1978 年伯克希尔完整年报

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PURDUE UNIVERSITY JUL 25 1979 KRANNERT LIBRARY 29) BERKSHIRe HATHAWAY INc. Prem Jain. 1978 ANNUAL REPORT TO THE STOCKHOLDERS

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Berkshire Hathaway Inc. 1978 Annual Report to the Stockholders merged company. The information in this 1978 Annual Report accordingly reflects such result. of the businesses in which Berkshire Hathaway Inc. and its subsidiaries See the Business Segment Information on pages 35 to 37 for a description are engaged. Contents of This Report Pages 1-7 Chairman's Letter 8-26 Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries 27-28 Summary of Operations for the Past 5 Years 29-34 Management's Discussion of the Summary of Operations 35-37 Business Segment Information 38-40 Reproduction of 1978 Annual Report Letter from Blue Chips Chairman and President 41-42 Reproduction of 1978 Annual Report Letter from Wesco's Chairman 43-53 Financial Statements of Insurance Group 54-64 Financial Statements of The Illinois National Bank & Trust Co. of Rockford Inside Common Stock Prices Back Cover Directors and Executive Officers •

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1 PURDUE UNIVERSITY Berkshire Hathaway Inc. JUL 25 1979 To the Shareholders of Berkshire Hathaway Inc.: KRANNERT LIBRARY yearend adds two new complications in the presentation of our financial results. After the merger, our First, a few words about accounting. The merger with Diversified Retailing Company, Inc. at ownership of Blue Chip Stamps increased to approximately 58% and, therefore, the accounts of that company must be fully consolidated in the Balance Sheet and Statement of Earnings presentation of single item on Berkshire's Statement of Earnings, and there had been a similar one-line inclusion on Berkshire. In previous reports, our share of the net earnings only of Blue Chip had been included as a our Balance Sheet of our share of their net assets. This full consolidation of sales, expenses, receivables, inventories, debt, etc. produces an aggregation of figures from many diverse businesses — textiles, insurance, candy, newspapers, trading stamps — with dramatically different economic characteristics. In some of these your ownership is 100% but, in those businesses which are owned by Blue Chip but fully consolidated, your ownership is a Berkshire shareholder is only 58%. (Ownership by others of the balance of these businesses is accounted for by the large minority interest item on the liability side of the Balance Sheet.) Such a grouping of Balance Sheet and Earnings items — some wholly owned, some partly owned - tends to abscure economic reality more than illuminate it. In fact, it represents a form of presentation that we never prepare for internal use during the year and which is of no value to us in any management activities. For that reason, throughout the report we provide much separate financial information and commentary on the various segments of the business to help you evaluate Berkshire's performance und prospects. Much of this segmented information is mandated by SEC disclosure rules and covered In "Management's Discussion" on pages 29 to 34. And in this letter we try to present to you a view of our various operating entities from the same perspective that we view them managerially. A second complication arising from the merger is that the 1977 figures shown in this report are different from the 1977 figures shown in the report we mailed to you last year. Accounting convention subsequently must be presented as if the companies had been merged at the time they were formed requires that when two entities such as Diversified and Berkshire are merged, all financial data rather than just recently. So the enclosed financial statements, in effect, pretend that in 1977 (and earlier years) the Diversified-Berkshire merger already had taken place, even though the actual merger time to time in our narrative report, we will talk of figures and performance for Berkshire shareholders date was December 30, 1978. This shifting base makes comparative commentary confusing and, from is historically reported to you rather than as restated after the Diversified merger. Operating earnings, exclusive of capital gains, at 19.4% of beginning shareholders' investment were With that preamble it can be stated that, with or without restated figures, 1978 was a good year. within a traction ot our 1972 record. While we believe it is improper to include capital gains or losses "ur largest profit producer — Berkshire's per share net worth virtually has doubled, thereby For example, over the last three years — generally a bonanza period for the insurance industry, rubstantial capital gains. Neither this 25% equity gain from all sources nor the 19.4% equity gain compounding at about 25% annually through a combination of good operating earnings and fairly from operating earnings in 1978 is sustainable. The insurance cycle has turned downward in 1979, and it is almost certain that operating earnings measured by return on equity will fall this year. However, operating earnings measured in dollars are likely to increase on the much larger shareholders' equity now employed in the business. In contrast to this cautious view about near term return from operations, we are optimistic about prospects for long term return from major equity investments held by our insurance companies. We 1

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Frank DeNardo came with us in the spring of 1978 to straighten out National Indemnity's California Worker's Compensation business which, up to that point, had been a disaster. Frank has the experience and intellect needed to correct the major problems of the Los Angeles office. Our volume in this department now is running only about 25% of what it was eighteen months ago, and early indications are that Frank is making good progress. relative to premium volume, and thus gives us reasonably satisfactory overall results. However, George Young's reinsurance department continues to produce very large sums for investment regarding underwriting results in reinsurance (particularly in casualty lines involving long delays in underwriting results still are not what they should be and can be. It is very easy to fool yourself settlement), and we believe this situation prevails with many of our competitors. Unfortunately, factors in the market don't know their true costs, the competitive "Fall-out" hits all — even those with self-delusion in company reserving almost always leads to inadequate industry rate levels. If major adequate cost knowledge. George is quite willing to reduce volume significantly, if needed, to achieve business under his direction. satisfactory underwriting, and we have a great deal of confidence in the long term soundness of this The homestate operation was disappointing in 1978. Our unsatisfactory underwriting, even though the backdrop of very favorable industry results in the conventional lines written by our homestate partially explained by an unusual incidence of midwestern storms, is particularly worrisome against group. We have confidence in John Ringwalt's ability to correct this situation. The bright spot in the group was the performance of Kansas Fire and Casualty in its first full year of business. Under Floyd Taylor, this subsidiary got off to a truly remarkable start. Of course, it takes at least several years to evaluate underwriting results, but the early signs are encouraging and Floyd's operation achieved the best loss ratio among the homestate companies in 1978. year. But of course we should expect a good year when the industry is flying high, as in 1978. It is a Although some segments were disappointing, overall our insurance operation had an excellent virtual certainty that in 1979 the combined ratio (see definition on page 31) for the industry will move up at least a few points, perhaps enough to throw the industry as a whole into an underwriting loss position. For example, in the auto lines — by far the most important area for the industry and for us - that make up loss costs — auto repair and medical care costs — were up over 9%. How different than CPI figures indicate rates overall were only 3% higher in January 1979 than a year ago. But the items yearend 1976 when rates had advanced over 22% in the preceding twelve months, but costs were up 8%. Margins will remain steady only if rates rise as fast as costs. This assuredly will not be the case in 1979, and conditions probably will worsen in 1980. Our present thinking is that our underwriting performance relative to the industry will improve somewhat in 1979, but every other insurance disappointed. Even if we do improve relative to others, we may well have a higher combined ratio management probably views its relative prospects with similar optimism - someone is going to be and lower underwriting profits in 1979 than we achieved last year. hould not be unrestrained joy. Some of our expansion efforts — largely initiated by your Chairman - We continue to look for ways to expand our insurance operation. But your reaction to this intent purchase of the segment which Phil Liesche now manages, and it still remains, by a large margin, the lave been lackluster, others have been expensive failures. We entered the business in 1967 throug best portion of our insurance business. It is not easy to buy a good insurance business, but our experience has been that it is easier to buy one than create one. However, we will continue to try both Insurance Investments enthusiasm for stocks is not unconditional. Under some circumstances, common stock investments by We confess considerable optimism regarding our insurance equity investments. Of course, our insurers make very little sense.

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We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively. We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents amounted to only $10.7 million at cost, and $11.7 million at market. There were equities of identifiably action. For example, in 1971 our total common stock position at Berkshire's insurance subsidiaries excellent companies available — but very few at interesting prices. (An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities — at fuil prices they couldn't buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.) million and a market value of $216.5 million. During the intervening three years we also had realized pre-tax gains from common equities of approximately $24.7 million. Therefore, our overall unrealized and realized pre-tax gains in equities for the three year period came to approximately $112 million. During this same interval the Dow-Jones Industrial Average declined from 852 to 805. It was a marvelous period for the value-oriented equity buyer. We continue to find for our insurance portfolios small portions of really outstanding businesses that are available, through the auction pricing mechanism of security markets, at prices dramaticall heaper than the valuations inferior businesses command on negotiated sales This program of acquisition of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists. It seems quite clear to us that either corporations are making very significant mistakes in purchasing entire businesses at prices prevailing in negotiated transactions and takeover bids, or that we eventually are going to make considerable sums of money buying small portions of such businesses at the greatly discounted valuations prevailing in the stock market. (A second footnote: in 1978 pension managers, a group that logically should maintain the longest of investment perspectives, put only 9% of net available funds into equities — breaking the record low figure set in 1974 and tied in 1977.) We are not concerned with whether the market quickly revalues upward securities that we believe funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying. only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are in buying worthwhile amounts. 5

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31, 1978 were as follows: Equity holdings of our insurance companies with a market value of over $8 million on December Shares No. of Company Cost Market 1,294,308 246,450 American Broadcasting Companies, Inc. . (000's omitted) 1,986,953 Government Employees Insurance Company Common Stock $ 6,082 $ 8,626 1,066,934 592,650 Interpublic Group of Companies, Inc.... Government Employees Insurance Company Convertible Preferred 19,417 4,116 28,314 9,060 953,750 453,800 Kaiser Aluminum and Chemical Corporation 4,531 19,039 Knight-Ridder Newspapers, Inc. 18,085 18,671 934,300 The Washington Post Company SAFECO Corporation 23,867 7,534 26,467 10,267 Total 10,628 43,445 All Other Holdings $ 94,260 39,506 $163,889 Total Equities. 57,040 $133,766 $220,929 In some cases our indirect interest in earning power is becoming quite substantial. For example, note our holdings of 953,750 shares of SAFECO Corp. SAFECO probably is the best run large property and casualty insurance company in the United States. Their underwriting abilities are simply superb, their loss reserving is conservative, and their investment policies make great sense. of ours are much better than average), is better than one we could develop and, similarly, is far better SAFECO is a much better insurance operation than our own (although we believe certain segments than any in which we might negotiate purchase of a controlling interest. Yet our purchase of SAFECO in the business, when far more than 100° on the dollar is being paid for mediocre companies in was made at substantially under book value. We paid less than 100° on the dollar for the best company more than do on the dilar is bang, corporate transactions. And there is no way to start a new operation - with necessarily uncertain prospects - at less than 100° on the dollar. policies of SAFECO. But why should we wish to do this? The record would indicate that they do a Of course, with a minor interest we do not have the right to direct or even influence management better job of managing their operations than we could do ourselves. While there may be less excitement and prestige in sitting back and letting others do the work, we think that is all one loses by accepting run as well as SAFECO, the proper policy also would be to sit back and let management do its job. a passive participation in excellent management. Because, quite clearly, if one controlled a company Earnings attributable to the shares of SAFECO owned by Berkshire at yearend amounted to $6.1 million during 1978, but only the dividends received (about 18% of earnings) are reflected in our eventual benefit to us as the amount distributed. In fact, SAFECO's retained earnings (or those of other operating earnings. We believe the balance, although not reportable, to be just as real in terms of eventually have a value to shareholders greater than 100° on the dollar. well-run companies if they have opportunities to employ additional capital advantageously) may well can utilize internally those funds at attractive rates. Why should we feel differently about retentior We are not at all unhappy when our wholly-owned businesses retain all of their earnings if they of earnings by companies in which we hold small equity interests, but where the record indicates even better prospects for profitable employment of capital? (This proposition cuts the other way, of course, in industries with low capital requirements, or if management has a record of plowing capital into projects ot low profitability; then earnings should be paid out or used to repurchase shares - often by far the most attractive option for capital utilization.) becoming quite substantial. It does not enter into our reported operating earnings, but we feel it we The aggregate level of such retained earnings attributable to our equity interests in fine companies ay have equal long-term significance to our shareholders. Our hope is that conditions continue 1 6

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earning power for relatively modest outlays. At some point market conditions undoubtedly will again prevail in securities markets which allow our insurance companies to buy large amounts of underlying preclude such bargain buying but, in the meantime, we will try to make the most of opportunities. Banking • continues to establish new records. Last year's earnings amounted to approximately 2.1% of average Under Gene Abegg and Pete Jeffrey, the Illinois National Bank and Trust Company in Rockford assets, about three times the level averaged by major banks. In our opinion, this extraordinary level of earnings is being achieved while maintaining significantly less asset risk than prevails at most of the larger banks. as it had been ever since Gene Abegg opened the doors in 1931. Since 1968, consumer time deposits We purchased the Illinois National Bank in March 1969. It was a first-class operation then, just have quadrupled, net income has tripled and trust department income has more than doubled, while costs have been closely controlled. Our experience has been that the manager of an already high-cost operation frequently is operation usually continues to find additional methods to curtail costs, even when his costs are uncommonly resourcetul in finding new ways to add to overhead, while the manager of a tightly-run already well below those of his competitors. No one has demonstrated this latter ability better than Gene Abegg. off to Berkshire shareholders some time in the second half of 1980. We are required to divest our bank by December 31, 1980. The most likely approach is to spin it Retailing a chain of about 75 popular priced women's apparel stores. Associated was launched in Chicago on running the business — and run it, he has. Associated's business has not grown, and it consistently has faced adverse demographic and retailing trends. But Ben's combination of merchandising, real estate and cost-containment skills has produced an outstanding record of profitability, with returns on capital necessarily employed in the business often in the 20% atter-tax area. Ben is now 75 and, like Gene Abegg, 81, at Illinois National and Louie Vincenti, 73, at Wesco, continues daily to bring an almost passionately proprietary attitude to the business. This group of top discrimination. While unorthodox, these relationships have been exceptionally rewarding, both managers must appear to an outsider to be an overreaction on our part to an OEO bulletin on age financially and personally. It is a real pleasure to work with managers who enjoy coming to work each morning and, once there, instinctively and unerringly think like owners. We are associated with some of the very best. Warren E. Buffett, Chairman March 26, 1978

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PEAT. MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS KIEWIT PLAZA OMAFIA, NEBRASKA 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway Inc. and consolidated subsidiaries as of December 30, 1978 and December 31, 1977 and the related consolidated statements of earnings, stockholders' examinations were made in accordance with generally accepted auditing equity and changes in financial position for the years then ended. Our standards, and accordingly Included such tests of the accounting records circumstances. and such other auditing procedures as we considered necessary in the We did not examine the financial statements of Blue Chip constituting 25 percent and 28 percent and total revenues constituting Stamps, a consolidated subsidiary, which statements reflect total assets respectively. These statements were examined by other auditors whose report thereon has been furnished to us, and our opinion expressed SE222 Stamps, is based solely upon the report of the other auditors. herein, Insolar as it relates to the amounts Included for Blue Chip In our opinion, based upon our examinations and the report of other fairly the financial position of Berkshire Hathaway Inc, and consoli- auditors, the aforementioned consolidated financial statements present dated subsidlaries at December 30, 1978 and December 31, 1977 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, after restatement for the merger of Diversified Retailing Company, the consolidation of Blue Chip Stamps, with which we concur, as explaine Inc. and in note 1 to • the consolidated financial statements. Rest, Marict, Mercel t Co. March 28, 1979

