NWA Inc. 1985 Annual Report Contents Financial Highlights 1 Letter to Shareholders 2 Operations Review 6 Management's Discussion and Analysis 18 Financial Statements 22 Notes to Financial Statements/Accountants' Report 27 Stock Price and Dividend Information 33 Ten Year Summary 34 Directors and Officers 36 ^ Northwest Orient Airlines Route System Singapore ^ Corporate Profile NWA Inc. is engaged primarily in the commercial transportation of passengers, freight and mail through its wholly-owned subsidiary Northwest Airlines, Inc., a scheduled U.S. air carrier. Northwest's cur rent route system spans 73 cities in 26 states and 17 countries in Western Europe and the Far East, where North west is the dominant U.S. airline. Northwest was the seventh largest U.S. carrier in terms of revenue passenger- miles in 1985, and its freight operations ranked number one in terms of freight ton-miles among all U.S. combination carriers. NWA Inc. is also the parent company of Mainline Travel, Inc, a major wholesaler of vacation travel packages that was acquired in 1985. In January 1986, NWA Inc. entered an agreement to acquire Republic Airlines. If this acquisition receives all necessary approvals, Northwest will become the third largest carrier in the U.S. airline industry based on 1985 total revenue passenger-miles. NWA Inc. is headquartered at Minneapolis/St. Paul International Airport and its common stock is traded on the New York Stock Exchange. Highlights Operating Revenues Year Ended December 31 1985 1984 1983 (Billions of Dollars) Total Operating Revenues $2,655,491,000 $2,444,974,000 $2,196,036,000 Operating Income 77,087,000 96,276,000 68,886,000 1983 Net Earnings for the Year 73,119,000 55,964,000* 50,073,000 Per Common Share 3.18 2.44* 2.19 Per Dollar of Revenue 2.8C 2.3RTHWSTrgjjT Establishing Northwest Orient Airlink market ing agreements with regional carriers is an important aspect of Northwest's overall domestic route system strategy. In addition to Mesaba Airlines, North west has signed Airlink agreements with Amer ica West Airlines, Big Sky Airlines and Fischer Bros. Aviation. VI f BTMMT PT, NORTjHWEST ORIENT ESSuHS) Jw U Implementing New Domestic Strategies Throughout 1985, Northwest placed its greatest emphasis on developing and enhancing the domestic route system. This undertaking was successful, as evidenced by 14 percent increases in both domestic revenue passenger-miles and capacity The Boeing 757 is becoming a major force in Northwest's domestic fleet. The 757 has the proper combination of range, efficiency and comfort that is needed to implement domestic expansion.The eleven 757s that Northwest was operating at year-end 1985 have met or exceeded all expectations, and Northwest will have a total of 20 757s in service by the end of 1986. aking full advantage of the 757s in 1985, Northwest was able to successfully execute several key strategies, including: Dramatically increasing the level of domestic nonstop service. By year-end, the 757s were providing over 12 percent of Northwest's domestic capacity. Re-entry into the New York-Seattle nonstop market. Providing greater volumes of feeder traffic to Northwest's international gateways. Developing Northwest's Detroit hub, including the intro duction of nonstop service to Los Angeles and Seattle/Tacoma. Increasing service and frequencies to sun belt des tinations in Florida and the Southwest. Inaugurating Northwest's first southern tier nonstop transcontinental service, between Los Angeles and Tampa/St. Petersburg. Northwest Orient Airlink marketing agreements with regional and national carriers are also important elements of Northwest's domestic strategy. Following the first Airlink agreement with Mesaba Airlines of Minneapolis/St. Paul in late 1984, Northwest established three new relationships in 1985: America West Airlines, the largest carrier serving Phoenix, with a route system of 23 cities in the Southwest and West and an all-jet fleet. Big Sky Airlines, which serves 13 cities in Montana, Wyoming and North Dakota. Fischer Bros. Aviation, a regional airline headquartered in Ohio that carries passengers between Detroit and seven other cities in Ohio and Michigan. Through these Northwest Orient Airlink agreements, the route systems of the smaller carriers are tied directly into Northwest's global structure. The result is better passenger service and higher volumes of feeder traffic into hubs served by Northwest. As part of every agreement, the flight designation of each Airlink partner carries Northwest's code in the computer reservations systems used by travel agents. In addition, Airlink agreements provide for coordinated scheduling, joint fares, participation in Northwest's Free Flight Plan, joint advertising and baggage handling arrangements. 9 Northwest has served the Far East since 1947 carrier in transpacific markets. Through its major hub at Narita Airport in Tokyo, Northwest pro vides scheduled air service to 10 cities in 8 Far Eastern countries. ^ Expanding in Pacific and Atlantic Markets Northwest further solidified its position as the leading U.S. carrier in the Pacific in 1985 by providing daily nonstop service to Tokyo from six U.S. gateway cities--New York, Chicago, Seattle, San Francisco, Los Angeles and Honolulu. The airline operated 61 weekly roundtrip nonstop flights between the U.S. and the Orient during summer 1985. This included introduction of air service to and from Kuala Lumpur, the capital city of Malaysia. Northwest's competitive position in the Pacific, as measured by the most re cently available statistics, remains strong at 26.5 percent of the U.S./Japan market and nearly 19 percent of the total transpacific traffic. Even with the full-scale entry of United Airlines into the Pacific in 1986, Northwest remains the largest U.S. carrier in this growing market. Having served the Orient since 1947 and gained the confidence of customers and shippers in the U.S. and throughout the Orient, Northwest intends to build upon its position of leadership by: Capitalizing on an extensive intra-Asian system, currently composed of a strong Tokyo hub with spokes to nine cities throughout the Far East, and an expanded connecting complex at Seoul. Developing steadily higher volumes of domestic feeder traffic to the six cities that serve as Northwest's U.S. gateways to the Orient. This is now being accomplished through Northwest's growing fleet of 757s and will be greatly expanded with the pending addition of Republic's domestic system. Further increasing transpacific capacity and scheduling in 1986 with three new 747-200s. Utilizing the new- technology, 450-passenger 747-400 aircraft beginning in 1988. The year 1985 was also a successful period for Northwest's Atlantic operations. By late 1985, Northwest ranked sixth out of the 50 transatlantic airlines in passengers carried across the Atlantic, up from seventh in 1984. In summer 1985, the airline operated 35 transatlantic flights per week from the U.S. gateways of New York, Boston and Minneapolis/ St. Paul to eight European cities. 