Northeast Airlines Annual Report 1970

1 Northeast Airlines AnnualReport1970
i
To Northeast Stockholders:
Financially, 1970 wa s still very much a troubl ed year for Northeast, although improved
from 1969 (partially attributabl e to th e National Airline strike in early 1970). Th e bottom line
loss of $10)00,000 furni shes littl e comfort except as a compari son to th e $28,800,000 loss
realized in 1969. Despite significant cutbacks in both operation s and personn el, th e sam e
fundam ental economic probl ems still exist, and w e are at the point wh ere additiona l cutbacks
pose revenu e ri sks that mu st be carefully w eighed again st th e potential saving in exp ense. Thi s is
being thoroughly explored by our operation s, marketing and planning peopl e as w e go, but
th ere is no easy answer. M erg er w ith a financially strong entity sti ll appears to be th e only long-
term solution .
One of th e major proj ects of th e year, of course, was th e proposed merg er between
Northeast and Northwest Airlin es, fil ed w ith th e Civil A eronautics Board in January of 1970.
Th is agreement was finally terminated by Northwest on March 10, 1971, under its option to do
so due to restriction s th e Civil A eronautics Board placed on th e tran sfer of th e Miami-Los
Angeles route in its conditional approval of th e merger. Both Northwest and North east
petition ed for reconsideration of thi s restriction, but th e petition s w ere d eni ed on March 1
and Northwest subsequently gave notice of termination . It is th e intention of North east
to proceed to negotiate a merger with on e of th e oth er airlines which have already expressed
specific interest. Since thi s letter is being written on March 11 to fulfill publication d eadlin es
for th e annual report, which is only on e day after receiving Northwest' s notice of cancellation,
no negotiations have begun with any of th e parti es.
In closing, I take thi s opportunity to convey the thanks o f all the Northeast directors
to th e loyal executives and line employees who have he lped us weather this trying year.
It has not been easyi it may not get any easier. They all can take great persona l pride in their
individual contribution in keeping the " Ye llowbirds" flying, and maintaining the high standard
of service in spite of the many obstacles.
Very truly yours,
~~
Bill M ichae ls
President
1
Northeast Airlines, Inc.
Balance Sheet
Assets
Current assets:
Cash
Accounts receivable less allowance for doubtful
accounts of $1 ,084,000 in 1970 and $823,000
in 1969
Aircraft parts and suppli es at average cost (less
reserve for obsolescence of $652,000 in 1970
and $362,000 in 1969) (note D)
Pre pa id expenses
Total current assets
Restricted deposit with mortgage trustee
Property and equi pment at cost
(notes B, C and D):
Flight equi pment and related spare parts
Ground property and equi pment
Less allowance for depreciation and
amortization
Non-operating property and equipment:
Flight equipment and related spare parts held for
sa le or lease at estimated realizable value (note H)
Leased flight equipment (note B)
Deferred charges and other assets (note D):
J et aircraft integration
Route development
Debt expenses
Other
The dCcompdnying notes dre dn integrdl pdrt of the findncidl stdtements.
2
December 31
1970 1969
$ 3,798,261 $ 4,435,912
10,870,893 12,529,283
5,642,602 4,956,621
2,360,963 2,781,807
22,672,719 24,703,623
1,637,884 1,727,785
28,053,075 27,780,834
9,409,422 9,451,361
37,462,497 37,232,195
10,007,947 7,611,001
27,454,550 29,621,194
4,300,000 5,581,720
4,985,562 5,951,515
900,181 1,050,031
722,809 780,409
576,155 365,072
7,184,707 8,147,027
$63,249,860 $69,781,349
Liabilities
Current I iabi I ities:
Current maturities of lon g-term debt (note C)
Accounts payable
Accrued sa laries and wages
Accrued vacation
Contributions to employee pension plans (note E)
Unearned transportation revenu e
Collections as agent
Total current liabilities (note C)
Estimated future liability for employee sick leave less discount of
$1)18,292 in 1970and $1,548)95 in 1969
Convertible subordinated debentures and lon g-term debt,
net of cu rrent maturities (note C)
Notes payable to Storer Broadcasting Company
(notes A and I)
Liability to Storer Broadcasti ng Company on reassignment
of certain flight equipment contracts
Commitments and contingencies (notes 8, C G and I)
Stockholders' Equity
Common stock, par va lue $1 .00 per share
Authorized 10,000,000 shares (notes C and F)
Issued 6,685,155 shares
Additional paid-in capital
Accumulated ddicit since January 1, 1966 (note C)
Tota I stockholders' ddicit
The dCcompdnying notes are dn integrdl part of the find ncid l stdtements.
