NORTHEAST
AIRLINES
ANNUAL REPORT 1 9 6 5
I Storer Acquisition Brings New Planes ... Opens New Horizons for Northeast . ...
UPPER
CENTER
LOWER
NEW PLANES ... Northeast Airlines will be com-
pletely turbine-powered in less than two years. The
carrier has selected new aircraft specifically design-
ed to meet the service requirements of its routes.
BO El NG 727 will fly the long flights to Florida from Montreal, Boston,
New York, Philadelphia, Baltimore, and Washington at speeds up to
600 m.p.h. Northeast has ordered six of the 98-passenger standard 727's
and six of the 138-passenger Super 727's. The first two standard trijets
are already in service. In addition, Northeast has an option for two more
Super 727's.
DOUGLAS DC-9 twinjet will serve the commuter markets between Bos-
ton, New York, Philadelphia, and Washington. The DC-9 will also serve
Montreal, principal markets in New England, and points in Florida.
Northeast has ordered ten of the 560 m.p.h., 100-passenger DC-9's and
has an option for an additional eight.
FAIRCHILD-HILLER FH-227 turboprop will bring the jet age to New
England's smaller airports. Northeast has already ordered seven of these
260 m.p.h., 48-passenger short haul airplanes and has an option for
eight more.
GR E A T NEW s
6
0 F
5
1 9
a GREAT NEW opportunity in Florida
after more than two years of legal struggles,
the CAB rescinded all its prior adverse rulings
and scheduled new hearings on our application
for permanent certification south to Florida.
a GREAT NEW look on our balance sheet
the transactions by which Storer Broadcasting
Company obtained ownership control also
eliminated all our defaulted liabilities and in-
creased total stockholders' equity on our bal-
ance sheet from a negative $36,000,000 to more
than a positive $9,000.000.
a GREAT NEW fleet of jet and turboprop aircraft
arrangements were made for future deliveries
(which in fact began in 1965) for 22 latest
model jets and seven new turboprop planes-
and options for ten more jets and eight more
turboprops.
4
George B. Storer
Chairman of the Board
George B. Storer, Jr.
Vice-Chairman of the Board
James W. Austin
President and General Manager
TD OUR STOCKHOLDERS:
It is a pleasure to report to you for the first time as Chairman of the Board of Northeast
Airlines, Inc.
On July 30, 1965, 87 per cent of the capital stock of Northeast was acquired by Storer
Broadcasting Company. Incorporated in 1927, Storer Broadcasting Company is one of the
nation's oldest and largest radio-television broadcasters. It presently owns and operates five
television stations: WAGA-TV, Atlanta; WJBK-TV, Detroit; WJW-TV, Cleveland; WITI-
TV, Milwaukee; and WSPD-TV, Toledo. It owns and operates seven radio stations: WHN,
New York; WIBG, Philadelphia; KGBS, Los Angeles; WJBK, Detroit; WJW, Cleveland;
WGBS, Miami; and WSPD, Toledo. Storer also operates a number of community antenna
television systems in the Los Angeles area, and is engaged in the distribution of television
film programs.
Storer Broadcasting Company acquired its interest in Northeast as a result of a long-
time interest in airline operation, and after careful investigation of that industry and other
available investment alternatives. I, and my associates in Storer, felt that the air transpor-
tation industry as a whole offered excellent growth prospects. We felt that Northeast, in
particular, offered good investment possibilities in spite of its hard-pressed financial position
and lack of permanent certification on the important Florida route.
For almost thirty years, Storer Broadcasting Company has been engaged in a public
service business regulated by the federal government. Over the years, we have prospered,
have enjoyed the satisfaction of public service, and have experienced no difficulty in accom-
modating ourselves to government regulation. We felt that the airline business - also a
government regulated public service business - was similar in many respects to broadcast-
ing. An added attraction of Northeast was the compatability of territories served by the
airline and by our broadcasting stations.
Just prior to Storer's acquisition of its interest, Northeast labored under a negative net
worth balance sheet with debts totaling over $40,000,000. As a part of the purchase arrange-
ments, this debt was compromised and converted into equity, and an additional $7,000,000
cash equity was invested by Storer Broadcasting Company. For the first time in years,
Northeast Airlines was without debt and interest obligations. It was possessed of operating
capital, and financial backing. We were at the beginning of a new Northeast Airlines.
