NORTHWEST AIRLINES; INC ~~ f!J2e/w;tl 4962 NORTHWEST AIRLINES, INC. 1962 IN REVIEW Total Operating Revenues Operating Income I\ et Earnings for the Year Per Common Share0 . Stockholders' Equity . Per Common Share0 Dividends Paid . . . Operating Expenses- Per Available Ton-Mile Per Revenue Ton-Mile Revenue Traffic- Passengers Carried . . . . . . . Passenger-Miles Flown . . . . . Ton-Miles, Mail, Freight and Express Number of Employees at Year End 'Kumber of Common Shares at Year End ( Includes equivalent shares to reflect February 1963 conversion of preferred stock) 1962 $150,453,420 19,206,051 7,230,392 $3.97 $ 59,711,883 $32.79 $ 1,701,743 23.9 50.2 2,437,342 1,904,112,000 68,814,000 5,788 1,820,781 1961 $111,052,512 9,721,886 3.661,139 $2.01 $ 54,176,525 $29.76 $ 1,700,766 27.6 54.2 1,723,667 1,361,790,000 49,990,000 5,803 1,820,281 ... the President's Letter TO O R STOCKHOLDERS: 1962 was an excellent year for :'.\orthwest Airlines. The total operating revenues exceeded 8150,000,000 for the first time in the history of the Company. The net earnings for the year reached a record high of $7,230,392. This is almost double the net earnings of 1961. All expenses were rigidly controlled during the year. nit costs in 1962 were less than the unit costs in 1961. The cost per available ton- mile was reduced by 13.4 per cent and the cost per re enue ton-mile was reduced by 7.4 per cent. The break-e en passenger load factor for the combined domestic and international operations was 45.5 per cent-one of the lowest in the airline industry. Reduced unit costs were the result of the increased efficiency in all departments and divisions of :'.\ orthwest irlines and the increa ed use of the productive capacity of jet airplanes. In 1962, K orthwest placed into service four additional 720B fan-jets. In 1963, Northwest will take deli ery of fi e Boeing Intercontinental 707-351B jets. The first deli ery will be in June and deliveries will continue through October. These long-range jet transports are being manufactured to I\ orthwest's specilications. They \"\ ill have seating for 112 passengers and approximately 2,800 cubic feet of cargo and baggage space, with a 91 by 134-inch cargo door to accommodate the largest items of freight. The year 1963 has started well for I\ orthwest Airlines. Gross revenues for the first two months are up approximately 19 per cent. Historically, I\ orthwest has shown a loss for the first quarter of the year because of reduced travel over its routes during the winter period. It is expected that the first quarter of 1963 will show a modest profit. Assuming that the national economy remains furn, 1963 should be another good year for your Company. \ e are grateful to our customers, shareholders and employees for their continuing support in 1962. Sincerely, March 27, 1963 c4~d ~7?~ 36th annual report to stockholders 1962 financial results Northwest Airlines' financial performance in 1962 was exceptionally good in comparison with prior years and with results attained by other airlines. After revenues of $150,453,420 and total operating expenses of $131,247,369, there remained operating income of $19,206,051, or 12.8 per cent of 1962 revenues. Interest expense was $5,040,266 in 1962 compared with $4,352,- 867 in 1961. Gain from disposal of property was not a large factor in your Company's profit in 1962, amounting to $346,352 before taxes con- trasted with $1,518,535 for 1961-the latter also before taxes. After taxes on income, net earnings for 1962 amounted to $7,230,392 or almost twice the net earnings of $3,661,139 reported for 1961. This is a record high for annual earnings and repre- sents the fourteenth consecutive year in which a net profit has been earned by Northwest Airlines. Earnings Per Share and Dividends In terms of the 1,388,459 common shares which were outstanding at the end of 1962, and after preferred dividends of $592,187, net earnings for 1962 reflect $4.78 per common share compared with $2.21 in 1961. In January, 1963, your Company called for redemption all outstanding shares of the Cumulative Preferred Stock, 57i% Convertible Series. This call resulted in virtu- ally complete conversion of this issue to common stock at the rate of .9615 share of