statements of The Illinois National Bank & Trust Co. of Rockford 27-34 Financial Statements - The Illinois National Bank & Trust Co. of Rockford 35 Lines of Business 36 Five Year Summary of Operations 37-41 Management's Discussion and Analysis of the Summary of Operations 42 Directors and Executive Officers 42 Common Stock Prices 1

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Berkshire Hathaway Inc. To the Stockholders of Berkshire Hathaway Inc.: After two dismal years, operating results in 1976 improved significantly. Last year we said the degree of progress in insurance underwriting would determine whether our gain in earnings would be "moderate" or "major". As it turned out, earnings exceeded even the high end of our expecta- National Indemnity Company. tions. In large part, this was due to the outstanding efforts of Phil Liesche's managerial group at record figure, we consider return on shareholders' equity to be a much more significant yardstick In dollar terms, operating earnings came to $16,073,000, or $16.47 per share. While this is a of economic performance. Here our result was 17.3%, moderately above our long-term average and achieved in 1972. even further above the average of American industry, but well below our record level of 19.8% Our present estimate, subject to all the caveats implicit in forecasting, is that dollar operating from the 1976 figure. earnings are likely to improve somewhat in 1977, but that return on equity capital may decline a bit Textile Operations Our textile division was a significant disappointment during 1976. Earnings, measured either by return on sales or by return on capital employed, were inadequate. In part, this was due to improper evaluation of machinery and personnel capabilities. Ken Chace, as always, has been candid in reporting problems and has worked diligently to correct them. He is a pleasure to work with - even under difficult operating conditions. While the first quarter outlook is for red ink, our quite tentative belief is that textile earnings in 1977 will equal, or exceed modestly, those of 1976. Despite disappointing current results, we continue to look for ways to build our textile operation and presently have one moderate-size acquisition under consideration. It should be recognized that the textile business does not offer the expectation of high returns on investment. Nevertheless, we maintain a commitment to this reasonable returns on average are possible. division - a very important source of employment in New Bedford and Manchester - and believe Insurance Underwriting Casualty insurers enjoyed some rebound from the disaster levels of 1975 as rate increases finally outstripped relentless cost increases. Preliminary figures indicate that the stockholder- owned portion of the property and casualty industry had a combined ratio of 103.0 in 1976, compared to 108.3 in 1975. (100 represents a break-even position on underwriting - and higher figures represent underwriting losses.) We are unusually concentrated in auto lines where stock dramatic, from 115.4 to 98.7. companies had an improvement from 113.5 to 107.4. Our own overall improvement was even more Our major sector in insurance, the traditional auto and general liability business of National Indemnity Company, had an outstanding year, achieving profit levels significantly better than the industry generally. Credit for this performance must be given to Phil Liesche, aided particularly by Roland Miller in Underwriting and Bill Lyons in Claims. 2

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Volume at National Indemnity Company grew rapidly during 1976 as competitors finally reacted to the inadequacy of past rates. But, as mentioned in last year's annual report, we are concentrated heavily in lines that are particularly susceptible to both economic and social infla- tion. Thus present rates, which are adequate for today, will not be adequate tomorrow. Our opinion is that before long, perhaps in 1978, the industry will fall behind on rates as temporary prosperity produces unwise competition. If this happens, we must be prepared to meet the next wave of inadequate pricing by a significant reduction in volume. Reinsurance underwriting has lagged the improvement in direct business. When mistakes are made in the pricing of reinsurance, the effects continue for even longer than when similar mistakes are made in direct underwriting. George Young, an outstanding manager, has worked tirelessly to achieve his goal of profitable underwriting, and has cancelled a great many contracts where appropriate rate adjustments were not obtainable. Here, as in the direct business, we have had a concentration in casualty lines which have been particularly hard hit by inflationary conditions. The near term outlook still is not good for our reinsurance business. Our "home state" operation continues to make substantial progress under the management of John Ringwalt. The combined ratio improved from 108.4 in 1975 to 102.7 in 1976. There still are some excess costs reflected in the combined ratio which result from the small size of several operations. Cornhusker Casualty Company, oldest and largest of the home state companies, was the winner of the Chairman's Cup in 1976 for achievement of the lowesi loss ratio among the home state companies. Cornhusker also achieved the lowest combined ratio in its history at 94.4, marking the fifth time in its six full years of existence that a ratio below 100 has been recorded. Premium growth was 78% at the home state companies in 1976, as market position improved significantly. We presently plan a new home state operation later this year. Our Home and Automobile Insurance Company subsidiary, writing primarily automobile husiness in the Cook County area of Illinois, experienced a strong recovery in 1976. This is directly altributable to John Seward who. in his first full year, has revamped significantly both rating methods and marketing. The auto business has been shifted to a six month direct bill policy, which permits a faster reaction time to underwriting trends. Our general liability business at Home and Automobile has been expanded significantly with good results. While it remains to be proven that progress John Seward has achieved. we can achieve sustained underwriting profitability at Home and Auto, we are delighted with the Overall, we expect a good year in insurance in 1977. Volume is high and present rate levels should allow profitable underwriting. Longer term, however, there are significant negatives in the insurance picture. Auto lines, in particular, seem highly vulnerable to pricing and regulatory problems produced by policital and social factors beyond the control of individual companies. Insurance Investments Pre-tax investment income in 1976 improved to $10,820,000 from $8,918,000 as invested assets built up substantially, both from better levels of profitability and from gains in premium volume. In recent reports we have noted the unrealized depreciation in our bond account, but stated that we considered such market fluctuations of minor importance as our liquidity and general financial strength made it improbable that bonds would have to be sold at times other than those of our choice. The bond market rallied substantially in 1976, giving us moderate net unrealized gains at yearend in the bond portfolios of both our bank and insurance companies. This, too, is of minor importance since our intention is to hold a large portion of our bonds to maturity. The corollary to higher bond prices is that lower earnings are produced by the new funds generated for investment.

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On balance, we prefer a situation where our bond portfolio has a current market value less than carrying value, but more attractive rates are available on issues purchased with newly-generated Last year we stated that we expected 1976 to be a year of realized capital gains and, indeed, gains of $9,962,000 before tax, primarily from stocks, were realized during the year. It presently appears that 1977 also will be a year of net realized capital gains. We now have a substantial unrealized gain in our stock portfolio as compared to a substantial unrealized loss several years ago. Here again we consider such market fluctuations from year to year relatively unimportant; unrealized appreciation in our equity holdings, which amounted to $45.7 million at yearend, has declined by about $5 million as this is written on March 21st. However, we consider the yearly business progress of the companies in which we own stocks to be very important. And here, we have been delighted by the 1976 business performance achieved by most of our portfolio companies. If the business results continue excellent over a period of years, we are certain eventually to achieve good financial results from our stock holdings, regardless of wide year-to-year fluctuations in market values. Our equity holdings with a market value of over $3 million on December 31, 1976 were as follows: No. of Shares Company Cost 1,986,953 141,987 California Water Service Company 1,294,308 Government Employees Insurance Company Convertible Preferred $ 3,608,711 395,100 Government Employees Insurance Company Common Stock 19,416,635 562,900 Interpublic Group of Companies 4,530,615 4,115,670 188,900 Kaiser Industries, Inc. 170,800 83,400 Munsingwear, Inc. 3,398,404 8,270,871 National Presto Industries, Inc. 934,300 Ogilvy & Mather International 1,689,896 Total The Washington Post Company Class B 10,627,604 2.762,433 All other Holdings $58,420,839 Total Equities 16,974,375 $75,395,214 You will notice that our major equity holdings are relatively few. We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business: (1) favorable long-term economic characteristics; (2) competent and honest management; (3) purchase price attractive when measured against the yardstick of value to a private owner; and (4) an industry with which we are familiar and whose long-term business that is one reason for our concentration of holdings. We simply can't find one hundred different characteristics we feel competent to judge. It is difficult to find investments meeting such a test, and securities that conform to our investment requirements. However, we feel quite comfortable concentrating our holdings in the much smaller number that we do identify as attractive. make a purchase with a shorter expected time horizon such as Kaiser Industries. Here a distribu- Our intention usually is to maintain equity positions for a long time, but sometimes we will tion of securities and cash from the parent company is expected to be initiated in 1977. Purchases were made in 1976 after the announcement of the distribution plan by Kaiser management. Banking Eugene Abegg, Chief Executive of Illinois National Bank and Trust Company of Rockford, Illinois, our banking subsidiary, continues to lead the parade among bankers — just as he has ever since he opened the bank in 1931. 4

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Recently, National City Corp. of Cleveland, truly an outstandingly well-managed bank, ran an ad stating "the ratio of earnings to average assets was 1.34% in 1976 which we believe to be the best percentage for any major banking company." Among the really large banks this was the best earnings achievement but, at the Illinois National Bank, earnings were close to 50% better than those of National City, or approximately 2% of average assets. This outstanding earnings record again was achieved while: (1) paying maximum rates of interest on all consumer savings instruments (time deposits now make up well over two-thirds of the deposit base at the Illinois National Bank), (2) maintaining an outstanding liquidity position (Federal funds sold plus U. S. Govern- ment and Agency issues of under six months' duration presently are approximately equal to demand deposits), and (3) avoiding high-yield but second-class loans (net loan losses in 1976 came to about $12,000, or .02% of outstanding loans, a very tiny fraction of the ratio prevailing in 1976 in the banking industry). Cost control is an important factor in the bank's success. Employment is still at about the level existing at the time of purchase in 1969 despite growth in consumer time deposits from $30 million 1o $90 million and considerable expansion in other activities such as trust, travel and data processing. Blue Chip Stamps During 1976 we increased our interest in Blue Chip Stamps, and by yearend we held about 33% of that company's outstanding shares. Our interest in Blue Chip Stamps is of growing importance 1o us. Summary financial reports of Blue Chip Stamps are contained in the footnotes to our attached financial statements. Moreover, shareholders of Berkshire Hathaway Inc, are urged to obtain the current and subsequent annual reports of Blue Chip Stamps by requesting them from Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040. Miscellaneous K & W Products has performed well in its first year as a subsidiary of Berkshire Hathaway Inc. Both sales and earnings were up moderately over 1975. We have less than four years remaining to comply with the requirement that our bank be divested by December 31, 1980. We intend to accomplish such a divestiture in a manner that minimizes disruption to the bank and produces good results for our shareholders. Most probably this will involve a spin-off of bank shares in 1980. We also hope at some point to merge with Diversified Retailing Company, Inc. Both corporate simplification and enhanced ownership position in Blue Chip Stamps would be benefits of such a merger. However, it is unlikely that anything will be proposed in this regard during 1977. Warren E. Buffett, Chairman March 21, 1977 5