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) ASSETS Dec. 30, 1978 Dec. 31, 1977 (Restated) Investments, other than investments in affiliates: (ash (notes 11 and 12)..... $ 13,001 $ 13,996 Marketable equity securities, at cost (note 5) Bonds, at amortized cost (note 5) .... ...•...•••.. 157,651 132,929 196,161 163,294 Invested cash, U.S. Treasury Bills and other approximates market short-term investments, at cost which 61,056 35,730 Total investments, other than affiliates 414,868 331,953 Investments in affiliates: The Illinois National Bank & Trust Co. of Rockford (note 6).. 27,146 Wesco Financial Corporation (note 7) 49,370 43,892 25,839 Other unconsolidated subsidiaries 1,477 1,627 Total investments in affiliates 77,993 71,358 Arcounts receivable from customers, agents and others (note 8) 23,029 45,283 23,776 38,009 Inventories (note 9).. Kral estate, equipment, furniture and leasehold improvements, at cost Deferred insurance premium acquisition costs less allowance for depreciation and amortization (note 10) 13,846 47,877 10,852 47,106 (ther assets 34,691 35,093 $670,588 $572,143 LIABILITIES AND STOCKHOLDERS' EQUITY I nearned premiums Losses and loss adjustment expenses $180,870 66,832 69,368 $139,461 66,209 57,128 Liability for unredeemed trading stamps.. Note payable to bank Accounts payable, accruals and other liabilities 33,983 35,466 10,768 2,000 Current income taxes 6,492 'lerm loan payable to bank (note 12) Deferred income taxes 13,500 9,885 13,500 7,793 Other notes and debentures payable (note 14) Senior notes payable (note 13) 27,000 27,000 48,579 16,571 14,604 Minority shareholders' interest .... 47,926 477,356 417,579 Stockholders' equity: Common stock of $5 par value. Authorized 1,250,000 shares; issued Capital in excess of par value 1,214,286 shares. 6,071 195,515 3,517 3,517 6,071 Retained earnings (note 13)............ ... ... .... 156,273 205,103 165,861 Less common stock in treasury, at cost (187,138 shares December 30, 1978; 183,606 shares December 31, 1977) 11,871 193,232 11,297 Total stockholders' equity….. ..... 154,564 Commitment and contingent liability (notes 6, 17 and 19) $670,588 $572,143 See accompanying notes to consolidated financial statements. 9

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of dollars) Year ended Dec. 30, 1978 Dec. 31, 1977 Income items: (Restated) Insurance premiums earned Net sales and operating revenues of manufacturing, merchandising and service $186,073 $143,087 Interest and dividend income operations ..... .... 235,576 24,293 203,752 16,796 Cost and expense items: 445,942 363,635 Cost of products and services sold Insurance losses and loss adjustment expenses ...... 151,521 132,263 Insurance underwriting expenses .... 96,869 71,172 50,810 130,647 Interest and financing costs Selling, general and administrative expenses ... .. 40,417 5,058 60,698 4,789 Earnings from consolidated operations including minority interests, before 410,824 333,420 and realized investment gain applicable income taxes, equity in earnings of unconsolidated subsidiaries Income taxes applicable to above (note 16) 35,118 10,442 30,215 Earnings from consolidated operations including minority interests, before 9,487 equity in earnings of unconsolidated subsidiaries and realized investment Minority interest in above.. 24,676 2,709 20,728 Earnings before equity in earnings of unconsolidated subsidiaries and realized 3,489 investment gain 21,967 17,239 Wesco Financial Corporation The Illinois National Bank & Trust Co. of Rockford 3,775 4,242 3,550 Earnings before realized investment gain 2,683 Realized investment gain 29,984 13,987 23,472 Applicable income taxes (4,416) 13,310 Applicable minority interest (313) (4,448) Realized investment gain, net of income taxes and minority interest (1,941) equity securities amounting to $14,665 in 1978 and Net unrealized appreciation in market value of marketable 9,258 6,921 tion of net earnings. $12,964 in 1977 has not been included in the determina- Net earnings ... Earnings per share of common stock based on weighted average outstanding shares: $ 39,242 $ 30,393 Earnings before realized investment gain.. Realized investment gain ..... $ 29.15 Net earnings ....... 9.00 $ 22.62 ...... - 6.67 See accompanying notes to consolidated financial statements. $ 38.15 $ 29.29 10

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands of dollars) in excess Capital apar Retained earnings Treasury stock Total Balance, January 1, 1977 — as Restatement effects of merger wit previously reported $4,898 - $110,827 $(432) $115,293 Diversified Retailing Company, Inc.* 1,173 3,517 15,053 (9,389) -10,354 Balance, January 1, 1977 restated

• as

6,071 Net earnings for 1977 (Restated) Purchases of treasury stock, 13,758 - 3,517 125,880 30,393 (9,821) 125,647 - 30,393 shares....... - (1,476) (1,476) Balance, December 31, 1977 - Net earnings for 1978 restated 6,071 - 3,517 156,273 39,242 (11,297) 154,564 Purchases of treasury shares... stock, 3,532 39,242 (574) (574) Balance, December 30, 1978 $6,071 $3,517 $195,515 $(11,871) $193,232 *Stockholders equity of Diversified at the beginning of 1977 .. $27,120 Carrying value to Diversified of common shares of The Company held by Diversified at Cash paid in merger in lieu of issuance of fractional shares …... the beginning of 1977, less deferred taxes considered applicable thereto (16,761) (5) Restatement effect on total stockholders equity of merger with Diversified $10,354 See accompanying notes to consolidated financial statements. 11

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (in thousands of dollars) Year ended Dec. 30, 1978 Dec. 31, 1977 Funds provided: (Restated) from operations: Net earnings Minority interest in earnings ... .. $ 39,242 Earnings including minority interest ... 6,371 $ 30,393 8,255 Charges (credits) to earnings not requiring (providing) funds: 45,613 38,648 Equity in undistributed earnings dividends received ot unconsolidated subsidiaries, net of Accretion of discount on bonds ... . . (1,000) (6,712) (1,107) preciation and amortization of property, plant and equipment, includin (929) leaseholds .. Increase in deferred insurance premium acquisition costs (2,994) 4,602 (3,659) 3,308 Increase in accounts receivable Decrease (increase) in inventories (7,274) Increase in unearned insurance premiums. Increase in unpaid insurance losses and loss adjustment expenses 747 (1,319) (2,654) $1,409 12,240 15,617 36,875 Increase in income tax liability Increase (decrease) in accounts payable Increase (decrease) in liability for unredeemed trading stamps 6,368 (1,001) 623 1,884 Other 7,207 (658) (339) 435 Proceeds from issuance of debt Funds provided from operations 46,669 55,000 92,282 Decrease in cash 4,791 39,000 93,648 995 Funds used: $ 98,068 $132,648 Net assets of acquired businesses: Investments.. Property, plant and equipment (of Buffalo Evening News) Other assets. 15,527 10,663 31,900 Other liabilities Loss and loss adjustment expenses (12,807) (7,761) Repayment of debt Additions to property, plant and equipment, net of disposals 5,450 - 37,522 4,824 23,275 3,906 Purchase of treasury stock Cost of net purchases of investments: Dividends paid to minority stockholders 574 564 1,476 613 Bonds U.S. Treasury Bills and short-term obligations Marketable equity securities. ... 23,722 25,326 24,656 5,016 Common stock of Blue Chip Stamps 32,867 Unconsolidated subsidiaries .... 4,891 22,630 Total purchase of investments .... (150) 5,978 2,728 Increase in cash 86,656 61,008 4,848 See accompanying notes to consolidated financial statements. $ 98,068 $132,648 12

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 30, 1978 and December 31, 1977 (dollars in thousands) (1) Merger of Diversified Retailing Company, Inc. At December 30, 1978 Diversified Retailing Company, Inc. ("Diversified") was merged into Berkshire Hathaway the year then ended give effect to the combination of the accounts of Diversified and The Company, and all prior financial statements have been restated on a comparable, combined basis. Prior to the merger of The Company and Diversified, each had an ownership interest in Blue Chip Stamps "Blue Chip"); for which each accounted pursuant to the equity method of accounting. The combination, resulting rom the merger, of these interests in Blue Chip caused Blue Chip to become a subsidiary of the combined company and accordingly, at December 30, 1978 and December 31, 1977 and for the years then ended, the accompanying consolidated financial statements reflect the consolidation of the accounts of Blue Chip and its consolidated subsidiaries. Net earnings determined by consolidation of Blue Chip are unchanged from net earnings determined ly using the equity method of accounting for the investment in Blue Chip. Prior to 1977, the combined holdings in Blue Chip by The Company and by Diversified represented less than a majority of Blue Chip's outstanding shares Diversified was a holding company; operations were conducted through wholly-owned subsidiaries, one of which is in the business of retailing of women's and children's apparel and others of which are engaged in the property and casualty insurance business. conforming their fiscal year to that of Berkshire is not material. Total income items reflect the following for entities combined and consolidated in the statements of earnings for the past two years: 1978 1977 Revenues of The Company Revenues of Diversified ....... $254,885 47,471 $197,628 48,834 Combined ..... 302,356 246,462 Revenues of Blue Chip, consolidated as a result of the merger ....... 143,586 117,173 Total income items, combined and consolidated .. . . $445,942 $363,635 Net earnings for the past two years represent a combination of earnings of The Company and Diversified (including the equity of each in earnings of Blue Chip) as follows: 1978 1977 The Company Diversified (excluding equity in earnings of The Company $37,033 $26,724 attributable to common shares of The Company owned by Diversified)...... ... . . 2,209 3,669 Net earnings, combined ... ..... $39,242 $30,393 increase resulting from the merger was 56,470 shares; after giving effect to the merger, outstanding shares of The There were 970,678 shares of common stock of The Company oustanding during 1978 prior to the merger; the Company were 1,027,148. 13

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (2) Summary of Significant Accounting Policies and Practices (a) Basis of Presentation As indicated in the preceding note, the consolidated accounts of The Company have been combined with a further result of the merger, the accounts of Blue Chip Stamps and its consolidated subsidiaries have the consolidated accounts of Diversified in the accompanying consolidated financial statements and, as also been included. The resulting financial statements thus reflect accounts of companies engaged in a number of businesses, a disaggregation of the operations of these several businesses is accomplished in the business segment information on pages 35 to 37 of this annual report. The Company's investment in The Illinois National Bank & Trust Co. of Rockford ("Illinois National Bank") company, are accounted for by the equity method of accounting. and Blue Chip's investment in Wesco Financial Corporation ("Wesco"), a savings and loan holding Subsidiaries which in the aggregate are insignificant have not been consolidated and investments therein are carried at cost less dividends received from such subsidiaries. Accounts of The Company, its textile manufacturing and sales subsidiaries, a retailing subsidiary, Blue Chip, and its candy business subsidiaries are maintained on the basis of a 52-53 week fiscal year ending with respect to December 31; the accounts of other subsidiaries (including members of the Insurance Group) are maintained on the basis of the calendar year. (b) Investment in Securities, Other Than Affiliates Investments in bonds are stated at amortized cost; investments in preferred and common stocks other than athiliates are carried at the lower of aggregate cost or aggregate market value. (c) Insurance Premiums Insurance premiums are recognized as revenues ratably over the terms of the policies. Unearned premiums reinsurers in the amount of $1,311 at December 31, 1978 and $1,672 at December 31, 1977. Premium are computed on the monthly pro rata basis and are stated after deduction for reinsurance placed with pursuant to statutory insurance accounting rules, charged against income when incurred. However, for acquisition costs such as commissions, premium taxes and certain other underwriting expenses are, financial statement purposes, a portion of such costs are deferred and charged against income as the related premiums are earned. (d) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses based upon (1) aggregate case basis based upon past experience, (3) estimates received relating to assumed reinsurance, and (4) deduction of estimates for losses reported, in respect to direct premiums written, (2) estimates of unreported losses amounts for reinsurance placed with reinsurers in the amount of $7,137 at December 31, 1978 and $5,199 at December 31, 1977. (e) Stamp Service Accounting Blue Chip recognizes stamp service revenues upon issuance of its trading stamps and provides a liability redemption service expenses. Factors affecting the estimated cost of future redemptions are periodically account for unredeemed trading stamps consisting of estimates of the cost of merchandise and related evaluated by management of Blue Chip and, when considered warranted, revisions are made of he total estimated number of stamps expected to be redeemed and the provision for future redemptio osts per stamp. The most recent change in these estimates occurred in 1976, no change was made to be approximately 97% of the stamps issued before March 1974 and approximately 93% of those during 1977 or 1978. Currently, the total number of stamps expected to be redeemed is estimated issued thereafter. 14

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) 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, and selected new items acquired by other businesses; the straight-line method is applied for other items. Maintenance, repairs and renewals of a minor nature are generally charged to operations as incurred. (x) Inventories are stated at cost, determined for The Company and for Blue Chip's newspaper subsidiary Inventories under the last-in, first-out method. Inventories of other members consolidated are stated at the lower of cost or market, with cost determined under the first-in, first-out or average cost methods. (h) Income Taxes A consolidated Federal income tax return is filed by The Company and its eligible (over 80% owned domestic) subsidiaries. Blue Chip and its eligible subsidiaries file a consolidated tax return. Amounts included in the consolidated balance sheets for Federal income taxes payable or recoverable include the direct or apportioned Federal tax amounts of the companies whose accounts are consolidated. Prepaid and deferred tax accounts are maintained in recognition of timing differences created by accounting for certain income and expense items for financial reporting purposes differently from the accounting for of The Company and its consolidated subsidiaries (other than Blue Chip) in current undistributed the items for income tax purposes. A provision for deferred taxes is also provided with respect to equity earnings of Blue Chip, on the assumption that such earnings will eventually be distributed, taxable as dividend income. (1) Acquired Businesses (In December 23, 1977, an insurance subsidiary of The Company purchased for approximately $2,700 cash all of the outstanding capital stock of Cypress Insurance Company ("Cypress"), South Pasadena, California. Cypress is "guged in the underwriting of workers' compensation insurance in the state of California. The acquired assets worn included in the December 31, 1977 balance sheet of the Insurance Group, which is included in the related •solidated balance sheet of The Company. Operations of Cypress were not reflected in the statement of earnings In vear, while not deemed material, would have been to increase consolidated net earnings by approximately 50€ fur 1977. The pro forma effect of this acquisition on 1977 earnings, assuming ownership of Cypress throughout all of put share in that year. Operations of Cypress are included in the statement of earnings for 1978. ffective April 15, 1977, Blue Chip acquired the newspaper assets, subject to certain liabilities, of the Buffalo the excess of Blue Chip's cost of net assets acquired over underlying value. (4) Business Segments Information with respect to business segments appears at pages 35 to 37 of this report and is an integral part uf these financial statements. 15

[PAGE 16]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (5) Investments in Bonds and Marketable Equity Securities marketable equity securities is as follows: A summary of the aggregate cost and aggregate approximate market value of investments in bonds and Dec. 30, 1978 Dec. 31, 1977 Bonds Cost Market Cost Marketable equity securities: $157,651 Market $155,541 $132,929 $137,193 Preferred stocks Common stocks 172,081 24,080 32,757 250,428 23,366 37,225 139,928 198,427 $196,161 $283,185 $163,294 $235,652 unrealized gains less unrealized losses as follows: The excess of the aggregate market value over aggregate cost of marketable equity securities represented Dec. 30, Dec. 31, Unrealized losses Unrealized gains 1978 1977 $91,315 4,291 $79,746 Net excess of market over cost 7,388 $87,024 $72,358 In addition to the investments summarized above, at both December 30, 1978 and December 31, 1977, there is included in other assets the $4,163 cost of an investment by Blue Chip in nonvoting stock of Pinkerton Holding Corporation ("PH") for which there is no trading market. PH's principal assets are equity securities of Pinkerton's, Inc. ("PI"). Blue Chip's indirect holdings (through PHC), plus its direct holdings in nonvoting stock of PI (included in the above summary) represent a beneficial ownership of approximately 32% of the equity of Pl at December 30, 1978. (The Company's economic interest in the equity of PI, reduced by the minority interest in Blue Chip which is outstanding, was approximately 19% at December 30, 1978) Blue Chip does not account for its investment in PI under the equity method inasmuch as Blue Chip's management considers its influence at PI to be insignificant because it has no vote as a stockholder and only one representative on the eleven-member Board of Directors. regulatory authorities or others as follows: Bonds and marketable equity securities of unaffiliated companies were deposited in trust with various Dec. 30, Marketable equity securities, at cost Bonds, at amortized cost.. 1978 Dec. 31, 1977 $46,680 3,494 $31,604 11,604 (6) Investment in The Illinois National Bank & Trust Co. of Rockford The investment of The Company in The Illinois National Bank represents approximately 98% of that commercial bank's outstanding stock. The equity method is used in accounting for this investment. Carrying value of the investment at December 30, 1978 exceeds underlying book value by approximately $1,836. The difference is not being amortized since it originated prior to 1970 and is considered by management to have continuing value. As a result of its ownership of The Illinois National Bank, The Company is a bank holding company under Federal legislation enacted in 1970. The Company has filed with the Federal Reserve Board an irrevocable election that the required divestiture will be accomplished sometime in 1980 by means of a spin-off of either the bank shares to divest of its holdings in The Illinois National Bank prior to January 1, 1981; management presently contemplates or the shares of a company to be formed which will hold the bank shares.

