_Annual Report -=-~~~~~~-~C*S .) CHICAGO ANO SOUTHERN AIR LINES, 1Nc YEAR ENDED DECEMBER 31, 1946 f946-4-nnua/ /eporl TO THE STOCKHOLDERS OF CHICAGO AND SOUTHERN AIR LINES, INC. * General Offiees - MuniciJtal Airport - Memphis 2, Tenn. CHICAGO AND SOUTHERN AIR LINES, INC DIRECTORS CARLETON PUTNAM SIDNEY A. STEWART ALBERT J. EARLING L. RAYMOND BILLETT W. HARRY JOHNSON OFFICERS CARLETON PUTNAM, President SIDNEY A. STE\VART, Executive Vice President ALBERT J. EARLING, Vice President-Traffic and Sales JUNIUS H. CooPER, Vice President-Treasurer R. S. MAURER, Secretary R. S. SCRIVENER, Assistant Treasurer E. MURRAY, Assistant Secretary GENERAL OFFICES, Memphis Municipal Airport, Memphis 2, Tennessee CORPORATE OFFICE, 100 West Tenth Street, Wilmington, Delaware TRANSFER AGENT Mississippi Valley Trust Company, Broadway and Olive Street, St. Louis, Missouri Co-TRANSFER AGENT Northern Trust Company, South LaSalle and West Monroe Streets, Chicago, Illinois REGISTRAR Boatmen's National Bank, Broadway and Olive Street, St. Louis, Missouri Co-REGISTRAR American National Bank and Trust Company of Chicago, Chicago, Illinois REPORT OF THE PRESIDENT TO THE STOCKHOLDERS DOMESTIC OPERATIONS In 1945 your Company increased the revenue plane-miles it flew by 83% over 1944. In 1946 it further increased its domestic plane-miles by 54% over 1945. The increase was in fact greater than indicated by plane-mile statistics, as fifty passenger DC-4 equipment was put in service on certain schedules in June, 1946, and total seat-miles flown in 1946 were thus increased by 79% over 1945. The number of revenue passengers carried in 1946 increased 77% over 1945, and the number of passenger miles 59% , Air express and freight ton-miles increased 60% , Only air mail ton-miles declined. The following table indicates our growth in these operating categories on our domestic system dur- ing the last five years. Comparative Operating Statistics 1946 1945 1944 1943 1942 Revenue plane miles flovm 8,107,897 5,279,336 2,882,381 2,179,472 2,210,187 Revenue seat miles flown 196,289,556 109,596,160 59,653,713 42,057,337 45,719,921 Number of revenue passengers -- 350,296 197,541 104,906 82,017 69,075 Revenue passenger miles 137,843,727 86,876,826 49,242,103 35,293,185 28,438,139 Air mail ton-miles ........ 363,731 463,385 471,740 464,034 261 ,770 Air express and freight ton-miles .................... 592,431 370,774 230,522 186,648 105,654 Unfortunately rising costs and declining load factors more than offset this increase in business. Your Company, in common with the majority of the country's air lines, saw the profits of 1945 become deficits in 1946. The return to prewar densities of traffic, even though -and in fact for the very reason that-it was on a greatly increased mil~age, caused substantial losses, since prewar mail rates had been reduced early in the war and the prewar margin of profit, made pos- sible by these rates, eliminated. Three FOREIGN OPERATIONS During 1946 your Company increased its certificated route mileage from 2,108 to 6,166 as a result of the award to it on May 22 of new routes from Houston and New Orleans to Havana, and beyond Havana (a) to Caracas, Venezuela, via Montego Bay and Kingston, Jamaica; and Aruba and Curacao, Netherlands West Indies; and (b) to San Juan, Puerto Rico, via Camaguey, Cuba; Port-au- Prince, Haiti; and Ciudad Trujillo, Dominican Republic. Service on the New Orleans-Havana segment was commenced on November 1, 1946, with one round-trip daily. It had been your man- agement's intention to expand operations this spring to San Juan, and this summer to Caracas, but on March 3, 1947, in conjunction with a temporary mail rate order fixing a rate of 95 cents a plane-mile on the ew Orleans-Havana segment, the Civil Aeronautics Board insti- tuted a proceeding to determine whether the public convenience and necessity require that the route segments beyond Havana be suspended until further order of the Board. No date for this proceeding has yet been set. Your management was given the opportunity for a conference with the Board on the subject of this suspension at which we con- ceded that the rising level of costs, the declining level of traffic, and other conditions, would put the mail rate needed to support the seg- ments beyond Havana sufficiently above that originally anticipated to justify a re-examination of these routes before service was started. It will be your Company's position at the hearing that while a tempo- rary suspension may be indicated until general traffic conditions im- prove, the routes should be opened within a reasonable time, and that they justify reasonable mail pay support. Meanwhile service between New Orleans and Havana continues, and is in no way affected by the aforesaid