11 MAINLINE TRAVEL MLT VACATIONS CORPORATE HEADQUARTERS Mainline Travel, Inc. became a wholly- owned subsidiary of NWA Inc. in 1985. A major wholesaler of tour and vacation travel packages, MLT gives NWA Inc. a significant presence in this grow ing industry. This acquisition also marks the first step toward vertical integration for NWA Inc. ^ Vertical Integration into Tour Wholesaling NWA Inc. diversified into the tour wholesale market in 1985 with the acquisition of Mainline Travel, Inc. (MIT). MLT thus became the first acquisition of NWA Inc., which was formed in 1984 as the parent company of Northwest Airlines. The holding company structure was adopted to facilitate the corporation's entry into new business ventures, and the acquisition of MLT represents the first step toward vertical integration in a related industry. MLT is one of the nation's largest and fastest growing wholesalers of low-cost vacation travel packages and has annual revenues of approximately S100 million. It makes bulk purchases of hotel rooms and land accommodations, combines these with charter air services or low-cost seats on scheduled carriers, and sells these travel packages through retail travel agencies and directly to the public. Northwest has been a supplier to MLT in the past, providing seats on flights in selected markets.This acquisition is a good fit from the standpoint of seasonal revenue generation. The first quarter of each year is normally MLT's strongest period but is typically soft for Northwest. Consequently, the airline can readily make passenger seats available for MLT during this period. It is expected that MLT's successful tour wholesaling business will have a further positive effect on the overall results of NWA Inc. through improved traffic on Northwest. 13 Technical excellence in maintenance pro grams, weather fore casting and noise abatement are just a few of the reasons why Northwest is a pace setter in the airline ^ Leadership and Excellence in Technical Management Excellence in technical aspects of airline operations has always been a tradition of Northwest Airlines. The use of conservative maintenance schedules, adherence to strict quality-control policies and development of programs that have led the air carrier industry have become trademarks of Northwest. Air Transport World, a leading industry publication, selected Northwest for its Financial Management Award for 1984 and has followed this with its 1985 Technical Management Award. In making that award the publication stated, "Selection of Northwest Airlines as the recipient of AirTransport World's Technical Management Award is a recognition of one of the most effective, efficient and productive operations in the busi ness." In addition to the award, the airline continues to be nationally recognized by industry groups and government agencies as the industry pacesetter in the following key areas: The airline does all of its airframe maintenance, engine overhaul and virtually all accessory and component work at its own facilities with its own staff. Northwest accomplishes major aircraft maintenance on a rigid program related to hours of flight time. Performing these tasks in-house ensures a high level of quality assurance and provides for better control of maintenance costs. Northwest has maintained its own meteorology department at a time when many airlines are reducing or eliminating weather departments. Northwest's meteorology department developed turbulence plot and weather forecasting programs that are reliable in identifying potentially dangerous weather situations and getting this information in a matter of minutes to pilots while in flight. Northwest pioneered procedures for quieting jet noise over the communities it serves. Its noise abatement procedures have been adopted throughout the airline industry, and Northwest's pilots are frequently recognized for their strict adherence to this good neighbor policy. Northwest has learned that, in addition to obvious safety advantages, superior technical management improves bottom-line results. Its conservative maintenance schedules and strict adherence to noise abatement procedures are reasons why its aircraft burn less fuel than similar types flown by other airlines. Northwest's operating expenses also rank consistently among the lowest in the industry. These benefits transfer directly to the customer in terms of reliable on-time performance, which is one of the best ways to ensure repeat customers. 8n 1985 Northwest completed a 54,000-square-foot addition to its Main Base facility, which houses equipment and personnel necessary to overhaul Pratt & Whitney 2037 jet engines that power the new 757 aircraft. Further, the Northwest engine test cell has been modified to accommodate checks and calibrations required for each 2037 after overhaul and before installation on an aircraft. 15 ^ The "New" Northwest Domestic Route System 16 ^ The Decision to Acquire Republic Airlines The planned $884 million acquisition of Republic Airlines by NWA Inc. represents a logical and positive development from practically any business standpoint. Through this pro posed combination of two medium-sized carriers with complementary route systems and fleets, Northwest will gain the economic mass neccessary to compete more effectively and efficiently in this intensely competitive indus try. When this transaction is approved by Republic's shareholders and the federal government--as it is expected to be--the new Northwest will be the nation's third largest carrier in terms of revenue passenger-miles. Northwest will operate more than 300 aircraft, employ over 30,000 people and serve more than 130 cities worldwide. The rapid expansion of carriers such as American and United since the beginning of airline deregulation has resulted in these airlines becoming "mega-carriers." To compete effectively against these carriers over the long term, Northwest needs a domestic system of a certain threshold size. Northwest was building toward this critical mass by expanding internally, but it became apparent ihat a more rapid expansion was needed to achieve a stronger market presence. Northwest has historically had one major domestic hub, located at Minneapolis/St. Paul. Republic, in addition to serving theTwin Cities, also has developed significant hub and spoke systems at Detroit and Memphis. By combining the operations of the two airlines, Northwest will become the largest carrier at these three major airports and will greatly increase domestic on-line traffic. The strong domestic system resulting from a Republic/Northwest combination will allow Northwest to greatly expand the feeder traffic to the airline's eight international gateways. This will enable Northwest to offer more single-carrier service to the Orient and Europe. In short, acquiring Republic will permit Northwest to attain a key objective in today's highly competitive environment: to keep passengers flying on a single airline --in this case Northwest--for all or most of their trips. Northwest's and Republic's fleets are excellent matches in terms of operational capabilities. Republic's smaller air craft, which average 102 seats, are ideal for building and serving domestic hub and spoke systems. Northwest's larger aircraft, averaging 228 seats, are well suited for longer hauls, including transcontinental and international service. The combined fleet will facilitate further development of a strong domestic system linking most areas of the United States with both the Orient and Europe. 