1973 年伯克希尔完整年报

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CLEVELAND PUBLIC LIBRARY BUSINESS INF. BUR CORPORATION FILE BERKSHIRE HATHAWAY INC. 1973 ANNUAL REPORT TO THE STOCKHOLDERS (52 WEEKS ENDED DECEMBER 29, 1973)

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Contents Pages 1-3 Chairman's Letter 4 Accountants' Certificate Regarding Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries and Insurance Group 5-14 Financial Statements — Berkshire Hathaway Inc. and Consolidated Subsidiaries 15-20 Financial Statements — Berkshire Hathaway Inc. Insurance Group 21-27 Financial Statements — The Illinois National Bank & Trust Co. regard thereto. of Rockford, including Accountants' Certificate with

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Berkshire Hathaway Inc. To the Stockholders of Berkshire Hathaway Inc.: Our financial results for 1973 were satisfactory, with operating earnings of $11,930,592, pro- ducing a return of 17.4% on beginning stockholders' equity. Although operating earnings improved occurred because the gain in earnings was not commensurate with the increase in shareholders from $11.43 to $12.18 per share, earnings on equity decreased from the 19.8% of 1972. This decline investment. We had forecast in last year's report that such a decline was likely. Unfortunately, our forecast proved to be correct. the insurance business turned in poor results. Overall, our insurance business continues to be a Our textile, banking, and most insurance operations had good years, but certain segments of most attractive area in which to employ capital. Management's objective is to achieve a return on capital over the long term which averages somewhat higher than that of American industry generally — while utilizing sound accounting and which will enable us to maintain this performance in the future. Prospects for 1974 indicate some debt policies. We have achieved this goal in the last few years, and are trying to take those steps further decline in rate of return on our enlarged equity base. Textile Operations not remained, un smal trop irough end 10 in main problems revo utilization of loom capacity. Prices of some fibers skyrocketed during the year. of some of our competitors. However, profits were reasonably commensurate with our capital Cost of Living Council regulations prevented the pricing of many finished products at levels investment, although below those that apparently might have been achieved had we been able to served to cut down some of the hills while still leaving us with the inevitable valleys. price at market levels. The textile business has been highly cyclical and price controls may have Because of the extraordinary price rises in raw materials during 1973, which show signs of continuing in 1974, we have elected to adopt the "lifo" method of inventory pricing. This method more nearly matches current costs against current revenues, and minimizes inventory "profits" included in reported earnings. Further information on this change is included in the footnotes to our financial statements. Insurance Operations During 1973, Jack Ringwalt retired as President of National Indemnity Company after an abso- lutely brilliant record since founding the business in 1940. He was succeeded by Phil Liesche who, fortunately for us, possesses the same underwriting and managerial philosophy that worked so well for Jack. Our traditional business, specialized auto and general liability lines conducted through National Indemnity Company and National Fire and Marine Insurance Company, had an exceptionally fine underwriting year during 1973. We again experienced a decline in volume. Competition was intense, and we passed up the chance to match rate-cutting by more optimistic underwriters. There currently are faint indications that some of these competitors are learning of the inadequacy of their rates (and also of their loss reserves) which may result in easing of market pressures as the year develops. If so, we may again experience volume increases. 1

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Our reinsurance operation had a somewhat similar year — good underwriting experience, but difficulty in maintaining previous volume levels. This operation, guided by the tireless and well- directed efforts of George Young, has been a major profit producer since its inception in 1969. Our "home state" insurance companies made excellent progress in Nebraska and Minnesota, with both good growth in volume and acceptable loss ratios. We began operations late in the year in Iowa. To date, our big problem has been Texas. In that state we virtually had to start over during 1973 as the initial management we selected proved incapable of underwriting successfully. The Texas experience has been expensive, and we still have our work cut out for us. Overall, however, the home state operation appears to have a promising potential. very poor underwriting in Chicago during 1973. It would Our specialized urban auto operation, Home and Automobile Insurance Company, experienced primary Cook County marketing area, although the current energy situation confuses the picture. appear that rates are inadequate in our than offset continuing inflation in medical and repair costs, as well as jury awards. We believe that The question is whether possible lowered accident frequency because of reduced driving will more inflation will hurt us more than reduced driving will help us, but some of our competitors appear to believe otherwise. how these moves will prove out financially. Home and Auto expanded into Florida and California during the year, but it is too early to know A contributing factor in our unsatisfactory earnings at Home and Auto during 1973 was an accounting system which was not bringing information to management on a sufficiently timely basis. This situation now is being corrected. On the investment side of our insurance operation, we made substantial additional commitments in common stocks during 1973. We had significant unrealized depreciation — over $12 million — in our common stock holdings at year-end, as indicated in our financial statements. Nevertheless, we worth. In spite of the large unrealized loss at year-end, we would expect satisfactory results from believe that our common stock portfolio at cost represents good value in terms of intrinsic business the portfolio over the longer term. Banking Operations The Illinois National Bank & Trust Co. of Rockford again had a record year in 1973. Average rates were increased substantially in the important consumer savings area when regulatory maximums deposits were approximately $130 million, of which approximately 60% were time deposits. Interest were raised at mid-year. heavily weighted toward interest bearing der 2.11% of average dep earning continue to meet the increasing loan demands of our customers. And we continue to maintain our We continue to be the largest bank in Rockford. We continue to maintain unusual liquidity. We unusual profitability. This is a direct tribute to the abilities of Gene Abegg, Chairman, who has been running the Bank since it opened its doors in 1931, and Bob Kline, our President. Merger With Diversified Retailing Company, Inc. Your Directors have approved the merger of Diversified Retailing Company, Inc. into Berkshire Hathaway Inc. on terms involving issuance of 195,000 shares of Berkshire stock for the 1,000,000 shares of Diversified stock outstanding. Because Diversified and its subsidiaries own 109,551 shares of Berkshire, the net increase in the number of shares of Berkshire outstanding after giving effect to this transaction will not exceed 85,449. Various regulatory approvals must be obtained before this may vote upon it. merger can be completed, and proxy material will be submitted to you later this year so that you women's apparel stores and also conducts a reinsurance business. In the opinion of your management, Diversified Retailing Company, Inc., through subsidiaries, operates a chain of popular-priced its most important asset is 16% of the stock of Blue Chip Stamps. 2

