1975 年伯克希尔完整年报

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26 Prem Jain. BERKSHIRE HATHAWAY INC. PURDUF UNIVERSITY NOV 6 1978 KRANINcHi LIBRARY 1975 ANNUAL REPORT TO THE STOCKHOLDERS

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Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders BUSINESS OF THE COMPANY CONTENTS P'esges 2-6 Chairman's Letter 7 Accountants' Certificate Regarding Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries and Insurance Group 8-19 Financial Statements - Berkshire Hathaway Inc. and Consolidated Subsidiaries 20-26 Financial Statements - Berkshire Hathaway Inc. - Insurance Group 27 Accountants' Certificate Regarding Financial Statements of The Illinois National Bank & Trust Co. of Rockford 28-34 Financial Statements - The Illinois National Bank & Trust Co. of Rockford 35 Lines of Business 36 Five Year Summary of Operations 37-41 Management's Discussion and Analysis of the Summary of Operations 42 Directors and Executive Officers 42 Common Stock Prices PURDUE UNIVERSITY NOV 6 1978 KRANNERT LIBRARY 1 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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We have great confidence in the ability of Ken Chace and his team to maximize our strengths in textiles. Therefore, we continue to look for ways to increase further our scale of operation while avoiding major capital investment in new fixed assets which we consider unwise, considering the relatively low returns historically earned on large scale investment in new textile equipment. Insurance Underwriting The property and casualty insurance industry had its worst year in history during 1975. We did our share - unfortunately, even somewhat more. Really disastrous results were concentrated lines. in auto and long-tail (contracts where settlement of loss usually occurs long after the loss event) Economic inflation, with the increase in cost of repairing humans and property far outstrip- levels established in a different cost environment. "Social" inflation caused the liability concept to ping the general rate of inflation, produced ultimate loss costs which soared beyond premium be expanded continuously, far beyond limits contemplated when rates were established - in effect, adding coverage beyond what was paid for. Such social inflation increased significantly both the propensity to sue and the possibility of collecting mammoth jury awards for events not previously considered statistically significant in the establishment of rates. Furthermore, losses to policyholders which otherwise would result from mushrooming insolvencies of companies in- adequately reacting to these problems are divided through Guaranty Funds among remaining solvent insurers. These trends will continue, and should moderate any optimism which otherwise might be justified by the sharply increased rates now taking effect. Berkshire Hathaway's insurance subsidiaries have a disproportionate concentration of busi- ness in precisely the lines which produced the worst underwriting results in 1975. Such lines produce unusually high investment income and, therefore, have been particularly attractive to us under previous underwriting conditions. However, our "mix" has been very disadvantageous part of the insurance spectrum during the inflationary years ahead. during the past two years and it well may be that we will remain positioned in the more difficult The only segment to show improved results for us during 1975 was the "home state" operation, which has made continuous progress under the leadership of John Ringwalt. Although still operating at a significant underwriting loss, the combined ratio improved from 1974. Adjusted for excess costs attributable to operations still in the start-up phase, underwriting results are satisfac- tory. Texas United Insurance Company, a major problem a few years ago, has made outstanding Texas United was the winner of the "Chairman's Cup" for achievement of the lowest loss ratio progress since George Billings has assumed command. With an almost totally new agency force, among the home state companies. Cornhusker Casualty Company, oldest and largest of the home state companies, continues its outstanding operation with major gains in premium volume and a combined ratio slightly under 100. Substantial premium growth is expected at the home state of a low combined ratio. operation during 1976; the measurement of success, however, will continue to be the achievement Our traditional business at National Indemnity Company, representing well over half of our insurance volume, had an extraordinarily bad underwriting year in 1975. Although rates were increased frequently and significantly, they continually lagged loss experience throughout the year. Several special programs instituted in the early 1970s have caused significant losses, as well as a heavy drain on managerial time and energies. Present indications are that premium volume Will show a major increase in 1976, and we hope that underwriting results will improve. Reinsurance suffered the same problems as our direct business during 1975. The same reme- dial efforts were attempted. Because reinsurance contract settlements lag those of direct business, 3 Berkshire Hathaway Inc. 1875 Annual Report to the Stockholders