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PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS KIEWII PLAZA OMAHA, NEBRASKA 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway Inc. and sheets of the Berkshire Hathaway Inc. - Insurance Group as of December 31, 1976 consolidated subsidiaries as of January 1, 1977 and January 3, 1976, the balance and 1975, and the related consolidated statements of earnings and retained earniny: and changes in financial position of Berkshire Hathaway Inc. for the 52 weeks endel January 1, 1977 and the 53 weeks ended January 3, 1976 and the statements of incom and unassigned surplus and changes in financial position of the Berkshire Hathaway Inc. - Insurance Group for the years ended December 31, 1976 and 1975. Our examination was made in accordance with generally accepted auditing standards, auditing procedures as we considered necessary in the circumstances. Company. The Company's investment in Blue Chip Stamps at January 1, 1977 and not examine the financial statements of Blue Chip Stamps, an investee of the January 3, 1976 was $27,304,491 and net earnings of Blue Chip Stamps was $3, 365,946 $18,177,479, respectively, and its equity in 1976 and 1975, respectively. The financial statements of Blue Chip Stamps were and $2, 002, 652 for the years: examined by other auditors whose report thereon has been furnished to us and our opinion expressed herein, insofar as it relates to the amounts included for Blue Chip Stamps, is based upon the report of the other auditors. In out teport dated March 26, 1976, our opinion on the financial statements for If any, as might have been determined to be necessary had the financial state- the year ended January 3, 1976 was qualified for the effect of such adjustments ments of Blue Chip Stamps been audited for the nine months ended November 29, 1975. 1976 of the auditors who examined the financial statements of Blue Chip Stamps As indicated above, we have now been furnished with the report dated April 12, January 3, 1976 financial statements, for the year ended February 28, 1976. Accordingly, our present opinion on the that expressed in our previous report. as presented herein, is different from aforementioned consolidated financial statements present fairly the financial In our opinion, based upon our examination and the report of other auditors, the position of Berkshire Hathaway Inc. and consolidated subsidiaries at January 1, 1977 and January 3, 1976 and the Berkshire Hathaway Inc. - Insurance Group at December 31, 1976 and 1975 and the results of their operations and the changes in their financial position for the respective years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. PeAr, MarwicK, Mraken + Co. March 11, 1977 6

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS Jan. 1, 1977 Jan. 3, 1976 (ash $ 3,436,996 $ 6,044,526 Investments, other than affiliates (notes 3 and 4): U. S. Treasury Bills and other short-term obligations, at cost which approx- Bonds, at amortized cost imates market 15,489,052 78,760,945 16,175,265 89,215,773 Preferred stocks, at cost 22,286,948 2,558,275 Common stocks of unaffiliated companies, at cost 53,108,266 39,341,135 Total investments, other than affiliates 180,100,039 136,835,620 Investments in affiliates (notes 5 and 6): Unconsolidated bank subsidiary Common stock of Blue Chip Stamps 24,731,779 27,304,491 23,424,329 18,777,479 Other unconsolidated subsidiaries 879,602 1,120,333 Total investments in affiliates 52,915,872 43,322,141 Recoverable Federal income taxes Accounts receivable from customers, agents and others, net (note 7) 23,730,027 19,710,105 4,400,000 Real estate, Inventories (note 8) 9,301,321 8,135,615 equipment, furniture and leasehold improvements, at cost less Deferred insurance premium acquisition costs allowance for depreciation and amortization (note 9) 5,051,699 3,722,242 6,820,000 2,950,000 (ther assets $283,041,269 1,685,315 $225,741,417 621,168 LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums Losses and loss adjustment expenses $ 85,152,259 Amounts due for purchase of securities Funds held under reinsurance treaties : 36,736,618 $ 73,033,492 3,783,169 22,344,290 2,939,462 Income taxes: Accounts payable and accrued expenses : 7,259,034 839,495 5,790,070 679,990 Deferred Current 4,677,301 3,346,111 178,546 4,522,326 464,260 2,518,786 7½% debentures due 1987 (note 10) 505,820 8% senior notes due 1993 (note 12) Sundry installment promissory notes (note 11) 20,000,000 3,602,480 579,070 20,000,000 Excess of net assets of consolidated subsidiaries over cost of investment 388,493 579,070 Other liabilities • • • 167,748,136 132,851,225 679,219 Stockholders' equity (note 12): Common stock of $5 par value. Authorized 1,100,000 shares; issued 979,569 Retained earnings shares 6 • : 110,827,343 4,897,845 87,992,347 4,897,845 115,725,188 92,890,192 Less 6,647 shares of common stock in treasury at cost . . Total stockholders' equity mammo 115,293,133 432,055 92,890,192 Commitment and contingent liability (notes 14 and 17) $283,041,269 $225,741,417 See accompanying notes to consolidated financial statements. 7

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Ian. 1, 1977 Year ended Finds provided: Jan. 3, 1976 From operations: Charges (credits) to earnings not requiring (providing) funds: Net earnings $22,834,996 $ 4,691,565 Equity in undistributed earnings of Blue Chip Stamps Equity in undistributed earnings of bank subsidiary (3,255,762) (1,307,450) (1,853,481) ( (1,007,450) Depreciation and amortization Accretion of discount on bonds (1,033,805) (384,278) (Increase) decrease in deferred insurance premium acquisition 618,024 536,632 Decrease (increase) in recoverable income taxes costs (3,832,608) (1,599,266) 1,450,000 (3,589,461) 4,400,000 Increase in accounts receivable from customers, agents and others 507,771 (32,731) (Increase) decrease in inventories 10,970,214 (892,738) Increase in unpaid losses and loss adjustment expenses Increase in funds held under reinsurance treaties Increase in unearned premiums 13,992,841 272,395 843,707 639,423 82,178 Increase (decrease) in liability for income taxes Increase in accounts payable and accrued expenses 1,312,783 5,305,080 (510,277) 378,721 Other, net (585,938) (1,475,054) 45,309 22,944.887 Dividends received from unconsolidated subsidiaries Funds provided from operations 45,779,883 3,216,511 1,218,473 224,000 1,150,000 82,000 Decrease in cash Proceeds from issuance of long-term debt $50,108,300 2.885,944 $ 4,448,511 Minds used: Net assets of acquired businesses: Investments Cash $ 278,414 3,734,736 $ 210,577 Inventories Accounts receivable 272,968 430,461 1,786,147 646,822 626,600 2,643,834 Other assets Real estate and equipment (1,665,000) 46,680 Notes payable Other liabilities (1.725,221) (1,361,913) 4.264,780 1,660,325 Additions to real estate, equipment, furniture and leasehold improvements 1,320,881 345,401 Repayment of debt Purchase of treasury stock : 432,055 340,187 536,917 - Cost of net purchase (sale) of investments: Bonds U.S. Treasury Bills -... (1,773,574) 19,728,673 8,685,226 5,067,102 6,846,016 Common stocks of unaffiliated companies Preferred stocks 11,855,553 (11,328,730) (296,910) Common stock of Blue Chip Stamps 5,271,250 Unconsolidated subsidiaries Net purchase of investments • • (16,731) 15,000 43,750,397 302,478 Increase in cash 1,603,390 $50,108,300 $ 4.448,511 See accompanying notes to consolidated financial statements. 9

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 1, 1977 and January 3, 1976 (1) Summary of Significant Accounting Policies and Practices (a) Basis of Presentation The accounts of Berkshire Hathaway Inc., the parent Company, are consolidated with the accounts of wholly-owned subsidiaries engaged in manufacturing businesses, and the accounts of subsidiary insurance The parent Company's investment in The Illinois National Bank & Trust Co. of Rockford is accounted for on the companies (The "Insurance Group"), wholly-owned by Berkshire Hathaway Inc. equity basis. Immaterial subsidiaries are not consolidated and investments therein are carried at cost less dividends received from such subsidiaries. The accounts of the parent Company and of textiles manufacturing subsidiaries are maintained on the basis of primarily the Insurance Group, are maintained on the basis of the calendar vear. a fiscal year ending on the Saturday nearest to December 31, while the accounts of other subsidiaries. (b) Investment in Securities, Other than Affiliates Investments in bonds are stated at amortized cost; investments in preferred and common stocks other than affiliates are carried at the lower of aggregate cost or market value. (c) Investment in Blue Chip Stamps The investment in Blue Chip Stamps ("Blue Chip") is accounted for on the equity basis. Deferred income taxes are provided for with respect to undistributed earnings of Blue Chip under the assumption that such earnings will be distributed as taxable dividends. Through February 1976, Blue Chip determined income on the basis of a fiscal year ending on or about February 28, and through 1975 Berkshire Hathaway Inc. reflected November 30. In December 1976, Blue Chip changed its 52-53 week fiscal year-end from approximately its equity in Blue Chip's earnings on the basis of that company's twelve months ending on or about equity in Blue Chip's earnings based on that company's calendar year 1976 results. This change in fiscal year February 28 to approximately December 31. Accordingly, for 1976, Berkshire Hathaway Inc. determined its reporting in determining equity in Blue Chip's earnings did not have a material effect on the 1976 net earnings of Berkshire Hathaway Inc. (See note 5.) (d) Insurance Premiums Insurance premiums are recognized as revenues ratably over the term of the policies. Unearned premiums are reinsurers in the amount of $4,281,000 at December 31, 1976 and $2,885,610 at December 31, 1975. Premium computed on the monthly pro rata basis and are stated after deduction for reinsurance placed with acquisition costs such as commissions, premium taxes and certain other underwriting expenses are, pursuant to statutory insurance accounting rules, charged against income when incurred. However, for financial statement purposes, a portion of such costs are deferred and charged against income as the related premiums are earned. (e) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses based upon (1) aggregate case basis upon past experience, (3) estimates received relating to assumed reinsurance, and (4) deduction of amounts estimates for losses reported, in respect to direct premiums written, (2) estimates of unreported losses based for reinsurance placed with reinsurers in the amount of $8,619,481 at December 31, 1976 and $6,094,384 at December 31, 1975. (f) Real Estate, Equipment, Furniture and Leasehold Improvements These items of property (including significant betterments and renewals) are carried at cost depreciated over their useful lives estimated at the date of acquisition. The double-declining balance method is used to calculate depreciation of new items of textile properties acquired after 1965; the straight-line method is 10

