Pacific Air Lines Annual Report 1962

OFFICERS AND EXECUTIVE STAFF
JOHN H. CONNELLY, President and General Manager
T . R. MITCHELL, Executive Vice President
R. C. WITHERS, Administrative Assistant to
the Executive Vice President
R. E. COSTELLO, Vice President, Traffic
WM. J. MITCHELL, Vice President
C. A. MYHRE, Vice President, Finance and Secretary
HARRY WHITE, Vice President, Operations
E. ROGER DAHL, Treasurer
R. C. COUK, Director of Flight Operations
D. G. DAVISON, Director of Engineering and Maintenance
R. J. DIXON, Director, Marketing
W. H. LEVINGS, Director of Personnel
BOARD OF DIRECTORS
LELAND HAYWARD, Chairman
JOHN H. CONNELLY
B. F. EDWARDS, JR.
WILLIAM GOETZ
JOSEPH MARTIN, JR.
Stock Transfer Agents
Crocker-Anglo National Bank
T. R. MITCHELL
C. A. MYHRE
RICHARD OSBORNE
HARRY WHITE
T. B. WILSON*
1 Montgomery Street, San Francisco, California
Bankers Trust Company
New York 17, New York
Stock Registrars
Bank of America
300 Montgomery Street, San Francisco, California
The Chase Manhattan Bank
New York 15, New York
Debenture Trustee
Bank of America
300 Montgomery Street, San Francisco, California
Debenture Paying Agents
Bank of America
300 Montgomery Street, San Francisco, California
Bankers Trust Company
New York 17, New York
*Deceased
2
PACIFIC
A.I/It LIN~S
2 l
1962 ANNUAL REPORT
PACIFIC AIR LINES, INC.
General Offices: San Francisco International Airport
San Francisco 28, California
CONTENTS PAGE
Management . 2
Fiscal Highlights 4
President's Letter 5
Financial Review 6
Source and Disposition of Funds 8
The Revenue Dollar . 8
Comparative Statistics 9
Traffic and Sales 10
Route Map 10
Routes 11
Financial Statements . 11
The Annual Meeting of shareholders will be held in Suite
567, First National Bank Building, 411 North Central
Avenue, Phoenix, Arizona, on June 3, 1963, at 10:00 a.m.
3
FISCAL HIGHLIGHTS
Operating Revenues .
Operating Expenses .
Net Earnings After Taxes
Net Earnings Per Share .
Revenue Passenger Miles
Revenue Passenger Load Factor
Average Number of Passengers Per Mile
AT END OF YEAR-
4
Working Capital
Stockholders' Equity
Book Value per Share .
1962
$12,077,382
$11,335,942
$ 170,362
$ .20
112,727,000
49.5%
20.6
$ 1,130,981
$ 2,864,458
$3.36
1961
$11,095,201
$10,175,879
$ 317,125
$ .37
98,119,000
48.3%
19.6
$ 905,486
$ 2,692,677
$3.16
TO OUR STOCKHOLDERS, EMPLOYEES AND CUSTOMERS
I am pleased to report that Pacific's 1962 revenues
increased substantially over the previous year. Total
commercial revenues, excluding public service rev-
enue, increased $792,000 over 1961 or 11 percent.
Passenger and charter revenues increased $700,000,
a gain of 10 percent. Air freight, other cargo, and
miscellaneous revenues increased $92,000 or 23 per-
cent.
Public service revenue increased $190,000 over the
year 1961 . This resulted primarily from the addition
of five new cities to our route system - San Diego,
Fresno, Long Beach and Inyokem, California, and
Reno, Nevada. Service was inaugurated to Fresno and
Inyokern on May 8; to Long Beach and Reno on
June 1; and to San Diego on July 1, 1962.
Your Company continued to lead the local service
industry in the number of passengers carried per air-
plane mile flown, which in 1962 amounted to 44 per-
cent more passengers per mile than the industry aver-
age. Although Pacific's average passenger yield is
below the average yield for the local service industry,
our commercial revenue, expressed in dollars col-
lected for each mile flown, is near the top for the
industry. A high yield ( or fare) by itself as an eco-
nomic gauge can be most deceiving; the only true
gauge is actual dollars of revenue collected for each
airplane mile flown. Raising our fares under the pres-
ent highly competitive conditions existing over the
major part of Pacific's system might very well reduce
our revenue rather than increase it.
