NORTHWEST AIRLINES, INC. ANNUAL REPORT NORTHWEST AIRLINES, INC. GEN E RAL OFFICES 1885 UNIVERSITY AVENUE ST. PAUL 1, MINNESOTA OFFICERS* DIRECTORS* DONALD W. NYROP President GORDON M. BAIN Vice President--Sales FRANK C. JUDD Vice President--Maintenance and Station Operations PAUL L. BENSCOTER Vice President--Orient Region A. E. FLOAN Vice President and Secretary C. L STEWART Vice President--Plans WM. J. EIDEN Treasurer DALE MERRICK Assistant Vice President--Properties A. D. PIEPGRAS Assistant Comptroller D. H. HARDESTY Assistant Treasurer FRA.NK J. SCOTT Assistant Secretary CROIL HUNTER Chairman of the Board 1885 University Avenue, St. Paul 1, Minn. JAMES H. BINGER Vice President, Minneapolis-Honeywell Regulator Co. 2753-4th Avenue South, Minneapolis, Minn. HADLEY CASE President, Case, Pomeroy & Company, Inc. 285 Madison Avenue, New York 17, New York MORTON H. FRY, SR. Partner, Riter & Company 40 Wall Street, New York 5, New York TED R. GAMBLE President and Director, Mt. Hood Radio and Television Broadcasting Corp. 140 S.W. Columbia, Portland 1, Oregon JOSEPH T. JOHNSON President, The Milwaukee Company Mitchell Building, 207 E. Michigan. Milwaukee, Wisconsin MALCOLM S. MACKAY President, Foothills Company Roscoe, Montana CLYDE B. MORGAN Chairman of the Board, Rayonier, Incorporated 161 East 42nd Street, New York 17, New York DONALD W. NYROP President, Northwest Airlines, Inc. 1885 University Avenue, St. Paul 1, Minn. ALONZO PETTF.YS Vice President, Farmers State Bank Brush, Colorado C. FRANK REAVIS Partner, Hodges, Reavis, McGrath & Downey 26 Broadway, New York 4, New York ALBERT G. REDPATH Partner, Auchincloss. Parker & Redpath 2 Broadway, New York 4, New York WILLIAM STERN ' President, Dakota National Bank Fargo, North Dakota LYMAN E. WAKEFIELD, JR. Vice President, First National Bank of Minneapolis 5th Street and Marquette Avenue, Minneapolis 2, Minn. ALBERT J. WEATHERHEAD, JR. President, The Weatherhead Company 300 East 131st Street. Cleveland 8. Ohio REGISTRAR: The Chase Manhattan Bank, New York, N. Y. TRANSFER AGENTS: Bankers Trust Company, New York, N. Y. As of February 25, 1960 PRESIDENT'S LETTER March 1, 1960 TO OUR STOCKHOLDERS: 1959 was a year of record net profits and record revenues. The earnings per common share were down slightly, due primarily to non-recurring jet training costs and because of the substantial increase in Preferred Stock dividend iequirements. During the past year your Company put ten advanced-design. 400 mile-an-hour Lockheed Electras in service on its domestic route system. It inaugurated service to Atlanta, Georgia, and to Ft. Lauderdale, Florida. It carried an all-time record of 2,138,970 passengers on its domestic and international route systems. This marks the first time Northwest has carried more than 2,000 000 passengers in a single year. Freight and express revenues increased from $7,437,000 in 1958 to $10,531,000 in 1959. This is an increase of 42% and was the result of all cargo schedules in both the domestic and international route systems. Freight rates have been reduced, during the past three months, in the Pacific Internationa] area. However, increased volumes should result for 1960 and Northwest expects I960 to be another year of substantial growth for freight and express revenues. During 1959 organizational realignments of duties and responsibilities were made to handle traffic and revenue growths and also to efficiently handle the technological changes resulting from the introduction of jet airplanes. The Operations Department was divided into two departments; namely, Flight Operations, and Maintenance and Station Operations. Competition in 1960 will be intensified because of the jet service that will be inaugurated by several competitors. However, any diverted traffic during the early part of this year will be quickly regained when your Company inaugurates service with its fleet of Douglas DC-8C aircraft. These DC-8C's will be equipped with the advanced model JT4A-9 Pratt & Whitney jet engines. Your Company will be the first airline to receive DC-8G's with the "A-9" engine, which will give improved "take-off" performance. During- 1960 your