December 31
1970
$ 2,854,032
8,927,903
833,749
2,239,398
137,593
4,025,522
4,479,174
23,497,371
2,012,398
40,449,522
26,000,000
3,968,764
6,685,155
9,135,950
(48,499,300)
(32,678,195)
$63,249,860
1969
$ 2,846,859
10,960,518
978,544
2A83J60
1 A48,088
4,345,238
4,320,089
27,383,096
1,837,923
43,307,606
15,241,014
3,968)64
6,685,155
9,1 35,950
(37)78,159)
(21,957,054)
$69,781,349
3
Northeast Airlines, Inc.
Statement of Income
Years Ended
Operating revenues:
Passenger
Express, freight and baggage
Mail
Charter and other, net
Total operating revenues
Operating expenses:
Flight operations, including direct maintenance
Other maintenance and repairs
Aircraft and traf~ic servicing
Promotion and sales
Depreciation and amortization (note D)
Passenger service
G eneral and administrative
Total operating expenses
Operating loss
Other expenses:
Interest expense
Other-net
Tota I other expenses
Loss before extraord inary items
Extraordinary items (note H)
Net loss
Losses per share of common stock:
Loss before extraordinary items
Extraordinary items
Net loss
Statement of Accumulated Deficit
Balance at beg inning of year
Net loss per statement of income
Ba lance at end of year (si nee January 1, 1966)
The accompanying notes are an integral pa rt o f the financia l statements.
4
December 31
1970 1969
$113,027,583 $113,347,434
4,190,674 4,587,031
1,579,450 1,242,137
4,038,669 2,912,008
122,836,376 122,088,610
55,444,025 58,590,153
8,275,637 10,354,384
22,180,715 23,185,119
18,600,746 20,424,355
3,996,096 4,654,179
12,816,385 14,089,617
6,224,648 7,859,781
127,538,252 139,157,588
4,701,876 17,068,978
4,876,491 3,436,740
442,774 550,846
5,319,265 3,987,586
10,021,141 21 ,056,564
700,000 7,786,898
$ 10,721,141 $ 28,843,462
$1 .50 $3.15
.10 1.16
$1.60 $4.31
$ 37,778,159 $ 8,934,697
10,721,141 28,843,462
$ 48,499,300 $ 37,778,159
Northeast Airlines, Inc.
Source and Use of Funds (Working Capital)
Years Ended
Source of funds:
Issuance of:
Notes payable to Storer Broadcasting Company
Long-term debt
Equipment deposits reimbursed by lessor
Disposal of property and equipment
Other
Use of funds :
Operations:
Net loss
Charges not requiring funds currently:
Extraordinary items (note H)
Depreciation and amortization
Other
Current maturities on long-term debt
Property and equipment:
Ai rcraft and parts including deposits
Ground property and equipment
Other, net
Increase (decrease) in working capita l
Th e dccompdnyi ng no tes dre dn inte grdl pdrt of the fi ndncidl stdtements .
December 31
1970
$11 ,000 ,000
625,164
11,625,164
10,721,141
(700,000)
(3,996,096)
(282,318)
5,742,727
2,854,032
348,275
330,634
494,675
9,770,343
$ 1,854,821
1969
$15,241 ,014
926,021
1,597,053
189,435
338,543
18,292,066
28,843,462
(7,786,898)
(4,654,179)
(786,065)
15,616,320
2,846,859
2,041 ,026
2,083,458
769,320
23,356,983
($ 5,064,917)
5
Northeast Airlines, Inc.
Notes to Financial Statements
A. Basis of Presentation
The 1969 and 1970 financia I statements have been prepared on a
going concern basis which contemplates the realization o f assets and the
liquidation of liabilities in the ordinary course of business, the continuation
of which was (as to the 1969 Financial statements) and is (as to the 1970
financia l statements) dependent on the Company's ability either to obtain
continued Financing and Financial support or to consummate a merger. The
Company's majority stockholder, Storer Broadcasting Company: ( a) in an
agreement dated January 19, 1970, with Northwest Air I ines, Inc. was
committed to advance additional funds to the Company pending consum-
mation of a proposed merger; and (b) has warranted, in conn ection
with certain loan agreements, that it would cause the Company
to maintain a minimum specified amount of working capita l (see
note C). The Company has continued to suffer operating losses, the
proposed Agreement of Merger has been terminated (note I), and there
is uncertainty as to the continued Financing of the Company by Storer,
all of which creates doubt as to the ability of the Company to continue
as a going concern .
