1977 年伯克希尔完整年报

[PAGE 1]

PURDUE UNIVERSITY APR 1 2 1978 KRANNERT LIBRARY 28 Prem Jain. BERKSHIRE HATHAWAY INC. 1977 ANNUAL REPORT TO THE STOCKHOLDERS

[PAGE 2]

[PAGE 3]

Berkshire Hathaway Inc. PURDUE UNIVERSITY 1977 Annual Report to the Stockholders APR 1 2 1978 KRANNERT LIBRARY BUSINESS OF THE COMPANY The Company is engaged directly and through subsidiaries in the manufacture and sale of woven textiles in the United States and through a subsidiary in the sale of textile products in Canada. Through subsidiaries collectively referred to in this annual report as the Insurance Group, the Company is engaged in the underwriting of fire and casualty insurance throughout the United States. In January 1976, the Company acquired the assets comprising a relatively smaller business engaged in the manufacture of branded (K & W) chemical products distributed nationwide for use in the automotive aftermarket. The Company owns approximately 98% of The Illinois National Bank & Trust Co. of Rockford, Illinois which is engaged in the ommercial banking business. The Company and subsidiary members of the Insurance Group have signil described herein. cant holdings in Blue Chip Stamps, a California corporation - the businesses of which are more full CONTENTS Pages 2-7 Chairman's Letter 8-9 Ten Year Summary 10-13 Management's Discussion 14 Accountants' Certificate Regarding Financial Statements of Berkshire Hathaway Inc. and Consolidated Subsidiaries and Insurance Group 15-27 Financial Statements — Berkshire Hathaway Inc. and Consolidated Subsidiaries 28-33 Financial Statements - Berkshire Hathaway Inc. - Insurance Group 34 Accountants' Certificate Regarding Financial Statements of The Illinois National Bank & Trust Co. of Rockford 35-43 Financial Statements - The Illinois National Bank & Trust Co. of Rockford 44 Common Stock Prices 44 Directors and Executive Officers 1

[PAGE 4]

Berkshire Hathaway Inc. To the Stockholders of Berkshire Hathaway Inc.: Operating earnings in 1977 of $21,904,000, or $22.54 per share, were moderately better than anticipated a year ago. Of these earnings, $1.43 per share resulted from substantial realized capital inin dy our pering an are Capil gains or losses realized. Hathaway Inc. or its insurance subsidiaries are not included in our calculation of operating earnings. While too much attention should not be paid to the figure for any single year, over the longer term the record regarding aggregate capital gains or losses obviously is of significance. Textile operations came in well below forecast, while the results of the Illinois National Bank as well as the operating earnings attributable to our equity interest in Blue Chip Stamps were about as anticipated. However, insurance operations, led again by the truly outstanding results of Phil Liesche's managerial group at National Indemnity Company, were even better than our optimistic expectations. Most companies define "record" earnings as a new high in earnings per share. Since busi- nesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital. In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earnings per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance. We expect difficulty in matching our 1977 rate of return during the forthcoming year. Begin- ning equity capital is up 23% from a year ago, and we expect the trend of insurance underwriting profit margins to turn down well before the end of the year. Nevertheless, we expect a reasonably good year and our present estimate, subject to the usual caveats regarding the frailties of forecasts, is that operating earnings will improve somewhat on a per share basis during 1978. Textile Operations The textile business again had a very poor year in 1977. We have mistakenly predicted better results in each of the last two years. This may say something about our forecasting abilities, the nature of the textile industry, or both. Despite strenuous efforts, problems in marketing and manufacturing have persisted. Many difficulties experienced in the marketing area are due pri- marily to industry conditions, but some of the problems have been of our own making. A few shareholders have questioned the wisdom of remaining in the textile business which, over the longer term, is unlikely to produce returns on capital comparable to those available in many other businesses. Our reasons are several: (1) Our mills in both New Bedford and Manches- possessing relatively non-transferable skills. Our workers and unions have exhibited unusual ter are among the largest employers in each town, utilizing a labor force of high average age understanding and effort in cooperating with management to achieve a cost structure and product 2

[PAGE 5]

mix which might allow us to maintain a viable operation. (2) Management also has been energetic and straightforward in its approach to our textile problems. In particular, Ken Chace's efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation. (3) With hard work and some imagination regarding manufacturing and marketing configurations, it seems reasonable that at least modest profits in the textile division can be achieved in the future. Insurance Underwriting Our insurance operation continued to grow significantly in 1977. It was early in 1967 that we made our entry into this industry through the purchase of National Indemnity Company and National Fire and Marine Insurance Company (sister companies) for approximately $8.6 million. In that year their premium volume amounted to $22 million. In 1977 our aggregate insurance premium volume was $151 million. No additional shares of Berkshire Hathaway stock have been issued to achieve any of this growth. Rather, this almost 600% increase has been achieved through large gains in National Indem- nity's traditional liability areas plus the starting of new companies (Cornhusker Casualty Com- pany in 1970, Lakeland Fire and Casualty Company in 1971, Texas United Insurance Company in 1972, The Insurance Company of Iowa in 1973, and Kansas Fire and Casualty Company in late 1977), the purchase for cash of other insurance companies (Home and Automobile Insurance Company in 1971, Kerkling Reinsurance Corporation, now named Central Fire and Casualty Company, in 1976, and Cypress Insurance Company at yearend 1977), and finally through the marketing of additional products, most significantly reinsurance, within the National Indemnity Company corporate structure. In aggregate, the insurance business has worked out very well. But it hasn't been a one-way street. Some major mistakes have been made during the decade, both in products and personnel. We experienced significant problems from (1) a surety operation initiated in 1969, (2) the 1973 expansion of Home and Automobile's urban auto marketing into the Miami, Florida area, (3) a still unresolved aviation "fronting" arrangement, and (4) our Worker's Compensation operation in California, which we believe retains an interesting potential upon completion of a reorganization our textile business where even very good management probably can average only modest results. One of the lessons your management has learned — and, unfortunately, sometimes re-learned — is the importance of being in businesses where tailwinds prevail rather than headwinds. In 1977 the winds in insurance underwriting were squarely behind us. Very large rate in- creases were effected throughout the industry in 1976 to offset the disastrous underwriting results of 1974 and 1975. But, because insurance policies typically are written for one-year periods, with pricing mistakes capable of correction only upon renewal, it was 1977 before the full impact was felt upon earnings of those earlier rate increases. The pendulum now is beginning to swing the other way. We estimate that costs involved in the insurance areas in which we operate rise at close to 1% per month. This is due to continuous monetary inflation affecting the cost of repairing humans and property, as well as "social infla- tion", , a broadening definition by society and juries of what is covered by insurance policies. Unless rates rise at a comparable 1% per month, underwriting profits must shrink. Recently the pace of rate increases has slowed dramatically, and it is our expectation that underwriting margins generally will be declining by the second half of the year. 3

[PAGE 6]

We must again give credit to Phil Liesche, greatly assisted by Roland Miller in Underwriting and Bill Lyons in Claims, for an extraordinary underwriting achievement in National Indemnity's traditional auto and general liability business during 1977. Large volume gains have been accom- panied by excellent underwriting margins following contraction or withdrawal by many compet- itors in the wake of the 1974-75 crisis period. These conditions will reverse before long. In the meantime, National Indemnity's underwriting profitability has increased dramatically and, in addition, large sums have been made available for investment. As markets loosen and rates become inadequate, we again will face the challenge of philosophically accepting reduced volume. Unusual managerial discipline will be required, as it runs counter to normal institutional behavior to let the other fellow take away business - even at foolish prices. Our reinsurance department, managed by George Young, improved its underwriting perfor- mance during 1977. Although the combined ratio (see definition on page 12) of 107.1 was unsatis- factory, its trend was downward throughoutthe year. In addition, reinsurance generates unusually high funds for investment as a percentage of premium volume. At Home and Auto, John Seward continued to make progress on all tronts. John was a battlefield promotion several years ago when Home and Auto's underwriting was awash in red ink and the company faced possible extinction. Under his management it currently is sound, profit- able, and growing. John Ringwalt's homestate operation now consists of five companies, with Kansas Fire and Casualty Company becoming operational late in 1977 under the direction of Floyd Taylor. The homestate companies had net premium volume of $23 million, up from $5.5 million just three years ago. All four companies that operated throughout the year achieved combined ratios below 100, with Cornhusker Casualty Company, at 93.8, the leader. In addition to actively supervising the other four homestate operations, John Ringwalt manages the operations of Cornhusker which has recorded combined ratios below 100 in six of its seven full years of existence and, from a standing start in 1970, has grown to be one of the leading insurance companies operating in Nebraska utilizing the conventional independent agency system. Lakeland Fire and Casualty Company, managed by Jim Stodolka, was the winner of the Chairman's Cup in 1977 for achieving the lowest loss ratio among the homestate companies. All in all, the homestate operation continues to make excellent progress. The newest addition to our insurance group is Cypress Insurance Company of South Pasadena, California. This Worker's Compensation insurer was purchased for cash in the final days of 1977 and, therefore, its approximate $12.5 million of volume for that year was not included in our results. Cypress and National Indemnity's present California Worker's Compensation operation will not be combined, but will operate independently utilizing somewhat different marketing strategies. Milt Thornton, President of Cypress since 1968, runs a first-class operation for policyholders, agents, employees and owners alike. We look forward to working with him. Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn't. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.

