OF NORTHEAST AIRLINES, . INC. FOR THE YEAR 1J44 * *~. * * * * * * NORTHEAST AIRLINES, INC. ~~ FOR THE YEAR ENDED DECEMBER 31, NORTHEAST AIRLINES, INC. MILTON H. ANDERSON Boston, Mass. J ACQVELINE COCHRAN New York, N. Y. PAUL F. COLLINS Boston, Mass. PAUL F. COLLINS MILTON H. ANDERSON l WILLIAM B. BRIGGS ~ H. LEROY SWIMM RICHARD ELY ELY, BRADFORD, THOMPSON & BROWN LYBRAND, Ross BRos. & MONTGOMERY OLD COLONY TRUST COMP ANY . THE FIRST NATIONAL BANK OF BOSTON 'JJireclors Officers * JAMES F. FITZGERALD Boston, Mass. RADU lRIMESCU New York, N. Y. EUGENE L. VIDAL New York, N. Y. President Vice Presidents Treasurer and Ass't Clerk Clerk General Counsel Auditors Transfer Agent Registrar General Offices, LOGAN INTERNATIONAL AIRPORT, EAST BOSTON, MAss. Treasury and Accounting Offices, 1 STATE STREET, BosTON, MAss. To THE STOCKHOLDERS OF NORTHEAST AIRLINES, INC. The Board of Directors presents its Annual Report for the year ended December 31, 1944, including a Comparative Balance Sheet of the Company as at December 31, 1944 and 1943, and a Statement of Profit and Loss and Earned Surplus (Deficit) for the twelve months ended Decem- ber 31, 1944, together with the certificate of the Company's independent auditors, Lybrand, Ross Bros. & Montgomery. Financial Operations for the year ended December 31, 1944 resulted in a loss of $77,041.89 after setting aside a reserve of $85,000, of which $60,000 represents a provision for possible adjustments of Army contract receivables and payments for years 1942 and 1943 and $25,000 for a similar reserve for the year 1944. Extension and route development costs amounting to $26,293.27 and expenses of non- operating property amounting to $27,784.84 have been charged against income for the year 1944. During the year, the Company revised its estimates of the life of certain equipment and facilities for depreciation purposes. The rate of amortization of the hangar at the Training School was changed from ten to twenty per cent per annum. The estimated life of the Company's airplanes, engines and certain associated equipment was changed from thirty-eight months from the date of acquisition to sixty months because it became apparent that the useful life of these assets would extend beyond August 31, 1945, at which date most of such equipment being operated at the time of the change would be completely charged off under the former depreciation policy. AV-Loan of $900,000 was paid in full on January 18, 1944, thereby eliminating substantial interest charges. Army Contract After three years of operation for the Army, pioneering all phases of operations and com- munications through Labrador, Newfoundland, Greenland, Iceland, Scotland, Arctic Bay and as far as 400 miles north of the Magnetic Pole, the military activities of the Company were termimrted on April 15, 1945. In a letter to the Commanding General, Air Transport Command, on the sub- ject of termination of the contract, the Commanding General of the North Atlantic Division wrote: "In the execution of the Contract, Northeast Airlines have rendered a commendable service. Their flight operation has been excellent and they can boast the enviable record of no loss of life or major damage to aircraft during their contract operations. The purpose for which this contract was entered into has been accomplished and it will be to mutual advantage to have it terminated at this time. Such termination will no in way jeopardize the mission of this Division." On April 1, 1944, your company, pursuant to Army directives, moved its main Army opera- tions base from Presque Isle, Maine to Boston and from that time until April 15, 1945, when Army operations were terminated, conducted its Army services from its home base. Most of the Company's personnel and facilities employed for military operations have been absorbed by its commercial operations with the opening of the Boston-New York Route. The cessation of our military activities was timely as proved by subsequent events and it eased certain personnel and equipment procurement problems which otherwise would have faced the Company in the opening of its new service. There remain unsettled sontroversies with regard to Government reimbursement of expendi- tures, principally indirect and overhead expenses incurred by the Company during its military oper- ations. The reserves mentioned above have been provided to cover possible adverse adjustments. The Company cannot presently determine whether these reserves will prove adequate or excessive. New Routes - Developments and Expansions Due to the requirements of the Army Air Forces for transport type aircraft which resulted in all air lines giving up to the government many of their airplanes, your company entered 1944 with * NORTHEAST AIRLINES, I N C * only two DC-3 typ~ aircraft. In June the Company was successful in obtaining from the Army one additional transport airplane which it immediately had converted for commercial use. After completion of the conversion, this airplane was used to resume service on October 24, 1944 with two round-trips daily between Boston and Montreal, with stops at Concord, New Hampshire, Montpelier and Burlington, Vt. An additional airplane was obtained from the government in October which was converted