[PAGE 17]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (7) Investment in Wesco Financial Corporation Wesco is a savings and loan holding company, approximately 80% owned by Blue Chip at December 30, 1978 undistributed earnings since date of acquisition. The unamortized excess of Blue Chip's equity in net assets of and December 31, 1977. The investment in Wesco is stated at Blue Chip's cost plus Blue Chip's equity in Wesco's Wesco over its carrying value at December 30, 1978 and December 30, 1977 was, respectively, $21,101 and $21,725. This excess is being amortized by Blue Chip over 40 years. A significant minority interest is outstanding with respect to Blue Chip; the equity of The Company and significantly less than Blue Chip's equity in Wesco's earnings. To appropriately reflect the amount of consolidated subsidiaries, other than Blue Chip, in Wesco's earnings after taking into account that minority interest, is consolidated statements of earnings net of the Blue Chip minority interest therein and less the provision for income net earnings represented by equity of The Company in Wesco's earnings, the latter is reflected in the accompanying laxes of The Company with respect thereto. This is summarized as follows for the past two years: 1978 1977 Wesco's net earnings $8,481 $6,449 Blue Chip's equity in Wesco's net earnings... 6,793 Blue Chip amortization of excess of equity over cost 624 5,166 549 7,417 Provision for income taxes Blue Chip minority interest (3,349) 5,715 (293) (2,824) (208) Equity of The Company in earnings of Wesco $3,775 $2,683 Summarized consolidated financial information of Wesco and its subsidiaries for the past two years follows: Dec. 30, 1978 Dec. 31, ASSETS 1977 Cash and marketable securities $143,101 $162,098 Loans receivable, less uneared loan fees, Other assets unrealized profit and loans in process 477,597 394,125 25,596 24,871 $646,294 $581,094 LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities Savings deposits $488,328 $459,908 70,497 39,777 Total liabilities........... 558,825 Stockholders' equity, partially appropriated 87,469 499,685 81,409 $646,294 $581,094 $ 51,019 $ 44,423 Net income •••• •..... 8,481 $ 6,449 17

[PAGE 18]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) which no provision for Federal income taxes has been made. If in the future these appropriations are used for any Wesco's appropriated retained earnings at December 31, 1978 include approximately $50,349 of reserves or purpose other than to absorb bad debt losses, Federal income taxes will be imposed at the then applicable rates The Federal Savings and Loan Insurance Corporation, in connection with the insurance of savings deposits, absorbing losses. In addition, associations must maintain certain reserves under California law. Such reserve requires savings and loan associations to maintain certain reserves which may be used only for the purpose of requirements were met as of December 31, 1978. (8) Receivables Accounts receivable from customers, agents and others was made up of the following: Dec. 31, Insurance Group: 1978 1977 Investment income due and accrued.... Agents' balances and premiums in course of collection $18,896 Reinsurance recoverable on loss payments 4,425 $13,042 Amounts due from sales of securities 5,413 2,891 - 5,837 Trade accounts receivable of other businesses: 28,734 22,057 287 Textile business Candy business Retailing business 10,109 541 9,661 Newspaper business. 1,119 237 Other Trading stamps and motivation businesses 4,149 1,065 379 899 1,169 4,027 391 Less allowance for doubtful accounts 17,196 647 16,550 598 Total receivables 16,549 15,952 $45,283 $38,009 18

[PAGE 19]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (9) Inventories A summary of inventories follows: Dec. 30, 1978 Dec. 31, Textile business: 1977 Stock in process Raw materials and supplies $ 1,292 $ 1,449 Retailing business... Greige and finished cloth 3,564 4,917 2,514 5,803 Candy business 4,880 6,436 Newspaper business. 4,098 3,650 Other Trading stamps and motivation businesses 3,245 617 2,624 1,058 416 242 $23,029 $23,776 ink inventories of the newspaper business. Other inventories are stated at the lower of cost or market with cost Textile inventories of The Company are determined by the last-in, first-out (LIFO) method, as are the paper and by the LIFO method exceeded their carrying value by $1,884 at December 30, 1978 and $1,955 at December 31, 1977. determined by the first-in, first-out method or the average cost method. Replacement cost of inventories determined (10) Real Estate, Equipment, Furniture and Leasehold Improvements The composition of property, plant and equipment is shown below: Dec. 30, Land 1978 Dec. 31, 1977 Buildings $ 3,778 Machinery and equipment 16,907 $ 3,794 Furniture, fixtures and leasehold improvements. 55,032 16,071 7,073 52,348 6,151 Less accumulated depreciation and amortization 34,913 82,790 31,258 78,364 $47,877 $47,106 (11) Compensating Balance Arrangements with Banks The Company has a $6,000 line of credit with a bank for which it has agreed to maintain average balances with the bank of 10% of the line plus 10% of outstanding borrowings under the line. The approximate daily average amount of borrowings under the line in 1978 was $1,910. The average annual interest cost of the borrowings was outstanding borrowings thereunder at December 30, 1978. In 1977, under the same arrangement, The Company paid 8.21%. The maximum short-term borrowings under the line at any month end in 1978 was $3,500, with no 6.86% interest with respect to $1,485 average borrowings, the maximum borrowings at any month-end were $5,000, and $2,000 was outstanding at December 31, 1977. which it has agreed to maintain compensating balances of $500 plus 10% of any amounts borrowed under the line. Blue Chip has a line of credit arrangement with another bank providing for borrowings of up to $5,000 for value of at least 150% of the amount of the borrowings. Blue Chip's maximum outstanding short-term borrowings Short-term borrowings from this bank by Blue Chip are required to be collateralized by securities with a market were $8,000 in 1978 and $6,000 in 1977, including amounts in addition to the credit line arrangement. Blue Chip's respectively, of 10.5% and 6.9%. Blue Chip had no short-term borrowings outstanding at the end of either 1978 daily average short-term borrowings were $1,432 in 1978 and $2,014 in 1977, at average annual interest rates or 1977. additional average balances with the same bank equal to at least 10% of its term loan outstanding through April In addition to maintaining compensating balances for its short-term borrowings, Blue Chip maintained 1978 and 15% thereafter. (See note 12.) 19

[PAGE 20]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (12) Term Loan Payable to Bank In April 1977 Blue Chip borrowed $30,000 from a bank. As a result of prepayments, the loan has been reduced to $13,500 at December 30, 1978, repayable $3,500 on April 30, 1981, and $5,000 each on April 30, 1982 and 1983. Interest is payable monthly at rates increasing from the present one-quarter percent above prime (which was 12% at December 30, 1978) to one-half percent above prime beginning in May 1980. The loan currently requires compensating balances of 15% of the average outstanding principal amount, increasing to 20% in May 1979. All of Blue Chip's shares of See's and the News are pledged as collateral. (13) Senior Notes Payable 8% Senior Notes Due 1993 The Company in 1973 issued $20,000 8% Senior notes with final maturity March 1, 1993, the total principal amount of which remained outstanding at December 30, 1978. The notes call for mandatory annual prepayments are permitted without premium up to the amount of the required prepayments in each of prepayments of $1,143 on March 1 in each of the years from 1979 to 1992, inclusive. Optional the years 1979 to 1992; this right is not cumulative. Additionally, The Company may prepay the notes at any time, in full or in part, at a premium declining ratably from the current rate of approximately 5.4% from proceeds of any refunding operation involving the incurring of any indebtedness at an effective to par in 1992. The Company agreed it will not affect any optional prepayment prior to March 1, 1983 annual interest rate of less than 8%. In the note instruments, The Company agreed, among other things, as to both The Company and restricted subsidiaries, as defined, to limitations as to permissible outstanding funded debt and subordinated funded debt and to a limitation on mortgage debt except as to after-acquired property. Further, the dividends or other equity distributions plus investment in unrestricted subsidiaries (those not bound by parent Company covenanted that it would not make "restricted payments", which term includes the terms of the loan agreement), in excess of stated formula amounts. Retained earnings of approximately $157,075 as of December 30, 1978 are restricted by this provision, $38,440 are unrestricted. The loan agreement also contains limiting terms relating to sales of The Company's assets, mergers and during the lifetime of Warren E. Buffett, stock ownership in the parent Company by Warren E. Buffett consolidations, and allows the noteholders to demand prepayment, at par, within 60 days of notice that, and the members of his immediate family, including certain trusts and charitable organizations, has decreased to less than 15% of the outstanding capital stock of the parent Company. 94% Senior Notes Due 1993 In December 1977, Associated borrowed $7,000 from institutional investors, evidenced by its 94% collateralized promissory notes in that aggregate principal amount. This debt was originally guaranteed by Diversified; as part of the merger of The Company and Diversified, The Company issued its substitute nost i exchange for the Angerited obligations and release ay che obe Cort any aling ari September 1st; principal payments of $777 annually are required commencing March 1, 1985; final passu with the 8% Senior notes discussed above. Interest on these notes is payable March 1st and maturity is March 1, 1993. An event of default under The Company's 8% Senior notes is considered an event of default under these notes. 20

[PAGE 21]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (14) Other Notes and Debentures Payable This caption is comprised of the following obligations: Dec. 30, Dec. 31, 1978 1977 (bligations of The Company: ating additional interest of $66 was paid November 1, 1978 with respect t 977 and is payable November 1, 1979 With respect to 1978) ................ $ 6,600 $ 6,600 ½% debentures issued 1967, interest payable semiannually on February 1st an ugust 1st redeemable through 1986 through the operation of a sinking func final payment due August 1, 1987 ... 384 421 Various notes bearing interest at 8% or 9%, as stated in the obligations, payable in installments or at fixed maturity dates through 1992 11,279 4,295 11,661 4,640 i ligations of wholly-owned subsidiary of The Company: N 1983 6% 193 payaal princily par April 30, 10 ruined thronge at lis obligation is guaranteed by The Company. 350 420 % note issued 1975 due April 30, 1980, contingently due earlier. This obligatio guaranteed by The Company. . 195 195 6% note matured August 1, 1978 - 160 obligations of Blue Chip: 4% debentures matured December 1, 1978. 2,168 Obligation of See's: % mortgage note payable in monthly installments of $41, including interes ing and warehousing facilities.. nal payment December 1, 2006. Secured by mortgage of obligor's manufactu: 4,747 $16,571 21

[PAGE 22]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) outstanding at December 30, 1978 are required as follows: Future principal payments on debt, including sinking fund requirements, with respect to notes and debentures Term loan yaD 1980 1979 bas Senior notes and $- $ 1,143 notes debentures Total debt maturities 1981 1982 3,500 1,143 $ 1,788 1983. 5,000 1,143 Thereafter. 5,000 1,143 1,143 7,175 21,285 6,534 $13,500 12,968 34,253 $27,000 $16,571 $57,071 22

[PAGE 23]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (16) Income Taxes $13,270 plus deferred expense of $2,093, less an increase of $212 in the amount of Federal income taxes considered Income tax expense of The Company and its consolidated subsidiaries for 1978 represents current expense of Federal U.S. Foreign, statcand Total The total represents the following: $ 8,762 .... ..... 293 $1,680 $10,442 53 293 4,363 4,416 Total income tax expense ..... $13,418 $1,733 $15,151 Current expense is applicable to: Current ordinary income for tax purposes Realized investment gain. ..... 7,015 ... 4,522 1,680 8,695 53 4,575 • 11,537 1,733 13,270 Deferred expense is applicable to: Increase in deferred insurance premium acquisition costs Cumulative accreted discount on bonds sold Discount on bonds currently accreted 1,437 (159) 266 1,437 - 266 Undistributed earnings of Blue Chip less amount deemed to represent Equity of The Company in earnings of Wesco 293 - (159) - 293 Other timing differences earnings of Wesco 229 229 27 2,093 2,093 The decrease (increase) in prepaid income taxes of Blue Chip relate to timing differences with respect to: State income taxes and other Stamp redemption expense... (712) 500 - (712) - 500 (212) (212) Total income tax expense .. . . $13,418 1,73 $15,151 23

[PAGE 24]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) of income tax expense at the statutory Federal tax rate of 48% applied to total income follows: Total 1978 net income, including interest of minority therein, before income taxes was $60,764. A reconciliation Decreases resulting from: "Tax expense, at 48% statutory rate $29,167 Tax-exempt interest income 100% exclusion relating to equity in earnings of: (2,652) Wesco The Illinois National Bank (2,036) 85% dividends received credit (3,561) Long-term capital gain rate differential (2,433) (4,829) Increases resulting from: State income taxes, less Federal income tax benefit Provision by The Company and consolidated subsidiaries (other than Blue Chip for income 911 Other taxes with respect to their equity in earnings of Blue Chip ... 571 13 Income tax expense of The Company and its consolidated subsidiaries for 1977 represents current expense of _$15,151 $12,121 plus deferred expense of $2,417, less an increase of $395 in the amount of Federal income taxes considered by Blue Chip to be prepaid. Federal U.S. state and Foreign, The total represents the following: local Total Applicable to: Equity of The Company in earnings of Wesco Operating earnings $ 7,827 Realized investment gain 208 $1,660 $ 9,487 Total income tax expense 4,153 295 4,448 208 $12,188 $1,955 $14,143 Current expense is applicable to: Realized investment gain........... Current ordinary income for tax purposes 4,313 5,853 1,660 10,166 295 4,608 7,513 1,955 12,121 Deferred expense is applicable to: Discount on bonds currently accreted Change in deferred insurance premium acquisition costs 1,758 Cumulative accreted discount on bonds sold 235 - Equity of The Company in earnings of Wesco (160) - 1,758 Undistributed earnings of Blue Chip less amount deemed to represent 208 - 235 - (160) 208 earnings of Wesco 376 2,417 - 376 2,417 The decrease (increase) in prepaid income taxes of Blue Chip relate to timing differences with respect to: State income taxes and other Stamp redemption expense..... (324) (71) = (324) (21) Total income tax expense (395) (395) $12,188 $1,955 $14,143 24

[PAGE 25]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) of income tax expense at the Federal statutory rate of 48% to the total income taxes as shown above follows: Total 1977 net income, including interest of minority therein, before income taxes was $52,790. A reconciliation lax expense, at 48% statutory rate Decreases resulting from: $25,339 Tax-exempt interest income 100% exclusion relating to equity in earnings of: (2,266) The Illinois National Bank 85% dividends received exclusion Wesco •.•• (2,743) (1,704) Long-term capital gain rate differential (3,447) Other Credit from unconsolidated subsidiary (2,353) (227) Additions resulting from: (69) Provision by The Company and consolidated subsidiaries (other than Blue Chip) State income taxes, less Federal income tax benefit 984 for income taxes with respect to their equity in earnings of Blue Chip 629 $14,143 (17) Lease Commitments commitments outstanding at December 30, 1978, the minimum rentals under which were as follows at December The Company's retailing subsidiary (Associated) and Blue Chip and its subsidiaries had significant lease 30, 1978: 1 Year Associated Blue Chip Total 1979 1980 $ 1,664 $ 2,555 $ 4,219 1981 1,576 2,056 3,632 1982 1,519 1,195 1,356 1,584 2,551 3,103 Thereafter 1983 ... 980 3,657 1,269 4,557 8,214 2,249 $10,591 $13,377 $23,968 Leases of The Company and its consolidated subsidiaries in effect at December 30, 1978 are classified as respect to equipment leases entered into are considered immaterial. Total rental expense charged to consolidated operating leases; there were no capital lease commitments pertaining to real property; any such commitments with net earnings was $7,486 for 1978 and $7,136 for 1977, including contingent real estate rentals in excess of stated minimum amounting to $2,157 for 1978 and $2,040 for 1977. (18) Pension Plans Employees of The Company and its consolidated subsidiaries who meet certain eligibility requirements are pension expense charged to consolidated earnings was $2,587 for 1978 and $2,135 for 1977, which includes, as to covered under either employer-sponsored or union-sponsored pension, profit-sharing or savings plans. Total generally fund pension costs accrued. Based on the most recent actuarial valuations, the market value of the assets certain of the plans, amortization of prior service costs over a 30-year period. The Company and its subsidiaries of certain employer-sponsored pension plans was $1,900 less than the actuarially computed value of vested benefits amounts accrued for contributions thereto, exceeded the aggregate of vested benefits at the valuation dates by under those plans; however, the aggregate market value of the assets of all employer-sponsored plans, plus approximately $2,300. Unamortized past service costs with respect to certain of the plans approximated $6,250. 25 1