[PAGE 7]

Insurance Investments During the past two years insurance investments at cost (excluding the investment in our affiliate, Blue Chip Stamps) have grown from $134.6 million to $252.8 million. Growth in insurance reserves, produced by our large gain in premium volume, plus retained earnings, have accounted for this increase in marketable securities. In turn, net investment income of the Insurance Group has improved from $8.4 million pre-tax in 1975 to $12.3 million pre-tax in 1977. In addition to this income from dividends and interest, we realized capital gains of $6.9 million before tax, about one-quarter from bonds and the balance from stocks. Our unrealized gain in stocks at yearend 1977 was approximately $74 million but this figure, like any other figure of a single date (we had an unrealized loss of $17 million at the end of 1974), should not be taken too seriously. Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks. A little digression illustrating this point may be interesting. Berkshire Fine Spinning Asso- ciates and Hathaway Manufacturing were merged in 1955 to form Berkshire Hathaway Inc. In 1948, on a pro forma combined basis, they had earnings after tax of almost $18 million and employed 10,000 people at a dozen large mills throughout New England. In the business world of that period they were an economic powerhouse. For example, in that same year earnings of IBM were $28 million (now $2.7 billion), Safeway Stores, $10 million, Minnesota Mining, $13 million, and Time, Inc., $9 million. But, in the decade following the 1955 merger aggregate sales of $595 million produced an aggregate loss for Berkshire Hathaway of $10 million. By 1964 the operation had been reduced to two mills and net worth had shrunk to $22 million, from $53 million at the time of the merger. So much for single year snapshots as adequate portrayals of a business. Equity holdings of our insurance companies with a market value of over $5 million on December 31, 1977 were as follows: No. of Shares Company Cost Market 220,000 Capital Cities Communications, Inc. $ 10,909 (000's omitted) 1.986,953 Government Employees Insurance Company Convertible Preferred 19,417 $ 13,228 1,294,308 Government Employees Insurance Company Common Stock 33,033 592,650 4,116 10,516 324,580 The Interpublic Group of Companies, Inc. Kaiser Aluminum & Chemical Corporation •• 4,531 • • 11,218 17,187 1,305,800 Kaiser Industries, Inc. 778 9,981 226,900 Knight-Ridder Newspapers, Inc. 7,534 8,736 6,039 934,300 170,800 The Washington Post Company Class B Ogilvy & Mather International, Inc. 10,628 2,762 33,401 6,960 Total $ 71,893 $139,081 All Other Holdings .. 34,996 41,992 Total Equities $106,889 $181,073 We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price. 5

[PAGE 8]

Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority. Such investments initially may have negligible impact on our operating earnings. For exam- ple, we invested $10.9 million in Capital Cities Communications during 1977. Earnings attributable to the shares we purchased totaled about $1.3 million last year. But only the cash dividend, which currently provides $40,000 annually, is reflected in our operating earnings figure. Capital Cities possesses both extraordinary properties and extraordinary management. And these management skills extend equally to operations and employment of corporate capital. To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us. While control would give us the opportunity - and the responsibility - to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound. Banking In 1977 the Illinois National Bank continued to achieve a rate of earnings on assets about three times that of most large banks. As usual, this record was achieved while the bank paid maximum rates to savers and maintained an asset position combining low risk and exceptional liquidity. Gene Abegg formed the bank in 1931 with $250,000. In its first full year of operation, earnings amounted to $8,782. Since that time, no new capital has been contributed to the bank; on the contrary, since our purchase in 1969, dividends of $20 million have been paid. Earnings in 1977 amounted to $3.6 million, more than achieved by many banks two or three times its size. Late last year Gene, now 80 and still running a banking operation without peer, asked that a successor be brought in. Accordingly, Peter Jeffrey, formerly President and Chief Executive Officer of American National Bank of Omaha, has joined the Illinois National Bank effective March 1st as President and Chief Executive Officer. Rockford's leading bank. Gene continues in good health as Chairman. We expect a continued successful operation at Blue Chip Stamps We again increased our equity interest in Blue Chip Stamps, and owned approximately 362% at the end of 1977. Blue Chip had a fine year, earning approximately $12.9 million from operations and, in addition, had realized securities gains of $4.1 million. Both Wesco Financial Corp., an 80% owned subsidiary of Blue Chip Stamps, managed by Louis Vincenti, and See's Candies, a 99% owned subsidiary, managed by Chuck Huggins, made good progress in 1977. Since See's was purchased by Blue Chip Stamps at the beginning of 1972, pre-tax operating earnings have grown from $4.2 million to $12.6 million with little additional 6

[PAGE 9]

'capital investment. See's achieved this record while operating in an industry experiencing practi- cally no unit growth. Shareholders of Berkshire Hathaway Inc. may obtain the annual report of Blue Chip Stamps by requesting it from Mr. Robert H. Bird, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040. Warren E. Buffett, Chairman March 14, 1978 7

[PAGE 10]

[PAGE 11]

[PAGE 12]

Berkshire Hathaway Inc. MANAGEMENT'S DISCUSSION earnings from insurance and manufacturing operations" for the past five years is as follows: A ten year summary is presented on pages 8 and 9. Supplementary data relative to elements of "net 1973 1974 1975 (in thousands) 1976 1977 Insurance underwriting gain (loss) Interest expense Gross profit from sales of manufactured products $3,319 $(6,892) $(10,647) 5,105 5,163 4,599 $ 709 $6,184 5,600 Income taxes (credit) applicable to insurance and 1,605 1,718 1,845 2,028 2,075 4,453 manufacturing operations 2,979 (2,010) (4,141) 1,489 2,914 revenue and operating profits plus additional data with respect to total year-end assets for the past five Note (3) to the consolidated financial statements sets forth certain information regarding sources of years. That note should be read in conjunction with these comments. The following discussion deals with items in the ten year summary or in the above table which reflect a change of 10% or more in 1977 or 1976 from the prior year which are not fully dealt with elsewhere herein. Insurance Premium Written volume has increased over the preceding year's total, as follows: In both 1976 and 1977, in each of the separately identifiable areas of our insurance business, premium 1975 1976 1977 Specialized Auto and General Liability (1) Reinsurance (3) Workers Compensation (2) $37,986 $58,337 2,947 5,986 $ 87,146 18,467 Home State Companies (4) 9,893 15,823 22,252 8,150 14,627 23,218 $58,976 $94,773 $151,083 (1) National Indemnity Company and National Fire and Marine Insurance Company less departments of National Indemnity dealing with (a) Workers' Compensation and (b) Reinsurance, plus underwritings by Home and Automobile Insurance Company in the urban Chicago area. (2) Workers' Compensation departments of National Indemnity. (3) Reinsurance department of National Indemnity. (4) Corporations organized in the jurisdictions of Nebraska, Minnesota, Texas, Iowa and Kansas underwriting multiple line fire and casualty insurance in those states. and National Fire & Marine Insurance Company has always tended to be highly cyclical. These operations The traditional specialized automobile and general liability business of National Indemnity Company have reflected significant volume increases following years which have been unprofitable for the industry, and this phase of the cycle simply recurred in 1976 and 1977. Their increased premium volume reflects significant necessary rate increases, but a greater contributing factor to their increased volume, particularly in 1976, was an increased volume of covered risks. Competition in the industry diminished significantly after the horrendous results suffered by the industry in 1974 and 1975; National Indemnity, National Fire, as specialized products in areas from which conventional underwriting organizations tended to withdraw. well as Home & Auto in lesser volume, had both the capacity and the underwriting skills to market their 10

[PAGE 13]

MANAGEMENT'S DISCUSSION, Continued Workers' compensation insurance was a relatively insignificant element of our insurance business prior to 1976. In that year, a branch office of National Indemnity in Los Angeles began aggressively called out as a separate and distinct aspect of the business of our Insurance Group. We expect that the marketing this coverage, and in 1977 that operation produced a volume of business that merits its being • underwriter, will make this line of insurance even more significant to the Group in coming years. addition to the Group at the end of 1977 of Cypress Insurance Company, a California workers' compensation The increased premium volume of the Reinsurance Department of National Indemnity is reflective of a combination of necessary increased rates plus an increased volume of insured risks. The Home State Company operations continued to increase their market penetration in each of the states in which they are licensed. The new Kansas operation was formed late in 1977 and therefore its production by year-end was virtually nil. Net Sales of Manufactured Products Sales from the businesses comprising the manufacturing segments of the Company were as follows for the past three years. 1975 1976 1977 Berkshire textile operation Waumbec textile operation : : $23,521 $30,887 $35,554 9,312 13,757 9,944 K & W automotive chemicals . . •.. 2,530 2,691 $32,833 $47,174 $48,189 combined to result in an increase in dollar sales from the Berkshire operation of about 30% in 1976 over 1975. Some increases in prices, changes in product mix and a 15% increase in unit sales and production In 1977, both unit sales and dollar sales increased about 15% from the prior year. Goods manufactured by others were purchased and resold in 1977 to account for the increased unit sales; total production at the New Bedford mill was near capacity level in both 1977 and 1976. reflected in the above table reflect only those from the April 28, 1975 date of the Company's purchase of the Sales from Waum bec textile operation for the full year 1975 were $12,444,000. Sales from that operation business. In 1977, sales were significantly depressed and well below levels necessary to maintain reasonable production schedules. Interest and Dividend Income years. Investments are shown at the average of their carrying values at the beginning and end of each year: In the following table, interest and dividend income is related to average investments for the past three (thousands of dollars) Average Investments, at cost Bonds, Treasury - bills and other hort terr referred an Interest and bligation Stocks Total Dividend Average Income Earned Percent 1975 $ 88,787 $47,713 $136,500 $ 8,918 6.53 1976 99,821 58,647 158,468 10,820 6.83 1977 117,512 90,706 208,218 12,549 6.03 11

[PAGE 14]

MANAGEMENT'S DISCUSSION, Continued Interest and dividend income is earned almost entirely bythe Insurance Group. The basic reason for the term obligations were significantly higher in 1976 than in either 1975 or 1977. The greater proportionate increase in this category of income is increased invested funds. Rates earned on taxable bonds and short increase in 1977 in investments in stocks further reduced the average yield earned in this most recent year, since the income vield on such investments tends to be less than on bonds. Insurance underwriting gain (loss) represents the sum of the ratio of losses and loss adjustment expenses to premiums earned plus the ratio of Insurance underwriting results are most commonly measured by the "combined ratio". Such term basis are used, that is, no adjustment is made for the change in deferred acquisition costs as is required under underwriting expenses to premiums written. In the computation, underwriting expenses on a statutory generally accepted accounting principles. A combined ratio below 100 indicates an underwriting profit; above 100 indicates an underwriting loss. The combined ratio for the Insurance Group for the past three years has been as follows: NET PREMIUMS RATIOS Written (in thousands) Earned Loss Adj. Exp./ Losses and Underwriting Combined Earned Prem. Expenses/ Loss and 1975 Written Prem. Expense Ratio 1976 58,975 1977 94,773 58,336 151,083 136,890 80,780 81.0 68.6 30.1 34.4 115.4 66.9 98.7 27.9 94.8 principles have resulted as follows for the Insurance Group for the past 3 years. Insurance underwriting profit (loss) stated in dollars on the basis of generally accepted accounting 1977 Workers Compensation Specialized auto and general liability • $ (7,443) (in thousands) $5,077 Reinsurance (133) $8,240 (1,182) Home State Companies .... (2,194) (2,585) (1,369) (877) (601) (1,442) 755 $(10,647) $ 709 $6,184 written by the multiple line Home State Companies) was 107.1 in 1977. We referred previously to our The combined ratio for the Workers Compensation business (which excludes volume in that line led to the writing of coverages at inadequate rates; some of this business is still on the books and we expect aggressive marketing of Workers Compensation in California in 1976 and 1977. The enthusiasm for volume ultimately eliminate underwriting losses, although probably not in 1978, while generating significant sums continuing losses therefrom over the near term. We believe that this business if properly managed can for investment. further diminished and possibly eliminated in the near future. The losses in reinsurance are diminishing; management is cautiously optimistic that they will be 12