17 ^ Management's Discussion and Anaylsis As part of an approved plan of reorganization, Northwest Air lines, Inc. (Northwest) became a wholly-owned subsidiary of NWA Inc. (NWA) in the latter part of 1984.The creation of NWA as a holding company did not result in any changes in the operation of Northwest and the shareholders of Northwest automatically became shareholders of NWA. In October, 1985 NWA purchased 100% of the capital stock of Mainline Travel, Inc. (MIT). MIT is a major wholesaler of low-cost vacation travel packages. Northwest and MLT are the only operating subsidiaries of NWA and together are responsible for all of its operating revenues and substantially all of its operating expenses. Earnings and Dividends NWA's 1985 consolidated net earn ings totaled $73,119,000 ($3.18 per share) and compare with net earnings of $55,964,000 ($2.44 per share) in 1984 and $50,073,000 ($2.19 per share) in 1983. The 1984 earnings were after an extraordinary charge of $30,903,000 resulting from the settlement of a 15-year-old lawsuit. Operating revenues increased 8.6% to $2,655,491,000 during 1985 while operating expenses grew 9.8% to $2,578,404,000 result ing in operating income of $77,087,000 com pared to $96,276,000 in 1984.1983 operating income was $68,886,000. Sources of 1985 Operating Revenues (Millions of Dollars) Passenger- Coach $2000.7 75.3% Freight $328.4 12.4% Passenger- First Class $153.7 5.8% Mail $80.1 3.0% Charter and Other $92.6 3.5% Distribution of 1985 Operating Expenses (Millions of Dollars) Fuel and Oil Employee Wages and Benefits Landing Fees, Rentals, Materials and Services Commissions Depreciation and Amortization I $717.9 27.9% $715.2 27.7% Interest expense totaled $19,873,000 in 1985 compared with $4,268,000 and $3,548,000 in 1984 and 1983, respec tively. The additional interest expense in the current year is a result of the higher level of debt outstanding for much of the year and the capital lease obligations entered into during the fourth quarter. Investment income totaled $4,741,000 in 1985, $7,214,000 in 1984 and $7,960,000 in 1983. Gain from the disposal of property amounted to $2,780,000 in 1985 and compares with $19,864,000 in 1984 and $805,000 in 1983. The 1984 gain re flected the sale of three McDonnell Douglas DC-10-40 aircraft. Earnings before income taxes for 1985 were $64,743,000 compared to $117,388,000 in 1984 and $73,603,000 in 1983. In 1985 NWA paid dividends to shareholders totaling $19,586,000 (90< per share) continuing an unbroken string of cash dividends extending back 123 consecutive quarters. NWA common stock is principally traded on the New York Stock Exchange. A table showing sales prices and divi dends paid per share in 1985 and 1984 is included on page 33. Operating Revenues Operating revenues increased 8.6% in 1985 to $2,655,491,000 compared with $2,444,974,000 in 1984 and $2,196,036,000 in 1983. Passenger revenues for 1985 rose 8.5% to $2,154,394,000, the result of a 13.0% increase in reve nue passenger-miles and a 4.0% decrease in yield (revenue per passenger-mile). 1984 passenger revenues of $1,984,999,000 were 9.5% greater than 1983 due to an 11.6% increase in traffic and a 1.9% decline in yield. The current year 13.0% increase in revenue passenger- miles compares with an aggressive 13.7% increase in capacity (available seat-miles), resulting in a slight drop in passenger load factor to 60.1% from 60.5% in 1984. Load factor in 1983 18 Operating Costs per Available Ton-Mile 1981 1982 1983 1984 1985 5.36 .37 .38 .39 .40 .41 .42 Operating Revenues and Expenses Revenues Expenses (Billions of Dollars) was 60.0%. The actual passenger load factors compare to break-even passenger load factors of 58.0% in 1985, 57.6% in 1984 and 57.7% in 1983. Freight revenues declined 7.6% to $328,400,000 in 1985 due to an 8.2% decrease in freight ton-miles and a .7% in crease in yield per ton-mile. 1984 freight revenues totaled $355,336,000 and were 22.9% greater than 1983. Mail reve nues increased 37.3% to $80,126,000 in 1985 and compare with $58,339,000 in 1984 and $55,585,000 in 1983. Charter and other transportation revenues increased 45.1% to $55,959,000 in 1985, primarily due to a higher level of military charter activity. Charter and other transportation revenues totaled $38,559,000 in 1984 and $36,198,000 in 1983. Other revenues totaled $36,612,000 in 1985, $7,741,00 0 in 1984 and $2,856,000 in 1983. Revenues of MIT subsequent to its purchase by NWA are included in other revenues. Operating Expenses Operating expenses for 1985 totaled $2,578,404,000, a 9.8% in crease over the prior year. 1984 operating expenses were $2,348,698,000, up 10.4% over 1983 expenses of $2,127,150,000. For the fourth year in a row, capacity of the airline increased at a greater rate than airline oper ating expenses. As a result, operating expen ses per available ton-mile decreased to 39.84 in 1985 from 40.24 in 1984 and 40.54 in 1983. Aircraft fuel expense increased a modest 3.7% in 1985 to $717,870,000 despite an 11.6% increase in plane-miles flown.This is a reflection of the continuing decline in jet fuel prices, which averaged 83.074 in 1985, 87.764 in 1984 and 92.584 in 1983. Additional i98i fuel price declines are expected during 1986. 1982 1983 1984 1985 1.6 1.8 2.0 2.2 2.4 2.6 2.8 Salaries and related costs increased 11.8% to $715,172,000 over 1984, the result of a higher level of employment, wage increases during the year and increased payroll taxes. Agency commission expenses increased 7.2% to $327,708,000 in 1985, reflecting the higher level of passenger revenues earned. Rentals and landing fees increased 8.3% to $106,220,000 and aircraft maintenance materials and repairs remained virtually flat at $111,742,000. Depreciation and amortization expense increased 9.2% in 1985 to $182,563,000 compared with $167,203,000 in 1984 and $146,908,000 in 1983. The 1985 increase is primarily the result of the addition of eleven new 757-200 passenger air craft while the 1984 increase reflects the addition of five additional 747s. Other operating expenses increased $83,026,000 over 1984, primarily the result of higher marketing and passenger service expenses plus the inclusion of MLT expenses for part of the year. Pension costs for 1985 were determined in accordance with Accounting Principles Board Opinion No. 8. The Com pany has not yet determined the impact on pension costs of the recently issued FASB Statement No. 87, which must be adopted by 1987. The impact and effect of inflation and changing prices are discussed in footnote K to the financial statements. 