NORTH CENTRAL AIRLINES 7soo northliner drive, minneapolis, minnesota board of directors Hal N. Carr* Chairman G. F. DeCoursin * Chan Gurney management Samuel H. Maslon * Jay Phillips Morton B. Phillips Hal N. Carr . .. . ............. . .. Chairman of the Board and Chief Executive Officer Bernard Sweet ...... . . . .. . .... .. .... . . ... ..... President John P. Dow .... . .......... . . Vice President and Secretary Robert L. Gren . ... . . . ..... . . .. Vice President-Maintenance and Engineering George J. Karnas .. ... . ... . . Vice President-lnflight Service highlights OPERATING REVENUES 1973 $127,392,000 OPERATING PROFIT ......... .. . . .. . . .. ... .. $ 12,001,000 EARNINGS Before out-of-period/ extraordinary items .. . . . $ 6,447,000 Out-of-period items . ....... . ........ . . . .. . Extraordinary item .... . .. . ... . ... . . .. .. .. . NET EARNINGS . . . . .. . . ... . ........ . . $ 6,447,000 NET EARNINGS PER SHARE . . . . . . . . . . . . . . . . . 52 CASH FLOW FROM OPERATIONS . . . . .... .... $ 14,176,000 WORKING CAPITAL . . . .. . ..... . . .. . .. .. ..... $ 4,654,000 STOCKHOLDERS' EQUITY . .. . . . .. ... ... . .. . . $ 40,611 ,000 PASSENGERS CARRIED . . . . . . . . . . . . . . . . . . . . . 4,263,000 REVENUE PASSENGER MILES .. . . .. . . .. . . . .. 1,011 ,525,000 CARGO TON MILES . . . . . . . . . . . . . . . . . . . . . . . . 13,394,000 Joseph E. Rapkin H. P. Skoglund Bernard Sweet Kenneth B. Willett * Executive Committee Daniel F. May ........... . .. .... .. Vice President-Finance Gowan J. Miller ....... . . Vice President-Industrial Relations David E. Moran . .. . .. ...... Vice President-Traffic and Sales T. M. Needham . . . ....... Vice President-Ground Operations G. F. Wallis . . . . . ...... . ... Vice President-Flight Operations J. F. Nixon .. . ....... . . .. ....... .. .. . ......... Treasurer Charlotte G. Westberg ...... . .... ..... . Assistant Secretary 1972 $120,627,000 $ 12,355,000 $ 5,837,000 656,000 1,043,000 $ 7,536,000 60 $ 14,263,000 $ 5,439,000 $ 34,787,000 4,319,000 1,029,193,000 12,181 ,000 Change 5.6% - 2.9 10.5 - 14.5 -13.3 -0.6 - 14.4 16.7 -1.3 -1.7 10.0 ANNUAL MEETING: First Wednesday in April (April 3, 1974) in Wausau, Wisconsin. REGISTRARS AND STOCK TRANSFER AGENTS: First National City Bank, New York, New York; Northwestern National Bank of Minneapolis, Minneapolis, Minnesota AUDITORS : Alexander Grant & Company March 4, 1974 to our stockholders, employees and friends: Revenues reached a record $127,392,000, and earnings totaled $6,447,000 in 1973-as North Central carried over four million passengers and flew one billion passenger miles for the second consecutive year. The company continues to rank first in the regional airline industry based on its financial performance. Revenues have increased every year since scheduled service began in 1948, and profits have been earned for 19 of the 20 years under present management. North Central leads the regionals with retained earnings of $20,086,000 and the best debt/equity position. Stockholders' equity has risen to $40,611,000. The airline's excellent results in 1973 and its strong financial condition led the Board of Directors to declare a cash dividend of $.10 per share to stockholders of record February 8, 1974. North Central is the only regional carrier currently paying a cash dividend. In 1973, revenues of $127,392,000 were six percent above the $120,627,000 realized the year before. Operating expenses rose seven percent to $115,391,000, producing an operating profit of $12,001,000 compared with $12,355,000 in 1972. After interest and taxes, the air- line achieved net earnings of $6,447,000 or $.52 per share. Since these net earnings did not include any special or out-of-period items, they represent a $610,000 gain over the comparable $5,837,000 ($.47 per share) in the previous year. (The $7,536,000 net earnings reported for 1972 were boosted by two out-of-period adjustments totaling $656,000 plus an extraordinary item of $1,043,000 from disposition of equipment.) Traffic, revenues and expenses in 1972 were increased by a third-quarter strike against another airline serving some North Central cities. The strike had little effect on earnings since $1,734,000 was paid to the struck carrier under terms of the airlines' Mutual Aid Agreement. Some 4,263,000 passengers were flown 1,011,525,000 passenger miles last year-four and six percent over normalized 1972 figures. Cargo ton miles established a new high with 13,394,000 flown, a normalized gain of 23 percent. The airline maintained its outstanding performance record by completing 99 percent of the 28,381,000 scheduled miles. Seeking further growth, North Central applied to the Civil Aeronautics Board for a Milwaukee- Philadelphia nonstop route. The Board was also asked to consolidate the company's existing route segments into one, permitting greater scheduling flexibility in the future. North Central earned the distinction of being the first regional airline to have its stock listed on the New York Stock Exchange. The symbol "NCA" appeared on the Big Board May 22, 1973. The company's common stock is also traded on the Midwest Exchange. To improve passenger service, the "Quick Ticket" was introduced at Minneapolis/St. Paul and Milwaukee. This automated on-demand system, a first for the regional carriers, cuts ticketing time to eight seconds for passengers with advance reservations. By the end of 1974, most of the company's ticketing activity will be automated. Five DC-9 fan jets were purchased in 1973. Nineteen of the 100-passenger jets and 33 Convair 580 prop-jets are now flying the Route of the North liners. Two additional DC-9s are on order for delivery in the Spring of 1975. North Central is in a strong position for expansion and continued profitability. Passenger and cargo traffic in the new year th us far is encouraging, despite the recent five percent reduction in schedules because of the fuel shortage. The fuel situation is expected to stabilize at present levels, and consequently have little impact on earnings. With the continued support of stockholders, employees, and the people North Central serves, 1974 should be another excellent year for the company. HAL N. CARR Chairman of the Board and Chief Executive Officer Sincerely, BERNARD SWEET President 2 financial review North Central achieved record revenues of $127,392,000 and earnings of $6,447,000 for 1973. Again this year, the company maintained its financial leadership in the regional airline industry with consistent profits, the highest retained earnings, and strongest debt/equity position. Revenues were up $6,765,000-six percent over 1972. The gain is attributable to traffic growth on long- haul routes, a year's benefit from the 2.7 percent fare increase granted in September 1972, and the phasing out of most promotional discounts. Fares were raised an additional five percent on December 1, 1973. Of the $127,392,000 total revenues, public service revenues accounted for $9,631,000. This compares with the $9,090,000 for 1972 in which a retroactive payment of $765,000 was received for the period July 1 through December 31, 1971. Operating expenses-including depreciation and amortization of $7,350,000-were $115,391,000 in 1973, or 6.6 percent over the $108,272,000 of the previous year. Both revenues and expenses in 1972 were inflated by a third-quarter strike against another carrier serving some North Central cities. The company realized an operating profit of $12,001,000, compared with $12,355,000 in 1972. Despite a steady climb in prime lending rates, other expenses (primarily interest-offset by interest income) The ticker tape in the New York Stock Exchange announced the listing of North Central Airlines on May 22, 19 73. were reduced $169,000 in 1973 to $2,791,000. Taxes declined by $592,000 to $2,763,000. The net earnings of $6,447,000, equal to 52 cents per share, are the second highest in the company's 26-year history. However, the record $7,536,000 profit reported in 1972 included $1,043,000 from disposition of equipment (net of taxes) plus $656,000 (net of taxes) in out-of- period adjustments to public service revenues and deferred taxes. Without these items totaling $1,699,000, earnings from operations in 1972 would have been $5,837,000. The comparable 1973 earnings of $6,447,000 show considerable improvement, particularly in view of the fuel shortage the last two months of the year. The company continued to achieve outstanding performance in other financial areas. Its long-term debt-to- equity ratio is 1.04 to 1; and among the nation's 19 scheduled airlines, only two