Although the Company experienced a substantial
increase in passenger revenues in 1962, it was de-
prived of additional revenues when our traffic between
San Francisco and Las Vegas, formerly served only
by Trans World Airlines and Pacific, was adversely
affected by the Civil Aeronautics Board granting non-
stop authority to Western Air Lines, Delta Air Lines
and National Airlines, resulting in a total of four trunk
line carriers now offering nonstop service between Las
Vegas and San Francisco. Without similar nonstop
authority, your Company cannot compete successfully
for traffic between these points and has now reduced
its service from two daily round trips to one. Further-
more, traffic formerly carried only by United and
Pacific between Sacramento and Los Angeles also
suffered diversion by the additional certification of
Western Air Lines in this important market. Your
management finds Board decisions such as the above
most confusing in light of its frequently announced
policy of strengthening local carriers.
In addition, the Civil Aeronautics Board adjusted
our system class mail rate, eliminating benefits of the
formula as applied to the expanded system. The true
concept and sole purpose of subsidy in air transpor-
tation, which is not clearly understood by the general
public, newspapers and some congressmen, is to sup-
port service to those smaller cities of America which
are unable to generate sufficient traffic to justify serv-
ice on a profit-making-basis. The present Civil Aero-
nautics Board policy, which leans toward curtailing
support of local service airlines, forces a reduction in
service to the smaller cities. Without assistance from
the government in the form of subsidy, air transpor-
tation to such cities must be curtailed or eliminated
altogether. In the final analysis, therefore, it is the
cities and air travelers who are being subsidized.
The financial structure of the Company remains
strong. Working capital increased by $225,495 in
1962, to a total of $1,130,981. Cash balances rep-
resented 44.8 percent of the total current assets at
the end of the year. Interest payments were covered
twofold and all bank debt is being retired in accord-
ance with the terms of the loan agreements. Book
value of stock outstanding increased to $3.36 a share
in the current year from $ 3 .16 in 19 61.
During the year it was necessary to add two addi-
tional Martin 404s to the fleet; however, all other
capital expenditures were held to a minimum. The
operating fleet now consists of six Fairchild turbo-
prop aircraft and 12 Martin piston aircraft.
I should like to take this opportunity to express my
appreciation to Pacific's customers and shareholders
for their continued patronage and support, and to all
members of our organization for their loyal and effec-
tive services which contributed to our successful oper-
ation during 1962.
Respectfully,
JOHN H. CONNELLY, President
5
FINANCIAL REVIEW
OPERATING RESULTS Operating revenues again
surpassed all previous records, totaling $12,077,382
as compared to $11,095,201 in 1961, or an increase
of almost $1,000,000. Gains were recorded in all
categories of revenue except Charter and Contract.
OPERATING REVENUES INCREASE
1962 1961 (DECREASE)
Passenger $ 7,425,887 $ 6,389,439 $ 1,036,448
Charter and
Contract . 25,432 361 ,455 (336,023)
Air freight and
other cargo and
miscellaneous
revenue 493 ,114 401 ,409 91 ,705
Public Service
Revenues 4,132,949 3,942,898 190,051
$12,077,382 $11 ,095,201 $ 982,181
As of January 2, 1962, Department of Defense
passenger traffic, formerly carried under contract,
was transferred to our regular scheduled flights. The
Agreement provides for a special tariff applicable to
these passengers. The Agreement continues in 1963.
Significant gains were recorded in cargo volume and
revenues. Increases in 1962 over 1961 were as follows:
Mail
Express
Freight
Excess baggage
PERCENTAGE INCREASE
TON MILES REVENUE
10.8% 8.8 %
18.3 29.3
21.2 55.1
2.4 3.0
Service was inaugurated to five additional cities
during the year. The Pacific Southwest Local Service
Case was decided by the Civil Aeronautics Board
6
early in 1962. Pacific was awarded Fresno, Inyokem,
Long Beach and San Diego, California, and Reno,
Nevada. Service was started to these cities during
May, June and July.
Additional trunk airline service was certificated by
the Board in the same decision. The additional Sac-
ramento -Los Angeles and San Francisco-Las Vegas
nonstop trunkline service diverted substantial reve-
nues from Pacific, annually approximating $250,000.