With the financial support of Storer Broadcasting Company, we then moved to acquire
needed flight equipment and related services. We have ordered, to date, six Boeing 727 jets;
six Boeing 727-200 jets (a long-bodied model of the 727); ten DC-9-30 Douglas jets; and
seven Fairchild-Hiller FH-227 turbo-props. Two Boeing 727's have been delivered and in
service since mid-December, 1965. The balance of the aircraft will be received and put into
service during 1966 and 1967. The 22 jet aircraft will be owned by Storer Leasing Corpor-
ation, a subsidiary of Storer Broadcasting Company, and leased to Northeast; the turbo-
prop aircraft will be owned by Northeast. Additional aircraft are under option.
The increase in numbers of flights and the conversion to all-jet and turbo-prop service
requires a large-scale training program, and this is underway. We are also in the process of
improving ground and flight services, reservations, catering, baggage handling, and the many
details that will make the public choose to fly Northeast.
5
Our objective is to create an airline that will merit both the patronage of the public,
and the confidence of government regulatory agencies. When this is done, profits will follow.
We are still. in the beginning phase of creating a great airline. But we are moving, and our
movement should accelerate as operational improvements take effect and more aircraft are
put into service.
In April, 1966, the CAB will commence a new hearing on Northeast's application for
permanent certification of its routes south of New York to Florida. While we cannot predict
the outcome of this proceeding, we approach it with confidence in the strength of the case
for permanent certification that Northeast will present. In our opinion, most of the adverse
factors upon which the CAB based its. 1963 refusal to grant permanent certification hav~
been resolved. Growth of the Florida market has been impressive, our competitors prosper,
Northeast has achieved financial stability, and we have plant, personnel, and equipment
presently serving the Florida routes. Everything possible will be done to assure that North-
east merits permanent certification.
My thanks to all the Company's stockholders, officers, directors, and employees for
their support and extra effort.
March 15, 1966
PRESIDENT'S
Sincerely,
George B. Storer
Chairman of the Board
MESSAGE
For Northeast Airlines the year 1965 was undoubtedly the most eventful in its 33-year
history - the acquisition of its control by the Storer Broadcasting Company and the sub-
sequent liquidation of its debt, transforming it from a negative to a positive net worth - the
purchase of an all new fleet of Boeing, Douglas and Fairchild turbine-powered aircraft with
a valuation of approximately $120 million - the Court action that resulted in the Civil
Aeronautics Board reopening the Florida Case. Indeed, the year just passed will be a mile-
stone in the history of Northeast.
Total operating revenues in 1965 increased 12.9% to $48,209,449 including $3,628,687
subsidy. Subsidy in 1964 was $3,435,942
Total operating expense of $48,415,018 -represented a 10.8% increase.
The net loss for 1965 was $471,074, an improvement of almost $1,400,000 over the
$1,844,000 loss during 1964. Both of the above figures have been restated to exclude interest -
expenses eliminated in the transaction whereby Storer acquired 87% of Northeast on
July 30, 1965. The interest so eliminated was $937,000 in 1965 and $1,603,000 in 1964.
On a total of 15,857,000 revenue plane miles flown, an increase of 11 % over 1964,
Northeast Airlines had available over one and one-quarter billion seat miles for sale to the
puqlic; of this total, 54.3% were sold compared with 52.6% of the available seat miles sold
6
in 1964. The system Performance Factor (scheduled miles completed) showed a suhstantial
increase from 93.8 % in 1964 to 95.5 % in 1965.
A total of 1,638,000 passengers were carried, up 16.6% from 1,404,000 carried in 1964.
This 234,000 passenger increase came from Northeast's Florida and commuter routes which
'were up 7.3 % and 18.4% respectively, while the New England routes contributed a 19.6'c
increase.
During 1965, 21,893,500 pounds of cargo - mail, express and air freight - was carried
for an increase of 23.2% over 1964.
During most of 1965, Northeast's fleet was composed of six DC-3's, seventeen DC-6B's
and four Convair 880 jets. Last October your Company received its first Boeing 727 jet. This
aircraft was used for training Northeast pilots until it went into scheduled service on De-
cember 15. Two days later the second B-727 was received from the manufacturer and was
placed in scheduled service as of December 22. Thus, for the winter season 1965/ 1966 our jet
fleet has increased from four to six aircraft and will be flown in service from Montreal, Bos-
ton, New York and Philadelphia to Miami and Fort Lauderdale.