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Berkshire Hathaway Inc. To the Stockholders of Berkshire Hathaway Inc.: Last year, when discussing the prospects for 1975, we stated "the outlook for 1975 is not encouraging". This forecast proved to be distressingly accurate. Our operating earnings for 1975 were $6,713,592, or $6.85 per share, producing a return on beginning shareholder's equity of 7.6%. This is the lowest return on equity experienced since 1967. Furthermore, as explained later in this letter, a large segment of these earnings resulted from Federal income tax refunds which will not be available to assist performance in 1976. On balance, however, current trends indicate a somewhat brighter 1976. Operations and prospects will be discussed in greater detail below, under specific industry titles. Our expectation is that significantly better results in textiles, earnings added from recent acquisitions, an increase in equity in earnings of Blue Chip Stamps resulting from an enlarged ownership interest, and at least a modest improvement in insurance underwriting results will more than offset other possible negatives to produce greater earnings in 1976. The major variable - and by far the most difficult to predict with any feeling of confidence — is the insurance underwriting result. Present very tenta- tive indications are that underwriting improvement is in prospect. If such improvement is moder- ate, our overall gain in earnings in 1976 likewise will prove moderate. More significant underwrit- ing improvement could give us a major gain in earnings. Textile Operations During the first half of 1975 sales of textile products were extremely depressed, resulting in much as 53% from a year earlier. major production curtailments. Operations ran at a significant loss, with employment down as In contrast with previous cyclical slumps, however, most textile producers quickly reduced production to match incoming orders, thus preventing massive industry-wide accumulation of inventories. Such cutbacks caused quite prompt reflection at the mill operating level when demand revived at retail. As a result, beginning about midyear business rebounded at a fairly rapid rate. This "V" shaped textile depression, while one of the sharpest on record, also became one of the shortest ones in our experience. The fourth quarter produced an excellent profit for our textile division, bringing results for the year into the black. On April 28, 1975 we acquired Waumbe Mills Incorporated and Waumbec Dyeing and Finishing Co., Inc. located in Manchester, New Hampshire. These companies have long sold woven goods into the drapery and apparel trade. Such drapery materials complement and extend the line already marketed through the Home Fabrics Division of Berkshire Hathaway. In the period prior to our acquisition, the company had run at a very substantial loss, with only about 55% of looms in operation and the finishing plant operating at about 50% of capacity. Losses continued on a reduced basis for a few months after acquisition. Outstanding efforts by our manufacturing, administrative and sales people now have produced major improvements which, coupled with the general revival in textiles, have moved Waumbec into a significant profit position. We expect a good level of profits from textiles in 1976. Continued progress is being made in the movement of Waumbec goods into areas of traditional marketing strength of Berkshire Hathaway, productivity should improve in both the weaving and finishing areas at Manchester, and textile demand continues firm at decent prices. 2 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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We have great confidence in the ability of Ken Chace and his team to maximize our strengths in textiles. Therefore, we continue to look for ways to increase further our scale of operation while avoiding major capital investment in new fixed assets which we consider unwise, considering the relatively low returns historically earned on large scale investment in new textile equipment. Insurance Underwriting did our share - unfortunately, even somewhat more. Really disastrous results were concentrated The property and casualty insurance industry had its worst year in history during 1975. We in auto and long-tail (contracts where settlement of loss usually occurs long after the loss event) lines. Economic inflation, with the increase in cost of repairing humans and property far outstrip- ping the general rate of inflation, produced ultimate loss costs which soared beyond premium levels established in a different cost environment. "Social" inflation caused the liability concept to be expanded continuously, far beyond limits contemplated when rates were established - in effect, adding coverage beyond what was paid for. Such social inflation increased significantly both the propensity to sue and the possibility of collecting mammoth jury awards for events not previously considered statistically significant in the establishment of rates. Furthermore, losses to policyholders which otherwise would result from mushrooming insolvencies of companies in- adequately reacting to these problems are divided through Guaranty Funds among remaining solvent insurers. These trends will continue, and should moderate any optimism which otherwise might be justified by the sharply increased rates now taking effect. Berkshire Hathaway's insurance subsidiaries have a disproportionate concentration of busi- ness in precisely the lines which produced the worst underwriting results in 1975. Such lines produce unusually high investment income and, therefore, have been particularly attractive to us under previous underwriting conditions. However, our "mix" has been very disadvantageous during the past two years and it well may be that we will remain positioned in the more difficult part of the insurance spectrum during the inflationary years ahead. The only segment to show improved results for us during 1975 was the "home state" operation, which has made continuous progress under the leadership of John Ringwalt. Although still progress since George Billings has assumed command. With an almost totally new agency force, Texas United was the winner of the "Chairman's Cup" for achievement of the lowest loss ratio state companies, continues its outstanding operation with major gains in premium volume and a among the home state companies. Cornhusker Casualty Company, oldest and largest of the home combined ratio slightly under 100. Substantial premium growth is expected at the home state operation during 1976; the measurement of success, however, will continue to be the achievement of a low combined ratio. Our traditional business at National Indemnity Company, representing well over half of our insurance volume, had an extraordinarily bad underwriting year in 1975. Although rates were increased frequently and significantly, they continually lagged loss experience throughout the as a heavy drain on managerial time and energies. Present indications are that premium volume year. Several special programs instituted in the early 1970s have caused significant losses, as well will show a major increase in 1976, and we hope that underwriting results will improve. Reinsurance suffered the same problems as our direct business during 1975. The same reme- dial efforts were attempted. Because reinsurance contract settlements lag those of direct business, 3 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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it well may be that any upturn in results from our direct insurance business will precede those 01 the reinsurance segment. At our Home and Automobile Insurance Company subsidiary, now writing auto business only in the Cook County area of Illinois, experience continued very bad in 1975 resulting in i management change in October. John Seward was made President at that time, and has energetic- ally and imaginatively implemented a completely revamped underwriting approach. Overall, our insurance operation will produce a substantial gain in premium volume during 1976. Much of this will reflect increased rates rather than more policies. Under normal circum- stances such a gain in volume would be welcome, but our emotions are mixed at present. Underwriting experience should improve - and we expect it to - but our confidence level is not high. While our efforts will be devoted to obtaining a combined ratio below 100, it is unlikely to be attained during 1976. Insurance Investments Gains in investment income were moderate during 1975 because premium volume remainer flat and underwriting losses reduced funds available for investment. Invested assets, measured ai cost at yearend, were close to identical with the level at the beginning of the year. At the end of 1974 the net unrealized loss in the stock section of our portfolio amounted tu about $17 million, but we expressed the opinion, nevertheless, that this portfolio overall repre• sented good value at its carrying value of cost. During 1975 a net capital loss of $2,888,000 before tax credits was realized, but our present expectation is that 1976 will be a year of realized capital gain On March 31, 1976 our net unrealized gains applicable to equities amounted to about $15 million Our equity investments are heavily concentrated in a few companies which are selected based on favorable economic characteristics, competent and honest management, and a purchase price attractive when measured against the yardstick of value to a private owner. When such criteria are maintained, our intention is to hold for a long time; indeed, our largest equity investment is 467,150 shares of Washington Post "B" stock with a cost of $10.6 million which we expect to hold permanently. With this approach, stock market fluctuations are of little importance to us - except as they may provide buying opportunities - but business performance is of major importance. On this score we have been delighted with the progress made by practically all of the companies in which we now have significant investments. We have continued to maintain a strong liquid position in our insurance companies. In last year's annual report we explained how variations of 1/10 of 1% in interest rates result in millior dollar swings in market value of our bonds. We consider such market fluctuation of minor importance as our liquidity and general financial strength make it highly improbable that bond: will have to be sold at times other than those of our choice. Banking It is difficult to find adjectives to describe the performance of Eugene Abegg, Chief Executivi of Illinois National Bank and Trust of Rockford, Illinois, our banking subsidiary. In a year when many banking operations experienced major troubles, Illinois Nationa continued its outstanding record. Against average loans of about $65 million, net loan losses wer $24,000, or .04%. Unusually high liquidity is maintained with obligations of the U. S. Governmen and its agencies, all due within one year, at yearend amounting to about 75% of demand deposits Maximum rates of interest are paid on all consumer savings instruments which make up more thar 4 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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hulf of the deposit base. Yet, despite the maintenance of premier liquidity and the avoidance of ""tretching" for high yield loans, the Illinois National continues as about the most profitable bank uf its size, or larger, in the country. In 1975 the thirty largest banks in the United States earned an average of .5% on total ssets. The Illinois National earned about four times that much. These same thirty largest banks carried down 7% of operating revenues to net income. Without counting any tax benefits from consolidation, Illinois National carried down 27%. Gene Abegg opened the doors of the Illinois National Bank in 1931 with paid-in capital of $250,000. In 1932, its first full year of operation, it earned $8,782. No additional capital has been paid in, and we recommend reading its financial statements on pages 28-34 to see what a truly out- standing manager has built in 44 years at the helm. Under the present interest rate structure, it is expected that earnings of the Bank will be off somewhat during 1976 but still will remain at a highly satisfactory level. Blue Chip Stamps During 1975 our holdings of Blue Chip Stamps remained at 25½% of that company's outstand- ing shares. However, early in 1976 our holdings were increased to 31½%. We expect some increase in our equity in Blue Chip's earnings in 1976 because of this increased ownership. The stamp business continues its precipitous decline with volume in the year ended February 28, 1976 amounting to only one-sixth that of the peak year ended February 28, 1970. Don Koeppel und Bill Ramsey have done an extraordinary job of cost-cutting, which has served to moderate operating problems resulting from this evaporation of business. In addition, the acquisition of See's Candies in 1972 has proven a real winner. Chuck Huggins's management has been outstand- ing, and profits have moved up dramatically during the past several years. Shareholders of Berkshire Hathaway Inc. desiring the current annual report of Blue Chip Stamps should write Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040. Federal Income Tax Implications In reading our earnings statement you will notice a significant amount of Federal income taxes paid in earlier years are now recoverable because of the net operating loss, as computed for tax purposes, sustained in 1975. Such loss results from the exclusion from income of 100% of interest from state and local issues, and 85% of dividends from domestic corporations. We have exhausted our reservoir of available tax recoveries and, therefore, a repeat of our overall operating perfor- mance in 1976 would produce much smaller net earnings. While we do not expect this result, it is important that you are aware of the absence of this cushion in the event that operating losses, as calculated for Federal tax purposes, should continue. Acquisition of K& W Products In addition to the 1975 Waumbec acquisition, we acquired for cash and notes on January 6, 19/6, 100% of the assets ot K & W Products, including its insurance subsidiaries. The insurance operations are minor in scope, representing business already associated with National Indemnity Company. K & W Products manufactures specialty automotive chemicals for use in automobile maintenance, such as radiator and block sealants, gasket compounds and fuel and oil additives. The company has extensive trademark or trade name protection for its products, which it man- ufactures at plants in California and Indiana. Although relatively small, with sales of a little over 5 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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$2 million, it consistently has generated favorable earnings. Positioned as we now are with respect to income taxes, the addition of a solid source of taxable income is particularly welcome. General Review Your present management assumed responsibility at Berkshire Hathaway in May, 1965. At the end of the prior fiscal year (September, 1964) the net worth of the Company was $22.1 million, and 1,137,778 common shares were outstanding, with a resulting book value of $19.46 per share. Ten years earlier, Berkshire Hathaway's net worth had been $53.4 million. Dividends and stock repurchases accounted for over $21 million of the decline in company net worth, but aggregate net losses of $9.8 million had been incurred on sales of $595 million during the decade. In 1965, two New England textile mills were the company's only sources of earning power and, before Ken Chace assumed responsibility for the operation, textile earnings had been erratic and, cumulatively, something less than zero subsequent to the merger of Berkshire Fine Spinning and Hathaway Manufacturing. Since 1964, net worth has been built to $92.9 million, or $94.92 per share. We have acquired total, or virtually total ownership of six businesses through negotiated pur- chases for cash (or cash and notes) from private owners, started four others, purchased a 312% interest in a large affiliated enterprise and reduced the number of outstanding shares of Berkshire Hathaway to 979,569. Overall, equity per share has compounded at an annual rate of slightly over 15%. sified sources of earnings. Our objective is a conservatively financed and highly liquid business - While 1975 was a major disappointment, efforts will continue to develop growing and diver- possessing extra margins of balance sheet strength consistent with the fiduciary obligations on equity capital exceeding that of American industry as a whole. inherent in the banking and insurance industries - which will produce a long term rate of return Warren E. Buffett, Chairman : 6 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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- PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS KIEWIT PLAZA OMAHA, NEBRASRA 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 January 3, 1976 and December 28, 1974, the balance sheets of the Berkshire Hathaway Inc. - Insurance Group as of December 31, 1975 and 1974, and the related consolidated statements of earnings and retained earnings and changes in financial position of Berkshire Hathaway Inc. for the 53 weeks ended January 3, 1976 and the 32 weeks ended December 28, 1974 and the statements of income and unassigned nurplus and changes in financial position of the Berkshire Hathaway Inc. - Insurance Group for the years ended December 31, 1975 and 1974. Except as stated in the following paragraph, our examination was 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. Blue Chip Stamps for the nine months ended November in part IOI the amount of equity in earnings of Blue Chip Stamps recorded by Berkshire Hathaway Inc. Under the terms of our engagement, we did not examine evidence in support of the unaudited earnings and accordingly do Clip Stamps for 1975. not express an opinion as to the equity of $2, 002, 652 in earnings of Blue lave been determined to be necessary had the earnings of Blue Chip Stamps In our opinion, except for the effect of such adjustments, if any, as might been audited for the nine months ended November 29, 1975, the aforementioned consolidated financial statements present fairly the financial position of berkshire Hathaway Inc. and consolidated subsidiaries at January 3, 1976 and December 20, 1914 and the Berkshire Hathaway Inc. - Insurance Group at December 31, 1975 and 1974 and the results of their operations and the changes In their financial position for the respective years then ended in accordance with generally accepted accounting principles applied on a consistent basis. Peat Marvak, Mitill Co. March 26, 1976 7 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Cash ASSETS Jan. 3, 1976 Dec. 28,1974 Investments, other than affiliates (notes 3 and 4): $ 6,044,526 $ 4,230,559 U. S. Treasury Bills and other short-term obligations, at cost which approx- Bonds, at amortized cost imates market 16,175,265 Common stocks of unaffiliated companies, at cost Preferred stocks, at cost 78,760,945 71,530,651 11,108,163 2,558,275 2,855,185 Total investments, other than affiliates 39,341,135 Investments in affiliates (notes 5 and 6): • • . 136,835,620 50,669,865 136,163,864 Common stock of Blue Chip Stamps Unconsolidated bank subsidiary • . ... 18,777,479 Other unconsolidated subsidiaries 23,424,329 16,923,998 Total investments in affiliates • • 1,120,333 22,416,879 Recoverable Federal income taxes • • 43.322,141 1,187,333 Inventories (note 8) Accounts receivable from customers, agents and others, net (note 7) 19,710,105 4,400,000 40.528,210 17,891,227 2,800,734 Real estate, equipment, furniture and leasehold improvements, at cost less 8,135,615 5,999,552 Deferred insurance premium acquisition costs allowance for depreciation and amortization (note 9) 2,950,000 3,722,242 Other assets : 4,400,000 3,913,473 $225,741,417 621,168 285,954 $216.213.573 Losses and loss adjustment expenses LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 73,033,492 Funds held under reinsurance treaties 22,344,290 $ 72,761,097 Amounts due for purchase of securities 2,939,462 21,704,867 Accounts payable and accrued expenses 679,990 2,857,284 Income taxes: 5,790,070 4,435,325 294,101 Deferred Current 178,546 74% debentures due 1987 (note 10) 2,518,786 3,043,800 163,809 Sundry installment promissory notes (note 11) 505,820 8% senior notes due 1993 (note 12) 3,602,480 1,274,437 555,780 Excess of net assets of consolidated subsidiaries over cost of investment 20,000,000 Other liabilities • • 579,070 20,000,000 879,219 345,376 579,070 Stockholders' equity: 132,851,225 128,014,946 Common stock of $5 par value. Authorized 1,100,000 shares; issued and Retained earnings (note 12) outstanding 979,569 shares ..... ... .. :: 4,897,845 Total stockholders' equity Commitment and contingent liability (notes 14 and 17) •... 87,992,347 4,897,845 92,890,192 88,198.627 83,300,782 $225,741,417 $216.213,573 See accompanying notes to consolidated financial statements. 8 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders -

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 3, 1976 and December 28, 1974 (1) Summary of Significant Accounting Policies and Practices (a) Basis of Presentation The accounts of Berkshire Hathaway Inc., the parent Company, are consolidated with the accounts of wholly-owned subsidiaries engaged in the textile business, and the accounts of subsidiary insurance The parent Company's investment in The Illinois National Bank & Trust Co. of Rockford is accounted for on companies (The "Insurance Group"), wholly owned by Berkshire Hathaway Inc. the equity basis. Immaterial subsidiaries are not consolidated and investments therein are carried at cost less dividends received from such subsidiaries. The accounts of the parent Company and its consolidated noninsurance subsidiaries are maintained on the basis of a fiscal year ending on the Saturday nearest to December 31, while the accounts of the Insurance the textile business. Group are maintained on the basis of the calendar year. Fiscal year 1975 comprised 53 weeks operations of (b) Investment in Securities, Other than Affiliates Investments in bonds are stated at amortized cost; investments in preferred and common stocks other than 974. The investments in equity securities are held by the Insurance Group and are stated at cost. Thes nvestments generally consist of a relatively few issues acquired with a general view to holding as long-teri However, pursuant to the dictates of Statement of Financial Accounting Standards No. 12, the Company has changed its method of accounting for these investments whereby they are reflected at the lower of cost or value exceeded cost on an aggregate basis. Any future adjustment of the carrying value will be reflected market value at December 31, 1975. There was no effect of this change at December 31, 1975 since market through a direct charge or credit to stockholders' equity. (r) Investment in Blue Chip Stamps The investment in Blue Chip Stamps ("Blue Chip") is accounted for on the equity basis. Deferred income taxes earnings will ultimately be distributed as taxable dividends. Blue Chip determines income on the basis of a are provided for with respect to undistributed earnings of Blue Chip under the assumption that such fiscal year ending on or about February 28. Berkshire Hathaway Inc. reflects its equity in the earnings of Blue Chip on the basis of that company's twelve months ending on or about November 30. (il) Insurance Premiums Insurance premiums are recognized as revenues ratably over the term of the policies. Unearned premiums are computed on the monthly pro rata basis and are stated after deduction for reinsurance placed with reinsurers in the amount of $2,885,610 at December 31, 1975 and $4,583,628 at December 31, 1974. Premium 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 pursuant to statutory insurance accounting rules, charged against income when incurred. However, for premiums are earned. (e) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses based upon (1) aggregate case basis estimates for losses reported, in respect to direct premiums written, (2) estimates of unreported losses based for reinsurance placed with reinsurers in the amount of $6,094.384 at December 31, 1975 and $5,518,385 at upon past experience, (3) estimates received relating to assumed reinsurance, and (4) deduction of amounts December 31, 1974. 11 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued These items of property (including significant betterments and renewals) are carried at cost depreciated ovi their useful lives estimated at the date of acquisition. The double-declining balance method is user !. calculate depreciation of new items of textile properties acquired after 1965; the straight-line method i applied for other items. Maintenance, repairs and renewals of a minor nature are generally charged In operations as incurred. (g) Inventories Inventories relate to the textile operations and are stated at cost, determined for the parent Company under thr last-in, first-out method at both December 31, 1975 and December 31, 1974; cost of inventories of textilr subsidiaries are determined under the first-in, first-out method. (h) Income Taxes A consolidated Federal income tax return is filed by the parent Company and its eligible subsidiaries. Thr recoverable amount reflected in the consolidated balance sheets includes the apportioned Federal 1. amounts of the companies whose accounts are consolidated. A provision for deferred taxes is made in recognition of timing differences created by the manner in which the accounting treatment of these items for income tax purposes. Insurance Group accounts for certain income and expense items for financial reporting purposes and thr Investment tax credits on qualifying property and equipment acquisitions are applied as a reduction •! income tax expense in the year realized. (2) Acquisition of Waumbec Mills Incorporated On April 28, 1975, the parent Company purchased all of the outstanding capital stock of Waumbec Mill: selling woven fabrics. A wholly-owned subsidiary of Waumbec engages at the same location in the finishing of textile Incorporated ("Waumbec"), Manchester, New Hampshire, Waumbec is engaged in manufacturing, distributing «!! fabrics. The acquisition of Waumbec has been accounted for as a purchase, and results of operations from date •! acquisition are included in the consolidated statements of earnings for 1975. notes of principal amount of $1,150,000, which bear interest at 8% per annum, were issued by the parent Company ' The cost of Waumbec to the Company, including direct acquisition cests, was $1,660,325: installment promissor partial consideration of the purchase price with the balance paid in cash. The net book value of assets less liabilities of Waumbec was in excess of the purchase price; such excess w.r: applied in accordance with the Accounting Principles Board Opinion No. 16 to eliminate the net property, plant an equipment accounts of Waumbec and its subsidiary as they existed at the purchase date. As a result of that acquisition. adjustment, no depreciation expense with respect to the acquired properties (which as to Waumbec's prior basis ! to earnings, nor will such depreciation be chargeable to future consolidated earnings. accountability amounted to $239,000 during the period of Berkshire Hathaway's ownership in 1975), has been charged the Internal Revenue Code, of approximately $2.6 million. To the extent that future tax benefits are derived from surh Waumbec and its subsidiary as of the date of acquisition had unused net operating loss carryovers, as defined bs carryovers, they will be accounted for as "negative goodwill" to be amortized into consolidated income in futur periods which will not coincide with the periods in which benefits, if any, are realized. Such benefits will arise only it Waumbec and its subsidiary have future taxable income, and then only to the extent that such income excert aggregate net losses for tax purposes, if any, of other members of the consolidated group. Management of Berkshirr Hathaway Inc. believes some tax benefits might be realized, though their effect on income in any given futur accounting period would not be material in amount. the consolidated statements of earnings on a pro forma basis would have been as follows: Had the purchase of Waumbec been consummated on the same basis as of the beginning of 1974, certain items 12 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1975 Net sales of textile products Total income items $ 35,965,000 1974 Farnings before equity in net earnings of other companies and realized investment 103,507,000 $ 45,900,000 114,780,000 Net earnings losses • . • • 608,000 Net earnings per share ... 4,039,000 3,567,000 4.12 7,372,000 7.53 (3) Bonds and Common Stocks Deposited with Others Common stocks with a cost of $2,619,268 (market value $2, 437,500) at December 31, 1975 and bonds with amortized cost of $20,911,305 and $15,294,910 at December 31, 1975 and 1974, respectively, were deposited in trust with various regulatory authorities or others. (4) Investment in Securities of Unaffiliated Companies companies at December 31, 1975 and 1974 is as follows: A summary of the aggregate cost and approximate market value of investments in securities of unaffiliated 1975 1974 Cost Bonds Market Cost Market 578,760,945 S74.487,055 $71,530,651 Equity securities: $58,907,900 Common stocks Preferred stocks •... ... 2,558,275 39,341,135 39,280,357 2,886,871 541,39.410 $42,167,228 50,669,865 2,855,185 34,802,358 1,842,817 S53,525.050 536.545.175 losses, $3,527,448. A net realized loss of $2,888,062 (before tax benefit) on the sale of securities was included in the At December 31, 1975, with respect to equity securities, gross unrealized gains were $3,795,267 and gross unrealized : determination of net income for 1975. The cost of securities sold is generally determined on a first-in, first-out basis. (5) Investment in Blue Chip Stamps the net excess of cost over equity in net assets at dates of acquisition, plus equity in undistributed earnings. Deferred The carrying value of the investment in Blue Chip Stamps ("Blue Chip") represents the cost, less amortization of taxes of $337,786 and $191,800 at December 31, 1975 and 1974, respectively, have been provided with respect to the equity in undistributed earnings assuming their ultimate distribution as a taxable dividend. The investment in Blue Chip is summarized as follows: December 31, Shares owned 1975 1974 • •• ... •• 1,325,233 1,325,233 Percentage of total outstanding shares 25.6% Cost, represented by: 25.6% Net excess cost, less amortization of $1,353,994, 1975 and $1,179,873, 1974 Underlying net asset values at dates of acquisition $13,084,112 $13,084,112 13,780,594 696,482 13,954,715 870,603 Equity in post-acquisition undistributed earnings • .... $18,777,479 4,996,885 2,969,283 $16,923,998 Amortization was $174,121 for 1975 and $384,200 for 1974. The excess of cost over equity in net assets is being amortized over eight years from the beginning of 1972. As indicated above, Berkshire Hathaway Inc. and its subsidiaries own approximately 26% of Blue Chip; these holdings plus holdings of other persons who may be considered affiliates aggregate over 50% of Blue Chip's outstanding 13 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued provides a trading stamp service to retail merchants and their customers in California and Nevada. (2) A division, Blue Blue Chip Stamps, a California corporation, and its subsidiaries are engaged in four lines of business: (1) Blue Chip Chip Incentives, on a nationwide basis, develops incentive programs for businesses and also develops, for oil companies and other large issuers of credit cards, complete merchandise packages for their credit card holders. (3) A subsidiary, See's Candy Shops, Incorporated, produces quality candy and confectionary products in fully equipped kitchens in Los Angeles and South San Francisco. The candy is sold fresh to the public in approximately 170 company-operated shops in ten western states including Hawaii. (4) A 64%-owned, unconsolidated subsidiary, Wesco is in Pasadena, and its fifteen other locations are also in Southern California. Pinancial Corporation, owns all of the outstanding stock of Mutual Savings and Loan Association. Mutual's head office The financial statements of Blue Chip as of March 1, 1975, and for the 52 weeks then ended (audited), and as of November 29, 1975 and for the 52 weeks then ended (unaudited) reflect the following: BLUE CHIP STAMPS Consolidated Balance Sheets Assets Mar. 1, 1975 ($000 omitted) Nov. 29, 1975 Marketable securities, at cost (market March 1-$59,594; November 29-$62,600). Cash 1,506 (Unaudited) Inventories 77,541 $ 2,607 Investment in Wesco Financial Corporation Property, fixtures and equipment, net 11,767 76,095 .... 8,273 13,824 Excess of cost over equity in net assets of consolidated subsidiary 26,307 8,339 Other assets 12,218 15,883 27,911 13,083 15,595 $153,495 $157,454 Stockholders' Equity Liabilities and 64% subordinated debentures due 1978 Liability for unredeemed trading stamps ::: $ 72,183 6,512 $ 70,962 Stockholders' equity Other liabilities 67,309 7,491 6,392 71,247 8,853 -... $153,495 $157,454 BLUE CHIP STAMPS Consolidated Earnings Summaries 52 weeks ($000 omitted) ended 52 weeks Mar. 1, 1975 Nov. 29, 1975 ended Merchandise promotions and incentive sales Stamp service revenues $ 25,564 (Unaudited) $ 21,502 Candy sales

• ..

