DIRECTORS S. M. Archer, Chairrnan George E. Gardner R. M. Hardy Croil Hunter T. E. Irvine Joseph T. Johnson L. M. Leffingwell William Stern Camille L. Stein Edwin White E. I. Whyatt OFFICERS Croil Hunter - - President George E. Gardner - - - Vice-President E. I. Whyatt - Camille L. Stein L. S. Holstad Secretary and Treasurer Assistant Secretary Assistant Treasurer General Offices: St. Paul Municipal Airport, St. Paul, Minnesota. First Trust Company of St. Paul, St. Paul, Minnesota Principal Registrar and Transfer Agent City National Bank and Trust Company of Chicago, Chicago, Illinois Co-Registrar Continental Illinois National Bank and Trust Com- pany of Chicago, Chicago, Illinois Co-Transfer Agent Annual meeting of shareholders last Monday in August. NORTHWEST AIRLINES INC. ANNUAL REPORT To Shareholders Year Ended June 30, 1940 NORTHWEST AIRLINES, INC. TO THE SHAREHOLDERS OF NORTHWEST AIRLINES, INC.: St. Paul, Minnesota August 23, 1940 There is submitted herewith the annual stcxtement of your company for the fiscal year ended June 30, 1940. For the y ear the company made a net profit of $296,407.78 after providing for $81,638.26 in income and excess profits taxes. This amounts to $1.27 for each common share outstanding at the end of the yecrr, after allowance for dividends on preferred. As a result of the year's profit, the deficit which appeared at the beginning of the year has been turned into a surplus of $161,475.91. During the year we established Douglas DC-3 depreciation bases as follows: hull and radio, 5 years; engines, 6,000 flying hours; propellers, 4,000 flying hours. These are in line with depreciation bases used by other airline operators, and we consider them adequate. A comparison of figures on the profit and loss statement shows an important increase in the volume of business done. Gross income increased $1,044,174.22. Of this, $783,163.74 was an increase in passenger revenue. This increase in passenger revenue clearly indicates the growth in passenger travel, not only over your company's lines but over all airlines throughout the United States. Our increase in traffic revenue was 80.78% over the previous year. During the year we completed the changeover of our fleet to Douglas DC-3's, and DC-3 equipment is now used on all schedules except those between Fargo and Winnipeg and between Minneapolis-St. Paul and Duluth. At the present time we own eleven of this type of aircraft and have two more on order for delivery before the end of 1940. We also have four Lockheed Electras in service to Winnipeq and Duluth. It is interesting to note that available information indicates that Northwest Airlines is now operating a larger percentage of its total mileage with 21-passenger airplanes than any other of the five major airlines in the United States, with the result that the average number of seats available per airplane mile flown is higher than any of these lines. From such figures as are available, we believe that, while Northwest's cost per airp~ane mile has risen to somewhat above the average of the five major lines, our cost per seat mile flown is considerably below the average of the same lines. The lowering of seat mile costs is the basic factor that makes profits possible provided a reasonable load factor can be attained. Our average fare per passenger mile is 4.05 cents, which is less than the average tor the country. We believe this is a sound position because it is probable that the trend of fares nationally will be downward as the size of equipment increases and the airlines find it necessary to attract passengers from the lower income brackets. Our average fares are now on a comparatively competitive basis with other forms of transportation, and our traffic increases, we believe, have justified the pioneering job we have done in the territory which we serve by maintaining compara- tively low passenger fares. -2- We have during the year signed agreements with the Air Line Mechanics Association