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Blue Chip Stamps company's outstanding shares. Since year-end, we have increased our holdings so that they now Our holdings of stock in Blue Chip Stamps at year-end amounted to approximately 19% of that represent approximately 22½%; implementation of the proposed merger with Diversified Retailing Company, Inc. would increase this figure to about 38½%. Our equity in earnings of Blue Chip Stamps became significant for the first time in 1973, and posed an accounting question as to just what period's earnings should be recognized by Berkshire Hathaway Inc. as applicable to the financial statements covered by this annual report. Blue Chip's fiscal year ends on the Saturday closest to February 28, or two months after the prior to Berkshire Hathaway's. An acceptable fiscal year-end of Berkshire Hathaway Inc. Or, viewed, alternatively, their year ends ten months would not have required an auditor's disclaimer as to scope, was to recognize in our 1973 income an accounting choice for us, and one which, if made equity of $632,000 in Blue Chip's earnings for their year ended March 3, 1973 with regard to the fewer shares of Blue Chip we owned during this earlier period. But such an approach seemed at odds with reality, and would have meant a ten month lag each year in the future. Therefore, we chose to reflect as 1973 income our equity of $1,008,000 in Blue Chip's earnings based upon unaudited interim earnings through November as publicly reported by Blue Chip Stamps and with regard to our shareholdings during 1973. Because we made this choice of unaudited but current figures, as opposed to the alternative of audited but far from current figures, Peat, Marwick, Mitchell & Co. were unable to express an opinion on our 1973 earnings attributable to Blue Chip Stamps. The annual report of Blue Chip Stamps, which will contain financial statements for the year ending March 2, 1974 audited by Price, Waterhouse and Company, will be available in early May. Any shareholder of Berkshire Hathaway Inc. who desires an annual report of Blue Chip Stamps may obtain it at that time by writing Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040. Blue Chip's trading stamp business has declined drastically over the past year or so, but it has important sources of earning power in its See's Candy Shops subsidiary as well as Wesco Financial Corporation, a 54% owned subsidiary engaged in the savings and loan business. We expect Blue Chip Stamps to achieve satisfactory earnings in future years related to capital employed, although certainly at a much lower level than would have been achieved if the trading stamp business had been maintained at anything close to former levels. Corporation, and is Chairman of the Board of See's Candy Shops Incorporated. Operating manage- Your Chairman is on the Board of Directors of Blue Chip Stamps, as well as Wesco Financial ment of all three entities is in the hands of first-class, able, experienced executives. Sun Newspapers, Inc. In the 1969 annual report we commented on the purchase of Sun Newspapers Inc., a group of on their operations in the text of our annual reports, nor have we consolidated their financial results weekly papers published in the metropolitan Omaha area. Since that time we have not commented since the operation, because of the small investment involved, has been "financially insignificant." quality. On May 7th Sun Newspapers was awarded a Pulitzer Prize for local investigative reporting During 1973 it was made quite apparent that such insignificance did not extend to publishing (the first time in history that a weekly had won in this category) for its special section of March 30, 1972 relating to Boys Town. We reported the extraordinary contrast between decreasing services and mounting wealth that had taken place since Father Flanagan's death in 1948. Delta Chi, the national society of professional journalists, as well as seven other national awards. In addition to the Pulitzer Prize, the reporting job also won the Public Service Award of Sigma editorial staff of Sun Newspapers for their achievement, which vividly illustrated that size need not Our congratulations go to Paul Williams, Editor, and Stan Lipsey, Publisher, as well as the entire be equated with significance in publishing. Warren E. Buffett March 29, 1974 Chairman of the Board 3

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PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS KIEWIT PLAZA OMAHA, NEBRASKA 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway Inc. and consolidated subsidiaries as of December 29, 1973 and December 30, 1972, the statements of assets and liabilities of the 1972, and the related consolidated statements of earnings and retained Berkshire Hathaway Inc. - Insurance Group as of December 31, 1973 and earnings and changes in financial position of Berkshire Hathaway Inc. for the 52 weeks ended December 29, 1973 and December 30, 1972 and the statements of income and realized investment gains, paid-in and unassigned surplus and changes in financial position of the Berkshire Hathaway Inc. - examination was made in accordance with generally accepted auditing Insurance Group for the years ended December 31, 1973 and 1972. Our standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances except as stated in the following paragraph. described in note 4 to consolidated financial statements, was examined Blue Chip Stamps, an investee of Berkshire Hathaway Inc., as Unaudited by other auditors for its most recent fiscal year ended March 3, 1973. earnings of Blue Chip Stamps for the nine months ended earnings of Blue Chip Stamps recorded by Berkshire Hathaway Inc. Under December 1, 1973 was the basis in part for the amount of equity in the terms of our engagement, we did not examine evidence in support of the unaudited earnings and accordingly do not express an opinion as to the equity of $1,008,000 in earnings of Blue Chip Stamps for 1973. in the preceding paragraph, the aforementioned consolidated financial In our opinion, except for the effect of the matter referred to statements present fairly the financial position of Berkshire Hathaway Inc. and consolidated subsidiaries at December 29, 1973 and December 30, 1972 1972 and the results of their operations and changes in their financial and the Berkshire Hathaway Inc. - Insurance Group at December 31, 1973 and position for the respective years then ended in accordance with generally approve) in the method accepted accounting principles which, except for the change (of which we in note 6 to consolidated financial statements, have been applied on a of determining inventory valuations, as described which consistent basis, after giving retroactive effect to the change, with consolidated financial statements. we concur, in the basis of presentation as described in note l to Peat, Marik, Mitchell + Co. March 20, 1974 4

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Berkshire Hathaway Inc. AND Consolidated Subsidiaries Financial Statements 1973 and 1972

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 29, 1973 and December 30, 1972 ASSETS Dec. 29, 1973 Dec. 30, 1972 Investments: Cash $ 2,885,645 $ 4,998,225 Bonds (note 2) . Preferred stocks (note 3) . 74,474,461 Common stock of Blue Chip Stamps (note 4) Common stocks of unaffiliated companies (note 3) 49,756,778 2,298,348 88,148,480 17,411,780 2,942,252 Other unconsolidated subsidiaries (note 5). Unconsolidated bank subsidiary (note 5) 21,003,034 13,717,274 11,287,396 Accounts receivable from customers, agents and others (less allowance for 1,333,832 20,472,590 1,258,832 Inventories (note 6). doubtful accounts, 1973 — $332,679; 1972 — $226,530) 14,056,574 Real estate, equipment, furniture and leasehold improvements, at cost less 7,136,676 12,853,881 6,827,043 Deferred insurance premium acquisition costs allowance for depreciation and amortization (note 7) 3,668,005 Other assets. 5,240,000 3,640,249 560,987 5,624,000 $196,131,614 $176,109,833 645,105 LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums Losses and loss adjustment expenses S 61,675,768 21,281,980 $ 60,275,018 Funds held under reinsurance treaties 1,318,205 23,839,397 Agents' and policyholders' deposits 459,609 471,728 957,845 Amounts due for purchase of securities 540,742 Income taxes: Accounts payable and accrued expenses. 4,726,609 4,383,758 674.123 Deferred Current 3,297,368 262,357 3,576,109 Notes payable to banks (note 9) 7½ % debentures due 1987 (note 8) 598,540 3,214,084 641,300 Excess of net assets of consolidated subsidiaries over cost of investment 8% senior notes due 1993 (note 10) 20,000,000 9,000,000 Other liabilities 579,070 304,914 579,070 114,976,148 133,364 Stockholders' equity: 107,814,810 ommon stock of $5 par value. Authorized at December 29, 197. 1,100,000 shares, December 30, December 29, 1973, 979,569 shares, December 30, 1972, 1,017,547 1972. 1.722.983 shares: issued a Retained earnings (note 10) . shares 76,257,621 4,897,845 5,087,735 81,155,466 69,112,398 64,024,663 Less, at December 30, 1972, cost of 37,978 shares of common stock in treasury . .. Contingencies (notes 12 and 14) Total stockholders' equity . 817,375 81,155,466 68,295,023 $196,131,614 $176,109,833 See accompanying notes to consolidated financial statements. 6