investigation. Operating costs have dropped from 298 cents a mile during 1946 to 228 cents a mile for the first quarter of 1947. In fact, in February, 1947, this seg- ment, with the help of the temporary mail rate, earned a profit of $11,500. But February is a month of heavy travel between the United States and Cuba, and it is still too early to determine what financial results such factors as seasonal variations in traffic, greater familiariza- tion of the public with a totally new route, and the lower costs that should come with greater overseas operating experience on our part, will produce. In any event, your management proposes so fully to meet the statutory standards of efficiency and economy in the opera- tion of this service that the Civil Aeronautics Board will find no diffi- culty in providing adequate mail pay support throughout the develop- mental period. EARNINGS The trend of events discussed under Domestic Operations had be- come apparent by mid-1946. In my report to stockholders for the seven Fou r months period ending July 31, I said, "It is the intention of your management to give prompt consideration to the advisability of apply- ing to the Civil Aeronautics Board for an increased mail rate. Should it seem proper to do so after a short additional period of operating experience, such relief as we may be entitled to receive will then be a question for Board action ... Your Company, in the years before the war, was paid a plane-mile rate which averaged about 26 cents. Be- cause of the unusual density of war traffic arising from scarcity of equipment as well as from excessi e demand, the wartime net income of your Company rose to a point where the Civil Aeronautics Board felt justified in taking us off a plane-mile rate and placing us on a pound-mile rate, with a consequent violent reduction in revenues. The effect was to lower our plane-mile mail revenues from 26 cents to approximately 3 cents a mile. We continued, however, to show a profit as long as wartime conditions continued to exist. ow that those con- ditions no longer prevail, it would be entirely reasonable for us to request a review of our position. Because of the pound-mile payment method we are today actually receiving next to the lowest plane-mile rate of any airline in the industry." Three weeks after the above was written, your Company filed a petition for a mail rate of 19.5 cents a plane mile for the period January 1, 1946, through August 31, 1946, and of 42.5 cents a plane- mile from and after September 1, 1946. Due to the Civil Aeronautics Board's congested calendar, this proceeding has not yet come to a hearing, and consequently it is impossible at present to determine what your Company's final earnings for 1946 will be. However, in recognition of the rapid change in circumstances since the war years, and of the serious drain on our resources created thereby, the Civil Aeronautics Board on March 24, 1947, issued with- out a hearing, a temporary "show cause" order granting us additional domestic mail pay for the year 1946 amounting to S925,000. Although a final rate may legally be higher or lower than the temporary rate which precedes it, it has been the practice of the Civil Aeronautics Board to set temporary rates safely below what it considers likely to be the permanent rate. Therefore, in attempting to estimate the prob- able financial results for 1946, your management feels justified in say- ing they will be no worse than those set out below, and may be better. The figures given include domestic mail pay for 1946 base_ d on the temporary "show cause" order. They likewise include mail pay at 95 cents a mile on our ew Orleans-Ha ana route, under the temporary "show cause" order for that route mentioned in a preceding section. Condensed Comparative Income Statement Twelve months ended Dec. 31, 1946 Revenue miles flown .............................................................. 8,182,014 Operating Revenue: Passenger and excess baggage ............................................ $6,761,046 l\Iail ........................................................................................ 1,212,786 Express and freight.............................................................. 222,667 Other ...................................................................................... 24,147 Total operating revenue ........................................................ $8,220,646 Total operating expenses ...................................................... 9,445,646 Income (loss*) from operations .......................................... $1 ,225,000* Other income (net)................................................................ 17,891 * Income (loss*) before provision for income taxes .......... $1,242,891 * Provision for Federal and State income taxes .................. 