11,022 Other revenues 42,907 12,804 Total revenues 9,872 47,582 ....... $ 89,365 $ 88,545 6,657 Earnings before securities gains (losses) and extraordinary credit Per share 7,508 Net earnings 1.45 7,568 Per share 1.67 8,665 1.46 9,183 1.77 14 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 18]

[PAGE 19]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued preceding presentations, Blue Chip's marketable securities would have been carried in the November 29, 1975 balance Had the provisions of statement of Financial Accounting Standards No. 12 been effective with respect to the sheet at market value which amount was, as indicated, S13,495,000 less than cost. Such amount would have been applied as a reduction of stockholders' equity of Blue Chip Stamps, and Berkshire Hathaway Inc. would have recorded its proportionate share of such reduction, or $3,455,000 as a reduction of its stockholders' equity at January 3, 1976. Of such amount, $2,580,000 would have applied as a reduction of capital and surplus of the Insurance Group as of December 31, 1975. Blue Chip financial statements for their fiscal year ended March 1, 1975 (and for certain prior years) revealed significant litigation proceedings against the Company. The Company stated with regard to certain of these proceedings that a possible result could be to "compel it to discontinue issuance of trading stamps." Additional proceedings involve substantial contingent liabilities; the accountants' opinion covering the financial statements of Blue Chip Stamps as of March 1, 1975 and for the fiscal year then ended, as well as that for certain preceding years, was given subject to the effect, if any, of the legal proceedings referred to. (6) Investments in Unconsolidated Subsidiaries The Illinois National Bank & Trust Co. of Rockford. The equity method is used in accounting for this investment. See The investment in the unconsolidated bank subsidiary represents approximately 98% of the outstanding stock of note 14 regarding divestiture of this investment. Financial statements of The Illinois National Bank & Trust Co. of Rockford and subsidiary are presented elsewhere herein. The carrying values of $24,544,662 at January 3, 1976 and $23,604,212 at December 28, 1974 for all unconsolidated subsidiaries were approximately $2,500,000 in excess of the parent Company's equity in the net assets as reflected in the being amortized since it is considered by management to have continuing value over an indefinite period. financial statements of the subsidiaries at those dates. This excess cost originated prior to November 1, 1970 and is not (7) Receivables Accounts receivable from customers, agents and others was made up of the following: 1975 December 31, Insurance Group: 1974 Investment income due and accrued Agents' balances and premiums in course of collection $ 6,949,958 Reinsurance recoverable on loss payments 1,649,292 $ 9,583,769 Amounts due from sale of securities ::: :... 4,520,912 1,438,492 13,143,246 23.084 2,459,093 Textile business trade accounts receivable (less allowance for doubtful accounts, 13,513,309 31,955 1975-$362,095; 1974-$331,394) • . .. $19,710,105 6,566,859 4,377,918 (8) Inventories $17,891,227 A summary of inventories follows: Stock in process Raw materials and supplies Jan. 3, 1976 Dec. 28, 1974 Griege and finished cloth ... • • . . $1,717,825 $ 832,210 • • . : 2,987,238 3,430,552 1,425,670 $8,135,615 $5,999,552 3,741.672 Cost of inventories of the parent Company are determined by the last-in, first-out ("LIFO") method. Cost of inventories of subsidiaries are determined by first-in, first-out ("FIFO"') method. Cost using FIFO for all inventories would have exceeded balance sheet carrying amounts by $1,261,842 and $1,234,436 at January 3, 1976 and December 28, 1974, respectively. 15 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 20]

[PAGE 21]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (9) Real Estate, Equipment, Furniture and Leasehold Improvements The composition of plant and equipment is shown below: Properties January 3, 1976 peration of Insurance Land Machinery and equipment Buildings ::::: $ 84,860 Group Total 2,409,214 83,847 Furniture and fixtures and leasehold improvements •... .... 13,035,988 1,260,989 3,670,203 168,707 772,810 - Less accumulated depreciation and amortization 16,302,872 1,141,562 13,035,988 • 14,106,876 2,486,398 1,914,372 18,789,270 $ 2,195,996 $1,526,246 960,152 15,067,028 $ 3.722,242 December 28, 1974 Land Buildings ..... $ 84,860 Machinery and equipment Furniture and fixtures and leasehold improvements ... 12,734,171 2,409,214 $ 83,847 1,254,363 $ . 168,707 12,734,171 3,663,577 834,992 Less accumulated depreciation and amortization 16,063,237 1,053,380 $ 2,332,879 13,730,358 2,391,590 1,888,372 810,996 18,454,827 $1,580,594 $ 3,913,473 14.541,354 (10) 7½% Subordinated Debentures debentures are not secured by any lien and are not convertible; they are subordinated to senior indebtedness which Debentures bear interest at the rate of 74% payable February 1 and August 1 and will be due on August 1, 1987. The includes indebtedness of the parent Company for money borrowed. The debentures may be redeemed at par at the $42,800 principal amount of the debentures, through a sinking fund, annually on August 1 through 1986. Company's option. The indenture under which the debentures were issued requires the parent Company to redeem (11) Sundry Installment Promissory Notes This caption includes the following: • December 31, Parent Company: •1975 1974 8% note issued May 1974, repayable in monthly installments of $13,071 includ- 8% notes issued April 1975, repayable in annual installments of $287,500 plus ing interest, through February 1988 $1,217,480 $1,274,437 Obligations of subsidiary acquired in 1975: interest, in each of the years 1977 through 1980 • .. 1,150,000 - 6% note issued 1973, repayable in semiannual installments of $80,000 plus Note issued 1973, principal repayable in annual installments of $70,000 through interest through August 1, 1978 480,000 8% note issued in April 1975 with a fixed due date of April 30, 1980, contingently May 1, 1983, plus interest at 5% through April 30, 1978 and 6% thereafter* 560,000 - due earlier* 53,602,480 195,000 51.274,437 *Guaranteed by parent Company. 16 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 22]

Berkshire Hathaway Ing. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (12) 8% Senior Notes due 1993 The parent Company in 1973 issued $20,000,000 8% Senior notes with final maturity March 1, 1993. The notes call for mandatory annual prepayments of $1,143,000 on March 1 in each of the years from 1979 to 1992, inclusive. Optional prepayments are permitted without premium up to the amount of the required prepayments in each of the years 1979 to 1992; this right is not cumulative. Additionally, the parent Company may also prepay the notes at any time, in full or in part, at a premium declining ratably from the current rate of approximately 7% to par in 1992. The parent Company involving the incurring of any indebtedness at an effective annual interest rate of less than 8%. agreed it will not affect any optional prepayment prior to March 1, 1983 from proceeds of any refunding operation restricted subsidiaries, as defined, to limitations as to permissible outstanding funded debt and subordinated funded In the note instruments the parent Company agreed, among other things, as to both the parent Company and debt and to a limitation on mortgage debt except as to after-acquired property. Further, the parent Company covenanted that it would not make "restricted payments", which term includes dividends or other equity distributions plus investment in unrestricted subsidiaries (those not bound by the terms of the loan agreement), in excess of stated formula amounts. Retained earnings of approximately $26,000,000 as of January 3, 1976 are unrestricted by this provision; the remainder is restricted. tions, and allows the noteholders to demand prepayment, at par, within 60 days of notice that, during the lifetime of The loan agreement also contains limiting terms relating to sales of the Company's assets, mergers and consolida- Warren E. Buffett, stock ownership in the parent Company by Warren E. Buffett and the members of his immediate family, including certain trusts and charitable organizations, has decreased to less than 15% of the outstanding capital stock of the parent Company. (13) Income Taxes deferred expense credit of $525,014, composed of the following: Net recoverable income taxes credited to 1975 earnings represent a current expense credit of $4,313,045 and a Federal U.S. state ana Foreign, Totals: local Total Credit (expense) applicable to operating loss (Charge) applicable to equity in earnings of Blue Chip Stamps $4,528,690 Credit applicable to realized investment losses (168,886) $(131,521) $4,397,169 • $4,969.580 609,776 = (168,888) Current credit (expense) applicable to: $(131,521) $4,838,059 609,776 Dividends from Blue Chip Stamps Operating loss • .. $3,857,690 Realized investment losses (22,900) S(131,521) $3,726,169 • 4,444,566 609,776 (22,900) Deferred credit (expense) applicable to: (131,521) 4,313,045 609,776 Accreted discount on tax free bonds Change in deferred insurance premium acquisition costs Undistributed income of Blue Chip Stamps :: (281,259) 696,000 696,000 Benefit of capital loss carryover • • Cumulative accreted discount on tax free bonds sold .. (145,986) 104,185 - (281,259) 152,074 - (145,986) 104,185 Total credit (expense) ... $4.969,580 525,014 - 152,074 S(131,521) $4,838.059 525.014 17 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 23]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued statutory rate to the above credit follows: A before tax net loss of $146,494 was realized in 1975. A reconciliation of the tax credit from such net loss at the Increases (decreases) resulting from: Tax credit at 48% statutory rate Amount $ 70,000 Tax-exempt interest income 85% dividends received credit: On dividends from unaffiliated companies 2,137,000 On equity in earnings of Blue Chip Stamps ••. 100% exclusion relating to equity in earnings of The Illinois National Bank • • 957,000 978,000 Capital loss rate differential (30% vs. 48%) • • • i Tax benefit to unconsolidated subsidiary • 1,656,000 Other, net (520,000) .... (319,000) Total tax credits .... $4,838,059 (120,941) As of December 31, 1975, taxes paid and recoverable in the event of future operating losses were minimal. Unused net operating loss carryovers in acquired subsidiaries exist in the amount of $2,600,000 expiring in 1977, 1978 and 1979. These can only be offset against taxable income earned by the acquired subsidiaries, and any tax benefits realized therefrom would be accounted for as a reduction of purchase price resulting in their amortization into income over a period not to exceed forty years. Net recoverable income taxes credited to 1974 earnings were made up as follows: Federal U.S. state and Foreign, Totals: local Total Credit (charge) applicable to operating earnings (Charge) applicable to equity in earnings of Blue Chip Stamps $2,187,851 Credit applicable to realized investment losses ... (112,090) $(177,530) $2,010,321 567,678 (112,090) $(177,530) $2,465,909 567,678 Currently recoverable (payable): $2,643,439 From net operating loss from insurance underwriting and manufactur- On dividends from Blue Chip Stamps ing operations ....• .... From carryback of realized investment losses .... $1,842,483 Total current . . . • • • • • • • • • ... .. 567,678 (20,290) S(177,530) $1,664,953 (20,290) Deferred credit (expense): 2,389,871 (17,530) 567,678 2,212,341 On equity in undistributed earnings of Blue Chip Stamps On net accreted discount on bonds (91,800) Credit for tax effect of reduction in deferred insurance premium acqui- (75,632) (91,800) sition costs (75,632) Total deferred Total income tax credits ... 421,000 ... •... 253,568 - 421,000 $2,643,439 S(177,530) $2,465.909 253,568 Total net income after taking into account realized investment losses, but before income taxes, was $4,577.252. Income tax expense of approximately 52,197,000 would result if computed by applying the statutory U.S. Federal income tax rate of 48% to income before taxes. A reconciliation of the difference is as follows: 18 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 24]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Tax expense at statutory rate Amount Decreases (increases) resulting from: $(2,197,000) Tax-exempt interest income 100% exclusion relating to equity in earnings of The Illinois National Bank 1,965,000 2,082,000 85% dividends received credit: On equity in earnings of Blue Chip Stamps On dividends from unaffiliated companies 1,065,000 Amortization of excess of cost over net assets of subsidiary and investee (not deductible for tax 632,000 Capital loss rate differential (30% vs. 48%) purposes) (343,000) (230,000) Tax benefits to unconsolidated subsidiary Miscellaneous •.... (620,000) Total tax credits • . $2,465,909 111,909 (14) "One-Bank Holding Company" Status The Company is a bank holding company under Federal legislation enacted in 1970. It has filed with the Federal Reserve Board an irrevocable election to divest of its holdings in The Illinois National Bank & Trust Co. of Rockford Company controls the bank it is subject to the restrictions imposed upon it by the Bank Holding Company Act. prior to January 1, 1981. No determination has been made as to how it will effect such divestiture, and so long as the (15) "Savings and Loan Holding Company" Status The Company, as a result of its investment in Blue Chip Stamps which in turn holds controlling interest in a California savings and loan association, is a savings and loan holding company under the Savings and Loan Holding imposed upon it by the Savings and Loan Holding Company Act. Company Amendments of 1967. As such, the Company is subject to the restrictions and regulatory requirements (16) Subsequent Event outstanding capital stock of Kerkling Reinsurance Corporation ("Kerkling"), a Nebraska company engaged since its In early January 1976, National Fire & Marine Insurance Company acquired for approximately $2 million all of the inception in 1970 in the underwriting of reinsurance risks. Its business has been derived essentially through the reinsurance department of National Indemnity Company. Kerkling's annual premium volume has been less than $1 was book value, adjusted to generally accepted accounting principles. million annually; its total assets at December 31, 1975 approximated $4 million. The purchase price for this corporation In a related transaction on the same date, Berkshire Hathaway Inc. acquired substantially all of the other net assets of Kerkling's parent company. These acquired assets consisted of all of the outstanding stock of Transportation Facilities, Inc., a corporation operating a small insurance brokerage business, plus the net assets comprising a business engaged in the manufacture and sale of branded chemical products used in the automotive after market. The latter were acquired through a newly formed subsidiary of Berkshire Hathaway Inc., K & W Products, Inc. The acquired manufacturing facilities are located in Los Angeles, California and Bloomington, Indiana; K & W products are sold nationwide. Sales volume of this business approximated $2.5 million in 1975. Purchase price for these assets approx- imated $2.25 million, of which approximately $1 million was funded by issuance by Berkshire Hathaway Inc. of 9% installment promissory notes. The notes issued have maturities extending to 1987. (17) Litigation certain subsidiaries, was named as a defendant in a lawsuit filed in mid 1975 alleging numerous causes of action and The company, together with a number of subsidiaries, officers, directors and employees of the Company and seeking damages of several million dollars. Since the filing of the complaint, interrogatories have been served upon the relating to performance of certain of its obligations, and has conducted no discovery in this matter. In the opinion of plaintiff but the plaintiff has refused to answer such interrogatories, has refused to testify in pretrial proceedings counsel for the Company, the Company will not be affected materially by the final outcome of the proceeding. 19 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 25]