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS 52 weeks ended December 29, 1973 and December 30, 1972 Income items: Dec. 29, 1973 Dec. 30, 1972 Insurance premiums earned $ 52.929.257 $ 59,627,050 Interest and dividend income Net sales of textile products 33.410.551 27,741,969 Real estate income 7,378,109 6,648,359 287,017 310,951 94,004,934 94,328,329 Cost and expense items: Insurance losses and loss adjustment expenses 32,835,798 36,987,030 Cost of textile products sold. 28,305,725 23,655,273 Insurance underwriting expenses 16,774,167 18,355,872 Selling, administrative and other expenses. 3,363,223 3,119,518 Interest expense 1,606.313 583,724 Earnings from insurance underwriting and manufacturing opera- 82,885,226 82,701,417 tions before applicable income taxes 11,119,708 11,626,912 Income taxes applicable to operating earnings (note 11) 2,979,016 3,240,861 Earnings before equity in realized investment gains net earnings of other companies and 8,140,692 8,386,051 Equity in net earnings of bank subsidiary (note 5) . 2,781,900 2,700,353 Equity in net earnings of Blue Chip Stamps (note 4) Earnings before realized investment gains 1,008,000 11,930,592 11,197,572 111,168 Realized investment gains, net of related income taxes of $401,699 in 1973 and $430,344 in 1972 929,851 928,586 Net earnings . 12,860,443 12,126,158 Retained earnings at beginning of year 64,024,663 51,898,505 Excess of cost over par value of treasury stock retired in 1973 • (627,485) Retan earnings at end of year ... $ 76,257,621 $ 64,024,663 Earnings per share of common stock, based on 979,569 shares outstanding: Earnings before realized investment gains $12.18 $11.43 Realized investment gains .95 .95 Net earnings $13.13 $12.38 See accompanying notes to consolidated financial statements.

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION 52 weeks ended December 29, 1973 and December 30, 1972 Funds provided: Dec. 29, 1973 Dec. 30, 1972 From operations: Net earnings $ 12,860,443 $ 12,126,158 Charges (credits) to earnings not requiring (providing) funds: Equity in undistributed earnings of bank subsidiary (530,444) (355,744) Accretion of discount on bonds Equity in undistributed earnings of Blue Chip Stamps (900,000) Depreciation and amortization (481,767) (538,715) 519,608 Increase in unpaid losses and loss expense 536,358 1,400,750 Decrease in unearned premiums 7,284,393 (Increase) decrease in accounts receivable from customers, (2,557,417) (1,676,871) Increase in inventories agents and others (1,202,693) 1,432,787 (309,633) Decrease in deferred insurance premium acquisition costs (796,396) (Decrease) increase in liability for income taxes 384,000 1,147,656 (3,230,468) 2,344,510 Increase (decrease) in accounts payable and accrued expenses Other, net 342,851 (446,701) 332,500 (426,112) Funds provided from operations (6,232,713) 8,505,165 6,627,730 20,631,323 Proceeds from issuance of long-term debt . Decrease in cash 20,000,000 2,112,580 S 526,862 • 28,740,310 $ 21,158,185 Funds used: Net purchase (sale) of investments: Bonds Preferred stocks. (14,155,786) (643,904) 4,921,043 Common stocks of unaffiliated companies 1,959,005 32,344,998 Common stock of Blue Chip Stamps. 1,529,878 6,515,454 Investment in unconsolidated subsidiary. 7,159,171 75,000 Additions to real estate, equipment, furniture and leasehold improve- 19,150,186 20,554,673 Repayment of long-term debt 547,364 603,512 9,042,760 $ 28,740,310 $ 21,158,185 See accompanying notes to consolidated financial statements. 8

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 29, 1973 and December 30, 1972 (1) Summary of Significant Accounting Policies reinsurance and Practices amount of $3,281,480 at December 31, 1973 and placed with other insurers in the (a) Basis of Presentation $3,691,310 at December 31, 1972. Premium ac- The accounts of Berkshire Hathaway Inc., the quisition costs such as commission, premium parent Company, are consolidated with the ac- taxes and certain other underwriting expenses owned Canadian textile sales subsidiary, and counts of Bourne Mills of Canada, Ltd., a wholly- are pursuant to statutory insurance accounting rules charged against income when incurred. (The "Insurance Group"), wholly-owned by the accounts of subsidiary insurance companies portion of such costs are deferred and charged However, for financial statement purpose :, a Berkshire Hathaway Inc. This basis of presenta- against income as the related premiums are tion differs from that used in previous financial earned. statements in which the parent Company's invest- ment in the Insurance Group was carried on the (e) Reserve for Losses The parent Company's investment in The Illinois equity basis. The insurance group provides a reserve for losses and loss adjustment expenses based upon (1) National Bank & Trust Co. of Rockford is ac- aggregate case basis estimates for losses reported, Immaterial subsidiaries are not consolidated and counted for on the equity basis. in respect to direct premiums written, (2) esti- mates of unreported losses based upon past investments therein are carried at cost. assumed experience, (3) estimates received relating to The accounts of the parent Company and its non- amounts for reinsurance placed with reinsurers reinsurance, and (4) deduction of insurance subsidiary are maintained on the basis of a fiscal year ending on the Saturday nearest to in the amount of $4,421,537 at December 31, 1973 December 31, while the accounts of the insurance and S3,324,369 at December 31, 1972. group are maintained on the basis of the calendar (f) Catastrophe Reserves year. The Insurance Group does not provide a reserve (b) Investment in Securities, Other than Affiliates for catastrophe losses. The Committee on Insur- Investments in bonds are stated at amortized cost, ance Accounting and Auditing of the American while investments in preferred and common Institute of Certified Public Accountants in co- stocks other than affiliates are shown at cost. operation with industry representatives is work- The investment in Blue Chip Stamps ("Blue Chip") (c) Investment in Blue Chip Stamps ing toward the development of a definitive statement as to the appropriate accounting for is accounted for on the equity basis. Deferred catastrophe losses and resolution may lead to income taxes are provided for with respect to followed. changes in the accounting practices being undistributed earnings of Blue Chip under the distributed assumption that such earnings will ultimately be determines income on the basis of a fiscal year as taxable dividends. Blue Chip (g) Real Estate, Equipment, Furniture and Lease- hold Improvements ending on or about February 28. Berkshire These items of property (including significant Hathaway Inc. reflects its equity in the earnings betterments and renewals) are carried at cost of Blue Chip on the basis of that company's depreciated over their useful lives estimated at twelve months ending November 30. the date of acquisition. The double declining of new items of textile properties acquired after balance method is used to calculate depreciation (d) Insurance Premiums Insurance premiums are recognized as revenues other items. Maintenance, repairs and renewals 1965; the straight-line method is applied for ratably over the terms of the policies. Unearned premiums are computed on the monthly pro of a minor nature are generally charged to rata basis and are stated after deduction for operations as incurred. 9