[PAGE 15]

MANAGEMENT'S DISCUSSION, Continued Manufacturing business gross profits Gross profits of the manufacturing businesses are summarized for the past three years as follows: (in thousands of dollars) Waumbec textile operation Berkshire textile operation $2,972 $3,583 K & W automotive chemicals 1,627 579 $2,951 (48) 1,438 1,550 $4,599 $5,600 $4,453 1975; the total achieved in 1976 was, however, less than satisfactory. Prices deteriorated somewhat in 1977 Berkshire textile operation: Volume and price increases in 1976 resulted in improved gross profits over from the less than satisfactory 1976 level, while manufacturing costs continued to increase; this combina- tion resulted in $632,000 less gross profits in 1977 than in 1976 on increased sales. Waumbec textile operation: Unfavorable manufacturing cost variances were experienced in the Waumbec operation in 1976 and these persisted in 1977. Further, in 1977, production curtailments were made at this operation to the extent that approximately 50% of capacity was not utilized. In the last quarter of 1977, an increased order rate and slightly improved prices were noted. Management expects greater utilization of Waumbec capacity for 1978, at least some gross profit contribution, and possibly a net profit contribution. Equity in Net Earnings of Blue Chip Stamps for each of the past three years has been as follows: Berkshire's equity in net earnings of Blue Chip Stamps ("Blue Chip") computed by the equity method 1975 1976 1977 Equity in net earnings Applicable income taxes $2,346 $3,733 $5,977 Amortization of difference between cost and • • (169) (269) (430) equity in net asets ... (174) (98) 192 $2,003 $3,366 $5,739 Equity in 1977 net earnings of Blue Chip includes $1,494,000 representing equity in Blue Chip's realized ecurities gains. Applicable Berkshire income taxes on such amount were approximately $108,000, so tha Berkshire's 1977 net earnings were enhanced $1,386,000, or $1.43 per outstanding Berkshire share, as a resul of such securities gains of Blue Chip. each of the past three years. Average shares owned in 1975, 1976, and 1977 were, respectively, 1,325,233, The average number of shares of Blue Chip owned by Berkshire has increased from the prior year in 1,579,090, and 1,781,033. At 1977 year end, Berkshire's ownership of Blue Chip shares had increased to 1,889,903, representing approximately 36.5% of Blue Chip's outstanding shares. 13

[PAGE 16]

PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS RIEWIT PLAZA OMAFA, NEBRASKA 68131 The Board of Directors and Stockholders Berkshire Hathaway Inc.: We have examined the consolidated balance sheets of Berkshire Hathaway 1977, the balance sheets of the Berkshire Hathaway Inc. - Insuranc Inc. and consolidated subsidiaries as of December 31, 1977 and January 1 Group as of December 31, 1977 and 1976, and the related consolidated statements of earnings and retained earnings and changes in financial position of Berkshire Hathaway Inc. for the 52 weeks ended December 31, surplus and changes in financial position of the Berkshire Hathaway Inc. - 1977 and January 1, 1977 and the statements of income and unassigned examinations were made in accordance with generally accepted auditing Insurance Group for the years ended December 31, 1977 and 1976. standards, and accordingly included such tests of the accounting records circumstances. and such other auditing procedures as we considered necessary in the We did not examine the financial statements of Blue Chip Stamps, an investee of the Company. The Company's investment in and 921,304,491, respectively, and its equity in net earnings of Blue Chip blue chip stamps at December 31, 1977 and January 1, 1977 was $35, 773,558 Stamps was $5, 738, 694 and $3,365,946 for the years 1977 and 1976, respectively. by other auditors whose report thereon has been furnished to us and our l'he financial statements of Blue Chip Stamps were examined opinion expressed herein, insofar as it relates to the amounts included for Blue Chip Stamps, is based upon the report of the other auditors. In our opinion, based upon our examinations and the report of other fairly the financial position of Berkshire Hathaway Inc. and consolidated auditors, the aforementioned consolidated financial statements present subsidiaries at December 31, 1977 and January 1, 1977 and the Berkshire Hathaway Inc. - Insurance Group at December 31, 1977 and 1976 and the for the respective years then ended, in conformity with generally accepted results of their operations and the changes in accounting principles applied on a consistent basis. PeAT, MaRwicK, Merchen A Co. March 17, 1978 14

[PAGE 17]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS Dec. 31, 1977 Jan. 1, 1977 Cash $ 4,920,576 $ 3,436,996 Investments, other than affiliates (note 5): U. S. Treasury Bills and other short-term obligations, at cost which approx- Bonds, at amortized cost imates market 127,324,424 18,635,379 89,215,773 15,489,052 Preferred stocks, at cost 23,231,882 22,286,948 Common stocks of unaffiliated companies, at cost 83,656,835 Total investments, other than affiliates 252,848,520 _53,108,266 130,100,039 Investments in affiliates (notes 4 and 6): Common stock of Blue Chip Stamps 35,773,558 Unconsolidated bank subsidiary 25,839,229 27,304,491 24,731,779 Other unconsolidated subsidiaries 1,612,102 879,602 Total investments in affiliates 63,224,889 52,915,872 Inventories (note 8) Accounts receivable from customers, agents and others, net (note 7) 31,203,596 10,008,048 23,730,027 1 9,301,321 Real estate, equipment, furniture and leasehold improvements, at cost less Deferred insurance premium acquisition costs allowance for depreciation and amortization (note 9) 9,810,000 5,580,507 6,820,000 5,051,699 Other assets $379,240,882 1,644,746 $283,041,269 1.685,315 LIABILITIES AND STOCKHOLDERS' EQUITY Losses and loss adjustment expenses $133,591,629 $ 85,152,259 8% Senior Notes due 1993 (note 11) Unearned premiums 52,190,714 20,000,000 36,736,618 20,000,000 Notes payable to bank (note 17) Promissory notes and debentures (note 10) 4,342,647 2,000,000 4,986,586 Income Taxes: Accounts payable, accrued expenses, and other liabilities 17,215,634 12,849,261 Deferred Current 1,524,036 237,452,479 6,587,819 3,346,111 167.748,136 4,677,301 Stockholders' equity (note 11): Common stock of $5 par value. Authorized 1,100,000 shares; issued 979,569 Retained earnings shares 4,897,845 4,897,845 . • 137,551,775 110,827,343 142,449,620 115,725,188 Less common stock in treasury at cost (8,891 shares December 31, 1977; 6,647 shares January 1, 1977) Total stockholders' equity :: 661,217 141,788,403 115,293,133 432,055 Commitment and contingent liability (notes 13 and 16) $379,240,882 $283,041,269 See accompanying notes to consolidated financial statements. 15

[PAGE 18]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS Year ended Dec. 31, 1977 Jan. 1, 1977 Income items: Insurance premiums earned $136,890,470 $ 80,780,074 Interest and dividend income Net sales of manufactured products 48,189,227 47,173,989 12,548,889 10,820,148 Real estate income .... 287,927 293,693 197,916,513 139,067,904 Cost and expense items: Insurance losses and loss adjustment expenses 91,585,058 55,376,421 Cost of manufactured products sold Insurance underwriting expenses • • • 39,121,500 43,736,247 41,573,438 Selling, administrative and other expenses • . . . ... 24,694,390 5,868,864 4,949,424 Interest expense ... • 2,075,158 2,028,106 182,386,827 128,621,779 Earnings from insurance and manufacturing operations before appli- cable income taxes 15,529,686 10,446,125 Income tax expense applicable to operating earnings (note 12) 2,914,432 1,488,659 Earnings before equity in net earnings of other companies and realized Equity in net earnings of bank subsidiary investment gains 12,615,254 8,957,466 3,550,000 3,750,000 Equity in net earnings of Blue Chip Stamps (note 4) 5,738,694 3,365,946 Earnings before realized investment gains 21,903,948 16,073,412 Realized investment gains 6,870,484 9,961,584 Applicable income tax expense • • • • 2,050,000 3,200,000 Net realized investment gains 4,820,484 6,761,584 Net unrealized appreciation in market value of preferred and common stocks of unaffiliated companies of $28,528,000 in 1977 and $45,388,000 in 1976 has not been included in the determination of net earnings. Net earnings 26,724,432 22,834,996 Retained earnings at beginning of year 110,827,343 87,992,347 Retained earnings at end of year $137,551,775 $110,827,343 Earnings per share of common stock, based on weighted average outstanding shares: Earnings before realized investment gains $22.54 $16.47 Realized investment gains • • • • . 4.96 6.93 Net earnings . . . . $27.50 $23.40 See accompanying notes to consolidated financial statements. • 16