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued applied for other items. Maintenance, repairs and renewals of a minor nature are generally charged to operations as incurred. (g) Inventories Inventories relate to manufacturing operations and are stated at cost, determined for the parent Company under the last-in, first-out method. Inventories of manufacturing subsidiaries are stated at the lower of cost or market, determined under the first-in, first-out method. (h) Income Taxes A consolidated Federal income tax return is filed by the parent Company and its eligible subsidiaries. Amounts included in the consolidated balance sheets for Federal income taxes payable or recoverable include the A provision for deferred taxes is made in recognition of timing differences created by the manner in which the apportioned Federal tax amounts of the companies whose accounts are consolidated. Insurance Group accounts for certain income and expense items for financial reporting purposes and the Investment tax credits on qualifying property and equipment acquisitions are applied as a reduction of accounting treatment of these items for income tax purposes. income tax expense in the year realized. (2) Acquired Businesses "'ngaged in the manufacture and sale of branded chemical products used in the automotive after market. Manufacturing In January 1976, the Company acquired net assets valued at approximately $2.1 million comprising a business facilities of this business are located in Los Angeles, California and Bloomington, Indiana. The assets were acquired through a newly formed subsidiary; the acquisition has been accounted for as a purchase and 1976 results of the operations are included in the consolidated statements of earnings. Promissory notes aggregating $1,218,473 were issued by the Company as part of the purchase transaction. In a related transaction on the same date, an insurance subsidiary of the Company purchased for approximately previously been conducted with and through the Company's Insurance Group. 1976 results of this acquired subsidiary $2.2 million cash, all of the outstanding capital stock of a small reinsurance operation, the business of which had •re included in the statements of income of the Insurance Group and in the consolidated statements of earnings. (Waumbec"), Manchester, New Hampshire. Waumbec is engaged in manufacturing, distributing and selling woven On April 28, 1975, the Company purchased all of the outstanding capital stock of Waumbec Mills Incorporated fabrics. A wholly-owned subsidiary of Waumbec engages at the same location in the finishing of textile fabrics. The acquisition of Waumbec has been accounted for as a purchase, and results of operations from date of acquisition are included in the consolidated statements of earnings. The cost of Waumbec to the Company, including direct acquisition costs, was $1,660,325; installment promissory notes of principal amount of $1,150,000, which bear interest at 8% per annum, were issued by the parent Company in partial consideration of the purchase price with the balance paid in cash. applied in accordance with the Accounting Principles Board Opinion No. 16 to eliminate the net property, plant and The net book value of assets less liabilities of Waumbec was in excess of the purchase price; such excess was equipment accounts of Waumbec and its subsidiary as they existed at the purchase date. As a result of that acquisition adjustment, no depreciation expense with respect to the acquired properties (which as to Waumbec's prior basis of accountability amounted to $310,000 in 1976 and $239,000 during the period of the Company's ownership in 1975), has been charged to earnings, nor will such depreciation be chargeable to future consolidated earnings. Waumbec and its subsidiary as of the date of acquisition had unused net operating loss carryovers, as defined by carryovers, they will be accounted for as "negative goodwill" to be amortized into consolidated income in future the Internal Revenue Code, of approximately $2.6 million. To the extent that future tax benefits are derived from such periods which will not coincide with the periods in which benefits, if any, are realized. Such benefits will arise only if Waumbec and its subsidiary have future taxable income, and then only to the extent that such income exceeds aggregate net losses for tax purposes, if any, of other members of the consolidated group. No such tax benefits were 11

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued realized in 1976; management of Berkshire Hathaway Inc. believes some tax benefits might be realized, though their effect on income in any given future accounting period would not be material in amount. their actual execution, certain items in the consolidated statement of earnings for 1975 on a pro forma basis would hav Had the purchase of these businesses been consummated on the same basis at the beginning of the year prior lo Insurance premiums earned Earnings before equity in net earnings of other companies and realized investment gains or losses Net sales of manufactured products $59,366,000 38,328,000 Net earnings 734.000 Net earnings per share 4.165.000 4.25 (3) Bonds and Common Stocks Deposited with Others Bonds and common stocks were deposited in trust with various regulatory authorities or others as follows: December 31.1925 Common stocks - at cost Bonds - at amortized cost ......... $ 7.199,764 18,606,648 $ 2,619,268 20.911.305 (4) Investment in Securities of Unaffiliated Companies companies at December 31, 1976 and 1975 is as follows: A summary of the aggregate cost and approximate market value of investments in securities of unaffiliated 1976 1975 Cost Bonds Market Cost Market $89,215,773 $ 90.425,187 $78.760,945 $74.487,055 Equity securities: Common stocks Preferred stocks 22,286,948 53,108.266 32,732,520 88.318,145 39.341,135 2,558,275 39.280.357 2.886.871 $75,395,214 $121.050,665 $11,899.110 S12.167.220 unrealized losses, $636,332. Net realized gains of $9,961.584 on the sale of securities were included in the determination At December 31, 1976, with respect to equity securities, gross unrealized gains were $46,301,783 and gross of net income for 1976. The cost of securities sold is generally determined on a first-in. first-out basis. (5) Investment in Blue Ghip Stamps increased during 1976 to 33.2% at January 1. 1977. The investment is accounted for by the equity method The Company's consolidated investment in Blue Chip Stamps ("Blue Chip") remained at 25.6% during 1975 bul Equity in net earnings of Blue Chip reflects the following for the past two years. 1976 1975 Dividends received Provision for current income taxes Equity in undistributed earnings • • $ 378,982 3,354,381 $ 318.056 2,027,603 Amortization of net excess of cost of investment over underlying net asset values Provision for deferred income taxes (241,515) (27,282) (145,986) (22,900) $3,365,946 (98,620) (174,121) $2,002.652 Equity in 1975 earnings was based on the fifty-two weeks operations of Blue Chip ended November 29, 1975. Blue Chip changed from a February 28 year-end reporting basis to a calendar vear reporting basis for 1976 and, accordingly equity in 1976 earnings is based on the fifty-three weeks operations of Blue Chip ended on January 1. 1977. Equity in 12

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued i lendar year 1976 earnings so computed is approximately $400,000 greater than if it were computed with regard to Blue Chip's operations for the fifty-two weeks ended in November 1976. This result obtains primarily from the fact that the Company's consolidated holdings of Blue Chip shares was approximately 30% greater in December 1976 than in Ircember 1975; had Blue Chip retained its previous fiscal year, the Company's equity in earnings attributable to its increased holdings in December 1976 would not have been reflected until the first quarter of 1977. Amortization of the difference between the Company's cost of Blue Chip shares and approximate underlying net *it values at dates of acquisition has been computed on the basis that such difference would be extinguished by Immary 1, 1981. At 1976 year-end the Company's carrying value of its consolidated holdings of Blue Chip shares amounting to $27,304,491 is $1,259,279 less than underlying net asset value on that date while such net asset value was Ir Company's intention to amortize the 1976 year-end difference between carrying value and underlying net asset approximately $452,000 less than carrying value of Blue Chip shares held by the Insurance Group, Beginning in 1977, it is value over seven years, the resulting credit (charge, in the case of the Insurance Group) will not be significant in any win year. "indy Shops, Incorporated, a 99%-owned subsidiary, produces candy and other confectionery products of the highes Blue Chip Stamps, a California corporation, and its subsidiaries are engaged in four lines of business: (1) See's mility in two fully equipped kitchens in California. See's is believed to be one of the largest candy manufacturer •tributing through its own chain of retail shops; it now has 173 in nine western states including Hawaii. (2) Blue Chip ••amps provides a trading stamp service to retail merchants and their customers in California and Nevada. Stamp » vice revenues have declined significantly in recent years from a peak of $124,180,000 in the fiscal year ended February :%. 1970 to $17,208,000 for the fiscal year ended January 1, 1977. Over the past five years Blue Chip has reduced the "ber of redemption stores from a peak of 90 to 44 at present. (3) Blue Chip operates a separate "incentives division" " i nationwide basis, tailoring for businesses programs designed to perform motivational functions. (4) Wesco I mancial Corporation, now an 80%-owned subsidiary, owns all of the outstanding stock of Mutual Savings and Loan I'ociation which operates at sixteen locations in Southern California. In February 1977 Blue Chip agreed to buy the newspaper assets of the Buffalo Evening News, Inc., publisher of a om cossful daily newspaper in Buffalo, New York. 'The financial statements of Blue Chip as of January 1, 1977 and for the 53 weeks then ended, and as of February 28, 1t and for the 52 weeks then ended reflect the following: Consolidated Balance Sheets BLUE CHIP STAMPS Assets Jan 1, 1977 ($000 omitted) Feb. 28, 1976 ..h and short-term investments M.mhetahle securities, at cost January 1, 1977 (market - $73,240); at market Febru- $ 14,162 $ 26,727 intentories • 28, 1976 (cost - $61,690) 63,143 6,493 56,712 7,295 Imperty, fixtures and equipment, net Incement in Wesco Financial Corporation • • 8,417 8,290 thur assets I wess of cost over equity in net assets of consolidated subsidiary 38,661 15,128 28,588 21,133 22,356 15,487 $167,137 $165,455 Liabilities and Stockholders' Equity ••.subordinated debentures due 1978 Haulity for unredeemed trading stamps $ 66,867 4,287 $ 71,135 •I kholders' equity I her liabilities 9,995 17,787 6,392 $167,137 85,988 $165,455 70,141 13

[PAGE 16]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued BLUE CHIP STAMPS Consolidated Earnings Summaries 53 weeks ($000 omitted) ended 52 weeks ender Stamp service revenues Candy sales Jan. 1, 1977 Feb. 28, 1974 $ 56,333 $ 51,342 Dividends and interest Merchandise promotions and incentive sales 17,208 8,888 20,361 Other revenues .... 5,211 15,210 Total revenues 682 4,913 818 $ 88,322 Earnings before securities gains or losses $ 2,644 Net earnings Per share ...... $ 11,780 .... ... 2.27 $ 9,045 1.75 Per share 11,703 2.26 9,053 1.75 (6) Investments in Unconsolidated Subsidiaries The investment in the unconsolidated bank subsidiary represents approximately 98% of the outstanding stock of note 14 regarding divestiture of this investment. Financial statements of The Illinois National Bank & Trust Co. of The Illinois National Bank & Trust Co. of Rockford. The equity method is used in accounting for this investment. Ser Rockford and subsidiary are presented elsewhere herein. subsidiaries were approximately $2,500,000 in excess of the parent Company's equity in the net assets as reflected in the The carrying values of $25,611,381 at January 1, 1977 and $24,544,662 at January 3, 1976 for all unconsolidated financial statements of the subsidiaries at those dates. The major portion of this excess cost originated prior In November 1, 1970 and is not being amortized since it is considered by management to have continuing value over an indefinite period. (7) Receivables Accounts receivable from customers, agents and others was made up of the following: December 31, Insurance Group: 1976 1975 Investment income due and accrued Agents' balances and premiums in course of collection • . $ 7,861,366 Reinsurance recoverable on loss payments 2,005,335 $ 6,949,956 Amounts due from sale of securities .... ::: 5,221,214 1,649,292 135,601 4,520,912 Textile business trade accounts receivable (less allowance for doubtful accounts, 15,223,516 13,143,246 23,084 Automotive chemicals business trade accounts receivable 1976 - $434,785; 1975 - $362,095) 8,101,575 $23,730,027 404,936 6,566,859 $19,710,105 - 14