in the Company's shops and entered service in April, 1945. The third airplane obtained from the government was received in January, 1945 and became available for commercial service in May, 1945. With the addition of the latter two airplanes it became possible to realize an ambition of many years standing- opening of service between Boston and New York. The certificate to operate this route was granted your company by the Civil Aeronautics Board in June, 1944 (after a hearing by that Board in September, 1943 of the Company's original application filed in 1938). Service was commenced on May 1, 1945 with nine round trips daily leaving the airports at both New York and Boston on every even hour from 8 A.M. to 12 midnight ( except that the last flight leaves Boston at 11 P .M.) Volume of traffic on the Boston - New York service has been highly gratifying. A fourth airplane was received from the government in April, 1945 and is being co:r:iverted in the Company's shops. The completion of this airplane will provide a total of six DC-3 type air- planes for service over the Company's presently certificated routes. As additional airplanes are obtained more schedules and new route mileage already certified will be added to that presently operated. In anticipation of greatly expanded commercial operations, considerable effort and energy during the year 1944 was devoted to effecting reorganizations within the Company and to com- pleting arrangements for the Boston-New York operation. The traffic, sales, advertising, public reJations, and maintenance departments, as well as other minor departments, have been reorgan.: iz~d and enlarged. A new office on Airlines Row in the Statler Hotel in Boston designed and refurbished for complete sales and passenger services, was opened to the public on March 1, 1945. The modern office in the Copley-Plaza Hotel in Boston is necessary for service to this area and will be retained. Negotiations were begun in 1944 and concluded in 1945 for the use and occupancy by your company of space and facilities at LaGuardia Field in New York. Having been officially notified that no space was available in the Airlines Terminal at New York, we have established a modern passenger service office in that dty at Park Avenue and 42nd Street, directly across from the Grand Central Station. This new facility will be occupied and operated jointly by your company, Pennsylvania-Central Airlines, and Northwest Airlines. This terminal handles all the ticketing, baggage checking, limousine, and other services customarily provided airline passengers. In co-operation with all other airlines authorized to operate into New York, preliminary negotiations were conducted during 1944 for an operating base at New York's new ldlewild Air- port, now under construction. In its decision granting your company authorization to operate between Boston and New York, the Civil Aeronautics Board also authorized stops at New Bedford-Fall River, Worcester, Waterbury and Newark. On September 29, 1944 Board authorization was secured to operate into Lawrence, Massachusetts. The Worcester-Fitchburg, New Bedford-Fall River, and Lawrence- Haverhill-Lowell metropolitan areas are the three largest in the country without air transportation, and Northeast Airlines, Inc. is the only airline company presently authorized to serve those areas. On January 5, 1945, the Civil Aeronautics Board issued a certificate to your company to operate between Boston, Provincetown, Hyannis, Oak Bluffs, and Nantucket. This certificate together with certain land adjoining the present airport at Nantucket was acquired from May- flower Airlines, Inc., and schedules over the route will be operated when equipment is available. During the year, the Company's application, together with those of other applicants to operate scheduled commercial trans-Atlantic service to numerous North European countries was heard by the Civil Aeronautics Board. The Company was able to place before the Broad its pioneering * NORTHEAST AIRLINES, I N C * achievement. s in North Atlantic operations as an argument in favor of the award to it of the certification applied for. The Examiner, without suggesting that Northeast be certificated, recom- mended to the Board that a northern route to Russia through Labrador, Greenland, Iceland, Norway and Sweden, for which Northeast had applied, should be certificated. The case is still pending before the Board and decision is expected sh.ortly. The Company's application to provide a network of services to 408 communities in the New England area was amended to include nine new routes not theretofore specifically named and this application also was heard during the year. On September 22, 1944, the Company applied to the Board for consolidation of its routes in order to operate, upon compliance with the Board's regulations, directly between Portland and New York, via Lawrence and Worcester; between Concord and New York, via Manchester and Worcester; and between Cape Cod and New York. This application was heard in January, 1945 and was reported favorably by the Examiner in April,' 1945. No final decision has been rendered in this case. Continuing its policy of expansion and development of new air routes for the greater