[PAGE 19]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Year ended Dec. 31, 1977 Jan. 1, 1977 Funds provided: From operations: Net earnings Charges (credits) to earnings not requiring (providing) funds: $26,724,432 $22,834,996 Equity in undistributed earnings of bank subsidiary (5,740,739) (1,107,450) (3.255,762) (1,307,450) Equity in undistributed earnings of Blue Chip Stamps Accretion of discount on bonds (890,266) Depreciation and amortization Increase in deferred insurance premium acquisition costs (2,990,000) 734,463 (1,033,805) (3,832,608) 618,024 Increase in accounts receivable from customers, agents and others Decrease in recoverable income taxes Increase in inventories (5,371,423) (3,589,461) 4,400,000 (706,727) (892,738) Increase in unpaid losses and loss adjustment expenses Increase in liability for income taxes Increase in unearned premiums 35,632,125 14,192,666 10,970,214 10,130 13,992,841 5,305,080 Other, net 36,731,483 2,968,704 1,570,552 Dividends received from unconsolidated subsidiaries Funds provided from operations .... 63,455,915 45,779,883 22,944,887 Proceeds from issuance of debt 2,000,000 50,000 1,218,473 224,000 Decrease in cash 2,885,944 $65,505,915 $50,108,300 Funds used: Net assets of acquired businesses: Cash $ Investments 15,526,994 462,140 $ 3,734,736 278,414 Inventories Accounts receivable 2,102,146 430,461 186,346 626,600 272,968 Other assets Real estate and equipment (12,807,245) (1,148,553) 646,822 Unearned premium Loss and loss adjustment expenses Other liabilities (1,516,551) (1,261,430) (399,487) (177,181) 1,076,925 2,692,400 4,264,780 Repayment of debt Additions to real estate, equipment, furniture and leasehold improvements 643,939 1,320,881 Purchase of treasury stock •... 229,162 340,187 Cost of net purchase (sale) of investments: 432,055 Bonds U.S. Treasury bills ...... . :: 22,562,607 3,146,327 (1,773,574) Preferred stocks 30,548,569 73,718 19,728,673 8,685,226 Common stock of Blue Chip Stamps Common stocks of unaffiliated companies 2,728,328 11,855,553 Unconsolidated subsidiaries 5,271,250 Net purchase of investments 59,812,049 782,500 (16,731) Increase in cash $65,505,915 1,021,440 43,750,397 $50,108,300 See accompanying notes to consolidated financial statements. 17

[PAGE 20]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1977 and January 1, 1977 (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 companies (The "Insurance Group"), wholly-owned by Berkshire Hathaway Inc. wholly-owned subsidiaries engaged in manufacturing businesses, and the accounts of subsidiary insurance The parent Company's investment in The Illinois National Bank & Trust Co. of Rockford is accounted for on the Insignificant subsidiaries are not consolidated and investments therein are carried at cost less dividends equity basis. The accounts of the parent Company and its consolidated manufacturing subsidiaries are maintained on the received from such subsidiaries. basis of a fiscal year ending on the Saturday nearest to December 31, while the accounts of other subsidiaries, primarily the Insurance Group, are maintained on the basis of the calendar year. (b) Investment in Securities, Other than Affiliates Investments in bonds are stated at amortized cost; investments in preferred and common stocks other than affiliates are carried at the lower of aggregate cost or market value. (c) Investment in Blue Chip Stamps The investment in Blue Chip Stamps ("Blue Chip") is accounted for on the equity basis. Deferred income taxes are provided for with respect to undistributed earnings of Blue Chip under the assumption that such earnings will be distributed as taxable dividends. (d) 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 acquisition costs such as commissions, premium taxes and certain other underwriting expenses are, reinsurers in the amount of $5,268,090 at December 31, 1977 and $4,281,000 at December 31, 1976. Premium pursuant to statutory insurance accounting rules, charged against income when incurred. However, for financial statement purposes, a portion of such costs are deferred and charged against income as the related premiums are earned. (e) Losses and Loss Adjustment Expenses The Insurance Group provides for losses and loss adjustment expenses based upon (1) aggregate case basis estimates for losses reported, in respect to direct premiums written, (2) estimates of unreported losses based upon past experience, (3) estimates received relating to assumed reinsurance, and (4) deduction of amounts for reinsurance placed with reinsurers in the amount of $8,532,954 at December 31, 1977 and $8,619,481 at December 31, 1976. (f) Real Estate, Equipment, Furniture and Leasehold Improvements These items of property (including significant betterments and renewals) are carried at cost depreciated over their useful lives estimated at the date of acquisition. The double-declining balance method is used to calculate depreciation of new items of textile properties acquired after 1965; the straight-line method is applied for other items. Maintenance, repairs and renewals of a minor nature are generally charged to operations as incurred. (g) Inventories Inventories relate to manufacturing operations and are stated at cost, determined for the parent Company under the last-in, first-out method. Inventories of manufacturing subsidiaries are stated at the lower of cost or market, determined under the first-in, first-out method. 18

[PAGE 21]

1 g Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (h) Income Taxes A consolidated Federal income tax return is filed by the parent Company and its eligible subsidiaries. Amounts included in the consolidated balance sheets for Federal income taxes payable or recoverable include the apportioned Federal tax 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 Insurance Group accounts for certain income and expense items for financial reporting purposes and the Investment tax credits on qualifying property and equipment acquisitions are applied as a reduction of accounting treatment of these items for income tax purposes. income tax expense in the 'year realized. (2) Acquired Businesses On December 23, 1977, an insurance subsidiary of the Company purchased for approximately $2.7 million cash all in the underwriting of Workers' Compensation insurance in the state of California. The acquired assets are included in of the outstanding capital stock of Cypress Insurance Company, South Pasadena, California. That company is engaged the December 31, 1977 balance sheet of the Insurance Group, which is included in the year-end consolidated balance sheet of the Company. No operations of Cypress are reflected in the statements of earnings. The pro forma effect of this acquisition on 1977 earnings, assuming ownership of Cypress throughout all of the year, while not deemed material, would have been to increase consolidated net earnings by approximately 50c per share. In January 1976, the Company acquired net assets valued at approximately $2.1 million comprising a business engaged in the manufacture and sale of branded chemical products used in the automotive after market. Manufacturing facilities of this business are located in Los Angeles, California and Bloomington, Indiana. The acquisition was accounted for as a purchase and results of the operations are included in the 1976 and 1977 consolidated statements of earnings. In a related transaction on the same date, an insurance subsidiary of the Company purchased for approxi- previously been conducted with and through the Company's Insurance Group. 1976 and 1977 results of this acquired mately $2.2 million all of the outstanding capital stock of a small reinsurance operation, the business of which had caria, as maid a te ales of come of to lane roup and to concild atens of (3) Business Segments FASB Statement No. 14 requires inclusion of the data in this note as to 1977. Information for earlier years is presented to satisfy certain disclosure requirements of the Securities and Exchange Commission. Major business segments of the Company are the manufacturing and sale of woven textiles and the underwriting of property and casualty insurance. Products of the textile business are principally sheer curtain fabrics of synthetic materials. To a lesser degree, the Company deals in heavier textile fabrics marketed in part to the home furnishings trade and in part to the womenswear trade, plus fabrics marketed for use as menswear lining materials. The insurance business (a) underwrites automobile and general liability risks (b) provides Workers' Compensation coverages (c) reinsures risks assumed from other insurers and (d) writes multiple line fire and casualty coverages in domiciliary states of its "Homestate" companies. In the following tables, revenues of the insurance business include investment income of subsidiaries comprising the Insurance Group. Operating profit is total revenue less total expense identified with each segment. In computing operating profit identified with segments, none of the following items has been added or deducted: equity in income expense. Neither depreciation nor capital expenditures are significant to either of the major business segments. from unconsolidated subsidiary and investee, realized investment gains, general corporate expenses and interest has a significant investment in Blue Chip Stamps which has been excluded from assets identified with the insurance Identifiable assets by industry are those used in the operations in each industry except that the insurance business industry; this exclusion is in line with exclusion from income and operating profit of the insurance industry of income relating to such investment. 19

[PAGE 22]

-.. Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Sources of Revenue Insurance 1972 1976 1975 Textiles $149,710 1974 1973 45,498 $ 91,617 44,644 $ 67,116 Other 2,709 2,807 32,833 $ 68,776 32,592 $ 60,526 33,410 Total Revenue . . . . • • ... $197,917 $139,068 $100,375 426 $101,482 114 $ 94,005 69 Operating Profit Identified with segments: Textiles Insurance $ 18,166 (620) $ 10,970 • • 593 1,148 $ (2,327) 1,289 $ 2,660 892 $ 10,249 Other Not identified with segments: Segments Operating Profit (Loss) •.. 18,139 12,914 796 (612) 426 3,666 114 2,837 13,155 69 Equity in net earnings of Blue Chip Stamps Equity in net earnings of bank subsidiary 6,169 3,550 3,750 Interest expense General corporate expenses 6,870 3,635 3,450 Realized investment gains (losses) (534) 9,962 2,172 4,093 (1,908) 1,164 2,782 Income (loss) before taxes $ 32.119 (2,075) (439) (2,888) 1,124 (2,029) (422) (1,715) (723) 1,331 $ 27,793 $ (1,846) (433) (146) 4,577 (1,602) Identifiable Assets at Year End $ 16,357 Identified with segments: Insurance Textiles $291,534 22,480 $206,644 .. ... 315,866 1,852 20,621 $158,657 1,973 17,821 $157,967 13,282 $144,121 Other 14,786 Not identified with segments: 229,238 176,478 171,249 158,907 Corporate cash and short-term investments Investment in Blue Chip Stamps Investment in Illinois National Bank & Trust Co. 25,839 150 24,732 887 5,942 27,304 23,424 4,437 63.375 marinara 53,80 880 18,777 22,417 1,171 Investment in unconsolidated subsidiaries 35,774 1,120 16,924 21,003 1.612 13,717 49,263 _ 1,187 1,334 Total Consolidated Assets $379,241 44,965 $283,041 $225,741 $216,214 $196,132 37,225 (4) Blue Chip Stamps The Company's consolidated investment in Blue Chip Stamps ("Blue Chip") was 25.6% at January 3, 1976, 33.2% at January 1, 1977 and increased to 36.5% at December 31, 1977. The investment is accounted for by the equity method. At year end 1977 the Company's carrying value of its consolidated holdings of Blue Chip shares amounted to $35,773,558 which is $1,350,639 less than underlying net asset value. Underlying net asset value with respect to Blue Chip shares held by the Insurance Group was $230,343 less than carrying value at December 31, 1977. Blue Chip Stamps, a California corporation, and its subsidiaries are engaged in five lines of business: (1) See's Candy Shops, Incorporated, a 99%-owned subsidiary, produces candy and other confectionery products of the highest quality in two fully equipped kitchens in California. See's is believed to be one of the largest candy manufacturers Stamps provides a trading stamp service to retail merchants and their customers in California and Nevada. Stamp distributing through its own chain of retail shops; it now has 179 in nine western states including Hawaii. (2) Blue Chip service revenues have declined significantly in recent years from a peak of $124,180,000 in the fiscal year ended February 28, 1970 to $15,723,000 for the fiscal year ended December 31, 1977. Over the past six years Blue Chip has reduced the number of redemption stores from a peak of 90 to 42 at present. (3) Blue Chip operates a separate "motivation division" Financial Corporation, an 80%-owned subsidiary, owns all of the outstanding stock of Mutual Savings and Loan on a nationwide basis, tailoring for businesses programs designed to perform motivational functions. (4) Wesco 20