[PAGE 17]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (8) Inventories A summary of inventories follows: Jan. 1, 1977 Jan. 3, 1976 listile business: Raw materials and supplies Stock in process $ 1,966,793 $ 1,717,825 Griege and finished cloth .... :: 2,488,847 4,520,086 2,987,238 8.975,726 8,135,615 3.430,552 Intomotive chemicals business $ 9,301.321 325,595 $ 8.13.615 •ubsidiaries are stated at the lower of cost or market, determined under the first-in, first-out ("FIFO) method. Cost Inventories of the parent Company are determined by the last-in, first-out ("LIFO") method. Inventories of ung PIFO for all inventories would have exceeded balance sheet carrying amounts by $1,542,744 at January 1, 1977 and 11.261,642 at January 3, 1976, respectively. ! Real Estate, Equipment, Furniture and Leasehold Improvements The composition of plant and equipment is shown below: Properties Properties January 1, 1977 maneratin Insuranc Total Hunkings :: 251,360 Furniture and fixtures and leasehold improvements Machinery and equipment 14,033,720 2,792,915 $ 128,847 1,365,863 $ 4,158,778 380,207 17,899,798 821,803 1.271.184 14,033,720 2,092,987 Less accumulated depreciation and amortization 2,765,894 20,665,692 14,484,374 1,129,619 $ 3,415,424 $1,636,275 $ 5,051,699 15,613,993 January 3, 1976 1.amd Machinery and equipment Huildings $ 2,409,214 84,860 $ 83,847 13,035,988 1,260,989 $ 168,707 3,670,203 Turiture and fixtures and leasehold improvements :: 16,302,872 772,810 13,035,988 1,141,562 2,486,398 1,914,372 Low accumulated depreciation and amortization $ 2,195,996 14,106,876 $1,526,246 960,152 15,067,028 18,789,270 • • $ 3,722,242 (10)) 7½% Subordinated Debentures debentures are not secured by any lien and are not convertible; they are subordinated to senior indebtedness which Debentures bear interest at the rate of 7%% payable February 1 and August 1 and will be due on August 1, 1987. The uu.hudles indebtedness of the parent Company for money borrowed. The debentures may be redeemed at par at the Lumpany's option. The indenture under which the debentures were issued requires the parent Company to redeem $12,800 principal amount of the debentures, through a sinking fund, annually on August 1 through 1986. 15

[PAGE 18]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (11) Sundry Installment Promissory Notes This caption includes the following: Parent Company: 1976 1975 8% note issued May 1974, repayable in monthly installments of $13,071 includ- 8% notes issued April 1975, repayable in annual installments of $287,500 plus ing interest, through February 1988 $1,155,797 $1,217,480 9% notes issued january 1976, $100,000 principal amount, with interest on such interest, in each of the years 1977 through 1980 1,150,000 1,150,000 amount trom date of issue, payable in each of the years 1979 through 1987; payable January 6, 1988 final principal payment of $173,341, with interest thereon from date of issue. 9% notes issued January 1976, $10,000 principal amount, with interest on such 1,073,341 amount from date of issue, payable in each of the years 1977 through 1982; final principal payment of $8,469, with interest thereon from date of issue, 9% notes issued january 1976, repayable in monthly installments of $1,000 68,469 Obligations of subsidiary: including interest. through March 1985 69,719 0% note issued 1973, repayable in semiannual installments of $80,000 plus interest through August 1, 1978 Niles issued 1973, principal repayable in annual installments of $70,000 320,000 480,000 thereafter* Ihrough May 1. 1983. plus interest at 5% through April 30, 1978 and 6%

• mole issued in April 1975 with a fixed due date of April 30, 1980, contingently

490,000 560,000 due cariler* $4.522,326 195,000 195,000 *Guaranteed by parent Company. 53,602,4311 (12) 8°, Senior Notes due 1993 i he parent Company in 1973 issued $20,000,000 8% Senior notes with final maturity March 1, 1993. The notes call for Mahidtory annua! prepayments of 51.143.000 on March 1 in each of the years from 1979 to 1992, inclusive. Optional 1992. this right is not cumuiative. Additionally. the parent Company may also prepay the notes at any time, in full or in preparmentsare permittec without premium up to the amount of the required prepayments in each of the years 1979101 agreed i will not affect any optional prepayment prior to March 1, 1983 from proceeds of any refunding operation part. il a premium declining ratabiy from the current rate of approximately 6.3% to par in 1992. The parent Company involving the incurring of any indebtedness at an effective annual interest rate of less than 8%. restnerd subsidiaries, as defined. to limitations as to permissible outstanding funded debt and subordinated funded In the note instruments the parent Company agreed, among other things, as to both the parent Company and thalit would not make "restricted payments", which term includes dividends or other equity distributions plus debt intod limitationon mortgage debt except as to after-acquired property. Further, the parent Company covenanted amounts. Retained earnings of approximately $40,000,000 as of January 1, 1977 are unrestricted by this provision; the investment in unrestricted subsidiaries (those not bound by the terms of the loan agreement), in excess of stated formula remainder is restricted. tions. and allows the noteholders to demand prepayment, at par, within 60 days of notice that, during the lifetime of The loan agreement also contains limiting terms relating to sales of the Company's assets, mergers and consolida- family, including certain trusts and charitable organizations, has decreased to less than 15% of the outstanding capital Warren E. Buffett, stock ownership in the parent Company by Warren E. Buffett and the members of his immediate stock of the parent Company 16

[PAGE 19]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (13) Income Taxes Income tax expense for 1976 represents current expense of $2,819,941 and deferred expense of $2,137,515, , omposed of the following: Federal U.S. state and Foreign, local Total lotals: Applicable to operating earnings Applicable to equity in earnings of Blue Chip Stamps • • $1,263,270 268,797 $225,389 $1,488,659 Applicable to realized investment gains $4,732,067 3,200,000 - 3,200,000 268,797 $225,389 $4,957,456 I urrent expense (credit) applicable to: Current ordinary income (loss) for tax purposes $ (845,448) $225,389 $ (620,059) Realized investment gains 3,440,000 2,594,552 225,389 3,440,000 2,819,941 Deferred expense (credit) applicable to: (hange in deferred insurance premium acquisition costs 1,836,000 Indistributed income of Blue Chip Stamps Miscount on bonds currently accreted 300,000 - 1,836,000 300,000 Cumulative accreted discount on bonds sold (240,000) 241,515 - (240,000) 241,515 2,137,515 - 2,137,515 Total tax expense $4,732,067 $225,389 $4,957,456 Total net income before taxes was $27,792,451. A reconciliation of income tax expense at the statutory 48% rate to total income taxes as shown above follows: Amount Ile reases (increases) resulting from: Ias ixpense at 48% statutory rate $13,340,000 100"% exclusion relating to equity in earnings of the Illinois National Bank lix exempt interest income (2,021,000) Is", dividends received credit: (1,800,000) In dividends from unaffiliated companies Long-lerm capital gains rate differential (In equity in earnings of Blue Chip Stamps :: ::: (1,523,000) (1,301,000) (1,721,000) Difference in tax basis of assets trudit to unconsolidated subsidiary ...... (149,000) 237,000 I ther net (104,544) Total income tax expense • • $ 4,957,456 17

[PAGE 20]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued credit of $525,014, composed of the following: Net recoverable income taxes credited to 1975 earnings represent a current credit of $4,313,045 and a deferred Federal U.S. state and Foreign, local Total Credit (expense) applicable to operating loss (Charge) applicable to equity in earnings of Blue Chip Stamps $4,272,431 Credit applicable to realized investment losses (168,886) $(131,521) $4,140,910 (168,886) $4,969,580 866,035 $(131,521) $4,838,059 866,035 Current credit (expense) applicable to: Realized investment losses Ordinary loss for tax purposes ... $3,834,790 609,776 $(131,521) $3,703,269 609,776 Deferred credit (expense) applicable to: 4,444,566 (131,521) 4,313,045 Change in deferred insurance premium acquisition costs Undistributed income of Blue Chip Stamps Accreted discount on bonds 696,000 - 696,000 (281,259) (145,986) 152,074 104,185 - (281,259) Cumulative accreted discount on bonds sold - (145,986) Benefit of capital loss carryover 104,185 525,014 152,074 Total credit (expense) $4,969,580 525,014 $(131,521) $4,838,059 statutory rate to the above credit follows: A before tax net loss of $146,494 was realized in 1975. A reconciliation of the tax credit from such net loss at the Tax credit at 48% statutory rate Amount Increases (decreases) resulting from: $ 70,000 85% dividends received credit: Tax-exempt interest income 2,137,000 On dividends from unaffiliated companies 100% exclusion relating to equity in earnings of The Illinois National Bank On equity in earnings of Blue Chip Stamps 978,000 957,000 Tax benefit to unconsolidated subsidiary Long-term capital loss rate differential 1,656,000 (520,000) Other, net (319,000) Total tax credits (120,941) $4,838,059 amount of $2,600,000 expiring in 1977, 1978 and 1979. These can only be offset against taxable income earned by the As ot December 31, 1976, unused net operating loss carryovers in acquired subsidiaries exist in the approximate acquired subsidiaries, and any tax benefits realized therefrom would be accounted for as a reduction of purchase price resulting in their amortization into income over a period not to exceed forty years. 18