This revenue diversion effectively reduced the gains
from the cities certificated to Pacific.
Operating expenses increased by $1,160,000, re-
sulting partly from servicing the expanded system and
partly from the normal increases in wages and mate-
rials prices. These increases were held in good pro-
portion to the volume of service; however, costs per
available ton-mile as well as costs per revenue ton-
mile decreased over the previous year:
Cost per available ton-mile-cents
Cost per revenue ton-mile-cents
1962
50.6
101.1
1961
50.8
104.1
Net earnings aggregated $170,362, equivalent to
20 cents per share. This compares to 3 7 cents per
share for 19 61.
FINANCIAL POSITION The strong financial posi-
tion of the Company reflected in the Balance Sheet
at year end 1961 continues and is further improved.
Working capital increased by $225,495 to a total of
$1,130,981. The working capital ratio at year end
was 1.48 to 1. Cash and receivables exceeded current
liabilities by $475,000. Cash also rep resented 44. 8 %
of total current assets.
Additions to fixed asset amounts were represented
primarily by the purchase of two additional Martin
404 aircraft and spare parts.
Long term debt principal payments, and interest
thereon, were met in accordance with the terms of
the Agreements.
MAIL RATES The Company received Public Service
Revenue (subsidy) in accordance with the class mail
rate instituted on January 1, 1961.
Two adjustments were made to the rate formula in
the year 1962. As of January 2, 1962, when Pacific
began carrying Department of Defense traffic on its
regular scheduled flights ( formerly carried under con-
tract) landings were required at Vandenberg Air Force
Base and at Van Nuys, California. By Order No.
E-17886 the Board permitted the landings but did not
permit the inclusion of the two stops in the mail rate
formula calculation.
The second adjustment was made at the time serv-
ice was commenced to the newly certificated cities in
the Pacific Southwest Local Service Case, Order No.
E-18286. This adjustment was made to "prevent an
excessive overpayment" under the formula application.
In the calculation of the adjustment, no consideration
was permitted to give effect to traffic diversion caused
by newly certificated trunk-line service in some of
Pacific's longer haul, high load factor markets. This
diverted traffic seriously affected our total revenues by
largely nullifying the gains from the newly certificated
cities and thus contributed the reduction in net earn-
ings this year as compared to last year.
On October 12, 1962, the Board issued Order No.
E-18911 instituting an investigation to determine
whether a revised class rate should be established
effective January 1, 1963.
After several months of study by the Board and the
industry, the Board issued Order No. E-19118 on
December 20, 1962, opening the rates of all local
service airlines preparatory to instituting a revised
rate as of January 1, 1963. The tentative agreement
reached at this time by the Board's Staff and the car-
riers was not shared by all parties. Several carriers
objected to the proposed rate for several reasons. It
placed an arbitrary ceiling on total subsidy available,
much less than the indicated "need" for some carriers
and provided substantially more than "need" for other
carriers. Several carriers, including Pacific, vigorously
opposed the proposed formula.
Protests did not prevail, however, and on March 1,
1963, the Board issued its Show-Cause Order No.
E-19340, to institute the rate. Pacific filed objection
and has until May 15, 1963 to file its answer or, in
the alternative, accept the rate.
Pacific is opposed to the proposed rate formula, not
only for the reason that we believe it to be contrary
to the Federal Aviation Act, but because its puts a
premium on reductions in service and suspension of
service and contrariwise, a financial penalty on any
increase in service that is not practically self support-
ing. This we believe to be contrary to the public
interest.
TAXES The total taxes paid by the Company in
1962 equalled 33.9 percent of total subsidy received.
Exclusive of taxes deducted from employees' earnings
the tax bill was $1,402,078, as follows:
Federal transportation taxes collected
from passengers
State and Federal Fuel Taxes
Federal and State payroll taxes, excluding taxes
deducted from earnings of employees
Federal income taxes applicable to 1961
Property and all other taxes .