[PAGE 26]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) (19) Litigation (published by Blue Chip's subsidiary, Buffalo Evening News, Inc.) in the Buffalo metropolitan area, filed an action On October 28, 1977, the Buffalo Courier-Express, Inc. a principal competitor of the Buffalo Evening News against such subsidiary in the United States District Court under Federal antitrust laws seeking to enjoin certain practices allegedly engaged in by the News in connection with the proposed initiation of a Sunday edition in place of its Saturday weekend edition and publication of Saturday and holiday editions, thus providing competition for the existing Sunday edition of the Courier-Express. In addition to seeking an injunction, the complaint seeks treble damages in an unspecified amount, attorneys' fees and costs. On November 9, 1977, the District Court issued a preliminary order granting in part and denying in part a motion for preliminary injunction. Among other things, promotional subscription pricing plan, to withdraw certain circulation guarantees and to limit free sampling. The the order required the News to maintain its proposed subscription pricing structure, to shorten a proposed order is subject to modification as circumstances may warrant pending trial, and is not final on any of the issues raised in the litigation. A motion by the plaintiff (1) to have defendant held in contempt for alleged violations of the preliminary injunction and (2) for modification of the preliminary injunction to impose further restrictions was advertisers regarding future circulation without full basis as required by the preliminary injunction; the issue of denied by the District Court except for one finding that a News advertising salesman made a prediction to two motion to modify the preliminary injunction to reduce restrictions, which was likewise denied. The News is damages, if any, attributable to this alleged action by an advertising salesman, was deferred. The News also made a appealing the granting of the preliminary injunction, the denial of its motion for modification thereof, and the one contempt holding, to the Court of Appeals for the Second Circuit. Additional motions filed by the plaintiff are dates have been set with respect to these motions. In the main action in the trial court, the defendant has filed an pending in the trial court alleging that the News is in contempt of various aspects of the injunction. No hearing answer and counterclaim denying all liability and seeking affirmative relief of treble damages in an unspecified amount, injunction, attorneys' fees and costs against plaintiff on the ground, among others, that plaintiff seeks to monopolize the Sunday newspaper business in the Buffalo metropolitan area in violation of the Federal antitrust laws. If the plaintiff is successful in obtaining the kind of permanent injunctions it is seeking, the News probably will be forced to cease operations and liquidate; however, with discovery incomplete, the outcome of the action and defendant's potential exposure, if any, are uncertain. have a materially adverse effect on the consolidated financial position of Berkshire Hathaway Inc., notwithstanding It is the opinion of management of Berkshire Hathaway Inc. that the ultimate outcome of this litigation will not its potentially severe impact upon the News. 26

[PAGE 27]

Berkshire Hathaway Inc. SUMMARY OF OPERATIONS FOR THE PAST 5 YEARS The following Consolidated Summary of Operations of the Company and its consolidated consolidated financial statements of the Company and the related notes thereto included elsewhere subsidiaries for the 5 years ended December 30, 1978 should be read in conjunction with the in this Report. See Note (A) to this Summary for information as to the bases for presentation used in its preparation. 1974 1975 1977 1978 Insurance premiums written Sales of textile mill products $64,172 41,686 45,498 $198,313 Retail sales of apparel 33,977 32,592 35,082 38,892 44,644 52,674 Candy sales .... 62,886 40,719 Newspaper revenues - = 31,786 73,653 Trading stamps and motivation service 44,674 Interest and dividend income revenues .. 8,444 - - -. ----. 9,363 11,340 - 16,796 18,208 20,322

24,293 Insurance underwriting gain (loss) Gross profit from sales of goods and $ (7,362) $(11,350) $ 248 $ 5,801 $ 3,001 Interest expense services.. 18,259 2,395 18,477 2,559 20,910 3,055 73,105 4,789 84,055 Income taxes operations (credit) applicable to 5,058 (1,703) (3,652) 2,071 9,486 10,442 Earnings from insurance, merchandising and service operations manufacturing, (including minority interest) earnings applicable to Equity in net earnings of: $ 3,641 $ 1,765 $ 9,686 $ 20,729 $ 24,676 Blue Chip Stamps Illinois National Bank 1,911 Realized investment gain (loss) net of Wesco Financial Corporation 4,093 2,923 - 3,450 4,700 - 3,750 3,550 5,507 7,124 4,242 income taxes Minority earnings shareholders' interest in (1,550) (2,017) 6,830 8,862 9,571 Net earnings 8,163 6,121 24,966 30,393 8,255 39,242 6,371 -- Average shares outstanding 1,169,988 1,150,521 1,069,899 1,037,705 1,028,684 Net earnings per share $6.98 $5.32 $23.33 $29.29 $38.15 See notes to Summary of Operations on the following page. 27

[PAGE 28]

Berkshire Hathaway Inc. NOTES TO SUMMARY OF OPERATIONS (A) The merger of Diversified into The Company effective December 30, 1978 required a restatement of The Company's previously reported financial information for the years 1974 through 1977 so as to include the results of Diversified's operations for those years. The Company's and Diversified's operations for The Company's year ended December 30, 1978 have also been combined The merger also required consolidation of the results of Blue Chip's operations for 1977 and 1978; tor periods prior to 1977 The Company's interest in the earnings of Blue Chip Stamps is reported on the equity method. These changes in the bases of presentation substantially affect the comparability of the financial intormation presented in the Summary with that previously reported by The Company The comparability of the information presented for 1977 and 1978 (which reflect consolidation of Blue Chip's accounts) with that for prior periods (which reflect Blue Chip's results on a one-line equity basis) is also affected by this different basis of presentation. (B) Average outstanding shares were calculated as follows: Outstanding Average Raditional Shares of The Company* utstanding 1974 Shares Reported Above 1975 979,569 979,569 170,952 190,419 1,150,521 1,169,988 1977 1976 975,693 971,600 66,105 94,206 1,069,899 1978 970,678 58,006 1,037,705 1,028,684 shares in Treasury during the entire year. *1974-1977 as previously reported. The 1978 figure represents 979,569 shares issued less 8,891 **Equivalent additional outstanding shares give effect to the merger of Diversified. In connection Shares Outstanding Average Diversified Average Berkshire 30% Shares Owned B Fractional Equivalent 1975 1974 Total Thereof Diversified and Additional Its Subsidiaries Outstanding Shares 1,000,000 300,000 1976 1,000,000 109,551 300,000 1978 1977 833,118 782,490 249,935 129,018 782,490 234,747 155,699 30 190,419 234,747 176,711 168,612 30 170,952 30 30 94,206 58,006 66,105 28

[PAGE 29]

Berkshire Hathaway Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS Insurance Premiums Written business as follows: Insurance premiums were written by subsegments! of Berkshire property/casualty insurance ..($000) ... .... 1976 1977 1978 Workers' compensation Specialized auto and general liability .... $ 58,337 Reinsurance ....• 6,598 $ 87,146 $102,094 Multiple lines underwritten by "Home State" Companies ... 14,627 21,449 19,664 28,676 30,214 23,218 31,266 34,739 $101,111 $158,704 $198,313 'See business segment information for definition and narrative discussion of these subsegments. National Fire has always tended to be highly cyclical. These operations have reflected significant The traditional specialized automobile and general liability business of National Indemnity and CHEES volume increases following years which have been unprofitable for the industry. (A greater proportion of risks are considered by underwriters to be "specialized" or "nonstandard" following bad years.) This phase of the cycle recurred in 1976 and 1977 and continued in the first half of 1978, after the decline in 1979. Workers' compensation insurance was a relatively insignificant element of Berkshire's insurance "ggressively marketing this coverage, and its premium volume in 1977 was significant. These writings business prior to 1976. In that year, a branch office of National Indemnity in Los Angeles began by Cypress Insurance Company, acquired at the end of 1977, were approximately $14 million in 1978. were at inadequate rates and in 1978 the writings by this office were reduced. Net premiums written The addition to the group of this historically successful workers' compensation underwriting organization more than accounts for the increase in this category of premium volume in 1978 compared combination of necessary increased rates plus an increased volume of insured risks. The increase for The increased premium volume of the Reinsurance operation for 1977 compared to 1976 reflects a 1978 over 1977 of approximately 9% essentially reflects premium rate adjustments. The Home State companies continued to increase their market penetration in each of the states in which they are domiciled. A new Kansas operation was formed in late 1977, its production in 1977 was vias or milled in colorado in ate 1978, a wity he alias operation for 1377, o ever, its contribution to 1978 volume was negligible. 29

[PAGE 30]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued Sales of Textile Mill Products Sales from Berkshire's and Waumbec's textile operations were as follows for the past three years. Waumbec textile operations Berkshire textile operations $30,887 1978 13,757 9,944 $39,809 12,865 $44,644 $45,498 $52,674 Goods manufactured by others were purchased and resold by Berkshire in 1977 in higher quantity 1977 compared to 1976: Berkshire's unit sales and dollar sales increased about 15% over 1976. than in 1976, accounting for the higher unit sales in 1977. for goods was well below levels necessary to maintain reasonable production schedules. Waumbec's 1977 sales both in quantity and price were significantly depressed in 1977; demand sales are excluded. Berkshire's sales in 1978, as reflected in the table, include an increased quantity of 1978 compared to 1977: Sales reflected in the above table reflect sales to outsiders, intercompany reflect improved prices over 1977. goods produced at Waumber's mill and sold through the Berkshire marketing organization; they also reflecting both an improved order rate and a price recovery from the depressed 1977 levels. Waumbed's 1978 sales to outsiders, as reflected in the table, were substantially higher than in 1977, Retail Sales of Apparel contributed the most significant portion of the increased sales in 1977 over those for 1976. This item represents net sales by Associated. Additional stores opened in late 1976 and in 1977 Candy Sales Berkshire's Summary of Operations because that was the first year for which Blue Chip's operations This item represents sales of See's, a subsidiary of Blue Chip Stamps, and appears first in 1977 in were consolidated. Candy sales increased in 1978 over those in 1977 due about 60% to an increase in average selling price per pound; improved volume accounted for the remainder. Newspaper Revenues 978 revenues were, however, adversely affected venues into a la our the a for th the neveaper 7? ubsequent of its acquisition. Full Financial Statements. a competitor in late 1977 and by the publicity attendant thereto. See Note 19 of Notes to Consolidated Trading Stamps and Motivation Service Revenues because an exceptionally large short-term motivation division program for a financial institution These are income items of Blue Chip. 1978 revenues increased over those of 1977 primarily benefitted 1978 revenues. 30

[PAGE 31]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued Interest and Dividend Income Interest and dividend income reflected in the Summary of Operations is as follows for the past three years: .($000)... .•. 1976 1977 1978 Interest and dividend income of Insurance Group: Subsidiaries of Berkshire.. Subsidiaries of Diversified $10,543 $12,532 $19,208 432 529 736 10,975 13,061 19,944 Interest income of Berkshire, Diversified and their subsidiaries other than Blue Chip.. non-insurance 365 99 247 11,340 13,160 20,191 Interest and dividend income of Blue Chip Stamps, included in consolidation .. ... - 3,636 4,102 Total interest and dividend income $11,340 $16,796 $24,293 uf their increased volume. In addition, income yield on those investments increased in 1978. Blue Invested assets of the Insurance Group have increased significantly in the past two years as a result Chip's investment income increased in 1978 mainly from an increase in yield on their marketable "quity securities. Insurance Underwriting Gain or Loss Insurance underwriting results are most commonly measured by the "combined ratio" which represents the sum of the ratio of losses and loss adjustment expenses to premiums earned plus the "tatutory basis are used; that is, no adjustment is made for the change in deferred acquisition costs as rutio of underwriting expenses to premiums written. In the computation, underwriting expenses on a is required under generally accepted accounting principles. A combined ratio below 100 indicates an underwriting profit; above 100 indicates an underwriting loss. The combined ratio for the Insurance limup for the past three years has been as follows: RATIOS NET PREMIUMS Losses and Exp./Earned Loss Adj. Underwriting Expenses/ Combined Premiums Written Loss and Expense Written Earned Premiums Ratio 1176 (in thousands of dollars) 1978 1477 $101,111 158,704 $ 84,875 69.07 198,313 143,088 67.70 29.70 27.77 98.77 186,073 71.08 27.13 95.47 98.21 principles has resulted as follows for the Insurance Group for the periods indicated below. Insurance underwriting gain (loss) stated in dollars on the basis of generally accepted accounting 1971). 1978 Workers' compensation iyu:ialized auto and general liability $4,768 $ 7,800 Keinsurance ...... (1,093) (2,879) (1,644) $11,543 Home State companies .... (548) (1,251) (3,944) 896 (2,155) (2,443) $ 248 $ 5,801 $ 3,001 31

[PAGE 32]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued The combined ratio for the specialized auto and general liability business of National Indemnity and National Fire, plus that of Home and Auto, has improved in each of the past two years over the preceding year, and on increased volume. That combination cannot continue indefinitely. We expect the volume of this business to decline in 1979; the combined ratio for this business in 1978 was approximately 88, it is highly unlikely that such a low ratio can be sustained for any extended period. The combined ratio for the workers' compensation business (which excludes business in that line Cypress Insurance Company, which was not a member of the Insurance Group prior to 1978. Without written by the Home State Companies) in 1978 was 113.6, but that figure reflects favorable results of Cypress, the workers' compensation line would have reflected a combined ratio of a highly unfavorable insurance premiums written, to the aggressive marketing from a Los Angeles branch of National 130.6 for 1978 compared to 108 for 1977 and 116 for 1976. Reference was made above, with regard to Indemnity of workers' compensation in California in 1976 and 1977, and to the fact that the rates at which this business was written were inadequate. Management of the branch has been changed and premium writings by this branch have been significantly reduced, with a view to reduction of total dollars of workers' compensation losses and to an improvement in the combined ratio for this line. Reinsurance underwriting results in 1978 were impacted adversely by one significant loss recorded in the fourth quarter of the year. The reinsurance division generally covers a limited number ot risks with fairly high per-risk exposure, so a single large loss cannot be classified as unusual for this business. summer storms in the midwest. The Home State results in 1978 were affected adversely by an unusual number of spring and Gross Profit From Sales of Goods and Services following table for the past three years: These figures in the Summary of Operations represent gross profit from operations shown in the Berkshire-Waumbec textiles 1976 0 978 Other Berkshire/Diversified Associated Retail Stores . $ 4,162 15,310 $ 2,903 $ 6,609 Blue Chip and its subsidiaries Berkshire/Diversified, combined 1,438 16,367 16,810 20,910 1,890 1,495 21,160 24,914 Total. 51,945 59,141 $20,910 $73,105 $84,055 Fifteen percent higher 1978 textile sales, compared to 1977, resulted in increased dollars of gross in the textile business for 1978 as compared to 1977. Price deterioration, combined with inadequate plant utilization in 1977 contributed to the decline in textile gross profits in 1977 from the 1976 level. Blue Chip's consolidated product and service sales increased about 23% in 1978 over 1977, their percentage of related revenues from the percentage in 1977 due mainly to escalating costs in the gross profit dollars increased a lesser 14%. Cost of sales and services during 1978 increased as newspaper and candy business. 32