conven- ience of the New England and Canadian flying public, your company filed with the Civil Aero- nautics Board during 1944, an application seeking authorization to operate between Boston and Bermuda, a distance of 770 miles, with the hope of linking New England and Eastern Canada with this winter playground. Your Company has more recently made application for a route between Boston and New Orleans, via Philadelphia, Baltimore, Washington, Richmond, Winston-Salem, Charlotte, Green- ville~ Atlanta, and Montgomery. New Equipment A purchase order has been placed with Douglas Aircraft Company for three new four-engine Douglas DC-4, 56-passenger airplanes with option on six additional. These are ordered for delivery eleV'en to thirteen months after government restrictions allow the resumption of com- mercial airplane production. Pilot Training School As previously reported, the Civil Aeronautics Administration terminated all contracts for the training of flight and ground personnel at our Pilot Training School at Burlington, Vermont, as it did at all schools of this type. Final settlement was made during 1944 of all claims against the government for our Pilot Training Division. Many of the personnel employed at Burlington were absorbed into your Company's commercial and military operations. The management of the Company was successful during the year in selling all school airplanes (except one Stinson), main- tenance materials, spare parts and airplane equipment of the school at a price exceeding the total depreciated value. General During 1944 the primary aim of the directors, management and employees of your company has been to aid the war effort. Theoperation over the North Atlantic and Arctic during the last three years has been fraught with difficulties and uncertainties in respect not only to financial reimbursement but also to manpower, supplies and equipment. Our contributions to aeronautical science and our conduct of flying operations during this period have been commended. Our attention is now devoted to expansion and development of the Company along new routes and the progressive improvement of our gross and net revenues by providing the best possible service in our old and new territories. Boston, Massachusetts June 6, 1945 For the Directors, PAUL F. COLLINS, President. CURRENT ASSETS: Cash in banks Receivables, billed or accrued: Air lines and a gen ts United States Post Office Department ASSETS United States Army Air Force-under operational con- tracts (note A), less reserve for adjustments, $86,709, 1944; $50,000, 1943 . Pilots' training school tuition under government contracts Other receivables, less reserve Total receivables . Inventories (at average cost or less): Aviation fuels and oil and returnable containers Replacement parts and supplies Total inventories . Total current assets CLAIM FOR REFUND OF 1942 FEDERAL INCOME TAXES BASED ON CARRY-BACK OF 1943 Loss . PROPERTY AND EQUIPMENT, AT CosT: Improvements to real estate not owned-operating property Flight equipment-passenger, mail and express service (1944 amount includes aircraft and engines at estimated cost of $156,100 and cost of aircraft in process of reconversion $84,119) . Ground and shop equipment . Training school property (non-operating at December 31, 1944): Hangar on land not owned Flight equipment . Less reserves for depreciation and amortization DEPOSITS: Under lease agreements For purchase of franchise and land of Mayflower Airlines, Inc. (acquired in January, 1945). PREPAID EXPENSES AND DEFERRED CHARGES: Prepaid insurance Prepaid rentals Other . $ NORTHEAV AIRijNES, INC. Comparative ~alance SheeL As at December 31, 1944 and 194 3 December 31 LIABILITIES 1944 1943 648,988.54 $1,621,330.49(B) 21,757.28 44,087.79 40,873.84 41,126.01 687,668.37 515,612.48 (B) 226,280.31 (B) 38,503.65 38,472.03 788,803.14 865,578.62 2,214.83 1,958.48 98,345.10 118,129.55 100,559.93 120,088.03 1,538,351.61 2,606,997.14 30,856.71 30,856.71 53,414.48 38,983.97 i 1 CURRENT LIABILITIES: Notes payable to bank under loan agreement (note B) Accounts payable vendors and others Accrued salaries and wages . Income and social security taxes withheld Accrued taxes Other current liabilities Total current liabilities DEFERRED INCOME AND LIABILITY . RESERVE FOR TAXATION CONTINGENCIES CAPITAL COMMON STOCK, par value $1.00 per share, authorized 2,000,000 Decemh,r 31 1944 1943 $ 900,000.00 $ 330,411.30 129,526.75 80,028.05 15,447.19 25,182.46 8,278.31 16,489.91 6,807.16 6,150.51 360,943.96 1,157,377.68 15,006.09 11,780.72 20,000.00 20,000.00 shares, issued and outstanding 500,000 shares 500,000.00 500,000.00 CAPITAL SURPLUS (premium on common stock) 1,498,547.52 1,498,547.52 546,037.89 249,331.25 123,202.72 96,429.22 DEFICIT IN EARNED SURPLUS (since July 1, 1940) (130,593.72) (53,551.83) 120,211.05 119,996.55 15,451.69 125,315.01 858,317.83 630,056.00 266,483.62 219,553.77 591,834.21 410,502.23 50,000.00 50,000.00 17,500.00 2,500.00 67,500.00 52,500.00 j~ 15,258.43 14,338.50 ~ 13,016.65 13,066.65 7,086.24 5,892.86 35,361.32 33,298.01 $2,263,903.85 $3,134,154.09 $2.263,903.85 $3,134,154.09 ' The accompanying notes a rf J integra. of this statement. * NORTHEAST AIRLINES, I N C Statement of Profit and Loss and 'J)eficiL For Year Ended December 31, 1944 OPERATING REVENUE: Passengers $ 742,978.06 Air Mail . 