B. Equipment Program and Lease Commitments
On December 31, 1970, the Company's operating fleet consisted
of the following :
Model of Aircraft Owned Leased Total
Boeing 727-100 2 6 8
Boeing 727-200 13 13
Douglas DC9-30 4 10 14
6 29 35
Of the leased aircraft, all except seven Boeing 727-200's are being
leased from Storer Leasing Corporation (a wholl y owned subsidiary of
Storer Broadcasting Company), from which the Company is also leasing
certain related spare parts.
Lease expense on all of the foregoing flight equipment approxi-
mated $14,800,000 in 1970 ( and annually thereafte r) until the leases
expire at various dates from 1978 to 1982.
Rentals under long-term leases in effect at December 31, 1970 for
hangar, terminal and reservations facilities approximate $2,600,000
annually until 1977, when the first major lease expires.
C. Convertible Subordinated Debentures and Long-Term Debt
Long-term debt at December 31, 1970 consisted of the following :
Series A secured notes, 6%, due quarterly
throug h 1973 $ 6,988,663
Series B secured notes, 7%, due semi-annually
from 197 4 through 1979
Subordinated notes to aircraft manufacturers,
6% and 63/4% due quarterl y through 1979
Convertible subordinated debentures, 6 %,
due 1986
Fuel Farm Construction Contract, 7%, due
monthl y through 1977
Other
Total debt
Less insta llments due in 1971
Long-term portion
10,000,000
3,373,307
22,000,000
750,588
190,996
43,303,554
2,854,032
$40,449,522
The 6% convertible subordinated d ebentures due August 1,
1986 are convertible into common stock at $25 per share, subject to an
adjustment in certain events, and 880,000 shares of common stock are
reserved for such conversion . The Company is required to provide
$1,100,000 annually from 1976 to 1985 for sinking fund redemptions.
The debentures impose certain restrictions on cash d ivid ends and stock
repurchases, but these are less restrictive than those provided under other
loan agreements, which are noted below.
So long as certain indebtedness (with maturiti es extending to
1979) is outstanding under loan agreements between Storer Broadcasting
Company and th e Company, respecti ve ly, and certain banks and institu-
tional investors in conjunction with financing the acquisitions of jet Flight
equipment leased by Storer Leasi ng Corporation ( note B) to or purchased
by the Company, Storer and the Company have respectively warranted
that, without prior consent of the lenders, the Company will not pay
divid ends in excess of 50% of net ea rnings subsequent to January 1, 1966
and w ill mainta in a specified amount of net working capital, as defined in
the loan agreements.
At December 31, 1970, the Company's defin ed net working
capital was approximately $5,700,000 less than the stipulated amount
and waivers were obtained from the lenders, effective until Apri 11 , 1971.
In the event additional waivers are not granted, the lenders have the
option to declare the total amount of the notes due and payable.
Substantiall y all of the Company's owned Flight equipment and
related spare parts are pledged as co llatera l under the Series A and B
notes and subordinated notes to aircraft manufacturers.
6
D . Depreciation, Amortization and Maintenance
The Company charges depreciation expense on a straight- line
basis. Depreciable lives are Fifteen years for owned operating aircraft and
certai n parts, principally five years for ground properties and equipment
and the lease period or useful life, wh ichever is less, for leasehold
improvements. Depreciation and amortization of property, plant and
equipment charg ed against income approximated $2,740,000 in 1970
and $3,388,000 in 1969.
E.
Training and other aircraft integration costs incurred in conjunction
with the Company's major re-equipment program in 1966 and 1967 are
being amortized over ten years. Similar costs incurred after 1967, none in
1970, for expansion of the aircraft Fleet are being amortized over five
years. Amortization charged against income approximated $966,000 in
1970 and $987,000 in 1969.
Provision for obsolescence of aircraft parts and supplies, which is
made ratabl y over the lives of the related aircraft, amounted to $290,000
in 1970 and $279,000 in 1969. Such parts and supplies are reflected
in cu rrent assets in accordance with the Uniform System of Accounts
prescribed by the Civil Aeronautics Board, although some portion of
quantities on hand represent in excess of one yea r's expected usage.
Overhaul s of owned and leased Boeing 727 and Douglas DC-9
airfram es and engines are charged to expense when the overhaul s are
performed . Expenditures extending materially the life of property and
those for additiona l equipment are capitalized.
