Chicago and Southern Air Lines Annual Report 1940

ANNUAL REPORT
OF
CHICAGO AND SOUTHERN AIR LINES, INC.
For the Fiscal Year Ended June 30, 1940
CHICAGO AND SOUTHERN AIR LINES, INC.
DIRECTORS
CARLETON PUTNAM
D. D. WALKER
B. E. BRAUN
A. CULBERT
(There is one vacancy on the Board of Directors)
OFFICERS
CARLETON PUTNAM, President
D. D. WALKER, Vice-President-Sales-Secretary
B. E. BRAUN, Vice-President-Operations
A. CULBERT, Vice-President-Treasurer
E. MURRAY, Assistant Secretary
General Offices :
Lambert-St. Louis Municipal Airport, Robertson, Missouri.
Corporate Office:
100 West Tenth Street, Wilmington, Delaware.
Transfer Agent :
Mississippi Valley Trust Company, Broadway and Olive Street, St. Louis, Missouri.
Registrar:
Boatmen's National Bank, Broadway and Olive Street, St. Louis, Missouri.
August 27, 1940
TO THE STOCKHOLDERS OF CHICAGO AND SOUTHERN AIR LINES, INC.:
The directors of your company submit to you herewith, as a part of this report, our Balance
Sheet as at June 30, 1940, together with the statements of Profit and Loss and Surplus for the
fiscal year then ended.
In my letter to you a year ago, I stated that the management had two major objectives for
the ensuing year, namely, a re-equipment program to meet the requirements of our growing
business, and an extension of our service from Memphis, Tennessee, to Houston, Texas, via
Pine Bluff, Arkansas, and Shreveport, Louisiana.
We are happy now to announce_
that our re-equipment program was completed on May
1, 1940, with the installation of 21-passenger Douglas airplanes. These planes are equipped
with 1200 horsepower Wright Cyclone 200-A engines, developing 200 more horsepower
than is developed by the engines used by the majority of the major air lines. All our engines
have Bendix Stromberg pressure type carburetors of the latest design for the elimination of
carburetor icing. We are the first air line to adopt automatic radio compasses as standard
equipment on all our planes, and in other respects have kept in the forefront of technological
advance.
Concerning the proposed new route between Memphis and Houston for which two other
carriers were applicants besides ourselves, the Examiners for the Civil Aeronautics Board in
this case have recommended your company as the operator, and it is therefore believed that
our chances of being awarded the route by the Board are now favorable. If granted, this
extension will constitute an increase of 55% in our route mileage and will open to us the rich
oil country of east Texas and northwest Louisiana, and the important commercial territory
around Houston.
Applications by us are also pending for new routes from Memphis, Tennessee, to Detroit,
Michigan, by way of Paducah, Kentucky, and Evansville, Indianapolis, Anderson-Muncie and
Fort Wayne, Indiana; and from St. Louis, Missouri, to Detroit, Michigan, by way of Terre Haute,
Indianapolis, Anderson-Muncie and Fort Wayne, Indiana. Neither of these applications
have as yet been set for hearing by the Board and no attempt is therefore made to forecast
the outcome. We believe, however, that opportunities for development throughout the mid-
west and south remain open to us and that we shall enjoy a substantial share of the general
expansion of the industry.
Earnings for the fiscal year just ended were $29,668, including profit on the sale of equip-
ment. The company also was awarded during the year an additional $24,745 as a retroactive
adjustment in mail pay which, under the regulations of the Securities and Exchange Com-
mission, having been largely accrued in former years, was to this extent allocated to Capital
Surplus rather than Earned Surplus, accumulated since May 23, 1938. Total passenger reven-
ues were $539,764 as compared with $355,638 in the preceding year, and total express
revenues $21,498 as against $16,556.
Many preparatory and promotional costs relating to the new Douglas operation were
charged during the year to expense instead of being capitalized. In this connection it may be
added that your management has endeavored to follow a long range program in regard to
standards of service which will maintain Chicago and Southern on a level with the best of its
competitors, even among the major companies. For example, a school was set up for ste-
wardesses which involved seven weeks of training before the first flight was undertaken.