While Northeast's temporary Florida certificate allows service to Jacksonville and
Tampa, with so few jet aircraft available this service remains in a state of suspension until
sufficient aircraft are available to make resumption of this service feasible.
Northeast's commuter service between Boston and the cities of New York, Philadelphia
and Washington continued to more than hold its ground against the competition. More
daily flights were offered from Boston to these cities than by any of our competitors. Again,
lack of flight equipment has precluded service between New York and Washington, how-
ever, it is planned that we will re-enter this market as soon as additional aircraft become
available.
The unprecedented improvement in the overall New England economy is reflected in
the almost 100,000-passenger increase north of New York.
The future outlook for Northeast Airlines is much brighter than it has ever been. There
have been triumphs, and there have been disappointments - however, there is every reason
to believe that your Company will participate to the fullest in the bright future that is ahead
for the air transport industry. Our organization is being strengthened - new flight equip-
ment on order 'is already being received-facilities are being improved daily-our employees
are dedicated to offering our patrons the safest, most dependable and courteous service
possible - all this, plus the sponsorship and confidence exhibited by our majority stock-
holder, the Storer Broadcasting Company - these things, ladies and gentlemen, I believe
are the principal ingredients that assure a bright future for our Company.
Certainly a debt of gratitude is owed to you, our stockholders - to our employees - to
all our friends - for your continued support and loyalty.
Respectfully,
March 15, 1966 ~ s ~ u s t i ~
President and General Manager
7
MONTREAL
B U RL I NG T O N
PHILADELPHIA
BALTIMORE
WASHINGTON
JACKSONVILLE
kAMPA
ST. PETERSBURG
-CLEARWATER
FORT
LAUD ERDALE
MIAMI
PRESQUE ISLE-HOULTON
Northeast Airlines current route system parallels the
East Coast of the United States running from Montreal,
Canada to Miami - Ft. Lauderdale, Florida via Boston,
New York ( Kennedy and La Guardia Airports), Philadel-
phia, Washington, Baltimore, Jacksonville and Tampa.
Jacksonville and Tampa service is temporarily suspended
pending the outcome of CAB proceedings in the Florida
Renewal Case.
The route system blankets one of the most densely
populated areas in the nation - one which is destined
to assume an ever increasing importance in world affairs
. .. in business and industry, finance, government and
recreation.
To the North, Northeast connects Montreal, largest
market in Canada with Boston, hub of New England's
entire economy. Reaching out from Boston to twenty-
one New England communities, Northeast's local service
provides New England residents, as well as its hundreds
of business and manufacturing companies, with conven-
ient air transportation to the major cities of the Eastern
Seaboard and connecting services to every other des-
tination throughout the United States and around the
world.
South of Boston, Northeast operates high-frequency
commuter service to New York, Philadelphia and Wash-
ington providing easy one-day round trip service between
these world centers of government and trade.
Northeast also links two great vacation areas, Florida
and New England. The route system provides a seasonal
balance between the winter traffic to Florida and the
summer traffic to New England, as well as a highly desir-
able combination of business traffic between these areas.
9
A
N
L 0
EW
5-YEAR COMPARISON ...
/\j
0 K
H
T 0
0 R I
Passenger revenues increased $4,889,000 or 13.3 % from 1964
to 1965, while other revenues increased $616,000 or 10.5%. Other
revenues included subsidy of $3,629,D00 in 1965 and $3,436,000 in
1964. The increase in this category was 5.6%.
Total revenue passengers carried went up from 1,404,000 to
1,638,000, a jump of 16.6%.
Available seat miles expanded by 9.2% to 1,226,000,000;
54.3 % or 665,996,000 seat miles were sold.
Northeast carried an average of 42.6 passengers per mile in
1965, an increase of 3.1 % over the 41.3 passengers in 1964. The
1965 average load represents the highest that this figure has ever
been in the history of Northeast.
Total wages and salaries paid to Northeast employees increased
by $2,483,000 in 1965 to $18,766,000. The personnel employed at
year end were 2,341 in 1965, up from 2,062 in 1964. During 1965
wage increases were granted to employees under union contracts.
Cost per available seat mile went up only 1.5% from 3.89c in
1964 to 3.95c in 1965.