Company also will place eight more Lockheed Flectras in service. It will move stores, shops, overhaul and maintenance units to its new $18,000,000 main base at the Twin Cities International Airport. Its new and efficient Univac automatic reservations system will be expanded to ten more major stations. We are grateful to the stockholders, customers and employees of Northwest Airlines for their continued support during 1959. Sincerely, President 33rd ANNUAL REPORT TO STOCKHOLDERS NORTHWEST AIRLINES, INC. EARNINGS Profit for the year 1959 amounted to $5,713,512. com pared with $5,613,687 for the year 1958. The figures for both of these years include profit on disposal of prop erty and equipment, after taxes, of $1,311,859 for the year 1959 and $627,554 for the year 1958. For 1959 this is equivalent to $3.68 per share of common stock outstanding at the close of the year, after provision for Preferred dividends in the amount of $610,559. The 1958 net profit was equal to $4.06 per share with fewer shares outstanding, and after pro vision for Preferred dividends in the amount of only $36,003. REVENUES Operating revenues reached an all-time high in 1959 of $126,029,501. an increase of 23.6% above the pre vious year 1958. Passenger revenues in 1959 were $100,641,156, an increase of 24%. U. S. mail revenues were $10,173,961, while foreign mail revenues in creased 8% to $1,044,541. Air freight and express reve nues continued to improve and rose 42% to $10,531,- 000. Charter and other revenues reflected gains. To achieve this revenue volume, many factors were prominent: (1) a full year of Florida service, (2) in troduction of long-range jet-powered Lockheed Electra aircraft, (3) improved service and schedules to virtually every area your Company serves, and (4) increased cargo lift, both domestic and international. These factors, combined, again enabled your Com pany to be among the leaders in the industry in per centage increase in revenue passenger miles flown in 1959 over 1958. In the year under review your Com pany flew 1,738,138,265 revenue passenger miles. This was a 23.4% increase over the 1,408,742,516 revenue passenger miles flown in 1958. EXPENSES The year's expenses totaled $115,120,583, compared with $89,919,000 in 1958. The cost of providing 25% more capacity was the principal factor in the increase. Depreciation and amortizadon amounted to $10,935,- 000, an increase of 28.5% over 1958. This reflects the addition of eleven new aircraft to the fleet--ten Lock heed Electras and one DC-6A. The average number of employees was 7,017, as compared with 6,146 in 1958, an increase of 14%. Charming Atlanta combines industry and good Hying. Georgia's capital city, served by Northwest, is the commercial, industrial and transportation hub of the Southeast region. Its airport is the sixth busiest in the United States. It is a billion dollar banking center and the nation's fifth largest insurance center. Rich in history, modern Atlanta is a city of fashion and hospitality. Every aircraft enqine overhauled by Northwest at its new base will receive thorough testing in this engine test cell building before being put back in service. Fore ground is engine preparation room. Concrete test cells are virtually soundproof. NET WORTH The net worth of the Company at the end of the year was $52,266,860. or $29.59 per share on each of the 1,384,903 shares of common stock outstanding. Last year's reported stockholders' equity was $48,224,344, or $26.77 per share on 1,373,620 shares outstanding at December 31, 1958. Earned surplus was $20,559,391 at the end of 1959, as compared with $ 16,560,267 at the end of 1958. DIVIDENDS AND STOCK CONVERSION Regular quarterly dividends at $.20 a share were paid on common stock on February 1, June 30. Sep tember 30 and December 31, 1959. This is consistent with the policy started in 1955. Dividends on the $25 par value 5 /\/o Convertible Cumulative Preferred Stock were paid on the quarterly due dates of March 31, June 30, September 30 and December 31, 1959. During the year under review 6,639 shares of 5J4% Size of Northwest's $18,000,000 main base is evident. View shows general office