Berkshire Hathaway Inc. INSURANCE GROUP BALANCE SHEETS December 31, Investments - other than investments in affiliates (notes 3 and 4): ASSETS 1975 1974 Bonds, at amortized cost Preferred stocks - at cost Common stocks - at cost :: $ 78,760,945 2,558,275 $ 71,530,651 U.S. Treasury Bills - at cost which approximates market Total investments - other than investments in affiliates .. 13,912,843 39,341,135 50,669,865 2,855,185 • . 134,573,198 134,194,364 9,138,663 Cash Investment in Blue Chip Stamps (note C) Accrued investment income • . . :: ... 15,400,558 2,000,940 1,513,636 1,649,292 14,370,980 Premiums receivable and agents' balances 4,520,912 6.949,956 1,438,492 Reinsurance recoverable on paid losses 9,583,769 Property and equipment, at cost less accumulated depreciation (note 9) 2,950,000 1,526,246 1,580,594 2,459,093 Deferred premium acquisition costs Other assets Recoverable Federal income taxes 4,100,000 4,400,000 $174,058,505 387,403 2,600,734 196,560 $172,338.222 Losses and loss adjustment expenses LIABILITIES, CAPITAL STOCK AND SURPLUS Unearned premiums 73,033,492 22,344,290 72,761,097 Deferred income taxes Funds held under reinsurance treaties 2,472,002 2,939,462 21,704,867 Other liabilities ..... 2,857,284 ::: 2,322,089 3,034,000 103,111,335 102.107,322 1,750,074 Capital stock and surplus: Common stock of National Indemnity Company of $10 par value. Autho- • Common stock of National Fire & Marine Insurance Company of $100 par rized 750,000 shares; issued 550,000 shares 5,500,000 5,500,000 Paid-in surplus value. Authorized 50,000 shares; issued 25,000 shares 20,601,250 2,500,000 20,601,250 2,500,000 Unassigned surplus (note D) •.•.. : Total capital stock and surplus 42,345,920 41,629,650 $174,058,505 70,947,170 $172,338.222 70,230,900 See accompanying notes to financial statements. 20 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 26]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF INCOME AND UNASSIGNED SURPLUS December 31, Year Ended Underwriting income: 1975 1974 Premiums written Increase in unearned premiums • • Premiums earned • :::: Losses and claims • • • • $58,975,130 (639,424) $60,996,616 58,335,706 (422,887) .. 39,285,324 60.573.729 Loss adjustment expenses 7,952,413 38,615,906 Underwriting expenses (note E)

• . ..

• :: 21,744,891 8,503,940 68,982,628 20,345,744 Underwriting loss (10.646.922) (6,891,861) 67,465,590 Investment income: Interest on bonds Dividends on stock of unaffiliated companies ... 2,456,103 6,036,808 2,811,980 5,103,543 Real estate income .. ... • 8,780,225 287,314 286,307 Less investment expenses 338,918 8,201,830 Net investment income ::::: 8.441,307 7.879,820 322,010 Other expense 121,451 95,708 Income (loss) before income taxes and items below (2,327,066) 892,251 : Applicable income tax credit (note F) Income before items below 3,924,410 1,597,344 2.184,761 3.077,012 Equity in earnings of Blue Chip Stamps Income before realized losses on investments 2,738,297 1,140,953 791,985 Realized loss on investments _3,868.997 Applicable income tax credit (note F) (2,888.062) 866,035 (1,908,093) Net realized loss on investments (note G) (2.022.027) 567,678 Net unrealized appreciation (depreciation) in market values of pre- (1,340,415) ferred and common stocks of unaffiliated companies of $17,148,000 in 1975 and ($4,356,000) in 1974 have not been included in the determi- Net income nation of net income. 716,270 2,528,582 Unassigned surplus at end of year Unassigned surplus at beginning of year .... ... $42,345,920 41,629,650 ..... $41,629,650 39,101,068 See accompanying notes to financial statements. 21 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 27]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION December 31, Year ended Funds provided: 1975 1974 From operations: Net income $ Charges (credits) to income not requiring (providing) funds: 716,270 $ 2,528,582 Equity in undistributed earnings of Blue Chip Stamps Accretion of discount on bonds (1,029,578) (653,706) Depreciation • • (384,278) (442,153) Increase in unpaid losses and loss expense 152,155 147,972 Increase in unearned premiums 272,395 11,085.329 Increase in funds held under reinsurance treaties • • • . • • 639,423 422,887 Decrease (increase) in agents' balances and premiums in course of • 82,178 1,539,079 collection 2,633,813 Increase in reinsurance recoverable on loss payments (2.691,992) Decrease in deferred acquisition costs (2,061,819) (1,960, 169) Decrease in liability for income taxes 1,450,000 840,000 Increase in recoverable income taxes (561,998) (705,670) Other, net (1,499,266) (2,600,734) •.. 170,372 (136,603) (115,130) Funds provided from operations 579,667 4,865,713 Net sale of investments 7,394,295 5,444 $ 585,111 $ 7,394,295 Funds used: Purchase of furniture and equipment Net purchase of investments 97,807 123,394 Increase in cash 7.222,624 487,304 48,277 $ 585,111 $ 7,394.295 Net purchase (sale) of investments: U.S. Treasury Bills Bonds Preferred stocks • • • 4,774,180 7,738,228 • • 6,846,016 (1,985,528) Common stocks of unaffiliated companies • • • • • • (296,910) 556,837 Net cost of investments (sold) purchased ..... (11,328,730) 913,087 (5,444) $ 7,222,624 See accompanying notes to financial statements. 22 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 28]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS December 31, 1975 and 1974 (A) Note References Numerical note references are to the notes to consolidated financial statements of Berkshire Hathaway Inc. and consolidated subsidiaries. Note 1 to such statements includes a summary of significant accounting policies and practices of the Insurance Group. (B) Basis of Presentation The financial statements of Berkshire Hathaway Inc. - Insurance Group include the accounts of wholly-owned subsidiaries of Berkshire Hathaway Inc. which are engaged in fire and casualty insurance underwriting. The statements are presented on a combined basis with significant intercompany transactions and balances elimi- from principles prescribed or permitted by insurance regulatory authorities (statutory methods) in accordance nated, and in accordance with generally accepted accounting principles (GAAP) which differ in some respects with which the companies maintain 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, 1975 1974 FixCRS Of NAIC market valuations over cost valuations of investments in equity securi Statutory surplus as regards policyholders $55,406,942 $37,201,793 Excess ex cost over NAIC market valuations of investments in equity securities (exclud. ties (excluding stock of Blue Chip Stamps) (267,819) - Excess of carrying value of investment in Blue Chip Stamps (determined under GAAP ing stock of Blue Chip Stamps) - 16,449,675 pursuant to the equity method) over NAIC market valuation 9,216,289 Excess statutory liability loss reserves Deferred insurance premium acquisition costs 2,950,000 4,400,000 9,176,194 Net recoverable from unauthorized reinsurers 2,426,692 756,343 1,850,644 2,930,725 1,042,892 1,788,012 Income tax effect and adjustments Sundry nonadmitted assets $70,947,170 (2,472,002) (1,678,310) Capital stock and surplus per accompanying financial statements $70,230,900 Statutory net income is reconciled to GAAP net income as follows: 1975 1974 Statutory net income Decrease in deferred acquisition costs • • $1,814,693 Equity in undistributed earnings of Blue Chip Stamps, net of amortization of excess cost (1,450,000) $2,354,072 Income tax effects and adjustments Amortization of excess cost of investment in Home and Automobile Insurance Company 1,029,579 (840,000) 653,706 Net income per accompanying financial statements . . .... .. (678,002) (93,886) • • • $ 716,270 $2.528.582 454,690 Continued 23 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 29]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued (C) Investment in Blue Chip Stamps The investment in Blue Chip Stamps by the companies comprising the Insurance Group represented 989,483 shares, or approximately 19% of that company's total outstanding shares at the end of both 1975 and 1974. The carrying value was comprised of the following: December 31, Cost, represented by: 1975 1974 Excess cost, net of amortization of $1,764,181, 1975 and $1,279,853, 1974 Underlying net asset values at dates of acquisition $ 9,115,779 • 1,937,314 $ 9,115,779 Equity in post-acquisition undistributed earnings 11,053,093 2,421,642 • 4,347,465 11,537,421 $15,400,558 2,833,559 $14,370,980 The excess cost over underlying net assets is being amortized over eight years from the beginning of 1972. See also note 5 to consolidated financial statements of Berkshire Hathaway Inc. and consolidated subsidiaries. Amortization charges against earnings of the Insurance Group was $484,328 in 1975 and $484,180 in 1974. (D) Stockholders' Equity Surplus is restricted for dividend purposes by the insurance departments of the states in which the companies do business. (E) Underwriting Expenses The following expenses made up underwriting expenses: Salaries and other compensation Commissions and brokerage 1975 1974

