NORTHEAST AIRLINES, INC . . Jnnual 'Jv!port FOR THE YEAR ENDED DECEMBER 31, 1946 NORTHEAST AIRLINES, INC. 'Board of 'Directors PAUL F. COLLINS, Chairman RADU lRIMESCU New York, N. Y. J ACQ,UELINE COCHRAN New York, N. Y. H. LEROY SWIMM Boston, Mass. PAUL F. COLLINS . MILTON H. ANDERSON H. LEROY SWIMM. RICHARD ELY FOLEY, HOAG AND ELIOT LYBRAND, Ross BRos. & MONTGOMERY OLD COLONY TRUST CoMPANY . THE FIRST NATIONAL BANK OF BOSTON JAMES F. FITZGERALD Boston, Mass. EUGENE L. VIDAL New York, N. Y. MILTON H. ANDERSON Boston, Mass. Officers * President and Chairman of Board Vice President and General Manager Treasurer and Assistant Clerk of Corporation . Clerk of Corporation General Legal Counsel Auditors Transfer Agent Registrar General Offices, LOGAN INTERNATIONAL AIRPORT, BosTON 28, MAss. Treasury and Accounting Offices, 1 STATE STREET, BosTON 9, MASS. l I, ' To THE STOCKHOLDERS OF NORTHEAST AIRLINES, INC. The Board of Directors submits its Annual Report for the year ended December 31, 1946. Financial Your company, for the year 1946, showed an overall profit after taxes of $190,707.53. There was a loss of $67,564.99 as a result of operations, which however was more than made up as a result of other income including tentative retroactive mail pay for the year 1945. The results for the year as above reported were after provision for depreciation and amortization of $643,187.68. Herewith you will find as a part of this Director's report for the year ended December 31, 1946, comparative balance sheets as of December 31, 1946 and December 31, 1945; and a state- ment of profit and loss for the year ended December 31, 1946, which includes therein a statement of the deficit in earned surplus at the beginning of the year and the reduced amount thereof as of the end of the year. Included is the certificate of the Company's auditor, Lybrand, Ross Bros. & Montgomery. Passenger revenues in 1946 were $4,256,115 compared with $1,945,444 in the prior year. However, expenses increased substantially during the year due to the general rise in prices of material, wages and services. In common with the industry, your company experienced a decJine in demand for its services in the fourth quarter of 1946. During the same period weather conditions were abnormally poor, leading to many flight cancellations. Army Contract Your company executed a termination agreement with the Army Air Forces in connection with their War Contracts which were in effect during the years, 1942, 1943, 1944, and 1945, and the Company has received satisfactory reimbursement of costs. Property and Equipment On January 1, 1946, flying equipment consisted of six DC-3's, five of which were 24-passenger planes, including four converted in our own shops, and one 21-passenger plane, all with an adequate supply of spare engines, propellers, and accessories. During 1946, the Company sold the 21-passenger DC-3 plane and replacetj. it with a 24-passenger plane converted in our own shops. In addition, three DC-4 Deluxe four-engine Douglas Skymasters were purchased, each having sixty passenger seats. The Company also purchased five DC-3's of 29 passenger capacity, bringing our fleet to a total of fourteen planes at the end of 1946, consisting of six DC-3 twenty- four passenger, five DC-3 twenty-nine passenger, and three DC-4 Douglas Skymasters of sixty passenger capacity. During 1946 the Company entered into an agreement for the loan of sums up to but not in excess of $1,250,000 to provide money for the construction of a modern hangar at the East Boston Airport; the purchase of two planes, together with engines and equipment; the tepay,ment of loans held by a Boston bank; and the furnishing of additional working capital. Mail Pay On April 1, 1946, the Civil Aeronautics Board, in a proceeding commenced on petition of Northeast and, on order of the Board, issued an order proposing an increase in your company's mail compensation retroactive to May 1, 1945. The rates tentatively established by the Board were, in the opinion of the management, inadequate to meet the requirements of the statute. * NORTHEAST AIRLINES, INC. * The Company therefore filed notice of objections with the Civil Aeronautics Board, and on December 31, 1946, after some interim proceedings, it filed a substitute answer to accompany its notice of objections, requesting higher rates. Meanwhile, Northeast's effective mail pay rate continued until December 6, 1946, at the