CHICAGO ANO SOUTHERN AIR LINES. INC. YEAR ENDED DECEMBER 31.1945 1945 ~mi;-To THE STOCKHOLDERS OF CHICAGO AND SOUTHERN AIR LINES, INC. General Offices Municipal Airport Memphis 2, Tennessee ST. PAUL-MINNEAPOLIS' .... * SERVICE PENDING AIRPORT DEVELOPMENTS ANDERSON. IND, MUNCIE. IND, MARION. IND . NEW CASTLE . IND , SPRINGFIELD. ILL KANSA * ROCHESTE, __ ~ .... 0UBUQU R ,~ ' JOPLIN, qp~, wv4_/a . . ,,.:;:; .-/ ED ROUTES < / , ROUTES Today, Chicago and Southern Air Lines, serving the middle west and deep south, connecting Chicago and Detroit with New Orleans and Houston, is reaching out for 27,186 miles of new routes. The map above shows 2,133 miles of domestic routes presently operated, and 13,052 miles of new domestic routes applied for. 14,134 miles of foreign routes applied for through the Caribbean to South America are not shown on the above map. CHICA GO AND SOUTHERN The Route of the Dlxlellners DIRECTORS CARLETON PUTNAM B. E. BRAUN ALBERT J. EARLING L. RAYMOND BILLETT Of FICERS CARLETON PUTNAM, President AIR HARVEY L. "\.VILLIAMS, Executive Vice-President B. E. BRAUN, Vice-President-Operations LINES N. HENRY JosEPHS, Vice-President-Finance and Administration ALBERT J. EARLING, Vice-President-Traffic and Sales W. J. BYRNE, Treasurer R. S. MAURER, Secretary R. S. SCRIVENER, Assistant Treasurer M. J. BROWN, Assistant Treasurer ,E. MURRAY, Assistant Secretary GENERAL OFFICES, Memphis Municipal Airport, Iemphis 2, Tennessee 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 REPORT OF THE PRESIDENT TO THE STOCKHOLDERS . MEMPHIS, TENNESSEE, APRIL 10, 1946 OPERATING EXPANSION During the year 1945 your Company undertook the largest expansion of operations in its history. Revenue plane miles flown increased 83% over 1944. An increase of 51 % occurred over already established routes and the remaining 32% arose from the inauguration in June, 1945, of service over our new route from Detroit to Memphis-via Indianapolis and other inter- mediate points. In a period involving such a substantial increase in new route operations some decrease in net revenues might well have been expected, but the wider acceptance by the public of air travel not only carried the additional costs o the inauguration of new service but, by enabling us to derive larger revenues from previously established routes, actually increased our profits for the year. fARNINGS Page Four Net profits for 1945 amounted to $168,891 as compared with $140,750 for 1944. Our increase from commercial operation was in fact greater than this since, in 1944, we derived $51,435 in net revenues from Army contracts against none in I 945. On the other hand, air line net operating in- come in 1945 exceeded 1944's by $94,824. This is perhaps the truest index of your Company's progress. Dividends paid in 1945 amounted to $77,476, leaving earnings retained m the business of $91,415. Depreciation set aside amounted to $346,067. The following statement sets forth detailed comparisons of the years 1944 and 1945: Conde~sed Comparative Income Statement Twelve months Twelve months ended ended Dec. 31, 1945 Dec. 31, 1944* Revenue miles flown ............................................................................................................................... . 5,279,336 2,882,381 Operating Revenue: Passenger and excess baggage ........................................................................................................ . $4,376,775 $2,545,016 Mail .................................................................................................................................. '. ...................................... . 277,238 281,808 Express ................................................................................................................................................................. . 169,396 107,245 Other ...................................................................................................................................................................... . 25,413 12,643 Total operating revenue ...................................................................................................... _. .............. . $4,848,822 $2,946,712 Total operating expenses .................................................................................................................. . 4,562,478 2,755,192 Income from operations ..................................................................................................................... . $ 286,344 $ 191,520 Other income (net) .................................................................................................................................. . 4,847 50,293 Income before provision for income taxes ................................................................. . $ 291,191 $ 241,813 Provision for Federal and State income taxes ........................................................ . 