common stock for each share of preferred stock. Thus net earn- ings for 1962, reflecting this conversion and elimination of the preferred dividend require- ment, are $3.97 per common share ( on the equiv- alent of 1,820,781 total shares after conversion). During 1962, regular quarterly dividends total- ing $.80 per share were paid to holders of com- mon stock. In February, 1963, your Directors voted to increase the quarterly dividend from 20 cents to 25 cents per common share-or at the rate of $1.00 per share per year. Regular quarterly dividends also were paid in 1962 on the Cumulative Preferred Stock, 5% Convertible Source Net Earnings $ 7,230,392 Depreciation and Amortization . 18,445,190 Deferred Taxes 5,821,500 Other Sources . 227,160 Total $31,724,242 Series, then outstanding. Stockholders' Equity Net worth of the Company increased by $5,- 535,358 in 1962-from $54,176,525 to $59,711,883. This growth resulted from net earnings for the year less dividends paid. Book value per share at year-end ( reflecting the early 1963 conversion of preferred stock) was $32.79, an increase of $3.03 over the comparable book value of $29.76 at the close of 1961. In the period of five years ending December 31, 1962, your Company has earned $23,844,495 and has paid $7,927,552 in cash dividends. Stockholder equity has been increased by $15,916,943 from net earnings re- tained in the business during this period. Financial Position Long-term credit agreements made prior to 1962 continued in effect during the year and no new debt was incurred. Regular payments in the total amount of $2,786,013 were made under the Conditional Contract of Sale for Lockheed Electra II aircraft and 43 per cent of this debt now has been repaid. During 1962, terms of our $42,500,000 bank loan were amended to provide a portion of the financing needed for aircraft acquisition in 1963 by continuing the revolving credit feature into 1963 and by moving repay- ment dates forward one year. Internal cash Bow, principally from net earn- ings, depreciation and deferred taxes, totaled $31,724,242 in 1962. These sources generated ample funds to cover expenditures during the year for operating property additions, equipment deposits and other cash needs. In addition, the year's cash Bow permitted interim repayment of $13,000,000 in bank loans, pending the need to draw such funds for aircraft purchases in 1963. Capital expenditures committed for 1963 will be made from funds available in present credit arrangements and from internal cash Bow, with no additional borrowing from outside sources. Application Advance Deposit on Aircraft . $ 6,327,901 Additions to Operating Property 6,485,922 Repayment of Debt . 15,786,013 Cash Dividends 1,701,743 Increase in Working Capital . 1,014,863 Other Applications 407,800 Total $31,724,242 SOURCE AND APPLICATION OF FUNDS, 1962 REVENUE PASSENGER MILES MAIL TON MILES FREIGHT AND EXPRESS TON MILES 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 . 1,904,112,000 . 1,361,790,000 . 1,653,966,000 . 1,738,138,000 . 1,408,743,000 . 1,205,765,000 . 1,094,121,000 . 1,017,400,000 909,675,000 851,175,000 33,635,000 26,955,000 24,424,000 24,436,000 21,892,000 17,803,000 16,780,000 15,407,000 6,990,000 5,003,000 35,179,000 23,035,000 32,480,000 31,377,000 22,285,000 19,714,000 18,825,000 16,341,000 12,970,000 13,222,000 revenues and expenses Total revenues of the Company reached an all-time high of $150,453,420 in 1962. The reve- nue level of $76,479,526 achieved in 1956 has been doubled in the past six years of growth. In this period an average growth rate of 11.9 per cent per year has been realized despite the setback from a lengthy strike which affected revenues late in 1960 and in early 1961. Passenger Revenue Passenger traffic remains our primary reve- nue source, producing $121,781,068 in 1962, more than 80 per cent of total operating reve- nues. This amount was derived from the car- riage of 1,904,112,000 revenue passenger-miles at a system average fare of 6.40 per passenger- mile. Comparable figures for 1961 were 1,361,- 790,000 passenger-miles carried at an average yield of 6.31 per passenger-mile for a total of $85,970,900 in passenger revenues. These traffic gains resulted in large part from the