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 OR EGON ELKO_o ,,, \ \ \ \ \ \ \ ELY O I DA H 0 ,,, ,,,,,' LEGEND ROUTES NONSTOP SERVICES NEW ROUTES (pending CAB action) Q S ALT LAK E , CITY DENV E R UTAH GRAND ---------0 JUNCTION ______ _ o------ C O LOR ADO 0 -------------- --Q FARMINGTON / 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.