Retirement Plans
The Company has various contributory and non-contributory
trusteed retirement plans for substantially all employees. The total pension
expense was approximate ly $3,154,000 in 1970 and $2,362,000 in
1969, which includes, as to the non-contributory plans, normal cost and
interest on past service cost, which the Company funds currently. The
actuarially estimated present value of vested benefits of non-contributory
plans at December 31, 1970 exceeded the amounts funded and accrued
by approximately $175,000.
F. Employee Stock Option Plan
At December 31, 1970, 256,250 shares of authorized and unissued
common stock were reserved under the Company's 196 4 Oualified Stock
Option Plan and options were outstanding and exercisab le to purchase,
at prices not less than fa ir market va lue on dates granted, 50,000 shares at
prices ranging from $11 .625 to $32.875 per share ( total price of
$985,218).
During 1970, no options to purchase shares were granted, options
for 73,750 shares were terminated, and no options were exercised.
G. Contingencies
Available tax loss carryforwards from periods prior to July 31,
1965, which aggregate approximately $2 million (subject to Internal
Revenue Service examination) at January 1, 1971 will expire in 1971.
There are pending against Northeast various claims by certain
defendants who were enjoined in December, 1964, in proceedings
instituted by Northeast against alleged illegal charter Flights. Although
th e injunctions w ere upon revi ew later substantially affirmed, the
defendants allege wrongful injunctions, abuse of process, antitrust
violations and interference with contractual and advantageous relations,
and seek substantial damages. The District Court has ruled that damages for
interference with enjoined flights can be recovered, if at all, only to the
amount of $200,000 previously on deposit with th e Court as security,
and that, in any event, there can be no recovery for interference with
illega l flights . In view of the decisions in favor of Northeast in the case to
date, that defendants' charter program was illegal, counsel for Northeast
has advised that, in their opinion, the claims are without merit, but that
th e outcome of the litigation cannot be predicted .
Certain stockholders of Northeast have commenced actions against
Northeast, Northwest, and Storer Broadcasting Company challenging th e
proposed merger with Northwest. In such actions, the pla intiffs allege
that they are acting for themselves and for the minority stockholders of
Northeast as a class, that the terms of the proposed merg er are unfair to
the stockholders of Northeast, and that Storer Broadcasting Company and
certain of its officers and directors violated fiduciary duties as directors of
Northeast in negotiating and approving the proposed merg er. These
actions have been consolidated by order of the United States District
Court for the Southern District of New York. Plaintiffs' motions for certain
injunctive relief have been denied by the District Court and such d enial
has been affirmed by the Court of Appeals for the Second Circuit.
Proceedings have been commenced in certain jurisdictions against
Northeast and other airlines, alleging violations of various environmental
conditions, principally air pollution and noise in the vicinity of airports.
The airlines are seeking dismissal of these proceedings on the ground,
among others, that these are matters of federal regulation . The airlines
have agreed to install smoke reduction devices on certain aircraft engines
substantially by the end of 1972, and will be subject to regulation under
recent federal legis lation.
Proceedings are pending against Northeast, in which the union
representing Northeast's pilots is seeking reinstatement with back pay of a
number of pilots furloughed as part of a reduction in force of employees.
Northeast has contended that the furloughs were lawful and in accordance
w ith existing collective bargaining agreements.
There are other claims and proceedings pending against the
Company, d eve loped during the ordinary course of bus iness, which in
the opinion of counsel are without merit or will not result in any
material liability.
H. Extraordinary Items
Extraordinary items in the Statement of Income consist of the
following :
Write-down of Fairchild FH-227 fleet and
related spare parts and engines to
estimated realizable value, including in
1969 a write-off of $562,450 in FH-227
deferred training and aircraft integration
costs
Provision for loss incurred in the cancella-
tion of eight Lockheed Model L-1011 jet
aircraft and on related contracts for engines
Loss on sale of remaining Douglas DC-6B
aircraft, spare engines and parts
Write-off of certain ground equipment
Total
I. Merger Plans
1970 1969
$700,000 $3,690,317
3,642,059
226,666
227,856
$700,000 $7,786,898
During 1970, the Boards of Directors and the stockholders of the
Company and Northwest Airlines, Inc. approved an Agreement of
Merger, under the terms of which Northwest would be the surviving
entity.
On December 31, 1970, the CAB pub I ished its order, as approved
by the President of the United States, approving the merger subject to
certain conditions including a stay of Northwest's authorization to operate
the Company's route segment between Miami and Los Angeles pending
final d ecision in a new CAB proceed ing. The Company, Northwest and
others filed petitions for reconsid eration . Northwest indicated that if the
condition staying the Miami-Los Angeles authorization was not deleted,
it would terminate th e Agreement of Merger.