[PAGE 21]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (14) "One-Bank Holding Company" Status 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 imposed upon it by the Bank Holding Company Act. (15) "Savings and Loan Holding Company" Status California savings and loan association, is a savings and loan holding company under the Savings and Loan Holding The Company, as a result of its investment in Blue Chip Stamps which in turn holds controlling interest in a 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 Company Act. (16) Transactions with Affiliates Members of the Insurance Group in 1976 and 1975 engaged in transactions in the ordinary course of business with Columbia Insurance Company (Columbia"), a subsidiary of Diversified Retailing Company, Inc. ("Diversified"). Warren E. Buffett, Chairman of the Board of the Company, is also Chairman of the Boards of Columbia and Diversified. At the end of 1976, Mr. Buffett owned more than 50% of the outstanding shares of Diversified. In 1976 and 1975, in connection with reinsurance business, gross premiums of $5,777,098 and $2,066,155, respectively, were ceded to Columbia by insurance subsidiaries of the Company. National Indemnity Company performs all of Columbia's bookkeeping and other administrative services. For these services Columbia pays to National Indemnity Company as part of its ceding commissions an amount ordinarily equal to one-half of the customary originating brokerage commissions. The amount of ceding commissions representing fees for bookkeeping and administrative services paid by Columbia to National Indemnity Company was $35,334 in 1976 and $12,850 in 1975. Reinsurance transactions with parties, except as to that portion of the ceding commissions representing fees as to which there are no similar Columbia are effected at rates comparable to rates in similar transactions conducted at arm's length with unrelated transactions with unrelated parties; management believes that Columbia's capacity to accept cessions of reinsurance from the Company's Insurance Group contributes an element of marketing strength to the Group. (17) Litigation The Company, together with a number of subsidiaries, officers, directors and employees of the Company and certain subsidiaries, was named as a defendant in a lawsuit filed in mid 1975 alleging numerous causes of action and plaintiff but the plaintiff has refused to answer such interrogatories, has refused to testify in pretrial proceedings seeking damages of several million dollars. Since the filing of the complaint, interrogatories have been served upon the relating to performance of certain of its obligations, and has conducted no discovery in this matter. In the opinion of counsel for the Company, the Company will not be affected materially by the final outcome of the proceeding. (18) Compensating Balance In accordance with the terms of a line of credit with a bank, the Company has verbally agreed to maintain an adjustment for uncollected funds. During 1976 the average compensating balance required to be maintained under the average cash compensating balance of 10% of the unused line of credit, based upon the bank's ledger records without line of credit amounted to approximately $570,000. The line of credit was not utilized at December 31, 1976 or 1975 and has an expiration date of October 22, 1977. The approximate average amount of short-term debt outstanding during the year, using month-end balances, was $300,000 with a related interest rate of 6.75%. The maximum amount of short-term debt outstanding at any month-end was $1,200,000 during 1976 and none during 1975. 19

[PAGE 22]

Berkshire Hathaway Inc. INSURANGE GROUP BALANGE SHEETS December 31. Investmenis - ofber than investments in afthates (poles s and 4) ASSETS 1976 1975 Bonds demonsed ensl Pretered socal cost $ 89.215.773 1S Measory Nils• el cod alch approximates marked Comicion shans - at cost 22.286,940 S 78.760.948 53.108.280 39.341.135 2,650.375 Jotal miesiments • other than investmends in affliates 179,003.481 14.042.494 13.012,843 134.073.198 Investment in Blor @Chip Stamps (on 00 Crashi 2,503.562 Premiums rescale and apents balances demed noredment incomr 17.740,283 15.400.508 2.000.940 2.005,335 Rensurance to oserable on pold losses 7,861.366 6.149,956 1.049.302 Defensed premium neguisiton coste Property and eptopmento cost lees or cumulated depreciation (nole Di 5221.214 1.636,270 4.520.912 Keeperahie Deetal rome loses 6.820.000 1,536.246 2.050.000 8224.384.330 903.814 $.100.000 387.409 S174.058.505 Losses and loss adjustment papense. MABILITIES CAPHIAL STOCK AND SURPLUS Hoearned premiums S 85.152.250 Funds held under pemsudante treaties 36.736.618 $ 73.008,492 Current income laser Amounts dur for purchase of securites 3.783.168 22,344,200 839,495 2,939.462 Deterted home lases 2.560.922 679.900 135.921.780 2.313.187 4.536,189 1,642.009 2.472.002 103.111,335 Capital Mout and surplos Common slock of Sational Inmat S compame of SID par value. Autho- zed :50,000 shares issociAte shores Common stock of Natonal Pree Atten Insurance Company of 5100 par 5.500,000 6,500.000 Pete on surplus balue. Autborized 30.000 chantee sooted 06,000 khares 30.601.290 3.500.000 2.900,000 Total capital sink and mght- 59.861.201 20.601.250 88 402.541 12.046.920 20042 120 5294.384.330 $174.058.500 SoiRe ampantine notes to bnonciol stotemenis 20

[PAGE 23]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OP INCOME AND UNASSIGNED SURPLUS December 31, Year Ended 1976 1925 Underwriting income: Premiums written $94.772.915 S58.975.130 Increase in unearned premiums (13,092,841) (030.424) Premiums earned 80,780,074 Losses and claims 44.609.702 39,285.324 58.335,700 Loss adjustment expenses 10,766.719 7.952.413 Underwriting expenses (note B) 24,894,390 80.070.811 68.902,628 21.742,891 Underwriting gain (loss) 709,263 (10,640,922) Investment income: Interest on bonds 7,412,780 2,456,103 6,036,808 Real estate income Dividends on stocks of unaffiliated companies 3,130,747 293,693 287.314 10,837,170 Less investment expenses 390,365 8,780,225 338,918 Net investment income 10,437.815 8,441,307 Other expense 177,109 121,451 Income (loss) before income taxes and items below 10,969,879 (2,327,066) Applicable tax (expense) credit (note F) -11.134.822) 9,835,057 3,824.410 Income before items below 1,597,344 Equity in earnings of Blue Chip Stamps (notre C) 11,472,523 1,637,465 1,140,953 Income before realized gain or loss on investments 2.738.297 Realized gain (loss) on investmente 10.242,849 (3.200,000) (2,888,062) Applicable income tax (expense) credit (note F) 886.035 Net realized guin (loss) on investments (note G) 7,012,849 (2.022.027) Net unrealized appreciation in market values of preferred and common stocke ofunaffiliated companies of $45.388,000 in 1976 and $17,148,000 Net income in 1975 have not been included in the defermination of net income. .. ° 18,516,371 710,270 Dividends paid te stockholder Unassigned surplus at beginning of year (1.000,000) 42,340,920 41.629,650 Unassigned surplus al end of year 30881,291 12.345.920 See accompanying notes to financial statements. 21

[PAGE 24]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION Decomber 31. Year ended Funds provided: 1976 1975 From operations: ted income Charges (credito) to income noi requiring (providing) funds: $ 10.315.371 ..710.270 Bquity in undistributed enrongs of Blue Chip Stamps Depreciation Acerelion of discount on bonds (1.561,012) (1.033,805) (1.029,578) Increass in unpaid losses and loss expense: 162,972 (089,278) Inercase in uneared promiums 10,070.214 162,150 Decrease (increase) in agents' halences and premiums in course of Inerease in funds held under reinsurance treaties 13.092.041 272.395 843.707 639.423 82,178 Increase in reinsurance mcoverable on loss paymenis collection (858.928) Decrease (increase) in recoverable income laxes (ocrease) decrease in deferred acquisition costs (3,332,608) (700.302) 2.633.813 (2.001,819) Increase (decroost) in liabilliy for income laxes 4,100,000 (1,499.266) 1,450.000 Cher net Increasn in accrued investment income 4.604.059 (356,093) (210,800) (561,998) 306.919 381.172 Net sale of investments Funds provided from operations 26,637.114 45,152.485 (136.603) 579.607 $ 45.152,485 5,444 S Fands need 585,111 Subsidiary acquired: Honds IS. Treasury Bills Common storks 1,911,578 735.797 Cash 887,301 Other assets and dafored charpos 126,204 Unearned premiums Unpaid leesce and loss adjustment expenses (1.148,583) 94,430 ()ner Mobilities (399,487) 2.174,512 02810) Purchase of realestate, furnitum and equipment Dividend paid Nel purchase of investments 41,239,554 273,001 97,807. Increase in cash 1.000,000 405,418 $ 45,152.005 Not purchase (aale) of investments: 220P0 S 487,304 580.111 Preferred stocke Bonds 8.695.226 192,200 4,774,180 Common slock of Blue Chip Stamps Common stocks of anuffiliated companies 19.720,673 6,846,016 11,850,553 (296,910) Nel cost of investments (sold) purchased 773.812 (11,328,730) 311.220204 (5.444) see orcamponying notes to financial stotements. 22

[PAGE 25]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS December 31, 1976 and 1975 (Al Note Referenons Numerical note references are to the notes to consolidated financial statements of Berkshire Hathaway Inc. and consolidated subsidiaries. Note 1 to such statemenis Includes a summary of significant accounting policies and practices of the Insuranco Group. (B) Basis of Presentation The financial statements of Berkshire Hathaway Ind. - Insurance Group inclode the accounts of wholly-owned subsidiaries of Berkshire Hathaway Ine. which are engaged in fire and canuulty insurance underwriting. The statements are presented on a combined basis with significant intercompany transactions and balances elimi- nated, and in accordance with generally accepted accounting principles (GAAP) which differ in some respects from principles prescribed or permitled by insurance regulatory authorities (statutory method) in accordanoe ("Surplus as regards Policyholders") as determined nder the statutory method to thot determined and reported with which the companies maintein thoir records. A reconciliation of the aggregate capital stock and surplus herewith in accordance with GAAP Is as follows: December 31, 1970 1975 Excess of NAIC market valuations over cost valuations of investments in equity securi Statutory surplus as regards policyholders $123.589,200 S85.406,912 Excees of NAIC market valuations over amortized cost of bonds fies (excluding stock of Blue Chip Stamps) (25,855,447) Excess of carrying value of investment in Blue Chip Stamps (determined under GAAP (301,648) (207,819) Doferred insurance premium acquisition costa pursuant to the equity metbod) over NAIC market valuation 6,820.000 35.072 9.216.289 1,283,560 2,950,000 Excess statutory liability loss reserves 4,214.230 750,343 Sundry nonadmitted assets Net recoverable from unauthorized reinsurers 2.313,694 2.420.682 2,030,725 Income tax effect and adjustments $ 80.402.641 (3,836,139) $70,947,170 (2.472,002) Capital stock and surplus per accompanying financial stalements Statutory net income is reconciled to GAAP net income as follows: 1976 1925 Increase: (decrease) in deferred acquisition costs Statutory met incorne S14.293.893 3.832,808 $ 1,814.093 Subsidiary neguisition cost adjustment Equity In undistributed corings of Blue Chip Stamps, net of amortization of excess cost 1.561.012 (1.430.000) 170,095 1.029.579 Income lux effecte and adjustments (1.343.137) Not income per accompanying financlal statementa $18.015.371 S (078,002) 716,370 Continued 28

[PAGE 26]

.* Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANGIAL STATEMENTS, Continued (G) Investment in Blue Chip Stamps The investment in Blue Chip Stamps (Blue Chip) by the componies comprising the Insorance Group represented loreal December 31. 1023. The investment is accounted for by the equity method. approximately 20% of that company's onistanding shares at December 31. 1976, incroosed from approximatoly Equity in net earnings of Blue Chip reflects the following for the past two years: Dividends received 1975 Provision for current income laxes Aquity in undistribuied earnings 2,043,575 249,006 S 237,476 1.013.002 Provision for deferred income laxes (17,276) (17,100) Amortization of excess of cost of investment over underlying net assel values (481,803) (147,137) (484,328) (109.002) 91.817,107 See also moles Ic) and 6 lo consolidaled fencial solements of Berkshire Hathaway Ine. and consolidated 91140,953 subsidiarins. (D) Stockholdors Equity Surplus is restricted for dividend purposes by the insurance departments of the states in which the companios do business. (5) Underwriting Expenses The inbow ine expenses comprise anderriting expenses. Commissions and Wokenge 1976 1975 Taxes. licenses and loes Salaries and other campensation SU0.390.844 3328012 S13.012,560 Other onderweing expenses 2.011.322 3.027.0253 (Inerrast) decrease in deferred acquisition costs Total slattory moderwriting expenses 3.399,620 2,240.405 1500145 (3.832.606) 28,506.008 20,204.801 1.150.000 (FI Federal Incomo Taxes S04.601,300 S2174211 Nederal mcome tax fespened credits are made ap of the following Totals. 1972 1923 (Expenee) credit applicable lo operating earnings (expense) credit applicebie to mealized insestment gains or losses (Expense) applicable to equity in canines of Blue Chip Stamps $ (1,104,822) (160.018) 83.924.010 (3. 300(000) (120, 102) $ (4,400,205) 006,085 51.664.343 For 1020. current income dos expense was 82.956.008 and deferred tos expense wes $2.043,107. For 192h, current mcome lex credis were 54, 102.340 and defened insometox codits were 8501.0080. Dofered lax (exponse) credits related lo: Change in deterred premiom acquisition costs 1976 1975 Ryuly in undistributed earnings of Blue Chip Stampe $ (1,836,000) Nond dischant currently accreled. not curently foxed (107.107) $ 030.000 Comulative healed discoant on bonds sold (300.00%)) 1109.002) Beneft of capital loss carrylorand 240.000 (281.238) 104,105 Total deferred las (expense) ordit 5(2.043, 137) 561.998 1N2,074 =: Continued 24

[PAGE 27]

Berkshire Hathaway inc. INSURANGE GROUP NOTES TO FINANCIAL STATEMENTS, Continued 1976 incomo tax expense is reconciled to the Federal 48% statutory rate as follows; Amount Inoome tax expense at statutory rate $11,047,000 (Decreases) increases resulting from: Tax-exempt interest 89% dividends received credit relating to: (2,021,000) Equity in earnings of Blue Chip Stamps Dividends received from unaffiliated companies (1,277,000) (931,000) Nondeductible amortization 231,000 Long-term capital gain rate differential Benefits from affiliates (1,772,000) (050,000) Other, net (97,765) Total 1970 Pederal income tax expense $ 4,409,235 1975 Federal income tax credits are reconciled to the total credi! at the Federal 48% statutory rates as follows: Amount Credit at statutory rate $ 1,895,000 Increases (decreases) resulting from: Tax exempt interest 2,137,000 83% dividends received credit relating to: Equity in earnings of Blue Chip Stamps Dividends received from unafiliated companies 978,000 715.000 Benefit to affiliates Nondeductible amortization (232,000) (319,000) (Hhrr nr! Long term capital loss rate differential (520,000) 10,340 futal 1975 Federal income tex credit $ 4,664,343 (Gi) Investment Gains and Losses Araumar ot realized and unrealized investment gains (losses) for 1070 and 1075 is as follows: 1376 guins Net Applicable income Net taxes income taxes goins less unrealized Net Bonds S 1,155,004 Preferred staks 441,613 (182,484) (340.080) S 8003,003 (2.720.812) 309,129 10,117,000 Common state S10,242,848 B,645,072 $ (3,200,000) $ 7.042,849 5.824,755 $45,388,000 35,271,000 10/5 Nel. Net Applicable gaini (losses) income (losses) taxes income taxes less unrealized Net gain Preferred stocks Bonds S 239,041 28,450 S (71.712) 167,329 Common stocks (3.155,553) 946,282 (8,535) 19,915 S 1,044,000 $ (2.880,062) 806,035 _(2.203.271) 10,104,090 513032027) $17,148,000 25

[PAGE 28]

The Board of Direccors The illinois National Bank & Trust Co, of Rockford: we have examined che consolidated balance sheeta of che Illinois Natal Bank A Trust Co. of Rockford and 1975 and che related consolidated statements of carping, changes subsidiary as of Decenber 31, 1976 and stockholders equity and chonges in ended. Our examination was pade in financial position for che yoors enen audíting standards, and accordingly included such cests of the accounting in accordance with generally accepted records and such other auditing procedures so we considored acessary in the circumstances. fairly che tinancial position of In our opinion, the aforementioned consolidated financini statements present the Illinois National Bank & Trust Co, 0F Rockfore and subsidiary at Decomber 3l, 1976 and 1975 and the roublts of chei: operations and chenges do choir financial prsitlon for che years theo on i wonsistent basie, ended, in conformity bich generally accepted accountlop principles appled Peat, Mariah, Mitchell the. January 14: 1977

[PAGE 29]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 37. ASSETS 1976 1975 Cush and due from banks $ 10,868,111 $ 18.797,271 Investment securities (note 2): • United States Government obligations 30.337,817 24.181,462 United States Government agencies 160,792 15,576,778 Obligations of states and political subdivisions 54,002,192 48,959,481: Federal Reserve Bank stock 300,000 300,000 Other securities 6,629.054 1,053,154 Federal funds sold 32,000.000 Loans (notes 3 and 0) 56,188,346 58.081,252 Bank premises and equipment (note 4) 895,977 966,026 Accrued interest receivable 1:545.707 2,040,487 Other assets $193.392.516 464,520 514.603 $171471.114 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits S 54.074,671 $ 53.477,577 Time deposits 113,461,996 Federal funds purchased Total deposits 168,336.867 146,978,902 93.501,328 1,000,000 Accrued taxes and otber liabilities (note 5) 1,628,082 1,411,487 Total Habilities 169,904,749 149.390,389 Stockholders equily: Common stock of $20 par value. Authorized end issued 250,000 shares 5.000.000 5,000,000 Surpins 5.000.000 5,000,000 Undivided profita 12.124.955 10.771.923 Reserve for contingencies 1.302.612 1.308,802 Tbral stockholders cquity 23427.767 22.000,725 5193,322576 S171.471,114 See accompanying notes to consolidated finonciol stotements of bank subsidiory. 27 :

[PAGE 30]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS Yours ended December 31. Operating income: 1976 1975 Inferest and fees on loans Interest and dividends on: Income on Federal funds sold 5 3.002.525 227.353 $ 5.711.826 213.640 United Stales Government obligations Uniled States Government agencies 1.075,950 Time deposits with other banks Obligations of states and political subdivisions 1.415.017 201.175 6.230,189 2,853,496 013,791 Foderal Reserve Bank stock Other securite: 10,000 303.331 Thrust Ines ibial interest income 501.162 18,000 11.383.491 252, 598 Other Service charges on deposit accounis 546.501 10.868,064 149.217 503.178 Tolal operatme income 636.203 133.005 Operating expenses 12.014.362 583.329 12,088,116 interest on borrowed money Interest on deposiis 5.874,300 4.206 5.190,803 Salaries Total iterest express 5,883.771 3,795 5.104.503 Employe benellts (note 7) 1,675.744 Dacipancy, net (nute 41 349.331 1,042.956 Provisinn for Joan lossos quote ol Furitame and coupment (00l0 41 259.405 292.981 203.017 216.770 12.000 296,233 Total operating expenses 837,857 11.900 706.203 side moome taxes pet (note 5 Karnags belts incoms laxes and securities gains 0.251.175 8.401.840 3.063.207 Karmengs Indone scotties gams 1Dh.0b8 3.086,476 shes pains Detes mistedtaxesof $142,437 in 1920 0ml S2. 185 in 1075 (note: 5) 3.530.219 172.092 200003 3.514.304 52,430 $ 3,047,043 $ 3.506,014 #togs per share: Parings Doore seconds pains 51422 1.17 $19.00 515.20 21 $14.27 See de companyine notes to consondated founciol shotonents of bank sobsidiory 38

[PAGE 31]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Common Undivided stock Surplus (note 6) profits contingencies Reserve for Balance, December 31, 1974, as previously re- Accretion of discount through December 31, ported 55.000,000 55.000,000 $ 9.940,669 $1,001.000 Keclassification - contingency portion of al- 1974, net of tax of $72.474 72,242 lowance for lomn losses (313.742) 313.742 Net earnings Balance. December 31. 1974, as restated 5,000,000 5,000,000 9,699,169 3,568,014 1.314,742 Cosh dividends - S10 per share Transfer from reserve for contingencies- loan (2,500,000) Balance, December 31, 1975 loss provision 5,000,000 5.000.000 10.771.929 5.940 15.940) Cash dividends - $10 per share Net earnings (2.500.000) 3.847.042 1.308.802 Transfer from reserve for contingencies « luan Bulance, December 31. 1976 loss provision 55,000.000 S5.000.000 6,990 (5.990) $12.124,955 51,302.812 See accompanying notes to consolidated financiol statements of bank subsidiory. 29

[PAGE 32]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Resember 1 Your condes Hands prouded 1954 197, From operatons Depressate enchaling direct least eggppend No racing 5100020 33.021 $ 35M814 12,000 210,300 11.0010 Discount mutting steps in Preded tom operates (038901 89.223 3.738.017 3.805.17 (71,066) Depend: federal hands purchasi 31.02.280 3,3001.02 INTERNS 1000 1.000.000 Cash and rap tree host Federal homes sold 1.280201 13.040.473 (hur bol 7.020 N0 5.000,000 S05R00000 12001. 1201 1745306 282.321 930,150.192 Increase nethng abort Biderat lands and Adelines to band pressest reptipment, are 23:008 hehendends 15.718 501:29 Denarayan federall how 2300000 total tunds gas! 1,0800,0800 2. 3000000 503130190