efficient operation and aggressive merchandising of im- proved schedules offering excellent competitive service in all our markets. A continuing trend toward greater passenger us of coach and economy services is reflected in the fact that 70 per cent of our total passenger traffic was carried in the lower-fare services in 1962. Your Company has met this varied traffic need by offering a combination of first-class and coach accommodations in the same aircraft on most of our schedules. Public reaction to this type of service has been good. It appears that the general level of passenger fares will not be altered significantly in the near future. Your Company enthusiastically supports and offers those special promotional fares and tariff features which are economically sound and capable of developing additional traffic. We have not regarded as sound a number of special fares which are of doubtful promotional value and serve to debase the general fare structure by diversion of existing revenues. CENTS 40 35 ........ ........ ........ :T~~ } NTERNATIONAL CARRIERS ------- ---......... ......... ---- ----........ ----- .......... 30 25 20 0 -----_\ ____________ _ TOTAL DOM ESTIC TRUNKS 1953 1954 1955 1956 1957 Cargo and Other Revenues Freight and express re enues were $10 7 44 241 in 1962, earned by carriage of 35,179,000 ton- miles of traffic. Both are new highs for ~orth- west Airlines and demonstrate the growing im- portance of air cargo in our o er-all re enues. R_apid mo e~ent of goods both on passenger flights and m aircraft equipped with special freight capability has resulted in e er-increasing awareness by shippers of the ad antages of air transportation. Air mail revenues, both . S. and foreign origin, amounted to 814,228,416 in 1962, an in- crease of 21.6% over 1961. Included in this total is a growing olume of non-priority . S. mail offered to the air carriers on a space-a ailable basis at rates which are 10\ er than those for regular air mail. Re enues of Sl,974,79 , ere earned in our domestic and international services during 1962 from thi type of traffic compared with Sl,384,245 in 1961 and S593,984 in 1960. Your Company continued its participation in scheduled military contract service during the past year. Re enues from this source amounted to S1,964 832 in 1962 and we expect renewal of our contract at a higher re enue le el for the fiscal year starting Jul 1 1963. Operati ng Expenses Operating e;,.._'Penses ,rnre S131,247 369 in 1962, including Sl 445,190 for depreciation and amortization. Comparable figures for 1961 were S101,330 626 total expense and Sl 7 117 959 for depreciation and amortization. Total expenses increased 29.5% o er the prior year while operating revenues increased 35.5% . t the same time our unit operating costs , ere reduced greatly reflecting the production of in- crea ed alable capacity ,, ithout proportionate cost increa e . Your Compan achieved a cost- of-capacity rate of 23.9c operating expense per arnilable ton-mile flown in 1962. This , as 3.7c or 13.4 per cent le s than the unit co t rate of 1958 ........ ........ NORTHWEST AIRLINES SYSTEM TOT AL 1959 1960 1961 1962 2'"'.6c experienced in 1961. Operating expense per re enue ton-mile of traffic carried was 50.2 in 1962 a reduction of 4.0 from the 1961 rate of 54.2~. ;,.._'Pressed another wa , Korthwest Airlines' low operating cost level resulted in a break-even passenger load factor. of only 45.5 per cent in 1962. This is calculated as the load factor re- quired to co er operating expenses and interest costs and is among the 10\ est in the airline ind_:1 try. Our actual 1962 passenger load factor of ol.5 per cent represents a margin of six per- centage points O\er the load factor required to break even. "\"\ e v ill continue in the coming year to offer a high standard of service to the public with the best equipment a, ailable to de elop maxi- mum total re enues. t the same time we will c?ntinne to maintain careful management scru- tiny of our operating costs to provide the best margin of net profit attainable. TOTAL OPERA TING EXPENSE IN CENTS PER AVAILABLE TON-MILE equipment and services orthwest Airlines during 1962 operated a balanced fleet of jet, jet-propeller and piston- engined