The operating breakeven load factor was 54.6% while the
actual passenger load factor was 54.3%, a difference of only 0.3%.
In 1964 the load factor required to breakeven was 54.0% while the
actual load factor was 52.6%, a difference of 1.4%.
WAR
Z ON
D
s
On April 11, 1966, the Civil Aeronautics Board
will commence hearing testimony on the Com-
pany's application for renewal, on a permanent
basis, of Northeast's authority to serve its
routes south of New York to Florida. While
the outcome of this hearing cannot be pre-
dicted, the Company is confident of the sound-
ness of the case for permanent authority it
will present.
Northeast Airlines is also an active applicant
for authority to operate over the new non-stop
route between Montreal, Canada, and Tampa
and Miami, Florida, recently established by
agreement of the Canadian and United States
Governments. A pre-hearing conference to
determine which United States carrier will be
selected to operate the route was held on
February 23, 1966, and hearings before the
C. A. B. hearing examiner are scheduled for
May of this year.
C. A. B. hearings are also expected to be held
during the current year with respect to the
authorization of additional services between
points along the East Coast of the United
States and the Bahamas. In that proceeding,
Northeast will seek authority to serve the
% INCREASE
'65 vs. '64 1965
Passenger Revenue . . +13.3% $41,708,467
Other Revenue . . .
+10.5% 6,500,982
Total Revenue .. .......
+12.9% $48,209,449
Revenue Passengers Carried . +16.6% 1,637,863
Revenue Plane Miles . . . +11.0% 15,856,856
Available Seat Miles (000) . . ..... . .. . + 9.2% 1,226,165
Load Factor . 54.32%
Revenue Passenger Miles (000) . +12.7% 665,996
Average Passengers per Mile . . ..
+ 3.1% 42.64
Available Ton Miles . . . . . . . . . . . . . .
. .
+ 9.0% 155,544,052
Revenue Ton Miles .... . . . . . . . .
+12.8% 69,034,617
Operating Cost per Available Ton Mile . + 1.6% 31.1 Oc
Operating Cost per Available Seat Mile . + 1.5% 3.95c
Payroll Total Wages and Salaries . . +15.2% $18,766,007
Number of Personnel . . +13.5% 2,34.1
These statistics have been calculated in accordance with
the Civil Aeronautics Board system of Codes and Accounts.
Bahamas from Boston, New York, Philadel-
phia, Washington and Florida.
New flight equipment on order for improve-
ment of Northeast's presently authorized
services is being delivered in accelerating vol-
ume. Two Boeing 727 aircraft have been
delivered and have been in service since
December, 1965; four additional Boeing 727
aircraft and two Douglas DC-9 aircraft will
be received during 1966, prior to commence-
ment of the 1966-67 winter season. The
remaining DC-9 aircraft will be delivered in
1967; for the most part, in the first six months
of that year. Six Boeing Super-727's, the last
of the current order of aircraft scheduled for
delivery, will be received in the last quarter
of 1967. The Company will receive all seven
of its Fairchild-Hiller FH-227 aircraft during
1966, on a schedule providing for delivery of
one aircraft each month, beginning in May.
As service expands, it is necessary to strength-
en and add to managerial, administrative and
field personnel. This is being done on a selec-
tive basis with the objective of building a
management team that will bring Northeast
to its full potential.
11
1964 1963 1962
$36,819,403 $39,888,763 $48,082,078
5,884,572 4,026,042 3,308,483
$42,703,975 $43,914,805 $51,390,561
1,404,487 1,358,801 1,551,059
14,290,315 16,948,778 19,315,430
1,122,880 1,279,613 1,381,954
52.61 % 49.91 % 53.23%
590,800 638,682 735,561
41.34 37.68 38.08
142,770,650 160,835,808 172,088,705
61,193,858 66,754,323 76,716,209
30.60c 32.68c 33.55c
3.89c 4.llc 4.18c
$16,282,843 $18,196,945 $20,898,641
2,062 2,025 2,700
LYBRA ~ D. Ross BRos. G.. MONTGOME RY
ACCOUNT A NTS AND A U D ITORS
Northeast Airlines, Inc.
Boston, Massachusetts
We have examined the balance sheet of Northeast
Airlines, Inc. as at December 31, 1965 and the
related statements of income and expense, deficit
and paid-in-surplus for the year then ended. Our
examination was made in accordance with gener-
ally accepted auditing standards, and accordingly
included such tests of the accounting records and
such other auditing procedures as we considered
necessary in the circumstances.