[PAGE 23]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Association which operates at sixteen locations in Southern California. (5) Buffalo Evening News, a 100% owned subsidiary purchased in April 1977, publishes a daily newspaper in Buffalo, New York. The balance sheets of Blue Chip as of December 31, 1977 and January 1, 1977 are summarized as follows: BLUE CHIP STAMPS Consolidated Balance Sheets Assets Dec. 31, 1977 ($000 omitted) Jan. 1, 1977 Marketable securities, at market December 31, 1977 (cost - $55, 186); at cost January Cash and short-term investments $ 16,559 $ 14,162 Inventories 1, 1977 (market - $73,240) .... • .. 53,010 63,143 7,332 6,493 Investment in Wesco Financial Corporation Property, fixtures and equipment, net 40,414 8,417 43,892 38,661 Excess of cost over equity in net assets of consolidated subsidiaries 15,439 15,128 Other assets 23,460 21,133 $200,106 $167,137 Liabilities and Stockholders' Equity Liability for unredeemed trading stamps $ 66,209 $ 66,867 64% subordinated debentures due 1978 2,168 4,287 Other liabilities Note payable to bank ..... 13,500 Stockholders' equity ....... 18,978 9,995 - 99,251 85,988 $200,106 $167,137 A footnote accompanying the 1977 financial statements of Blue Chip Stamps stated that Buffalo Evening News, Inc., a subsidiary of Blue Chip, was engaged in certain legal proceedings, with counsel for Blue Chip unable at this time to express any opinion as to the likely outcome of the action. Blue Chip's investment in such subsidiary represented approximately one-third of its total shareholders' equity at December 31, 1977. Earnings of Blue Chip for the past two years are summarized below: BLUE CHIP STAMPS Consolidated Earnings Summaries 52 weeks ($000 omitted) ended 53 weeks Dec. 31, 1977 Jan. 1, 1977 ended Candy Revenues: Newspapers ...... . ..... $ 62,886 31,786 $56,333 Stamp service 15,723 17,208 - Merchandise promotion and motivation service • • Other ... Total revenues . . . .. • 2,485 8,888 $117,173 4,293 $88,322 5,893 Earnings before securities gains or losses Per share ... ... ...... $ 12,893 2.49 $11,780 Net earnings Per share .. .. • • • 16,993 11,703 2.27 •. • 3.28 2.26 21

[PAGE 24]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The Company's equity in net earnings of Blue Chip reflects the following for the past two years. Dividends received 1977 1976 Provision for current income taxes Equity in undistributed earnings $ 428,311 5,548,893 $ 378,982 Provision for deferred income taxes (30,838) 3,354,381 Amortization of difference between cost of investment and underlying net asset (399,518) (241,515) (27,282) values .... 191,846 $5,738,694 $3,365,946 (98,620) (5) Investment in Securities of Unaffiliated Companies companies at December 31, 1977 and 1976 is as follows: A summary of the aggregate cost and approximate market value of investments in securities of unaffiliated Cost 1977 Market Cost 1976 Bonds Market $127,324,424 $131,179,864 $89,215,773 $ 90,425,187 Equity securities: Preferred stocks Common stocks 23,231,882 83,656,835 144,001,968 37,070,565 53,108,266 22,286,948 32,732,520 $106,888,717 $181,072,533 $75,395,214 $121,050,665 88,318,145 unrealized losses, $2,778,459. Net realized gains of $6,870,484 on the sale of securities were included in the determination At December 31, 1977, with respect to equity securities, gross unrealized gains were $76,962,278 and gross of net income for 1977. The cost of securities sold is generally determined on a first-in, first-out basis. Bonds and stocks of unaffiliated companies were deposited in trust with various regulatory authorities or others as December 31, Bonds - at amortized cost 1977 1976 Common stocks - at cost :::::::: $30,421,453 5,399,300 18,606,648 7,199,764 (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 13 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 $27,451,331 at December 31, 1977 and $25,611,381 at January 1, 1977 for all unconsolidated subsidiaries were approximately $2,500,000 in excess of the parent Company's equity in the net assets as reflected in the financial statements of the subsidiaries at those dates. The major portion of this excess cost originated prior to indefinite period. November 1, 1970 and is not being amortized since it is considered by management to have continuing value over an 22

[PAGE 25]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (7) Receivables Accounts receivable from customers, agents and others was made up of the following: December 31, 1977 1976 Insurance Group: Investment income due and accrued Agents' balances and premiums in course of collection $12,733,598 $ 7,861,366 Amounts due from sale of securities Reinsurance recoverable on loss payments 2,786,138 5,837,052 2,005,335 286,641 5,221,214 135,601 Textile business trade accounts receivable (less allowance for doubtful accounts, 21,643,429 15,223,516 Automotive chemicals business trade accounts receivable 1977 - $492,176; 1976 - $434,785) : 9,168,579 391,588 8,101,575 $31,203,596 $23,730,027 404,936 (8) Inventories A summary of inventories follows: Textile business: Dec. 31, 1977 Jan. 1, 1977 Raw materials and supplies Stock in process ::..: $ 1,448,498 $ 1,966,793 Griege and finished cloth 2,514,368 2,488,847 ...... 5,802,982 9,765,848 4,520,086 8,975,726 Automotive chemicals business $10,008,048 242,200 325,595 $ 2,301,321 subsidiaries are stated at the lower of cost or market, determined under the first-in, first-out ("FIFO) method. Cost Inventories of the parent Company are determined by the last-in, first-out ("LIFO") method. Inventories of using FIFO for all inventories would have exceeded balance sheet carrying amounts by $1,976,635 at December 31, 1977 and $1,542,744 at January 1, 1977, respectively. (9) Real Estate, Equipment, Furniture and Leasehold Improvements The composition of plant and equipment is shown below: Properties of Properties December 31, 1977 manufacturing of Land operations Insurance Group Total Buildings .... ......: $ 251,360 Machinery and equipment 2,823,580 $ 143,247 Furniture and fixtures and leasehold improvements ::: 14,504,402 1,604,709 $ 394,607 4,428,289 841,891 14,504,402 Less accumulated depreciation and amortization 18,421,233 1,783,980 $ 3,416,774 15,004,459 1,368.203 3,531,936 2,625,871 16,372,662 21,953,169 $2,163,733 $ 5,580,507 23

[PAGE 26]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Properties January 1, 1977 Total Land Buildings • • • $ 251,360 Furniture and fixtures and leasehold improvements Machinery and equipment 14,033,720 2,792,915 $ 128,847 1,365,863 $ 380,207 4,158,778 • 821,803 1,271,184 14,033,720 Less accumulated depreciation and amortization • • 14,484,374 17,899,798 1,129,619 2,765,894 2,092,987 20,665,692 $ 3,415,424 $1,636,275 15,613,993 (10) Promissory Notes and Debentures $ 5,051,699 1988 at interest rates varying from 6% to 9%. Maturities and debenture sinking fund requirements are as follows: Promissory notes and debentures payable represent unsecured debt obligations payable at various dates through Year 1978 Amount 1980 1979 $ 644,784 597,555 1982 1981 799,896 1983-1988 .... 330,866 325,358 $4,342,647 1,644,188 (11) 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 5.9% 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 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 restricted subsidiaries, as defined, to limitations as to permissible outstanding funded debt and subordinated funded 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 $81,000,000 as of December 31, 1977 are restricted by this provision. The loan agreement also contains limiting terms relating to sales of the Company's assets, mergers and consolida- tions, and allows the noteholders to demand prepayment, at par, within 60 days of notice that, during the lifetime of Warren E. Buffett, stock ownership in the parent Company by Warren E. Buffett and the members of his immediate family, including certain trusts and charitable organizations, has decreased to less than 15% of the outstanding capital stock of the parent Company. 24

[PAGE 27]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (12) Income Taxes of the following: Income tax expense for 1977 represents current expense of $3,484,270 and deferred expense of $1,910,518 composed U.S. Foreign, Totals: Federal state and local Total Applicable to earnings of Blue Chip Stamps Applicable to operating earnings $2,847,272 Applicable to realized investment gains 2,050,000 430,356 $67,160 $2,914,432 430,356 $5,327,628 $67,160 2,050,000 $5,394,788 Current expense applicable to: Realized investment gains Current ordinary income for tax purposes $1,207,110 2,210,000 $67,160 $1,274,270 3,417,110 67,160 2,210,000 Deferred expense (credit) applicable to: 3,484,270 Discount on bonds currently accreted Change in deferred insurance premium acquisition costs 1,436,000 1,436,000 Cumulative accreted discount on bonds sold . . . . Undistributed income of Blue Chip Stamps 399,518 235,000 235,000 (160,000) (160,000) 399,518 Total tax expense $5,327,628 1,910,518 $67,610 $5,394,788 1,910,518 total income taxes as shown above follows: Total net income before taxes was $32,119,220. A reconciliation of income tax expense at the statutory 48% rate to Tax expense at 48% statutory rate Amount Decreases resulting from: $15,417,226 100% exclusion relating to equity in earnings of the Illinois National Bank Tax-exempt interest income (2,136,000) 85% dividends received credit: (1,704,000) On dividends from unaffiliated companies Long-term capital gains rate differential On equity in earnings of Blue Chip Stamps • . . . . ... (2,103,000) Credit from unconsolidated subsidiary .... (2,439,000) (1,161,000) Other, net :::: .. (227,000) $ 5,394,788 (252,438) amount of $2,500,000 of which approximately $850,000 expires in 1978. These can only be offset against taxable income As of December 31, 1977, unused net operating loss carryovers in acquired subsidiaries exist in the approximate 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. 25