aircraft that provided excellent flight service throughout the carrier's domestic and international route system. Although a two-year program for acquisition of modern, turbine-powered aircraft had been completed in 1961, further changes in North- west s fleet accomplished in 1962 and announced for the future proved again that equipping a jet-age air carrier is far from being a static undertaking. Northwest Orient Airlines air-ground radio com- munications are consolidated into a single oper- ation at the General Office. During 1962, Northwest added four Boeing 720B fan-jet airliners to its fleet and sold one of its Douglas DC-8 jets, making the year-end total of pure jet equipment 13 720B's and four DC-S's. There was no change, however, in orthwest's total of 16 Lockhged Electra II jet- prop airliners. orthwest also has seven DC- 7C's ( four of which have been converted to DC-7C/ F cargo configuration, with large for- ward cargo door and cargo floor ) and 11 DC-6B's. Aircraft Acquisition Plans Looking to future operations, orthwest in 1962 announced purchase plans for a fleet of Intercontinental Boeing 707-351B fan-jets, five of which will be delivered beginning in June, 1963. These newest and most advanced of the Boe- ing family of jetliners will have a first-of-a-kind cabin configuration, designed especially to Iorth- west's requirements for both passenger and cargo capacity on the northern transcontinental and North Pacific routes. Incorporated in the design will be a large-door cargo compartment, with space for nearly a thousand cubic feet or 10,000 pounds of cargo. This compartment, in the forward left side of the passenger cabin behind the forward passen- ger entrance, will be 37 feet long, with an aver- age floor width of 50 inches. It will be separated from the passenger area by permanent, decora- tive panels. Access will be from the exterior of the aircraft, through a forward, upper deck cargo door with an effective opening of 91 by 134 inches. Design will allow for the use of Northwest's second-level passenger loading ramps at the forward passenger entrance. The new compartment, plus cargo capacity in the aircraft's lower holds, will allow orthwest to carry, on its longest flight segments, the cargo tonnage now lifted aboard all-freight DC-7C/ F planes and, at the same time, 112 passengers. Increase in Jet Services These ne\ fan-jet aircraft with v,hich sen ce will be inaugmat d on Jul 1 1963 \\ill con- tinu the ears-long trend of more and more of ortlm est' s re\ enue passenger-miles being pro- duced by modern, turbine-pm ered aircraft ( both jet and jet-prop). In 1959 for example onl 4.9 per cent of tl1e airline's total s stem re enue passenger-miles were produced b turbine air- liners. This percentage has climbed steadily to 24.7 in 1960, 74.4 in 1961 and 88.9 per cent of total re enue passenger-miles in 1962. orth\, est' s jet ser ices \\ ere increased sub- stantially during 1962. Polar jets-from ,-,.,, York and Chicago to Tol70 a Anchorage- " ere operated on a daily frequency. Jet service bet\ een Seattle-Tacoma and Anchorage was increased to t\ o round bips daily. orthv est restored daily ser ice ben, een th Pacic orth- west and Ha, aii witl1 the aircraft operating on a tluough-plane basis bet\ een ew York Chi- cago and Honolulu. To accommodate heavy winter travel to Flo- rida, Iorth, est operated Bve jet round trips daily bet\:veen the Mid\, est and Miami an in- crease of t\vo-tl1irds over I "\ A's pure jet fre- quencies in the market during the height of the 1961-62 ,-,.,,inter acation season. There were comparable increases in jet frequencies in other domestic markets, including banscontinental Bights to ser e the traffic generated by tl1e Seattle ~lorld's Fair. Schedule Performance orthwest established new standards of excel- lence in its operations in 1962, in terms of on- time performance. Maintenance & Engineering, Flight Operations and Transportation Services Departments combined forces to keep 1orth- west among tl1e industry leaders in performance during most of the year. In flights operated in the nation's top 100 city-pair markets-category utilized by the Civil Aeronautics Board to determine carrier perform- ance-I orth,; vest had the best record in the industry, April through T o ember for percent- age of Bights completed to scheduled destination. "\ A , as in second place in December, reflect- ing the onslaught of bad winter weatl1er on tl1e airline's northern routes. T orthwest ranked among tl1e top four trtmk carriers for 10 montl1s of the year in "on-time performance" in the top 100 city-pairs and was among the top three June tlrrough December. 