In our opinion, the accompanying statements
present fairly the financial position of Northeast
Airlines, Inc. at December 31, 1965 (after giving
effect at that date to the quasi-reorganization des-
cribed in note D) and the historical results of its
operations for the year then e_
nded, in conformity
with generally accepted accounting principles ap-
plied on a basis consistent with that of the pre-
ceding year.
Also, in our opinion, such statements present
fairly the net loss of Northeast Airlines, Inc. for
the year ended December 31, 1965 as restated to
exclude interest expense applicable to debt dis-
charged in 1965 as described in note E, in con-
formity with generally accepted accounting prin-
ciples applied on a basis consistent with that of
the preceding year.
~-~ ~ ~ . '), ~Ir
Boston, Massachusetts
February 21, 1966
1961
$48,012,195
3,116,753
$51,128,948
1,644,581
21,273,364
1,495,026
50.23%
750,955
35.30
186,100,260
77,921,116
31.90c
3.99c
$21,297,576
2,918
-
ASSETS
CURRENT ASSETS:
Cash . .. . . . .. . ... .. .. .. . ... . . . ....... . .. . .. . . . . . .......... .. .. .... .... . . $ 3,669,935
Certificates of Deposit ($330,000 restricted) . . . . ..... . . . .... . .. . .. . ........ . .
Accounts Receivable ... .. . . . ..... .. ... . .. . ... . ..... ......... . .... .. ...... .
Flight Equipment Expendable Parts,
Substantially at Cost ... .. .... .. .... . .... . ......... : .... . .... . ....... .
Prepaid E xpenses .. . . .. . . . . . . . ... . .. .. .. . . . . . ......... . ....... . ....... . . .
Miscellaneous Supplies, at Cost .. ... ............ ... . . ... . .. . .... . ... . . . .... .
1,750,053
4,408,717
1,917,523
818,371
384,258
TOTAL CURRENT ASSETS .... . .. . . . . . ..... . .............. . . .. . 12,948,857
DEPOSITS UNDER EQUIPMENT PROGRAM (Note B) . . ...... . . .. . ... . ... ... .... . 750,000
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Flight Equipment and Related Spare Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,431,547
Ground Property and Equipment ... .. .. . .. . .. . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . 5,596,276
Non-operating Property and Equipment . . . .... .... .. .... . ................. . .
Less Allowances for Depreciation,
413,522
25,441,345
Amortization and Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,346,986
Property and Equipment Less Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,094,359
DEFERRED CHARGES:
Jet Aircraft Integration Costs . . . . .. . .... . ...... . . .. . .. .. . ................. .
Other ......... .. . . .... . ......... . .................. .... ....... . .. . ..... .
T he accom panying notes are an
integral part of the above balance sheet .
12
493,018
149,657
$19,435,891
BALANCE SHEET
NORTHEAST AIRLINES, INC., DECEMBER 31, 1965
LIABILITIES
CURRENT LIABILITIES:
Trade Accounts Payable .... . . .. . .. . .. ....... .. .... .. . . .. .. . . ... . . .. ....... $ 3,054,231
Accrued Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,134
Accrued Pension Costs (Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Accrued Vacation Pay.. . .. . .. . . . . ... . . . . . ....... .. .. . . .. .. . ..... ... . .. . .. . 886,489
Unearned Passenger Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,558,522
Lea~ed Aircraft Overhaul Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,464,934
Collections as Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,678,046
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . 9,538,356
ESTIMATED EMPLOYEE TERMINATION LIABILITY (NOTE D) . . .. . . . . . . . . . . . . . . . . . . 423,693
COMMITMENTS (NOTES B AND C)
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1.00 Per Share
Authorized 6,500,000 Shares (Note G)
Issued 6,329,983 Shares Including 7,500 Treasury
Shares (Note A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 6,329,983
Paid-In Surplus, per accompanying statement (after elimination
of deficit at December 31, 1965 in conjunction
with quasi-reorganization - see Note D ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,143,859
$19,435,891
13
STATEMENT OF INCOME AND EXPENSE
For the Year Ended December 31, 1965
OPERATING REVENUES (Note H):
Passengers ................................................................... $41,708,467
Express, Freight and Baggage ..... . ................. . ....... . .... . ............ . 1,623,694
Air Mail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489,774
Federal Subsidy (Note F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,628,687
Other, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758,827
Total Operating Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,209,449
OPERATING EXPENSES:
Flying Operations, Including Direct
Maintenance of Flight Equipment .... ..... ....... .. .......... .. .... . ....... . . .