[PAGE 33]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued Interest Expense This caption represents interest expense, plus amortization of debt discount and expense, for the entities combined and consolidated for the past three years as follows: • ($000) 1976 1977 1978 Berkshire companies. Diversified companies $2,028 $2,075 1,027 $2,081

• 1,174

1,298 Blue Chip companies Combined total... 3,055 1,540 3,249 3,379 1,679 Combined and consolidated totals .... $3,055 $4,789 $5,058 Although not shown above, interest and discount amortization of Blue Chip and its subsidiaries in that year. in 1976 was $594,000. This increased in 1977 as a result of their financing the newspaper acquisition Income Tax Expense See Note 16 to the Consolidated Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries in which income tax expense for the last two years is discussed at length. Equity in Net Earnings of Illinois National Bank the bank's earnings. Financial statements of the bank are included elsewhere herein. Berkshire's equity in net earnings of the Illinois National Bank represents approximately 98% of of dollars: The Illinois National Bank's operations for the last three years is summarized below, in thousands 1976 Interest income 1977 1978 Interest expense $11,565 5,884 $12,463 6,602 $14,564 7,425 Non-interest income 1,349 5,681 5,861 1,348 7,139 1,180 Non-interest expense 3,367 7,030 7,209 3,409 3,497 8,319 Earnings before income taxes and before securities gains $ 3,663 $ 3,800 $ 4,822 Net earnings $ 3,847 $ 3,640 $4,343 Berkshire's equity therein $ 3,750 $ 3,550 $ 4,242 earning assets. The bank divested of its travel department in April, 1978, in response to requirement Loans by the bank increased in 1978, and increased rates of interest were earned on interest 1978 from the level of earlier years. of the Comptroller of the Currency; such divestiture explains the decrease in non-interest income in Equity in Net Earnings of Wesco Equity in net earnings of Wesco as shown in the Summary of Operations for 1977 and 1978 Consolidated Subsidiaries which explains the slightly different treatment afforded this item in the Consolidated Statement of Earnings for 1977 and 1978. 33

[PAGE 34]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued and National Fire, plus that of Home and Auto, has improved in each of the past two years over the The combined ratio for the specialized auto and general liability business of National Indemnity the volume of this business to decline in 1979; the combined ratio for this business in 1978 was preceding year, and on increased volume. That combination cannot continue indefinitely. We expect approximately 88, it is highly unlikely that such a low ratio can be sustained for any extended period The combined ratio for the workers' compensation business (which excludes business in that line written by the Home State Companies) in 1978 was 113.6, but that figure reflects favorable results of Cypress Insurance Company, which was not a member of the Insurance Group prior to 1978. Without Cypress, the workers' compensation line would have reflected a combined ratio of a highly unfavorable 130.6 for 1978 compared to 108 for 1977 and 116 for 1976. Reference was made above, with regard to Indemnity of workers' compensation in California in 1976 and 1977, and to the fact that the rates at insurance premiums written, to the aggressive marketing from a Los Angeles branch of National which this business was written were inadequate. Management of the branch has been changed and dollars of workers' compensation losses and to an improvement in the combined ratio for this line. premium writings by this branch have been significantly reduced, with a view to reduction of total Reinsurance underwriting results in 1978 were impacted adversely by one significant loss recorded in the fourth quarter of the year. The reinsurance division generally covers a limited number of risks with fairly high per-risk exposure, so a single large loss cannot be classified as unusual for this business. summer storms in the midwest. The Home State results in 1978 were affected adversely by an unusual number of spring and Gross Profit From Sales of Goods and Services following table for the past three years: These figures in the Summary of Operations represent gross profit from operations shown in the • ($000). Berkshire-Waumbec textiles 1976 1977 Associated Retail Stores.... $ 4,162 15,310 $ 2,903 16,367 $ 6,609 1978 Other Berkshire/Diversified 1,438 1,890 16,810 Berkshire/Diversified, combined 20,910 1,495 Blue Chip and its subsidiaries 51,945 21,160 24,914 Total. $20,910 59,141 $73,105 $84,055 profit from those increased sales; more importantly, the higher levels of production increased gross Fifteen percent higher 1978 textile sales, compared to 1977, resulted in increased dollars of gross peration. Price improvement and improvement in product mix also contributed to higher gross profit profit by reducing unit product costs from unsatisfactory 1977 levels, particularly at the Waumbe in the textile business for 1978 as compared to 1977. Price deterioration, combined with inadequate plant utilization in 1977 contributed to the decline in textile gross profits in 1977 from the 1976 level. Blue Chip's consolidated product and service sales increased about 23% in 1978 over 1977, their percentage of related revenues from the percentage in 1977 due mainly to escalating costs in the gross profit dollars increased a lesser 14%. Cost of sales and services during 1978 increased as a newspaper and candy business. 32

[PAGE 35]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued Interest Expense This caption represents interest expense, plus amortization of debt discount and expense, for the entities combined and consolidated for the past three years as follows: 1976 ..($000) 1977 1978 Diversified companies Berkshire companies. .... $2,028 1,027 $2,075 1,174 $2,081 Combined total. 1,298 Blue Chip companies 3,055 3,249 Combined and consolidated totals 1,540 1,679 3,379 $3,055 $4,789 $5,058 Although not shown above, interest and discount amortization of Blue Chip and its subsidiaries in that year. in 1976 was $594,000. This increased in 1977 as a result of their financing the newspaper acquisition Income Tax Expense Subsidiaries in which income tax expense for the last two years is discussed at length. See Note 16 to the Consolidated Financial Statements of Berkshire Hathaway Inc. and Consolidated Equity in Net Earnings of Illinois National Bank the bank's earnings. Financial statements of the bank are included elsewhere herein. Berkshire's equity in net earnings of the Illinois National Bank represents approximately 98% of of dollars: The Illinois National Bank's operations for the last three years is summarized below, in thousands Interest income 1976 1977 1978 Interest expense $11,565 5,884 $12,463 6,602 $14,564 7,425 Non-interest income 1,349 5,681 5,861 1,348 7,139 ...• 1,180 Non-interest expense 3,367 7,030 7,209 3,409 8,319 3,497 Farnings before income taxes and before securities gains $ 3,663 $ 3,800 $ 4,822 Net earnings $ 3,847 $3,640 $4,343 Berkshire's equity therein $ 3,750 $3,550 $ 4,242 Loans by the bank increased in 1978, and increased rates of interest were earned on interest earning assets. The bank divested of its travel department in April, 1978, in response to requirement 1978 from the level of earlier years. of the Comptroller of the Currency; such divestiture explains the decrease in non-interest income in Equity in Net Earnings of Wesco Equity in net earnings of Wesco as shown in the Summary of Operations for 1977 and 1978 its equity in Wesco's net assets over its investment in Wesco, less Berkshire's provision for applicable represents Blue Chip's equity in Wesco's net earnings, plus Blue Chip's amortization of the excess of income taxes. See Note 7 to Consolidated Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries which explains the slightly different treatment afforded this item in the Consolidated Statement of Earnings for 1977 and 1978. 33

[PAGE 36]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION, Continued Realized Investment Gain, Net of Income Taxes This item in the Summary of Operations represents the combined net gain of Berkshire and Diversified from sales of securities in each of the five years covered by the Summary, plus in 1977 an‹ 978, such net gain realized by Blue Chip. This make up for the past three vears is as follows ...($000).. Diversified companies Berkshire companies 1976 1977 1978 $6,762 Combined.... 68 $4,820 97 $8,543 330 Blue Chip Stamps, included in consolidation 6,830 3,945 4,917 8,873 698 $6,830 $8,862 $9,57l realized by the Insurance Group. See Note (J) to the financial statements of the Insurance Group in which 1977 and 1978 investment gain of the Berkshire and Diversified companies represent such gain such gain is further broken down. Blue Chip realized an exceptionally large gain in 1977 (approximately $7,000,000, net of taxes) on sale of its holdings of Source Capital, Inc. which was partially offset by to fund their liabilities to policyholders; Blue Chip holds securities, among other assets, to fund its net losses on disposition of other securities. Insurance subsidiaries hold securities, among other assets, liability to holders of its outstanding trading stamps. under changing economic conditions and is thus unpredictable and sporadic. Realization of investment gains (or losses) is determined by prevailing investment strategy applied Minority Shareholders' Interest in Earnings 48.5% of Blue Chip's 1977 earnings and 44.5% of its 1978 earnings (Berkshire's and Diversified's The Minority shareholders' interest in earnings of Blue Chip Stamps represent approximately combined holdings of Blue Chip increased from approximately 49.5% at January 1, 1977 to 52.8% at categories of earnings as shown below for the past two years, in thousands of dollars: December 31, 1977 and further to 57.6% at December 30, 1978). The minority interest applied to the Category of Earnings to Which Minority Interest Applies Earnings from operations of companies consolidated 1977 1978 Equity in earnings of Wesco ... excluding realized investment gain $3,490 Realized investment gain .............. 2,824 $2,709 Total minority shareholders' interest.. .. . . 1,941 3,349 313 .... $8,255 $6,371 34

[PAGE 37]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES BUSINESS SEGMENT INFORMATION pulstuntially wholly owned subsidiaries, are the manufacturing and sale of woven textiles, the Mujor business segments of The Company, conducted directly and through wholly owned or muturwriting of property and casualty insurance and the retailing business. Blue Chip stamps (approximately 58% owned by The Company at December 30, 1978) and aulnidiaries of Blue Chip are engaged in the candy business, the trading stamps and motivation Innesses and the newspaper business. I'roducts of the textile business include curtain and bedspread materials, apparel fabrics and Industrial fabrics. Insurance subsidiaries engage in (1) the underwriting of specialized and non-standard automobile and general liability insurance, (2) underwriting of workers' compensation insurance, principally in California and Louisiana, (3) acceptance of contracts providing reinsurance from other Imurance, conducted by six "home state" corporations each writing principally only in the state in Inurers, (4) multiple line underwriting of standard and preferred classes of property and casualty 1 mmpany, Inc.) operates a chain of retail stores, which numbered 76 at December 30, 1978, under a which it is organized. Associated Retail Stores, Inc. (formerly a subsidiary of Diversified Retailing variely of trade names, which sell popular-priced women's and children's apparel. See's Candy Shops, Im orporated, a subsidiary of Blue Chip, produces candy (primarily boxed chocolates) and other infectionery products which it distributes through its own chain of retail shops, which numbered In2 at December 30, 1978, in twelve western and midwestern states. Blue Chip provides for retail . #urchants and their customers in California and Nevada the predominant trading stamp service in thut area. Through a separate division operating on a nationwide basis, Blue Chip tailors motivation "mployee attendance or safety, or to provide other motivational functions. Blue Chip's newspaper programs for business, designed to stimulate their customer's sales or productivity, to promote business represents the Buffalo Evening News, Inc., publisher of a newspaper in upstate New York. "wned subsidiary of The Company accounted for by the equity method of accounting. Wesco Financial The Illinois National Bank & Trust Co. of Rockford, a commercial bank, is an approximately 98% Corporation is an approximately 80% owned subsidiary of Blue Chip. Wesco is a California savings und loan holding company accounted for by the equity method of accounting. Neither the Illinois National Bank nor Wesco are considered business segments for purposes of the following tables. In the following tables, revenues of the insurance business include investment income of subsidiaries comprising the Insurance Group. Operating profit is total revenue less total expense identified with each segment. In computing operating profit identified with segments, none of the following items has been added or deducted: equity in income from unconsolidated subsidiaries, realized investment gain or loss, general corporate expenses and interest expense. insurance business has a significant investment in Blue Chip which has been excluded from assets Identifiable assets by industry are those used in the operations in each industry except that the identified with the insurance industry; this exclusion is in line with exclusion from income and operating profit of the insurance segment of income relating to such investment. 35

[PAGE 38]

[PAGE 39]

[PAGE 40]

Blue Chip stockholders from the Chairman and the President of that Company The 1978 Annual Report of Blue Chip Stamps included the following letter to To Our Stockholders year 1978 increased slightly, to $13,553,000 ($2.62 per share) from $12,893,000 ($2.49 per share) in the previous Consolidated normal operating income (i.e., before parent company gains from sale of securities) for the calendar fiscal year. ($2.76 per share) from $16,993,000 ($3.28 per share) in the previous fiscal year. Consolidated net income (i.e., after parent company gains from sale of securities) decreased to $14,280,000 on sale of securities held to offset liabilities to trading stamp savers and others. Given this situation, our objective is to Our constituent businesses produce fluctuating returns from normal operations as well as from gains or losses earn from all sources a fluctuating return on our shareholders' equity which amounts to a respectable average annual on our shareholders' equity of $99,251,000 at the start of the year. Over the last five years return on shareholders' return over a period of years. Last year's total consolidated net income of $14,280,000 represented a return of 14.4% equity has averaged 15%. Corporation (80% owned) and Buffalo Evening News, Inc. (100% owned). If we used "equity accounting" instead of We have three major subsidiaries, See's Candy Shops, Incorporated (100% owned), Wesco Financial "consolidated accounting" for See's and the Buffalo Evening News as well as Wesco, our consolidated income for our two reporting years just ended would break down as follows: in See's Blue Chip equity Year ended about in Wesco Buffalo Evening News Blue Chip equity in Blue Chip All other consolidated Blue Chip net income* December 31, 1978 net income*? $5,802,000 net income (loss)*3 $7,417,000 net income*4,$ $(1,427,000) net income*s Per Blue Chip share 1.12 1.43 $2,488,000 $14,280,000 December 31, 1977 5,750,000 5,715,000 340,000 (.27) .48 5,188,000 2.76 Per Blue Chip share 1.11 1.10 .07 1.00 16,993,000 *1 After reducing income by amortization of intangibles arising from purchase of See's at a large premium over its book value. 3.28 *3 After reducing income by amortization of relatively minor intangibles arising at acquisition of the newspaper in April 1977. *2 After increasing income by amortization of the discount from Wesco book value at which the interest was acquired. *4 After deduction of interest and other general corporate expenses. In each year there was an operating loss before securities transactions and before crediting income for (i) interest and dividends resulting from investment of the funds available through "float" caused by trading stamps issued but not yet redeemed, plus (i) income tax benefit caused by 85% exclusion of dividends in computing federal income taxes. *5 The 1978 amounts include $727.000 or $.14 per Blue Chip share from securities gains, net of taxes. In 1977 such securities gains were $4,100,000 or $.79 per Blue Chip share. SEE'S CANDY SHOPS, INCORPORATED By a razor-thin margin, our 100%-owned subsidiary, See's Candy Shops, Incorporated, had another record year under the skilled leadership of Charles Huggins. The nominal percentage gain in earnings (less than 1%) was much lower than the percentage gain in sales (17%). Comparative figures for See's for the last two years are set forth below: Year ended about Number of Number of Sales after taxes* Profits candy sold pounds of stores open December 31, 1978 $73,653,000 at yearend December 31, 1977 '62,886,000 6,262,000 22,407,000 *These earnings figures are a little higher than Blue Chip Stamps' share of See's earnings shown in the table above because Blue Chip's 20,921,000 1978, (i) amortization of intangibles arising from purchase of See's stock at a large premium over book value, and (iii) state income taxes share reflects (i) deduction of the approximately 1% share of See's earnings owned by minority stockholders of See's prior to June 6, on See's dividends received by Blue Chip. candy-store business has been subject to extraordinary cost pressure. Despite substantial increases in See's retail Boxed chocolate consumption per capita in the United States continues to be essentially static, and the prices, its profits lagged substantially below year-earlier levels until December when an extraordinary burst of holiday-period sales caused the lag to be eliminated. It is very difficult to cope so successfully with the production and distribution problems of a seasonal sales peak which becomes more extreme each year, and the flat earnings trend of 1978 represented outstanding managerial achievement. So far as we know the candy-store business is terrible to mediocre for all other companies, whereas it is quite profitable at See's for the simple reason that both new by a virtually fanatic insistence on expensive natural candy ingredients plus expensive manufacturing and and old customers have a pronounced tendency to prefer its candy to all others. This customer enthusiasm is caused distributing methods ensuring rigorous quality control and cheerful retail service. The fanaticism is rewarded by 38