$ 702,022
81,475
214,069
252,052
152,460
$1,402,078
7
SOURCE AND DISPOSITION OF FUNDS THE REVENUE DOLLAR
1962 1961
WORKING CAPITAL AT BEGINNING OF YEAR-
Current assets $ 3,459,550 $ 2,848,386
Current liabilities 2,554,064 4,448,742
Working capital (deficiency) . $ 905,486 $ (1,600,356)
Additions during the year: ~
Net earnings before sale of equipment $ 145,575 $ 276,070 PASSENGER
& EX BAG
Depreciation and amortization 829,359 873,845
EXPRESS
Deferred debt discount expensed 15,009 6,970 OTHER
Overhaul costs expensed . 583,966 447,421 SOURCE 1962 1961
Passenger and excess baggage $ 7,462,116 61.7 57.7
Sale of property and equipment 122,420 132,464 Public service revenue and mail 4,311,023 35.6 36.9
Increase future income taxes . 19,330 Charter and contract 25,432 .2 3.2
Conversion of debentures 1,600 Freight 167,936 1.4 1.0
Net proceeds from sale of debentures 1,599,803 Express 70,538 .6 .5
Other. 65,124 .5 .7
Net proceeds from sale of common stock 718,573
$12,102,169 ~ ~
Sale of warrants 2,000
Deferred investment tax credit 4,582
Other. 516
$ 1,722,357 $ 4,057,146
Used during the year:
Purchase of property and equipment, less value of
equipment traded in $ 556,509 $ 359,640
Overhaul costs capitalized 599,522 216,644
Reduce long term debt 286,745 908,237
Reduce future income taxes 22,247
Route development costs . 50,445 41,322 INSURA NCE
INTEREST
Increase investments 3,641 RETAI NED
Other. 3,214 DISPOSITION
$ 1,496,862 $ 1,551,304 Wages and employee benefits $ 5,037,045 41.6 40.7
Rents, supplies and services . 1,933,205 16.0 15.3
Net increase during year $ 225,495 $ 2,505,842 Fuel and oil for aircraft . 1,202,379 9.9 9.9
Parts and supplies for aircraft . 1,534,981 12.7 11.4
Depreciation and amortization . 829,359 6.8 7.8
WORKING CAP IT AL AT END OF YEAR- Taxes. 700,056 5.8 6.0
Current assets $ 3,483,484 $ 3,459,550 Insurance 359,652 3.0 3.3
Current liabilities 2,352,503 -2,554,064 Interest 335,130 2.8 2.8
Retained in the business . 170,362 1.4 2.8
Working capital $ 1,130,981 $ 905,486 $12,102,169 ~ ~
8
COMPARATIVE FINANCIAL AND OPERATING STATISTICS
REVENUE AIRPLANE MILES 1962 1961 1960 1959 1958 1957
FLOWN
Scheduled service 5,470,054 5,010,206 6,117,367 5,456,087 5,058,016 4,313,468
Charter and contract service . 12,782 287,071 535,792 554,237 326,033 238,248
Total revenue miles flown. 5,482,836 5,297,277 6,653,159 6,010,324 5,384,049 4,551,716
SCHEDULED SERVICES
Available seat miles ( 000) 227,681 203,092 235,646 190,304 165,226 139,593
Revenue passenger
miles (000) 112,727 98,119 103,374 93,636 78,332 70,000
Revenue passengers . 493,301 424,319 451,472 421,813 351,982 319,276
Average number of
passengers per mile 20.6 19.6 16.9 17.2 15.5 16.2
Average length of trip
(miles) 229 231 229 222 223 219
Passenger load factor 49.5% 48.3% 43.9% 49.2% 47.4% 50.1%
Passenger revenue per
passenger mile 6.6 6.5 6.0 6.2 5.9 5.4
Available ton miles 22,305,567 19,945,837 22,655,560 17,728,993 15,837,711 13,395,737
Revenue ton miles:
Passenger 10,709,109 9,321,311 9,820,529 8,895,385 7,441,507 6,649,979
U.S. Mail 223,346 201,510 196,837 174,320 135,624 113,555
Freight 138,162 114,022 106,908 99,024 87,322 78,992
Express 64,471 54,481 53,891 56,276 57,215 54,949
Excess baggage 44,842 43,774 42,677 38,838 31,564 24,530
11,179,930 9,735,098 10,220,842 9,263,843 7,753,232 6,922,005
Miles of route at end of year. 2,570 2,257 2,260 2,260 1,983 1,983
Number of airports served
at end of year . . 30 23 25 25 25 24
Number of aircraft operated
at end of year 18 21 23 22 17 18
Number of employees
at end of year 736 658 698 668 560 470
Number of common shares
outstanding at end of year 851,765 851,410 671,410 671,410 671,410 671,410
Book value per share
at end of year . $3.36 $3.16 $2.46 $2.76 $2.65 $2.56
Net earnings per share $0.20 $0.37 NIL $0.03 $0.09 $0.06
9
TRAFFIC AND SALES
During the year 1962, new emphasis was placed on
sales and service with field personnel. This new em-
phasis, plus the company's route structure changes,
brought about by Civil Aeronautics Board action in
the Pacific Southwest Local Service Case, accounted
for an over-all increase of 68,982 passengers over
1961. Other indices show gains were made system
wide.