• . ..

$13,512,566 Taxes, licenses and fees Other underwriting expenses • . . ..... 3,027,683 $13,016,977 1,508,145 2,816,024 Total statutory underwriting expenses ...• 2,246,497 2,276,581 1,396,162 Add decrease in deferred acquisition costs • • • 20,294,891 1,450,000 19,505,744 840,000 $21.744,891 $20,345,744 Continued 24 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 30]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued (F) Federal Income Taxes Federal income tax credits (expense) are made up of the following: 1975 Totals: 1974 (Charge) applicable to equity in earnings of Blue Chip Stamps Credit applicable to operating earnings $3,924,410 Credit applicable to realized investment losses (126,102) $2,184,761 Total credits 866,035 (99,200) • $4,664,343 567,678 $2,653,239 Current tax credits and (expense) relating to: Dividends received from Blue Chip Stamps Net operating loss for tax purposes of insurance underwriting operations $3,509,669 Realized investment gains (losses) (17,100) $1,839,393 Total current ..• 609,776 567,678 (17,200) 4,102,345 2,389,871 Deferred tax credit and (expense) relating to: Accreted discount on bonds Equity in undistributed earnings of Blue Chip Stamps :: (109,002) Credit for tax effect of reduction in deferred acquisition costs (177,074) (82,000) Benefit of capital loss carryforward .. .. 696,000 421,000 (75,632) Total deferred ..... 152,074 Total credits 561,998 • .... 54.064,343 $2,653,239 263,368 : Total net loss after taking into account realized investment losses, but before income taxes, was $3,948,073 for 1975 and $124,657 for 1974. Income tax credits of approximately $1,895,000 for 1975 and $60,000 for 1974 would result if reconciliation of the differences is as follows: computed by applying the statutory U. S. Federal income tax rate of 48% to such losses before taxes. A 1975 1974 Im rrase (reduction) in credits resulting from: lax credits at statutory rate $1,895,000 $ : 60,000 Tux-exempt interest 15% dividends received credit relating to: .." 2,137,000 2,082,000 Dividends received from unaffiliated companies male to a faces of cost ever net storabita and averie not diate Equity in earnings of Blue Chip Stamps 978,000 715,000 1,065,000 561,000 Tax benefit to affiliate tible for tax purposes) :: (232,000) ('apital loss tax rate differential . . . . (319,000) (277,000) Miscellaneous Total credits ...... .. • • • (520,000) (620,000) 10,343 (343,000) 125,239 ..•• • • 54,664,343 $2,653,239 Continued 25 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 31]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued (G) Investment Gains and Losses A summary of realized and unrealized investment gains (losses) for 1975 and 1974 is as follows: 1975 Bonds Preferred stocks ... Gross Applicable tax Common stocks :: 239,041 Net (3,155,553) 28,450 $ (71,712) Unrealized (8,535) 167,329 $ (2,888,062) 3866,035 946,282 _(2.209,271) 19,915 $ 1,044,000 $ (2,022,027) $17,148,000 16,104,000 Applicable 1974 Preferred stocks Bonds -•.. Gross tax •. $ (138,579) 91,817 Net $ (27,317) $ Unrealized Common stocks .. (1,861,331) 41,229 64,500 $ (1,908,093) $567,678 553,766 (1.307,565) (97,350) $ (901.000) $ (1,340,415) (3,455,000) $ (4,356,000) • 26 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 32]

PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS 206 WEST STATE STREET, SUITE 700 ROCKFORD, ILLINOIS 61101 Ihe Board of Directors The Illinois National Bank & Trust Co. of Rockford: We have examined the consolidated balance sheets of the Illinois National 1974 and the related consolidated statements of earnings, changes in Bank & Trust Co. of Rockford and subsidiary as of December 31, 1975 and stockholders' equity and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records the circumstances. and such other auditing procedures as we considered necessary in In our opinion, the aforementioned consolidated financial statements present fairly the financial position of the Illinois National Bank & Trust Co. of their operations and changes in their financial position for the years then Rockford and subsidiary at December 31, 1975 and 1974 and the results of ended, in conformity with generally accepted accounting principles applied on a consistent basis. Peat, maruch, mitchell to. January 14, 1976 27 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 33]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, Cash and due from banks ASSETS 1975 1974 Investment securities (note 2): $ 18,797,271 $ 21,543,577 United States Government obligations United States Government agencies ... 24,180,903 565,107 Other securities Obligations of states and political subdivisions • . . . 15,576,778 10,050,113 •..: 46,769,523 45,857,638 Federal funds sold Loans (notes 3 and 6) .... 4,327,888 3,845,970 5,000,000 Accrued interest receivable Bank premises and equipment (note 4) 58,081,252 70,133,624 966,626 1,008,749 Other assets 2,040,487 514.603 1,812,021 1.044.645 $171,255,331 $160,861,444 Liabilities: LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits Time deposits $ 53,477,577 $ 53,177,813 Total deposits 93,501,325 Accrued taxes and other liabilities (notes 5 and 6) Federal funds purchased 146,978.902 85,519,225 1,000,000 138,697,038 Total liabilities 149,282,324 1,303,422 139,919,775 1,222,737 Stockholders' equity: Common stock of $20 par value. Authorized and issued 250,000 shares Surplus 5,000,000 Undivided profits (note 6) 5,000,000 5,000,000 5,000,000 Reserve for contingencies 10,972,007 Total stockholders' equity 21,973,007 1,001.000 1,001,000 9,940,669 $171,255,331 20,941,669 $160,861,444 See accompanying notes to consolidated financial statements of bank subsidiary. 28 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 34]

[PAGE 35]

• Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS Years ended December 31, Operating income: 1975 Interest and fees on loans 1974 Income on Federal funds sold • ...... Interest and dividends on: .... $ 5,711,826 213,649 $ 6,607,862 United States Government obligations 361,452 United States Government agencies • .... ... • 700,630 Other securities and time deposits Obligations of states and political subdivisions ::: 913,779 42,986 2,796,479 898,579 Trust fees Total interest income 460,635 2,797,632 10,796,998 284,283 Service charges on deposit accounts 503,178 10,992,794 Other 133,645 434.201 Total operating income 583,229 139,060 12,017,050 559,578 Operating expenses: 12,125,633 Interest on deposits Interest on borrowed money 5,190,802 Salaries Total interest 3,795 4,954,302 5,194,597 14,106 Employee benefits (note 7) 1,642,956 1,968,408 Occupancy, net (note 4) 292,981 1,551,511 Furniture and equipment (note 4) ... . 246,770 246,573 Provision for loan losses (note 6) 246,233 257,229 Other 11,900 248,078 Total operating expenses 766,203 19,300 8,401,640 592,443 Applicable income taxes, net (note 5) Earnings before income taxes and securities gains 3,615,410 7,883,542 136.502 4,242,091 Securities gains, net of related taxes of $2,185 in 1975 and $7,001 in 1974 (note 5) Earnings before securities gains 3,478,908 220,256 Net earnings 52,430 7,021,835 Earnings per share: • $ 3.531,338 168,022 $ 4,189,857 Securities gains Earnings before securities gains • • Net earnings $13.92 21 $16.09 • • $14.13 ..67 $16.76 See accompanying notes to consolidated financial statements of bank subsidiary. 29 Berkshire Hatbaway Inc. 1975 Anpual Report to the Stockholders

[PAGE 36]

[PAGE 37]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Undivided profit Balance, December 31, 1973 stock Surplus note 6 Reserve for Cash dividends - $11 per share Net earnings $5,000,000 - $5,000,000 contingencies - $ 8,500,812 4,189,857 5100-000 Balance, December 31, 1974 Net earnings 5,000,000 5,000,000 (2,750,000) 9,940,669 1.007,000 Balance, December 31, 1975 Cash dividends - $10 per share ... - (2,500,000) 3,531,338 $5,000,000 $10.972.007 $1,001,000 See accompanying notes to consolidated financial statements of bank subsidiary. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION December 31, Years ended Funds provided: 1975 1974 From operations: Depreciation (including direct leased equipment) Net earnings $ 3,531,338 ...... 210,303 $ 4,189,857 Provision for loan losses ...... 11,900 240,711 Deferred income taxes 19,300 Increase in: Provided from operations • ... 3,807,174 53,633 1,686.785 236,917 Deposits Federal funds purchased ... :::: 8,281,864 1,000,000 1,530,545 Decrease in: - Federal funds sold Loans :: 12.040,472 Investment securities 5,000,000 Other, net Cash and due from banks ... • • • •• 2.746,308 2,106.915 Total funds provided • • $33,159,192 283,376 5,140,076 $13,464.321 Funds used: Increase in earning assets: Federal funds sold Loans ... .... 4,865,062 Investment securities Additions to bank premises and equipment, net ..... 30,536,264 5,000,000 Increase in direct leased equipment 79,428 11,891 Other, net Cash dividends .. . 2,500,000 43,500 2,750,000 Total funds used : $33,159,192 513.464.321 804,368 See accompanying notes to consolidated financial statements of bank subsidiary. 30 Berkshire Hathaway inc. 1975 Annual Report to the Stockholders