have more favorable ratios. Of the eight regional carriers, North Central ranks first. Working capital at the end of the year was $4,654,000, compared with $5,439,000 in 1972. Net earnings before extraordinary item, depreciation, amortization and deferred taxes generated substantial cash flow over the past two years- $14,176,000 in 1973 and $14,263,000 in 1972. This greatly improved cash position has permitted the company to make short-term investments averaging $6,600,000 in 1973. It was especially advantageous because the prevailing high interest rates produced $546,000 of interest income for an average return of 8.3 percent. North Central has operated profitably for 19 of the 20 years under present management. This consistent financial success has enabled the company to accumulate $20,086,000 in retained earnings-the highest in the regional airline industry. Stock- holders' equity has reached a record $40,611,000, the equivalent of $3.26 per share. May 22, 1973 was an eventful day for North Central when it became the first regional airline to be listed on the New York Stock Exchange as the symbol "NCA" moved across the tape. The company's stock is also traded on the Midwest Exchange. On the basis of the airline's overall financial stability and excellent 1973 earnings, the Board of Directors declared a cash dividend of ten cents per share of common stock payable March 1, 1974 to stockholders of record February 8. In looking forward to 1974, North Central will continue its intensive cost control program and anticipates that fare adjustments will help to offset inflation and a stabilizing fuel supply will bolster the national economy. The company is confident that a high level of profitability can again be achieved in 1974. traffic growth and performance In 1973, North Central carried over four million passengers and flew more than a billion revenue passenger miles for the second consecutive year. With passenger boardings of 4,263,231, revenue passenger miles reached 1,011,524,922, for increases of four percent and six percent-after normalizing 1972 totals for extra traffic generated by a third-quarter strike against another airline serving some North Central cities. Actual 1973 statistics in both categories were less than 1.8 percent under 1972 when company highs of 4,318,643 passengers and 1,029,192,937 revenue passenger miles were established. North Central set a new record by carrying 2,058,839 passengers in the first two quarters of 1973. Boardings in each month exceeded the corresponding month for any previous year. These gains are partially attributable to expanded DC-9 fan jet service between major markets. Traffic for the fourth quarter of 1973 was adversely affected by the fuel crisis in November and December. The Federal Government required all airlines to implement fuel conser- Engine shop mechanics contribute to North Centra/'s 99 percent flight completion record. The company's main operations base is located at the Minneapolis-St. Paul International Airport. vation measures that would reduce fuel consumption by 10 percent, effective November 1. To comply with this directive, North Central was forced to cut its planned schedule by five percent, drastically curtail non-scheduled flights, and revise aircraft operating procedures on the ground and in the air. Some 65,037 passengers chose North Central on 479 charters to cities in the Bahamas, Jamaica, Mexico and Canada-even Yellow- knife in the Northwest Territories- and domestically, to 40 states and the District of Columbia. Another 45,030 people flew on extra sections of scheduled trips, and 4,281 took scenic excursions. Since inaugurating service in 1948, the airline has carried 38.5 million passengers 7.5 billion revenue passenger miles. North Central serves 90 cities in 13 states and Canada over a 9,900-mile route system. Cargo ton miles climbed dramatically in 1973, jumping 23 percent to a record 13,393,664 over normalized 1972 traffic. The actual increase was 10 percent. Air freight alone rose 14 percent; express and mail were both up five percent. North Central completed 99 percent of its 28,381,385 scheduled miles in 1973, attaining that superior level of performance for the fourth consecutive year. The airline consistently ranks among the leaders in the industry even though it contends with severe weather longer than any other domestic carrier. A comprehensive, progressive . maintenance program continues to be a significant factor in North Central's excellent flight completion record. In 1973, only one-tenth of one percent of the airline's 217,000 scheduled departures were cancelled for maintenance reasons and less than 1.3 percent were delayed by mechanicals. This program has proven so successful that it frequently attracts inquiries and prompts visits by maintenance personnel from other airlines around the world. These traffic and performance achievements illustrate how well the company's 3,200 employees have succeeded in their continuing effort to provide safe, dependable scheduled airline service to the traveling and shipping public. new services/ facilities North Central improved its service to passengers by introducing the regional airline industry's first "Quick Ticket"-an on-demand automated ticketing and computer- ized fare quote system. Only eight seconds are needed for electronic equipment to type the complete itinerary and fare calcu- lations for a passenger with advance reservations. The same procedure requires about three minutes to perform manually. Airport counters at Minneapolis/ St. Paul and Milwaukee were the first North Central locations to have the Quick Ticket equipment. By the end of 1974, nearly 85 percent of the company's ticketing activity will be automated. The expedited process enables passenger service personnel to spend more time with the individual needs of each traveler. Quick Tickets are prepared by high-speed printers connected to ESCORT, the airline's $8-million electronic reservations and communications system. Other benefits include uniform fare calculations, legibility, and expedited billing and auditing. A new downtown ticket office was opened in New York City, and the Toronto office was completely remodeled. Numerous travel agencies have direct access to ESCORT for reservations and flight information. To place more emphasis on the care given to the passenger on board, an lnflight Service Department was created. It groups personnel whose responsibilities relate to those passengers, the food service, and the appearance of the aircraft. Included are flight attendants (stewards and stewardesses) and the staff involved in the airline's catering operation, contract catering, aircraft cleaning and cabin supplies. Five DC-9 fan jets were added to North Central's fleet in 1973. Three were purchased directly from Douglas Aircraft, and two from a foreign carrier. The company now has 19 of the 100-passenger jets and 33 Convair 580 prop-jets. Currently, 70 percent of the airline's seat miles are flown with DC-9s. Two more fan jets are to be delivered in the Spring of 1975. A $1.8-million DC-9 digital flight simulator has recently been ordered from CAE Electronics. Its six-axis motion system is synchronized with McDonnell Douglas VITAL 11 visual equipment to duplicate actual flight sensations. The major consideration which led to this purchase was the comprehensive training the simulator can provide. Besides the many routine maneuvers that are possible, training in emergency procedures can be more realistically accomplished. Other factors in the decision to acquire a simulator were the fuel shortage, availability of aircraft for training, ecology and safety. The simulator will be operational in 1975. Another safety feature is being added to North Central 's fleet of DC-9 fan jets with the installation of DeVore Tel-Tail supplemental lighting equipment. Located on each wingtip, the lights provide brilliant, full coverage of the tail section. The DC-9 aircraft will be conspicuous by night as well as by day-to passengers, pilots, traffic controllers, and ground crewmen. The lights also have an identity feature because they illuminate the airline's mallard duck insignia on the tail. To accommodate North Central's rapidly growing freight business, construction has begun on a new building at the Minneapolis-St. Paul International Airport. The $800,000 air freight structure will be part of the company's headquarters complex. The regional airline industry's first "Quick Ticket" is printed by electronic equipment-in eight seconds-for passengers with advance reservations. In addition, a district