19 Management's Discussion and Analysis-Continued Taxes On Earnings Income taxes were a credit of $8,376,000 in 1985 compared to an expense of $2,427,000 in 1984 (after the $28,094,000 income tax credit resulting from the extraor dinary item) and $23,530,000 in 1983. Earned investment tax credits totaled $37,749,000 in 1985, $23,576,000 in 1984 and $9,745,000 in 1983. Investment tax credits are applied on tax returns as allowed by income tax regulations. Credits not cur rently applied are offset against deferred taxes for accounting purposes, and as of December 31,1985, these credits totaled $75,395,000. Financial Condition Stockholders' equity at December 31, 1985, totaled $947,001,000 or $43.49 per share, up $54,078,000 or $2.44 per share from the balance at December 31,1984. Long-term debt, excluding current maturi ties, totaled $332,992,000 at December 31, 1985, and long-term obligations under capital leases were $161,101,000. Thus, capitalization consisted of 34% long-term debt (including lease obligations) and 66% equity. During the fourth quarter 1985, North west leased five 757-200 passenger aircraft under the commonly called "finance lease" provisions of the tax code. Northwest was the first airline to use this new type of lease, which provides for the ability to have a low fixed price purchase option at the end of the lease term, for commercial jetliners. For accounting purposes these leases are treated as capital leases while for tax purposes they are treated as operating leases. All other aircraft are owned outright by Northwest and none have been pledged as security for debt or otherwise encumbered. In addition to providing the majority of NWA's $73 million profit during 1985, and thus continuing an unbroken string of profitability going back to 1950, Northwest also lowered its unit costs, achieved above average growth in reve nue passenger-miles and, for the seventh consecutive year, increased its market share. Cash Flow, Liquidity and Capital Resources Cash provided from operations during 1985 totaled $221,432,000 compared with $215,413,000 in 1984 and $209,865,000 in 1983. Total cash from all sources including borrowings was $850,343,000 in 1985, $281,100,000 in 1984 and $383,818,000 in 1983. During 1985 the Company issued $236,988,000 of new debt, inclu ding $175,000,000 of 71/2% convertible subordinated deben tures due in 2010, increased the amount of outstanding com mercial paper by $134,357,000 and entered into $167,290,000 of capital lease obligations. No borrowings have been made under the available bank revolving credit agreement. Total cash used during 1985 was $854,065,000 compared with $333,222,000 in 1984 and $314,632,000 in 1983. The major uses of cash during the year were equip ment purchases of $432,698,000 and aircraft deposits of $260,418,000. Eleven new Boeing 757-200 passenger aircraft were placed into service during 1985 with nineteen more scheduled for delivery in 1986 through 1989. Other aircraft purchase commitments consist of three Boeing 747-2 00 pas senger aircraft to be delivered in 1986 and ten new-generation Boeing 747-400 passenger aircraft which will be delivered in 1988, 1989 and 1990. Outstanding aircraft purchase commit ments were approximately $1,923,163,000 at December 31, 1985, including approximately $524,868,000 for expenditures in 1986. In addition, deposits totaling $239,292,000 have been made with manufacturers in connection with the above air- Scheduled Freight Ton-Miles (Millions) 1981 mmm 1982 mmmKm 1983 1984 1985 500 600 700 800 900 1000 1100 Scheduled Available Seat-Mi les (Billions) 1981 Mm 1982 IM 1983 1984 1985 21 24 27 30 33 36 39 20 Selected Financial Data (In Thousands Except Per Share Amounts) Year Ended December 31 1985 1984 1983 1982* 1981 Operating Revenues $2,655,491 $2,444,974 $2,196,036 $1,877,568 $1,854,290 Net Earnings 73,119 55,964** 50,073 5,019 10,460 Total Assets 2,320,006 1,754,233 1,602,236 1,377,387 1,492,381 Long-Term Debt 332,992 100,000 100,000 - 12,500 Obligations Under Capital Leases 161,101 - - - - Per Common Share: Earnings 3.18 2.44** 2.19 .23 .48 Cash Dividends .90 .825 .80 .80 .80 `Operating results were affected by a major strike which extended from May 22,1982 to June 17,1982. "After extraordinary charge of $30,903 or $1.30 per share resulting from the settlement of a lawsuit. Fuel Efficiency Increases (Available ton-miles per gallon) 1981 1982 1983 1984 1985 6.6 6.8 7.0 7.2 74 76 7.8 craft orders.The Company expects to finance its aircraft purchase commitments with a combination of leases, new debt and inter nally generated funds. On January 23, 1986, NWA entered into an agreement to purchase Republic Air lines, Inc. for approximately $884,000,000. Republic is a major U.S. air carrier serving ap proximately 100 cities in 34 states, Canada, Mexico and the Cayman Islands. The pro posed transaction is subject to government and Republic shareholder approval. The Com pany expects to incur additional debt to facil itate its acquisition of Republic. At December 31,1985, NWA and its subsidiaries had cash and short-term investments of $45,842,000 compared to $49,564,000 in 1984 and $101,686,000 in 1983. In addition, it has a revolving credit agreement with a group of major banks which provides for unsecured borrowings up to $500,000,000 through June 30,1988. The Company believes that internally generated funds plus borrowings will provide sufficient capi tal to meet all present commitments. Stockholders' Equity vs. Long-Term Debt (Hundred Millions of Dollars) Debt Equity 1981 1982 1983 1984 1985 0 2 4 6 8 10 12 21 Consolidated Statements of Financial Position NWA Inc. (Dollars in Thousands) December 31 ASSETS Current Assets Cash and short-term investments Accounts receivable, less allowance of $2,300 (1984-$2,150) Flight equipment spare parts, less allowance for depreciation of $40,230 (1984 --$35,490) Maintenance and operating supplies Prepaid expenses Prepaid income taxes TOTAL CURRENT ASSETS Other Assets Property and Equipment Flight equipment Less accumulated depreciation Advance payments on new flight equipment Other property and equipment Less accumulated depreciation Property and Equipment Under Capital Leases-Note F Flight equipment Less accumulated depreciation 1985 1984 $ 45,842 248,794 52,955 22,985 22,311 392,887 43,437 2,617,263 1,356,033 1,261,230 239,292 365,769 148,493 217,276 167,290 1,406 165,884 1,883,682 $2,320,006 $ 49,564 196,836 52,464 19,682 25,190 23,914 367,650 18,491 2,356,048 1,204,118 1,151,930 57,795 287,391 129,024 158,367 1,368,092 $1,754,233 22 December 31 1985 1984 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Commercial paper $ 152,191 $ 17,834 Accounts payable and other liabilities 262,805 230,944 Employee compensation 59,936 114,789 Air traffic liability 131,912 103,900 Income tax 110 - Current maturities of long-term debt 3,996 - Current obligations under capital leases 6,189 -- TOTAL CURRENT LIABILITIES 617,139 467,467 Long-Term Debt-Note C 332,992 100,000 Long-Term Obligations Under Capital Leases-Note F Deferred Credits and Other Liabilities 161,101 -- Income taxes-Note E 246,213 280,463 Other 15,560 13,380 261,773 293,843 Stockholders' Equity-Note D Common Stock $2.00 par value, authorized 60,000,000 shares; issued and outstanding, 1985-21,774,251 shares; 1984-21,749,667 shares 43,549 43,499 Capital surplus 111,318 110,823 Retained earnings 792,134 738,601 947,001 892,923 Commitments and Contingencies-Notes F and G $2,320,006 $ 1,754,233 See notes to consolidated financial statements. 