237,211* 1 et income (loss*) for period ............................................ $1,005,680* * Indicates red figures. Twelve months ended Dec. 31, 1945 5,279,336 $4,376,775 277,238 169,396 25,413 $4,848,822 4,562,478 $ 286,344 4,847 $ 291,191 122,300 $ 168,891 While non-mail revenues in 1946 increased 53% over 1945 and total revenues 69%, operating expenses increased I 07% . A substantial portion of the increased cost is attributable to the inauguration of the DC-4 service already mentioned. These ships, operating on abot 22% of our schedules after July 11, 1946, relieved the wartime congestion over the whole system, dropping load factors from 80% in 1945 to 70% in 1946, but contributed to raising our cost per airplane mile from 86 cents to 115 cents. Other items adding to our costs in 1946 were the establishment of the forty-hour work week, which increased expenses about 7 cents a mile; increases due to a job evaluation program for non-union em- ployees undertaken to bring our scale for these employees in line with other air carriers, about 3 cents a mile; increases in the cost of mate- rials and supplies, about 3 cents a mile; increases in rentals and services, about I cent a mile; and the cost of introducing DC-4 equip- ment and the training of personnel :incident thereto, about 4 cents a mile. Finally, mention should be made of the fact that although our New Orleans-Havana operation accounted for only 1 % of the total miles flown in 1946 all of these overseas miles were flown with DC-4 equipment at an average cost of 298 cents a mile, which had the effect of increasing our over-all cost nearly 2 cents a mile. On the revenue side, it should be noted that various of our com- petitors decided during December, 1945 to reduce their domestic pas- senger fares. This forced us to follow suit, and throughout 1946 we have been operating at a passenger fare about 7% below 1945. Six . The following table compares revenue and expense for the last five years on a cents-per-plane-mile basis: 1946 1945 1944 1943 1942 Revenue miles flown .................. 8 ,182,014 5,279J36 2,882,381 2,179,472 2,210,187 PaS$enger and excess baggage 82.63.c 82.91c 88.30c 85.57c 64.33c Mail ------------- 14.82c (1) 5.25c 9.78c 13.85c 21.42c Express and freight... ............... 2.72c 3.21c 3.72c 4.44c 2.82c Other .......................................... .30c .48c .43c .22c .44c Total revenue ----- 100.47c 91.85c 102.23c 104.08c 95.0lc Total expense ............................ 115.44c 86.43c 94.71c 102.95c 74.67c Profit or loss ............................ 14.97c 5.42c 7.52c 1.13c 20.34c (1) Includes retroactive mail pay under temporary 'show cause" orders. Indicates red figure . This table serves to show that had our mail rates and our pas- senger fares, both of which were beyond your management's control, been maintained at their 1942 level in 1946, your Company would have been able to meet the forty-hour week, other rising labor costs, increases in materials, supplies and rents, $318,000 worth of DC-4 preliminary costs, and the return to lower load factors, and still earn a profit. RETRENCHMENT PROGRAM But obviously your management has not felt justified in relying alone upon either mail rate relief or increased passenger fares to meet these financial difficulties. As soon as it became apparent that wartime load factors would not continue when the seat-mile offering was in- creased, steps were taken progressively to reduce the staff which had been engaged to handle them. As of October, 1946 your Company had 2,174 employees on its payroll. By March, 1947, the payroll had been reduced by over 600. Plans for moving our general offices to Chicago were abandoned. Construction work on a hangar in Chicago was suspended and is being renewed only after arrangements have been approved for transferring half the financial burden to another carrier. Thirteen traffic office leases in ten cities were cancelled, traffic and airport station activities were consolidated, and shop layouts were rearranged to improve efficiency. In Havana, where we were at the disadvantage of having planned an operation which was to have been the hub of our Caribbean routes, with schedules running beyond Havana to both Caracas and San Juan, as well as to New Orleans, we began arranging to share our downtown ticket offices with other lines, and have already transferred a quarter of the expense of this lease to another carrier, with more under negotiation. Negotiations are also in progress to effect arrange- ments by which we may perform duties for certain carriers at a com- pensation which will further reduce the burden of our Cuban over- head. S e-ven OUTLOOK 1OR. 1941 Since many factors at one time