100% 60% Turbine Aircraft 40% 20% 1959 1960 1961 1962 Per cent of total revenue passenger-miles. Ground Facilities I e, $10 000,000 lll1it air terminal at Idlewild International Airport ey-; York, was completed and open d b ortl1\ est and its co-occupants, Northeast and Braniff in member. lso, in accord ,vitl1 ortlrn est's continuing polic of providing the utmost in passenger con- venience, new terminals or e.x-panded facilities \\ ere occupi d at 1 finneapolis-St. Paul; 0 Hare Airport Chicago Dulles International, "\;\ ashing- ton D. C. Butte, Mont., and Honolulu. orth- west installed second-level jet passenger loading ramps at ew York, Chicago, 1 !iami, :Minne- apolis-St. Paul and Seattle-Tacoma. All domestic air-grolll1d radio communications ,:vere consolidated into a single operation located at the General Office. Four domestic radio net- works working via remote radio transmitter sites and landlines from four control consoles at company headquarters, maintain en route radio communications \, ith Vv A flights. The consol- idation has resulted in increased operating effi- cienc . Fifty-eight hundred skilled and well-trained emplo es using modern procedures and tech- niqu s provided continuous, efficient and cour- teous service to 2,437,342 passengers and to our shippers and other customers. These men and women vvere insbumental in maintaining Iorth- v est's reputation for service of the highest qual- ity. GROWTH IN TURBINE SERVICE Northwest 707-351B's will have large cargo door. LASKA ANCHORAGE HONG KONG THE PHILIPPINES HAWAII HONOLULU SYSTEM MAP NORTHWEST ~.~t~N"!! CANADA UNITED STATES NEW YORK NEWARK MIAMI There were no significant changes in or addi- tions to the routes of orthwest Airlines in 1962. However, orthwest was authorized to suspend service to Edmonton, Alberta, and Baltimore, Maryland. Still pending before the Civil Aeronautics Board are petitions of various airlines for recon- sideration of the Board's and the President's decisions of January 19, 1961, in the Transpacific Route Case. Among these petitions is North- west's for reconsideration of the failure to cer- tificate Northwest Airlines over the Central Pa- cific route from California to Tokyo via Hawaii, and between California and Hawaii. Public hearings were held in 1962 in the United Air Lines Competitive Service Investiga- tion, to consider authorizing competition in the ew York-Cleveland, Cleveland-Chicago, Cleve- land-Philadelphia and Detroit-Philadelphia mar- kets. United acquired monopoly status in these markets through its 1961 merger with Capital Airlines. orthwest vigorously pursued its appli- cations for authority to serve all of these markets, which would contribute significantly to offsetting the competitive imbalance in favor of United created by the merger. An initial decision by the Hearing Examiner is awaited. Early in the year, American Airlines and East- ern Air Lines asked CAB approval of a merger. orthwest, most of the other trunkline carriers and the Department of Justice opposed the merger, which if approved would create a giant carrier controlling nearly 35 per cent of domestic trunkline business, with consequent adverse im- pact on the ability of medium-sized airlines to compete effectively. The Examiner has recom- mended that the merger be denied. The matter now is pending before CAB. route development The CAB during the year began an investi- gation of possible correction of alleged excessive competition among airlines operating between the Pacific Northwest and Alaska and reduction of the resulting subsidy paid to Pacific Northern and Alaska Airlines by revising the route struc- ture. One issue was possible restriction of orthwest's authority to conduct local turn- around services between Seattle-Tacoma and Anchorage. Your Company believes that there is no valid basis