cargo office was opened at the Milwaukee Airport, and an improved air freight facility established in Detroit. New terminals were completed at Menominee and Grand Rapids, and another at Thief River Falls is nearly finished. Building plans are progressing at Duluth/Superior, Rochester and Marquette. A third jetway has been added for Milwaukee passengers, and Dayton has a new ticket counter and baggage area. Walk-th rough electronic screening devices for security are now installed at nearly every North Central station. SCEPTRE, a computerized maintenance data base system, was designed in 1973. It will provide "real time" information on inventory control; service records for aircraft, component parts and support equipment; plus work schedules and progress reports on all periodic and overhaul maintenance. Information will be readily accessible on individual TV-type screens or hard copy printers. Using the company's three I BM 360 computers, SCEPTRE is expected to produce significant operational economies by improving the reliability and productivity of maintenance and engineering functions. The first phase of SCEPTRE will be completed January 1, 1975. Applications can then be developed for other departments utilizing the SCEPTRE data base system. The financial strength of North Central has enabled it to invest in programs and facilities that improve the airline's service and efficiency while providing for long-term savings. ESCORT, the company's $8-million electronic reservations and communi- cations system, is being used to implement new services and programs. route development To further develop Milwaukee as a Midwest aviation gateway, North Centra l applied to the Civil Aero- nautics Board for Milwaukee- Philadelphia nonstop service. Two daily round trips, with 100-passenger DC-9 fan jets, have been proposed on the 690-mile segment. Company studies show a first-year potential of 70,000 passengers and a $1,150,000 operating profit. By originating prime-time flights north and west of Milwaukee, North Central expects to attract air travelers who now use other airports for connections to Philadelphia. Eight Wisconsin cities and two Minnesota communities would have new single-plane service. Only one nonstop round trip is operating between Milwaukee and Philadelphia, although two airlines are certificated on the route and a 1970 CAB decision recognized the need for improved service. One carrier has discontinued all its direct flights. In another action, North Central has asked the Board to designate its nine existing route segments as one. This would allow more flexibility in scheduling between city pairs on the airline's system. Hearings and oral arguments in the Detroit, Cleveland, Cincinnati-Atlanta Investigation were completed in 1973. North Central is proposing nonstop service to Atlanta from Detroit and Cincinnati. A decision by the Board is imminent. A petition for reconsideration of the company's request for an earlier hearing in the Milwaukee-Denver nonstop application has been filed. (In July, the CAB had dismissed North Central's motion to expedite the case.) The 908-mile segment would be the longest on the airline's system. United States and Canadian govern- ment officials have decided, in an amendment to the 1966 Bilateral Air Transport Agreement, that a U.S. carrier should be selected for nonstop service between Winnipeg and Duluth/Superior, and Winnipeg- Milwaukee. The company has offered to furnish the first single-carrier service in this market. The amend- ment, which becomes effective after formal ratification, also authorizes additional Detroit-Montreal flights after 1978. The company has filed to serve the Detroit-Montreal route via Toronto. While route development procedures will continue, only a few cases are likely to be acted upon by the CAB until the fuel situation improves. North Central has applications pending for 6,121 new route miles, with service to Philadelphia, Boston, Atlanta, Montreal and Winnipeg. Principal cases are summarized below: MILWAUKEE-PHILADELPHIA NONSTOP New nonstop service has been proposed between Milwaukee and Philadelphia, providing single-plane service for 10 Minnesota and Wisconsin communities. Although two other carriers are certificated on the route, only one nonstop flight is available in each direction. (690 miles) DETROIT-BOSTON NONSTOP North Central would offer the first competitive nonstop service between Detroit and Boston and also the only single-plane service between Boston and seven Michigan cities, plus South Bend, Indiana, via Detroit. (632 miles) MILWAUKEE-DENVER NONSTOP North Central would provide the first competitive service in this market, with flights originating in cities east of Milwaukee. The company has petitioned for reconsideration of the CA B's order denying a request for an expedited hearing. (908 miles) DETROIT, CLEVELAND, CINCINNATI-ATLANTA The CAB reopened the record in this proceeding. The company has filed additional exhibits in its efforts to serve Atlanta from Detroit and Cincinnati. Hearings began in February 1973, and oral arguments were heard in October. A decision is expected soon. (968 miles) MICHIGAN POINTS-DETROIT-NEW YORK This proposed authority would enable North Central to provide new, single-plane service through Detroit to New York City from ten Michigan cities. (501 miles) COLUMBUS, DAYTON, CINCINNATI- PHILADELPHIA NONSTOP The company's request to serve Philadelphia from Columbus, Dayton, and Cincinnati has been consolidated into the CA B's Ohio/Indiana Points Nonstop Service Investigation. (1,389 miles) TWIN CITIES-KANSAS CITY NONSTOP This application would permit North Central to operate nonstop flights in addition to the present two-stop service. ( 404 miles) DETROIT-MONTREAL, VIA TORONTO Authority to serve Montreal from Detroit, via Toronto, was requested under an amendment to the 1966 Bilateral Air Transport Agreement between the United States and Canada. With this route, North Central could also offer convenient single-plane service from Minneapolis/St. Paul and Milwaukee to Montreal. The amendment is awaiting formal ratification. (315 miles) DULUTH/SUPERIOR-WINNIPEG, MILWAUKEE-WINNIPEG NONSTOPS This route would allow nonstop service from Duluth/Superior or Milwaukee to Winnipeg, Canada , and also make available single- carrier service between a number of Wisconsin communities and Winnipeg. The route has been approved for a U.S. carrier by United States and Canadian officials under the Bilateral Air Transport Agreement, pending formal ratification. (314 miles) NORTH CENTRAL ROUTE REALIGNMENT In 1973, North Central requested that its nine existing route segments be redesignated as one. A decision by the CAB is expected this year. Approval would allow future scheduling flexibility between non-competitive points currently served by the airline. 5 6 social action programs Energy conservation became a principal concern of North Central's in 1973. The company has always sought minimum consumption of power and fuel for economic reasons, but the national shortage neces- sitated further action. When the Federal Government limited the fuel available to airlines as of November 1, 1973, North Central was required to reduce fuel usage by 10 percent. The company responded with a program that would affect scheduled service the least. Extra sections of regular flights and scenic trips were eliminated. Where traffic permits, Convair 580 prop-jets were substituted for DC-9 fan jets. Nearly all DC-9 pilot training is being done in simulators since Federal regulations now allow this. Opera- tionally, slower en route cruising speeds were set. Use of onboard power units was cut in half, and departure and landing procedures were revised. These measures produced fuel savings of five percent, equal to about 300,000 gallons a month. The other five percent reduction resulted from canceling selected flights that would inconvenience the fewest passengers and shippers. From the onset of the fuel crisis, North Central pledged to continue serving all 90 cities on its 9,900-mile system. That promise has been kept. Although the airline has been operating a "smokeless" jet fleet for more than a year, fuel conservation efforts have also lowered the emission of other air pollutants that current technology cannot eliminate. On the ground, the company has curtailed energy requirements. Thermostats are turned down to 68 degrees during working hours, and 60 degrees at night and over week- ends and holidays. Some 5,300 fluorescent tubes, drawing a quarter of a million watts a month, have been removed from fixtures in the Twin Cities