took a turn for the worse in 1946, with traffic densities, mail rates and passenger fares going down, and expenses up, every effort is being made in 1947 to reverse each one of these trends. A more accurate appraisal is now possible of traffic potentials, and equipment commitments are being reduced . wherever possible, with schedules adjusted more closely to probable demand. With our routes beyond Havana indefinitely suspended, one of two additional DC-4's which were being converted to serve those routes has been can- celled, and an attempt is being made to dispose of the second. We also hope to be able to cancel three of the ten Martin 2-0-2's we have on order. The remaining seven should start coming into service late in the year, and after the initial break-in period should permit lower seat-mile costs than do the DC-3's now operating the majority of our schedules. With the arrival of Spring, traffic is showing signs of im- provement, and a great deal of attention is being given to strengthen- ing our sales efforts. The Board's temporary domestic mail "show cause" order - calls for an increase in our mail rate to about 18 cents a mile on 19,000 daily scheduled miles through January, February and March, 1947; then to 15 cents from April 1, 1947 to June 30, 1947; then to 13 cents from July 1, 1947 to March 31, 1948; then to 10 cents from April 1, 1948 to June 30, 1948; and then to 7 cents on and after July 1, 1948. Your management proposes here, as in the conduct of foreign operations, to so clearly meet the statutory standards of effi- ciency and economy that any deficiency in this temporary rate will be promptly made good by the Board in the permanent rate. By joint action of all the air lines, under the auspices of the Board, passenger fares were raised to their prewar levels as of April 1, 1947. Benefits from this increase should be felt throughout the re- mainder of the year. It is, of course, impossible to forecast the net result of all these factors working together in conjunction with our retrenchment in ex- penses. The first three months of 1947 have been as hard as any in 1946, and show a loss of $545,197 for this quarter. But there are signs that with March behind us, your Company has weathered the worst of the storm. Barring any general recession in the country's economy as a whole, it seems probable we will enjoy slow but steady gains hence- forward. The chief remaining uncertainty surrounds the effectiveness of the Martin 2-0-2 on our routes, both as a producer of business and as a means of achieving lower unit costs, but we propose to ,move as conservatively as possible in the introduction of these planes, and to keep preliminary expenses to a minimum. Eight I NEW ROU1E APPLICATIONS The status of our applications for new routes now pending before the Civil Aeronautics Board is as follows: Submitted to Civil Aeronautics Board-Decision not Issued MEMPHISPITTSBUROH-HEW YORK CASE Between Memphis and New York City via Paducah and Louisville, Ky.; Coving- ton-Cincinnati, Kentucky-Ohio; and Pittsburgh and Allentown-Bethlehem, Pa. Chicago and Southern not recommended by Examiners. 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, via Terre Haute, Ind. 4. Between St. Louis and Cleveland, via Fort Wayne, Ind. The Examiners recommended route 2 (b) for Chicago and Southern. MISSISSIPPI VALLEY CASE I. (a) (b) (c) (d) 2. 3. (a) (b) Between Memphis and New Orleans via Helena, Ark.; Clarksdale, Greenville, Vicksburg and Natchez, Miss.; and Baton Rouge, La. Between Memphis and ew Orleans, via T upelo, Columbus, Jackson and Hattiesburg, Miss. Between Memphis and Shreveport, via Pine Bluff and El Dorado, Ark. Between Memphis and Texarkana, via Little Rock and Hot Springs, Ark. 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. Between Shreveport and Dallas-Fort Worth via Longview, Texas. Between Little Rock and Dallas-Fort Worth. The Examiners recommended the inclusion of El Dorado and Hot Springs on Route 8 between Little Rock and Shreveport. SOUTHEASTERN ST ATES CASE Between Memphis and Washington, via Chattanooga, Tenn.; Greenville a.nd Spartanburg, South Carolina; Charlotte, Winston-Salem, Greensboro and High Point, North Carolina; and (a) Danville and Richmond, Virginia; or (b) Roan- oke, Lynchburg and Charlottesville, Virginia. Chicago and Southern not recom- mended by Examiners. Nine KANSAS CITY MEMPHIS-FLORIDA CASE Between Omaha and Miami, 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 con- nection with this application: (a) via Chattanooga or (b) via Birmingham. Chicago and Southern not recommended by Examiners. Examiners' Report Received-Exceptions Submitted MIDDLE ATLANTIC ST ATES CASE Between Washington and New York City, via Wilmington, Delaware. (Represents the remainder