[PAGE 28]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (12) Income Taxes (continued) Income tax expense for 1976 represents current expense of $2,819,941 and deferred expense of $2,137,515, composed of the following: Federal U.S. state and Foreign, local Total Totals: Applicable to equity in earnings of Blue Chip Stamps Applicable to operating earnings $1,263,270 268,797 $225,389 $1,488,659 Applicable to realized investment gains 3,200,000 = 268,797 $4,732,067 $225,389 $4,957,456 3,200,000 Current expense (credit) applicable to: Realized investment gains Current ordinary income (loss) for tax purposes $ (845,448) $225,389 $ (620,059) 3,440,000 2,594,552 225,389 2,819,941 3,440,000 Deferred expense (credit) applicable to: Change in deferred insurance premium acquisition costs 1,836,000 Undistributed income of Blue Chip Stamps Discount on bonds currently accreted 300,000 1,836,000 Cumulative accreted discount on bonds sold 241,515 - 300,000 (240,000) 241,515 2,137,515 (240,000) 2,137,515 Total tax expense $4,732,067 $225,389 $4,957,456 Total net income before taxes was $27,792,451. A reconciliation of income tax expense at the statutory 48% rate to total income taxes as shown above follows: Amount Tax expense at 48% statutory rate $13,340,000 (Decreases) increases resulting from: Tax-exempt interest income (2,021,000) 100% exclusion relating to equity in earnings of the Illinois National Bank 85% dividends received credit: (1,800,000) On dividends from unaffiliated companies (1,301,000) On equity in earnings of Blue Chip Stamps (1,721,000) (1,523,000) Long-term capital gains rate differential Credit to unconsolidated subsidiary . . (149,000) 237,000 Other, net Difference in tax basis of assets 104,544) Total income tax expense $ 4,957,456 (13) "One-Bank Holding Company" Status Reserve Board an irrevocable election to divest of its holdings in The Illinois National Bank & Trust Co. of Rockford The Company is a bank holding company under Federal legislation enacted in 1970. It has filed with the Federal prior to January 1, 1981. No determination has been made as to how it will effect such divestiture, and so long as the Company controls the bank it is subject to the restrictions imposed upon it by the Bank Holding Company Act. (14) "Savings and Loan Holding Company" Status California savings and loan association, is a savings and loan holding company under the Savings and Loan Holding The Company, as a result of its investment in Blue Chip Stamps which in turn holds controlling interest in a Company Amendments of 1967. As such, the Company is subject to the restrictions and regulatory requirements imposed upon it by the Savings and Loan Holding Company Act. 26

[PAGE 29]

Berkshire Hathaway Inc. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (15) Transactions with Affiliates Columbia Insurance Company ("Columbia"), a subsidiary of Diversified Retailing Company, Inc. ("Diversified"). Members of the Insurance Group in 1977 and 1976 engaged in transactions in the ordinary course of business with Warren E. Buffett, Chairman of the Board of the Company, is also Chairman of the Boards of Columbia and Diversified. At the end of 1977, Mr. Buffett owned more than 50% of the outstanding shares of Diversified. In 1977 and 1976, in connection with reinsurance business, gross premiums of $7,293,705 and $5,777,098, respectively, were ceded to Columbia by insurance subsidiaries of the Company. National Indemnity Company performs all of Columbia's bookkeeping and other administrative services. For these services Columbia pays to National Indemnity Company as part of its ceding commissions an amount ordinarily equal to one-half of the customary originating brokerage commissions. The amount of ceding commissions representing fees for bookkeeping and administrative services paid by Columbia to National Indemnity Company was $59,340 in 1977 and $35,334 in 1976. Reinsurance transactions with Columbia are effected at rates comparable to rates in similar transactions conducted at arm's length with unrelated parties, except as to that portion of the ceding commissions representing fees as to which there are no similar from the Company's Insurance Group contributes an element of marketing strength to the Group. transactions with unrelated parties; management believes that Columbia's capacity to accept cessions of reinsurance (16) Litigation The Company, together with a number of subsidiaries, officers, directors and employees of the Company and certain subsidiaries, was named as a defendant in a lawsuit filed in mid 1975 alleging numerous causes of action and 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. (17) Compensating Balance In accordance with the terms of a $6 million line of credit with a bank, the Company has agreed to maintain an average cash compensating balance of 10% of the line of credit plus 10% of the amount of borrowing under the line that may be outstanding from time to time, based upon the bank's ledger records without adjustment for uncollected funds. 1977 and $630,000 in 1976. The approximate average amount of short-term debt outstanding during 1977 and 1976, using The average compensating balances required to be maintained under this agreement were approximately $750,000 in daily balances, were $1,485,000 and $300,000, respectively. Average interest cost on borrowings under the line in 1977 was 6.86%; in 1976, 6.75%. The maximum amount of short-term debt outstanding at any month-end was $5,000,000 during 1977 and $1,200,000 during 1976. At December 31, 1977, $2,000,000 was outstanding under the line of credit. 27

[PAGE 30]

Berkshire Hathaway Inc. INSURANCE GROUP BALANCE SHEETS December 31, Investments - other than investments in affiliates (note 5): ASSETS 1977 1976 Bonds, at amortized cost Common stock, at cost Preferred stock, at cost .. $127,324,424 : 23,231,882 $ 89,215,773 U.S. Treasury Bills - at cost which approximates market 83,656,835 53,108,266 22,286,948 Total investments - other than investments in affiliates • 252,848,520 18,635,379 179,603,481 14.992,494 Investment in Blue Chip Stamps (note C) Cash :.: 4,532,113 Premiums receivable and agents' balances Accrued investment income 21,697,062 17,740,283 2,592,562 2,786,138 Reinsurance recoverable on paid losses 12,733,598 2,005,335 Property and equipment, at cost less accumulated depreciation (note 9) 5,837,052 5,221,214 7,861,366 Other assets Deferred premium acquisition costs 2,163,733 9,810,000 1,636,275 $313,231,298 823,082 6,820,000 $224,384.330 903,814 Losses and loss adjustment expenses LIABILITIES, CAPITAL STOCK AND SURPLUS Funds held under reinsurance treaties Unearned premiums $133,591,629 52,190,714 $ 85,152,259 36,736,618 Current income taxes Amounts due for purchase of securities 5,030,020 1,338,425 3,783,169 .. 6,276,889 909,946 2,560,922 839,495 Other liabilities Deferred income taxes 4,536,139 203,361,337 4,023,714 135,921,789 2,313,187 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 value. Authorized 50,000 shares; issued 25,000 shares 2,500,000 Unassigned surplus (note D) 20,601,250 20,601,250 2,500,000 lotal capital stock and surplus ... 109,869,961 81,268,711 59,861,291 $313,231,298 $224,384,330 88,462,541 See accompanying notes to financial statements. 28

[PAGE 31]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF INCOME AND UNASSIGNED SURPLUS December 31, Year Ended 1977 1976 Underwriting income: Premiums written Increase in unearned premiums • • $151,083,136 $ 94,772,915 Losses and claims Premiums earned (14,192,666) ...... 136,890,470 (13,992,841) 80,780,074 Loss adjustment expenses 76,762,779 Underwriting expenses (note E) ... 14,822,279 10,766,719 44,609,702 130,706,558 39,121,500 80,070,811 24,694,390 Underwriting gain 6,183,912 709,263 Investment income: Interest on bonds Real estate income Dividends on stocks of unaffiliated companies 7,376,481 5,155,060 7,412,730 3,130,747 12,819,468 287,927 293,693 Less investment expenses 537,938 10,837,170 Net investment income 12,281,530 10,437,815 399,355 Other expenses 298,899 177,199 Income before income taxes and items below 18,166,543 10,969,879 Applicable tax expense (note F) Income before items below 15,452,931 2,713,612 9,835,057 1,134,822 Equity in earnings of Blue Chip Stamps (note C) 3,134,005 1,637,465 Income before realized gain on investments 18,586,936 11,472,522 Realized gain on investments Applicable income tax expense (note F) 2,050,000 6,870,484 10,242,849 3,200,000 Net realized gain on investments (note G) 4,820,484 7,042,849 Net unrealized appreciation in market values of preferred and common in 1976 has not been included in the determination of net income. stocks of unaffiliated companies of $28,528,000 in 1977 and $45,388,000 Net income 23,407,420 18,515,371 Unassigned surplus at beginning of year Dividends paid to stockholder •••. 59,861,291 42,345,920 5 200000 $ 59,861,291 (1,000,000) Unassigned surplus at end of year See accompanying notes to financial statements. 29

[PAGE 32]

Berkshire Hathaway Inc. INSURANCE GROUP STATEMENTS OF CHANGES IN FINANCIAL POSITION December 31, Year ended Funds provided: 1977 1976 From operations: Net income Charges (credits) to income not requiring (providing) funds: $ 23,407,420 $ 18,515,371 Equity in undistributed earnings of Blue Chip Stamps Accretion of discount on bonds (3,130,476) (890,266) (1,561,912) 35,632,125 198,179 (1,033,805) 10,970,214 162,972 14,192,666 Increase in agents' balances and premiums in course of collection 1,246,851 13,992,841 Increase in reinsurance recoverable on loss payments (3,146,300) (858,928) 843,707 Increase in deferred acquisition costs (594,050) Increase in liability for income taxes Decrease in recoverable income taxes (2,990,000) (3,832,608) (700,302) Increase in accrued investment income 11,461 4,604,059 4,100,000 Other, net 1,002,991 (577,417) (356,043) Funds provided from operations 40,955,764 26,637,114 306,919 Funds used: 64,363,184 45,152,485 Subsidiary acquired: Preferred and common stocks Bonds $ 14,655,778 U.S. Treasury Bills 871,216 $ 1,911,578 735,797 Cash Unpaid losses and loss adjustment expenses Other assets and deferred charges 2,288,492 462,140 887,361 126,204 Unearned premiums (12,807,245) 94,430 Other liabilities (1,261,430) (1,148,553) (1,516,551) (399,487) Purchase of real estate, furniture and equipment 2,692,400 2,174,512 (32,818) Dividend paid Net purchase of investments 1,477,411 2,000,000 7.654.08 539,291 41,239,554 273,001 Increase in cash 1,000,000 Net purchase of investments: $ 64,363,184 $ 45,152,485 465,418 U.S. Treasury Bills Preferred stocks Bonds 22,562,607 3,642,885 192,290 Common stock of Blue Chip Stamps Common stocks of unaffiliated companies 30,548,569 73,718 19,728,673 8,685,226 Net cost of investments purchased 826,303 11,855,553 • $ 57,654,082 $ 41,239,554 777,812 See accompanying notes to financial statements. 30