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (h) Inventories Inventories relate to the textile operation and are in undistributed earnings. Deferred taxes of $100,000 equity in net assets at dates of acquisition, plus equity stated at cost at December 29, 1973, determined at December 29, 1973 have been provided with respect under the last-in, first-out method. This repre- sents a change in accounting method; inventories to the equity in undistributed earnings assuming their ultimate distribution as a taxable dividend. at the beginning of the year and previously were stated at the lower of cost or market on The investment in follows: Blue Chip is summarized as a first-in, first-out basis. See note 6. (i) Income Taxes Shares owned Dec. 29, 1973 Dec. 30, 1972 A consolidated Federal income tax return is filed Percentage of total outstanding 989,483 853,754 to the pren by the parent Company and its eligible subsidi- shares 19% aries. The liability for current income taxes Cost represented by: 17% reflected in the consolidated balance sheets repre- Underlying net asset values at sents the apportioned Federal tax liability of the Excess cost, net of amortization dates of acquisition $ 9,115,779 $ 7,704,246 companies whose accounts are consolidated, of $795,673, December 29, plus the foreign tax liability of the consolidated 1973 and $315,673, December noninsurance subsidiary and plus state or pro- 30, 1972 2,905,822 vincial income taxes of the consolidated 12,021,601 10,971,723 3,267,477 companies. Equity in post-acquisition A provision for deferred taxes is made in recogni- undistributed earnings $13,717,274 1,695,673 $11,287,396 315.673 in which the tion of timing differences created by the manner certain income and expense items for financial Insurance Group accounts for The excess cost over underlying net assets is being amortized over eight years from the beginning of 1972. of these items for income tax purposes. reporting purposes and the accounting treatment The stock of Blue Chip is publicly traded in the over- the-counter market, but there is only limited trading in Investment tax credits on qualifying property and the public market in this stock. The National Association equipment acquisitions are applied as a reduction of Insurance Commissioners Valuation Committee as- of income tax expense in the year realized. signed to the stock at December 31, 1973 a valuation of $7.25 per share, and $15.375 per share at December 31, (2) Bonds Deposited with Others 1972. Accordingly, on these bases, the insurance sub- Bonds with amortized cost of $13,932,645 and sidiaries reported in their Convention statements filed $16,582,277 at December 31, 1973 and 1972, respectively, gate "market value" of $7,171,502 at December 31, 1973 with the various state insurance departments an aggre- authorities or others in accordance with the terms of were deposited in trust with various regulatory and $13,130,968 at December 31, 1972 for the shares of certain reinsurance treaties. Blue Chip held at those respective dates. The Company indicative of the value in the public market for a mod- believes that while such statutory valuations may be (3) Investments in Stocks of Unaffiliated Companies The market values of preferred stocks and common indicative of the fair market value of a substantial block erate number of shares, they are not necessarily stocks of unaffiliated companies were as follows: Preferred stocks Dec. 29, 1973 $ 2,186,960 Dec. 30, 1972 of the shares such as that represented by the Berkshire Common stocks of unaffiliated $ 2,872,980 Hathaway holdings. companies 37,344,241 18,698,164 Blue Chip, a California corporation, is engaged primarily in the furnishing of a trading stamps service (4) Investment in Blue Chip Stamps in the States of California, Nevada and Oregon and in The carrying value of the investment in Blue Chip for business, and through subsidiaries in the manufac- the development of incentive and marketing programs the cost, less amortization of the excess of cost over Stamps ("Blue Chip") at December 29, 1973, represents ture and sale of candy. Blue Chip, at December 31, 1973 owned approximately 45% of Wesco Financial Cor- 10

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, Continued poration ("Wesco"), a savings and loan holding com- Blue Chip financial statements for their fiscal year made a tender offer for additional Wesco shares. pany. Subsequent to December 31, 1973, Blue Chip ended March 3, 1973 (and for certain prior years revealed significant litigation proceedings against the 1973 and for the 52 weeks then ended (audited), and as The financial statements of Blue Chip as of March 3, Company. The Company stated with regard to certain of December 1, 1973 and for the 52 weeks then ended of these proceedings that a possible result could be (unaudited) reflect the following: "a materially adverse effect on revenues and earnings and under existing market conditions might have a BLUE CHIP STAMPS materially adverse effect on its ability to continue its Consolidated Balance Sheets trading stamp business." Additional proceedings in- Mar. 3, 1973 Dec. 1, 1973 ($000 omitted) volve substantial contingent liabilities; the accountants' (Unaudited) opinion covering the financial statements of Blue Chip ASSETS Stamps as of March 3, 1973 and for the fiscal year then Cash $ 4,196 $ 2,370 ended, as well as that for certain preceding years, was Marketable securities, at cost given subject to the effect, if any, of the legal proceed- (market, March 3 — $148,302; December 1 - $105,900) ings referred to. Inventories 144,601 13,114 117,918 8,940 20,666 Property, fixtures and equipment, Other current assets 9,401 (5) Investments in Unconsolidated Subsidiaries The investment in the unconsolidated bank sub- Unamortized debenture discount net 10,785 1,347 10,579 ing stock of The Illinois National Bank & Trust Co. of sidiary represents approximately 98% of the outstand- Investment in Wesco Financial 1,068 Excess of cost over equity in net Corporation 16,826 this investment. See note 12 regarding divestiture of Rockford. The equity method is used in accounting for assets of subsidiary $199,724 16,741 $195,250 16,422 this investment. Financial statements of The Illinois are presented elsewhere herein. National Bank & Trust Co. of Rockford and subsidiary STOCKHOLDERS* EQUITY LIABILITIES AND The carrying values of $22,336,886 at December 29, Liability for unredeemed trading Current portion of long-term debt stamps $ 93,351 Note payable to bank, less current Other current liabilities 13,503 5,751 $ 84,548 unconsolidated 1973 and $21,731,422 at December 30, 1972 for all 13,860 7,648 subsidiaries $2,500,000 in excess of the parent Company's equity in were approximately the net assets as reflected in the financial statements of 6¾% subordinated portion due 1978, less current portion debentures 23,004 23,004 nated prior to November 1, 1970 and is not being the subsidiaries at those dates. This excess cost origi- Stockholders' equity Minority interest in subsidiary 10,840 53,125 150 8,672 147 amortized since it is considered by management to have $199,724 $195,250 57,371 continuing value over an indefinite period. (6) Inventories Consolidated Earnings Summaries BLUE CHIP STAMPS A summary of inventories follows: 52 weeks ($000 omitted) Dec. 29, 1973 Stock in process Raw materials and supplies. $ 1,047,827 Dec. 30, 1972 ended 52 weeks Griege and finished cloth 1,604,824 690,219 Mar. 3, 1973 Dec. 1, 1973 ended $ 7,136,676 4,484,025 1,676,141 $ 6,827.043 4,460,683 Stamp service revenues $ 88,736 (Unaudited) Total revenues. 132,323 $ 63,760 Earnings before securities gains 111,845 Inventories at December 30, 1972 were, consistent with prior years, stated at the lower of cost (first-in, charges or tosses and extraordinary Net earnings 8,108 Earnings per share. 1.38 7,101 8,537 first-out) or market. Effective with the year ended 1.75 9,021 determining inventory valuations to cost determined on December 29, 1973, the Company changed its method of a basis of last-in, first-out ("LIFO"'). This change was 11