foundation area, shipping and receiving area and overhaul and maintenance hang ars. Base is being built on a 75-acre tract. Three high-pressure boilers, each capable of pro ducing 50,000 pounds of sfeam an hour, will produce heaf for Northwest's main base. Rafed af 190 psi, fhey can be operafed with either gas or oil. Ideating system of overhead hot air blowers will be augmented in overhaul and main tenance hangars with "radiant heat" from hot water pipes imbedded in cement flooring. Convertible Cumulative Preferred Stock were converted into 6,383 shares of common stock under the conver sion privileges of this issue. ROUTES Early in 1959 the Civil Aeronautics Board initiated a comprehensive proceeding covering the entire Pacific route complex for the purpose of determining whether additional competitive service is required. Hearings in the Trans-Pacific Route Case commenced in October 1959. They now are nearing completion. In this pro ceeding Northwest has been heard on its applications for new Central Pacific routes between Los Angeles, San Francisco/Oakland and Hawaii and beyond to the Orient. Northwest also is seeking extension of its routes to Thailand, Burma, India, Vietnam, Singapore and Djakarta. In addition, our applications involve re quests for additional eastern kb S. co-terminals and California terminals for our North Pacific route, as well as permanent certification of existing route segments which we now operate beyond Tokyo under tempo rary certificates. In a separate proceeding the Civil Aeronautics Board now has before it for decision the application of North west Airlines for permanent renewal of its Pacific Northwest-Hawaii authority. In this case the Civil Aeronautics Board Examiner and the Board's staff have recommended that Northwest be renewed on a per manent basis as the sole carrier on this route. North west is also awaiting Board decision on its application for a Spokane-Calgary route. During the past year Northwest received authority to serve Winnipeg and Edmonton on the same flight, thus permitting a more flexible operation of our Cana dian authority. Your Company's newly acquired Flor ida authority also was improved in 1959 by the grant of authority to serve Ft. Lauderdale as a co-terminal point with Miami. We now have authority to serve five cities in the rapidly growing Florida market. In addition to the new route applications currently under CAB consideration, your Company has on file a comprehensive pattern of route requests awaiting pro cedural action. These include: 1. Applications to serve Los Angeles and San Fran cisco/Oakland by extension of existing routes from Chicago, Milwaukee and Minneapolis/St. Paul via in termediate points including Omaha, Denver and Salt Lake City. 2. California applications aiso include the request to provide service from Seattle/Tacoma and Portland to San Francisco/Oakland and Los Angeles. 3. Northwest is awaiting action on applications for service between Detroit and New York via Cleveland, Pittsburgh a,nd Philadelphia, between Chicago and Bos ton via Detroit and Toronto, between Detroit and Boston via Buffalo and New York, and for service be yond New York to Boston via Hartford/Springfield. These applications and others on file with the CAB comprise a sound and aggressive program for route ad ditions to augment the traffic potential and revenue growth of your Company. Northwest's system-wide general office and overhaul base, now being constructed at the Minneapolis-St. Paul International Airport, will be the most modern, efficient airline facility in the world. Aerial view shows five overhaul and maintenance hangars which have a total frontage of 1,600 feet--more than five football fields. Finished structure, with more than 1,000,000 square feet of floor area, will be largest in entire Upper Midwest region. EQUIPMENT AND SERVICE Fleet modernization continued in 1959 when your Company accepted delivery of ten long-range prop-jet Lockheed Electras powered with Allison turbine en gines. This aircraft was immediately placed in coast- to-coast and Florida service. Newly overhauled engines will travel between engine shop and