[PAGE 33]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS December 31, 1977 and 1976 (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- 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 trom principles prescribed or permitted by insurance regulatory authorities (statutory method) in accordance ("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, 1977 1976 Statutory surplus as regards policyholders Excess of NAIC market valuations over cost valuations of investments in equity securi- $169,748,004 $123,569,209 Excess of NAIC market valuations over amortized cost of bonds ties (excluding stock of Blue Chip Stamps) (74,183,816) (1,943,796) (45,655,447) Excess of carrying value of investment in Blue Chip Stamps (determined under GAAP (281,646) Deferred insurance premium acquisition costs pursuant to the equity method) over NAIC market valuation 9,810,000 3,667,891 35,072 Net recoverable from unauthorized reinsurers Excess statutory liability loss reserves 2,875,379 3,076,480 6,820,000 1,283,560 Income tax effects and adjustments Sundry nonadmitted assets (5,801,889) 2,621,708 4,214,238 2,313,694 Capital stock and surplus per accompanying financial statements $109,869,961 $ 88,462,541 (3,836,139) Statutory net income is reconciled to GAAP net income as follows: Statutory net income Increase in deferred acquisition costs $ 19,252,694 3,130,476 2,990,000 $ 14,293,893 Subsidiary acquisition cost adjustment Equity in undistributed earnings of Blue Chip Stamps, net of amortization of excess cost 1,561,912 3,832,608 Income tax effects and adjustments (1,965,750) 170,095 Net income per accompanying financial statements $ 23,407,420 $ 18,515,371 (1,343,137) Continued 31 •

[PAGE 34]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued (C) Investment in Blue Chip Stamps The investment in Blue Chip Stamps (Blue Chip) by the companies comprising the Insurance Group represented approximately 21% of that company's outstanding shares at December 31, 1977, increased from approximately 20% at December 31, 1976. The investment is accounted for by the equity method. Equity in net earnings of Blue Chip reflects the following for the past two years: Equity in undistributed earnings Dividends received 1977 1976 $ 251,378 Provision for current income taxes 3,190,980 $ 239,966 Provision for deferred income taxes (18,099) 2,043,575 Amortization of excess of cost of investment over underlying net asset values (229,750) (17,276) $3,134,005 (60,504) (481,663) (147,137) $1,637,465 See also notes 1(c) and 4 to consolidated financial statements of Berkshire Hathaway Inc. and consolidated subsidiaries. (D) Stockholders' Equity Surplus is restricted for dividend purposes by the insurance department of the states in which the companies do business. (E) Underwriting Expenses The following expenses comprise underwriting expenses: Salaries and other compensation Commissions and brokerage $31,380,265 1971 1976 $20,490,844 Taxes, licenses and fees 4,284,910 Other underwriting expenses 2,911,441 3,325,212 Increase in deferred acquisition costs Total statutory underwriting expenses 3,534,884 2,699,620 2,011,322 • 42,111,500 (3,832,608) 28,526,998 $39,121,500 (2,990,000) $24,694,390 (F) Federal Income Taxes Federal income tax expense is made up of the following: 1977 1976 Totals applicable to: Equity in earnings of Blue Chip Stamps Operating earnings • • $2,713,612 Realized investment gains .... 2,050,000 247,849 $1,134,822 3,200,000 164,413 $5,011,461 $4,499,235 For 1977, current income tax expense was $3,270,711 and deferred tax expense was $1,740,750. For 1976 current (credits) related to: income tax expense was $2,456,098 and deferred income tax expense was $2,043,137. Deferred tax expense 1977 1976 Equity in undistributed earnings of Blue Chip Stamps Change in deferred premium acquisition costs $1,436,000 Bond discount currently accreted, not currently taxed 229,750 $1,836,000 Cumulative accreted discount on bonds sold • ... 235,000 147,137 Total deferred tax expense -... $1,740,750 (160,000) (240,000) 300,000 $2,043,137 Continued 32

[PAGE 35]

Berkshire Hathaway Inc. INSURANCE GROUP NOTES TO FINANCIAL STATEMENTS, Continued Income tax expense is reconciled to the Federal 48% statutory rate as follows: 1977 1976 Income tax expense at statutory rate $13,641,063 $11,047,000 (Decreases) increases resulting from: 85% dividends received credit relating to: lax-exempt interest • • • (2,136,000) (2,021,000) Equity in earnings of Blue Chip Stamps Dividends received from unaffiliated companies ::: (1,404,000) (2,103,000) (1,277,000) (931,000) Long-term capital gain rate differential Benefits from affiliates .... (1,717,000) (1,161,000) (1,772,000) (680,000) Other, net $ 5,011,461 (108,602) 133,235 $ 4,499,235 (G) Investment Gains and Losses A summary of realized and unrealized investment gains for 1977 and 1976 is as follows: 1977 realized Net Applicable Net realized gains income taxes income taxes gains less unrealized gains Preferred stocks Bonds ..... $ 1,556,033 97,205 $ 466,810 29,162 $ 1,089,223 1,554,028 3,663,218 68,043 $ 3,393,000 - Common stocks • • $ 6,870,484 5,217,246 25,135,000 $ 2,050,000 $ 4,820,484 $28,528,000 1976 Bonds Preferred stocks ...... $ 1,155,664 441,613 $ (346,699) $ Common stocks • • 8,645,572 (2,720,817) (132,484) 309,129 808,965 $ 10.117,000 5,924,755 $10,242,849 $ (3,200,000) $ 7,042,849 $45,388,000 35,271,000 33

[PAGE 36]

PEAT, MARWICK, MITCHELL & Co. CERTIFIED PUBLIC ACCOUNTANTS 206 WEST STATE STREET, SUITE 700 ROCKFORD, ILLINOIS 61101 The Board of Directors The Illinois National Bank & Trust Co. of Rockford: We have examined the consolidated balance sheets of The Illinois National Bank & Trust Co. of Rockford and subsidiary as of December 31, 1977 and stockholders' equity and changes in financial position for the years 1976 and the related consolidated statements of earnings, changes in then ended. accepted auditing standards, and accordingly included such tests of the Our examinations were made in accordance with generally necessary in the circumstances. accounting records and such other auditing procedures as we considered In our opinion, the aforementioned consolidated financial statements present fairly the financial position of The Illinois National Bank & Trust Co. of Rockford and subsidiary at December 31, 1977 and 1976 and the results of their operations and changes in their financial position principles applied on a for the years then ended, in conformity with generally accepted accounting consistent basis. Peat, MaRwicK, Mrenel tCo. January 20, 1978 34

[PAGE 37]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1977 and 1976 cash and due from banks ASSETS 1977 1976 avestment securities (notes 2 and 9): $ 20,973,276 $ 10,868,111 United States Treasury obligations Obligations of states and political subdivisions United States Government agency obligations 41,553,063 566,558 30,337,817 Other securities 58,696,192 160,792 Federal Reserve Bank stock 6,053,613 54,002,192 6,629,054 deral funds sold 300,000 32,000,000 ... 300,000 i0ans (note 3) 7,000,000 Wher assets lank premises and equipment (note 4) 62,267,886 1,021,747 56,188,346 2,719,924 2,010,227 895,977 $201,152,259 $193,392,516 „labilities: LIABILITIES AND STOCKHOLDERS' EQUITY Time deposits Demand deposits $ 56,978,240 $ 54,874,671 117,890,119 Total deposits (note 5) 174,868,359 113,461,996 Accrued taxes and other liabilities (note 6) 168,336,667 Total liabilities 1,716,594 1,628,082 176,584,953 169,964,749 (tockholders' equity: Common stock of $20 par value. Authorized and issued 250,000 shares Surplus 5,000,000 5,000,000 Undivided profits 5,000,000 Reserve for contingencies (note 8) 13,266,149 5,000,000 Total stockholders' equity 1,301,157 12,124.955 $201.152.259 24,567,306 1,302,812 $193,392,516 23,427,767 See accompanying notes to consolidated financial statements of bank subsidiary. 35

[PAGE 38]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS Years ended December 31, 1977 and 1976 Operating income: 1977 1976 Interest and fees on loans Income on Federal funds sold $ 5,479,848 $ 5,092,525 Interest and dividends on: • 287,622 225,353 United States Treasury obligations United States Government agency obligations • 172,484 Other securities Obligations of states and political subdivisions 2,098,230 1,075,950 3,848,051 1,415,317 3,255,184 Federal Reserve Bank stock 576,652 Trust fees Total interest income 18,000 501,162 18,000 12,480,887 Other Service charges on deposit accounts 636,939 11,583,491 546,501 116,375 149,217 Total operating income 577,087 635,253 13,811,288 12,914,462 Operating expenses: Interest on deposits Interest on Federal funds purchased 6,600,325 1,981 5,879,505 Total interest 4,266 Occupancy, net (note 4) Salaries and employee benefits (note 7) 2,096,796 6,602,306 5,883,771 269,442 2,025,075 Provision for possible loan losses (note 3) Furniture and equipment (note 4) 259,455 215,021 16,000 233,017 Other 811,709 12,000 Total operating expenses 837,857 10,011,274 9,251.175 Income taxes, net (note 6) barnings betore income taxes and securities gains 3,800,014 3,663,287 Securities gains, net of related taxes of $11,209 in 1977 and $142,437 in 1976 Earnings before securities gains 429,493 108,068 3,370,521 3,555,219 (note 6) Net earnings 269,018 $ 3,639,539 291,823 $ 3,847,042 Earnings per share: Earnings before securities gains Securities gains $13.48 1.08 $14.22 Net earnings 1.17 $14.56 $15.39 See accompanying notes to consolidated financial statements of bank subsidiary. 36

[PAGE 39]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Years ended December 31, 1977 and 1976 Common Undivided Reserve stock Surplus (note 6) profits tingencies for con- (note 8) Net earnings Balance, December 31, 1975 $5,000,000 $5,000,000 $10,771,923 3,847.042 $1,308,802 Transfer from reserve for contingencies - loan Cash dividends - $10 per share (2,500,000) loss provision 5,990 (5,990) Balance, December 31, 1976 Net earnings -5,000,000 5,000,000 12,124,955 Cash dividends - $10 per share 3,639,539 1,302,812 Transfer from reserve for contingencies - loan (2,500,000) loss provision 1,655 (1,655) Balance, December 31, 1977 $5,000,000 $5,000,000 $13,266,149 $1,301,157 See accompanying notes to consolidated financial statements of bank subsidiary. 37