1962 1961 INCREASE
Scheduled miles flown 5,470,054 5,010,206 9.18%
Available seat miles
flown (000) 227,681 203,092 12.11 %
Passenger miles flown ( 000) 112,727 98,119 14.89%
Passenger load factor 49.5% 48.3% 1.5 %
Average passengers per mile 20.6 19.6 5.10%
Passenger revenue per
passenger mile flown 6.6 6.5 1.54%
U.S. Mail, express and
freight revenues $ 416,548 $ 326,467 27.59%
Interline traffic, the exchange of passengers between
airlines, amounted to $2,223,455 received from other
scheduled carriers, up nearly $200,000 from 1961.
Pacific also exchanged to these airlines $4,232,222,
over $800,000 greater than the previous year.
To further improve our customer service, a new type
of self-ticketing concept known as the "QUICKET"
was inaugurated in January, 1963. The holder writes
his own ticket and, after making the usual reserva-
tion, may board his flight without going through the
check-in procedure at the airport ticket counter. The
"QUICKET" has met with overwhelming approval
from our customers.
10
WASHINGTON
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LEGEND
ROUTES
NONSTOP SERVICES
NEW ROUTES (pending CAB action)
Q S ALT LAK E
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DENV E R
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---------0
JUNCTION ______ _
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C O LOR ADO
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/ PAGE -
I
'
ARIZONA ALBUQUEROU~C)
NEW MEXICO
ROUTES STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31
The Company is an applicant for route extensions in Operating revenues: 1962 1961
the Southern Rocky Mountain Area local service case. Passenger $ 7,425,887 $ 6,389,439
A decision is expected during the current year. Mail . 178,074 163,647
The application for extension of our route from Charter and contract operations . 25,432 361,455
Express, freight and excess baggage 274,703 197,987
Portland to Seattle has not been set for hearing at Other 40,337 39,775
this time. 7,944,433 7,152,303
Other applications for lifting of closed door and Public service revenue 4,132,949 3,942,898
certain operating restrictions are on file; nonstop Bur- 12,077,382 11,095,201
bank-Las Vegas, the carriage of local passengers be-
Operating expenses:
tween San Diego and Los Angeles, and permission to
Flying operations 3,111,336 2,869,775
fly between Medford and Portland-decision from the Maintenance . 2,665,323 2,504,009
Civil Aeronautics Board on these applications is ex- Passenger service 442,762 398,597
pected in the near future. Aircraft and traffic servicing 2,218,298 1,827,365
Continued study and surveillance of Pacific's route Promotion and sales . 1,234,058 958,199
structure is being performed to assure your Company's General and administrative 834,806 744,089
Depreciation . 792,602 829,594
participation and leadership in air transportation com- Amortization of pre-operating and
merce in the west. route development costs . 36,757 44,251
11,335,942 10,175,879
Operating income 741,440 919,322
Other income and (expenses) :
Interest (335,130) (314,644)
Net gain on disposition of assets . 24,787 41,055
Other, net (8,683) (6,151)
(319,026) (279,740)
422,414 639,582
Estimated federal income taxes (252,052) (322,457)
Net earnings for the year (Notes E and G) 170,362 317,125
Earnings retained for use in the business:
Balance, beginning of year 1,390,075 1,072,950
Balance, end of year . $ 1,560,437 $ 1,390,075
11
12
PACIFIC AIR LINES, INC. BALANCE SHEET
ASSETS
CURRENT ASSETS:
Cash (includes time deposit: 1962-$1,000,000; 1961-$500,000)
Sacramento Redevelopment Agency Preliminary Loan Notes, 1.46%
Accounts receivable:
United States Government:
Mail, passenger and other
Traffic and agents .