engine test cells (back ground) on this 400 foot monorail at Northwest s new overhaul base. Monorail does away with need for special engine transport ground equipment. During the year direct service to Atlanta was initiated and Polar flights from New York to Anchorage to Tokyo were started in June with Douglas DC-7C equip ment. On September 8 we increased our weekly Seattle/ Tacoma-Tokyo DC-6B coach/freight combination flights from two to five. Daily service to Hawaii was continued. As reported in the 1958 Annual Report, our Boeing Stratocruisers were sold to Lockheed Aircraft Corpora tion upon delivery of the new Electras. Your Company continues to rent two for service from Minneapolis/ St. Paul to New York. These will be removed frem the fleet in June of 1960. As of December 31, 1959 your Company operated 64 aircraft. Of this total 52 were company owned. The balance were operated under lease agreements. DC-4 aircraft continue serving points with restricted airport facilities and continue to be used in freight service. On January 1, 1960 your Company inaugurated new daily air service to Ft. Lauderdale, Florida, with Lockheed Electra equipment. Because of the fine operational record of the Electra, and its proven passenger appeal, your Company has ordered eight additional units of this aircraft for deliv ery in May, June and July of this year. With a total of eighteen Electras, Northwest will be one of the largest operators of this aircraft in the industry, con sidering your airline's size in relation to other Electm operators. Northwest will provide Electra service for all of its major domestic cities before the end of this year. Delivery of the first of five 600 mile-an-hour long- range Douglas DC-8C aircraft is scheduled for this spring. Deliveries will continue through October. The first DC-8C's will be placed in service on your Com pany's transpacific route. Additional units will go in service on long-haul domestic routes. Northwest will be the first carrier to receive delivery of a fleet of DC-8C's equipped with advanced-model Pratt & Whitney JT4A-9 engines. Construction work on the stores, shops and hangar sections of Northwest's new main base at the Min Sunny Fort Lauderdale, 30 miles north of Miami, is the newest city on Northwest's system. When Northwest inaugurated Fort Lauderdale service January 1, 1960, it became the first airline to operate direct flights to the popular resort city from the Upper Midwest. Northwest now originates flights at both Fort Lauderdale and Miami. neapolis-St. Paul International Airport has been com pleted. In March your Company is moving its over haul facilities from its former base at Holman Field. St. Paul, to its new base. The General Office portion of the main base now is scheduled for 1961 completion. Construction work has been delayed because of the recent steel strike. By May of this year contracts will have been let for underground work on your Company's new unit terminal at Idlewild International Airport, New York, and a general contractor will have been selected. It is now estimated that this terminal will be ready for use by the summer of 1961. Our new hangar at O'Hare Field, Chicago, to be occupied jointly with another major carrier, now is in the design stage. Bids will be taken early this sum mer. Construction work will start shortly thereafter. According to estimates, the hangar should be com pleted in about one year from the start of construction work. CREDIT AGREEMENTS Your Company has two basic Credit Agreements. Both were negotiated in the fall of 1958. I hey are dated as of November 28, 1958 and became effective December 30, 1958. (1) Bank Agreement--This Agreement provides credit in the amount of $32,500,000 among a group of fifteen banks with Bankers Trust Company, New York, as the lead bank. The notes issued carry a final maturity date of December 31, 1965, but the Com pany is obligated to make prepayments thereon at the rate of $6,000,000 per year for the years 1961-1964 Ground soon will be broken for Northwest's new $7,000,000 passenger terminal at New York's Idlewild International Air port. Northwest will share the building