Other Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ .
Aircraft and Traffic Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ .
Reservations, Sales, Advertising and Publicity .. . .... . .. . ... . ............. .. ... . . .
Depreciation and Amortization . . .......... .. ....... .. . . .. . .... .. .... . .. . .... . . .
Passenger Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... . ......... . ..... . .
General and Administrative ....... ........ ... ..... . .. ... .. .. .. ..... . .......... .
Total Operating Expenses . . ..... .. . .... .. ..... ........... . ..... .. ... .. .
Operating Loss .... . .. ... . . .... ... ....... .... .................. .. ... . .
NON-OPERATING CHARGES:
Interest Expense (Before Restatement, See Below) . ........ .. .................... .
Other, Net .................................................................. .
Net Loss ... . . . .. . .... .. . ... ........ . . . .. ............ . .............. .
Interest Applicable to Debt Discharged in 1965 (Note E) .............. .. ..... . .. . . .
Net Loss (As Restated, See Note E) ..... . ..... . . . .. .. . . ..... . .. . . . ..... . $
STATEMENT OF DEFICIT
Year Ended December 31, 1965
22,609,855
4,386,943
9,336,421
5,905,340
675,398
3,287,171
2,213,890
48,415,018
205,569
976,352
225,928
1,407,849
936,775
471,074
Deficit at Beginning of Year .. .. ..... ... ............ . . . . . ....................... $62,679,416
Net Loss Per Statement of Income and Expense (Before
Restatement of Interest Expense - See Note E) ......... ,. . . . . . . . . . . . . . . . . . . . . . . . . 1,407,849
Adjustments to Effect a Quasi-Reorganization as at
December 31, 1965 (Note D):
Reduction of Deficit Applicable to Revaluation
of Certain Asset and Liability Accounts .................. . .............. . ... (1,183,803)
Application of Remaining Deficit Against Paid-In Surplus ............ ... ........ (62,903,462)
Deficit at End of Year (Note D) .. . .. . .......................................... $
=====
STATEMENT OF PAID-IN SURPLUS
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,553,280
Excess of amount paid in over par value of 57,950 shares of
common stock issued under employee stock option plans (Note G) . . . . . . . . ....... .
Amount paid in on 15,500 shares of common stock
issued under employee stock option plans
(satisfied by issuance of treasury shares) (Note G) ............................ .
Excess of cash proceeds and aggregate indebtedness
discharged in transactions at July 30, 1965 ( described in
note A) over par value and issue expenses of 4,488,345
181,500
67,812
shares of common stock issued in conjunction therewith. . . . . . . . . . . . . . . . . . . . . . . . . 40,244) 729
Application hereto of deficit at December 31, 1965 to
effect a quasi-reorganization (Note D) ........... . .............. . ............ (62,903,462)
Balance at End of Year ...... . . ............ .. ......... . ......... ... ............. $ 3,143,859
The accompanying notes are an
integral part of these statements.
14
NOTES TD FINANCIAL STATEMENT
A - Discharge of Indebtedness on July 30, 1965:
On July 30, 1965, Storer Broadcasting Company acquired
from a trustee for Hughes Tool Company 973,226 shares
of common stock (majority control) of Northeast and
claims against Northeast in the amount of $24,124,170,
and acquired from certain other major creditors claims
against Northeast in the amount of $13,635,960 as re-
corded on Northeast's books as at July 30, 1965.
On this same date, Northeast issued to Storer 4,488,345
shares of its common stock in consideration of a payment
to Northeast of $7,000,000 in cash and in exchange for,
and in full satisfaction and release of, the debts men-
tioned above aggregating $37,760,130.