Miscellaneous, less allowance for possible losses ( 1962-$8,000;
1961-$6,800)
Expendable parts and supplies, at approximate cost, not in excess of market .
Prepaid expenses .
PROPERTY AND EQUIPMENT, at cost-pledged under notes payable (Notes A and C):
Flight equipment .
Ground and other equipment.
Less-Accumulated depreciation and amortization
Construction in progress
INVESTMENTS, at cost.
DEFERRED CHARGES, less amortization:
Route extension and development expense
Pre-operating cost of new flight equipment
Debt discount and expense
DECEMBER 31
1962 1961
$ 1,561,258 $ 1,336,014
500,000
728,961 572,876
431,104 380,195
106,133 84,810
561,126 478,929
94,902 106,726
3,483,484 3,459,550
9,515,195 9,397,669
1,066,245 968,099
10,581,440 10,365,768
4,239,229 3,797,010
6,342,211 6,568,758
91,988
6,342,211 6,660,746
16,269 12,628
125,779 88,799
30,082 53,374
195,401 210,742
351,262 352,915
$10,193,226 $10,485,839
LIABILITIES
CURRENT LIABILITIES:
Notes payable-current instalments
Accounts payable .
Taxes collected or withheld from others
Accrued expenses
Unearned transportation revenue .
Estimated federal income taxes .
LONG-TERM DEBT:
Notes payable to bank (Note A) .
6 % convertible subordinated debentures, due July 1, 1976 (Note B)
PROVISION FOR FEDERAL INCOME TAXES OF FUTURE YEARS (Note C)
DEFERRED INVESTMENT TAX CREDIT (Note C)
STOCKHOLDERS' EQUITY (Notes A, B and D) :
Common stock:
Authorized, 40,000,000 shares of 50 par value per share
Outstanding 1962-851,765 shares, 1961-851,410 shares
Paid-in surplus
Earnings retained for use in the business, per accompanying statement
See notes to Balance Sheet on page 14
DECEMBER 31
1962 1961
$ 656,320 $ 818,404
981,339 809,581
157,622 169,616
216,437 170,026
131,785 116,437
209,000 470,000
2,352,503 2,554,064
3,116,746 3,401,891
1,798,400 1,800,000
4,915,146 5,201,891
56,537 37,207
4,582
425,883 425,705
878,138 876,897
1,560,437 1,390,075
2,864,458 2,692,677
$10,193,226 $10,485,839
13
NOTES TO FINANCIAL STATEMENTS
NOTE A-Notes payable:
5 %, payable in monthly instalments
of $38,550 to February 1969 .
6% , payable in monthly instalments
of $5,583 to July 1967 . . .
6% , payable in monthly instalments
of $10,560 to October 1967
DUEIN
1963
$462,600
67,000
126,720
~
DUE AFTER
1963
$2,449,300
234,500
432,946
$3,116,746
Substantially all of the Company's equipment is pledged as security
under chattel mortgages for the loans.
The Civil Aeronautics Board, under agreements dated Decem-
ber 1, 1958 and May 9, 1960, guaranteed 90% of the principal
amount and 100% of the interest on the 5 % loan and the 6%
loan payable to July 1967.
Under the terms of the Joan agreements, the Company has agreed
that ( 1) it will not, without the prior consent of the bank, pay any
dividends (except in stock) or purchase, redeem or otherwise
acquire for value any of its outstanding shares, and (2) it will
maintain current assets at least equal to current liabilities; for the
purpose of this computation, current instalments under the Joan
agreements may be excluded from current liabilities.
NOTE B-Debentures: Under the terms of the indenture relating to
the 6 % convertible subordinated debentures, annual sinking fund
payments of $90,000 each, commencing in 1966, are required. The
debentures are convertible into common stock of the Company at
conversion prices per share of $4.50 to December 31, 1963, $6.00
from January 1, 1964 to June 30, 1966 and $8.00 after June 30,
1966.
The terms of the indenture restrict the payment of cash dividends
and the purchase or redemption of common stock by the Company
to the sum of $100,000 plus 66 % of the earnings of the Company
accumulated subsequent to December 31, 1960. (See Note A for
restrictions on payment of dividends imposed by bank loan agree-
ments.)