23 Consolidated Statements of Earnings NWA Inc. (Dollars in Thousands, except per share amounts) Year Ended December 31 Operating Revenues Passenger Freight Mail Charter and other transportation Other Operating Expenses Fuel, oil and taxes Salaries and related Commissions Rentals and landing fees Aircraft maintenance materials and repairs Other operating Depreciation and amortization OPERATING INCOME (LOSS) Other income (Expenses) Investment income Interest, net of capitalized interest (1985--$7,799; 1984-55,446; 1983-$4,872) Gain on sale of equipment Other Earnings Before Income Taxes and Extraordinary Item Income tax expense (credit)-Note D EARNINGS BEFORE EXTRAORDINARY ITEM Extraordinary loss from settlement of litigation (less applicable income tax credit of $28,094)-Note F NET EARNINGS Earnings Per Share-Primary and Fully Diluted Earnings before extraordinary item Extraordinary loss NET EARNINGS PER SHARE See notes to consolidated financial statements. 1985 1984 1983 $2,154,394 $1,984,999 $1,812,227 328,400 355,336 289,170 80,126 58,339 55,585 55,959 38,559 36,198 36,612 7,741 2,856 2,655,491 2,444,974 2,196,036 717,870 692,160 672,169 715,172 639,606 569,535 327,708 305,679 251,943 106,220 98,044 89,651 111,742 111,903 100,483 417,129 334,103 296,461 182,563 167,203 146,908 2,578,404 2,348,698 2,127,150 77,087 96,276 68,886 4,741 7,214 7,960 (19,873) (4,268) (3,548) 2,780 19,864 805 8 (1,698) (500) (12,344) 21,112 4,717 64,743 117,388 73,603 (8,376) 30,521 23,530 73,119 86,867 50,073 _ (30,903) _ $ 73,119 $ 55,964 $ 50,073 $ 3.18 $ 3.74 $ 2.19 - (1.30) -- $ 3.18 $ 2.44 $ 2.19 24 Consolidated Statements of Changes in Financial Position NWA Inc. (Dollars in Thousands) Year Ended December 31 1985 1984 Cash Provided Earnings before extraordinary item $ 73,119 $ 86,867 Add (deduct) non-cash items: Depreciation and amortization 182,563 167,203 Increase (decrease) in deferred income taxes (34,250) 20,340 TOTAL FROM OPERATIONS BEFORE EXTRAORDINARY ITEM 221,432 274,410 Extraordinary loss before tax benefit of $28,094 - (58,997) TOTAL FROM OPERATIONS 221,432 215,413 Issuance of debt 236,988 - Increase in capital lease obligations 167,290 - Increase (decrease) in commercial paper 134,357 17,834 Increase in accounts payable and other liabilities 31,861 16,282 Increase (decrease) in air traffic liability 28,012 (1,033) Net book value of property dispositions 775 20,672 Other 29,628 11,932 TOTAL CASH PROVIDED 850,343 281,100 Cash Used Additions to flight equipment, other property and deposits 693,116 345,844 Decrease (increase) in accrued employee compensation 54,853 (63,926) Increase in accounts receivable 51,958 7,171 Dividends 19,586 17,933 Other 34,552 26,200 TOTAL CASH USED 854,065 333,222 INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (3,722) (52,122) Cash and short-term investments at the beginning of the year 49,564 101,686 Cash and short-term investments at the end of the year $ 45,842 $ 49,564 See notes to consolidated financial statements. 1983 $ 50,073 146,908 12,884 209,865 209,865 100,000 (4,958) 41,305 27,728 2,667 7,211 383,818 234,256 (10,847) 46,018 17,367 27,838 314,632 69,186 32,500 $101,686 25 @ Consolidated Statements of Stockholders' Equity NWA Inc. (In Thousands Except Per Share Amounts) Common Stock Shares Amount Capital Surplus Retained Earnings Balance January 1,1983 21,678 $27,098 $125,643 $667,864 Exercise of stock options 38 47 831 - Net earnings for 1983 - - - 50,073 Cash dividends-$.80 per share - - - (17,367) Balance December 31,1983 21,716 27,145 126,474 700,570 Exercise of stock options 38 55 840 - Increase in par value from $1.25 to $2.00 per share - 16,308 (16,308) - Net earnings for 1984 - - - 55,964 Cash dividends --$.825 per share - - - (17,933) Other (4) (9) (183) - Balance December 31,1984 21,750 43,499 110,823 738,601 Exercise of stock options 30 60 753 - Net earnings for 1985 - - - 73,119 Cash dividends--$.90 per share - - - (19,586) Other (6) (10) (258) - Balance December 31,1985 21,774 $43,549 $111,318 $792,134 See notes to consolidated financial statements. Notes to Consolidated Financial Statements NWA Inc. December 31,1985 Note A-Accounting Policies A summary of significant ac counting policies of the Company is set forth below: Basis of Presentation: The consolidated financial statements include the accounts of NWA Inc., Northwest Airlines, Inc., and all other subsidiaries after elimination of intercompany ac counts and transactions. Short-Term Investments: Short-term investments are stated at cost which approximates market and amounted to 516,528,000 and $30,173,000 at December 31,1985 and 1984, respectively. Flight Equipment and Property: Provision for depreciation is computed by the straight line method over the estimated use ful lives of the assets. Useful lives are estimated at fifteen years with 10% residual values for 747, DC-10, and 757 aircraft and ten years with 15% residual value for 727 aircraft. Useful lives of buildings van/ from 5-30 years and other equipment from 4-10 years. Depreciation of flight equipment spare parts, reta bles and assemblies is provided by the straight line method at rates which depreciate cost, less residual value, over the esti mated useful lives of the related aircraft. Pension Plans:The Company has several noncontributory pension plans covering substantially all of its employees.The pension costs accrued include amortization of prior service costs over periods of ten to thirty years. It is the Company's policy to annually fund at least the minimum pension contri bution as required by the Employees Retirement Income Security Act. Income Taxes: Income taxes are provided at statutory rates applied to earnings before income taxes regardless of when such taxes are paid. Deferred income taxes arise principally from timing differences between financial and tax methods of accounting for depreciation and capitalized interest. The Company uses the flow-through method of ac counting for investment tax credits. Investment tax credits not applied on tax returns are offset against deferred income taxes to the extent they are applicable to deferred taxes be coming payable in the investment tax credit carryover periods. Operating Revenues: Passenger and freight revenues are recognized when the transportation is provided. Earnings Per Share: Net earnings per share are calculated by dividing net earnings, adjusted for interest expense (net of in come taxes) on the convertible debentures, by the weighted average number of shares of Common Stock and Common Stock equivalents. Common Stock equivalents consist of con vertible debentures and stock options. Reclassifications: Certain amounts in the 1984 and 1983 finan cial statements have been reclassified to conform with the 1985 presentation. Note B-Business Acquisition Effective October 1,1985, the Company acquired 100% of the capital stock of Mainline Travel, Inc., a wholesaler of vacation travel packages. The transaction, which is not material to the Company's financial results, was accounted for as a purchase. On January 23, 1986, the Company entered into an agreement to purchase Republic Airlines, Inc. for 5884 million. Republic is a major U.S. air carrier serving approximately 100 cities in 34 states, Canada, Mexico and the Cayman Islands.The proposed transaction is subject to government and Republic shareholder approval. 