with two other major United States airlines. It will be occupied in the summer of 1961. and $8,500,000 in 1965. In addition to the fixed pre payments, when net earnings plus flight equipment de preciation exceed specified dollar amounts, the Com pany is obligated to make further prepayments not ex ceeding a maximum of $3,000,000 on each June 30 in 1961, 1962 and 1963 and a maximum amount of $4,000,000 on June 30, 1964. The first borrowing under this Credit Agreement was made in November 1959. The amount outstanding as of December 31, 1959 was $10,000,000. (2) Insurance Company Agreement--This Agree ment with a group of twelve insurance companies pro vides long-term credit in an aggregate amount of $40,- 000,000. The final borrowing under this Agreement was accomplished on January 15, 1959. Amortization payments will commence in October 1966 with final payment due October 1, 1978. Both of these Agreements contain covenants with respect to the relationship of debt to net worth, net tangible assets and net depreciated value of the Com pany's investment in flight equipment. Other Long-Term Credit--The terms of the condi tional sales contract for an additional eight Lockheed Electras require a down payment of 12/2% of the orig- Northwest will be the first airline to operate DC-8C s equipped with the new, improved Pratt and Whitney JT4A-9 turbojet engine. The "A-9" develops 16,800 pounds of thrust, about 6 percent more than earlier JT4 models. Additional thrust pro vides improved take-off performance. Engine is more widely known by its military designation, J-75. inal agreed purchase price of the aircraft. 1 he final installment on the purchase price on each of these ad ditional eight aircraft is payable in sixty equal monthly installments, the first of which is payable on the tenth day of the month following the month in which each aircraft is delivered. PERSONNEL AND LABOR RELATIONS Through the use of new and improved recruiting and selection techniques and procedures, all units of Northwest's organization were assigned qualified and skilled personnel. Flight and ground training throughout the Company system made the transition to Electra equipment one of the most effective in the industry, and arrangements are being made to continue the program into 1960 to accommodate integration of the DC-8C into the fleet. Good employee relations and industrial peace Typical of Northwest s neat and modern ticket counters is this one at Milwaukee's General Billy Mitchell Field. Counter and scale units are easily removable from a mounted floor track. This enables units to be swiftly re arranged to meet changing passenger check-in requirements. Idea was developed by Northwest. It is protected by a patent. were maintained through cooperation between man agement and eight labor organizations representing seventeen different classes or crafts of personnel. Your Company's continued growth and progress in 1959 was primarily due to the quality, lovalty and efficiency of the employees in all work classifications and at all stations in the United States and seven foreign coun tries. STATEMENTS OF INCOME NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 31, OPERATING REVENUES 1959 Passenger United States mail... Foreign mail Charter and other transportation. OPERATING EXPENSES Passenger service Provision for depreciation, less amounts charged to other accounts OTHER DEDUCTIONS AND INCOME Interest on long-term debt Other income, less miscellaneous deductions. INCOME BEFORE TAXES AND PROPERTY DISPOSALS NET INCOME FROM OPERATIONS come taxes $510,000--1959, $200,000--1958. NET INCOME FOR THE YEAR 1958 10,173,961 1,044,541 1,349,086 10,531,400 526,166 $ 81,115,900 9,264,889 963,319 1,230,217 7,437,293 1,237,053 708,501 $126,029,501 $101,957,172 $ 37,610,259 21,770,715 8,464,743 15,511,064 14.011,037 6,817,864 $ 29,747.029 17,089,570 6,033,929 12,207,269 10,753,489 5,573,021 t 10,934,901 8,514,515 $115,120,583 $ 89,918,822 $ 10,908,918 $ 12,038,350 $ 1,794.940 307,675 $ 1,418,715 31,498 $ 1,487,265 $ 1,387,217 $ 9,421,653 $ 10,651,133 >9, 5,020,000 5,665,000 $ 4,401,653 $ 4,986,133 in- 1,311,859 627,554 $ 5,713,512 $ 5,613,687 See notes to financial statements. STATEMENTS OF NORTHWEST AIRLINES, ASSETS Decern ber 31, CURRENT ASSETS 1959 1958 Cash United States Government securities--at cost which approximates ..