[PAGE 40]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 1977 and 1976 1977 1976 Funds provided: From operations: Depreciation Net earnings $ 3,639,539 (376,620) 16,000 96,192 $ 3,847,042 Provision for loan losses 104,377 Discount accretion Deferred income taxes • .. 12,000 : Other • (169,835) (202,529) 3,283,377 78,101 (132,375) Provided from operations 3,738,117 109,602 Increase in deposits Decrease in: 6,531,692 21,357,765 Loans Federal funds sold 25,000,000 1,880,906 Other, net Cash and due from banks $34,855,524 40,455 7,929,160 Total funds provided $35,806,069 900,121 Funds used: Increase in earning assets: Investment securities Federal funds sold

• ••

15,569,736 32,000,000 Additions to bank premises and equipment, net Loans 6,095,540 226,605 Increase in cash and due from banks Cash dividends 2,500,000 221,962 33,728 10,105,165 2,500,000 Decrease in Federal funds purchased Other, net 363,121 1,000,000 Total funds used 45,736 $34,855,524 $35,806,069 See accompanying notes to consolidated financial statements of bank subsidiary. ..... 38

[PAGE 41]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1977 and 1976 (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 the more significant accounting policies: accepted accounting principles and to general practice within the banking industry. The following is a description of Consolidation The consolidated financial statements include those of the Bank and its wholly-owned subsidiary. All significant intercompany transactions are eliminated in consolidation. Investment Securities Investment securities are stated at cost, adjusted for amortization of premium and accretion of discount. Prior to 1976, accretion of discount was not recorded. During 1976 accretion was recorded, including the cumulative investment securities are recognized only upon realization and are shown separately in the statements of amounts applicable to securities owned which were acquired in prior years. Gains or losses on sales of earnings. Consumer Credit Loans Consumer credit loans are generally made on a discount basis. Unearned discount is taken into earnings over the terms of the respective loans using a method that approximates straight line. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the equipment. Rates of depreciation are based on the following: buildings, 40 years, improvements and other straight-line method for building and automobiles, and on an accelerated method for improvements and other equipment, 3-8 years. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged against operations as incurred. Income Taxes The Bank utilizes the accrual method of accounting for financial reporting purposes, but files its income tax returns on a cash basis. Investment tax credits are treated as a reduction of the provision for Federal income taxes in the year realized. Provision for Possible Loan Losses The provision for possible loan losses is based on past loan loss experience, management's evaluation of the loan portfolio under current economic conditions, and such other factors as in management's best judgment, deserve current recognition in estimating loan losses. 39

[PAGE 42]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (2) Investment Securities A summary of investments by major classifications is as follows: Dec. 31, 1977 value Par (in thousands) Dec. 31, 1976 Book value Market value value Par (in thousands) value Book Market U.S. Government: value Agencies Treasury • • 565 Other State and political subdivisions ::: 59,301 41,550 $ 41,553 566 $ 557 58,696 41,616 $30,455 $108,761 7,345 $106,869 6,054 61,985 160 $30,338 $110,573 6,415 55,104 161 $30,343 $93,978 8,259 54,002 165 6,629 56,090 $91,130 7,027 $93,625 were pledged to secure public deposits and for other purposes. Investment securities with a par value of $8,001,000 and $7,801,000 at December 31, 1977 and 1976, respectively, (3) Loans A summary of the major classifications of loans at December 31, 1977 and 1976 is as follows: Real estate loans 1977 Loans to financial institutions $14,935,184 $14,129,616 1976 Commercial and industrial loans Loans for purchasing or carrying securities 5,000 439,000 Loans to individuals 33,837,853 23,000 All other loans Total net of unearned discount ... 12,697,237 28,797,400 1,492,694 12,235,762 Less allowance for possible loan losses 62,967,968 1,270,616 Net loans $62,267,886 (700,082) 56,895,394 $56,188,346 (707,048) The following is a summary of activity in the allowance for possible loan losses: 1977 Balance at beginning of year 1976 Provision for loan losses Recoveries on loans previously charged off $707,048 • . . . • 16,000 9,471 $707,735 14,360 Balance at end of year Less loans charged off 732,519 12,000 • • • • $700,082 32,437 734,095 27,047 $707,048 (4) Bank Premises and Equipment December 31, 1977 and 1976, respectively. Depreciation expense totaled $96,192 for 1977 and $104,377 for 1976. Bank premises and equipment are recorded at cost less accumulated depreciation of $2,031,918 and $1,945,559 at 40

[PAGE 43]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (U) Deposits A summary of deposits by major classifications at December 31, 1977 and 1976 is as follows: 1977 1976 Demand deposits of individuals, partnerships and corporations $ 52,720,561 Deposits of U.S Government Time and savings deposits of individuals, partnerships and corporations 115,603,809 $ 49,105,982 1,659,050 110,165,314 Deposits of commercial banks Deposits of states and municipalities 2,799,656 938,158 236,735 4,017,368 284,494 Certified and official checks 1,848,548 Total deposits $174,868,359 $168,336,667 3,825,351 18) Income laxes Accrued taxes and other liabilities in the accompanying balance sheets include deferred income taxes of S878,657 and $502,037 at December 31, 1977 and 1976, respectively. Such deferred income taxes result primarily from timing differences arising from reporting taxable income on the cash basis. The Bank and its subsidiary join in the filing of a consolidated Federal income tax return with the parent company, Berkshire Hathaway Inc. The tax benefits to and from the parent have been recorded by the Bank, as shown in the reconciliation which follows. Taxes applicable to net earnings were as follows: 1977 1976 Tax provision applicable to securities gains Tax provision applicable to earnings before securities gains $73,771 140,336 $ 270,420 217,021 214,107 487,441 Add (deduct) tax benefit to (from) parent corporation applicable to: Securities gains Earnings before securities gains 129,127 355,722 (162,352) 226,595 (236,936) (74,584) Income taxes $ 440,702 $ 250,505 The components of consolidated income tax expense are as follows: 1977 1976 Current income taxes: Federal Add (deduct) tax benefit to (from) parent applicable to taxes currently $ (226,595) $ 631,551 payable 226,595 (236,936) State 64,082 394,615 58,419 Total current income taxes 64,082 453,034 Deferred income taxes: Federal 369,861 State 6,759 (209,725) 7,196 Total deferred income taxes 376,620 (202,529) Income taxes $ 440,702 $ 250,505 41

[PAGE 44]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The sources of timing differences resulting in deferred income taxes and the tax effect of each were as follows: 1977 1976 Accrued earnings and expense not reported for income tax purposes until collected Loan loss deductions for tax purposes more (less) than that provided for financial or paid, net $ 374,961 $ (196,519) reporting purposes $ 376,620 1,659 $ (202,529) (6,010) The reasons for the difference between the effective tax rate and the corporate Federal income tax rate of 48% are as The total income tax expense for 1977 amounted to $440,702, an effective rate of 10.8% ($250,505 and 6.1% in 1976). follows: 1977 Percent 1976 $1,958,516 Amount earnings of pretax Percent Amount of pretax earnings Increase (reduction) in taxes resulting Tax expense at statutory rate 48.0% $1,966,823 48.0% from: Tax-exempt interest, net of discount ac- State income taxes, net of Federal in- cretion (1,790,903) (43.9) (1,523,483) (37.2) Tax benefit to (from) parent, net come tax benefits 36,837 Other - net 226,595 9,657 5.6 (236,936) 34,120 (5.7) .8 Actual tax expense _2 $ 440,702 10.8% 9,981 2 250,505 6.1% (7) Pension and Profit-Sharing Plan The Bank has a noncontributory pension plan and a profit-sharing plan for all officers and employees with one full exceeded the actuarial computed value of vested benefits and there was no unfunded past service cost liability. The year of service. Based upon the most recent actuarial report available (as of December 31, 1976), the pension fund assets Bank's policy is to fund pension costs as accrued. The total pension and profit-sharing expense was $213,665 for 1977 and $180,163 for 1976. (8) Reserve for Contingencies the valuation reserve for financial statement purposes and the applicable deferred income taxes. This amounted to Included in the reserve for contingencies is the portion of the reserve for bad debts for tax purposes, which exceeds $300,157 and $301,812 for December 31, 1977 and 1976, respectively. The remaining portion of the reserve for contingen- cies ($1,001,000 for both 1977 and 1976) is not attributable to any specific contingency of the Bank. (9) Investment Securities Write-down remove from the bank investment account, the value of the stock conversion privilege on convertible debentures of the The regulatory reporting requirements by the Office of the Comptroller of the Currency required the Bank to Bank's investment holdings during the year 1977. However, the necessary accounting revision of these amounts was 42

[PAGE 45]

Berkshire Hathaway Inc. BANK SUBSIDIARY The Illinois National Bank & Trust Co. of Rockford AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued permission from the Comptroller of the Currency to report to shareholders, totals which do not contain any write-down determined not to be in accordance with generally accepted accounting principles. As a result, the Bank received that are submitted to the Comptroller of the Currency comply with the Comptroller's ruling and exclude the conversion or revisions, which is in accordance with generally accepted accounting principles. The reports for calendar year 1977 privilege value on debentures not sold or matured prior to December 31, 1977. The reconciliation between the report to the Comptroller and the accompanying financial statements at December 31, 1977 and for the year then ended is as follows: Per Balance Sheet Accounts statements financial comptroller Per Net effect of report write-down the security Investments $106,869,426 $106,237,253 $632,173 Undivided profits $ 13,266,149 $ 12,633,976 $632,173 Statement of Earnings Accounts Operating income: Interest and dividends on other securities 576,652 588,816 $ (12,164) Operating expenses - other 811,709 $ 1.456,046 644,337 Net earnings 3,639,539 3.007,366 $632,173 43

[PAGE 46]

ad Berkshire Hathaway Inc. DIRECTORS AND EXECUTIVE OFFICERS WARREN E. BUFFett, Director and Chairman of the Board Chief Executive Officer of the Company KENNETH V. CHACE, Director President of the Company and Chief Operating Officer of the Textile Operations of the Company MALCOLM G. CHACE, JR., Director Retired, Former Chairman of the Board of Directors of the Company J. VERNE MCKENZIE, Director Vice President, Secretary and Treasurer of the Company COMMON STOCK PRICES for the stock in each quarter of 1976 and 1977 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. High Low 1976 Ist Quarter 56 38 2nd Quarter 63 59 3rd Quarter 4th Quarter 73 61 95 66 1977 1st Quarter 97 85 2nd Quarter 100 95 3rd Quarter 107 100 Ath Quarter 139 107 The Company did not pay a dividend in 1976 or 1977. 44

[PAGE 47]

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

[PAGE 48]