for restricting its existing authority and that there are other, more economically sound solutions for such difficulties as other car- riers may be encountering in these markets. The proceeding still is in its preliminary stages. In December, Pan American World Airways and Trans World Airlines applied to the Civil Aeronautics Board for approval of a merger. Northwest will oppose approval of a PAA-TWA merger, which would have a significant. impact on the Trans-Pacific route picture. The Board has deferred indefinitely all further procedural steps because of internal complications relating to stockholder control of TWA, which is the subject of current litigation. There are several other proceedings pending before the CAB in which orthwest Airlines has an interest and is a participant, none of which have an importance comparable with those men- tioned above. orthwest also has on file several applications for route authorizations to strength- en its route structure, which are awaiting pro- cedural action. STATEMENT OF EARNINGS NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 31, OPERATING REVENUES Passenger . . . . United States mail Foreign mail . . . Excess baggage . . Freight and express . Charter and other bansporta tion . Mutual Aid Agreement-net- ote G . Other . . . . . . . . . . . OPERATING EXPENSES Flying operations Maintenance . . . Passenger service Aircraft and traffic ser icing Reservations, sales and ad ertising Adminisbati e and general . Depreciation and amortization . . OTHER INCOME AND (DEDUCTIONS) Interest on long-term debt . . Gain from disposals of property Other income . . . . . . EARNINGS BEFORE TAXES TAXES ON EARNINGS (including deferred tax s$5, 12900- 1962 $2,868,900-1961 ari ing principally from accelerat d d preciation methods )- ote H . . . . . . . . . . . . . . . . NET EARNINGS FOR THE YEAR 1962 121,781,06 12,904,069 1,324,347 1 083 96 10,744,241 2,646,207 858,402 ) 827,922 $150 453,420 $ 38,947,732 23,243,505 9 5 6 053 17,29 ,393 15,030 749 8 695 747 18,445,190 $131,247 369 19 206,051 5,040,266 ) 346 352 116 555 1961* $ 5 970 900 10,473,605 1,227,259 914 423 7,528,793 1481,883 2,563,150 892,499 $111,052 512 29,268,829 17 252,807 7 178,262 12 445 830 11,973 343 6,093,596 17,117 959 101330 626 9,721,886 4,352,867) 1518,535 6,385 ( $ 4,577 359 ) ( $ 2, 27,947 ) $ 14 628 692 6,893,939 7 39 300 3 232,800 7 230 392 3 661139 0 Operation wer curtail d in th fir t quart r of 1961 a a re ult of a flight ngin r trik . See notes to financial statements. ASSETS CURRENT ASSETS Ca h .. ... Trade receivable , l allowanc of $105,000 . Flight cquipm nt parts, at average cost, less allowance for d pr ciation ( 1962-$2,529,171; 1961-$1,793,568 ) faint nanc and operating supplies-at average cost . . Pr paid e pens s . . . . . . . . . . . . . . . TOT AL CURRENT ASSETS INVESTMENTS AND OTHER ASSETS R lat d indu try in tments and advanc s-at cost PROPERTY AND EQUIPMENT -at cost Flight quipm nt . . . . . . . . . . . . L ss allowances for d preciation an l obsole c nee d anc on purchas contracts . . . . . . . 0th r prop rty and quipm nt . Les allowanc s for d pr ciation DEFERRED CHARGES namortiz d haining and oth r co t in connection with aircraft B et R ntal Other See notes to financial statements. STATEMENT OF FINANCIAL POSITION NORTHWEST AIRLINES, INC. and SUBSIDIARY December 31, 1962 $ 16,371,029 14,037 703 6,475,526 2,181,111 2,414,788 $ 41,480,157 $ 320,332 $169,413,299 46,433,719 $122 979,580 6,327,901 $129,307,481 $ 21,103,687 10,751,430 $ 10,352,257 $139,659,738 $ 4,461,405 890,756 74,214 $ 5,426,375 $186,886,602 1961 $ 15,991,175 12,532,949 5,880,199 2,377,424 2,064,721 $ 3 ,846 468 $ 154,890 $170,772,136 37,286,701 133,485,435 $133,485,435 $ 21,429,995 10,919,266 $ 10,510,729 $143,996,164 $ 4,930,453 1,057,525 117,716 $ 6,105,694 $189,103,216 ------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable . . . . . Salaries, wages and vacations Air travel card deposits . . Unredeemed ticket liability . Income taxes-estimated Curr nt maturities of long-term debt TOTAL CURRENT LIABILITIES LONG-TERM DEBT, less curr nt maturities- ote A Notes payable to insurance companies Notes payable to banks . Subordinated notes payabl Conditional sales contracts . DEFERRED