27 Notes to Consolidated Financial Statements NWA Inc.-Continued Note C-Long-Term Debt and Credit Arrangements Long term debt less current maturities consists of (in thousands): 1985 1984 9% senior notes due 1992 S 50,000 $ 10'/8% notes due 1988 Convertible subordinated debentures: 7,992 -- 7'/2% due 2007 100,000 100,000 7V2% due 2010 175,000 $332,992 $100,000 The Company has a revolving credit agreement with a group of major banks which provides for unsecured borrow ings up to $500 million through June 30,1988. This amount decreases periodically thereafter to the termination date of July 1,1994. Interest on borrowings is, at the Company's elec tion, the lower of various formula rates or the prime rate as defined until June 30,1991, and the formula rate or prime rate plus 1/4% thereafter. Commitment fees ranged from 1/16% to 1/8% per annum on the unused credit and amounted to $469,000 in 1985. During 1985 there were no borrowings under the revolving credit agreement. In February 1983 the Company issued $100 million of 7V2% convertible subordinated debentures due in 2007. The debentures are convertible into Common Stock at a rate of $50.75 per share. The debentures are redeemable at prices ranging from 106% in 1986 to 100% in 2002 of the principal amount. Annual sinking fund payments are required begin ning in 1992 of $5 million, less the amount of debentures converted or redeemed. In June 1985 the Company issued $175 million of 71/2% convertible debentures due in 2010. The debentures are convertible into Common Stock at a rate of $57.00 per share. Subject to certain restrictions, the Company may redeem the debentures at prices ranging from 107% in 1986 to 100% in 2005 of the principal amount. Annual sinking fund payments are required beginning in 1995 of $7.5 million, less the amount of debentures converted or redeemed. The Company was in compliance with the covenants of all debt agreements at the end of the year. At December 31, 1985, approximately $214,000,000 of retained earnings was available for the payment of dividends under the terms of the agreements. Note D--Stockholders' Equity Shares 1985 1984 Cumulative Preferred Stock: Authorized 5,000,000 5,000,000 Issued None None The Company has 5,040,618 shares of Common Stock reserved for conversion of the 71/2% convertible subordinated deben tures as of December 31,1985. Common Stock options at prices which were not less than 100% of market at date of grant are as follows: Shares Price Per Share Outstanding at January 1,1984 94,442 $23.31 Granted 126,650 44.06 Exercised (38,395) 23.31 Lapsed (2,750) 23.31/44.06 Outstanding at December 31,1984 179,947 23.31/44.06 Granted 158,000 42.19 Exercised (29,710) 23.31/44.06 Lapsed (10,500) 44.06/42.19 Outstanding at December 31,1985 297,737 23.31/44.06/42.19 Options exercisable: At December 31,1984 54,797 23.31 At December 31,1985 86,663 23.31/44.06 Shares available for stock option plans were 197,000 and 350,000 at December 31,1985 and 1984, respectively. Note E-Taxes on Earnings (Dollars in thousands) Reconcili ation of the Company's effective income tax rate is as follows: Year ended December 31 Statutory rate applied to earnings before tax and 1985 1984 1983 extraordinary item Add (deduct): $29,782 $53,998 $33,857 Investment tax credit earned Rate change on timing (37,749) (23,576) (9,745) differences (1,444) (1,467) (1,284) Other 1,035 1,566 702 Income tax expense (credit) before extraordinary item (8,376) 30,521 23,530 Tax benefit on extraordinary loss - (28,094) - Total income tax expense (credit) $(8,376) $ 2,427 $23,530 28 Note E-Taxes on Earnings (Dollars in thousands)-Continued Federal, foreign and state income taxes (credit) consist of the following: 1985 Current Deferred Federal $(6,039) $(6,061) Foreign 1,855 - State (868) 2,737 $(5,052) $(3,324) The deferred income tax expense (credit) consists of the following: 1985 1984 1983 Extraordinary loss 528,094 $(28,094) $ Accelerated depreciation 13,739 (3,566) (10,961) Investment tax and other credits (54,891) 15,958 24,123 Disposition of property (565) 8,749 - Interest 3,588 2,505 2,241 Deferred employee benefits (923) (834) (685) Deferred 757 training costs 4,346 - - Deferred revenue 2,220 - - Rate change on timing differences (1,444) (1,467) (1,284) Other 2,512 (1,518) 805 $(3,324) $(8,267) $14,239 Investment tax credits of $75,395,000 not applied on tax re turns but offset against deferred income taxes at December 31, 1985, will expire $1,107,000 in 1996; $3,198,000 in 1997; $9,752,000 in 1998; $23,589,000 in 1999 and $37,749,000 in 2000. Note F-Commitments At December 31,1985, the Company has contracted to purchase nineteen 757-200 aircraft for de livery in 1986 through 1989, three Boeing 747-200 aircraft for delivery in 1986 and ten Boeing 747-400 aircraft for delivery in 1988 through 1990. Deposits of $239,292,000 have been made with the manufacturers, and additional expenditures for these aircraft and related equipment will be approxi mately: 1986 --$524,868,000; 1987-$271,840,000; 1988- $413,756,000; 1989-$430,806,000; and 1990-$281,893,000. The Company leases space in air terminals, land and buildings at airports and ticket, sales and reservation offices under noncancelable operating leases which expire in various years through 2018. Portions of these facilities are subleased under noncancelable operating leases expiring in various years through 1995. The Company also leases certain aircraft under capital leases which expire in 2003. 1984 1983 Current Deferred Current Deferred $ 6,687 $(7,107) $6,396 $14,138 1,118 - 827 - 2,889 (1,160) 2,068 101 $10,694 $(8,267) $9,291 $14,239 Rental expense for all operating leases consisted of: 1985 1984 1983 Gross 544,330,000 539,884,000 535,633,000 Sublease rental income (1,818,000) (1,079,000) (1,099,000) 542,512,000 538,805,000 $34,534,000 Future minimum rental commitments at December 31, 1985, for noncancelable operating leases with initial or remain ing terms of one year or more, of which $470 million are for air terminal and airport facilities and future minimum rental commitments for capital leases are as follows: Capital Leases Operating Leases 1986 $ 16,501,000 $ 31,107,000 1987 16,981,000 29,983,000 1988 16,981,000 27,453,000 1989 17,619,000 23,182,000 1990 15,894,000 21,706,000 Thereafter 214,886,000 345,189,000 298,862,000 478,620,000 Less sublease rental income 8,610,000 Less amounts representing interest 131,572,000 Present value of obligations under capital leases and mini mum rental commitments $167,290,000 $470,010,000 29 Notes to Consolidated Financial Statements NWA Inc.