[PAGE 38]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1975 and 1974 (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 generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant accounting policies: The consolidated financial statements include those of the Bank and its wholly-owned subsidiary. All significant Consolidation intercompany transactions are eliminated in consolidation. Investment securities are stated at cost, adjusted for amortization of premium. Accretion of discount is not Investment Securities reflected in the accompanying statements and would not be material. 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 are generally made on a discount basis. Unearned discount is taken into earnings over the Consumer Credit Loans terms of the respective loans using a method that approximates straight-line. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the Bank Premises and Equipment straight-line method for building and automobiles, and on an accelerated method for improvements and other equipment. Rates of depreciation are based on the following: buildings, 40 years; improvements and other Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are equipment, 3-8 years. charged against operations as incurred. The Bank utilizes the accrual method of accounting for financial reporting purposes, but determines current Income Taxes taxable income on a cash basis. Investment tax credits are treated as a reduction of the provision for Federal income taxes in the year realized. The provision for loan losses is based on past loan loss experience, management's evaluation of the loan portfolio Provision for and Reserve for Loan Losses under current economic conditions, and such other factors as in management's best judgment, deserve current recognition in estimating loan losses. (2) Investment Securities A summary of investments by major classifications is as follows: (In thousands) Dec. 31, 1975 Dec. 31, 1974 value Par value Book Market value Par (In thousands) value value Book Market value U.S. Government-agencies U.S. Government-direct • $24,565 $24,181 State and local municipalities ••• 15,550 47,680 15,577 $24,456 $ 565 565 567 46,769 15,605 10,050 10,050 10,066 Other .... 5,029 4,327 44,474 4,252 46,474 4,312 45,858 3,846 43,778 3,550 $92,324 $90,854 $88,787 $61,401 $60,319 $57,961 31 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 39]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The market value decline in investment securities is considered to be a temporary condition, in view of the fact that management presently intends to hold the securities to maturity or until any loss recognized would not materially affect the results of operations. were pledged to secure public deposits and for other purposes. Investment securities with a book value of S7,552,917 and $7,575,779 at December 31, 1975 and 1974, respectively, (3) Loans A summary of the major classifications of loans at December 31, 1975 and 1974 is as follows: Consumer credit loans (less unearned discount of $2.286,776 in 1975 and $2,722,089 Commercial loans 1975 1974 $27,331,810 $35.706.525 Real estate loans Floor plan loans 12.179,579 :: • • 5,701,588 15,042,339 13,576,010 6,211,502 Less allowance for loan losses 58,788,987 70,853,542 13.893,176 $58,081,252 707,735 S70,133,624 719,918 (4) Bank Premises and Equipment December 31, 1975 and 1974, respectively. Depreciation expense totaled $109,324 for 1975 and $146,576 for 1974. Bank premises and equipment are recorded at cost less accumulated depreciation of S1,995,311 and $1,919,822 at Income Taxes Accrued taxes and other liabilities in the accompanying balance sheets include deferred taxes of $596,502 and reporting taxable income on the cash basis. The Bank and its subsidiary join in the filing of a consolidated Federal $542,869 at December 31, 1975 and 1974, respectively. Such deferred taxes result from timing differences arising from income tax return with the parent company, Berkshire Hathaway Inc. The tax benefit of deductións by the parent has been passed to the Bank, as shown in the following schedules. Taxes applicable to net earnings were as follows: Tax provision applicable to securities gains Tax provision applicable to earnings before securities gains 1975 1974 :::: $431,667 • • 25.867 $759,929 88,380 Less tax benefit from parent corporation applicable to: 457,534 848,309 Earnings before securities gains Securities gains • ::: :: 295,165 23.682 539,673 81,379 Applicable income taxes, net 318,847 621,052 $138,687 5227.257 32 Berksbire Hatbaway Inc. 1975 Annual Report to the Stockholders

[PAGE 40]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO GONSOLIDATED FINANCIAL STATEMENTS, Continued The components of consolidated income tax expense are as follows: 1975 1974 Current income taxes: Federal $314,523 $486,701 Less tax benefit from parent applicable to: Recovery of prior taxes paid through net operating loss carryback Taxes currently payable 314,523 4,324 134,351 486,701 Total benefit from parent 318,847 State 89,378 (4,324) (134,351) 621,052 Total current income taxes 124,691 85,054 (9,660). Deferred income taxes: State Federal 60,517 (6,884) 222.635 Total deferred income taxes 53,633 236,917 14,282 Applicable income taxes, net $138,687 $227,257 The sources of timing differences resulting in deferred income taxes and the tax effect of each were as follows: 1975 1974 Accrued earnings and expense not reported for income tax purposes until collected Loan loss deductions for tax purposes in excess of (less than) that provided for or paid, net $ 59,593 $185,795 financial reporting purposes $ 53,633 (5,960) $236,917 51,122 The total incometax expense for 1975 amounted to $138,687, an effective rate of 3.8% ($227,257 and 5.1% in 1974). The reasons for the difference between the effective tax rate and the corporate Federal income tax rate of 48% are as follows: 1975 Percent 1974 Amount of pretax Percent earnings Amount of pretax earnings Increase (reduction) in taxes resulting from: Tax expense at statutory rate $1,761,612 48.0% $2,120,215 48.0% Tax-exempt interest State income taxes, net of Federal income (1,342,310) (36.6) (1,342,863) (30.4) Tax benefit from parent tax benefits 42,896 Other-net (318,847) 1.2 (4,664) (8.7) 72,266 1.6 Actual tax expense $ 138,687 (1) (621,052) (1,309) (14.1) 3.8% $ 227,257 5.1% It is not expected that the cash outlay for income taxes for any year through 1978 will exceed the income tax expense for such year. 33 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 41]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (6) Allowance for Loan Losses For the years ended December 31, 1975 and 1974, there are certain changes in the method of presenting loans and the allowance for loan losses for financial statement purposes. Prior to such dates the valuation portion of the allowance for loan losses was included with the deferred tax and contingency portion of the allowance and shown with liabilities. At December 31, 1975 and 1974, loans are stated net of the valuation portion of the allowance for loan losses. the deferred tax portion ($211,543 for 1975 and $217,503 for 1974) has been included in other liabilities and the contingency portion ($307,802 for 1975 and $313,742 for 1974) has been included in undivided profits. The following is a summary of activity in the valuation portion of the allowance for loan losses: Recoveries on loans previously charged off Balance at beginning of year 1975 1974 ..... • • $719,918 Provision for loan losses ... ....... 11,900 27,179 $734,495 7,299 Less loans charged off 758,997 19,300 Balance at end of year • • .... $707,735 51,262 761,094 $719.918 41,176 (7) Pension and Profit-Sharing Plan The Bank has a noncontributory pension plan and a profit-sharing plan for all officers and employees with two full years of service. Based upon the most recent actuarial report available (as of January 1, 1975), the pension fund assets Bank's policy is to fund pension costs as accrued. The total expense was $159,351 for 1975 and $128,247 for 1974. exceeded the actuarial computed value of vested benefits and there was no unfunded past service cost liability. The vested benefits, if any, has not been determined, and it is management's opinion that such effect will not be material to The effect of the Retirement Income Security Act of 1974 on the Bank's pension expense provision and unfunded future years' earnings. 34 Berksbire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 42]

Berkshire Hathaway Inc. LINES OF BUSINESS Sources of Revenues: Revenues reflected in the consolidated financial statements include those from (1) premiums earnings and investment income of the Insurance Group, plus (2) sales revenues from the textile business plus a minor amount of investment income of the parent company. The following table summarizes the total revenues derived from these two categories for the past five years, in thousands of dollars: 1971 1972 1973 1974 1975 Insurance $66,050 $66,556 $60,526 $ 68,776 $67,116 Textile 26,092 _27,772 33,479 32,706 33,259 $92,142 $94,328 $94,005 $101,482 $100,375 Sources of Net Earnings: The unconsolidated bank subsidiary and the investment in Blue Chip Stamps represent additional significant sources of income for the Company. Sources of total net earnings on a pre-tax basis with total tax effectsto the Company and its consolidated subsidiaries reflected as a separate item, were as follows for the past five years: 1971 1972 (Thousands of Dollars) 1973 1974 1975 Insurance Textile $6,372 $10,701 $10,249 $ 892 Inconsolidated bank subsidiary • 233 1,697 2,700 2,837 2,660 $(2,327) 1,715 2,192 142 2,782 4,093 3,450 Blue Chip Stamps Interest and corporate administrative 68 1,124 1,164 2,172 Realized investment gain (loss) expenses (648) (770) (1,966) (2,324) (2,268) 1,028 1,359 1,331 (1,908) (2,888) Less: Total income taxes (credits) Total pre-tax income 9,245 15,829 16,357 4,577 (146) 1,559 3,703 3,497 (2,466) (4,838) Net Earnings $7,686 $12,126 $12,860 $ 7,043 $ 4,692 35 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 43]

[PAGE 44]

•MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS Insurance Premiums Earned and Insurance Underwriting Gain (Loss) premiums earned plus the ratio of underwriting expenses, on a statutory basis, to premiums written) have Combined loss and expense ratios (which are the sum of the ratio of losses and loss expenses incurred to been as follows for the Insurance Group for the past five years. NET PREMIUMS RATIOS Written Losses and In thousan darned oss Adj. Exp Underwriting Combinea arned Prei Written Prem Expenses/ Loss and Ratio 1971 1972 $66,455 $60,867 1974 1973 57,950 59,627 67.0 50,372 52,929 62.0 30.1 62.0 29.7 97.1 1975 60,997 60,574 32.5 91.7 58,975 77.8 58,336 81.0 32.0 94.5 34.4 109.8 115.4 The combined loss and expense ratio is the traditional measure of underwriting results of property and business has been underwritten. casualty companies. In any year when that ratio exceeds 100, it generally indicates that unprofitable the past three years: The following table sets forth the net premiums written and earned by the Insurance Group in each of Operational Area 1973 (Thousands of Dollars) 1974 1975 Specialized Auto, General Liability and Other (1) ..Written Earned $28,617 $36,738 $37,860 29,969 34,436 38,144 Reinsurance(2) • ..Written Earned 10,184 12,204 11,996 12,938 9,893 10,188 Urban Auto(3) • .Written Earned 6,571 6,120 6,613 3.072 Home State Companies(4) . Written 7,902 3,332 Earned 5,000 5,442 8,150 4,844 Totals 5,298 6,672 Written Earned $50,372 $60,997 $52,929 $60,574 $58,975 $58,336 (1) National Indemnity Company and National Fire & Marine Insurance Company less the Reinsurance Depart- ment of National Indemnity. (2) Reinsurance Department of National Indemnity. (3) Home and Automobile Insurance Company. 4) Corporations organized in the jurisdictions of Nebraska, Minnesota, Texas and lowa underwriting standar nd preferred classes of fire and casualty insurance in those state 37 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 45]