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued made because management believes the use of LIFO will reduce the effect of inflation on stated earnings; senior indebtedness which includes indebtedness of current costs will generally be more nearly matched the parent Company for money borrowed. The deben- against current revenues in the statements of income. The indenture under which the debentures were issued tures may be redeemed at par at the Company's option. The change had the effect of reducing inventories at December 29, 1973 by $588,348 and net income by requires the parent Company to redeem $42,800 principal amount of the debentures, through a sinking $294,714 ($0.30 per share) for the 52 weeks then ended and is reported in accordance with Opinion No. 20 of fund, on August 1 in each of the years 1974 to and the Accounting Principles Board. There is no cumula- including 1986. tive effect of the change on prior years, since the December 30, 1972 inventory as previously stated is, (9) Notes Payable to Banks under the LIFO method, also the amount of the begin- The parent Company was liable at December 30, ning inventory used in calculating cost of sales for 1973. 1972 for $9,000,000 under the terms of a term loan refinanced in March 1973. See note 10. agreement with certain banks. These borrowings were (7) Real Estate, Equipment, Furniture and Leasehold Improvements The composition of plant and equipment is shown (10) 8% Senior Notes Due 1993 below: On March 15, 1973, the parent Company issued at par $20,000,000, 8% Senior Notes due March 1, 1993. Properties of textile Properties Land December 29, 1973 $ operations of insurance outstanding bank notes; the remainder of the proceeds Part of the proceeds was used to repay $9,000,000 of 84,860 $ group Total Machinery and Buildings 2,364,265 1,251,905 83,847 $ 3,616,170 168,707 was used for additional capital contributions to the Insurance Group. Furniture and fixtures equipment 12,361,378 - 12,361,378 $1,143,000 on March 1 in each of the years from 1979 The notes call for mandatory annual prepayments of and leasehold im- without premium up to the amount of the required to 1992, inclusive. Optional prepayments are permitted provements 15,404,403 593,900 2,271,497 935,745 17,675,900 1,529,645 prepayments in each of the years 1979 to 1992; this Less accumulated de- preciation and right is not cumulative. Additionally, the parent Com- amortization $ 2.062,833 $ 1,605,172 $ 3,668,005 13,341,570 666,325 14,007,895 pany may also prepay the notes at any time, in full or in part, at a premium of 8% in the twelve months December 30, 1972 commenced March 1, 1973; the premium declines Land Machinery and Buildings . $ 2,344,684 1,172,156 84,860 $ 83,847 $ 3,516,840 168,707 ratably to par in 1992. The parent Company agreed it will not affect any optional prepayment prior to March 1, 1983 from proceeds of any refunding operation in- Furniture and fixtures equipment 11,869,465 11,869,465 annual interest rate of less than 8%. volving the incurring of any indebtedness at an effective and leasehold provements im- 14,959,876 660.867 2,220,796 964.793 17,180,672 1.625.660 In the note instruments the parent Company agreed, and restricted subsidiaries, as defined, to limitations as among other things, as to both the parent Company Less accumulated de- amortization preciation and $ 1,966,135 12,993.741 $ 1,674,114 $ 3,640,249 546,682 13,540,423 to permissible outstanding funded debt and subordi- nated funded debt and to a limitation on mortgage debt except as to after-acquired property. Further, the parent (8) 7½% Subordinated Debentures payments," which term includes dividends or other Company covenanted that it would not make "restricted Debentures bear interest at the rate of 7½% equity distributions plus investment in unrestricted payable February 1 and August 1 and will be due on subsidiaries (those not bound by the terms of the loan lien and are not convertible; they are subordinated to August 1, 1987. The debentures are not secured by any agreement), in excess of stated formula amounts. Retained earnings of approximately $21,000,000 as of 12

[PAGE 15]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued December 29, 1973 and $13,000,000 as of December 30, Percent 1972 are unrestricted by this provision; the remainder is restricted. Amount of pretax income The loan agreement also contains limiting terms Tax expense at statutory rate • $7,851,436 48.0% relating to sales of the Company's assets, mergers and Increase (reduction) in income taxes consolidations, and allows the noteholders to demand resulting from: prepayment, at par, within 60 days of notice that, Tax-exempt interest (2,304,000) (14.1) during the lifetime of Warren E. Buffett, stock owner- 100% dividend exclusion relating the members of his immediate family, including certain ship in the parent Company by Warren E. Buffett and to equity in earnings of Illinois National Bank trusts and charitable organizations, has decreased to 85% dividends received credit: (1,335,000) (8.2) less than 15% of the outstanding capital stock of the On dividends from unaffiliated parent Company. On equity in earnings of Blue companies (542,000) (3.3) Chip Stamps (11) Income Taxes Amortization of excess of cost (655,000) (4.0) Total income tax expense for 1973 is made up of over net assets of subsidiary the following: and investee (not deductible for U. S. State Federal Foreign local and tax purposes) 290,000 1.8 Total Miscellaneous. 191,279 1.2 Current tax expense: Total income tax expense $3,496,715 21.4% On earnings from insurance under- Similar factors were operative for 1972 when the ufacturing writing and man- effective tax rate was 23.2%. On dividends from operations $2,781,668 $120,021 $94,043 $2,995,732 Consolidated income tax returns of the Company have been examined through 1970 by the Internal Revenue Service and deficiencies have been paid. vestment gains (12) "One-Bank Holding Company" Status Deferred tax expense: The Company is a bank holding company under On equity in un- Federal legislation enacted in 1970. It has filed with the ings of Blue distributed earn- Federal Reserve Board an irrevocable election to divest of its holdings in The Illinois National Bank & Trust On accreted dis- Chip Stamps 100,000 100,000 Co. of Rockford prior to January 1, 1981. No determina- Credit for tax count on bonds 170,000 170,000 tion has been made as to how it will effect such di- vestiture, and so long as the Company controls the in deferred in- effect of reduction bank it is subject to the restrictions imposed upon it by the Bank Holding Company Act. acquisition costs surance premium Total income (186,716) (186,716) (13) "Savings and Loan Holding Company" Status tax expense $3,282,651 $120,021 $94,043 $3,496,715 The Company, as a result of its investment in Blue Chip Stamps which in turn beneficially owns a signifi- an effective rate of 21.4% on income before taxes, which Total income tax expense of $3,496,715 amounted to cant interest in a federally insured savings and loan association, is a savings and loan holding company is less than the amount of $7,851,436 computed by under the Savings and Loan Holding Company Amend- income before taxes. The reasons for this difference applying the U. S. Federal income tax rate of 48% to restrictions and regulatory requirements imposed upon ments of 1967. As such, the Company is subject to the for 1973 were as follows: it by the Savings and Loan Holding Company Act. 13