316,437.70 Operations under Army Air Force contract (less $25,000.00 pro- vision for adjustments, note A) . 1,283,898.74 Pilots' training school operations and termination settlement (contract terminated January 15, 1944) 61,465.58 Other 21,144.11 * Total operating revenue $2,425,924.19 OPERATING EXPENSES: Conducting transportation, flying and training operations Maintenance and repairs (including maintenance of govern- ment owned and training equipment) Provision for depreciation and amortization (note C) Traffic and advertising . General and administrative . Taxes other than income taxes Total operating expenses Operating profit . D:r;;PoSALS OF Training School Equipment and Other Capital Assets in Excess of Depreciated Book Amounts ADJUSTMENT OF 1943 PILOTS' TRAINING SCHOOL REVENUE DEDUC'l'IONS FROM INCOME: Extension and development cost Additional reserve for adjustments of prior years revenue under operational contracts (note A) . Expenses of nonoperating property including $23,000.00 amortization of hangar on land not owned (note C). Interest expense Other deductions Loss for the year . DEFICIT IN Earned Surplus at Beginning of Year DEFICIT IN Earned Surplus at End of Year 1,119,754.99 767,740.59 69,978.47 95,493.55 306,537.50 53,776.70 26,293.27 60,000.00 27,784.84 1,341.93 1,299.14 The accompanying notes are an integral part of this statement. 2,413,281.80 12,642.39 11,245.01 15,789.89 39,677.29 116,719.18 77,041.89 53,551.83 $ 130,593.72 * NORTH- EA 5 T AIRLINES, I N C * 7\/ptes to Financial Statements A-The amount receivable and the revenue under operational contracts with the United States Army Air Force are subject to possible adjustments which may result from governmental audits of costs chargeable under the contracts. Interpretation of certain contract provisions has not been agreed upon between the company and the government. The company has provided a reserve for such adjustments, but it cannot presently determine whether this reserve will prove adequate or excessive. With respect to the Renegotiation Act, the Army Air Force Price Adjustment Board has found that no excessive profits were realized by the company from its war contract operations in 1942 and 1943 and the company believes that no excessive profits from such contracts were realized in 1944. The company has received orders terminating its operational services under the Army Air Force con- tract at April 15, 1945. B -At December 31, 1943 cash $36,250.32 and receivables uhder government war contracts $741,892.79 were pledged as security for notes payable to bank under loan agreement. The loan was paid in full January 18, 1944. C - Based on estimates ~f remaining useful life, the company reduced the rates of depreciation for certain aircraft and equipment effective January 1, 1944, with the result that depreciation expense for 1944 on this equipment was approximately $34,000 less than it would have been under the rates previously used. The rate of amortization of the hangar for training school (nonoperating property as at De- cember 31, 1944) was changed from 10% to 20% per annum effective January 1, 1944 with the result that amortization for 1944, $24,000.00, was $12,000.00 greater than it would have been if accrued at the rate used in 1943. D - In 1945 the company has purchased additional flight equipment at estimated cost reconverted of $200,000 and has entered orders for new aircraft at prices aggregating not over $1,200,000 . * NORTHEAST AIRLINES, NORTHEAST AIRLINES, lNc., Boston, Massachusetts. J.uditors' 'lv!port., I N C * We have examined the accompanying comparative balance sheet of Northeast Airlines, Inc. as at December 31, 1944 and 1943 and statement of profit and loss and deficit for the year ended December 31, 1944, have reviewed the system of internal control and the accounting procedures of the company and, without making a detailed audit of the transactions, have examined or tested accounting records of the company and other supporting evidence, by methods and to the extent we deemed appropriate. It was not practicable to obtain from government agencies confirmation of the amounts owed to the company under the government contracts referred to in note A to the financial statements. In other respects our examination was made in accordance with generally accepted auditing standards applicable in the cir- cumstances and included all procedures which we considered necessary. As indicated in note A to the financial statements the amounts receivable and the revenue under certain government contracts are subject to possible adjustme~ts which may result from governmental audits of costs chargeable under contracts. Subject to the foregoing explanation, said financial statements, in our opinion, present fairly the position of Northeast Airlines, Inc. at December 31, 1944 and 1943 and the results of its operations for the year ended December 31, 1944 in conformity with generally accepted accounting principles applied, except as to changes in depreciation and amortization rates described in note C, on a basis consistent with that of the preceding year. LYBRAND, ROSS BROS. & MONTGOMERY Boston, Massachusetts March 14, 1945