MANAGEMENT'S DISCUSSION, Continued following table: The total underwriting gain or loss for the Insurance Group for the past three years is shown in the 1973 (Thousands of Dollars) Statutory GAAP 1974 Statutory GAAP 1975 Specialized auto, general liability Statutory and other GAAP Reinsurance $4,623 Urban Auto Home State • • 715 $4,409 • (834) 353 $(2,119) (878) (1,470) $(1,939) (801) $3,703 (565) (1,761) (2,068) $(5,201) $ (6,728) (702) (2,183) (1,955) (941) (2,194) $3,319 (702) (1,100) (848) $(6,052) S(6,892) $(9,197) (877) $(10,647) premium acquisition costs (underwriting expenses, i.e., commissions, etc.) which is deferred under GAAP. The only difference between the Statutory and GAAP underwriting results is the change in amount of In each of the above years, the amount of such costs deferred at year-end decreased from the preceding year-end. The decreases were generally in expectation of unfavorable underwriting results from certain portions of the in-force book of business. The premium rates at which Berkshire's Insurance Group, and, indeed, the entire property and casualty insurance industry, wrote its business in 1973, 1974 and 1975 were inadequate; rate increases did not keep pace with rates of inflation. Both monetary inflation and social inflation have impacted insurers. Social inflation is used here to encompass both higher and relatively more frequent jury awards to claimants as well as increased crime rates which increase the frequency of property loss claims. The traditional businesses of National Indemnity and National Fire and Marine, as well as Berkshire's reinsurance business are preponderantly casualty type businesses. In casualty lines, losses incurred repre- sent largely those of third-parties (as opposed to "first-party" losses, i. e., those sustained directly by the insured). For casualty business, the elapsed time between writing of coverages and settlement of claims tends to be longer than that for property lines of insurance. As a result, casualty underwriting loss ratios suffer more in highly inflationary times than do the ratios for property lines underwriting. losses in 1974, in relation to earned premiums, of the Urban Auto business. In the traditional Cook County, The venture by Home and Automobile Insurance Company into Florida resulted in the extremely high Illinois business, rate increases were effected in both 1974 and 1975; premium volume (and thus, loss exposure) declined significantly but loss ratios did not. Home and Auto's management, rates, and un- business; it is much too soon to know the results of these changes. derwriting practices have been restructured with a view to restoring underwriting profitability to this Operations of the Home State companies other than Cornhusker Casualty Company have to date yielded only underwriting losses. The lowa operation completed only its second full year of operation in 1975 and has not yet reached viable size. Improvement was noted in the Texas operation in 1975; un- derwriting ratios deteriorated in the Minnesota operation. While the underwriting losses of the Home State companies increased in total dollars in 1975 over 1974, the overall loss ratio actually declined on higher 1975 Net Sales and Gross Profit from Sales of Textile Products appearance of stability in the textile operations; however, the 1975 figures require explanation inasmuch as Consolidated net sales of $33.4 million - 1973, $32.6 million - 1974, and $32.8 million - 1975 give an they include $9.3 million from the Waumbec operation acquired during the year. Thus, a more revealing comparision shows sales from what comprised the textile operation in 1974 declined in 1975 by 28%. Both demand and price for our goods declined drastically, starting their downward trend in the fourth quarter of 1974 and continuing well into 1975, from the recent record high levels of early 1974. Some market recovery 38 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

[PAGE 46]

MANAGEMENT'S DISCUSSION, Continued stringent cost control efforts exerted by management of the textile operations, and the fact of relatively low was noted in late 1975, which, combined with some gross profit realized from sale of Waumbec's products, fixed costs assignable to the operations, prevented a more significant decline in gross profits than that which vicurred. Gross profit from sale of textile products at $4,599,000 in 1975 was 11% less in total than that realized in 1974. Interest and Dividend Income Interest and dividend income is earned almost entirely by the Insurance Group. The continuing mcrease in this category of income through 1974 was the result of increased investments; in 1975, the average pust five years in the following table, which excludes the investment in and dividends received from Blue vitld on investments also increased. Interest and dividend income is related to average investments for the Chip Stamps, accounted for by the equity method. Investments Average • Dividend Interest and Average at cost Income Per Cent 1971 (Amounts in Thousands) Earned 1972 79,117 5,043 1973 103,217 6,648 6.37 1975 1974 • • 117,516 7,378 6.44 131,347 8,030 6.28 136,500 8,918 6.11 6.53 The average per cent earned declined in 1973 and 1974 as a result of the increase in those years in the "verage investments in preferred and common stocks relative to the average investment in bonds, the "verse we ta act y on the bonds tends to exceed that on the stocks. Investments for I past five years are categorized in the following table, at the average of their carrying values at the Bonds, Treasury short-term obligations bills and other and common Preferred 1971 stocks 1972 68,906 _Total 10,211 1973 87,175 1974 81,311 16,042 79,117 1975 • • 78,557 36,205 103,217 • 88,787 52,790 117,516 47,713 131,347 136,500 income Taxes (Credit) Applicable to Insurance Underwriting and Textile Operations Each year there is a significant difference between pre-tax income reported in the financial statements, from the fact that a considerable portion of income of the Insurance Group is produced by tax exempt •m income subject to tax. The difference arises principally from certain dividends received credits and minufacturing operations and all other items of taxable income so that "net operating losses", as defined by hunds. For both 1974 and 1975 these items exceeded the pre-tax earnings from insurance underwriting and I Internal Revenue Code, were reported for tax purposes. Berkshire Hathaway Inc. and its includible uperating losses have been carried back to recover income taxes paid by members of the group for 1971, 1972 nutsidiaries join in the filing of a consolidated Federal income tax return; the 1974 and 1975 consolidated net losses, if any. There are virtually no remaining paid and recoverable taxes which might benefit future net operating 39 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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MANAGEMENT'S DISCUSSION, Continued Equity in Net Earnings of Bank Subsidiary Berkshire's equity in net earnings of the Illinois National Bank and Trust Co. of Rockford ("the bank") represent approximately 98% of the bank's earnings. Financial statements of the bank are included else where herein. summarized below, in thousands of dollars: Income of the bank before income taxes and before securities transactions for the past three years is Interest income 1973 Interest expense $9,324 1974 1975 $10,993 Non-interest income Net interest earnings 4,351 $10,797 .... • • 4,973 4,969 5,195 • • • 6,024 5,602 1,080 Non-interest expenses • .... 6,053 1,133 7,157 1,220 Income before taxes and before securities 3,220 2,915 6,822 3,207 transactions • $2,833 $4,242 $ 3,615 1974 Compared to 1973 Loan demand was strong throughout 1974 and was accompanied by record high interest rates. Accord- ingly, interest income increased over 1973 as a result of both increased volume of earning assets and a higher average rate paid thereon caused the rise in interest expense in 1974. yield thereon. Increased reliance on interest bearing time deposits as a source of funds and on increased local taxing authorities in assessing to Berkshire, as a shareholder of the bank, certain capital stock taxes Non-interest expense items declined in total in 1974 primarily as the result of a change instituted by expense credit of $154,000 resulted in 1974 from reversal of this item previously accrued for 1973. While: previously assessed to the bank. In addition to elimination in 1974 of this particular expense item, an bank earnings increased as a result of this action by the taxing authorities, the net effect of this change was of 1975 selling and administrative expenses. no benefit to Berkshire, since taxes not theretofore paid by Berkshire appear as part of Berkshire's 1974 and! 1975 Compared to 1974 time deposits continued to increase resulting in higher interest costs. The combination resulted in a decline Outstanding loans declined in 1975, resulting in less total interest income than in 1974. Interest bearing of $422,000 in net interest earnings in 1975 from the prior year. The property tax expense credit in 1974 to "non interest" expense, discussed previously above, explains the major portion of the difference in that captioned item between 1974 and 1975. It is noted that non-interest expense of $3,207,000 compares not highly unfavorably with the second year prior (1973), when such captioned item totaled $3,220,000 including the capital stock tax. 40 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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MANAGEMENT'S DISCUSSION, Continued Equity in Net Earnings of Blue Chip Stamps the past three years, based on the twelve month's operations of Blue Chip ended on or about November 30, Berkshire's equity in net earnings of Blue Chip Stamps as computed by the equity method for each of luve been as follows: 1973 1974 1975 Equity in net earnings (Amounts in Thousands) Amortization of excess of cost over equity in nei Applicable income taxes $1,605 $1,548 $2,346 (116) (112) (169) assets Net equity in earnings . .

• • • •

(481) (384) (174) $1,008 $1,052 $2,003 pust three years. Average shares owned in 1973, 1974 and 1975 were, respectively, 934,000, 1,144,670, and The average number of shares of Blue Chip Stamps owned by Berkshire has increased in each of the 1.125.233. Stated on the basis of per-average-share-owned, the above table is as follows: 1973 Equity in net earnings 1974 Applicable income taxes ..... $1.72 1975 $1.35 $1.77 Amortization of excess of cost over equity in net (.12) (.10) (.13) assets Net equity in earnings •.. • • • (52) • .. $1.08 (.33) $0.92 (.13) $1.51 Healized Investment Gains (Losses) Realized investment losses in 1975 aggregated $2,888,000 with a tax credit of $866,000 reducing the Inars were, respectively, ($1,908,000) and $1,332,000; after taxes, ($1,340,000) and $929,000. Realization of after-tax realized investment loss to $2,022,000. In 1974 and 1973 realized investment gains (losses) before investment gains or losses is determined by prevailing investment strategy as applied under changing annomic conditions. 41 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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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 Textile Operations of the Company President of the Company and Chief Operating Officer of the MALCOLM G. CHAce, JR., Director Retired, Former Chairman of the Board of Directors ). VERNE MCKENZIE, Director Vice President, Secretary and Treasurer of the Company COMMON STOCK PRICES for the stock in each quarter of 1974 and 1975 is set forth in the following table. The quotations represent prices between The common stock of Berkshire Hathaway Inc. is traded in the over the counter market. The high and low bid prices dealers and do not include retail markup, markdown or commission. They do not represent actual transactions 1974 Ist Quarter High Low 2nd Quarter 76 3rd Quarter 76 72 64 4th Quarter 64 • 1975 1st Quarter 49 49 40 2nd Quarter 51 3rd Quarter 51 38 45 4th Quarter 60 41 43 38 The Company has not paid a dividend in the past two years. 42 Berkshire Hathaway Inc. 1975 Annual Report to the Stockholders

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