International and the Air Line Communication Employees Association. These agreements and a higher limit on co-pilots' pay have resulted in a wage increase of approximately $45,000 annually. In this connection, I am pleased to say that relations between the management and employees are entirely satisfactory and that we have an efficient organization, high in morale and company spirit. As stated in last year's report, the company borrowed from the Reconstruction Finance Corporation to make our original purchases of Douglas aircraft. During the year we were able to refinance this loan and borrow money for additional Douglases on more advanta- geous terms from one of our banks. The Duluth service was inaugurated June l and is attracting a satisfactory volume of traffic. In December, 1939, the company filed a registration statement with the Securities and Exchange Commission in connection with the sale of 100,040 shares of stock by certain of the company's shareholders. The result of this sale was a large increase in the number of shareholders and a considerably wider distribution throughout the country. During the year Mr. R. C. Lilly and Mr. Francis D. Butler resigned as directors of the company. Mr. Edwin White and Mr. R. M. Hardy were elected to fill these vacancies. During the year the Civil Aeronautics Authcrity approved the election of Mr. S. M. Archer as a member of the Board, and he was elected Chairman. In February, 1940, the Civil Aeronautics Authority heard our application to extend our operations to New York City. No decision hes been rendered. If our application is granted, it will enable us to tap the large eastern sources of passenger travel of both the United States and Canada. We have requested a route via Windsor, Canada, at which point we would have a connecting service with Trans-::=:anada Air Lines directly to Toronto, Montreal and Ottawa. In 1934, by authority of Congress, the Postmaster General designated our route as one of the four primary transcontbental routes, and its extension to New York City will complete the shortest transcontinental in the country and the most important geographically for our national defense. Our ability to give through coast-to-coast service is of vital importance to the territory we serve. Your company is the fifth largest airline in the United States in miles flown and revenues. The interest and help of the company's widely distributed shareholders can be of great assistance, and your management invites your suggestions for the improvement of our service. Very truly yours, ~~ President -3- BALANCE SHEET NORTHWEST AIRLINES, INC. June 30, 1940 ASS E TS CURRENT Cash . . . . ................................. . .... .. ... . . . . . ... . Accounts receivable: From U. S. and Canadian Governments for mail, transportation and supplies .... . .... . .. . .. .. . . ......... . ............... . Other transportation accounts ... . ... . . . . .. .... .. . .. .. ... .. . . . For services, supplies, gasoline tax refunds, etc .. . .... . . . . . Less reserve for doubtful acounts . . . . ..... . ...... . . . .... . . .. . . Inventories-at lower of cost or market: Repair parts, supplies and fuel ... . . .... .... . ............ . ... . TOT AL CURRENT ASSETS . . .... . ..... . .. . . .. ....... . OTHER ASSETS U. S. Treasury notes on deposit- at am'..)rtized cost (quoted market price $33,396.00)-Note A ...... . . . ........... . ... ..... . . . . . . . Insurance rebates and deposits-estimated . . . . . .. . . ... ...... .. . . Accounts receivable: Employees ..... . . . .. . . .. ......... . .... . ................... . Officers and directors .......... .. . . ... .. .. . ..... . . . . . . Sundry investments (at cost), deposits, etc .. . .......... . PROFERTY, PLANT AND EQUIPMENT-at cost to the Company or its predecessors, less reserves for depreciation and amortization Land ....... . ......... . ........... ... .. . .... . . . .. ... ... Airplanes $ 14,336.83 4,007.17 $1,860,932.81 766,833.21 Buildings and other equipment ................. . .......... . .. ______ _ $2,627,766.02 Less reserves for depreciation and amortization .. .... ......... . 