[PAGE 41]

changed in any significant way in the seven years of our ownership. Our main managerial contribution has been to extraordinary sales per square foot in the stores. We greatly admire See's business methods, which have not been leave See's alone as its proven executives pursued its proven policies. In 1978 we paid $55 per See's share to per share, such interest would have had a total value at that time approximately $25 million more than its aggregate acquire a tiny minority interest in See's. If our previously owned 99% interest in See's were valued at the same price amortized cost in our consolidated financial statements WESCO FINANCIAL CORPORATION new recora, compared with $5, 715,000 in the previous year. The substantial improvement in Wesco's contribution Our equity in net income of our subsidiary, Wesco Financial Corporation (80% owned) increased to $7,417,000, a was caused primarily by increased operating earnings in Wesco's savings and loan association subsidiary, Mutual associations, and Mutual Savings is soundly capitalized and efficient. Wesco is a separate public corporation, with Savings, headquartered in Pasadena, California. Conditions in 1978 generally favored savings and loan its stock listed on the American Stock Exchange. Summarized financial information for Wesco is contained in Note 1 1o our consolidated financial statements and includes an exceptionally strong balance sheet, partly caused by substantial assets outside the subsidiary savings and loan association and available for commitment elsewhere. In February, 1979, Wesco purchased for approximately $15 million a midwestern steel service center business which reported after-tax earnings of $1,918,000 in the full year ended June 30, 1978. For more complete information we encourage Blue Chip shareholders to obtain a copy of Wesco's 1978 Annual Report, which embodies an unusual clarity of reporting and reflects an excellence of management-both directly attributable to Louis Vincenti, Chairman. Simply make your request to: 315 East Colorado Boulevard Wesco Financial Corporation Pasadena, California 91109 Attention: Mrs. Bette Deckard, Secretary & Treasurer BUFFALO EVENING NEWS, INC. Our 100%-owned subsidiary, Buffalo Evening News, Inc., was acquired in April of 1977 for approximately $34 million and reported, after litigation expenses, increased depreciation and extraordinary expenses stemming from in the portion of the previous year subsequent to acquisition. equipment modernization, an after-tax operating loss of $1,427,000 in 1978, compared with net income of $340,000 opposition on Sundays. As we explained in detail in our Annual Report last year, the long-term survival of the Buffalo The Buffalo Evening News had no Sunday edition when acquired; a competing paper published without Evening News clearly required that it inaugurate a Sunday edition. (Real trouble has been the invariable eventual on weekday publication while a significant daily competitor enjoyed a Sunday monopoly.) Accordingly, the Buffalo outcome for every other daily newspaper in the United States which relied overlong, in an important city, exclusively Evening News commenced publishing Sundays late in 1977. In response, a lawsuit was filed by the competing paper which for the first time faced the prospect of competition on Sundays as well as weekdays. The lawsuit, in turn, resulted in some interlocutory (i.e., temporary and not final) injunctions (now on appeal) which, among other things, created severe disruptions in normal circulation procedures under midwinter conditions and restricted business promotion practices of our subsidiary's paper while similar but more aggressive practices of the competing paper were allowed. Despite all the difficulties, the new Sunday edition now has a steady circulation of about 156,000, up slightly in recent months. The litigation has continued through 1978, including a counter-complaint by our subsidiary as well as defense against the competing paper's complaint, causing heavy direct litigation expense and other. indirect costs. Affected by these factors, plus an unanticipated decrease in weekday circulation and advertising linage (now apparently arrested), operating results at our Buffalo newspaper have, of course, been unsatisfactory. We anticipate better operating results in the future, although we also expect that improvement in our subsidiary's charges for direct and indirect expense of litigation. Newspaper readership habits ordinarily change slowly, if at all, competitive position in Buffalo will, at best, be extremely slow and that operating results will continue to bear heavy and litigation is notoriously time-consuming, inefficient, costly and unpredictable. purchased a newspaper subject not only to the normal hazards of business competition but also to the hazards of the The ultimate security of the Buffalo Evening News remains in doubt, as it will for a very extended period. We modern tendency of competitors to seek protection from competition in the courts. 39

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We believe that the Buffalo Evening News remains by far the most respected newspaper in Buffalo, with a tradition of editorial objectivity and integrity and good citizenship, the result of editorial control by autonomous, community-minded local editors. We have maintained and will continue to maintain this tradition of locally-creater have performed loyally and well to help protect our common enterprise under difficult conditions. We expect that our excellence, as well as an equally important tradition of fair-dealing with all newspaper employees and unions, who policies eventually will cause our newspaper subsidiary to develop into a more satisfactory investment. But a long injunctions it is seeking, or if any extended strike shuts down the Buffalo Evening News, we believe that it will and prosperous future is not guaranteed. If the competing paper succeeds in obtaining the kind of permanent probably be forced to cease operations and liquidate, at an after-tax cost which could exceed $10 million. TRADING STAMP AND MOTIVATION BUSINESSES businesses. These businesses use the same headquarters and warehousing facilities. Combined, the businesse:; The final components of our consolidated net income last year were provided by our trading stamp and motivation the entire income (interest and dividends, plus income tax benefits caused by dividends, plus securities gains) from operated at a decreased profit last year (down from $5,188,000 to $2,488,000) after (properly) giving them credit fo investment of the funds available through "float" caused by trading stamps issued but not yet redeemed. However. the decrease in profit was entirely attributable to a decline in securities gains from the unusually high level of 1977 Profit before securities gains increased from $1,088,000 to $1,761,000. $15,723,000 in the previous year. Motivation business revenues increased substantially, from $2,485,000 to Trading stamp service revenues increased by a minor amount to $16,531,000 last year compared with $3,791,000. In our trading stamp business our "float" — resulting from past issuances of trading stamps when volume was at $124, 180,000 in fiscal 1970, and our 1978 revenues of $16,531,000 therefore represented a decline of 87% from many times greater than the current level-is large in relation to current issuances. (Trading stamp revenues peaked peak volume.) Eventually, unless stamp issuances improve, earnings from investing "float" will decline greatly. The liability actually increased by a tiny amount in 1978 and was $66,832,000 at yearend. decline in recent years, however, has proceeded at an extremely slow rate, and our estimated future redemption review, accounting for trading stamp redemption liability (which involves estimating the number of stamps that will As discussed extensively in previous annual reports (particularly for fiscal 1976), which we urge shareholders to an inflationary economy and when stamp issuances decline by a large percentage. We periodically revise our ultimately be redeemed and the cost per stamp) is a difficult process under any circumstances, but particularly so in estimated future redemption liability as conditions warrant. operate unusually successful supermarkets and other businesses, and we believe that, given the opportunity, we We intend to remain in the trading stamp business. Many of our present customers, aided by our stamp service, can also provide very useful service to new customers. PINKERTON'S, INC. At yearend 1978 we owned non-voting stock representing 32% of the equity in Pinkerton's, Inc., the leading national security and investigation service company. Our total investment at cost was $23,364,000. CONSOLIDATED BALANCE SHEET AND OTHER DATA Our consolidated balance sheet retains a strength befitting a company whose consolidated net worth supports large market value of our marketable securities is slightly lower than their aggregate cost. outstanding promises to others. As explained in Note 4 to the accompanying financial statements, the aggregate A section entitled "Principal Business Activities" and a "Summary of Operations" for a five year period are invite your careful attention to those items and to our audited financial statements. presented beginning on page 4, followed by notes and management's discussion and analysis of the summary. We Cordially yours, CharkesT Manger Smald a Kaygr Chairman of the Board Charles T. Munger Donald A. Koeppel February 28, 1979 40 President

[PAGE 43]

The 1978 Annual Report of Wesco Financial Corporation included the following letter from Louis R. Vincenti, Chairman of the Board and President of Wesco TO THE STOCKHOLDERS OF WESCO FINANCIAL CORPORATION lion and its subsidiaries for 1978 amounted to $8,481,000 Consolidated net earnings of Wesco Financial Corpora- $472,038,000 compared with $390,569,000 at December At December 31, 1978, real estate loans were ($1.19 per share) compared to $6,449,000 ($.91 per share) 31, 1977. Real estate loans made in 1978 were In 1977. Quarterly earnings per share were: $146,440,000 including the purchase of certificates of Quarter First Second Quarter Quarter Quarter Third Fourth amount of $51,532,000. Real estate loans made in 1977 Government National Mortgage Association in the 1978 1.19 1977 .19 .19 .22 .31 .91 amounted to $107,546,000 including the purchase of $43,661,000 in 90% participation interest in loans from increase in net interest income on loans and to increased This substantial increase in earnings was due to the four large California-based savings and loan associations who service the loans. Loans in process and firm loan uturns on other earning assets. commitments, which were $9,396,000 at December 31, Il 1978 compared to an increase of $54,912,000 in 1977. Total savings in Mutual Savings increased $28,420,000 1977, increased to $9,752,000 at December 31, 1978. their investment in common and preferred stocks and During 1978, Wesco and Mutual Savings increased of total savings) compared with $52,648,000 (11.4% of Al year end, out-of-state savings were $47,645,000 (9.8% municipal bonds by $24,718,000 and, at year end, had total savings) in 1977. invested $89,539,000. outhorized to issue money market certificates paying a On June 1, 1978, savings and loan associations were Common Stocks: Federal National Mortgage rate of 4% more than current six-month Treasury Bills. Cleveland-Cliffs Iron Company Association 2,044,000 shares 388,200 shares $30,862,000 standing, and by February 28, 1979 had increased to Al year end, $55,259,000 of such certificates were out- Safeco Corporation Other Corporations 478,823 shares 10,545,000 55,800 shares 11,730,000 $83,509,000. Continuing increase is expected during 1979 923,000 resulting in rising cost of savings. The cost, on a yield Preferred Stocks: $54,060,000 Municipal Bonds: 28,809,000 basis, of these funds has varied from 7.621% to 10.328%. $89,539,000 6,670,000 Effective March 15, 1979, the yield on money market includes loss of differential of .25% over banks when certificates was reduced by approximately .50%. This At December 31, 1978, the market value of these interest daily. Money market certificates will, as a result, rates are above 9%, and loss of the right to compound securities was $4,857,000 in excess of cost. Not included were 273,780 shares (21.6%) of Detroit be less competitive with Treasury bills. International Bridge Company purchased in 1977 which ings) and the yield on the loan portfolio increased in Cost of savings and cost of funds (savings and borrow- were sold on March 12, 1979 at $24.00 per share resulting in a profit, net of Federal and State income taxes, of 1978. The spread between the cost of funds and yield on $1,039,000 ($.14½ per share). loans has been favorable. assets of Precision Steel Warehouse, Inc. of Franklin Park, On February 28, 1979, Wesco purchased all of the Illinois for $15,081,876 and the assumption of its liabili- Cost of savings 1978 1977 1976 1975 1974 ties. Precision Steel is in the steel service center business Yield on loans at Cost of all funds 6.66 6.57% 6.46 6.51 6.35 6.41 6.29 6.00 specializing in cold rolled strip steel and has subsidiaries 6.43 engaged in the manufacture and distribution of packaged 6.25 tool room specialty products and hose clamps. For the year end 8.02 Spread (yield less 8.32 7.70 7.55 fiscal year ended June 30, 1978, Precision Steel's net 7.36 earnings after taxes were $1,918,000. This business will cost of funds) 1.66 1.51 1.27 tion chartered in the State of Illinois. be operated through a wholly-owned subsidiary corpora- 1.14 1.11 41

[PAGE 44]

It is anticipated that marketable securities held in sold to provide funds for one or more future corporate Wesco, at the parent company level, will eventually be to add to its sixteen branch offices. A satellite branch Mutual Savings did not open any new offices in 1978 acquisition. acquisitions similar or dissimilar to the Precision Steel office has been approved for a retail shopping center in Pasadena, which is scheduled for opening during 1980. Properties acquired by foreclosure were $1,824,000 at On January 16, 1979, Wesco increased its regular December 31, 1978, compared with $2,095,000 at Decem- quarterly cash dividend from $.08½ per share to $.09½ ber 31, 1977. Sale of the commercial property at Pacoima, per share payable March 15, 1979 to shareholders of with a cost basis of $289,000, is expected to close by record at the close of business on February 19, 1979. May 30, 1979, resulting in a deferred profit of $255,000. A "Summary of Operations" for a five-year period is A substantial portion of the Friendly Valley property was presented on page 4, followed by "Management's Dis- sold in 1978 resulting in a deferred profit of $457,000, cussion and Analysis" of that Summary. The purpose of 1980. The remaining vacant land at Friendly Valley, with which is expected to be taken into income by year end compare periodic results of operations and to assess the the Summary and Discussion is to enable investors to disposition. A planned development for houses at Santa a cost basis of $97,000, will require several years for source and probability of earnings. Barbara, on 22 acres of vacant land on the ocean front adjacent to the Biltmore Hotel, is being processed. We 1979. The time thereafter required to process this project expect approval by Santa Barbara County by April 30, LOUIS R. VINCENTI through the California Coastal Commission is indeterm- Chairman of the Board and President inate. Its cost basis is $1,074,000. Property at Upland, California, having an original cost basis of $78,000, is in the course of improvement with a commercial store building. Total investment at 1978 year end was $364,000 and final cost will be approximately $550,000. We plan leased and should earn an annual pre-tax return of 132% to retain this property for income. All stores have been after expenses including depreciation. 42

[PAGE 45]

PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS BIEWIT PLAZA OMAHA, NEBRASKA 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the balance sheets of the Berkshire Hathaway Inc. - statements of income and unassigned surplus and changes in financial Insurance Group as of December 31, 1978 and 1977 and the related position for the years then ended. Our examinations were made in Included such tests of the accounting records and such other auditing accordance with generally accepted auditing standards, and accordingly procedures as we considered necessary in the circumstances. We did not examine the financial statements of Blue Chip Stamps, an investee of the Insurance Group. The Insurance Group's Investment in Blue Chip Stamps at December 31, 1978 and 1977 was $31,442,000 and $26,862, 000, respec- and $3,852,000 for the years 1978 and 1977, respectively. The financial tively, and its equity in net earnings of Blue Chip Stamps was $3,230, 000 •tatements of Blue Chip Stamps were examined by other auditors whose herein, insofar as it relates to the amounts included for Blue Chip report thereon has been furnished to us and our opinion expressed Stamps, is based solely upon the report of the other auditors. In our opinion, based upon our examinations and the report of other financial position of the Berkshire Hathaway Inc. - Insurance Group at auditors, the aforementioned financial statements present fairly the December 31, 1978 and 1977 and the results of their operations and the In conformity with generally accepted accounting principles applied on a changes in their financial position for the respective years then ended, consistent basis, after restatement for the merger of Diversified to the financial statements. Retailing Company, Inco, with which we concur, as explained in note A March 28, 1979 43

[PAGE 46]