CREDITS- ote H Incom taxes-arising principally from accelerated depreciation method Other STOCKHOLDERS' EQUITY Cumulative Preferred Stock, $25 par value: Autboriz d 1,000,000 bar s issuable in series: 5}4% Convertible Seri s; authorized 457,873 bar ; is ued and out tanding 1962 -449,615 shares; 1961-451,234 shares- ot B . . . . . . Common Stock, $10 par value; authoriz d 4,500,000 shares; issued and outstanding 1962-1,388,459 hares; 1961-1,386,403 shares - ates B and D Capital surplus . . . . Retained arnings- ote C COMMITMENTS AND CONTINGENT LIABILITIES-Note E See notes to financial statements. December 3 I, 1962 $ 13,101,908 5,584,258 1,187,875 1,038,843 1,464,362 11,053,845 $ 33,431,091 $ 40,000,000 21,000,000 7,500,000 6,467,528 $ 74,967 528 $ 17,450,100 1,326,000 $ 18,776,100 $ 11,240,375 13,884,590 6,612,905 27,974,013 $ 59,711,883 $186,886,602 1961 $ 12,021,592 5,416,706 1,176,400 1,012,669 663,338 11,521,560 $ 31,812,265 $ 40,000,000 34,000,000 7,032,285 9,253,541 $ 90,285,826 $ 11,628,600 1,200,000 $ 12,828,600 $ 11,280,850 13,864,030 6,586,281 22,445,364 $ 54,176,525 $189,103,216 ST A TEMENTS OF CAPITAL SURPLUS AND RETAINED EARNINGS NORTHWEST AIRLINES, INC. and SUBSIDIARY Year Ended December 31, CAPITAL SURPLUS Balance at beginning of year Additions arising from: Sale of shares of Common Stock under option agreements, in excess of par Conversion of shares of Preferred Stock into shares of Common Stock . Balance at end of year RETAINED EARNINGS Balance at beginning of year Add net earnings for the year Deduct cash dividends on: SJ~% Preferred Stock-annual rate of $1.3B4 a share Common Stock-$.80 a share Balance at end of year See notes to financial statements. ACCOUNTANTS' REPORT To the Stockholders and Board of Directors Northwest Airlines, Inc. Saint Paul, Minnesota 1962 1961 $ 6,586,281 $ 6,577,695 1,710 8,512 24,914 74 $ 6,612,905 $ 6,586,281 $ 22,445,364 $ 20,484,991 7,230,392 3,661,139 $ 29,675,756 $ 24,146,130 $ 592,187 $ 592,245 1,109,556 1,108,521 $ 1,701,743 $ 1,700,766 $ 27,974,013 $ 22,445,364 We have examined the statement of consolidated financial position of orthwest Airlines, Inc. and subsidiary as of December 31, 1962 and the related statements of con olidated earnings, capital surplus and retained earnings for the year then ended. Our examination was made in accordance with gen- erally accepted auditing standards, and accordingly included such tests of the accounting records as we considered necessary in the circumstances. We have made similar examinations for prior years. In our opinion, the accompanying statements of financial position, earnings, capital surplus and retained earnings present iairly the consolidated financial position of orthwe t Airlines, Inc. and subsidiary at December 31, 1962 and the consolidated results of their operations for the year then ended, in conform- ity with generally accepted accounting principles applied on a basis consistent with that of the preced- ing year. Further, it is our opinion that the five year summary of earnings presents fairly the informa- tion stated therein. Saint Paul, Minne ota February 14, 1963 Certified Public Accountants NOTES TO FINANCIAL STATEMENTS NORTHWEST AIRLINES, INC. and SUBSIDIARY December 3t 1962 ote A-Long-Term Debt T ote Purchase Agreements \ ith twel e insurance companies provide for aggregate borrowings of $40,- 000,000 at 6% \ hich are payable $3,000,000 annually commencing October 1, 1966 \ ith the balance of $4,- 000,000 due October 1, 1978. Certain optional prepay- ments at par are permitted. The Agreements contain other provision with re pect to redemption a a \ hole ( but not from borrowed funds) at premiums ranging from 7% to 1% . The Amendatory Credit Agreement with fifteen banks provides for a term loan of $42,500,000 at 5% payable $8,500,000 each year 1963 through 1967. Optional pre- payments at par are permitted except from borro\ ed funds in which e ent a premium of % is required. The $7,500,000 Promissory ote \ a issued in con- nection with the purchase of six Boeing 720B turbojet aircraft and is subordinate to the notes payable to in- surance companies and to bank . This note bear intere t at 6% and is payable $1,500,000 annually 1968 through 1972. Certain prepayment