1,060,692.73 Improvements to leased buildings less amortization . . . . . . . .. . .. . INTANGIBLE Cost of U S. G'..)vernment air mail route ..... . .... . . . .... . ..... . . DEFERRED CHARGES Prepaid insurance .... . ............. . ..... . .... . . . .. . . Other prepaid and deferred expenses, supplies, etc ....... . ..... . $ 323,841.53 244,560.89 40,875.75 $ 609,278.17 750.00 $ 33,404.92 $ $ 38,993.92 18,344.00 3,220.00 5,082.47 1,567,073.29 39,478.36 78,193.87 32,463.62 $ 314,296.40 608,528.17 104,706.35 $1,027,530.92 93,962.84 1,611,634.12 48,736.69 110,657.49 $2,892,522.06 Note A- The Company has been named defendant in two lawsuits ansmg from the accidental death of one per- son. One of the cases has been tried, and damages of $37,500.00 were awarded the plaintiff. The Company has appealed the decision and has deposited securities carried in the balance sheet at $33,404.92 on a supersedeas bond. The appeal ':'las not yet been heard. The second suit is for $10,000.00. It has not come to trial and it is the opinion of the Company's legal counsel that this suit will have no standing in court unless the Company wins a reversal of the adverse judgment rendered in the first case. The maximum insurance coverage in this death is $10,000.00. -4-- BALANCE SHEET NORTHWEST AIRLINES, INC. June 30, 1940 LIABILITIES CURRENT Accounts payable: Tra de accoun s .... . . . ......... . ..... .. ..... . ... .. . . . . . .... . Transportation sold and deposits ....... . . .. .. . .. . .. .. .... . .. . Salaries, wages, and bonuses .. . , .. . . . .. . . Accrued expenses ......... . . . .... .. . . .. . ............ . .. .. . .. . Federal, state and Canadian taxes on income ... .. . .. . . . .. .. ... . Current maturities of long term debt ... ... ....... . TOT AL CURRENT LIABILITIES .. .. .. .. . . . .... . .. . .. . . DEFERRED I COME Unused ickets . . .. .. . . LONG TERM DEBT Bank loans secured by chat el mortgage on equipment carried a $1,192,000.54--payable in installments io iovember 1, 1942 ... Less: Amount paid ... . ............ . .... . .. . ....... .. . Amoun included in current liabilities . . . CA PIT AL STOCK A T::) SURPLUS Preferred stock-5% cumulative, par value S100.00 per share, con- ver ible into common shares on the basis of 'en snares of com- mon for each share of preferred, redeemable at $103.00 per share plus accumulated dividends: Authorized 6,000 shares; unissued 500 shares; recieemed and converted 5,049 shares; outs anding 451 shares- o,e B . . .. Common s ock:-no par value: Authorized 300,000 shares; unissued 69,550 shares (of which 4,510 shares are reserved for conversion of preferred swck and 10,000 shares are reserved under option); omsianding 230,450 shares ai aggregae s a,ed capi-al amoun: .. . Surplus: Paid-in surplus Earned surplus S 127,500.00 287,500.00 $ 41,810.86 119,665.05 s 341,723.77 162,511 .44 44,352.81 S 800,000.00 415,000.00 S 45,100.00 1,314,500.00 161,475.91 $ 548,588.02 47,568.03 80,500.00 287,500.00 s 964,156.05 22,290.10 385,000.00 1,521,075.91 S2,892,522 .06 Note Pre erred s-ock -.vas cal ed for redemption as d August 15, 1940. T!le !1olders o.: 450 shares exercseci their options of conversion. Div'dends accum lated to June 30, 1940 in L':e amount o: 1,127.50 -:,ere paid in July, 1940. -::.,,- COMPARATIVE SUMMARIES OF PROFIT AND LOSS AND SURPLUS NORTHWEST AIRLINES, INC. Years ended June 30, 1940 and 1939 1 9 4 0 PROFIT AND LOSS INCOME Tr nsporlation revenue: Mail .............. ....... .............. . $1,769,854.82 Passengers ..... .. ..................... . . l,75'.\,676.15 Express, freight, etc ....................... . 84,228.83 $3,606,759.80 Other operating income . .......... .. ........ . 32,899.65 GROSS INCOME ......... ....... . . $3,639,659.45 EXPENSES Maintenance . . ............................ . $ 597,069.94 Depreciation and amortization ......... . ..... . 382,852.34 Compens lion and expenses of airplane crews, radio operators, superintenaents, clerks, air- port and hangar employees ..... . ......... . 89(i,259 .32 Airplane fuel and supplies .. . .............. . 39Sl,845.13 Insurance ............................... . . . 26:3,094.13 Other transportation expenses ......... . ..... . 240,183.50 Traffic and advertising ......... . . .......... . 328,598.44 Administrative and gener 1 ................. . _12,63~ ~.536.38 OPERA TING PROFIT OR (LOSS) ... . $ 288,123.07 OTHER INCOME Net profit from disposal of capital assets ..... . $ 97,923.94 Discounts and interest earned ............ .. . . 5,491.10 undry ..... . ............................. . L,,991.19 108,406.23 $ 396,529.30 OTHER DEDUCTIONS Interest expense ............... . ... . .... . .. . $ 18,095.55 undry ................................... . 387 .71 18,483.26 PROFIT OR (LOSS) BEFORE TAXES ON INCOME .................. . $. 378,046.04 T AXE ON INCOME Provision for the year- estimated: Federal income and excess-profits taxes . ... . $ 7~1,000.00 St te income taxes ....................... . 5,000.00 $ 80,000.00 U nderprovision for prior years . .. .......... . . 1,638.26 81,638.26 NET PROFIT OR (LOSS) .......... . $ 296,407.78 SUR P LUS PAID-IN URPLUS B 1 nee t the beginnin and end of the year. $ 41,810.86 EARNED SURPLU DEFICIT' Balance at the beginning of the year ........ . $ 184,091.44 Net profit or (loss) for the ye r ............... . $ 296,407.78 Adjustment of prior year depreciation reserves. l l ,636.21 308,043.99 $ 123,952.55 Deduct cash dividends paid on preferred stock $8.75 per share ... ............. ....... . ___ 4,287.50 Balance al the end of the year .......... . ... . $ l l 9,665.05 SURPLUS OR DEFICIT' - June 30, 1940 and 1939 .... ............. . $ 161,475.91 -E- 1 9 3 9 $1,550,875.84 969,512.41 59,419.76 $2,579,808.01 15,677.22 $2,595,485.23 $ 547,630.74 384,458 .55 731,492.76 330,365.75 159,657.22 260,408.68 288,057.30 166,479.23 2,868,550.23 ($ 273,065.00) $ 152,483.73 3,960.61 1,291.61 157,735.95 ($ 115,329.05) $ 3,034.90 3,022.40 6,057.30 - - - - - ($ 121,386.35) $ 1,929.49 1,929.49 ($ 123,315.84) $ 41,810.86 $ 60,775.60' ($ 123,315.84) -o- ($ 123,315.84) $ 184,091.44 -o- $ 184,091.44. $ 142,280.58' ERNST & ERNST ACCOUNTANTS AND AUDITORS SYSTEM SERVICE BOARD OF DIRECTORS, Northwest Airlines, Inc. Saint Paul, Minnesota ST. PAUL, MINN . ' August 15, 1940. We have examined the balance sheet of NORTHWEST AIRLINES, INC. as of June 30, 1940 and the statements of profit and loss and surplus for the year then ended, have reviewed the system of internal control and the account- ting procedures of the Company and, without making a detailed audit of the transactions, have examined or tested accounting records of the Company and other supporting evidence, by methods and to the extent we deemed appro- priate. We made tests of accounts receivGble balances by direct correspondence with debtors and were present during the . taking of tlie physical inventories and satisfied ourselves as to the adequacy of procedures employed therein. Accounts payable and long term debt were confirmed by direct correspondence and by inspection of invoices, vouchers, records of subsequent tn:msactions, etc. In our opm1on, the accompanying balance sheet and related statements of profit and loss and surplus present f,:xirly the position of NORTHWEST AIR- LINES, INC. at June 30, 1940 and the results of its operations for the year, in conformity with generally accepted ac2ounting principles applied on a basis consistent with that of the preceding year. ERNST & ERNST Certified Public Accountants -7- 0 -------- Missoula Pendleton ',, I tedlord Boise,0 ,',,, I \ \, ' ' Reno ', ' \ 0 --------- - ---------' ; b s Salt Lake City b oakl=~~amento Jlorthwest Airlines Connecting Airlines Other Airlines Aberde -----o-- Q r, Bu ' "-ap;dc / J/y Sioux THE NORTHWEST AIRLINES SYSTEM With Connecting Lines