[PAGE 16]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (14) Proposed Merger Diversified. Consummation of the merger is subject its Board of Directors had approved for submission to The Company, on March 15, 1974 announced that to a number of conditions, including the approval of certain regulatory agencies and a favorable two-thirds the shareholders a proposal to merge Diversified Retail- stockholders' vote on the part of each corporation. ing Company, Inc. ("Diversified) into Berkshire Additional shares of the Company's stock are proposed Hathaway Inc. Diversified is engaged in the retail to be issued in the transactions, and if the merger is owns 16.2% of the outstanding shares of Blue Chip apparel and reinsurance businesses, additionally, it consummated on the basis proposed, the shares of the Stamps; Warren E. Buffett is the largest stockholder of proximately 85,000 shares. Company's stock outstanding will increase by ap- 14

[PAGE 17]

Berkshire Hathaway Inc. INSURANCE GROUP Financial Statements 1973 and 1972 15

[PAGE 18]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF ASSETS AND LIABILITIES December 31, 1973 and 1972 ASSETS 1973 1972 Bonds, at amortized cost (note 2) . Investments in stocks of unaffiliated companies, at cost (note 3): $ 74,474,461 $ 88,148,480 Common stocks Preferred stocks 49,756,778 2,298,348 2,942,252 17,411,780 52,055,126 20,354,032 Investment in Blue Chip Stamps (note 4) Real estate, furniture and equipment (note 7) 13,717,274 Cash and bank deposits 1,605,172 11,287,396 Reinsurance recoverable on loss payments Agents' balances and premiums in course of collection 1,465,359 1,674,114 6,891,777 6,892,288 3,044,367 Investment income due and accrued 498,924 Amounts due from sale of securities 1,409,869 277,741 Other assets. 107,765 1,629,176 Deferred acquisition costs 373,525 5,240,000 5,624,000 552,855 $157,839,252 $139,484,449 LIABILITIES, CAPITAL STOCK AND SURPLUS Unearned premiums Losses and loss adjustment expenses $ 61,675,768 $ 60,275,018 Funds held under reinsurance treaties 21,281,980 1,318,205 23,839,397 Contingent commissions 288,332 957,845 Taxes, licenses and fees Other expenses 149,973 369,152 478,036 567,914 210,833 Federal income taxes: Agents' and policyholders deposits 471,728 540,742 Current. Deferred 442,302 3,297,368 3,141,149 Other liabilities Amounts due for purchase of securities 273,633 459,609 3,214,084 674,123 112,901 90,136,934 93,903,158 Capital stock and surplus (note C): Common stock of National Indemnity Company of $10 par value. At at December 31, 1972, authorized 500,000 shares, issued 400,000 shares December 31, 1973, authorized 750,000 shares, issued 550,000 shares; Common stock of National Fire & Marine Insurance Company of $100 5,500,000 4,000,000 par value. Authorized 50,000 shares; issued 25,000 shares . Paid-in surplus 2,500,000 2,500,000 Unassigned surplus (note 10) 20,601,250 39,101,068 29,230,041 9,851,250 Total capital stock and surplus 67,702,318 $157,839,252 45,581,291 $139,484,449 See accompanying notes to financial statements. 16

[PAGE 19]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF INCOME AND REALIZED INVESTMENT GAINS Years ended December 31, 1973 and 1972 Underwriting income: 1973 1972 Net premiums written $ 50,371,841 Decrease in unearned premiums $ 57,950,178 Premiums earned 2,557,416 1,676,872 52,929,257 59,627,050 Losses and loss expenses incurred 32,835,798 36,987,030 20,093,459 22,640,020 Underwriting expenses: Commissions and brokerage 11,033,458 Salaries and other compensation 12,305,064 2,323,863 2,125,645 Taxes, licenses and fees 1,060,329 1,136,177 Other underwriting expenses Decrease in deferred acquisition costs 1,972,517 384,000 1,641,330 1,147,656 16,774,167 18,355,872 Net underwriting gain 3,319,292 4,284,148 Investment income: Interest on bonds 5,621,743 5,899,570 Dividends on stock (other than from Blue Chip Stamps) Real estate income 1,688,024 718,762 287,017 310,951 7,596,784 6,929,283 Investment expenses 313,894 Net investment income 285,209 7,282,890 6,644,074 Profit from underwriting and investments 10,602,182 10,928,222 Other expense 322,287 222,283 Income before Federal income taxes, equity in earnings of Blue Chip Stamps and realized investment gains 10,279,895 10,705,939 Applicable Federal income taxes (note D) 2,346,719 Income before equity in earnings of Blue Chip Stamps and realized 2,761,347 investment gains 7,933,176 7,944,592 Equity in earnings of Blue Chip Stamps (note 4) 1,008,000 Income before realized investment gains 8,941,176 111,168 8,055,760 Realized investment gains, net of Federal income taxes of $401,699 in 1973; $430,344 in 1972 929,851 Net income 9,871,027 $ 928,586 8,984,346 See accompanying notes to financial statements. 17

[PAGE 20]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF PAID-IN AND UNASSIGNED SURPLUS Years ended December 31, 1973 and 1972 PAID-IN SURPLUS 1973 1972 Beginning of year $ 9,851,250 $ 7,851,250 Contribution from parent 9,750,000 1,500,000 Excess of proceeds over par value of capital stock issued 1,000,000 500,000 End of year $ 20,601,250 9,851,250 UNASSIGNED SURPLUS Beginning of year $ 29,230,041 Net income $ 21,391,886 9,871,027 8,984,346 Adjustment in 1972, required as a result of change in accounting method - from reflecting investment in stocks at market to reflecting such invest- ments at cost. (1,146,191) End of year $ 39,101,068 $ 29,230,041 See accompanying notes to financial statements. 18