are pro ided for based on "net earnings" as defined for 1963 and ubsequent years. Conditional sales contract for the purchase of se en Lockheed Electra prop-jet aircraft bear interest at 5% and are payable over sLxty monthly period ending in 1966. The Company has agreed, among other things, that it will not permit: (a) its working capital at any time to be le s than certain specified amounts and ( b ) it funded debt to exceed certain percentages of net tangi- ble a ets, net worth and depreciated value of flight equipment, as these terms are defined in the Agree- ments. At December 31, 1962 the Company had com- plied \ ith the co enant then in effect. Note B-5 % Com ertible Curnulati e Preferred Stock This Stock Series was called for redemption or con- version by February 14, 1963 and 449,545 share were converted into 432,254 Common Share . ote C-Re triction on Stockholder 'Equity The ote Purcha e Agreements and the Bank Credit Agreement e tabli h an aggregate dollar maximum for the declaration and payment of ca h di idend on Common Stock, and for the di tribution on, redemption purcha e or other acqui ition of hares of any cla of Capital Stock. The amount of retained earning a ail- able for uch purpo e at December 31, 1962 was $5,977,426. ote D-Common Stock Option At year-end 10,500 Common Share were ubject to options held by Company officers at price not !es than 95% of market at date of grant. Option for 500 hare at $13.42 a hare and for 3,000 hares at S27.45 a hare ( granted in 1962) expire in 1965; o~tion for 7,000 share at $27.45 a share (grant d m 1962 ) expire in 1966. Options for 500 shares at Sl3.42 a share , ere exercised during the year. An additional 100 shares are re er ed for future options. ote -Commitment and Contingent Liabilities The Company has purchased for deli ery in 1963 four Boeing 320B turbojet aircraft for an aggregate of $26,094,460. Depo its on purcha e aggregated $6,- 327,901 at December 31, 1962. Annual payment of approximately S3,000,000 are required under ariou rental agreements for lea e from 5 to 40 ear of airport facilities, ticket office , et cetera. The Company wa contingently liable at December 31, 1962 in the amount of S731, 84 for di counted note recei able arising from the ales of assets. Other con- tingent liabilities include tho e inherent in the Com- pany's operation. \ hile the amount of the e contingent liabilitie i not now determinable, the management of the Company is of the opinion that it is not material with re pect to the Company's financial po ition. ote F-Mail Tran portation Compensation -o final determination of total mail com pen ation ha e been made by the Ci il Aeronautics Board on in- ternational and dome tic route for 1951 and on inter- national route for 1954. The ultimate effect of any redetermination are not known at thi time. In January 1957, the Board i sued an order asking the Company to ho\ cau e \ h temporary compen a- tion for 1954 hould not tentati ely be reduced Sl,- 406,000 pending final hearings. The Company ha re- funded this amount and recorded the adjustment in prior year . In January 1960, the Board i sued an order propo - ing to establish a final subsidy-free mail rate for 1954 and a king the Company to show cause why the re- maining $1,833,000 of mail compensation subsidy should not be refunded. o effect has been gi en in the ac- companying financial tatement to thi proposed reduc- tion which , ould approximate $843,000 net after income taxes of $990,000. The Company is conte ting both of the above action . ote G-Mutual Aid Agreement The Company is party to a ~Iutual Aid Agreement with certain airlines under which any party to the agree- ment uffering a trike a defined therein i to recei e from the other airlines amount as determined under the agreement. The Ci ii Aeronautic Board i inve ti- 15ating the agre ment and in the e ent of it di appro al, ).futual Aid payments are to be refunded to the paying airlines to the extent affected by such disapproval. ote H-ln e tment Credit The Company' 7% inve trnent credit under the Reve- nue Act of 1962 approximate S300,000. Of thi amount $156,000 ha been added to deferred income taxes and $144,000 ha b en included in other deferred credit to be r porte