B - Equipment Program:
Northeast has entered into an agreement with Storer Leas-
ing Corporation (a subsidiary of Storer Broadcasting
Company) to lease six Boeing Model 727 aircraft (two
of which were in service at December 31, 1965), six Boe-
ing Model 727-200 aircraft, and ten Douglas Model
DC-9-30 aircraft and related spare parts for a thirteen-
year period from dates of delivery of the respective equip-
ment at lease rentals which are expected to approximate
$1,500,000 in 1966, $5,700,000 in 1967 and $9,600,000 an-
nually thereafter. In addition to such rentals, Northeast
is obligated for various operating costs, including insur-
ance and maintenance. Storer Leasing Corporation has
options to acquire two additional Boeing Model 727-200
aircraft and eight additional Douglas Model DC-9-30
aircraft.
In November, 1965, Northeast entered into a letter under-
standing with Fairchild Hiller Corporation with respect
to the purchase of six Fairchild Model FH-227 turbo-
prop aircraft for scheduled delivery in 1966 at an
aggregate cost, including spare parts, of approximately
$10,000,000. Northeast also has options on nine additional
FH-227 turbo-prop aircraft. At December 31, 1965,
$750,000 had been deposited by Northeast with Fairchild
in conjunction with this letter understanding. Northeast
has a commitment letter from a bank to finance approxi-
mately 50% of the cost of the Fairchild equipment by a
5 % loan payable over a period not to exceed seven
years. Fairchild would, at Northeast's request, partici-
pate in financing approximately 15% of the equipment
cost.
C - Commitments:
Rentals under long-term leases in effect at December 31,
1965 for hangar, terminal and reservations facilities ap-
proximate $1,650,000 on an annual basis. In addition to
the annual rentals, certain of the leases obligate North-
east to pay maintenance and operating costs.
Rentals under short-term leases of flight equipment (in-
cluding aircraft rented for the peak winter season) aggre-
gating $4,245,000 for the twelve months ended December
31, 1965, are included in flying operations expense in the
accompanving financial statements. In addition to such
rentals, Northeast is obligated for various operating
costs, including insurance and maintenance.
See note B with respect to a long-term lease of additional
jet flight equipment and the purchase of turbo-prop
flight equipment.
Under a loan agreement dated as of January 3, 1966, be-
tween Storer Broadcasting Company and certain banks,
the broadcasting company has warranted that Northeast
will maintain a certain level of working capital and will
not pay dividends in excess of 25% of net earnings from
January 1, 1966 to December 31, 1968 and 50% of net
earnings thereafter.
D - Quasi-Reorganization:
On October 27, 1965, the Board of Directors of Northeast
voted to approve a restatement of the surplus accounts
through a quasi-reorganization as of December 31, 1965,
under which the paid-in surplus account has been re-
duced by the accumulated deficit in the earned surplus
account as at that date. The above action will be sub-
mitted to the stockholders for ratification at the regular
annual meeting. In conjunction with the quasi-reorgani-
zation, the recorded amounts of certain asset and liability
accounts have been re-evaluated as described in the fol-
lowing paragraphs.
Accruals for accumulated sick leave which, under certain
conditions, Northeast is obligated to pay to employees
upon employment termination have been reduced at De-
cember 31, 1965 to the estimated present value of future
payments, actuarially determined, less estimated future
income tax benefits. The resulting amount is reflected
as a non-current liability in the balance sheet at Decem-
ber 31, 1965, and the deficit account has been reduced
by $1,115,803 at that date.
In periods prior to December 31, 1960, Northeast had
accrued $468,000 representing initial past service costs
of a non-contributory employee retirement plan estab-
lished in 1953. The Internal Revenue Service does not
require payment into the plan of past service costs as a
condition to continued qualification of the plan, and
amounts in the plan or accrued in the accompanying
balance sheet at December 31, 1965 for payment into the
plan exceed the actuarially determined present value of
vested employees' rights. The reversal of the above-men-
tioned $468,000 prior pension accruals has been credited
to the deficit account at December 31, 1965. Unfunded
past service costs of the non-contributory retirement plan
(not accrued in the accounts at December 31, 1965) ap-
proximate $1,200,000.
Northeast is conducting a study to identify flight equip-
ment spare parts which are surplus to future needs in
view of the present equipment program. An estimated
amount of $400,000 has been charged to the deficit ac-
count at December 31, 1965 to reduce such surplus parts
to their realizable value.
The remaining accumulated deficit at December 31, 1965,
after net reduction of $1,183,803 for the foregoing adjust-
ments, has been charged against paid-in surplus in the
accompanying statements.