General Office and Main Operations Base. Signs are illuminated sparingly or not at all. Employee car pools, set up with the aid of North Central computers, are commonplace. Environmental considerations deter- mine what products are used for aircraft and plant maintenance purposes. All materials are disposed of in compliance with Federal and State standards. Airport security measures are in accordance with Federal directives. Walk-through passenger screening devices are installed at every North Central station able to accommodate these; otherwise, hand-held units are used. The security equipment is harmless to passengers and employees. Armed guards add further protection. Stewards returned to North Central flights in 1973. Those hired were among the first to apply for flight attendant positions in more than a decade. The company's "equal opportunity" employment policy also placed emphasis on jobs for disadvantaged minorities and veterans of the Armed Services. Employee membership in National Guard and Reserve units has always been supported. North Central strives to fulfill its responsibility as a corporate citizen by willingly participating in human dignity and environmental programs. New uniforms are being worn by stewardesses, stewards, captains, first off ice rs, station agents and fleet service personnel. communications " An airline is a corporate entity, but it also is the living, breathing sum of all the human parts that went into it ... " Wit h those words, author Robert Serling set the mood for his colorful and lively work entitled "CEILING UNLIMITED: The story of North Ce ntral Airlines." The profusely illustrated 250-page book was published in November 1973, and is now in its second printing. Serling, who also wrote the best- selling "The President's Plane is Missing," is a former aviation editor for United Press International and has covered commercial aviation for nearly 30 years. In CEILING UNLIMITED, Serling begins wit h the incorporation of the compa ny in 1944. He traces the hectic events prior to the start of scheduled service in 1948, and follows North Central through the first 25 yea rs to its current position of leadersh ip in the jet-age regional airline industry. The author, telling t he story from the human angle, provides a fascinating look behind- t he-scenes of the airline's incredible, frequent ly rollicking biography. The book was the highlight of North Central 's act ivities celebrating its Silver Anniversary. Copies were presented by sales and station personnel to libraries and Chambers of Commerce in the 90 cities the airline serves. CEILING UNLIMITED received extensive media coverage. On February 24, 1973-exactly 25 years since scheduled service was inaugurated-flights were reenacted over the original 1,028-mile route system that connected 18 Minnesota and Wisconsin cities with Chicago. Members of the first pilot group, who now fly DC-9 jets for the company, made the trip on North Central's "728", the corporate DC-3 cited for having flown more hours than any other aircraft in the history of aviation. Plaques were presented the future Early trends in 1974 provide some degree of optimism for the future. The 82 million revenue passenger miles flown in January set a new record, up nine percent over 1973 although available seat miles rose just two percent. The passenger load factor in January 1974 increased six percent over 1973, and advance passenger bookings are running considerably above last year. The national energy situation shows signs of stabilizing, which should stimulate business activity in the second half of 1974 and improve the general economy. The Federal Energy Office has allocated North to officials at each of the "pioneer" cities still served by the airline. Special Twenty-fifth Anniversary feature stories were carried in many newspapers and magazines. A 12-minute film, with the advertising slogan "Good People Make Our Airline Great" as its title, features the service North Central offers and the employees who make it possible. Produced in 1973 from footage shot for television commercials, the film has already been shown to over 400 gatherings. TV advertisements appeared on 36 stations, reaching an estimated six million viewers. A highly successful "Ski Tips" series attracted Denver- bound winter sports enthusiasts. Famous landmarks highlighted New York TV spots, and " Canada This Summer' ' was the theme encouraging visits to Toronto. I nflight meals, new DC-9 jet flights and compli- mentary beverages were also dramatized . Similar messages were directed to nearly four million prime- time radio listeners. Advertisements ran in 57 newspapers and magazines having a combined circulation of over eight million. Full color posters were displayed in travel agencies and city ticket offices. Brochures promoted tour packages for Broadway shows and Colorado skiing. Many requests were received for the airline's "Ski Tips" booklet. A financial public relations program was instituted in 1973. Company officers addressed financial analyst groups at major cities across the country, giving a current view of the airline's operation. The listing of North Central stock on the New York and Midwest Stock Exchanges has given investors immediate access to market information. Stockholders and the general public were informed of company activities through quarterly financial reports Central 100 percent of its adjusted 1972 fuel usage. Assuming suppliers can deliver the allocated quantities, scheduled miles will be maintained at 95 percent of 1973 levels. With passenger traffic rising and less seats available, the higher load factor should offset any adverse effect the flight cutbacks might h;ave on earnings. Judicious planning and effective cost control have further strengthened North Central's potential for growth and profitability. Benefits from major capital investments in the late 1960s and early 1970s are now being realized with vastly improved and 60 news releases distributed to media outlets. Sales representatives made 25,000 personal calls on customers and participated in sports and travel shows. Company personnel attended 420 industry meetings and 350 civic functions. Over 4,000 people toured the company's Twin Cities headquarters during 1973. Now in its fifth year, the Northliner Magazine continues to entertain and inform passengers in flight. The 32-page publiGation has articles about places and events throughout the airline's service area. An inside look at one aspect of the company's operation is given in each issue. A new Northliner Gifts and Accessories catalog is in the seat pocket of all North Central aircraft. Several of the items offered for sale, including a scale model of the DC-9, bear the company name and mallard duck insignia. This merc_ handising approach has been well received by passengers. North Central 's communications with congressional delegations and Federal officials were enhanced by the creation of an executive staff position in Washington, D.C. This liaison activity also assists manage- ment in expediting business with industry and regulatory agencies. Internal communications are accomplished through The Northliner newspaper, memos to all personnel, and bulletin board announcements. In addition, corporate officers and managers meet with employees at each station under a scheduled visitation program to personally exchange information and ideas. The generous efforts of innumerable friends and boosters again provided the airline with favorable public relations. North Central expresses sincere thanks for their significant contributions. productivity and increased net profits: the $13,983,000 earned in the last two years is substantially greater than the combined total of all previous years. Virtually every area of North Central's operation is capable of expansion with com- paratively small expenditures. For the company's 3,200 employees, the phrase "Good People Make Our Airline Great" is more than a slogan. Their dedication and ability enable North Central to effectively meet the needs of its air travelers and shippers. With favorable develop- ments in the economy, 1974 should be another good year. 7 -- -- -- -- ) ---- FARGO MOORHEAD -- I I I I -- --r -- I I I I I I I I I I KANSAS CITY SAULT STE. MARIE BOSTON -------___ ... -------- ------ - - - - - NEW YORK NEWARK ------------ ND ---------RlULADELPHIA - ~ .... ---...:--...:=--- ------ ----..:-...:----- .,,,..---- ----=-------- ---.,,,,,,. --C-C>LUMBUS - - - - I --- J--- -, INCi if NATi \ I \ I \ l \ I \ I \ I \ I \ I I _ ..... PRESENT ROUTES - PROPOSED ROUTES --- 10 NORTH balance sheet ASSETS CURRENT ASSETS Cash including certificates of deposit of $512,098 in 1973 and $5,050,327 in 1972 (note B) ... . ........ . .... . ..... . Investment in commercial paper . ... ... . .. ..... . ..... . .... . .. . Accounts receivable (note A) . . . .. .. . . .. ................ . . ... . Flight equipment parts and operating supplies - less reserves of $465,372 in 1973 and $443,447 in 1972 (notes A and B) ..... . ... . Prepaid expenses and sundry deposits (note A) ................ . Total current assets ..... . ......... .. .......... ... ... . . PROPERTY AND EQUIPMENT - at cost Flight equipment (note B) . . .. . .... . .... . .................... . Ground property and equipment .. .. ...... . ..... .. ............ . Improvements to leased property . . .. ... .. .. .. .... .. .......... . Less accumulated depreciation (note A) . ... ................ . Advance payments on equipment (note D) .................... . . DEFERRED CHARGES AND OTHER ASSETS Unamortized development and preoperating costs (note A) ... ... . . Unamortized discount and expense on debt (note A) . . .......... . Insurance receivable .. . .... ... ..... . ....... . ....... . .. . . . . . Rentals and other . . . . ..... . .. . ... . ........... . . . ........... . LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (note B) ... . ..... . ........ . Accounts payable (note A) . .. . . ............ . .. . . .. .. . . .. .... . Tickets outstanding (note A) .. . ....... . ..................... . Accrued compensation, taxes and other expenses .... .......... . Income taxes (notes A and I) . . .. .. ...... . .. . ................ . Total current liabilities .. . . . ... . .... . ................. . . LONG-TERM OBLIGATIONS Long-term debt - less current maturities (note B) . . . . . . . ... . .. . Deferred income taxes (notes A and I) ..... . ........ . . . ... . .. . . Warrant obligation (note B) .. .. . . ........... . ..... . ....... . .. . COMMITMENTS (note D) STOCKHOLDERS' EQUITY (notes B, E and F) Common stock - authorized 16,000,000 shares of $.20 par value . . . Additional paid-in capital .... . ................ . ..... . ....... . Retained earnings ......... . .. . ...... . .......... . .......... . The accompanying notes are an integral part of this statement. CENTRAL AIRLINES, INC. statement of earnings December 31 1973 1972 OPERATING REVENUES $ 3,458,188 $ 8,897,276 Passenger (note A) . . . . . . .. . . . ...... . ... . ................ . .. . 8,987,036 6,500,000 Freight and express ...... . .. . ........ . .. . .. . ... . .. . ..... . . . . 13,910,158 11 ,085,569 Public service revenues (note G) . . . .... .. .... . ..... .. ... . . .. . . 3,330,969 2,734,408 Mail . ..... . . . . . . . ....... . ..... . . . ... .. . .. . . ............ . . . Non-scheduled service and other .. . .. . . . ........ . . . . .. ....... . 4,477,350 4,588,388 Total operating revenues .. . . . ........... . ........ . .. . ... .. . 34,163,701 33,805,641 OPERATING EXPENSES 93,852,896 71 ,681 ,797 Flying operations . . ... . .. ....... . .... . . . . ...... . ..... .. . . . . . 7,622,458 6,458,707 Maintenance . ...... . .. . .. . ...... . .... . ..... . . . . . ..... . . . .. . 3,612,256 3,258,633 Aircraft ancf traffic servicing . . .... ... ... . . . ...... . .. .... . .... . 105,087,610 81 ,399,137 Passenger service . ......... . .. . ........ . ... . .. . .. . . . .... . . . . (31 ,025,962) (25,501 ,845) Promotion and sales .. ... . .... . . . . . ..... . . . . . . . . . . . ....... . . . 74,061 ,648 55,897,292 General and administrative .... . .. . .. . ...... . . . . ... ..... . . ... . 2,262,644 3,246,103 76,324,292 59,143,395 Depreciation and amortization (note A) . ... . . . .. . . . . . ... . .. .. .. . Mutual Aid payments (note H) . ...... .. . . ... . ....... . . . . .... .. . Total operating expenses . ...... . .. . ... .. . .. .. . ..... . .. . . . . 1,814,1 39 2,332,898 Operating profit . . .. ... ... ........ . ... . ..... . . .. .. . . . 172,055 234,104 4,300,000 2,587,079 2,230,945 4,573,273 9,097,947 OTHER (INCOME) EXPENSES Interest expense (note A) .. . .... . ......... . . .... .. .. .. . ... . .. . Other - net ... . ..... . .... . ........ ... . . .. . ....... .. ....... . $115,061 ,266 $102,046,983 Total other expenses .... .. . .. ..... . ..... ... . . ..... . .. . .. . . Earnings before income taxes and extraordinary item .... . $ 8,096,644 $ 7,075,237 INCOME TAXES (notes A and I) 12,885,221 10,344,324 Currently payable - less investment tax credits of $2,275,000 848,782 810,338 in 1973 and $2,019,000 in 1972 . .. . . .............. . ....... . .. 7,362,676 7,856,898 Deferred - less investment tax credits of $200,000 316,406 2,280,000 in 1973 and $381 ,000 in 1972 ..... . .................... . .. ... 29,509,729 28,366,797 Total income taxes . . ..... .. .... . ..... .. .. . .... . .......... . Earnings before extraordinary item .................. . . 42,172,264 36,327,040 2,504,087 2,320,762 EXTRAORDINARY ITEM 263,910 245,100 Gain on disposition of flight equipment - less related 44,940,261 38,892,902 deferred income taxes of $452,000 ....... . ... . . . .. .. .. . . . . . .. NET EARNINGS . .... . . ...... . .. .. ..... ... . . .... . ... 2,492,550 2,492,550 EARNINGS PER SHARE (note J) 18,032,384 18,032,384 Earnings before extraordinary item .......... .... ........... . .. 20,086,342 14,262,350 Extraordinary item .......... . . ... . . . . . .... . . . .. . .. . .. . .. .. . . 40,611 ,276 34,787,284 NET EARNINGS PER SHARE .. . . . . .. .. .. . ... . . ... .. . . $115,061,266 $102,046,983 The accompanying notes are an integral part of this statement. Years ended December 31 1973 $102,574,337 7,122,921 9,630,565 1,789,404 6,275,017 $ 127,392,244 30,929,021 17,551 ,371 32,035,917 8,539,637 11 ,865,871 6,592,217 7,350,182 526,892 115,391 ,108 12,001 ,136 3,480,535 (689,579) 2,790,956 9,210,180 2,530,400 232,650 2,763,050 6,447,130 6,447,130 $ .52 $ .52 - - 1972 $ 99,259,565 6,448,217 9,089,650 1,308,575 4,521,435 $ 120,627,442 28,829,706 18,580,600 27,371,970 7,681,173 10,788,628 6,234,750 6,990,351 1,794,947 108,272,125 12,355,317 3,215,696 (256,124) 2,959,572 9,395,745 2,280,000 623,049 2,903,049 6,492,696 1,043,182 7,535,878 $ .52 .08 -- $ .60 -- 11 12 statement of changes in financial position SOURCES OF WORKING CAPITAL From operations Net earnings before extraordinary item . . .. . .. ... .. .. . . . .... .. . Charges to earnings not using working capital Depreciation and amortization (note A) .... . . ..... .. .. ... . Deferred income taxes (note I) . . . ......... . ... . ... . ..... . Other .. . ................. . . . ... .. ... . . .. .... .. ... . .. . Working capital provided from operations exclusive of extraordinary item .. ... . .. . .. .. .. . ... . . Extraordinary item ..... . ........ .. ... . .. .... . . . .. ........ . Charges not using working capital - deferred income taxes (note I) Working capital provided from operations . .. ... ...... . Proceeds in excess of the gain from disposition of property and equipment ..... .. ... .. ....... . . . ... ... .. .. . .. . . Proceeds from sale of common stock . .. .. .... .. ... .... .. .. . . . . . Increase in long-term debt . ... .... .. .. .... .. .. . .. .. .. ... . .. . . . Reduction of insurance receivable .. ... ... . . . . . . ... . .. .. . .. . . . . Other .... . . ... . . ..... .. . . .... ... .. . . . ........ . . .. .. . .. . ... . APPLICATIONS OF WORKING CAPITAL Additions to property and equipment ... ... .. . .. ..... . . ... .. . .. . . Additions to deferred charges ... .... .. . . . .... ... .. . . .... .. . . .. . Reduction of long-term debt ......... ... . . . ... ...... .. . .. ..... . Increase in insurance receivable . .... .... ...... . . . ... .. .. ... .. . Payment of cash dividend .. . ...... . ... .. ..... .. . ... . .. .... . . . . Other . .......... . .. . .. . ... . ........... .. . . . . . .. ... . ... . ... . INCREASE (DECREASE) IN WORKING CAPITAL . . . ... . Working capital at beginning of year ....... . ........ ... ...... .. . Working capital at end of year .... ... ... .. .... ... .... ...... .. . . NET CHANGE IN WORKING CAPITAL ELEMENTS Increase ( decrease) in current assets Cash and certificates of deposit .... ..... . ... .. ..... .. .. .. ... . Investment in commercial paper . .. . . ..... . . . . . . .... .. .. . . ... . Accounts receivable . . . . . .... .............. . . . .. .... ....... . Flight equipment parts and supplies ....... . ...... . . . .... .. .. . Prepaid expense and sundry deposits .............. ... .... . .. . Increase (decrease) in current liabilities Current maturities of long-term debt . . .... ....... . .. .. . . . . . . . . Accounts payable and tickets outstanding .. . . .... ...... . . ..... . Accrued liabilities . . .. .. . . .. .. .... . ...... . . . . .. .... . ..... . . . Income taxes ........... . .. .... . . .... .... . ... .. ... .. . .... . . INCREASE (DECREASE) IN WORKING CAPITAL . . . . .. . Years ended December 31 1973 1972 $ 6,447,130 7,350,182 183,325 195,257 14,175,894 14,175,894 798,324 15,105,200 4,300,000 71,323 34,450,741 24,355,130 729,434 9,259,976 623,138 267,935 35,235,613 (784,872) 5,438,844 $ 4,653,972 $ {5,439,088) 2,487,036 2,824,589 596,561 (111,038) 358,060 1,021,407 2,579,341 (494,222) (1,963,594) 1,142,932 $ (784,872) $ 6,492,696 6,990,351 569,762 210,149 14,262,958 1,043,182 452,000 15,758,140 2,827,735 59,753 18,645,628 5,278,910 447,530 7,080,227 4,300,000 17,106,667 1,538,961 3,899,883 $ 5,438,844 $ 4,460,346 4,500,000 125,697 31,361 {1,036,502) 8,080,902 (13,372) 2,013,956 2,261,357 2,280,000 6,541,941 $ 1,538,961 statement of changes in stockholders' equity Years ended December 31, 1973 and 1972 Common Stock Additional Retained Shares Paid-in Earnings Outstanding Amount Capital (note B) Balance at January 1, 1972 . .. ... . .. . . ..... 12,445,852 $2,489,170 $17,976,011 $ 6,726,472 Exercise of stock options (note F) .. ...... 16,450 3,290 53,988 Exercise of stock warrants (note F) . . . .... 450 90 2,385 Net earnings for the year .. . . . . . .. . ... . .. 7,535,878 Balance at December 31, 1972 ... .......... 12,462,752 2,492,550 18,032,384 14,262,350 Payment of cash dividend ($.05 per share). (623,138) Net earnings for the year .... . ........... 6,447,130 Balance at December 31, 1973 ....... . . . ... 12,462,752 $2,492,550 $18,032,384 $20,086,342 The accompanying notes are an integral part of these statements. notes to financial statements December 31, 1973 and 1972 Note A - Summary of Significant Accounting Policies - The com- pany, regulated by the Civil Aeronautics Board (CAB), uses the Uni- form System of Accounts and Reports for Certificated Air Carriers as required by the CAB, which are consistent with generally ac- cepted accounting principles. The principal policies followed by the company are: Accounts Receivable: The company provides an allowance for cer- tain doubtful accounts receivable. Flight Equipment Parts and Operating Supplies: These are priced at average cost. Reserves are provided by allocating costs of repair- able items over the life of related flight equipment. Prepaid Expenses - Engine Overhaul: The company includes in pre- paid expense that portion of engine costs attributable to overhaul which will expire during the next operating cycle ($2,175,000 in 1973 and $2,338,000 in 1972). Engine overhaul costs are charged to expense as incurred. Capitalized Interest: Interest is capitalized on funds associated with major project expenditures such as acquisition of flight equipment, construction of ground facilities and expenditures for route devel- opment and preoperating costs. Capitalization of interest ceases when projects become operational. The capitalized interest is then amortized over the useful lives of the related assets for financial reporting purposes but charged to current period expense for in- come tax reporting purposes. Depreciation: Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their esti- mated service lives on a straight line basis for financial and tax reporting purposes. Prior to 1968, accelerated depreciation methods were used for tax purposes. Flight equipment is being depreciated to residual values (15% of cost): Convair 580 based on a common retirement date of June 1979 and DC-9-30 based on 15-year lives. Deferred Charges: Expenditures for route development are deferred and amortized over the life of temporary certificates, or five years for permanent certificates. Aircraft preoperating costs are amor- tized over approximately eight years. Certain expenditures are expensed when incurred for tax reporting purposes. Unamortized discount and expense on debt are amortized using the "interest method" over the term of the loan. Pension Costs: The company has pension plans for substantially all of its employees, and funds its current expense of normal costs and interest on unfunded prior service cost. Asset appreciation reduces the unfunded prior service cost. Revenues: Revenues are recognized when the related services are rendered. Tickets outstanding at December 31 represent tickets sold for the company's flights but unused by passengers at that date. Tickets sold for flights on other airlines, for which reimburse- ment has not been made, are included in accounts payable. Tickets sold by others and lifted at time of flight by the company are in- cluded in accounts receivable until payment is received. Disposition of Property and Equipment: To the extent allowable, the company defers gains on disposition of property and equipment for tax reporting purposes while recognizing them currently for finan- cial reporting purposes. Income Taxes: The company uses the flow-through method of accounting for investment tax credit which reduces income tax expense when the related liability is reduced. The company recog- nizes deferred income taxes resulting from differences in financial and income tax reporting (note I). Note B - Long-Term Debt - Long-term debt at December 31 con- sists of: 1973 1972 Quarterly installment notes (al . .. .. ... . . .... $31,247,304 $35,253,393 Quarterly installment notes (bl ........... . . . 2,937,783 Semi-annual installment notes (cl .. . . ........ 1,704,401 2,350,226 Semi-annual installment notes (dl . ........... 15,000,000 Total due banks and insurance companies (el . . . . . . . . . . . . . 47,951,705 40,541,402 Semi-annual subordinated notes (fl ..... . . .... 1,500,000 2,100,000 Subordinated convertible debentures (gl . . . . . . 692,500 721,500 Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,703 39,375 Total long-term debt . . . . . . . . . . . . . . . . . . 50,268,908 43,402,277 Less current maturities (hl . . . . . . . . . (8,096,644l (7,075,237l $42,172,264 $36,327,040 (a) Payable in quarterly installments of $1,420,332 plus interest, from July 1973 through April 1976 and alternating quarterly install- ments of $1,420,332 and $1,893,776 plus interest, from July 1976 through October 1978; interest at 7%. (b) Fully paid in April 1973; effective interest rate at December 31, 1972 was 6%. (c) Payable in semi-annual installments of $284,067 plus interest, from April 1972 through October 1976; interest at 1 % above bank's prime rate; effective interest rate at December 31, 1973 was 11 %. (d) Payable in semi-annual installments of $600,000 plus interest, from January 1974 through July 1978 and quarterly installments of $2,250,000 plus interest, from January 1979 through October 1979; interest at % above bank's prime rate; effective interest rate at December 31, 1973 was 10%. (e) Total loans are collateralized by substantially all flight equip- ment and spare aircraft parts owned by the company. Two equip- ment manufacturers partially guarantee these loans. Included in the loan agreement provisions are restrictions on dividend pay- ments, capital expenditures, additional borrowings and require- ments related to minimum working capital and net worth. The company has a commitment to retire 259,511 warrants at $1.50 per warrant within 30 days after the expiration date of October 31, 1979 for any of these warrants not then exercised. These warrants were issued to loan holders in consideration of deferring certain debt repayments. The obligation is being accrued as additional interest expense over the remaining term of the loan. It is the policy of the company to maintain compensating cash balances at various banks for general operating purposes and in connection with arrangements for lines of credit it has established. The average balances maintained during the year were $1,964,000 or 17% of the related amounts borrowed; however, these are not legally restricted as to withdrawal by the company. (f) Payable in semi-annual installments of $300,000 plus interest, through March 1976, interest at 7%. Stock purchase warrants issued in connection with this debt enable the holders to purchase a total of 200,000 common shares (note F). (g) Convertible into common shares at $8.55 a share to maturity, June 1, 1978; interest at 5%. (h) Curr~nt maturities of all long-term debt due in each of the next five years following December 31, 1973 are as follows: 1974 .... ..... . .. ..... ...... .. .. . ......... $8,097,000 1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,097,000 1976 ..... ... .. .. ......... . . . .. ... .... .. .. 