old, comparatively low level that had been in effect immediately prior to the issuance of the order. On July 11, 1946, the Company filed a motion which, in effect, asked that during the pendency of the proceedings payment be made at the proposed rates set forth in the order. This motion was at first denied by the Board, but was subsequently reconsidered. On December 6, 1946, the Board ordered that the rates proposed in the April 1 order should (subject to later adjustment, and tentatively) be the basis of current payments and be treated as having been in effect since May 1, 1945, while the proceedings remain open pending the determination of a permanent rate. Subsequent to the close of the year, the Board, on Northeast's motion and by order dated March 18, 1947, directed a substantial increase in these temporary tentative rates subject to similar later adjustment. Merger with Pennsylvania-Central The agreement dated November 9th, 1945 relating to a merger between Northeast Airlines, Inc. and Pennsylvania-Central Airlines Corporation was terminated and voided by mutual consent. The passage of time incident to carrying out the merger brought about changed con- ditions not only in the air transport industry generally but also in the different relative positions of thetwo companies and their securities. As shown by this Report, your Company succeeded in pretty well preserving its capital and surplus. As a consequence, the terms of the merger would have had to be renegotiated, and this in turn would have had to await the working out of the financial plans of the respective companies. Now your Company is free to develop its financial plans without considering the restrictive provisions of this merger a~eement. Routes The Company continues to operate over Routes No. 27 and No. 27-F. Route No. 27 is composed of five segments, namely, (1) between the co-terminals New York, New York, and Newark, New Jersey, and the terminal Caribou, Maine, via Waterbury, Connecticut; Worcester, Boston and Lawrence, Massachusetts; Portland, Maine, and other intermediate points; (2) between the co-terminals New York, New York, and Newark, New Jersey, and the terminal Boston, Massachusetts, via New ,London, Connecticut, and Providence, Rhode Island, and between Providence and Boston, either direct or via New Bedford, Massachusetts, and Cape points; (3) between the terminal Boston, Massachusetts, and Burlington, Vermont, via various intermediates; (4) between the co-terminals New York, New York, and Newark, New Jersey, and the terminal White River Junction, Vermont, via New Haven, Connecticut; Springfield, Massachusetts; Keene, New Hampshire, and other intermediates; and (5) between Portland, Maine, and Burlington, Vermont, via Lewiston-Auburn, Maine; Berlin, New Hampshire; Montpelier, Vermont, and other intermediates. Route No. 27-F runs between Burlington, Vermont, and Montreal, Canada, and between Bangor, Maine, and Moncton, New Brunswick. Certain of these segments are flown and cities served as a result of the Civil Aeronautics Board's decision in the so-called New England Case, in which, as indicated in last year's report, the Board in June, 1946 authorized the Company to provide numerous new services. Other of the Company's new services in 1946 had been authorized in earlier proceedings but could not be inaugurated sooner because flight equipment was not obtainable. Accordingly, the Company's operations and service were increased during the year 1946 as follows: Resumption of service at Lewiston-Auburn, and Waterville, Maine; inauguration of service at Lawrence (serving Lowell and Haverhill), and Worcester, Massachusetts, Newark, New Jersey, and Portsmouth, * NORTHEAST AIRLINES, INC. * New Hampshire; inauguration of service to the heavily travelled vacation areas of Hyannis, Nantucket, and Martha's Vineyard, Massachusetts, subsequently adding Providence, Rhode Island, and New Bedford, Massachusetts to this service; and inauguration of service over a new route between New York, Springfield, Massachusetts, and Keene, New Hampshire. The Company's application for extension of its route system to Washington was heard before Examiners of the Civil Aeronautics Board during 1946, and a brief was filed on behalf of the Company before the end of the year; and the same is true of the Company's application for ~:q extension of its route system . .to New Orleans. Examiners' reports have Tecently been issued . in these