Berkshire Hathaway Inc. INSURANCE GROUP BALANCE SHEETS (in thousands of dollars) ASSETS December 31, 1978 1977 Investments - other than investment in affiliate (note D): (restated) Bonds, at amortized cost Invested cash, U.S. Treasury Bills and Marketable equity securities, at cost......... $157,651 133,766 $132,929 which approximates market other short-term investments, at cost 108,107 Investment in Blue Chip Stamps, an affiliate (note E) Total investments — other than investment in affiliate . 43,068 334,485 22,088 31,442 263,124 Cash .. 18,896 2,570 26,862 Reinsurance recoverable on paid losses Premiums and agents' balances receivable .... 4,607 5,413 13,042 Accrued investment income 4,424 5,837 Property and equipment, at cost less accumulated depreciation of $1,541, 1978; 2,891 Deferred premium acquisition costs $1,401, 1977... 13,846 2,757 10,852 2,164 Other assets, including $2,948 Berkshire Hathaway Inc. investment, at cost, in 52,287 shares of ... 3,432 $417,265 3,865 $333,244 LIABILITIES, CAPITAL STOCK AND SURPLUS Unearned premiums Losses and loss adjustment expenses $180,870 69,368 $139,461 Current income taxes 4,591 57,128 Deferred income taxes 8,813 705 Other liabilities. 10,472 10,463 6,989 Capital stock and surplus: 274,114 214,746 National Indemnity Company, $10 par value. Authorized 750,000 shares; National issued 550,000 shares .. 50,000 shares; issued 25,000 shares Fire and Marine Insurance Company, $100 par value. Authorized 5,500 5,500 Columbia Insurance Company, $100 par value. Authorized and issued 2,500 2,500 20,000 shares..... Paid-in surplus Unassigned surplus (note F) ......... ... . . 24,457 2,000 2,000 108,694 84,041 24,457 Total capital stock and surplus... Contingency (note E) ...... ... .. 143,151 118,498 ..... $417,265 $333,244 See accompanying notes to financial statements. 44

[PAGE 47]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF INCOME AND UNASSIGNED SURPLUS (in thousands of dollars) December 31, Year ended 1978 1977 (restated) Underwriting income: Ircrease in unearned premiums Premiums written $198,313 12,240 $158,704 15,616 Premiums earned 186,073 143,088 Losses and claims 108,642 Loss adjustment expenses. 23.621 81,463 Underwriting expenses (note G) 50,809 40,418 15,406 183,072 137,287 Underwriting gain 3,001 5,801 Investment income: Interest on bonds Dividends on stocks of unaffiliated 9,671 19,944 2,059 8,214 7,261 Interest on short-term investments and other interest companies 5,235 :565 239 13,061 Less investment expenses 256 Net investment income 19,705 12,805 Income before income taxes and items below 22,706 4,681 18,606 Applicable income tax expense (note H) 2,761 Income before items below 18,025 3,230 15,845 Equity in earnings of Blue Chip Stamps, an affiliate (note E) 3,852 Income before realized gain on investments 21,255 19,697 Realized gain on investments 12,873 4,000 2,114 7,031 Applicable income tax expense (note H) Net realized gain on investments (note )) - 8,873 4,917 Net unrealized appreciation in market values of preferred in 1978 and $28,621 in 1977 has been excluded from and common stocks of unaffiliated companies of $12,628 the determination of net income. Unassigned surplus at beginning of year - as restated Net income 84,041 30,128 61,827 24,614 Dividends paid to stockholders (5,475) (2,400) Unassigned surplus at end of year $108,694 $ 84.041 See accompanying notes to financial statements. 45

[PAGE 48]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION (in thousands of dollars) Year ended December 31, 1978 1977 Funds provided: (restated) From operations: Net income Charges (credits) to income not requiring (providing) funds: $ 30,128 $ 24,614 Equity in undistributed earnings of Blue Chip Stamps Accretion of discount on bonds (3,175) (1,000) (3,794) Depreciation 41,409 304 (929) Increase in unpaid losses and loss expenses 198 Increase in unearned premiums.......... 12,240 36,874 Increase in deferred acquisition costs Increase in premiums receivable and agent balances (2,994) (5,854) 15,617 (3,187) Increase in liability for income taxes (1,533) 5,710 (3,659) Increase in accrued investment income 512 Other ..... 851 1,136 (613) Decrease in cash Funds provided from operations 76,086 2,037 66,769 $78,123 $66,769 Funds used: Subsidiary acquired: Preferred and common stocks 14,656 462 871 Unpaid losses and loss adjustment expenses. Other assets and deferred charges (12,807) 2,288 Other liabilities Unearned premiums (1,261) (1,517) Purchase of Berkshire Hathaway Inc. common stock. Purchases of property, furniture, fixtures and equipment 897 2,692 539 Dividends paid Net purchase of investments* 71,751 73 5,475 59,590 Increase in cash 2,400 .. . . $78,123 1,475 $66,769 *Net purchase of investments: Bonds U.S. Treasury Bills •... 20,930 23,772 3,506 Preferred stocks ...... 24,929 715 24,657 Common stocks of unaffiliated companies .... 74 Common stock of Blue Chip Stamps Net purchase of investments........... .. . . 1,405 30,527 826 .... $71,751 $59,590 See accompanying notes to financial statements. 46

[PAGE 49]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL SIATEMENIS December 31, 1978 and 1977 (dollars in thousands) (A) Combination and Restatement of Accounts Note 1 to the consolidated financial statements of Berkshire Hathaway Inc. statements discloses the merger of Berkshire Hathaway Inc. ("Berkshire") and Diversified Retailing Company, Inc. ("Diversified") effected presentation of the accompanying consolidated financial statements. Financial statements of the Berkshire December 30, 1978 and the resulting combination of the accounts of Berkshire and Diversified in the Hathaway Inc. Insurance Group presented herewith combine the accounts of subsidiaries of Berkshire and companies which were formerly subsidiaries of Diversified engaged in fre and casualty insurance underwriting. This combination results in a restatement of the prior year financial statements. Certain significant results from the combination follow: Capital stock and surplus of the Insurance Group as previously reported as of Add - capital stock and surplus of insurance subsidiaries of Diversified at December 31, 1976 $ 88,462 December 31, 1976 10,694 Deduct - equity in undistributed earnings of Berkshire accumulated by 99,156 income taxes relating thereto insurance subsidiaries of Diversified at December 31, 1976, net of deferred (2,872) Net earnings of the Insurance Group for 1977 as previously reported Capital stock and surplus, December 31, 1976 - restated.. 96,284 Add - net earnings of insurance subsidiaries of Diversified for 1977 $23,407 2,489 Deduct - equity in net earnings of Berkshire Hathaway Inc. reported by 25,896 insurance subsidiaries of Diversified for 1977. (1,282) Dividends paid to stockholders during 1977 Net earnings for 1977 - restated 24,614 (2,400 Net earnings for 1978: Capital stock and surplus, December 31, 1977 -- restated 118,498 Subsidiaries of Diversified Subsidiaries of Berkshire 29,052 1.076 Dividends paid to stockholders during 1978 Net earnings for 1978 30,128 (5,475) Capital stock and surplus, December 31, 1978 $143,151 The elements of capital stock and surplus of insurance subsidiaries of Diversified which have been added to the capital stock and surplus of the Berkshire Insurance Group in the accompanying balance sheets is as follows: Dec. 31, 1978 Dec. 31, 1977 Capital stock Unassigned surplus Additional paid-in capital $ 2,000 $ 3,853 3,855 2,000 3,855 2,773 $ 9,708 $ 8,628 (Continued) 47

[PAGE 50]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS (Continued) (dollars in thousands) Certain components of net earnings, derived from combining the accounts of insurance subsidiaries of Berkshire and insurance subsidiaries of Diversified for the past two years, are as follows: 1978 1977 Premiums earned: Insurance subsidiaries of Berkshire Insurance subsidiaries of Diversified $180,329 $136,890 $186,073 5,744 6,198 $143,088 Underwriting gain (loss): Insurance subsidiaries of Berkshire Insurance subsidiaries of Diversified 3,287 (286) 5,884 (83) $ 3,001 $ 5,801 Net earnings: Insurance subsidiaries of Diversified Insurance subsidiaries of Berkshire 29,052 1,076 23,407 1,207 $ 30,128 $ 24,614 (B) Significant Accounting Policies See note 2 to the consolidated financial statements of Berkshire which includes a summary of significant accounting policies and practices of the Insurance Group. (C) Basis of Presentation The financial statements of the Insurance Group intercompany transactions and balances eliminated, and in accordance with generally accepted accounting are presented on a combined basis with significant insurance regulatory authorities (statutory method) in accordance with which the companies maintain principles (GAAP). Such principles differ in some respects from principles prescribed or permitted by their records. A reconciliation of the aggregate capital stock and surplus ("Surplus as regards Policyholders") as determined under the statutory method to that determined and reported herewith in accordance with GAAP is as follows: December 31, 1978 1977 Statutory surplus as regards policyholders. Excess of NAIC market valuations over cost valuations of investments in equity $214,331 $181,257 Excess of NAIC market valuations over amortized cost of bonds. securities (excluding stock of Blue Chip Stamps) (87,163) (1,350) (74,530) Excess of carrying value of investment in Blue Chip Stamps (determined under (2,010) Excess of NAIC market valuation over cost of investment in common stock of GAAP pursuant to the equity method) over NAIC market valuation 6,615 4,708 Deferred insurance premium acquisition costs Berkshire Hathaway Inc. .......... (4,728) Net recoverable from unauthorized reinsurers Excess statutory liability loss reserves .... 13,846 (4,021) 5,163 10,852 Sundry nonadmitted assets ........... 2,093 3,077 Income tax effects and adjustments ..... _(10,042) 4,386 2,696 2,875 (6,406) Capital stock and surplus per accompanying financial statements $143,151 $118,498 (Continued) 48

[PAGE 51]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands) Statutory net income in reconciled to GAAP net income as follows: December 31, Statutory net income 1978 1977 Increase in deferred acquisition costs $27,537 Equity in undistributed earnings of Blue Chip Stamps, net of amortization of 2,994 $19,356 3,659 excess cost....... Increase in unpaid policyholders dividends Increase in earned but unbilled premiums 3,175 60 3,848 Income tax effects and adjustments (3) 20 Net income -- GAAP (3,635) (2,219) (50) $30,128 $24,614 (D) Investments - Other Than Investment in Affiliate A summary of the Insurance Group's aggregate cost and aggregate approximate market value of investments

• other than investment in affiliate - was as follows:

December 31, 1978 December 31, 1977 Bonds Cost Märket Cost Market $157.651 Marketable equity securities: $155,540 $132,929 $138,576 Common stocks Preferred stocks: 109,686 24,080 188,172 32,757 23,365 Total marketable equity securities 84,742 145,417 37,225 133,766 220,929 108,107 Invested cash, U.S. Treasury Bills and other 182,642 short-term investments 43.068 Total investments - other than invest- 43,068 22,088 22,088 ment in affiliate $334,485 $419,537 $263,124 $343,306 The excess of the aggregate market value over aggregate cost of marketable equity securities represented unrealized gain less unrealized loss as follows: December 31, 1978 1977 Unrealized gain Unrealized loss. $87,691 Net excess of market over cost 528 $77,377 2,842 $87,163 $74,535 49

[PAGE 52]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS (Continued) (dollars in thousands) (E) Investment in Blue Chip Stamps The investment in Blue Chip Stamps ("Blue Chip") by the companies comprising the Insurance Group represented approximately 27.4% of the company's outstanding shares at December 30, 1978, increased Equity of the Insurance Group in net earnings of Blue Chip reflects the following for the past two years: December 31, 1978 Dividends received 1977 Equity in undistributed earnings.... $ 331 $ 310 Provision for deferred income taxes Provision for current income taxes 3,507 (24) 3,951 (22) Amortization of excess of cost of investment over underlying net asset values... (332) (252) (103) (284) $3,230 $3,852 The amortization charge in 1978 of the Insurance Group represents the amount required to adjust the carrying value of the shares to their underlying book value as reported by Blue Chip as of December 30, 1978. The balance sheets of Blue Chip as of December 30, 1978 and December 31, 1977 are summarized as follows: Consolidated Balance Sheets BLUE CHIP STAMPS ASSETS Dec. 30, 1978 Dec. 31, Marketable equity securities, at market (cost, December 30, 1978 Cash and short-term investments 1977 December 31, 1977 — $55,186) .....

• $62,395;

$ 17,595 $ 16,559 Inventories ... 62,256 40,603 7,960 53,010 Investment in Wesco Financial Corporation Property, fixtures and equipment, net 7,332 15,615 49,370 43,892 40,414 Other assets ..... Excess of cost over equity in net assets of consolidated subsidiaries 23,473 23,460 15,439 $216,872 $200,106 LIABILITIES AND STOCKHOLDERS' EQUITY Income taxes payable .... Accounts payable and accrued expenses.. $ 13,055 Liabilities for unredeemed trading stamps 4,413 $ 14,199 6¾% subordinated debentures due 1978 66,832 66,209 4,779 Stockholders' equity Notes payable................. 114,325 18,247 13,500 2,168 99,251 $216,872 $200,106 (Continued) 50

[PAGE 53]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS (Continued) (dollars in thousands) A footnote accompanying the 1978 financial statements of Blue Chip Stamps stated that Buffalo Evening News, Inc., a subsidiary of Blue Chip was engaged in certain legal proceedings, with counsel for Blue Chip unable at this time to express any opinion as to the likely outcome of the action. Blue Chip's investment in such subsidiary represented less than 30% of its total shareholders' equity at December 30, 1978. See note 19 of notes to the Consolidated Financial Statements of Berkshire Hathaway Inc. Earnings of Blue Chip for the past two years are summarized below: Consolidated Earnings Summaries BLUE CHIP STAMPS 52 weeks ended Dec. 30, 1978 Дес. 31, 1977 Revenues: Candy Newspapers $ 73,653 Stamp service 44,674 $ 15,723 31,786 62,886 Other Merchandise promotion and motivation service 16,531 4,937 3,791 2,485 4,293 Total revenues $143,586 $117,173 Earnings before securities gains or losses Net earnings Per share.. $ 13,553 2.62 $ 12,893 Per share. 14,280 16,993 2.49 2.76 3.28 (F) Unassigned Surplus Surplus is restricted for dividend purposes by the insurance departments of the states in which the companies do business. (G) Underwriting Expenses The following expenses comprise underwriting expenses: 1978 1977 Commissions and brokerage ... Salaries and other compensation $ 38,977 Other underwriting expenses Taxes, licenses and fees 5,394 $ 32,932 3,751 4,285 5,681 2,942 3,918 Increase in deferred acquisition costs Total statutory underwriting expenses 53,803 2,994 44,077 3,659 $ 50,809 $ 40,418 (Continued) 51

[PAGE 54]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS (Continued) (dollars in thousands) (H) Federal Income Taxes Federal income tax expense is made up of the following: Deferred income tax expense Current income tax expense 1978 1977 Totals •••• $ 7,133 1,824 $ 3,064 2,117 ......... $ 8,957 $ 5,181 The totals are applicable to: Operating earnings other than equity in earnings of Blue Chip Equity in earnings of Blue Chip 4,681 Realized investment gain....... 4,000 276 2,761 2,114 306 $ 8,957 $ 5,181 The current expense is applicable to: Operating earnings other than equity in earnings of Blue Chip Realized investment gain ....... Dividends received from Blue Chip 2,950 4,159 24 768 22 2,274 $ 7,133 $ 3,064 The deferred expense relates to the following: Change in deferred acquisition costs Accumulated accreted discount on bonds sold Accretion of discount on bonds, not currently taxable Equity in undistributed earnings of Blue Chip 1,438 252 1,758 266 284 Other (159) 235 $ 1,824 27 (160) $ 2.117 Income tax expense is reconciled to the Federal 48% statutory rate as follows: 1978 Decreases resulting from: Income tax expense at statutory rate 1977 $18,761 $14,302 Tax-exempt interest.. 85% dividends received credit relating to: (2,652) (2,266) Dividends from unaffiliated companies. Long-term capital gain tax rate differential Equity in earnings of Blue Chip Stamps (3,352) (1,407) (2,136) Discount accretion and other .... (2,067) (1,739) Benefit from affiliates .......... (167) (1,174) (159) (89) (1,717) $ 8,957 $ 5,181 (Continued) 52

[PAGE 55]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS (Continued) (dollars in thousands) ()) Investment Gain or Loss A summary of realized and unrealized investment gain or loss of the Insurance Group for 1978 and 1977 is as follows: Net realized Net Applicable realized gain income gain less Net taxes income unrealized taxes (Loss) gain Preferred stocks Bonds 1978 $ 1,848 Common stocks 16 $ 574 6 5127 $4,000 3,420 7,589 10 (5,183) 17,811 $8,873 $12,628 Bonds 1977 Preferred stocks Common stocks 97 488 29 68 53