8,727,000 1977 . ... . . .... .... ....................... 7,828,000 1978 ......... .. ........... . .. .... . .. .. .. . 8,521,000 Note C - Pension Costs - Total pension expense was $3,014,000 for 1973 and $2,553,000 for 1972. At the 1973 actuarial valuation date, the company had funded in excess of vested benefits for all plans by approximately $566,000. 13 14 notes to financial statements December 31, 1973 and 1972 { continued} Note D - Commitments - Rental expense under noncapitalized financing leases and various operating leases was $8,793,000 in 1973 and $8,239,000 in 1972. In addition, landing fees, which are a form of ground facilities rental under various operating leases, were $3,403,000 in 1973 and $3,035,000 in 1972. The company has lease commitments for various airport facilities based upon usage and landings, subject to adjustment depending upon the needs of the airport operating authority. The 1973-related expense is included above. These leases expire over varying periods, and future annual lease commitments are not determinable due to the usage and adjustment factors. The estimated minimum commitments for major leases expiring after December 31, 1974 are as follows (in thousands of dollars): DC-9-30 CV-580 Computer Period Aircraft Aircraft Equipment Facilities Other Total - - - - - - -- - - 1974 $2,088 $1,764 $1,236 $1,634 $297 $7,019 1975 2,088 1,715 1,227 1,634 297 6,961 1976 2,088 392 1,227 1,634 297 5,638 1977 2,088 1,227 1,634 229 5,178 1978 2,088 1,227 1,634 48 4,997 1979-1983 6,133 1,019 8,170 56 15,378 1984-1988 8,170 8,170 1989-1993 7,611 7,611 1994-2000 9,151 9,151 The lease commitments for CV-580 aircraft and various facilities included in the above tabulations reflect both the current period expense and the rental prepayment required under the terms of the leases. Since the DC-9-30 leases are related to the prevailing prime interest rate, the 1973 expense was approximately $260,000 in excess of the minimum commitment. Nearly all leases contain renewal or extension options which are to be negotiated within specified periods prior to the expiration of the lease. The present value of the noncapitalized financing leases and the related interest rates are (in thousands of dollars): Interest December 31 Rate 1973 1972 Five DC-9-30 aircraft .... . ...... . . . .. 6 % ...... $12,828 $13,878 NineCV-580aircraft ..... . .. . . . ..... 5% .. . . . . 3,611 5,132 Computer equipment ...... . . ...... . . 8 % . . . . . . 5,628 6,341 Facilities .. .. . ... . . . .. .. .. . . . . . .. . 4% .. . . . . 16,909 17,364 Other ... . ....... .. . . . . .. . . . .... . . 6 % . . . . . . 1,029 ~ TOTAL .... . . ... . . ..... . ......... . . ..... $40,005 $43,957 The impact on net earnings of capitalization of such leases would have been immaterial. The company, regulated by the CAB, is unable to determine what impact the above capitalization might have on the rate base and any consequent rate adjustments. At December 31, 1973, the company had purchase commitments on two new DC-9-30 aircraft for which it has advanced $2,225,000. An additional $9,901,000 will be expended by the company in ful- filling these commitments prior to the scheduled delivery dates of April and May 1975. The total purchase price of $11,126,000 could be adjusted upwards since it is based upon an agreement which allows for changes in specifications. At December 31, 1973, the company had a purchase commitment for a Digital Flight Simulator and visual system for Douglas DC-9-30 series aircraft which amounted to $1,749,000, of which approxi- mately $87,000 had been paid in advance deposits. The scheduled delivery date is March 1975. The company also had a commitment for the construction of an air freight facility in the amount of approximately $800,000 and for the development of additional computer programs in the amount of approximately $200,000. Note E - Stockholder Disclosure of Ownership - The company is required by 245.16 of the Civil Aeronautics Board Economic R egu- lations to include in its annual report to stockholders the follow- ing notice: (1) Any person who either owns, as of December 31, of the year preceding issuance of such annual report, or subsequently ac- quires, beneficially or as trustee, more than 5 percent, in the aggregate, of any class of the capital stock or capital of the air carrier, shall file with the Board a report containing the information required by 245.12, on or before April 1, as to the capital stock or capital owned as of December 31, of the pre- ceding year, and in the case of stock subsequently acquired, a report under 245.13, within 10 days after such acquisition or ownership; (2) any bank or broker covered by (1), to the extent that it holds shares as trustee on the last day of any quarter of a calendar year, shall file with the Board, within 30 days after the end of the quarter, a report in accordance with the provisions of 245.14; and (3) any person required to report under this subpart who grants a security interest in more than 5 percent of any class of the capital stock or capital of the air carrier shall within 30 days after granting such security interest file with the Board a report containing the information required in 245.15. The notice shall also state that any stockholder who believes that he may be required to file such a report may obtain further information by writing to the Director, Bureau of Operating Rights, Civil Aero- nautics Board, Washington, D .C . 20428. Note F - Common Stock - Under a qualified plan, 350,000 shares of unissued common stock were reserved for officers and key em- ployees. When options are exercised, the excess of the option price over par value of the shares is credited to additional paid-in capi- tal. The company makes no charges to income in connection with the shares issued under the stock option plan. Options outstanding Option Price and Fair Market Value at Date of Grant which were granted December 31 , 1973 December 31, 1972 and became Per exercisable in: Share Shares Total Shares Total - - - - - - 1968 (expire 1973) $5.61 - $ 5,000 $ 28,050 1969 (expire 1974) 4.125 18,000 74,250 18,000 74,250 1970 (expire 1975) 4.125 47,500 195,937 47,500 195,937 1970 (expire 1975) 3.25 105,000 341,250 105,000 341,250 1971 (expire 1976) 3.1875 38,050 121,284 38,050 121,284 1972 (expire 1977) 6.375 2,500 15,937 2,500 15,937 1973 (expire 1978) 4.25 7,500 31,875 Total 218,550 $780,533 216,050 $776,708 Options exercised 131,450 131,450 Options available to grant 2,500 350,000 350,000 At December 31, 1973, and 1972, there were outstanding war- rants to purchase 2,649,061 shares of common stock. These war- rants resulted from public offerings prior to 1972 and from financial transactions as discussed in note B(e) and (f). All warrants enable the holder to purchase common stock at $5.50 per share and must be exercised by October 31, 1979. During January 1974, the Board of Directors declared a $.10 per share dividend payabl'e on March 1, 1974 to shareholders of record on February 8, 1974. Note G - Public Service Revenues - The CAB adopted Class Rate VI on June 16, 1972 for the period beginning July 1, 1971 through June 30, 1972. The company received in June 1972, $765,000 per- taining to the period July 1, 1971 through December 31, 1971 in excess of the estimate previously recorded. The CAB adopted Class Rate VII on January 24, 1974 for the period beginning July 1, 1973, from which the company has determined amounts includable in 1973 operations. Note H - Mutual Aid Payments - Under provisions of the Mutual Aid Agreement effective January 1, 1971, the company pays struck carriers who are a party to this agreement. The company would receive such payments in the event of a strike by its employees. Note I - Income Taxes - Income tax expense is made up of the following components: Years ended December 31 1973 1972 Currently payable income taxes Federal ...... . ........ .. .. ..... .. ... .. $2,138,400 State and local . . . . . . . . . . . . . . . . . . . . . . . 392,000 Def erred income taxes Federal ..... . ....... . .. . .. . .... . .. . .. . State and local ...... . ... . ...... . ..... . 2,530,400 196,000 36,650 232,650 $2,763,050 $2,000,000 280,000 2,280,000 925,000 150,049 1,075,049 $3,355,049 The 1972 amounts include a deferred provision of $452,000 which reduced the reported extraordinary item. Total tax expenses amounted to $2,763,050 for 1973 (an effective tax rate of 30%), a total less than the amount of $4,421,000 com- puted by applying the Federal income tax rate of 48% to income before tax. The reasons for this difference are: Amount (in thousands) Computed "expected" tax expense .. ... . .. . .. . . $4,421 Increase (decrease) in income taxes Investment tax credit used during 1973 . ... (2,475) State and local income taxes . . . . . . . . . . . . . 