two proceedings recommending denial of the Company's applications. Exceptions have been taken and the matter is now pending before the Board. No action has been taken by the Board with respect to the Company's applications for a route between Boston and Bermuda, and for a route between New York and Chicago. During the year the Company filed an application for routes between Boston and Quebec and New York and Quebec but no hearing .has yet been held. Conclusion The past year which was one of industry-wide readjustment was marked by a broad expansion in operations of Northeast. Passengers carried, passenger miles, and revenue miles more than doubled. As previously mentioned, mounting costs were one of our major problems in 1946. Your Company's position, however, improved, due in part to expense reduction achieved through budgetary control and should continue to improve as a result of concentration of presently- scattered operations into the new hangar and service building now under construction at the Logan International Airport. The Directors and Management again wish to express their appreciation for the interesl and support of the stockholders and for the cooperation of our employees, which has made it possible to fly 180,293,458 passenger miles since Northeast Airlines was established in 1933 without passenger injury. It is expected that the Company's financial plan can be placed before the stockholders at an early date, at which time the business will also be transacted that normally is laid before the stockholders at their annual meeting. Boston, Massachusetts June 2, 1947 For the Board of Directors, PAUL F. COLLINS, President. CURRENT ASSETS: Cash in banks . Receivables: Airlines and agents ASSETS United States Post Office Department (note A) United States Army Air Forces under operational con- tracts, less reserve Note receivable Other receivables Total receivables Inventories of supplies and replacement parts (at average cost or less) Total current assets Account receivable from United States Post Office Department, determined March 18, 1947 by order of the Civil Aeronautics Board on that date, for increase in air mail revenue for the years 1945 and 1946 (note A) Total current assets as they would have appeared if the foregoing retroactive increase in air mail revenue had been receivable at December 31, 1946 (note A) Note receivable, due in 1947 ($25,000 paid in 1946) Claim for refund of 1942 federal income taxes PROPERTY AND EQUIPMENT, AT CosT: Improvements to real estate not owned-operating property Flight equipment (of which $1,850,000 at December 31, 1946 and $675,000 at December 31, 1945 were pledged against notes payable) Flight equipment spare parts Ground and shop equipment Construction in progress Nonoperating property (including land, $8,300) Less reserves for depreciation and amortization Escrow deposit under lease agreement ($32,000 receivable in 1947) Unexpired insurance and other prepaid expenses and deferred charges Franchise and route extension costs, less amortization NORTHEAST AIRLINES, INC. Comparative 'Balance Sheet As at December 31, 1946 (note A) and December 31, 1945 December 31 LIABILITIES CURRENT LIABILITIES: 1946 $ 166,664.05 247,468.04 347,218.32 5,000.00 126,090.59 725,776.95 117,696.36 1,010,137.36 576,090.20 1,586,227.56 137,789.22 2,393,475.88 317,349.91 366,663.58 92,350.03 8,300.00 3,315,928.62 899,975.47 2,415,953.15 36,200.00 53,910.45 20,924.10 $4,113,215.26 1945 $ 185,572.05 199,920.92 164,105.30 459,788.80 20,000.00 62,637.75 906,452.77 82,243.58 1,174,268.40 1,174,268.40 30,000.00 30,856.71 113,014.30 1,128,413.01 182,676.13 221,756.25 5,286.08 44,069.92 1,695,215.69 360,563.84 1,334,651.85 50,000.00 46,734.45 9,200.00 $2,675,711.41 Notes payable with liens on flight equipment: Held by bank Held by others (note B) Accounts payable-vendors and others Accrued salaries and wages . Taxes withheld from employees, not yet remitted Accrued payroll and other taxes . Unearned transportation revenue Total current liabilities Note payable to bank, due in 1947 Reserve for aircraft overhaul . Provision for possible federal income taxes (note A) Contingent liabilities (note C) CAPITAL COMMON STOCK, par value $1.00 per share, authorized 2,000,000 shares, issued and outstanding 500,000 shares CAPITAL SURPLUS (premium on common stock) . DEFICIT IN EARNED SURPLUS (since July 1, 1940), giving effect as of December 31, 1946 to retroactive increase in