E - Interest Restatement:
Net loss for 1965 in the accompanying statement of income
and expense has been restated in order to present results
of operations on a basis which gives recognition to North-
east's present capitalization and which, therefore, ex-
cludes interest expense applicable to debt discharged on
July 30, 1965 in transactions described in note A.
F - Federal Subsidy:
Northeast has been receiving federal subsidy payments
based upon the historically unprofitable operation in
New England under a subsidy formula established in
1963 on the basis of the class subsidy rate formula ap-
plicable to the thirteen local service carriers at the time.
The Civil Aeronautics Board issued orders in December,
1965 reopening for reconsideration as of January 1, 1966
both the subsidy rate for Northeast's New England op-
erations as well as the current sub!,,idy rate for the local
service group.
G - Employee Stock Option Plan:
At December 31, 1965, 145,300 shares of authorized and
unissued common stock were reserved under Northeast's
Qualified Stock Option Plan for key employees adopted
in 1964 under which options are granted at prices not
less than fair market value on dates granted. At Decem-
ber 31, 1965, options were outstanding and exercisable to
purchase 39,050 shares at $4.125, aggregating $161,081,
and options were outstanding, exercisable in 1966, to
purchase 2,500 shares at $18.50 and 15,000 shares at
$18.6875, aggregating $326,563.
Also, at December 31, 1965, options were outstanding and
exercisable for key employees to purchase 7,000 shares
of treasury stock at $4.375 per share (fair market value
on date granted), aggregating $30,625.
During 1965 options were exercised for 54,700 shares at
$4.125 per share, 3,250 shares at $4.25 per share, and
15,500 treasury shares at $4.375 per share, aggregating
$307,263.
H - Florida Route Renewal:
Northeast continues to serve its route south of New York
City pending final determination of its application for
permanent authorization. On April 13, 1965, the United
States Court of Appeals for the First Circuit remanded
the case to the Civil Aeronautics Board and ordered it
to receive certain further evidence which Northeast
sought to present. The Board subsequently rescindecf
its prior adverse decisions, has announced that it would
reconsider the whole matter, and has scheduled hearings
on applications by Northeast and others to begin in
April, 1966. The route south of New York City currently
generates approximately two-thirds of Northeast's rev-
enue, exclusive of subsidy.
NORTHEAST
AIRLINES
LOGAN INTERNATIONAL AIRPORT
BOSTON , MASS. 02128
DIRECTORS
GEORGE B. STORER, Chairman
GEORGE B. STORER., JR., Vice-Chairman
JAMES W. AUSTIN, President
JACQUELINE COCHRAN
LEONARD DALSEMER*
A. D. DAVIS*
JAMES F. FITZGERALD
ROBERT C. HI LL
CURTIS HUTCHINS**
BILL MICHAELS
STUART W. PATTON
HARRY M. STEVENS, 11
DAVID A. STRETCH
FRANCIS W. SULLIVAN
EUGENE L. VIDAL
EXECUTIVE COMMITTEE
GEORGE B. STORER, Chairman
GEORGE B. STORER, JR.
STUART W. PATTON
JAMES W. AUSTIN
OFFICERS
GEORGE B. STORER, Chairman of the Board
GEORGE B. STORER, JR., Vice-Chairman of the Board
JAMES W. AUSTIN, President and General Manager
EDMUND 0. SCHROEDER, Executive Vice President - Operations
EDWIN H. BISHOP, Vice President- Southern Region
EDWIN W. BR EEO, Vice President - Traffic and Sales
ARTHUR A. BR EN NAN, Vice President - Personnel
JOSEPH W. CANNON, Treasurer
FRANCIS M. COATES, Vice President - Administration and Finance
ROGER J. HOY, Vice President and Director of Operational Standards
WHEATON W. MI ES, Vice President and Director of Technical Services
ARNO W. MUELLER, Vice President - Financial Planning
WILLIAM J. MURPHY, Vice President- Customer Services
STUART W. PATTON, Vice President - Law
HEN RY E. FOLEY, Clerk
* elected February 2, 1966
** subject to C.A .B. approval
REGISTRARS - The First National Bank of Boston, Boston, Mass.
- The Chase Manhattan Bank, New York, N.Y.
TRANSFER AGENTS - Old Colony Trust Company, Boston, Mass.
- The Chase Manhattan Bank, New York, N.Y.
GENERAL COUNSEL - Foley, Hoag & Eliot, Boston, Mass.