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Berkshire Hathaway Inc. BANK SUBSIDLARY The Illinois National Bank & Trust Co,of Rockford AND SUBSIDIARY NOTES TO GONSOLIDATED FINANCIAL STATEMENTS O6comber s1 1076 and 1975 (U Signifoent Accounting Policies Berkshite Hathaway Mo) and 1s wholly owned subsidiary, Brown Fuilding Corporation conform to generally The accountibi policier of the 1Umol Nation Bank & Trust Cocol Rockford 10 97.2% owned sub ulary of austpied norounting principles and to genomi praction within the banking trdustry The followines a description of the mote signifi nant ascounting pol nine Consolation The consolidated fancin statements include those of the bank and his wholly ormed sittidiony All slepthrant intercompany hansaations are etramatelt is consolidetion Investmont Securities Investment secunnies are stated at cosh, adfunted for amortizalios bl premium and toretion of discourt Priot to 1976, accretion of discount was not recorded During the curent year accretion was recorded, Including the cumulative amounts applicable to securitles owned which were acquired in prior years, The effect of 1875 bel incomeand she rummlative antu pro Tormetectoo procesars of changios ip he mothed of scaroting clacount is normaterial flowever to compiym th zeporting regu rements promulgated by soper cory aulliontes Merrior year fancia statements hava been restated to reflect the change to include accretion income net oftax Colos or losses on sales of investment securities are recognized only upon realization and are showti Separatelv in the Statements of earninos Consomer Credit Loons Consumer cred loans me gener illomade on a dircoul baris. Uncared discounttakonto earnings over the terme of the tespective loans ming i method that approximates saight-line Bank Premises Find Eighipment Bank prenues nd uguipment are stated at cost loss acoumilated deprecion. Depretiation is computed on the straight line method for wouldig and automobiles and on an occeler ted method for improvements and other equipmen: Rites us deprecation are based on the followings buildings, 40 years, Amprove menta and other equipment c-B years Costs of mijor adortions and improvements are capitalized Expenditures for maintergune and renmits art charged agamst operations be neurred. Income Taxes The Bank utilizesthe acctual method ofaccounting for binancial reporting purposes, but nies sincome cretams ona cash bask, lovesbrent taxeredits arotreated as a reductien oftbe provision for Federal income taxes in the year realized Provision for Loon Losses The provision for loan losses is bused or past loan loss experience, managements evaluation ofthe Joan portfolio under cursin eronomic conditions and such other factors i in mangements best judgment, deserve dument recognition in estimating loan losses. 31

[PAGE 34]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Investment Securities A summary of investmenis by major classifeations iN ax follows: Dor. 31. 1020 voltu: Par (in thousands) Des. 31. 1075 Booh Market 15 overnment-chrect volte valor value: Par (in thousands) vaine Book Murkri State and local municipalites US Coverment -agencies S30,455 value 56,204 160 530,338 161 530.343 105 S24,560 S03,928 1,209 54.002 6.624 36,090 15,530 $34.181 46.953 15,577 $24.450 S91.130 SA3,625 .7.027 47,880 15,005 4,730 44,474 690,770 3,05: 52,92 $08,407.. pledged to secur publie deposita lot other purposes. Ivestent soonities with a par valur of $7.001.000 amd S7.501000at December 31. 1976and 1923, respectisely iete 03) Loans Astomary of the major classications of loans al December 31. 1020and 1925 is as follows Commermal loans 1020 1995 Convosner credit loans fless unearned discoent of $2.340,401 in 1970 and S2.200230 $37.331.010 Moor plan loans IN 19237 11.625.281 Neal edair loans 14, 12000015 5.420,035 1X174370 13.576.010 5.701.583 Les allowance for loon lover 50.205. 394 7021-2 58.788,987 702.230 S00. 188,346 S06.083.252 (4) Bank Premists and Equipment •becember Mohand 10za, cespectice Deprecation expense tolled S104077 War 07s and $100.30% Ior 1070. Rank prenusand eumpeed art secordedan cost less accumulated deprenatom of $1.940030 and 51.004,024 at 5) Income Taxes $904,306 at December 31. 1800d 173 moppledy: Such deferred tokes cooir from gonna differennes arisg trom Acond loke and olber Datelies m thr cosmpaoyme balance shoes include delerred taxes of $502.037 anil reposing tosable pee en the coch basis. The Bank one is subendary join n: the foling of a consolidated Moderal lenn possed de the Bank. as shose to the follow meg schedules ecomeles exhor with the part company. Berkshme Hathaway ine. Thetax benefit of dadoctions by the patront has 12

[PAGE 35]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Taxes applicable to net earnings were as follows: 1920 1475 The provision applicable to securilies gains Tax provision applicable to carnings before securities gains 5270,420 $407,257 212,022 21.067 487,411 493.124 Less tax beneft from parent corporation applicable to: Secturities gains Barings hefore securities galos 162.30m 205.165 230.036 74.584 318,847 23,063 Appitcable income taxes, net $250,505 $174.277 The components of consolidated income tax expense are as follows: 1026 1953 Carrent income taxes: Federal 8631,551 $314.523 Less tax benefit from parent applicable to: Recovery of prior taxes paid through net operating loss carryback Taxes currently payable 236,936 314.523 1,324 Total beneft from parent 236,936 318.047 194.015 14.3241) Stale 58,419 89,378 Total corrent income laxes 453,034 85,054 Deferred income laxes: Federal (200.227) 93.204 State 5.190 (1.041) Total deferred income taxes (202.329) 39,223 Appitcable income taxes, Del 5200,305 5174277 The sources of timing differences resuiting in deferred income laxes and the ton offoot of each won as follows: 19CE 1023 Acorneateurnings andexpenss notreported forlocumetax porposestbed cullected Isabless dodgeons icetot pryoses beetlo that prose for Grassed sport. or potal. net SC9B.519) $ 95,183 ing purposes S:203.8201 (0.010) (5.000) 9 41 2313 33

[PAGE 36]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued reasons forthe difference between theeffectivelax rate and the corporate Foderal income tax rateof 48% areas follows: Thetotal incomelax expense for 1970 amounted to $230.505, an effective rate of 6.1% ($174,277 and 4.0% in 1075), Thr 1076 Percent 1975 Increase (reduction) Tus expeese al stolutory ral Amount of pretax of pretax Percunt from: taxes resuiting $1,966,823 carmines 48.0% Amount $1.205.724 cornings 400% Jax-exempt interest, net of discount ar- State income laxes, not of Federal in- cretion (1.523,483) (37.2) (1.341.705) (85.9) Tex benefit from parent come tax benehis 34.120 Other-net (230,936) .B Actual tax expenst 9,081 (S.7) 41,374 $ 250,505 .2 (310,847) 1.1 (3.200) (8.5) .... 6.1%

• 176.272

(0) 4.0% expense for soch year. lies not expoce thot the cash corley for income taxes for any year through 1970 sill exceed the income tax (6) Allowances for Loan Losses The following is a summary of activily in the allowance for loan losses: Balance al beginning of your 1920 Provision for loan losses Recoveries on loans previousty charged off 8707,735 1023 14,300 5719.938 12000 27,178 Less loans charged off 734,000 11,000 Balance at end of yoar 27,097 758.997 5707.048 01202 5707,735 17) Penaloo and Proff-Sharing Plan The bank has a noncontribuory prosion plan and a profit-sharing plan for all oföcers and omployees with one full estdni the actuarial computed valte of vested bonefits and there was no unfunded past service cost lability. The that of service. Based upon the most recent actuarialreport available (as of December 31. 1975) the pension fund assets Honk's pohes is to find pension costs os accred. The total pension and profit-shoring expense was $180,100 lor 1976 anti S130.351 for 1925. 34

[PAGE 37]

Berkshire Hathaway Inc. LINES OF BUSINESS Sources of Revenues: Revenues reflected in the consolidated financial statements include those from (1) premium earnings umount of investment income of the parent Company, plus, in 1976 (3) sales revenues from the automotive and investment income of the Insurance Group, (2) sales revenues from the textile business plus a minor clumicals business. The following table summarizes the total revenues derived from these categories for the past five years, in thousands of dollars: 1972 1973 197. 1975 1976 Insurance Business Textile Business $66,556 $60,526 $ 68,776 $ 67,116 $ 91,617 Antomotive Chemicals Business 27,772 33,479 32,706 33,258 44,921 • • $94,328 $94,005 $101,482 $100,375 $139,068 2,530 Sources of Net Earnings: The unconsolidated bank subsidiary and the investment in Blue Chip Stamps represent additional « ffects to the Company and its consolidated subsidiaries reflected as a separate item, were as follows for the significant sources of income for the Company, Sources of total net earnings on a pre-tax basis with total tax past five years: (Thousands of Dollars) 1972 1973 1974 1975 1976 Insurance $10,701 1,697 $10,249 $ 2,837 2,660 892 $ (2,327) 1,290 $10,970 "Textiles 1,148 Automotive Chemicals 2,700 2,782 - 4,093 - - 518 Unconsolidated bank subsidiary 142 1,124 1,164 2,172 3,450 3,750 Interest Blue Chip Stamps 3,635 expenses, less parent Company inter- and corporate administrative est income (770) (2,324) (1,848) (2,190) Realized investment gain (loss) 15,829 1,359 (1,908) (2,888) 4,577 (146) _ 9,962 Less: Total income taxes (credits) Total pre-tax income (loss) 27,793 3,703 _(2,466) (4,838) Net Earnings .. $12.126 $ 7,048 $4,692 32960 • 35

[PAGE 38]

[PAGE 39]

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS Insurance Premiums Earned and Insurance Underwriting Gain (Loss) premiums earned plus the ratio of underwriting expenses, on a statutory basis, to premiums written) have Combined loss and expense ratios (which are the sum of the ratio of losses and loss expenses incurred to been as follows for the Insurance Group for the past five years. NET PREMIUMS RATIOS Written (In thousands) Earned Losses and Underwriting coming Bored Prem. Witten Prem. Ratio 1972 1973 $57,850 $59,627 62.0 50,372 52,829 62.0 32.5 29.7 81.7 94.5 1975 1974 60,997 60,574 1976 58,975 58,336 77.8 32.0 109.8 81.0 34.4 94,773 80,780 68.6 30.1 115.4 98.7 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 husiness has been underwritten. the past three years: The following table sets forth the net premiums written and earned by the Insurance Group in each of Operational Area (Thousands of Dollars) Specialized Auto, General Liability and Other(1) • .Written $36,738 Earned $37,860 $60,860 34,436 38,144 52,550 Reinsurance (2) • ... .Written 12,204 9,893 Earned 12,938 10,188 13,792 15,823 Urban Auto & Casualty (3) • . Written Earned 7,902 6,613 3,072 3,463 3,332 3,380 Home State Companies 4) • .Written 5,442 8,150 14,627 Earned 5,298 6,672 11,058 Totals .Written $60,997 $58,975 Earned $60,574 $58,336 $80,780 $94,773 (3) National Indemnity Company and National Fire & Marine Insurance Company less the Reinsurance Depart- ment of National Indemnity. (2) Reinsurance Department of National Indemnity. (3) Home and Automobile Insurance Company. (4) Corporations organized in the jurisdictions of Nebraska, Minnesota, Texas and iowa underwriting standard and preferred classes of fire and casualty insurance in those states. 37

[PAGE 40]