air mail revenue determined March 18, 1947 ($576,090.20 less $25,000.00 tax provision, note A) The accompanying notes are an integral part of this statement. December 31 1946 1945 $ 120,000.00 $ 180,000.00 919,445.00 974,973.46 501,335.02 80,763.13 36,827.17 20,707.69 21,403.77 24,302.07 13,227.19 54,673.32 61,672.54 2,194,864.67 814,465.69 120,000.00 1,010.07 19,612.73 25,000.00 20,000.00 500,000.00 500,000.00 1,498,547.52 - 1,498,547.52 (106,207.00) (296,914.53) $4,113,215.26 $2,675,711.41 * N O R. T H E A S T A I R L I N E S , I N C . Statement of Profit and o(oss and '7Jeficit.., For the Year Ended December 31, 1946 ( note A) OPERA TING REVENUE: Passengers Air mail: Revenue under rate in effect during year Increase in revenue for the year under rate adjustment ordered March 18, 1947 (note A) Express and freight Other Total operating revenue OPERATING EXPENSES: Conducting transportation Maintenance and repairs Provision for depreciation and amortization Traffic and advertising . General and administrative . Taxes other than income taxes Total opera ting expenses Operating loss NET GAINS from sales and retirements of property and equipment Other income Less interest ($31,191) and other charges PROVISION for possible federal income tax (note A) Loss for the year after giving effect to the retroactive increase in air mail revenue explained in note A CREDITS in respect of prior years: Increased air mail revenue for the year 1945 under rate ad- justment ordered March 18, 1947 (note A) . U nrequired portion of reserves provided in prior years against revenues under Army Air Forces operational contracts, less $9,486 related federal income tax . Unrequired reserve for prior year taxation contingencies Net reduction of deficit DEFICIT IN EARNED SURPLUS at .Beginning of Year DEFICIT IN EARNED SURPLUS at End of Year . $ 451,323.14 472,212.36 2,210,591.61 1,304,886.57 643,187.68 642,582.39 423,560.23 107,272.38 75,696.96 7,711.39 83,408.35 34,789.59 103,877.84 110,775.92 20,000.00 The accompanying notes are an integral part of this statement. * $4,256,115.72 923,535.50 71,299.90 13,564.75 5,264,515.87 5,332,080.86 67,564.99 48,618.76 18,946.23 25,000.00 43,946.23 234,653.76 190,707.53 296,914.53 $ 106,207.00 * NORTHEAST AIRLINES, INC. * 1\[otes to Financial Statements A - EFFECT OF RETROACTIVE INCREASE IN AIR MAIL REVENUES The financial statements as at December 31, 1946 give effect to increased compensation receivable from the United States Post Office Department for air mail carried by the company during the period from May 1, 1945 to December 31, 1946 computed at the temporary rate fixed by the Civil Aeronautics Board by its order dated March 18, 194 7. The Board's proceedings remain open pending an order fixing a final rate retroactive to May 1, 1945. Of the $576,090.20 additional air mail revenue computed on the basis of the increased tempo- rary rate and given effect in the financial statements, $103,877.84 is in respect of 1945 operations and $472,212.36 is in respect of 1946 operations. Effect has also been given in the accompanying financial statements to $25,000 provision for federal income tax which might be payable in 1948 as a result of the retroactive increase in air mail revenue. B-NOTES PAYABLE AND CREDIT AGREEMENT Notes payable held by others at December 31, 1946 comprise $143,800 notes payable due October 7, 1947 to Salta Holding Corporation, a subsidiary of Atlas Corporation; and $775,645 notes payable which have since been acquired by Salta Holding Corporation and which since December 1; 1946 have been in default with respect to payment of monthly instalments of principal. Title to flight equipment acquired by the company from issue of these riotes is retained by the holder of the notes as security therefor. At December 31, 1946 the company entered into a loan agreement under which Atlas Corporation, a stockholder, will lend to the company sums not to exceed $1,250,000 to be evidenced by 3% notes payable over a period of one year or less with liens on aircraft and on certain property and equipment (including the hangar) to be acquired in 194 7. Proceeds from borrowings are to be used, under the terms of this credit agreement, for construction of a hangar on leased land, for purchase of two aircraft, for payment of the note held by bank December 31, 1946 and for additional working capital. C - CONTINGENT LIABILITIES The Commonwealth of Massachusetts has submitted