of the original Memphis-Carolina-New York proposal). Examiners recommended deferral until decision in Southeastern States Case. NEW YORK-BOSTON-NEW ORLEANS CASE 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 Montgomery, Ala.; Atlanta, Ga.; Asheville, North Carolina; Roanoke, Lynchburg and Rich- mond, Va.; Washington, D. C., and Wilmington, Delaware. Chicago and Southern not recommended by Examiners. Awaiting Pre-Hearing Conference LITTLE ROCK-ST. LOUIS CUT-OFF This application proposes an operation over a Great Circle course between Chi- cago 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 8. MONROE-ALEXANDRIA CASE This application seeks the addition of Monroe and Alexandria, La., as additional intermediate points between Memphis and Houston on Route 8. NEW ORLEANS-HOUSTON-WEST COAST PROCEEDING This application seeks a route from New Orleans, via Baton Rouge, La., Beau- mont-Port Arthur, Houston, Austin, San Antonio, Del Rio, Pecos and El Paso, Texas; Nogales, Tucson, and Phoenix, Arizona; and (a) beyond Phoenix to Los Angeles, Calif., via El Centro, San Diego, San Bernadina and Long Beach, Calif.; and (b) beyond Phoenix to San Francisco, Calif., via Prescott, Arizona, Boulder City, and Los Vegas, Nevada; Bakersfield, Fresno, Stockton and Oakland, Calif. DETROIT-TOLEDO-NEW YORK-WASHINGTON PROCHDING This application seeks to extend Route 8 from Chicago to Fort Wayne and from Detroit and Toledo to New York-Newark, via Cleveland, Ohio; Buffalo-Niagara Falls, Rochester and Syracuse, New York; and from Detroit and Toledo, via Cleveland, Akron-Canton and Youngstown, Ohio; Pittsburgh and Allentown- Bethlehem, Pa.; and from Detroit and Toledo to Washington, D. C., via Cleve- land, Akron-Canton and Youngstown, Ohio and Pittsburgh, Pa. Ten HOUSTON-DAUAS-FORT WORTH PROCEEDING This application seeks a route between Houston and Dallas-Fort Worth. FOREIGN ROUTE AMENDMENT PROCEEDINGS Application to serve Chicago as a co-terminal with ew Orleans and Houston. Application to serve Maricaibo, Venezuela as an intermediate point between Curacao, Netherlands ,,vest Indies, and Caracas, Venezuela; to abandon Cama- guey, Cuba, and to place Kingston, Jamaica on the Havana, Cuba-San Juan, Puerto Rico segment of the route; and to extend the San Juan, Puerto Rico, and Caracas, Venezuela, segments to Port of Spain, Trinidad. Civil Aeronautics Board procedures require that, after an Exam- iner's report has been made and exceptions and briefs have been filed, oral argument before the Board itself be held. An adverse Examiner's 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. ANNUAL MEETING The annual meeting of stockholders will be held at the Com- pany's General Office at the Municipal Airport, Memphis, Tennessee, at 2 p.m. on Tuesday, May 6, 1947, for the purpose of electing a Board of Directors for the ensuing year and transacting such other business as may come before it. Notice of this meeting has been sent you and it is hoped that you will be able to be present. Respectfully submitted, ahh~ President. By Order of the Board of Directors. April 15, 1947. E/e-.,en CH IC A GO A ND SOU 1 HERN A IR L INES, INC. BALANCE SHEET-DECEMBER 31, 1946 ( A Delaware Corporation) ASSETS CURRENT ASSETS: Cash (Note 7) ....................................................................... "" ... $ 711,161 United States Government securities, at cost 1,168,974 Receivables from: Air lines, customers, agencies, etc ..................... . United States Government (Note 2) .......... .. Officers and employees .............................................. _ Claims for refund of prior years Federal income taxes ..................................................... __ _ Materials and supplies, at average cost. __ ........ . 571,372 1,069,912 21,256 236,547 153,963 OTHER ASSETS AND DEFERRED CHARGES: Advance payments on flight equipment (Note 3) .................................................................................... $ 189,698 172,940 23,825 Prepayments ............................................................................... .. Miscellaneous investments and advances ....... .. Receivable from sale of stock purchase warrants (Note 4) .............................................................. . Miscellaneous ............................................................................. . 8,000 6,250 OPERATING PROP.ERTY AND EQUIPMENT: Cost Flight equipment .............................. $4,049,691 Other property and equipment 774,935 Work in progress .............................. 215,934 Depreciation Reserves (Note 5) $1,576,157 301,432 $5,040,560 $1,877,589 FRANCHISES AND GOODWILL $3,933,185 400,713 3,162,971 LIABILITIES CURRENT LIABILITIES: Notes payable to bank, 2% (Note 6) ............ $ 500,000 Accounts payable ..................................................................... 1,046,124 Traffic balances and deposits payable............... 432,833 Other current ,and accrued liabilities.................. 92,870 OTES PAYABLE TO BANK, 2%, due after one year (Note 6) .................................................... .. UNEARNED TRANSPORTATION REVENUE CAPITAL STOCK AND SURPLUS: Capital stock-authorized 650,000 shares, without nominal or par value; issued and outstanding 509,326 shares ........................... $4,831, 102 Stock purchase warrants (Note 4) ........................... 8,000 $2,071,827 1,160,000 145,283 Earned surplus (deficit*) since May 23, 1938 (Note 2) .......................................... 719,342 4,119,760 COMMITMENTS (Note 7) $7,496,870 $7,496,870 The accompanying notes constitute an integral part of this statement Twehe Thirteen CHICAGO AND SOUTHERN AIR LINES, INC. STATEMENT OF INCOME YEAR ENDED DECEMBER ~I, 1946 OPERA TING REVENUES: Passenger and excess baggage (Note 1) .......................................................... $6,761,046 Mail (N.ote 2) ........................................................................................................ 1:2.12,786 Express .................................................................................................................... 222,667 Miscellaneous (net) ............................................................................................ 24,147 Total operating revenues .................................................................................. $8:2.20,646 OPERA TING EXPENSES: Flying and ground operations ............................................................................ $3,471,574 Maintenance ............................................................................................................ 1,862,969 Traffic, sales and advertising ............................................................................ 2:2.95,965 General and administrative.................................................................................. 928,196 Depreciation ............................................................................................................ 886,942 Total operating expenses ................................................................................ $9,445,646 Net loss from operations ................................................................................ $1:2.25,000 OTHER DEDUCTIONS (NET) ......................................................................... . 17,891 Net loss before refund of Federal income taxes ................................ $1,242,891 REFUND OF FEDERAL INCOME TAXES for 1944 and 1945- resulting from carryback of 1946 loss in accordance with pro visions of the Internal Revenue Code.................................................... 237,211 Net loss (Notes 2 and 8) ........................................................................ $1,005,680 STATEMENT OF SURPLUS YEAR ENDED DECEMBER 31, 1946 EARNED SURPLUS (DEFICIT"") SINCE MAY 23, 1938 BALANCE DECEMBER 31, 1945, per previous report... ................................. $ 295,672 DEDUCT: I Net loss for the year ended December 31, 1946 .................... $1,005,680 Miscellaneous ................................................................................ 9,334 1,015,014 / BALANCE DECEMBER 31, 1946 (DEFICIT) (Note 2) ........ $ 719,342 Denotes red figure. The accompanying notes constitute an integral part of these statements. Fourteen CHICAGO AND SOUTHERN AIR LINES, INC. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1946 1. Passenger fares have been increased 10%, to become effective April I, 1947. 2. Accounts receivable from the United States Government include $925,960.02 . additional domestic mail revenue and $69,580.25 international mail revenue for the period prior to December 31, 1946, based on temporary rates fixed in "show cause" orders issued by the Civil Aeronautics Board in March, 1947. The inter- national mail rate order was issued in March. The domestic portion of these accounts will be payable as soon as the Board issues the mail rate order pursuant to the domestic "show cause" order. It is estimated that the new rates will produce international mail revenue of approximately $37,000 per month in 1947 and domestic mail revenue of approximately $275,000 for the first quarter of 1947, $240,000 for the second quarter, and $225,000 for each of the last two quarters, based on the diminishing minimum capacity factors stated in the "show cause" order. The foregoing are temporary rates and the final rates, which will be set after hearings before the Board, may differ therefrom although the management does not anticipate that they will be lower. 