Meticulous care was exercised in the training of pilots in the use of the new planes. A staff of
competent reservations clerks was established to expedite the handling of the greatly increased
number of calls for our service in a manner most convenient to the public. A commissary
department of better than average grade was installed.
All of these matters necessarily involved an increase in operating costs, some of them
initial and others of a permanent nature, which are reflected in the period under review. But
your management feels that in the long run these expenditures will be rewarded by continual-
ly increasing public patronage, and that our standards of equipment and service are now
equal to those of the major carriers.
Prior to May 1, 1940, three round trips daily between Chicago and New Orleans made
available a maximum total of thirty passenger seats each way. Because of heavy mail loads it
often happened that this maximum figure was reduced to twenty-four seats. Now the three
round trips provide a maximum of sixty-three seats each way, and with the new Douglas
equipment this permissible number is less likely to be reduced by heavy mail loads.
The opportunity for your company to increase its earnings is closely related to its ability
to secure increased revenues from passenger travel. This, in turn, cannot be had unless pas-
senger seats are available. While your management was fully aware that the re-equipment
program and establishment of Douglas service would entail substantial initial expenses, and
while the operation of the larger planes necessarily increases ordinary operating expenses,
the whole program was adopted in the interests of further developing the line's passenger
capacity in keeping with its opportunities and its responsibilities to the stockholders as well
as to the public.
That the judgment which dictated the change-over of equipment was sounq. may be, in
some degree, indicated by the increase in passenger revenues in May, 1940 of 74% as com-
. pared with May, 1939, and the increase of 108% in June, 1940 on the same basis. The total
passenger revenues in these two months this year amounted to $149,942 as compared
with $78,825 in May and June of 1939.
With continued growth in the popularity of air travel, and with intelligent direction of the
promotion of travel over your company's route, passenger seats now are available to make
possible a further substantial increase in passenger revenues upon which net earnings, in
large part, depend. In other words our profit leverage for the future, which with our old equip-
ment had almost disappeared, is now restored.
Under the terms of a loan agreement approved by the stockholders at a special meeting on
January 5, 1940, your company borrowed $350,000 in April. These funds, together with
depreciation reserves and working capital, were used to purchase the fleet of four Douglas
21-passenger DC-3's, which are now in operation on our route. On July 1, 1940, your com-
pany received $402,187.50 as the proceeds after the payment of brokerage commissions of
the sale of 65,000 shares of common stock. Although not within the purview of the financial
statements submitted herewith, these funds place your company in a strong position to meet
new opportunities.
The annual meeting of stockholders will be held at the company's offices at Lambert-St.
Louis Municipal Airport, Robertson, Missouri, at 2:00 P. M. on Tuesday, October 1, 1940,
for the purpose of electing your Board of Directors for the ensuing year and transacting such
other business as may properly come before it. Notice of this meeting is enclosed herewith,
and it is hoped that you will be able to be present.
We extend to each of you and to all our employees our grateful thanks for the loyalty and
generous support which has made the past year a milestone in our progress.
Respectfully submitted,
CARLETON PUTNAM, President.
CHICAGO AND SOUTHERN AIR LINES, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
JUNE 30, 1940
ASSETS LIABILITIES
CURRENT ASSETS:
Cash on demand deposit and on hand .. . ... .
Accounts receivable (no reserve required):
United States Post Office Department .... . .
Traffic balances, agents and other trade . . .
Due from officers and employees .......... .
Inventory of parts and supplies, at cost ..... .
OTHER ASSETS:
Special funds-cash on demand deposit:
Depreciation .. ............. . .......... .
Accident ... ...... . . . ................. .
Capital expenditures ...... . . . . ......... .
Miscellaneous investments, at cost. ........ .