NOTE C-lnvestment Tax Credit: Under the Revenue Act of 1962
investment tax credit on the acquisition of certain qualified depre-
ciable property amounted to $10,500. For accounting purposes, as
suggested by the Civil Aeronautics Board, 52 % of this reduction
has been credited to provision for federal income taxes of future
years and will be amortized over the lives of the related properties.
The remaining portion has been credited to deferred investment
tax credit and will be taken into income over the statutory period
required to establish the permanency of the "investment tax credit."
NOTE D-Warrants: 40,000 shares of unissued common stock are
reserved for the exercise of outstanding warrants for the purchase
14
of such shares at prices ranging from $5.00 to $5.25 until August
1964.
NOTE E-Pension plans: The Company has several pension plans
for pilots and other employees. All of the plans are contributory
except for the fixed benefit plan for pilots which became non-con-
tributory in 1962. In addition, the method of funding under some
of the plans was changed during the year. The effect of these
changes was that the Company's 1962 pension contributions of
$153,000 (including $19,500 toward past service costs) were ap-
proximately $38,000 less than would have been payable under the
previous funding method. As a result, net income for the year was
increased by approximately $18,000. These changes also resulted
in an increase in unfunded past service costs which are estimated
to be approximately $560,000 at December 31, 1962. Past service
costs will be funded over future years at a rate which will accumu-
late sufficient funds to meet pension obligations to employees as
they retire.
NOTE F-Commitments: At December 31, 1962, the Company had
long-term leases on land, terminal facilities and radio equipment
with aggregate rental commitments of $830,000 payable as follows:
1963-$68,000, 1964-$58,000, 1965-$31,000, and 1966 to 1990-
$673,000. In addition to the foregoing, the Company was occupy-
ing certain terminal facilities while negotiating a lease for a term
of 30 years from April 1962 at a minimum annual fixed rental of
approximately $30,000 subject to renegotiation at five-year intervals.
NOTE G-Net income: In accordance with the request of the Civil
Aeronautics Board, the Company revised its method of accounting
for built-in-overhaul costs on certain flight equipment. As a result
of this change, net income for 1962 is approximately $30,000
greater than it would have been under the method followed in
the preceding year.
NOTE H-Subsequent event: In an effort to reduce public service
revenues paid to local service carriers, the Civil Aeronautics Board
effected a new class mail rate formula as of January 1, 1963. Under
the method of operating and level of service furnished during 1962,
the amount of public service revenue to be received would be sub-
stantially reduced. Under the new formula successively higher rates
of public service revenue per available seat mile apply as the num-
ber of departures decrease; the formula thus tends to encourage a
decrease in service to smaller communities, many of which are
served by the Company. Steps are being taken to meet the problems
facing the Company under the new formula.
The Company has not finally accepted the new formula for
determination of public service revenue and is presently discussing
its situation with the Civil Aeronautics Board in an effort to obtain
some relief.
ACCOUNTANTS'REPORT
PRICE WATERHOUSE & Co.
120 :
MONTGOMERY STREET
SAN FRANCISC O 4,
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF PACIFIC AIR LINES, INC.
In our opinion, the accompanying statements
present fairly the financial position of Pacific
Air Lines, Inc. at December 31, 1962 and the
results of its operations for the year, in con-
formity with generally accepted accounting prin-
ciples applied, except for the change described
in Note G, on a basis consistent with that of the
preceding year. Our examination of these state-
ments was made in accordance with generally
accepted auditing standards and accordingly in-
cluded such tests of the accounting records and
such other auditing procedures as we consid-
ered necessary in the circumstances. Certain re-
ceivables from the United States Government
selected for tests were not confirmed by direct
correspondence, but we satisfied ourselves as
to these amounts by means of other auditing
proced~
~~- 9C,
March 18, 1963
IN MEMORIAM
Brig. General Thomas Byane Wilson, a
Director of Pacific Air Lines since Novem-
ber 1962, closed a lifetime of service in the
transportation industry on May 7, 1963.
His many years of varied experience in civil
and military aviation, as well as surface
transportation, brought a wealth of knowl-
edge, advice and assistance to Pacific.