3. Advance payments on flight equipment include payment of $140,000 in connec- tion with the acquisition and conversion to commercial use of a 5th Douglas DC-4 aircraft (at an estimated cost of $450,000) . In March, 1947 the Civil Aero- nautics Board instituted proceedings to determine whether the Company's pro- jected Latin American routes extending beyond Havana should be suspended. The Company thereupon suspended work on the conversion of the 5th DC-4 which had been ordered in anticipation of early operation over these routes and is endeavoring to dispose of it. It cannot be determined at this time what loss may be sustained on the disposition of this aircraft. 4. As of October 27, 1945 the Company issued stock purchase warrants to a Vice President entitling the holder thereof to purchase 8,000 shares of capital stock at $30 per share prior to 1955, receiving a demand note from the Vice President in the amount of $8,000. Stock purchase warrants for 34,000 shares issued as of the same date to two officers who are no longer with the Company were re- acquired at the date of termination of their employment and were held in the treasury at December 31, 1946 (subsequently cancelled). In 1946 the Company granted stock purchase warrants to two other officers entitling one to acquire 10,000 shares of capital stock at ' 30 per share and the other to acquire 10,000 shares of capital stock at $18 per share, prior to 1956. The market quotations of the Company's capital stock at the dates of granting the warrants were less than the prices at which they may be exercised. 5. Includes reserves of approximately $693,000 for fully depreciated property. Fifteen 6. Notes payable to bank are secured by chattel mortgage on aircraft. The chattel mortgage provides that so long as any of the indebtedness secured thereby shall remain unpaid the Company, among other things (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 (computed on the basis of excluding from current liabilities any indebtedness to the bank secured by the chattel mortgage) . 7. The Company has contracted for the purchase of ten Martin 2-0-2 type air- craft at a cost of $2,410,000, for delivery in 1947, and has outstanding commit- ments for the acquisition of spare parts therefor at an estimated cost of $420,000. The Company is negotiating with the Glenn L. Martin Company in an effort to reduce the number of aircraft from ten to seven. Reference is also made to the commitment of $450,000 for the purchase of a 5th DC-4 aircraft as referred to in Note 3. The Company has contracted for the construction of a hangar at Chicago, Illi- nois at an estimated cost of $400,000 of which $78,800 had been expended to December 31, 1946. Work on this hangar has been suspended and the Company is negotiating arrangements for completion and joint occupancy of the hangar on a basis which will reduce the Company's commitment to one-half the estimated cost. Under an agreement covering the lease for ten years from 1946 (at an annual rental of $35,000) of a five-story office building in Chicago, Illinois, which was to be used as the general offices of the Company commencing in the latter half of 1947, the Company has agreed to remodel and improve the building at a cost of not less than $150,000. The plans for transferring the general offices to Chicago have been abandoned and the Company is in the process of subleasing the space in this building. The management anticipates that the rental income should cover the Company's future commitments under the lease. 8. Preliminary estimates of the Company indicate that operations for the first quarter of 1947 will result in losses aggregating approximately $550,000. Sixteen ARTHUR ANDERSEN & CO. ACCOUNT.A..i.vrs AND AUDITORS 506 OLIVE STREET ST. LOUIS l TO THE BOARD OF DIRECTORS OF CHICAGO AND SOUTHER AJR LI1 ES, I C.: We have examined the balance sheet of CHIC GO AND SOUTHERr AIR LL ES, INC. (a Delaware corporation) as of December 31 , 1946, and the state ments of income and surplus for the fiscal ear then ended, have reviewed the system of internal control and the accounting procedures of the Compan , and, without making a detailed audit of the transaction , ha e examined or tested accounting records of the Company and other supporting evidence, b , methods and to the extent we deemed appropriate. Our examination was made in accordance \ ith generally accepted auditing standards applicable in the circumstances and in- cluded all procedures which we considered necessary. In our opmion, 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, 1946 and the results of its operations for the year ended that date, and are in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. St. Louis, Missouri March 29, 1947 AR THUR ANDERSEN & CO. ..... 'J