FIXED ASSETS:
Cost
Flying equipment. ... . .. . .. ... $729,076.12
Ground equipment. .......... 101,693.39
Work in process... .... ..... .. 21,037.23
Improvements to leased
premises . . . . . . . . . . . . . . . . . . . 9,628.13
$861,434.87
DEFERRED CHARGES:
Prepaid expenses:
Insurance ............................ .
Advertising, licenses, etc ... ............ .
Interest. ..... ... ........ ... ... . ... .. . .
Commission paid on sale of 7% cumulative
convertible preference stock, less amorti-
zation of $22,565.18 .. ... ..... ...... ... .
Extension and development expense .... ... .
Expense incident to sale of 65,000 shares of
common stock ......................... .
Organization expense, less amortization of
$10,640.50 ........................... .
FRANCHISES AND GOODWILL ............ .
$ 72,966.04
100,000.65
$ 28,814.85
25,000.00
25,000.00
$ 43,298.34
172,966.69
7,297.59
45,583.35
$ 78,814.85
160.00
Depreciation Net
$204,035.98 $525,040.14
41,556.12 60,137.27
6,411.82
$252,003.92
$ 39,604.69
7,439.48
1,205.55
21,037.23
3,216.31
$ 48,249.72
29,684.82
21,316.68
17,493.22
14,591.87
$269,145.97
78,974.85
609,430.95
131,336.31
1.00
$1 ,088,889.08
1
J
CURRENT LIABILITIES:
Equipment notes payable to banks--due
within one year .. ..... ..... . . . .. ...... .
Accounts payable ................. .
Traffic balances and deposits payable ....... _
Accrued liabilities:
Salaries and wages ............. ... ... . .
Federal and state taxes on income ....... .
Taxes, other than income .. ...... ... ... .
Insurance premiums, etc ............... .
RESERVE FOR ENGINE OVERHAUL. ....... .
LONG-TERM DEBT:
Equipment notes payable to banks- due in
equal quarterly instalments beginning
August 1, 1940 ....................... .
Less -- amounts due within one year
included in current liabilities ....... .
CAPITAL STOCK AND SURPLUS:
Capital stock:
Preference stock-7% cumulative con-
vertible (entitled upon call or vOiuntary
liquidation to $12.50 per share plus
accrued dividends):
Authorized, 50,000 shares- reduced to
$ 10,141.47
11,625.97
10,131.75
5,876.86
49,088 shares, par value $10.00 each. $490,880.00
Less:
Unissued, 15,000 shares$150,000.00
Converted into common
stock, 1,215 shares. . . 12,150.00 162,150.00
Issued and outstanding, 32,873 shares. . $328,730.00
Common stock-no par value:
Authorized 300,000 shares
Issued and outstanding 102,530 shares,
including 2,430 shares issued to
convert preference stock. . . . . . . . . . . . 27,165.00
Surplus, from Statement No. 2:
Earned surplus, since May 23, 1938 . . . . . . $ 21,614.22
Capital surplus......................... 115,420.34
Subject to accompanying explanatory notes which are made a part hereof.
Statement No. 1
Page 1
$ 87,500.00
117,026.34
81,151.70
37,776.05
$350,000.00
87,500.00
$355,895.00
$323,454.09
10,005.43
262,500.00
137,034.56 492,929.56
$1,088,889.08
Statement No. 1
Page 2
CHICAGO AND SOUTHERN AIR LINES, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
JUNE 30, 1940
EXPLANATORY NOTES
Substantially all of the fixed assets are pledged under a trust indenture as collateral on
equipment notes payable to banks.
Commission paid on sale of 7% cumulative convertible preference stock and organization
expense incurred in connection with incorporation of the Company are being amortized
over a period of ten years from May 1, 1936. Unamortized commission of $1,058.06 is
applicable to 1,215 shares of preference stock which were converted into common stock
during the current fiscal year. No change will be made in the method of amortizing com-
mission applicable to converted stock.