[PAGE 21]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 1973 and 1972 Funds provided: 1973 1972 From operations: Net income 9,871,027 8,984,346 Charges (credits) to income not requiring (providing) funds: Equity in undistributed earnings of Blue Chip Stamps (900,000) Accretion of discount on bonds (481,767) (538,715) Depreciation 128,689 109,296 Increase in unpaid losses and loss expense 1,400,750 7,284,393 Decrease in unearned premiums (2,557,417) (1,676,871) Decrease in deferred acquisition costs 384,000 1,147,656 (Decrease) increase in liability for income taxes (2,615,563) 2,083,559 Other, net 76,206 (438,181) (4,565,102) 7,971,137 Funds provided from operations 5,305,925 16,955,483 Additional capital paid in by shareholders . 12,250,000 2,500,000 Decrease in cash 1,579,008 1,518,710 $ 19,134,933 20,974,193 Funds used: Net purchase (sale) of investments: Bonds (14,155,786) 4,921,043 Preferred stocks . (643,904) 1,959,005 Common stocks of unaffiliated companies 32,344,998 6,515,454 Common stock of Blue Chip Stamps • 1,529,878 7,159,171 19,075,186 20,554,673 Purchase of real estate, furniture and equipment • 59,747 419,520 19,134,933 20,974,193 See accompanying notes to financial statements. 19

[PAGE 22]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS December 31, 1973 and 1972 (A) Note References Current Federal income tax ex- 1973 1972 Numerical note references are to Notes to Consoli- dated Financial Statements of Berkshire Hatha- Earnings before income taxes, pense relating to: way Inc. and Consolidated Subsidiaries which equity in earnings of Blue include the summary of significant accounting gains Chip Stamps and realized policies and practices. Equity in earnings of Blue Chip $2,363,435 $2,816,437 Realized investment gains Stamps 16,000 (B) Basis of Presentation Deferred Federal income tax The financial statements of Berkshire Hathaway pense (credit) relating to: ex- 401,699 430,344 Inc. — Insurance Group include the accounts of Equity in undistributed ings of Blue Chip Stamps earn- wholly-owned subsidiaries of Berkshire Hatha- Credit for tax effect of reduction Accreted discount on bonds 100,000 170,000 way Inc. which are engaged in fire and casualty 494,368 insurance underwriting. The statements are pre- in deferred acquisition costs. $2,864,418 (186,716) $3.191,691 (549,458) sented on a combined basis with significant intercompany transactions and balances eli- Total Federal income tax expense of $2,864,418 for minated, and in accordance with generally 1973 and $3,191,691 for 1972 amounted to effec- differ in some respects from principles pre- accepted accounting principles (GAAP) which tive rates of 22.5% and 26.2% of income before taxes in those respective years. The tax expense authorities in accordance with which the com- scribed or permitted by insurance regulatory is less than that computed by applying the U.S. Federal income tax rate of 48% to income before panies maintain their records. follows: taxes; the reasons for the difference were as (C) Stockholders' Equity Amount 1973 1972 The following additional common stock was issued Tax expense at Rate Amount Rate during the two years ended December 31, 1973. Increase statutory rate tion) in income (reduc- $6,113,014 48.0% $5,844,498 48.0% National Indemnity Company, $10 par value common stock: March 1973 — 150,000 shares for $11,250,000 taxes from: resulting National Fire & Marine Insurance Company, Tax-exempt in- $100 par value common stock: 85% dividends terest (2,304,000) (18.1) (2,410,000) (19.8) July 1972 — 5,000 shares for $1,000,000 relating to: received credit Surplus is restricted for dividend purposes by the insurance departments of the states in which the Dividends re- unaffiliated ceived from companies do business. Equity in earn- companies (542,000) (4.3) (233,000) (1.9) (D) Federal Income Taxes ings of Blue Federal income tax expense is made up of the Miscellaneous . Chip Stamps (655,000) 252,404 (5.1) $2,864,418 22.5% 2.0 $3,191,691 (9,807) 26.2% (1) following: 20

[PAGE 23]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford Financial Statements 1973 and 1972 21

[PAGE 24]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1973 and 1972 ASSETS Cash and due from banks . 1973 1972 Investment securities (note 2): $ 26,683,653 $ 22,111,475 United States Government obligations 11,354,830 Obligations of states and political subdivisions 10,614,548 Other securities 47,712,563 50,162,736 Loans (note 3) 3,358,350 7,778,900 Bank premises and equipment, at cost less accumulated depreciation (note 4) 66,426,338 59,618,025 Accrued interest receivable and other assets 1,116,504 1,360,892 1,752,096 1,750,315 $158,404,334 $153,396,891 LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits Time deposits $ 55,716,465 $ 55,129,900 81,450,028 Total deposits 77,558,396 137,166,493 132,688,296 Accrued taxes and other liabilities (note 5) … Total liabilities 835,154 886,645 Allowance for possible loan losses (note 6) 138,001,647 133,574,941 1,163,658 Stockholders' 1,024,601 Common stock, $20 par value. Authorized and issued 250,000 shares 5,000,000 5,000,000 Undivided profits. 5,000,000 5,000,000 Reserve for contingencies 8,238,029 7,796,349 Total stockholders' equity. 1,001,000 19,239,029 1,001,000 18,797,349 $158,404,334 $153,396,891 See accompanying notes to consolidated financial statements of Bank Subsidiary. 22

[PAGE 25]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1973 and 1972 1973 1972 Operating income: Interest and fees on loans Income on Federal funds sold .. 5,316,152 4,134,013 236,853 109,905 Interest and dividends on: United States Government obligations 632,176 598,308 Obligations of states and political subdivisions 2,795,721 2,677,138 Other securities 342,642 524,229 Trust income 450,529 385,389 Service charges on deposit accounts 129,500 127,258 Other operating income 499,862 411,413 Total operating income 10,403,435 8,967,653 Operating expenses: Salaries 1,503,374 1,366,702 Employee benefits (note 7) 262,878 238,618 Interest on deposits 4,295,303 3,418,746 Interest on borrowed money 55,303 3,137 Furniture and equipment expense (note 4) Occupancy expense, net (note 4) • 417,739 314,221 252,709 264,366 Provision for possible loan losses (note 6) • 16,100 36,900 Other expense 766,862 644,882 Total operating expenses 7,570,268 6,287,572 Income before income taxes, securities gains and extraordinary item 2,833,167 2,680,081 Applicable income taxes (note 5) 61,136 (354) Income before securities gains and extraordinary item 2,772,031 2,680,435 Securities gains, net of related taxes of $33,939 in 1973 and $72,351 in 1972 33,477 83,715 Income before extraordinary item. 2,805,508 2,764,150 Gain on sale of real estate, net of related taxes of $19,305 42,717 Net income 2,848,225 $ 2,764,150 Income per share based on 250,000 shares: Income before securities gains and extraordinary item $11.09 $10.72 Securities gains .13 .34 Extraordinary item .17 Net income .. • $11.39 $11.06 See accompanying notes to consolidated financial statements of Bank Subsidiary. 23