429 Adjustment to previously deferred taxes . . . . . 322 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Actual tax expense .... . ... . ... . .. . ... . .. . . .. $2,763 auditors' report Alexander Grant & COMPANY CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Board of Directors North Central Airlines, Inc. % of pretax income 48.0% (26.9) 4.7 3.5 .7 30.0% We have examined the balance sheet of North Central Airlines, Inc., (a Wisconsin corporati'on) as of December 31, 1973 and 1972, and the related statements of earnings, changes in stockholders' equity and changes in financial position for the two years ended December 31, 1973. Our examination was made in accordance with generally accepted auditing standards and ac- cordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. Deferred tax expense results from timing differences in the recog- nition of revenue and expense for tax and financial reporting pur- poses. The sources of these differences in 1973 and the tax effect of each were: Increase (decrease) in deferred income tax expense Excess of tax over book depreciation .. . .... . . . . . .. . . .. . . . $ 71,200 Interest capitalized on books and expensed on tax return . . . . 42,500 Vacation expense on the tax return previously expensed on the books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,300 Amortization of extension and development on the books previously expensed on the tax return . . . . . . (39,600) Amortization of capitalized interest on the books previously expensed on the tax return . . . . . . . . . . . . . . . . . (30,100) Amortization of training and development costs on the books previously expensed on the tax return . . . .. . . . . ... (140,200) Gain on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,500) Adjustment to previously deferred tax . . . . . . . . . . . . . . . . . . . 322,050 $232,650 The unused investment tax credits at December 31, 1973 total $2,500,000, of which $2,000,000 has been recognized as a reduc- tion of reported deferred provision for income tax expense, and are available to reduce future income taxes payable as follows: Expiration dates Amount 1978 ... . .......... . ........... . .. . .. .. ....... ... .. $ 89,500 1979 . ........ ,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553,000 1980 . . . . . . . . . . . ... . . .... . .. . . . . ........ . ... . .. .. .. 1,857,500 $2,500,000 Note J - Earnings Per Share - Earnings per share is based on the weighted average number of shares outstanding for the year (12,462,752 in 1973 and 12,455,348 in 1972). Conversion of deben- tures into common stock, exercise of stock options and warrants to purchase stock would not result in material dilution of earnings per share for the years ended December 31, 1973 and 1972. Note K - Reclassifications - Certain of the 1972 figures have been reclassified where appropriate to conform with the financial state- ment presentation used in 1973. M IDWEST PLAZA BU ILDING M INNEAPOLI S, MN 55402 FIR ST NATIONAL BANK BU ILDING ST. PAUL , MN 55101 INTERNATIONAL FI RM ALEXAN DER GRANT TANSLEY W ITT In our opinion, the financial statements referred to above present fairly the financial position of North Central Airlines, Inc., at December 31, 1973 and 1972, and the results of its operations and changes in its financial position for the two years ended December 31, 1973, in conformity with generally accepted ac- counting principles applied on a consistent basis. Minneapolis, Minnesota February 15, 1974 4~'-tt~-' ~ 15 fortune magazine Survey- 50 largest transportation companies * EARNINGS PER SHARE NET INCOME AS PERCENT OF OPERATING NET STOCKHOLDERS' YEAR GROWTH RATE 1962-72 OPERATING REVENUES EQUITY REVENUES INCOME EQUITY AIRLINES 1972 1962 % Rank % Rank % Rank (ODD) Rank (ODO) Rank (ODD) Rank North Central ........... $0.60 $0.06 25.89 6.2 21 .7 $120,627 13 $7,536 10 $34.787 13 Braniff . . ...... .. . .. .... 0.85 0.13 20.66 4.6 15.8 4 372,117 17,151 108,402 10 Delta ...... .. . . .... . .... 2.20 0.39 18.89 5.6 4 13.3 757,569 42,169 31 7,533 Frontier ... .. ... . . .. . . . .. 1.08 0.21 17.79 4 6.5 41.8 108,857 15 7,119 11 17,014 14 National ...... .. . . .. . .. . 2.34 0.58 14.97 5.9 14.0 339,265 11 19,874 4 141 ,895 Continental ... ........ .. 0.75 0.21 13.58 2.5 10 6.4 10 365,904 9.187 143,487 Piedmont ... . .... .. . . ... 1.49 0.73 7.40 3.0 33.3 111 ,756 14 3,323 14 9,976 15 Western . . .... . . . .. .. .. . 0.81 0.41 7.05 3.1 11.6 365,663 10 11.216 96,723 11 Allegheny ........... . .. . 1.01 0.70 3.73 2.3 11 11.5 264,961 12 6,068 12 52,724 12 Northwest ........ . ... . . . 0.83 0.60 3.30 10 4.5 3.6 12 392,501 17,682 492.837 United . ... .... . . .. . . . . . 0.80 0.61 2.75 11 1.1 13 3.1 13 1,828,357 20.376 666,533 American . .... . . . . . . ... . 0.20 0.41 (6.93) 12 0.4 14 1.0 14 1,353,808 5,635 13 589,388 Trans World . ... . . ... ... . 3.01 (0.85) 3.0 11.0 1,418,288 43,078 391 ,653 Eastern . ........ .. .. . . .. 1.02 (2.07) 1.7 12 5.1 11 1,160,919 19,760 384,899 Pan American ... . .... .... (0.72) 0.56 1,305,273 (28,892) 15 411.430 4 * FORTUNE Double 500 Directory, July 1973: Survey of the 50 largest transportation companies, pp. 66-67. ("Rank" restated for the 15 airlines in the survey. 1972 statistics unless otherwise indicated.) 16 ten-year earnings summary OPERATING REVENUES 1973 1972 1971 Passenger ........... . . . .............. $102,574,337 $99,259,565 $83,820,866 Public service revenues .. . . . . . . . . . . . . . . 9,630,565 9,089,650 6,884,964 Other . . . . . .. . . . . . . . .. . . . .. .. . . . . . . . . 15,187,342 12,278,227 10,159,514 127,392,244 120,627.442 100,865,344 OPERATING EXPENSES Direct expenses...... ... . . . . . . ........ 48.480,392 Indirect expenses . . . . . . . . . . . . . . . . . . . . . 59,560,534 Depreciation and amortization . . . . . . . . . . . 7,350,182 47.410,306 53,871.468 6,990,351 115,391.108 108,272.125 OPERATING PROFIT .. . .. . . . ... . ....... 12,001 ,136 Non-operating expenses. net . . . . . . . . . 2.790,956 EARNINGS (Loss) before taxes ......... . Income taxes . . . . ... ..... . . . ... ...... . EARNINGS (Loss) before gain (loss) 9,210,180 2,763,050 on disposition ofequipment.... .. ..... 6.447,130 Gain (Loss) on disposition of equipment, less income taxes .................. . Prior years' adjustment due to change in accounting ..... . . . ..... . . . 12,355,317 2,959,572 9,395,745 2,903,049 6,492,696 1.043, 182 43,360.472 44.449,035 7,240.431 95,049,938 5,815,406 4,035,719 1,779,687 544,000 1,235,687 (10,979) 1970 $76,954,521 5,131,306 9,866,126 91 ,951,953 39,207,293 37,879,733 6,700,175 83.787 ,201 8,164,752 4,875,788 3,288,964 451 ,000 2,837,964 (43,349) ~ ) 1969 $57,073,369 4,016,386 7,338,168 68.427,923 31 ,647,246 30,782,288 5,605,500 68,035,034 392,889 4,677,092 1968 $44,628.769 4,667,639 5,929.518 55,225,926 25,525,000 24,318,200 4,356,893 54,200,093 1,025,833 3,008,205 1967 $33,482,371 5,249,563 4.118,543 42,850.477 19,811 ,886 19,523,811 2,626,251 41 ,961 ,948 888,529 628,731 (4,284,203) (1 ,982,372) 259,798 (1 ,934,888) ~ ) ~ ) (2,349,315) ( 1. 113,372) (29,080) 1.183,588 595,808 924,316 1966 $30,261.479 5.767 ,888 3,583,304 39,612,671 17,980,535 17,062,543 2,253,361 37,296.439 2,316,232 464,974 1,851 ,258 720.647 1.130,611 24,000 1965 $23,720,203 7,199.418 2,971.410 33,891 ,031 15,356,876 13,970,237 1,997.488 31,324,601 2,566,430 442,894 2.123.536 1,006,520 1.117,016 21,736 NETEARNINGS (LOSS) ............... . $ 6,447,130 $ 7,535.878 $ 1.224,708 $ 2,177,615 $(2,378,395) 70,216 $ 1,520,124 $1 ,154,611 $ 1,138.752 THIS SUMMARY OOES NOT INCLUDE ALL DETAILED INFORMATION CONTAINED IN THE ANNUAL REPORTS FOR RELATED YEARS AND IS NOT COVERED BY THE AUDITORS' REPORT HEREIN. 1964 $20,002,281 7,274,370 2,438,126 29,714,777 13,666,142 12,303,601 1,712,800 27,682,543 2,032,234 348,305 1,683,929 873,304 810,625 33,939 844,564 PASSENGERS (MILLIONS) 425 - - - - - 400-- - - - 375-- - - 300 _ _ _ _ _ _ __,__~ 1969 '70 '71 '72 73 Statistics in 1970 and 1972 were inflated by strikes against another carrier serving some North Central cities. PASSENGER MILES (BILLIONS) 8 -- - - - - L 1969 '70 71 '72 '73 SEAT MILES CARGO TON MILES (BILLIONS) (MILLIONS) 18-- - 1.6 -- 1 4 - - - - - t- 25 - - o--------~ 1969 '70 '71 '72 '73 1969 71) '71 '72 '73 NORTH CENTRAL AIRLINES, INC. 7500 NORTHLINER DRIVE MINNEAPOLIS , MINNESOTA 55450