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 GR E A T NEW s 6 0 F 5 1 9 a GREAT NEW opportunity in Florida after more than two years of legal struggles, the CAB rescinded all its prior adverse rulings and scheduled new hearings on our application for permanent certification south to Florida.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.