-Continued Note G--Litigation and Contingencies As previously re ported, in 1973 a federal trial court in Washington, D.C., held in a class action by certain female flight attendants that the Company violated certain provisions of the Equal Pay Act of 1963 and the Civil Rights Act of 1964. After several appeals the trial court judgment was affirmed. On January 14, 1985, the Supreme Court of the United States declined to review the case. The Company's liability was estimated at $58,997,000 including plaintiffs' attorneys' fees. This amount was reflected as an extraordinary loss in the fourth quarter of 1984 in the amount of $30,903,000 net of a $28,094,000 tax benefit. The Company is also involved in other legal actions relating to environmental issues (primarily noise and air pollu tion), alleged employee discrimination, and other matters re lating to the Company's business. While the Company is unable to predict the ultimate outcome of these actions, it is the opinion of management that their disposition will not have a material adverse effect on the Company's financial position. Note H-Pension Plans The Company's pension expense was $23,242,000 in 1985, $26,409,000 in 1984 and $27,817,000 in 1983. Certain actuarial assumptions for all plans and the actuarial cost method for one plan were changed in 1985 which reduced pension expense for the year by approximately $10,200,000.The change in actuarial method, which comprised approximately $3,800,000 of the expense reduction, was from the aggregate cost method to the projected unit credit method. The new actuarial method is believed to be prefer able because it more closely matches pension expense with the pension benefits actually earned during the period and because it more accurately reflects the current funded status of the plan. The changes had no effect on pension benefits to employees. Accumulated plan benefit information, as estimated by consulting actuaries, and plan plans are: net assets for the Company's Year Ended December 31 1985 1984 Actuarial present value of accumulated plan benefits: Vested $455,014,000 $421,624,000 Non-vested 58,363,000 51,721,000 $513,377,000 $473,345,000 Net assets available for benefits $735,610,000 $591,881,000 The interest rate used in computing the present value of accumulated plan benefits was 8% except for certain re tired plan participants where a 13.75% rate was used. The rate for retirees is based upon the actual earnings of a dedi cated securities portfolio established for the payment of their benefits. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for cer tain retired employees. Those benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The cost of providing those benefits, which is not material, is recognized by expensing the annual insurance premiums. Note I--Sales to Customers in Foreign Countries The opera tions of NWA Inc. consist primarily of holding stock in North west Airlines, Inc. Northwest Airlines, Inc. is a scheduled air carrier engaged in commercial transportation of passengers, freight and mail. Sales to customers in foreign countries were $658,000,000 in 1985, $649,000,000 in 1984 and $612,000,000 in 1983, principally associated with countries in Asia and Europe. 30 Note J-Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of opera tions for the two years ended December 31,1985: Operating Revenues (Dollars in Thousands) Earnings (Loss) Before Extraor- Operating dinary Expenses Item Net Earnings (Loss) Earnings (Loss) Per Share of Common Stock Before Extraordi nary Item Net Earnings (Loss) Per Share of Common Stock 1985 First quarter $ 577,191 $ 590,793 $ 798 $ 798 $ .04 $ .04 Second quarter 692,530 638,229 35,318 35,318 1.52 1.52 Third quarter 754,535 692,561 39,012 39,012 1.55 1.55 Fourth quarter 631,235 656,821 (2,009) (2,009) (.09) (.09) $2,655,491 $2,578,404 $73,119 $73,119 $3.18 $3.18 1984 First quarter $ 542,529 $ 556,123 $ 1,040 $ 1,040 $ .05 $ .05 Second quarter 622,766 578,511 39,625 39,625 1.70 1.70 Third quarter 705,251 629,450 45,898 45,898 1.97 1.97 Fourth quarter 574,428 584,614 304 (30,599) .02 (1.28) $2,444,974 $2,348,698 $86,867 $55,964 $3.74 $2.44 See also Note G for extraordinary loss recorded in fourth quarter 1984. Note K--Supplemental Information on the Effects of Chang ing Prices (Unaudited) AS REQUIRED BY FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) STATEMENT NO. 33, "FINANCIAL REPORTING AND CHANGING PRICES," THE COMPANY MUST PROVIDE SUPPLEMENTAL INFORMATION CONCERNING THE EFFECT OF CHANGING PRICES ON ITS FI NANCIAL STATEMENTS. While there is presently no consensus on how the impact of inflation should be reported, FASB has devised an experiment requiring certain large, publicly held companies to present supplemental information reflecting the effect of specific price changes in the individual resources used by the Company and the effect of general inflation on monetary assets and liabilities. THE COMPANY HAS SERIOUS RESERVATIONS ABOUT THE USEFULNESS OF THIS DATA. Statement of Earnings Adjusted for Changing Prices Year Ended December 31,1985 (Dollars in Thousands) As Reported in the Primary Statements Adjusted for Changes in Specific Prices (Current Costs) Operating revenues 52,655,491 52,655,491 Depreciation and amortization 182,563 247,347 Other operating expenses 2,395,841 2,395,841 Gain on sale of equipment 2,780 - Other income, net (15,124) (15,124) Earnings (loss) before income taxes 64,743 (2,821) Income tax benefit 8,376 8,376 Net earnings S 73,119 5 5,555 Other Information Adjusted for Changes in Specific Prices (Dollars in Thousands) (Current Costs) Purchasing power gain from holding net monetary liabilities during the year $ 27,772 Increase in specific prices (current costs) of property and equipment held during the year* 461,897 Less effect of increase in general price level 367,706 Excess of increase in specific prices over increases in the general price level $ 94,191 *At December 31,1985, current cost of property and equipment net of accumulated depreciation, was $3,055,264,000 (historical amount--$1,883,682,000). 31 Notes to Consolidated Financial Statements NWA Inc.-Continued Note K--Supplemental Information on the Effects of Changing Prices (Unaudited)-Continued Five Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices In average 1985 dollars. Year Ended December 31 (Dollars in thousands, except per share and price index data) 1985 1984 1983 1982 1981 Operating revenues $2,655,491 $2,532,210 $2,371,189 $2,092,537 $2,193,290 Current Cost Information Earnings (loss) before extraordinary loss 5,555 (4,306) (164,993) (185,707) (159,800) Per share data .27 (.20) (7.03) (8.60) (7.36) Excess of increase in specific prices of property and equipment over increase in the general price level 94,191 82,187 464,507 259,564 121,357 Net assets at year-end 2,134,641 1,742,939 2,881,100 2,580,869 2,577,433 Other Information Purchasing power gain from holding net monetary liabilities during the year 27,772 Cash dividends declared per common share .90 Market price per common share at year-end 46.00 Average consumer price index 322.2 Statement of Earnings The accompanying supplemental statement of earnings presents income data under two meas urement methods. These are: a. As Reported in the Primary Statements-This amount is net earnings as reported in the primary financial statements on the historical cost basis of accounting. Under generally ac cepted accounting principles the effects of changing prices generally are not recognized for assets and liabilities. b. Adjusted for Change in Specific Prices (Current Costs) -- Income under current cost accounting attempts to reflect the effects of