Expense incident to sale of 65,000 shares of common stock during July, 1940 includes pro-
fessional fees, printing, traveling expenses, etc. This expense will be charged to capital
surplus when the transactions relative to the sale are recorded.
Pursuant to the articles of incorporation, the Company is required to set aside in a separate
fund on or before September 1st of each year, an amount equal to 20% of the net earnings
of the previous fiscal year, after deducting profit on sale of equipment and dividends paid
on cumulative convertible preference stock. Inasmuch as the aforesaid deductions exceed-
ed the net earnings for the year ended June 30, 1940, no fund will be required on Septem-
ber 1, 1940.
During July, 1940 the Company issued 65,000 shares of common stock for a total considera-
tion of $487,500.00 which has not been taken into account in the accompanying balance
sheet. The transfer agent dated 63,879.225 shares June 29, 1940 but did not deliver same
to the underwriters until July 1, 1940. After the issuance of the 65, 000 shares there will
remain 132,470 shares of authorized but unissued common stock, all of which are reserved
to cover options and possible conversion of the 32,873 shares of 7% cumulative convertible
preference stock outstanding.
In accordance with recommendations of the Securities and Exchange Commission, the
capital surplus has been increased by $42,782.67 representing awards of additional air
mail revenue (less income taxes thereon) applicable to periods prior to May 23, 1938
at which date the operating deficit amounting to $53,304.66, as per accounts, was charged
to capital surplus. As a result of this revision, the amount of operating deficit now charged
to capital surplus is $10,521.99. In addition thereto, capital surplus for the current fiscal
year has been credited with $4,755.52 representing additional air mail revenue (less income
taxes thereon) earned by the predecessor company.
The Company's articles of incorporation, as amended, provide that in the event its net current
assets are less than $35,000.00 after eliminating from current liabilities any amounts pay-
able on equipment obligations, and such a condition continues for a period of sixty days,
then the holders of cumulative convertible preference stock possess voting power to the
exclusion of the common stockholders so long as such a deficiency exists. The accompany-
ing balance sheet reflects a deficiency of $1,808.12 in this respect but this condition was
righted during July, 1940 upon sale of 65,000 shares of common stock.
On July 1, 1940 the Company entered into an agreement with Douglas Aircraft Company,
Inc. for the purchase of one Douglas, DC-3, twenty-one passenger, twin-engine airplane
at a contract price of $114,900.00, delivery of which is expected during September, 1940.
This amount has not been taken into account at June 30, 1940.
I
Statement No. 2
CHICAGO AND SOUTHERN AIR LINES, INC.
SURPLUS
Year Ended June 30, 1940
EARNED SURPLUS- since May 23, 1938:
Balance, July 1, 1939 .. .. ...... . .. . . . . . ... . .. .. . . .. . . . .
Add:
Net profit for the year ended June 30, 1940, from Statement
No. 3 . ........... . .... . .. .. ... ..... .. .. .. .. ..... . . $ 29,668.93
Portion of additional air mail revenue (less income taxes
thereon) applicable to period from May 24, 1938 to
June 30, 1939.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,571.47
Deduct:
Cash dividends paid on cumulative convertible pre-
ference stock.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,662.80
Transfer to capital surplus amount of additional air mail
revenue (less income taxes thereon) applicable to
periods prior to May 23, 1938, at which date the operat-
ing deficit was charged to capital surplus ...... . . ... . .. .
Balance, June 30, 1940, to Statement No. 1. .... .. . . . ...... .
CAPITAL SURPLUS:
Balance, July 1, 1939 ....... . . ... ...... ..... . ....... ... .
Add:
Transfer from earned surplus amount of additional air
mail revenue (less income taxes thereon) applicable to
periods prior to May 23, 1938, at which date the operat-
31,247.98
ing deficit was charged to this account... . . . ... .. .... $ 31,247.98
Portion of additional air mail revenue (less income taxes
thereon) applicable to periods prior to May 23, 1938.... . 16,290.21
Difference between par value ($10.00 per share) and cost
of 912 shares of cumulative convertible preference
stock purchased for retirement.. . . . . . . . . . . . . . . . . . . . . 110.46
Balance, June 30, 1940, to Statement No. 1 ... .. .. . . . . . . .. .