122,300 101,063 Net income for period ......................................................................................................................... . $ 168,891 $ 140,750 ===== Corrected to reflect subsequent adjustments of net income from U.S. Army contracts and certain reclassifications. OPERATING STATISTICS During the year 1944 we had an average of 4.9 planes in operation. In 1945 this average rose to 8.5 although by December 31, 1945, 12 planes were in service. Revenue passengers carried increased 88% in 1945 over 1944, and revenue passenger miles 76%. The average number of passengers carried per flight dropped slightly (approximately one-half passenger) but this can be attributed in part to the opening of the new Detroit-Memphis route and in part to a gradual return to more normal load factors with increasing equipment and service. Mail and express loads per flight de- clined, although total express pound miles increased 61 %- Page Five Operating Statistics Continued The decline in total mail carried is due, in part, to the general decline in soldier air mail which has occurred with the ending of the wars in Europe and the Pacific. The decline in revenue per mile flown derived from the carriage of mail is additionally due, in part, to the opening of new routes and the increase in schedules flown over old routes. The management is making efforts to offset these decreases by special attention to programs which will increase the poundage of normal air mail .handled by your Company. A plan has already been approved by the Post Office Department to establish an Air Mail Field Office (transfer and distributing, with letter drop in station) at Memphis, Tennessee, the hub of our existing routes and an important connecting point. This office should be in operation within sixty days and should increase our mail traffic between all points on the system. A program to reduce air mail postage from 8 to 5 cents an ounce is already under way through the introduction of proposed legislation. The Post Office Department is sponsor- ing the bill, and there is hope for its passage before Congress adjourns in May or June. This reduction would have the effect of substantially increasing the overall volume of air mail. Other phases of this program, such as air parcel post and the carriage of first-class mail by air, will not be actively undertaken until the 5 cent rate is approved and effected. Certain comparative operating statistics for the last five years follow: COMPARATIVE OPERATING STATISTICS 1945 1944 1943 1942 1941 Revenue miles flown .............................. 5,279,336 2,882,381 2,179,472 2,210,187 2,327,573 Passengers per revenue mile flown. 16.47 I 7.08 16.19 12.86 10.06 Number of revenue passengers ....... 197,541 104,906 82,017 69,075 62,125 Revenue passenger miles ..................... 86,876,826 49,242,103 35,293,185 28,438,139 23,414,438 Air mail pound miles .............................. 926,769,202 943,480,867 928,067,008 523,539,524 303,644,050 Air express pound miles ..................... 741,548,360 461,043,926 373,296,563 211,307,515 108,048,653 TRAFFIC DEVELOPMENT Page Six In 1944 passenger revenues, including excess baggage, amounted to $2,545,016. In 1945 they totalled $4,376,775, an increase of 72.0% . Although mail revenues declined $4,570 (1.6% ) , express revenues rose $62,151 (57.9% ) and other revenues $12,770 (101.0% ). Our progress in all these categories over the last five years is indicated in the following table: I I Dollar Comparison of Annual Operating Revenues 1945 1944 1943 1942 1941 Passenger and excess baggage ......................... $4,376,775 $2,545,016 $1,864,999 $1,421,834 $1,081,950 Mail ........................................................................................ 277,238 281,808 301,823 606,004 611,461 Express ................................................................................. 169,396 107,245 96,665 62,309 34,319 Other ..................................................................................... 25,413 12,643 4,842 9,689 3,662 $4,848,822 $2,946,712 $2,268,329 $2,099,836 $1,731,392 Cents Per Mile Comparison of Annual Operating Revenues 1945 1944 1943 1942 1941 Revenue miles flown ............................................. 5,279,336 2,882,381 2,179,472 2,210,187 2,327,573 Passenger and excess baggage ......................... 82.91 88:30 85.57 64.33 46.48 Mail ........................................................................................ 5.25 9.78 13.85 27.42 26.27 Express ................................................................................. 3.21 3.72 4.44 2.82 1.47 Other ..................................................................................... .48 .43 .22 .44 .16 91.85 102.23 104.08 95.01 74.38 Operating costs dropped from 95.60 cents per mile in 1944 to 86.43 cents in 1945 largely as a result of the increase in plane miles flown. Al though gross income per mile fell from 102. 