[PAGE 26]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1973 and 1972 Common Reserve stock Surplus Undivided profits contingencies for Balance, January 1, 1972 Add: $5,000,000 $5,000,000 S7,503,803 $1,001,000 Net income - - 2,764,150 Transfer to allowance for possible loan Cash dividends — $9.60 per share - - (2,400,000) - losses, net of tax of $66,095 (note 6) (71,604) Balance, December 31, 1972 Add: 5,000,000 5,000,000 7,796,349 1,001,000 Less: Net income 2,848,225 Transfer to allowance for possible loan Cash dividends — $9.20 per share. - (2,300,000) - losses, net of tax of $4,440 (note 6) (106,545) Balance, December 31, 1973 $5,000,000 $5,000,000 $8,238,029 $1,001,000 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 1973 and 1972 1973 1972 Funds provided: Increase (decrease) in: Stockholders' equity: Cash dividends Net income 2,848,225 Other, net. (2,300,000) $ 2,764,150 (106,545) (2,400,000) Net change in stockholders' equity (71,604) Deposits 441,680 292,546 Other, net 4,478,197 454,209 16,840,043 Total . . $ 5,374,086 493,308 $ 17,625,897 Funds used: Invested in earning assets: Investment securities Loans. 6.825.484 Direct lease equipment ... (6,130,441) 5,503,742 7,173,845 195,009 Increase in cash and due from banks Additions to bank premises and equipment 695,043 12,872,596 53,592 Other, net . . 4,572,178 49,186 53,273 4,278,789 5,374,086 425,326 17,625,897 See accompanying notes to consolidated financial statements of Bank Subsidiary. 24

[PAGE 27]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1973 and 1972 (1) Significant Accounting Policies The accounting policies of The Illinois National 1972, respectively, were pledged to secure public Bank & Trust Co. of Rockford (a subsidiary of Berk- deposits and for other purposes. shire Hathaway Inc.) and its wholly-owned subsidiary, (3) Loans Brown Building Corporation, conform to generally Loans have been reduced by unearned discount of accepted accounting principles and to general practice $2,786,609 and $2,226,579 on December 31, 1973 and cription of the more significant of the policies: within the banking industry. The following is a des- 1972, respectively. (4) Bank Premises and Equipment (a) Consolidation Bank premises and equipment are recorded at The consolidated financial statements include those cost less accumulated depreciation of $1,777,091 and of the Bank and its wholly-owned All significant intercompany transactions are subsidiary. $1,676,936 at December 31, 1973 and 1972, respectively. Depreciation expense totaled $188,552 for 1973 and eliminated in consolidation. $210,840 for 1972. (b) Investment Securities (5) Accrued Taxes and Other Liabilities Investment securities are stated at cost, adjusted Accrued taxes and other liabilities in the accom- for amortization of premium. and $137,824 of deferred taxes at December 31, 1973 panying consolidated balance sheets include $139,572 (c) Installment Loans Installment loans are generally made on a discount and 1972, respectively. Such deferred taxes relate basis. Unearned discount is taken into income principally to timing differences arising from reporting over the terms of the respective loans. taxable income on the cash basis. In addition, deferred (d) Bank Premises and Equipment taxes are included in the allowance for possible loan Bank premises and equipment are stated at cost losses. Taxes applicable to net income were as follows: less estimated useful life of each asset. Depreciation accumulated depreciation based on the Tax provision applicable to income 1973 1972 is computed on the straight-line method for before securities gains and extraor- method building and automobiles, and on an accelerated Tax provision applicable to dinary item gains securities $ 61,136 $ (354) for improvements, equipment, and drive-in and parking facilities. Tax provision applicable to gain on sale 33,939 72,351 (e) Federal Income Taxes of real estate $114,380 19,305 Taxable income is determined using the cash basis $ 71,997 accounting whereas the accrual method of accounting is used in preparation of financial are as follows: The components of consolidated income tax expense statements. Deferred taxes are provided in Taxes currently payable: 1973 1972 The Bank and its subsidiary join in the filing of a recognition of timing differences. Federal State $ 20,364 112.632 92,268 $ 73,682 consolidated Federal income tax return with Berkshire Hathaway Inc., the parent company Deferred income taxes: 73.682 of the Bank. Federal State (38,208) 39,956 (1,685) (2) Investment Securities The approximate market value of investment $114,380 1,748 $ 71,997 (1,685 $66,930,000 and $72,990,000, respectively. securities at December 31, 1973 and 1972 was National banks in Illinois were not subject to state Investment securities with a book value of income taxes until 1973. Accordingly, no current or $9,530,567 and $10,038,639 at December 31, 1973 and deferred state taxes were provided for 1972. 25

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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 income taxes and the tax effect of each were as follows: The sources of timing differences resulting in deferred (6) Allowance for Possible Loan Losses to the allowance for possible loan losses in accordance The Bank follows the policy of providing additions Net increase in accrued income taken 1973 1972 accrual basis for books on cash basis on tax return and on with maximum amounts allowed under applicable Net (increase) decrease in accrued ex- $101,402 $ 45,781 Federal tax laws. For financial reporting purposes, the the Bank's loan loss experience over the last five years. provision charged to operating expenses is based upon return and on accrual basis for books penses taken on cash basis on tax Deduction for state taxes taken on the (74,557) 383 losses for the years ended December 31, 1973 and 1972 Transactions in the allowance for possible loan crual basis for books cash basis on tax return and on ac- Final installment of amortization of (25,097) were as follows: 1973 1972 accrual conversion unearned discount resulting from Balance at beginning of year. $1,024,601 $ 854,671 (47,849) Recoveries on loans previously $ 1,748 $ 1,685) charged off 29,143 Additions charged to: 29,259 rate of 4.0%) in 1973, and $71,997 (an effective rate of Total tax expense amounted to $114,380 (an effective Operating expenses 16,100 2.7%) in 1972, a total less than $1,368,778 and Deferred income taxes Undivided profits 106,545 36,900 $1,295,255 for 1973 and 1972, respectively, computed 4,440 66,095 71,604 by applying the U. S. Federal income tax rate of 48% to income before tax. The reasons for these differences Less loans charged off 1,180,829 17,171 1,058,529 Balance at end of year $1,163,658 $1,024,601 33,928 are as follows: 1973 Percent 1972 of pretax of pretax Percent to absorb possible loan losses was $734,495 at De- The portion of the allowance which was available Tax expense at Amount income Amount income cember 31, 1973 and $706,422 at December 31, 1972. Increase statutory rate tion) in taxes re- (reduc- $1,368,778 48.0% $1,295,255 48.0% (7) Pension and Profit-Sharing Plan The Bank has a noncontributory pension plan and sulting from: Tax-exempt in- a profit-sharing plan for all officers and employees with State terest taxes, net income (1,341,946) (47.1) (1,285,026) (47.6) two full years of service. The pension contribution for 1973 was $8,406 and $6,409 for 1972. The profit- Federal income of sharing expense was $136,153 and $125,353 in 1973 and 1972, respectively. Other — net • tax benefits 68,756 expense $ Actual tax 18,792 2.4 .7 61,768 2.3 market value of the pension trust assets exceeded the As of January 1, 1973 and January 1, 1972, the 114,380 4.0% $ 71.997 2.7% actuarial values of the vested benefits of the participants. 26