$ 44,284.60
32,240.40
$ 76,525.00
54,910.78
$ 21,614.22
$ 67,771.69
47,648.65
$115,420.34
NOTE: In accordance with recommendations of the Securities and Exchange Commission,
the capital surplus has been increased by $42,782.67 representing awards of additional air
mail revenue (less income taxes thereon) applicable to periods prior to May 23, 1938 at
which date the operating deficit amounting to $53,304.66, as per accounts, was charged
to capital surplus. As a result of this revision, the amount of operating deficit now charged
to capital surplus is $10,521.99. In addition thereto, capital surplus for the current fiscal
year has been credited with $4,755.52 representing additional air mail revenue (less in-
come taxes thereon) earned by the predecessor company.
Statement No. 3
CHICAGO AND SOUTHERN AIR LINES, INC.
PROFIT AND LOSS
Year Ended June 30, 1940
OPERATING REVENUE:
Passenger and excess baggage ......................... .
Mail ................................................ .
Express .... . ... ..... .......... . .. .... ............... .
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSE:
Operations . . .. ... . .. .......... ..... ...... . .......... .
Maintenance ......................................... .
Depreciation .. ... ... . . ......... .. .. . .. .. .... . ........ .
Traffic and advertising ................................ .
General and administrative ............................ .
Taxes, other than income ............................ . . .
NET PROFIT FROM OPERATIONS ...................... . .
OTHER INCOME:
$544,419.11
402,864.59
21,498.84
3,453.62
$477,328.38
172,459.31
94,130.45
117,832.87
65,904.03
36,666.50
Profit on sale of United States Government obligations . . . . . . $ 1,068.88
38,742.29
1,194.80
Profit on sales and retirements of equipment-net . ........ .
Miscellaneous- net ................................... .
OTHER DEDUCTIONS:
Amortization of deferred charges:
Commission paid on sale of preference stock. . . . . . . . . . . . $
Organization expense .. .. .. ......................... .
Interest .................... . .................. . ..... .
NET PROFIT BEFORE PROVISION FOR INCOME TAXES ...
PROVISION FOR FEDERAL AND STATE INCOME TAXES ..
NET PROFIT FOR THE YEAR, to Statement No. 2 ........... .
6,019.22
2,501.52
3,855.92
$972,236.16
964,321.54
$ 7,914.62
41,005.97
$ 48,920.59
12,376.66
$ 36,543.93
6,875.00
$ 29,668.93
TOUCHE, NIVEN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
ARCADE BUILDING
ST. LOUIS
August 27, 1940.
TO THE BOARD OF DIRECTORS OF
CHICAGO AND SOUTHERN AIR LINES, INC.:
We have examined the balance sheet of Chicago and Southern Air Lines, Inc. as of
June 30, 1940, and the statements of income and surplus for the fiscal year then ended, have
reviewed the system of internal control and the accounting procedures of the Company and,
without making a detailed audit of the transactions, have examined or tested accounting
records of the Company and other supporting evidence, by methods and to the extent we
deemed appropriate.
As noted in the financial statements, certain revisions have been made in the Company's
accounts on the basis of recommendations of the Securities and Exchange Commission.
These revisions affect capital surplus and earned surplus, since May 23, 1938, and possibly
the payment of a portion of the cash dividends on the cumulative convertible preference
stock made during the period from May 24, 1938 to June 30, 1938.
In our opinion, the accompanying balance sheet and related statements of income and
surplus present fairly the position of Chicago and Southern Air Lines, Inc. at June 30, 1940,
and the results of its operations for the fiscal year, in conformity with generally accepted
accounting principles applied on a basis consistent with that of the preceding year.
TOUCHE, NIVEN & CO.

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