23 cents to 91.85 cents and net income from 4.88 cents to 3.20 cents, our increased mileage was nevertheless sufficient to produce the larger net profit already indicated. FURTHER EXPANSION PLANS-EXISTING SYSTEM Great as has been our expansion m the last year, it is dwarfed by comparison with our projected program for 1946 and 1947. In May of 1946 your Company will superimpose on its present fleet of l 2 Douglas DC-3's its new fleet of 4 Douglas DC-4 fifty passenger airplanes, carrying nearly two-and-one-half times the number of passengers per airplane and cruising some sixty miles an hour faster. These planes will be powered by new "\i\Tright 9-HD engines and will be more than twenty miles an hour faster than any ships of this type in service on any air line. Your management has endeavored to make them, in other respects, the finest of air- craft. A new nacelle-engine combination has been adopted for maintenance simplification. A method of synchronizing all four engines to eliminate "propeller throb" has been installed. A new color scheme and cabin interior arrangement has been conceived by a leading firm of industrial designers. A visual device for informing passengers of the progress of the flight Page Seven Chicago and Southern Douglas DC-4 ... in serv ice before the end of May, 1946 is incorporated in the forward bulkhead. Twelve of the fifty seats are arranged in groups of four seats each which face each other, with tables between, so that passengers wishing to play cards or engage in conferences may do so with maximum convenience. One of these sections 1s equipped with drawable curtains to assure complete privacy. During 1947 we propose to replace all our twin-engine DC-3's with ten or more Martin 2-0-2 forty passenger airplanes, cruising at about 255 miles an hour. This ship will equal in speed and luxury of accommodations anything in the twin-engine category to be used on other lines and should maintain our competitive position over all parts of our system in attracting the shorter haul traffic. EQUIPMENT LOAN Page Eight Financing of the purchase and conversion cost of the DC-4 airplanes, mentioned above, together with the cost of spare parts and ground equipment necessary for the adaption program, was accomplished through a chattel mortgage loan on our fleet of sixteen airplanes. This loan was obtained from the American National Bank and Trust Company of Chicago, Illinois, and two associated banks, is dated February 15, 1946, and is in the amount of $2,000,000. It is for a term of two years and is repayable in twenty equal installments, together with interest at 2% per annum on the principal balance remaining from month to month unpaid. Chicago and Southern Martin 2-0-2 .. . in service by autumn, 1941 NEW DOMESTIC ROUTE APPLICATIONS A glance at the map on Page Two of this report will indicate the general pattern of our new domestic route applications. The status of each one of these before the Civil Aeronautics Board is as follows: Examiners' Report Received-Exceptions Submitted NORTH CENTRAL ST ATES CASE Between Minneapolis-St. Paul and Chicago, via Rochester, Minn.; Dubuque, Iowa and Rockford, Ill. Between Minneapolis-St. Paul and Chicago, via Rochester, Minn.; Madison and Milwaukee, Wis. Chicago and Southern not recommended by Examiner. Submitted to Examiners-Examiners' Report Not Issued MEMPHIS- PITTSBURGH-NEW YORK CASE Between Memphis and New York City via Paducah and Louisville, Ky.; Covington-Cincinnati, Ken- tucky-Ohio; and Pittsburgh and Allentown-Bethlehem, Pa. Page Nine Page Ten GREAT LAKES AREA CASE I. (a) Between St. Louis and Memphis, via Poplar Bluff, Mo., and Jonesboro, Ark. (b) Between St. Louis and Memphis, via Cape Girardeau, Mo., Cairo, Ill., and Blytheville, Ark. (c) Between Chicago and Memphis, via Champaign-Urbana and Decatur, Ill.; St. Louis, Mo.; West Frankfort, Ill.; Paducah , Ky.; and Dyersburg and Jackson, Tenn. 2. (a) Between Chicago and Detroit, via Fort Wayne, Ind., and Toledo, Ohio. (b) Between Chicago and Detroit, via Michigan City and Elkhart, Ind., and _ Adrian, Mich. 3. Between Chicago and Evansville, Ind., via Terre Haute, Incl. 4. Between St. Louis and Cleveland, via Fort Wayne, Ind. MISSISSIPPI VALLEY CASE I. (a) Between Memphis and New Orleans via Helena, Ark.; Clarksdale, Greenville, Vicksburg and Natchez, Miss.; and Baton Rouge, La. (b) Between Memphis and New Orleans, via Tupelo, Columbus, Jackson and Hattiesburg, Miss. (c) Between Memphis and Shreveport, via Pine Bluff and El Dorado, Ark. (d) Between Memphis and Houston, via Little Rock, Hot Springs and Texarkana, Ark.; Shreve- port, La., and Longview-Marshall , Tyler and Palestine, Texas. (e) Between Memphis and Houston, via Little Rock and Hot Springs, Ark.; and Texarkana, T yler and Palestine, Texas. 