$ 10,206,460 $ 8,967,724 market price .. 4,443,794 Trade receivables, less allowance of $100.000 .. 13,804,267 11,721,181 Maintenance and operating supplies--at average cost .. 3,012,417 2,145,817 Prepaid expenses 655,598 411,630 TOTAL CURRENT ASSETS $ 27,678,742 $ 27,690,146 INVESTMENTS AND OTHER ASSETS Related industry investments and advances--at cost ..$ 145,107 $ 272,858 FLIGHT EQUIPMENT at cost ..$109,542,617 $ 96.156.766 Less allowances for depreciation and obsolescence .. 28.979,487 36,344,795 $ 80,563,130 $ 59.811,971 Advances on purchase contracts--Note E .. 11,442,896 10,438,765 $ 92,006.026 $ 70.250.736 OTHER EQUIPMENT AND PROPERTY at cost ..$ 18.889,956 $ 15,728.646 Less allowances for depreciation .. 10.653,805 9,912,334 DEFERRED CHARGES L namortized training and other costs in connection with aircraft $ 8.236,151 $ 5,816,312 fleets and routes ..$ 1,357,729 $ 619.031 Other 673.561 411.586 $ 2,031,290 $ 1,030,617 8130.097.316 $105,060,669 See notes to financial statements. FINANCIAL POSITION INC. and SUBSIDIARY LIABILITIES AND STOCKHOLDERS' EQUITY December 31, CURRENT LIABILITIES Accounts payable, collections as agent, etc $ 1 1,026,752 $ 9,334,518 Salaries, wages and vacations 4,291,033 3,773,082 Air travel card deposits 1,170,875 1,164,500 Unredeemed ticket liability 989,138 1,048,609 Income taxes--estimated 2,023,888 2,060,616 TOTAL CURRENT LIABILITIES $ 19,501,686 $ 17,381,325 LONG-TERM DEBT-Note A Notes payable to insurance companies $ 40,000,000 Notes payable to banks 10,000,000 $ 50.000,000 $ 34,250,000 $ 34,250,000 DEFERRED INCOME TAXES arising generally from accelerated depreciation methods $ 8,328,770 $ 5,205,000 STOCKHOLDERS' EQUITY- -Note C Cumulative Preferred Stock, $25 par value; authorized 1,000,000 shares issuable in series: 5lAcyc Convertible Series; authorized 457,873 shares; issued ar.d outstanding shares 451,234--1959, 457,873--1958--Note B $ 11,280,850 Common Stock. $10 par value; authorized 4,500,000 shares; issued and outstanding shares 1,384,903--1959, 1,373,620--1958-- Note D 13,849,030 Capital surplus 6,577,589 Earned surplus 20,559,391 $ 52,266,860 COMMITMENTS AND CONTINGENT LIABILITIES--Note E $130,097,316 $ 11,446.825 ' 13,736.200 6,481,052 16,560,267 $ 48.224,344 $105,060,669 See notes to financial statements. STATEMENTS OF SURPLUS NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 31, CAPITAL SURPLUS Balance at beginning of year Additions (deductions) arising from: Sale of shares of Common Stock under option agreements, in excess of par value Cost of issue of 5%% Convertible Series, Cumulative Preferred Stock. Conversion of shares of Preferred Stock into shares of Common Stock. Redemption of shares of 4.6% Series Preference Stock Balance at end of year EARNED SURPLUS Balance at beginning of year Add net income for the year Deduct: Cash dividends on: 5%% Preferred Stock--annual rate of $1.31% a share 4.6% Preference Stock--annual rate of $1.15 a share Common Stock--$.80 a share Balance at end of year. 1959 .$ 6,481,052 1958 $ 6,813,847 27,808 .( 33,409) 102,138 109,188 ( 435,488) ( 6,495) .$ 6,577,589 $ 6,481,052 .$16,560,267 . 5,713,512 $12,057,070 5,613,687 $22,273,779 $17,670,757 .$ 610,559 . 1,103,829 $ 36,003 1,074,487 $ 1,714,388 $ 1,110,490 .$20,559,391 $16,560,267 See notes to financial statements. ACCOUNTANTS' REPORT To the Stockholders and Board of Directors Northwest Airlines, Inc. Saint Paul, Minnesota We have examined the consolidated financial statements of Northwest Airlines, Inc. and subsidiary for the year ended December 31, 1959. Our examination was made in accordance with 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 had made similar examinations for prior years. In our opinion, the accompanying statement of financial position and statements of income and surplus present fairly the consolidated financial position of Northwest Airlines, Inc. and subsidiary at December 31. 