On March 1, 1971, the CAB reaffirmed its approva I of the merger
subject to the aforementioned conditions, and on March 10, 1971,
Northwest terminated the Merger Agreement.
The Company has indicated its intention to commence negotiations
with other potential merger partners, some of which have publicly
indicated a desire to negotiate a merger with Northeast, with or without
the conditions imposed by the CAB on the previous proposed merger.
Auditors' Opinion
Lybrand, Ross Bros. & Montgomery
Certified Public Accountants
To the Stockholders and Directors of
Northeast Airlines, Inc.
Boston, Massachusetts
We have examined the accompanying balance sheet of Northeast
A irlines, Inc. as at December 31, 1970 and the related statements of
income, accumulated deficit, and source and use of funds (working capita l)
for the year then end ed . Our examination was made in accordance w ith
generally accepted auditing standards and accordingly included such
tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances. We previously examined and
reported upon the financial statements of the Company for the year ended
December 31, 1969.
In our opinion, subject (as to the 1970 financial statements) to the
ability of the Company to continue as a going concern as discussed in
note A, the aforementioned financial statements present fairly the financial
position of Northeast Airlines, Inc. at December 31, 1970 and 1969 and
the results of its operations and source and use of its funds (working capital)
for the years then ended, in conformity w ith generally accepted accounting
principles applied on a consistent basis.
Boston, Massachusetts
February 22, 1971 (except for notes A and I of notes to financial
statements as to which the date is March 10, 1971)
7
NOTICE
Part 245 of the Economic Regulations of the Civil Aeronautics Board requires
that each Air Carrier notify its shareholders by notice in the carriers annual
report to shareholders, "that any person who owns as of December 31 of any
year or acquires ownership, either beneficially or as trustee, of more than 5
per centum, in the aggregate, of any class of capital stock or capital of the
air carrier shall file with the Board a report containing the information required
(by Subsection 13 of Part 245) on or before April 1 as to capital stock or
capital owned as of December 31 of the preceding year and within 10 days
of the acquisition, unless such person has otherwise filed with the Board a
report covering such acquisition or ownership". And "that any shareholder
who believes that he may be required to file such a report may obtain further
information by writing to the Director, Bureau of Operating Rights, Civil
Aeronautics Board, Washington, D.C. 20428".
8
Officers
Directors
Executive Committee
Reg istrars & Transfer Agents
General Counsel
Auditors
George B. Storer
Bill Michaels
Lewis E. Lyle
Dan D. Chandler
Garner W. Mi ller
Stuart W . Patton
N . Ralph Tipa ldi
Edwin H. Bishop
Arno W . Mueller
John C. Nebbia, Jr.
Henry E. Foley
Clarence I. Peterson
James W. Austin
Jacqueline Cochran
Leonard Dalsemer
A. D. Davis
RobertC. Hill
Curtis M . Hutchins
Stanton P. Kettler
Lewis E. Lyle
Bill Michaels
Arno W . Mueller
Stuart W . Patton
Harry M. Stevens, 11
George B. Storer
George B. Storer, Jr.
Peter Storer
David A. Stretch
Francis W . Sullivan
George B. Storer, Chairman
Leonard Dalsemer
A. D. Davis
Chairman of the Board
President and C hief Executive Officer
Executive Vice President and General Manager
Vice President-Flight
Vice President-Technical Services
Vice President-Law
Vice President-Marketing
Vice President-Marketing, Southern Region
Treasurer
Assistant Treasurer and Corporate Controller
Clerk
Assistant Clerk
Consu ltant
Rancher
Executive Vice President, International Paper Co.
Vice Chairman, Winn-Dixie Stores, Inc.
Ambassador to Spain
Chairman, Dead River Company
Vice C hairman, Storer Broadcasting Company
Executive Vice President and General Manager
President, Northeast Airlines, Inc. and Storer
Broadcasting Company
Treasurer, Northeast Airlines, Inc. and Vice
President-Finance and Treasurer, Storer Broad-
casting Company
V ice President-Law
Vice President and Treasurer, H. M. Stevens, Inc.
Chairman of the Board, Northeast Airlines, Inc.
and Storer Broadcasting Company
Consultant
Executive Vice President, Storer Broadcasting
Company
Cha irman, Executive Committee, Texas Industries,
Inc.
Attorney at Law
Lewis E. Lyle
Bill Michaels
Stuart W . Patton
The First Nationa l Bank of Boston, Boston, Massachusetts
The Chase Manhattan Bank, New York, New York
Foley, Hoag & Eliot, Boston, Massachusetts
Lybrand, Ross Bros. & Montgomery