2. Between New Orleans and Houston, via Baton Rouge, Lafayette-New Iberia and Lake Charles, La.; Beaumont-Port Arthur and Galveston, Texas and (a) beyond Houston to San Antonio, Texas via Austin and (b) beyond Houston to Brownsville, Texas via Corpus Christi, by exten- sion of route No. 8. 3. (a) Between Shreveport and Dallas-Fort Worth via Longview, Texas. (b) Between Little Rock, Ark., and Dallas-Fort Worth, Texas. SOUTHEASTERN ST ATES CASE Between Memphis and ,,vashington, D. C., via Chattanooga, Tenn.; Greenville and Spartanburg, South Carolina; Charlotte, Winston-Salem, Greensboro and High Point, North Carolina; (a) Danville and Richmond, Virginia; or (b) Roanoke, Lynchburg and Charlottesville, Virginia. TEXAS-OKLAHOMA CASE This application proposes to include Beaumont-Port Arthur, Texas as an intermediate point between ShreYeport and Houston on Route 53. KANSAS CITY-MEMPHIS-FLORIDA CASE Between Omaha, Nebraska and Miami, Fla., via Kansas City, Joplin and Springfield, Mo.; Memphis, Tenn.; Atlanta, Ga.; and Jacksonville, Orlando, and West Palm Beach, Fla. Two alternate routings between Memphis and Atlanta are proposed in connection with this application (a) via Chattanooga or (b) via Birmingham. MIDDLE ATLANTIC ST ATES CASE Between Washington, D. C. and New York City, via ,,vilmington, Delaware. (Represents the remainder of the original Memphis-New York proposal.) ROUTE CONSOLIDATION CASE Recently heard in ,vashington. Involves our application for consolidation of Routes 8 and 53. Assigned for Hearing Before Examiners NEW YORK-BOSTON-NEW ORLEANS Assigned for hearing June 10. Involves our application between New Orleans and New York (a) via Meridian, Miss.; Birmingham, Ala.; Atlanta, Ga.; Asheville, North Carolina; Roanoke, Lynchburg and Richmond, Va.; Washington, D. C.; and Wilmington, Delaware; or (b) via Montgon:iery, Ala.; Atlanta, Ga.; Asheville, North Carolina; Roanoke, Lynchburg and Richmond, Va.; Washington, D. C.; and Wilmington, Delaware. Awaiting Pre-Hearing Conference LITTLE ROCK-ST. LOUIS CUT OFF This application proposes an operation over a Great Circle course between Chicago and Houston, with a direct non-stop flight between St. Louis and Little Rock. This cut-off would reduce the present flight time between Houston and Chicago by approximately one hour. LOUISVILLE CASE This application seeks the addition of Louisville, Ky., .as an alternate intermediate point to Evansville between Paducah and Indianapolis on Route 53. Civil Aeronautics Board procedures require that, after an Examiners' report has been made and exceptions and briefs have been filed, oral argument before the Board itself be held. An adverse Examiners' report is in no sense conclusive. Therefore it can be said that all of the above applications are active, although no assurance can be given as to which, if any, will be granted. APPLICATIONS FOR INTERNATIONAi. ROUTES The Company is actively pressing its applications for new routes to Puerto Rico, South America, . the Canal Zone and Mexico. In Docket No. 798 service is proposed between New Orleans and South American cities via Cuba, Puerto Rico and various Caribbean points. Rout- ings are also proposed between New Orleans and the Canal Zone. Two other applications propose service from Houston to Mexico City and from New Orleans to Mexico City. All of these proposals were heard in a consolidated proceeding before the Civil Aeronautics Board and have been submitted for decision since May, 1945. Although it is impossible to predict the nature and extent of the routes, if any, which may be awarded to the Company as a result of that proceeding, the Board's decision, which must be approved by the President of the United States, should be forthcoming in the near future. ANNUAi. MEETINC, The annual meeting of stockholders will be held at the Company's General Office at the Munici- pal Airport, Memphis, Tennessee, at 2 p.m. on Tuesday, May 7, 1946, for the purpose of electing your Board of Directors for the ensuing year and transacting such other business as may come before it. Notice of this meeting is being sent you and it is hoped that you will be able to be present. Respectfully submitted, ~~ By Order of the Board of Directors President. Page Eleven Page Twelve CHICAGO AND SOUTHERN AIR LINES, ( A Delaware Corporation) ASSETS CURRENT ASSETS : Cash ....................................................................................................................................................... . $ 322,528 United States Government securities, at cost (Note 1) ................................ . 868,821 Receivables from: Air lines, customers, agencies, etc. ................................................................... , ............... . 342,567 United States Government. ...................................................................................................... .. ~8, 127 Officers and employees .................................................................................................................. . l 3,491 Materials and supplies, at average cost... ............................................................................ . 80,719 $1,666,253 OTHER ASSETS AND DEFERRED CHARGES: Prepayments ................................................................................................................................................... . Claims for refund of prior years Federal income taxes ...................................... .. Receivable from sale of stock purchase warrants (Note 2) ........................... . Miscellaneous ................................................................................................................................................ . OPERATING PROPERTY AND EQUIPMENT: $ 117,012 40,434 42,000 14,085 Depreciation Classification Cost Reserves (Note 3) Flight equipment. ................................................................................................. . Other property and equipment... ........................................................... . Work in progress .................................................................................................. . $1,757,842 $ 834,747 529,431 251,086 254,082 213,531 $2,538,359 FRANCHISES AND GOODWILL $1,088,829 1,449,530 I $3,329,315 NOTES: (1) United States Government securities in the principal amount of $640,000 were pledged as collateral to secure a note payable to bank of $300,000. The Company in 1946 has secured a commitment for a bank loan of $2,000,000 represented by 20 notes of $100,000 each, secured by chattel mortgage on aircraft, each note maturing serially over a period of two years from date of its issue, with interest at 2%, in connection with the acquisition and conversion of additional aircraft. It is contemplated that a portion of the pro- ceeds will be utilized to pay off the Company's unsecured bank loan of $100,000 outstanding at December 31, 1945 together with subsequent temporary borrowings of $500,000 incurred in con- nection with the acquisition of aircraft. The chattel mortgage securing the $2,000,000 bank loan provides that so long as any of the indebtedness secured thereby shall remain unpaid the Com pany (a) will not declare or pay any dividends, other than stock dividends, except out of net profits earned subsequent to February 15, 1946, and (b) will maintain a minimum working capital of $500,000. (2) At December 31, 1945 there were outstanding options to purchase, on or before Feb- ruary 25, 1946, 29,315 shares of capital stock at $8 per share. These options, which represented the unexercised portion of options for 50,000 shares of capital stock granted in 1936, were all exercised prior to February 25, 1946. INC. BALANCE SHEET- DECEMBER 31, 1945 LIABILITIES CURRENT LIABILITIES: Notes payable to bank (Note 1) ............................................................................................... .. Accounts payable and accrued liabilities .......................................................................... .. Liability for purchase of aircraft from United States Government... ..... .. Traffic balances, and deposits payable ................................................................................... . Accrued Federal and State income taxes ............................................................................. . $ 400,000 281,067 208,000 224,295 151,414 $1,264,776 UNEARNED TRANSPORTATION REVENUE 127,742 CAPITAL STOCK AND SURPLUS: Capital stock-authorized 500,000 shares, without nominal or par value; issued and outstanding 310,011 shares (Notes 2 and 4) .............. .. Stock purchase warrants for 42,000 shares of capital stock (Note 2) Earned surplus since May 23, 1938 ......................................................................................... . $1,599,125 42,000 295,672 1,936,797 COMMITMENTS for purchase and conversion of aircraft aggregate approximately $3,000,000. $3,329,315 .. As of October _27, 194:5 the Company issued stock purchase warrants to Mr. Harvey L. WIiliams and two V1ce-Pres1dents of the Company entitling the holders thereof to purchase 24,000 shares, 10,000 shares and 8,000 shares, respectively, of capital stock at $30 per share at any time to October 27, 1955. At the time of the issuance of the warrants the Company received demand notes in an amount equal to $1 for each share of capital stock of the Company subject to purchase upon the exercise of the warrants, being an aggregate amount of $42,000, bearing interest at the rate of 3% per annum from October 27, 1945. Pursuant to a contract dated January 25, 1946, Mr. Harvey L. Williams became affiliated with the Company as Executive Vice-President on February 15, 1946. The market quotation of the Company's capital stock al October 26, 1945 was approximately $26 per share. These warrants had not been exercised to December 31 , 1945. (3) Includes reserves of $659,559 for fully depreciated property. . (4~ At December 31 , 1945 the Company had a contingent