charges of $27,100 for landing fees at Logan International Airport, East Boston for the period December 1, 1941 to February 28, 1946. The company disclaims this liability and has made no provision therefor in the accompanying financial statements. Landing fees for periods subsequent to February 28, 1946 have been paid or accrued. The accompanying financial statements do not reflect a possible liability, amounting to $17,332.57, subject to legal dispute as the result of insurance policy cancellations. D-MERGER AGREEMENT The company has entered into an agreement with Pennsylvania-Central Airlines Corporation which provides, subject to certain conditions, for the merger of that company with North- east Airlines, Inc. on the basis of an exchange of stock of the two companies.' The stock- holders of both companies have voted to approve the agreement. Before the merger may become effective, however, the merger must be approved, under the Civil Aeronautics Act, by the Civil Aeronautics Board and, under Massachusetts law, by further confirmatory vote of the stockholders of Northeast Airlines, Inc. Prior to consummation of the merger, the agreement may be voided at the election of the Board of Directors of either corporation. While a hearing has been held on application for approval of the merger before Examiners of the Civil Aeronautics Board, argument has not been held before the Board and the matter is pending. * NORTHEAST AIRLINES, INC. NORTHEAST AIRLINES, INC., Boston, Massachusetts. c.A.uditors' 'lv!porl.J We have examined the accompanying balance sheet of Northeast Airlines, Inc. as at December 31, 1946 and statement of profit and loss and deficit for the year then ended, have reviewed the system of internal control and the accounting procedures of the company and, without making a detailed audit of the transactions, have examined or tested accounting records of the company and other supporting evidence, by methods and to the extent we deemed appropriate. Our examination was made in accordance with generally accepted auditing standards applicable in the circumstances and included all procedures which we considered necessary. In our opinion, the accompanying financial statements present fairly the position of Northeast Airlines, Inc. at December 31, 1946 and the results of its operations for the year then ended, (after giving effect to the retroactive increase in air mail revenue explained in note A), in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. LYBRAND, Ross BRos. & MONTGOMERY Boston, Massachusetts April 28, 1947 * * NORTHEAST A.IRLINES, INC. * Comparative Statistics 1940 1941 1942 1943 1944 1945 1946 Revenue Miles Flown .. 887,625 1,268,257 750,278 727,713 1,023,737 2,287,366 4,177,375 Completion of Sched- uled Miles .......... . 84.43% 84.04% 79.45% 79.10% 83.87% 83.61% 82.46% Passenger Revenue ..... $226,684 $378,569 $309,813 $533,972 $759,623 $1,945,444 $4,256,115 Revenue Passengers Carried ........... . 27,623 42,546 26,446 36,263 53,766 175,608 417,095 Revenue Passenger Miles ............. . 4,112,273 7,074,920 5,383,171 9,090,063 12,848,222 38,939,107 83,848,737 System Load Factor .... 46.38% 38.39% 35.94% 59.52% 59.14% 74.47% 65.76% Passenger Revenue Per Plane Mile ........ . $.2554 .2985 .4129 .7338 .7420 .8505 1.0189 Revenue Per Passenger Mile ............. . $.0503 .0535 .0576 .0587 .0591 .0500 .0507 MONTREAL 1111 1111 10 OJ'JAWA ANO TO OUUlC W01tllN CANADA MONTPELIER KEENE CONCORD SPRINGFIElD Ou O TO NlWtOUl'f0LANO H LT N TO,., .. ,( ~ f0w,oo ISlA"'O ~ .. ~ MONCTON E ,,,~~.., O'ON(\" ~~ HALIIAI( AUGUSTA AUBURN-lEWISTON The Wings of New Ensland now offers frequent 4-mile-a-minute non stop flights only 65 minutes from Boston to New Yorlc in deluxe 4-engine Douglas Slcymasten. Convenient supplementary DC-3 service also non-stop. PORTLAND ALSO New daily Boston-Montreal 99-minute non-stop flight, and return. Additional service to Moncton and the Maritimes. Additional service to Houlton and Presque Isle. PLUS MANY MORE SEATS AVAILABLE DAILY ON ALL NORTHEAST FLIGHTS . serving Maine, Montreal and Eastern Canada, and the Mari time Provinces industrial and recreational centers of New England. NEW YORK '<, ~,/a1Alf Jl11R I AIRLINE!i? Boston Ticket Offices HOTEL STATLER COPLEY PLAZA EASt Boston 41 00 New York Ticket Offices AIRLINES TERMINAL ANNEX BOwling Green 9-1740 General Offices . Logan Airport, Boston 28 New York Offices 500 fifth Avenue "SAVE TIME TO DO MORE"