[PAGE 56]

PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS 206 WEST STATE STREET, SUITE 700 ROCKFORD, ILLINOIS GUO! 815 - 965 - 9511 The Board of Directors The Illinois National Bank & Trust Co. of Rockford: We have examined the consolidated balance sheets of The Illinois National Bank & Trust Co. of Rockford and subsidiary (a 97.7% subsidiary of Berkshire Hathaway, Inc.) as of December 31, 1978 and 1977 and the related consolidated statements of changes in financial position for the years then ended. Our examinations earnings, changes in stockholders' equity and were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the aforementioned consolidated financial statements preser fairly the financial position of The Illinois National Bank & Trust Co. of Rockford and subsidiary at December 31, 1978 and 1977 and the results of their operations and changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Peat, maruch, Mithell No. January 12, 1979 54

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1978 and 1977 ASSETS 1978 1977 ('ush and due from banks ...... Investment securities (notes 2 and 8): ••.. $ 20,231,765 $ 20,973,276 United States Treasury obligations United States Government agency obligations .•.. 565,983 Other securities ... Obligations of states and political subdivisions .... .•.. 63,576,532 42,372,484 41,553,063 566,558 58,696,192 Federal funds sold ....... Federal Reserve Bank stock 5,394,458 6,053,613 300,000 300,000 Loans (note 3) 3,000,000 Other assets (note 10) Bank premises and equipment (note 4) 76,121,628 7,000,000 3,145,995 1,105,719 62,267,886 2,719,924 1,021,747 $215,814,564 $201,152,259 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits $ 58,132,746 Time deposits. $ 56,978,240 127,001,647 117,890,119 Liability for borrowed funds Total deposits (note 5) 185,134,393 Accrued taxes and other liabilities (notes 6 and 10) 2,356,584 174,868,359 2,413,309 1,716,594 Total liabilities 189,904,286 176,584,953 Stockholders' equity: Common stock of $20 par value. Authorized and issued 250,000 shares .. Undivided profits (note 8) Surplus. 5,000,000 5,000,000 5,000,000 Reserve for contingencies (note 9) 14,610,045 5,000,000 1,300,233 13,266,149 1,301,157 Total stockholders' equity 25,910,278 24,567,306 $215,814,564 $201,152,259 See accompanying notes to consolidated financial statements. 55

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS Years ended December 31, 1978 and 1977 Operating income: 1978 1977 Interest and fees on loans .......... ncome on Federal funds sol $ 6,479,704 nterest and dividends on 298,069 $ 5,479,848 287,622 United States Treasury obligations ... 99,355 Other securities as of aer men alect obligion s 3,170,672 2,098,230 172,484 4,032,161 Federal Reserve Bank stock 484,049 3,848,051 Trust fees Total interest and dividend income 18,000 576,652 18.000 14,582,010 709,603 12,480,887 Other.. Service charges on deposit accounts ... 375,615 76,419 636,939 116,375 Total operating income 577,087 Operating expenses: 15,743,647 13,811,288 Interest on deposits Interest on Federal funds purchased Interest on borrowed funds 7,386,698 35,999 6,600,325 Salaries and employee benefits (note 7) Total interest. 2,289 1,981 7,424,986 2,173,834 6,602,306 Furniture and equipment (note 4) Occupancy, net (note 4) 212,348 311,427 2,096,796 269,442 Provision for possible loan losses (note 3) 738,850 60,000 215,021 Other. 811,709 16,000 Total operating expenses..... Income taxes, net (note 6) .. Earnings before income taxes and securities (losses) gains 10,921,445 10,011,274 4,822,202 459,425 3,800,014 Securities (losses) gains, net of related tax (benefit) expense of $(19,867) Earnings before securities (losses) gains...... 429,493 4,362,777 3,370,521 in 1978 and $11,209 in 1977 (note 6) .. Net earnings............•• ... (19,805) 269,018 ... .. $ 4,342,972 $ 3,639,539 See accompanying notes to consolidated financial statements. 56

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1978 and 1977 Common Undivided Reserve Balance, December 31, 1976 stock Surplus profits for Net earnings ..... $5,000,000 (note 8) contingencies $5,000,000 $12,124,955 (note 9) Cash dividends - $10 per share 3,639,539 $1,302,812 Transfer from reserve for contingencies (2,500,000) loan loss provision Net earnings Balance, December 31, 1977: 1,655 5,000,000 (1,655) 5,000,000 13,266,149 Transfer from reserve for contingencies — Cash dividends - $12 per share 4,342,972 1,301,157 (3,000,000) loan loss provision.... Balance, December 31, 1978 924 $5,000,000 $5,000,000 $14,610,045 (924) $1,300,233 See accompanying notes to consolidated financial statements. 57

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 1978 and 1977 Funds provided: 1978 1977 From operations: Items which did not require (provide) funds from operations: Net earnings •.. $ 4,342,972 $ 3,639,539 Provision for loan losses Depreciation ........ Discount accretion. Deferred income taxes ... 60,000 85,491 96,192 (163,878) (11,786) 376,620 16,000 Other 24,390 (169,835) 78,101 Increase in: Total funds provided from operations 4,337,189 4,036,617 Deposits. Decrease in: Liability for borrowed funds 10,266,034 6,531,692 2,356,584 Cash and due from banks Federal funds sold 4,000,000 708,501 741,511 25,000,000 Other, net Total funds provided 49,926 $22,409,819 $35,618,235 Funds used: Increase in earning assets: Loans Investment securities 13,913,742 4,876,153 15,569,736 Cash dividends.. Additions to bank premises and equipment, net 329,729 6,105,011 ... 3,000,000 2,500,000 221,961 Other, net Increase in cash and due from banks 10,105,165 Total funds used 290,195 1,116,362 $22,409,819 $35,618,235 See accompanying notes to consolidated financial statements. 58

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1978 and 1977 (1) Significant Accounting Policies The accounting policies of The Illinois National Bank & Trust Co. of Rockford (a 97.7% owned subsidiary of Berkshire Hathaway Inc.) and its wholly-owned subsidiary, Brown Building Corporation, conform to is a description of the more significant accounting policies: generally accepted accounting principles and to general practice within the banking industry. The following Consolidation The consolidated financial statements include those of the Bank and its wholly-owned subsidiary. All significant intercompany transactions are eliminated in consolidation. Investment Securities Investment securities are stated at cost, adjusted for amortization of premium and accretion of discount. Gains or losses on sales of investment securities are recognized only upon realization and are shown separately in the statements of earnings. Consumer Credit Loans Consumer credit loans are generally made on a discount basis. Unearned discount is taken into earnings over the terms of the respective loans using a method that approximates straight-line, which does not differ materially from accelerated income recognition methods required by generally accepted accounting principles. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on other equipment. Rates of depreciation are based on the following: buildings, 40 years; improvements and the straight-line method for building and automobiles, and on an accelerated method for improvements and other equipment, 3-8 years. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged against operations as incurred. Income Taxes The Bank utilizes the accrual method of accounting for financial reporting purposes, but files its income tax returs on a cash basis. Investment tax credits are treated as a reduction of the provision for Federal income taxes in the year realized. Tax benefits arising from losses for tax purposes, which are passed on to the Bank's parent, are not recognized by the Bank. Provision for Possible Loan Losses The provision for possible loan losses is based on past loan loss experience, management's evaluation of the loan portfolio under current economic conditions, and such other factors as in management's best judgment deserve current recognition in estimating loan losses. (Continued) 59

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Investment Securities A summary of investments except Federal Reserve Bank stock, by major classification, is as follows: Dec. 31, 1978 Dec. 31,1977 Par (in thousands) Book Market (in thousands) value Par Book Market U.S. Government: value value value value value Agencies Treasury.. $ 44,144 565 566 State and political subdivisions 64,059 42,372 $ 528 6,597 63,577 41,761 565 5,394 63,204 41,550 $ 566 $ 557 5,665 59,301 58,696 41,553 41,616 $115,365 $111,909 7,345 6,054 61,985 6,415 $111,158 $108,761 $106,869 $110,573 Investment securities respectively, were pledged to secure public deposits and for other purposes. with a carrying value of $7,977,564 and $7,988,556 at December 31, 1978 and 1977, (3) Loans A summary of the major classifications of loans, net of unearned discount of $3,919,300 and $2,908,057 at December 31, 1978 and 1977, respectively, is as follows: Loans to financial institutions. Real estate loans 1978 1977 $18,234,896 Loans for purchasing or carrying securities 403,100 $14,935,184 Loans to individuals Commercial and industrial loans 43,593,359 33,000 5,000 All other loans 13,172,918 33,837,853 Total net of unearned discount 1,409,255 12,697,237 1,492,694 Less allowance for possible loan losses ... 76,846,528 Net loans 724,900 62,967,968 700,082 $76,121,628 $62,267,886 Loans to officers and directors and loans made to businesses and other interests of officers and directors Loans were made at customary terms and rates afforded other borrowers. amounted to approximately $6,413,000 and $1,933,000 at December 31, 1978 and 1977, respectively. Such The following is a summary of activity in the allowance for possible loan losses: Recoveries on loans previously charged off . Balance at beginning of year 1978 1977 .... .. $700,082 Provision for loan losses .... . .. 6,128 $707,048 9,471 60,000 16,000 Less loans charged off 766,210 Balance at end of year 41,310 732,519 32,437 $724,900 $700,082 60 (Continued)

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Bank Premises and Equipment Bank premises and equipment are recorded at cost less accumulated depreciation, as follows: 1978 Land and buildings. $2,083,659 1977 Furniture, fixtures and equipment .......... ...... 1,126,726 $1,933,879 1,119,786 3,210,385 3,053,665 Less accumulated depreciation .... 2,104,666 2,031,918 $1,105,719 $1,021,747 As of December 31, 1978 the Bank had entered into contracts for the construction of a drive-in facility. The $310,000 disbursed at December 31, 1978. total anticipated cost of the facility is approximately $760,000 (excluding furnishings), with approximately (5) Deposits A summary of deposits by major classifications at December 31, 1978 and 1977 is as follows: 1978 1977 Time and savings deposits of individuals, partnerships and corporations... Demand deposits of individuals, partnerships and corporations $ 51,658,453 124,549,588 $ 52,720,561 ...... 289,910 115,603,809 Deposits of states and municipalities Deposits of U.S. Government Deposits of commercial banks.. .... 2,896,906 1,659,050 Certified and official checks .... 150,578 2,799,656 .... 5,588,958 1,848,548 236,735 Total deposits ...... $185,134,393 $174,868,359 Income Taxes Accrued taxes and other liabilities in the accompanying balance sheets include deferred income taxes of primarily from timing differences arising from reporting taxable income on the cash basis. The Bank and its $866,871 and $878,657 at December 31, 1978 and 1977, respectively. Such deferred income taxes result subsidiary join in the filing of a consolidated Federal income tax return with the parent company, Berkshire Hathaway Inc. (Continued) 61

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The reconciliation between the report to the Comptroller and the accompanying financial statements at December 31, 1978 and 1977 and for the years then ended follows: Per financial Per Net effect statements comptroller i of the 1978 report write-down security Investments .. BALANCE SHEET ACCOUNTS Undivided profits $111.909,457 $111,290,394 $619,063 $ 14,610,045 $ 13,990,982 $619,063 STATEMENT OF EARNINGS ACCOUNTS Operating income - Interest and dividends on other securities Net earnings $ 484,049 $ 197,159 $(13,110) $ 4,342,972 $ 4,356,082 $(13,110) 1977 Investments BALANCE SHEET ACCOUNTS Undivided profits $106,869,426 $106,237,253 $ 13,266,149 $632,173 $ 12,633,976 $632,173 STATEMENT OF EARNINGS ACCOUNTS Operating income - Interst and dividends on securities other Operating expenses - Other $ 576,652 588,816 $ (12,164) Net earnings 811,709 1,456,046 $644,337 $ 3,639,539 $ 3,007,366 $632,173 (9) Reserve for Contingencies specific contingency of the Bank. (10) Standby Letters of Credit Standby letters of credit at December 31, 1978 and 1977 totaled $431,999 and $78,289, respectively. 64.

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDLARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Taxes applicable to net earnings were as follows: 1978 1977 Tax provision applicable to earnings before securities gains (losses) Tax provision (benefit) applicable to securities gains (losses) ... $459,425 $ 73,771 (19,867) 140,336 439,558 214,107 Add tax benefit to parent corporation applicable to: Securities gains.... Earnings before securities gains (129,127) 355,722 226,595 Income taxes $439,558 $440,702 The components of consolidated income tax expense are as follows: 1978 1977 Current income taxes: Federal $386,485 $(226,595) received Add tax effect of operating loss passed to parent for which no benefit 226,595 State.. 386,485 64,859 64,082 Total current income taxes 451,344 64,082 Deferred income taxes: State.. Federal (8,603) Total deferred income taxes (3,183) 369,861 6,759 (11,786) 376,620 Total income taxes $439,558 $440,702 The sources of timing differences resulting in deferred income taxes and the tax effect of each were as follows: 1978 1977 Accrued earnings and expense not reported for income tax purposes until Loan loss deductions for tax purposes more (less) than that provided for financial collected or paid, net $(10,859) $374,961 reporting purposes .. (927) 1,659 S(11,786) $376,620 (Continued) 62

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Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The total income tax expense for 1978 amounted to $439,558, an effective rate of 9.2% ($440,702 and 10.8% in 1977). The reasons for the difference between the effective tax rate and the corporate Federal income tax rate of 48% are as follows: 1978 % of 1977 Amount pretax % of Tax expense at statutory rate earnings Increase (reduction) in taxes resulting from: $2,295,614 48.0% Amount pretax $1,958,516 earnings 48.0% Tax-exempt interest, net of discount accretion .. State income taxes, net of Federal income (1,882,558) (39.4) (1,790,903) (43.9) Tax benefit to parent, net tax benefits .. 32,072 .7 226,595 36,837 .9 Other - net Actual tax expense (5,570) (1) 9,657 5.6 $ 439,558 9.2% $ (7) Pension and Profit-Sharing Plan 440,702 10.8% The Bank has a noncontributory pension plan and a profit-sharing plan for all officers and amployees. Based upon the most recent actuarial report available (as of December 31, 1977), the pension fund assets exceeded the actuarial computed value of vested benefits and there was no unfunded past service cost liability. The Bank's policy is to fund pension costs as accrued. The total pension and profit-sharing expense was $175,329 for 1978 and $213,665 for 1977. Investment Securities Write-down The regulatory reporting requirements by the Office of the Comptroller of the Currency required the Bank to remove from the Bank investment account, the value of the stock conversion privilege on convertible revision of these amounts was determined not to be in accordance with generally accepted accounting debentures of the Bank's investment holdings during the year 1977. However, the necessary accounting principles. As a result, the bank received permission from the Comptroller of the Currency to report to accepted accounting principles. The reports for calendar years 1978 and 1977 that were submitted to the shareholders, totals which do not contain any write-down or revisions, which is in accordance with generally value on debentures not sold or matured prior to December 31, 1978. Comptroller of the Currency comply with the Comptroller's ruling and exclude the conversion privilege (Continued) 63

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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, JR., Director Retired, Former Chairman of the Board of Directors of the Company ). VERNE MCKENZIE, Director Vice President, Secretary and Treasurer of the Company CHARLES T. MUNGER, Director Vice Chairman of the Board of the Company Chairman of the Board of Blue Chip Stamps COMMON STOCK PRICES prices for the stock in each quarter of 1977 and 1978 is set forth in the following table. The quotations represent The common stock of Berkshire Hathaway Inc. is traded in the over counter market. The high and low bid prices between dealers and do not include retail markup, markdown or commission. They do not represent High Low 1977 1st Quarter 97 2nd Quarter 100 95 85 4th Quarter 3rd Quarter 107 100 1978 1st Quarter 139 107 2nd Quarter 142 134 3rd Quarter 180 142 4th Quarter 180 165 189 152 The Company did not pay a dividend in 1977 or 1978. •

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

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