changes in specific prices of the resources actually used in operations so that measures of these resources and their consumption reflect the current cost of replacing these resources, rather than the historical cost. IncomeTaxes Current tax laws do not recognize deductions for current cost depreciation expense; therefore, no adjust ments have been made to the provisions for income tax. 18,501 14,894 15,200 45,982 .85 .86 .89 .95 42.20 48.32 52.38 31.94 311.1 298.4 289.1 272.4 Purchasing Power Gain from Holding Net Monetary Liabili ties During the Year When prices are increasing, the holding of monetary assets (e.g., cash and receivables) results in a loss of general purchasing power. Similarly, liabilities are associated with a gain of general purchasing power because the amount of money required to settle the liabilities represents dollars of diminished purchasing power. The net gain in purchasing power is shown separately in the accompanying supplemental data.The amount has been calculated based on the Company's average net monetary liabilities for the year multiplied by the change in the CPI for the year. Such amount does not repre sent funds available for distribution to stockholders. Increases in Current Cost of Properties Under current cost accounting, increases in specific prices (current cost) of proper ties held during the year (including realized gains and losses on those sold) are not included in income from continuing operations but are presented separately. The current cost in crease is reduced by the effect of general inflation measured by applying the annual rate of change in the CPI to the aver age current cost balances of properties. 32 Note K-Supplemental Information on the Effects of Changing Prices (Unaudited)--Continued Current Cost Measurements The current cost of property and equipment has been esti mated by management using pricing data for aircraft still in production furnished to the airline industry by the Air Trans port Association and current market values for nonproduc tion aircraft. Flight equipment represents approximately 90% of the property and equipment. Current cost depreciation is based on the average current cost of properties during the year. The depreciation methods (straight line), salvage values and useful lives are the same as those used in preparing the primary financial statements. Current cost calculations involve a substantial number of judgments as well as use of various estimating techniques that have been employed to limit the cost of accumulating the data. The data reported should not be thought of as pre cise measurements of the assets and expenses involved, but instead represent approximations of the price changes that have occurred in the business environment in which the Company operates. Current cost does not purport to represent the amount at which the assets could be sold. Stockholders' Information Stock Prices and Dividends Quarter Sales Price of Common Shares Dividends Per Share 1985 1984 1985 1984 1st High $461A $49 $.225 $.20 Low 40V4 3 4 Vi 2nd High 55% 41% .225 .20 Low 37 V4 34% 3rd High 59V2 42 .225 .20 Low 47% 33 V2 4th High 58V4 42 Vi .225 .225 Low 46 35% Stock listed Common Stock listed on New York Exchange, Pacific Stock Exchange and Midwest Stock Exchange. There were 6,384 stockholders of record as of February 28,1986. Co-Registrars and Transfer Agents Norwest Bank Minneapolis, N.A., Minneapolis, MN; Norwest Trust Company, New York, NY. Notice of Annual Meeting The 1986 annual shareholders' meeting will be held at Northwest Airlines General Offices, Minneapolis/St. Paul International Airport, St. Paul, Minnesota, on Monday, May 19,1986, at 9:30 A.M. Accountants' Report To the Stockholders and Board of Directors NWA Inc. Saint Paul, Minnesota We have examined the consolidated statements of financial position of NWA Inc. and subsidiaries as of December 31,1985 and 1984, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing pro cedures as we considered necessary in the circumstances. In our opinion, the financial statements referred to above present fairly the consolidated financial position of NWA Inc. and subsidiaries at December 31,1985 and 1984, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1985, in conformity with generally ac cepted accounting principles applied on a consistent basis. Saint Paul, Minnesota February 18,1986 33 ^ 10 Year Summary* NWA Inc. (Dollars in Thousands Except Per Shai Year Ended December 31 Operating Revenues Passenger Freight Mail Charter and other transportation Nontransport TOTAL OPERATING REVENUES Operating Expenses Depreciation and amortization Other TOTAL OPERATING EXPENSES Operating income (loss) Interest expense Other income and (deductions)--net Earnings (loss) before taxes and extraordinary item Income taxes (credit) Earnings1 Earnings per average share' Cash dividends Dividends per share Stockholders' equity Number of shares outstanding at end of year Book value per share at end of year Assets and Long-Term Debt Flight property at cost Flight property at net book value Total assets Long-term debt Obligations under capital leases Unit Expenses Per available ton-mile Per revenue ton-mile Percent of operating revenues Statistics--Scheduled Services Revenue plane-miles (000) Available seat-miles (000) Revenue passenger-miles (000) Passenger load factor Revenue passengers carried Freight ton-miles (000) Total revenue ton-miles (000) Statistics-Total Operations Revenue plane-miles (000) Available ton-miles (000) *Not covered by Accountant's Report. tStrikes adversely affected 1978 and 1982. t After extraordinary loss of $30,903 or $1.30 per share resulting from the settlement of a 'See pages 18 through 21 for Management's Discussion and Analysis. Figures) J 1985 1984 1983 $ 2,154,394 $ 1,984,999 $ 1,812,227 328,400 355,336 289,170 80,126 58,339 55,585 55,959 38,559 36,198 36,612 7,741 2,856 $ 2,655,491 $ 2,444,974 $ 2,196,036 \ $ 182,563 $ 167,203 $ 146,908 2,395,841 2,181,495 1,980,242 $ 2,578,404 $ 2,348,698 $ 2,127,150 77,087 96,276 68,886 (19,873) (4,268) (3,548) 7,529 25,380 8,265 I I $ 64,743 $ 117,388 $ 73,603 (8,376) 30,521 23,530 $ 73,119 $ 55,964tt $ 50,073 3.18 2.44tt 2.19 19,586 17,933 17,367 .90 .825 .80 947,001 892,923 854,189 21,774,251 21,749,667 21,715,995 $ 43.49 $ 41.05 S 39.331 $ 2,784,553 $ 2,356,048 $ 2,080,299 1,427,114 1,151,930 976,501 2,320,006 1,754,233 1,602,236 332,992 100,000 100,000 $161,101 -- -- 39.84 40.24 40.54 75.34 74.74 76.04 97.1% 96.1% 96.9% 159,337 143,410 133,699 37,148,562 32,663,660 29,511,287 22,341,334 19,772,355 17,711,929 60.1% 60.5% 60.0% 14,538,744 13,215,907 12,718,468 886,355 965,868 835,197 3,334,257 3,103,799 2,750,946 161,186 144,568 134,870 j 6,450,509 5,837,972 5,255,086 34 1982t $ 1,567,986 205,018 60,451 34,758 9,355 $ 1,877,568 $ 136,651 1,749,292 $ 1,885,943 (8,375) (7,216) 16,279 $ 688 (4,331) $ 5,019 .23 17,332 .80 820,605 21,678,458 $ 37.85 $ 1,996,925 1,019,071 1,377,387 40.7 , v MIDDLE !LS OFF *E CO PULL UP CADIN /^WCDfN MAKES AIRT nV8? 0M# D FWC V 1 , ^S400 1 ^350 300 ,00V Vs 120V n OOtf " 1 ol 2 'o Z- 250 s ,4Cf -- ... i-F-y V 2 ' I \ ^"'60'"/,, So I ? 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