1959 and the consolidated results of their operations for the year then ended, in conformitv with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Further, it is our opinion that the five-year summary of income presents fairly the information stated therein. Saint Paul, Minnesota ERNST & ERNST February 12, 1960 Certified Public Accountants NOTES TO FINANCIAL STATEMENTS NORTHWEST AIRLINES, INC. and SUBSIDIARY December 31, 1959 Note A--Long-Term Debt For the purpose of equipment financing (Note E) the Com pany, as of November 28. 1958, entered into Note Purchase Agreements with twelve insurance companies and a Bank Credit Agreement with fifteen banks. The Note Purchase Agreements provide for aggregate bor rowings of $40,000,000 at 6% which are payable $3,000,000 annually beginning October 1, 1966 with the balance of $4,000,000 due October 1, 1978. Certain optional prepayments at par are permitted. The Agreements contain other provisions with respect to redemption as a whole (but not from borrowed funds) at premiums ranging from 7% to 1%. The Bank Credit Agreement provides for a loan to the Company of $32,500,000. on a revolving credit basis through June 30, 1960 at 4)4% and thereafter as a term loan at 4Ya%. The loan is payable $6,000,000 annually in years 1961 through 1964 and $8,500,000 in 1965. The Agreement may require additional sinking fund prepayments based on income of the Company. The Company has agreed, among other things, it will not permit (a) its working capital at any time to be less than certain specified amounts (excess amount approximated $4,680,000 under the most restrictive provision of the Agree ments at December 31, 1959) ; and (b) its funded debt to exceed certain percentages of net tangible assets, net worth and depreciated value of flight equipment. Note B--5)4% Convertible Cumulative Preferred Stock This Stock Series has voting rights; is entitled upon vol untary liquidation to $25 a share plus accumulated unpaid dividends; is convertible at any time on the basis of $25 a Preferred Share into Common Stock at a conversion price of $26 a share, subject to adjustment in certain events; and is redeemable as a whole or in part at prices ranging from $26.25 a share before January 1, 1962 to $25 a share after December 31, 1973, together in each case with accrued dividends. Note C--Restrictions on Stockholders' Equity The Note Purchase Agreements and the Bank Credit Agree ment establish an aggregate dollar maximum for the declara tion and payment of cash dividends on Common Stock, and for the distribution on, redemption, purchase or other acqui sition of shares of any class of Capital Stock. At December 31, 1959 approximately $6,238,000 of earned surplus was available for dividends on Common Stock and the other stock provisions. The Agreements do not prohibit the payment of stock divi dends and do not restrict dividend payments on the 5)4% Convertible Series, Cumulative Preferred Stock. Note D--Common Stock Options and Reservations At the end of the year 1,600 shares of Common Stock were subject to outstanding options exercisable by Company offi cers and employees not later than July 1, 1961 at $15,675 a share, a price not less than 95% of market at date of grant. During the year options for 4,900 shares were exercised. An additional 11,000 shares are reserved for options which may be granted in the future to officers and employees and 433,878 shares are reserved for issuance upon conversion of the 5)4% Convertible Series, Cumulative Preferred Stock. Note E--Commitments and Contingent Liabilities At December 31, 1959 commitments for the purchase of five Douglas DC-8C turbojet aircraft and eight Lockheed Electra prop-jet aircraft (to be delivered in 1960) and other flight and ground equipment amounted to approximately $61,309,000 after credit for five Douglas DC-7C aircraft to be traded on aircraft purchases. Of this amount $11,442,896 was on de posit with manufacturers at December 31, 1959, approximately $33,949,000 becomes payable in 1960, and $15,917,104 be comes payable over sixty month periods from dates of delivery of the Lockheed Electra prop-jet aircraft under conditional sales contracts. Annual payments of approximately $1,190,000 from date of occupancy will be required under the Company's agreements for lease (from 25 to 30 years) of overhaul bases, hangars and administrative facilities at Wold-Chamberlain Field, Minne apolis, and International Airport, New York. Federal income tax returns of the Company have been ex amined through 1954 by the Internal Revenue Service. Ex aminations for 1955 and 1956 are now in progress but final determinations are not known at this time. The Company was contingently liable at December 31, 1959 in the amount of $42,453 for the repurchase of travel contracts sold. Note F--Mail Transportation Compensation No final determinations of total mail compensation have been made by the Civil Aeronautics Board on international and domestic routes for 1951 and on international routes for 1954. The ultimate effect of any redeterminations are not known at this time. In January 1957, the Board issued an order asking the Companv to show cause why temporary compensation for 1954 should not tentatively be reduced $1,406,000 pending final hearings. The Company has refunded this amount and recorded the adjustment in prior years ($653,790 net after income taxes of $752,210). In January 1960. the Board issued an order proposing to establish a final subsidy-free mail rate for 1954 and asking the Company to show cause why the remaining $1,833,000 of mail compensation subsidy should not be refunded. No ef fect has been given in the accompanying financial statements to this proposed reduction which would approximate $843,000 net after income taxes of $990,000. The Company is contesting both of the above actions. FIVE YEAR SUMMARY OF INCOME (Amounts Shown in Thousands) NORTHWEST AIRLINES, INC. and SUBSIDIARY Five years ended December 31, 1959 OPERATING REVENUES Passenger United States mail Foreign mail Excess baggage Freight and express Charter and other transportation. Other--net OPERATING EXPENSES Flying operations M aintenance Passenger service Aircraft and traffic servicing Reservations, sales and advertising. Administrative and general Provision for depreciation OTHER DEDUCTIONS, NET. INCOME BEFORE TAXES AND PROPERTY DISPOSALS TAXES ON INCOME NET INCOME FROM OPERATIONS PROFIT FROM DISPOSALS OF PROPERTY Less applicable income taxes NET PROFIT FROM DISPOSALS OF PROPERTY 1959 1958 1957 1956 1955 $100,641 $ 81,116 $66,674 $60,264 $57,253 10.174 9,265 7,587 7,192 6,513 1,045 963 763 666 577 1,349 1,230 1.004 728 585 . 10.532 7,437 6.537 6.427 5.539 526 1.237 226 816 111 1,763 709 641 386 510 $126,030 $101,957 $83,432 $76,479 $71,088 $ 37,610 $ 29.747 $25,555 $22,665 $21,694 21,771 17.090 16,037 14.095 12,707 8,465 6.034 5.061 4,502 4,139 15,511 12,207 11,689 10.847 9,718 14,011 10.753 9.218 8,169 7,761 6.818 5.573 5,452 4.834 4.447 10,935 8,515 5,436 6,772 6,205 $115,121 $ 89,919 $78,448 $71,884 $66,671 $ 10.909 $ 12,038 $ 4,984 $ 4,595 $ 4,417 1,487 1.387 994 522 250 $ 9,422 $ 10,651 $ 3.990 $ 4,073 $ 4.167 5,020 5,665 2,100 2,185 2,140 $ 4,402 $ 4,986 $ 1.890 $ 1.888 $ 2,027 $ 1.822 $ 828 $ 3,241 $ 1.828 $ 119 510 200 312 490 30 $ 1,312 $ 628 $ 2,929 $ 1,338 $ 89 .$ 5,714 $ 5,614 $ 4.819 $ 3,226 $ 2,116 NET INCOME FOR THE YEAR NORTHWEST AIRLINES, INC ANNUAL REPORT PROGRESS FOR THE LATEST 10 YEARS Calendar Year Total Operating Revenue Passenger Revenue Express and Freight Revenue Revenue Passenger Miles Mail Ton Miles Total Plane Miles Flown 1959 $126,029,501 $100,641,156 $10,531,400 1,738,138,265 24,435,745 49,282,475 1958 $101,957,172 $81,1 15,900 $7,437,293 1,408,742,516 21,892,299 40,721,143 1957 83,432,404 66,674,383 6,537,452 1,205,764,597 17,803,356 35,629,289 1956 76,479,526 60,264,291 6,426,502 1,094,121,438 16,780,406 32,461,321 1955 71,088,043 57,252,957 5,539,095 1,017,400,443 15,407,054 30,909,610 1954 62,138,312 51,053,599 4,676,190 909,674,550 6,990,462 27,029,860 1953 66,042,488 48,652,465 4,890,153 851,174,754 5,002,605 27,816,827 1952 61,474,153 41,962,758 4,781,081 720,046,264 5,017,993 23,210,634 1951 54,593,420 35,192,765 4,371,533 602,220,853 4,571,276 19,531,632 1950 52,401,767 33,148,395 4,122,222 613,446,244 4,987,561 26,868,177 34 years of superior Airmanship % wv;;' mmsm