liability to repurchase, at the issue I?nce of $8 per share with adjustments for interest less dividends, 18,324 shares of capital stock issued subsequent to December 8, 1944 pursuant to options granted in 1936. The same contin~ent liability has since attached to 29,315 shares of capital stock issued on the exercise of opt10ns subsequent to December 31, 1945. The market quotation of the Company's capital stock at December 31 , 1945 was approximately $33 per share. Page Thirteen CHICAGO AND SOUTHERN AIR LINES, INC. STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1945 OPERATING REVENUES: Passenger and excess baggage ....................................................................................................... . Mail ........................................................................................................................................................................ . Express ................................................................................................................................................................. . lv!iscellaneous (net) ..................................................................................................... .-......................... . Total operating revenues ............................................................................................................ . OPERATING EXPENSES: Flying and ground operation ........................................................................................................ . Maintenance .................................................................................................................................................. .. Traffic, sales and advertising ........................................................................................................ . General and administrative .......................................................................................................... .. Depreciation ................................................................................................................................................... . Total operating expenses ............................................................................................................ . Net earnings from operations before income taxes ........................................ . OTHER INCOME (NET) Net income before income taxes ........................................................................................ .. PROVISION FOR FEDERAL AND STATE INCOME TAXES (No excess profits tax payable) ................................................................................................ . Net income ............................................................................................................................................... .. Page Fourteen $4,376,775 277,238 169,396 25,413 $4,848,822 $2,245,429 798,679 660,152 512,151 346,067 $4,562,478 $ 286,344 4,847 $ 291,191 122,300 $ 168,891 CHICAGO AND SOUTHERN AIR LINES, INC. STATEMENT OF SURPLUS YEAR ENDED DECEMBER 31, 1945 EARNED SURPLUS SINCE MAY 23, 1938 .BALANCE DECEMBER 31, 1944, per previous report... .................... . ADD: Profit on sale of aircraft to United States Government in 1942............... $ 45,715 Adjustment of United States Army contracts applicable to prior years ................................................................................................................................................................. . 15,798 BALANCE DECEMBER 31, 1944, as adjusted NET INCOME for the year ended December 31, 1945, per accompanying statement ................................................................................................... . DEDUCT-Cash dividend (25c per share) .............................................................. . BALANCE DECEMBER 31, 1945 ........................................................................................... . $ 142,744 61,513 $ 204,257 168,891 $ 373,148 77,476 $ 295,672 Page Fiftee,i ARTHUR ANDERSEN & CO. ACCOUNTANTS AND AUDITORS 5 0 6 OLIVE STREET ST. LOUIS 1 TO THE BOARD OF DIRECTORS OF CHICAGO AND SOUTHERN AIR LINES, INC.: We have examined the balance sheet of CHICAGO AND SOUTHERN AIR LINES, I C. (a Delaware corporation) as of December 31, 1945, 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. Our examination was made in accord- ance with generally accepted auditing standards applicable in the circumstances and included all procedures which we considered necessary. 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 December 31, 1945, 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 except that in 1944 the Company capitalized certain indirect costs incident to the conversion of aircraft to com- mercial use. We concur with the Company's 1945 policy of charging similar costs to expense. St. Louis 1 Missouri April 3, I 946 ARTHUR ANDERSEN & CO. ~ ~ / / I I / ( / I