MANAGEMENT'S DISCUSSION, Continued following table: The total underwriting gain or loss for the insurance Group for the past three years is shown in the 1974 (Thousands of Dollars) Statutory GAAP Statutory 1975 GAAP 1976 Specialized auto, general liability Statutory GAAP Reinsurance and other $(2,119) Home State Urban Auto & Casualty (1,761) (1,470) $(1,939) (2,068) $(5,201) $ (6,728) $ 923 (702) (2,183) (1,955) $ 3,950 (2,194) (2,374) (702) (941) (1,100) (848) (103) (2,585) $(6,052) $(6,892) (877) (1,569) (601) (61) 9(9,197) S(10,647) $(3,123) $ 709 premium acquisition costs (underwriting expense, i.e., commissions, etc.) which is deferred under GAAP In The only difference between the Statutory and GAAP underwriting results is the change in amount of expectation of unfavorable underwriting results from certain portions of the in-force book of business. both 1974 and 1975, the amount deferred at year-end decreased from the preceding year-end, generally in Deferred acquisition costs were increased significantly in 1976, though full deferral of eligible costs was not deferred at December 31, 1976. made at 1976 year end, particularly for the Reinsurance business for which no acquisition costs were The very poor underwriting results experienced by National Indemnity and National Fire and Marine (Subgroup 1 above) in 1974 and 1975 resulted in substantial premium rate increases for business written by these operations in the last half of 1975; further rate increases were affected in 1976. Since premiums written the time rate adjustments are effected and the time at which they reflect in income. Results of rate are taken into the income account at the later point in time at which they are earned, there is a delay between adjustments are partially reflected in their 1976 income and their 1976 underwriting results were signifi- cantly improved over those of the prior two years. failed to compensate for increased losses. This business is heavily concentrated in casualty lines which have The Reinsurance business has sustained significant losses in each of the past three years; increased rates been more negatively impacted by inflation, both monetary and social, than have property lines because of the greater elapsed time between the writing of coverages and settlement of claims. Additionally, the risks in Berkshire's Reinsurance business tend to be more concentrated than in other areas of Berkshire's insurance dierwriting results of this segment. business, so that the effects from one or two contracts can, and have, significantly effected overall un- from that Company's ill-advised and ill-executed venture into the Florida market. In its traditional Cook The extremely high underwriting loss in 1974 of Home and Automobile Insurance Company resulted County: Illinois business, Home & Auto effected rate increases in 1974 and in 1975 with the result that cement, rates, and underwriting practices were restructured in late 1975. A strong recovery was experi ›remium volume declined signincantly from previous levels, but loss ratios did not improve. Their man enced in 1976. The automobile business has been shifted to a six month direct bill policy which permits a faster reaction time to underwritingtrends. Their general liability business has been expanded significantly with good results. combined ratio has improved for each of the past two years, their volume has become meaningful, and Operations of the Home State Companies in total have to date yielded only underwriting losses. Their management believes that the concepts underlying the formation of these companies remain sound. 38

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MANAGEMENT'S DISCUSSION, Continued Manufacturing Business Revenues and Gross Profits "Therevenues and gross profits of the manufacturing businesses are summarized for the past three years is follows: 1974 (in thousands of dollers) 1975 1976 Revenues: Berkshire operation Waumbec operation $32,592 $23,521 $30,887 K& W operation :: - 9,312 13,757 2,530 $32,592 $32,8337 $47,174 Gross Profits: Berkshire operation Waumbec operation : $ 5,163 $ 2,972 $ 3,583 1,627 579 K & W operation .... 1,438 $ 5,163 $ 4,599 $ 5,600 'the traditional Berkshire textile operation results improved in 1976 compared to 1975. However, 1975 was not, on balance, a satisfactory year, as evidenced by comparison to the better 1974 results. Textile profit mults in 1976 deteriorated from quarter-to-quarter, particularly in the Waumbec operation, where manu- Infuring cost variances significantly decreased both the rate and dollar amount of gross profits from those ul 1975. reflect those of that operation from date of purchase. 1975 full year sales of Waumbec were $12,444,000. 1975 The Waumbec operation was purchased April 28, 1975 and the above sales and gross profit figures revenues of K & W (which were prior to purchase of the business by the Company) were $2,363,000. Interest and Dividend Income Interest and dividend income is earned almost entirely by the Insurance Group. The continuing he average vield on investments also increased. Interest and dividend income is related to average nurease in this category of income has been primarily the result of increased investments; in 1975 and 1976. investments for the past five years in the following table, which excludes the investment in and dividends runeived from Blue Chip Stamps, accounted for by the equity method investments Average Interest and Dividend Average at cost Income Per Cent Earned 1972 $103,217 (Amounts in Thousands) $ 6,648 6.44 1974 1973 117,516 131,347 8,030 7,378 6.28 1975 6.11 136,500 8,918 6.53 1976 158,468 10,820 6.83 The average per cent earned declined in 1973 and 1974 as a result of the increase in those years in the iverage investments in preferred and common stocks relative to the average investment in bonds; the income yield on the bonds tends to exceed that on stocks. 39

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MANAGEMENT'S DISCUSSION, Continued values at the beginning and end of each year: Investments for the past five years are categorized in the following table, at the average of their carrying Bonds, ireasury bilis and other and common Preferred short-term obligations (in thousands of dollars) stocks Total 1972 1974 1973 • • $87,175 81.317 $16,042 36,205 $103,217 1975 78,557 52,790 117,516 1976 88,787 99,821 47,713 131,347 58,647 136,500 158,468 Income Taxes (Credit) Applicable to Insurance and Textile Operations and income subject to tax. The difference arises principally from certain dividends received credits and Bach year there is a significant difference between pre-tax income reported in the financial statements from the fact that a considerable portion of income of the Insurance Group is produced by tax exempt bonds. Berkshire Hathaway Inc. and its includible subsidiaries join in the filing of a consolidated Federal income tax return. Income tax expense for 1976 and credit for 1975 are detailed, summarized and reconciled to the statutory 48% rate in the footnotes to the financial statements. Equity in Net Earnings of Bank Subsidiary represent approximately 98% of the bank's earnings. Financial statements of the bank are included else- Berkshire's equity in net earnings of the Illinois National Bank and Trust Co. of Rockford ("the bank") where herein. of dollars: A financial summary of the bank's operations for the last three years is summarized below, in thousands Interest income 1974 1975 1976 Interest expense •• • $11,043 $10,868 $11,583 Non-interest income Net interest earnings 4,969 • ... 5,195 5,884 • . .. 6,074 • 5,673 1,133 5,699 7,207 1,220 1,331 Non-interest expenses .... 2,915 6,893 3,207 7,030 Earnings befors income taxes and before 3,367 securities gains Net earnings • $ 4,292 $ 3,680 $ 3,683 $ 4,215 $ 3,567 $ 3,847 accreted discount on bonds as explained in Note 1 to the Financial Statements of the Bank. Figures for 1974 and 1975 have been restated by a minor amount to include in income, net of tax, 1975 Compared to 1974 time deposits increased so that interest expense was greater in 1975 than in 1974. The combination resulted Outstanding loans declined in 1975, resulting in less total interest income than in 1974. Interest bearing in a decline of $401,000 in net interest earnings in 1975 from the prior year A non-recurring credit of $554,000 against property tax expense in 1974, reflected above as a reduction of "non-interest expenses" for that year, more than explains the increase in that category of expense from 1974 to 1975. 40

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MANAGEMENT'S DISCUSSION, Continued Income taxes applicable to operating earnings of the bank in both 1974 and 1975 were partially offset in much year by after-tax gain from disposition of securities, so that final Net Earnings were slightly less than Barnings before those items. Earnings before income taxes and before securities gains were approximately the same for 1976 as for 1976 Compared to 1975 the prior year. This result was achieved despite the fact that 1876 commercial and industrial loan demand wunless than vigorous, and the rate of return on loans declined steadily throughout the year Interest income oft securities, the funds for which were secured through increased deposits, more than offset the decline in Joan interest. Interest paid on increased time deposits caused the increase in interest expense. Operating expenses were closely controlled in 1976, as they have been historically. 1976 income taxes of the bank were more than offset by securities gains so that final Net Earnings inreased $280,000 over 1975. Equity in Net Earnings of Blue Chip Stamps Berkshire's equity in net earnings of Blue Chip Stamps ("Blue Chip") computed by the equity method for each of the past three years has been as follows: 1974 1975 1976 Applicable income taxes Equity in net earnings

• . .

•... $1,548 Amorization of excess of cost over equity in nel (112) $2,346 $3,733 (169) (269) assets (384) (174) (98) $1,052 $2,003 $3,366 nhout November 30 of those years. Blue Chip changed to a calendar year reporting basis for 1976, and Equity in 1974 and 1975 earnings were based on the twelve month operations of Blue Chip ended on or lerkshire equity in 1975 earnings is, accordingly, based on Blue Chip's 1976 calendar year results. The average number of shares of Blue Chip owned by Berkshire has increased from the prior year in wach of the past three years. Average shares owned in 1974, 1875 and 1978 were, respectively, 1,144,670, 1.325,233 and 1,579,090. At 1976 year end, Berkshire's ownership of Blue Chip shares had increased to 1.720,709, representing approximately 33% of Blue Chip's outstanding shares. Realized Investment Gains (Losses) Realization of investment gains or losses is determined by prevailing investment strategy as applied under changing economic conditions. Net results for the past three years were as follows, in thousands of dollars. 1974 1975 1976 Realized gains (losses) •... $(1,908) $ (2,888) $ 9,962 Applicable income tax (expense) credits 568 866 Realized gains (losses) after taxes $(1,340) $ (2,022) $ 6,762 (3,200) 41

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Berkshire Hathaway Inc. DIRECTORS AND EXECUTIVE OFFICERS WARREN E. BUFFETT, Director and Chairman of the Board Chief Executive Officer of the Company KENNETH V. CHACe, Director President of the Company and Chief Operating Officer of the Textile Operations of the Company MALCOLM G. CHACE, IR., Director Petired, Former Chairman of the Board of Directors of the Company I. VERNE MCKENZIE, Director Vice President, Secretary and Treasurer of the Company COMMON STOCK PRICES for the stock in each quarter of 1975 and 1978 is set forth in the following table. The quotations represent prices between The common stock of Berkshire Hathaway inc. is traded in the over the counter market. The high and low bid prices dealers and do not include retail markup, merkdown or commission. They do not represent actual transactions. High Low 1975 Ist Quarter 2nd Quarter 51 38 3rd Quarter 51 45 60 4th Quarter 41 45 38 1978 1st Quarter 56 38 2nd Quarter 63 59 4th Quarter 3rd Quarter 73 61 95 66 The Company did not pay a dividend in 1975 or 1976. 42

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