Pacific Air Lines Annual Report 1965

N inetee hundred sixty-five
annual r.eport
marking twenty-six years
of service
Pacific Air Lines 727 Jet Service
sets a new World Standard
for Local Air Travel
Contents
Directors and Officers
Chairman's Letter
Financial Highlights
Balance Sheet . . .
Statement of Earnings .
Notes to Financial Statement .
Page
2
4
7
10
12
13
DIRECTORS AND OFFICERS
MATTHEW E. McCARTHY, Chairman of the Board
and Chief Executive Officer, Member of the
Executive Committee
DAVID R. GRACE, Director and Member of the
Executive Committee
General Partner, Sterling, Grace & Co., New York
RICHARD E. LANG, Director and Member of the
Executive Committee
Chairman of the Board of Lang & Co., Seattle
JOSEPH MARTIN, JR., Director
Partner in the Law Firm of Allan, Miller,
Groezinger, Keesling & Martin, San Francisco
LLOYD W MARTIN, Director
President of Reed & Martin, Inc., Honolulu
IAN G. THOMSON, Director
President of The Chartered Bank of London, San Francisco
MAX H. WYMAN, Director
Partner-M. A. Wyman Lumber Co., Seattle
HARRY S. WHITE, Director and President
ROBERT SETRAKIAN, Director
President of Setrakian and Company, San Francisco
Chairman of the Board of the Valley National Bank
C. A. MYHRE, Director and Executive Vice President
JAMES T. KILBRETH, JR., Senior Vice President, Marketing
R. C. COUK, Vice President, Flight Operations
DARROL G. DAVISON, Vice President,
Engineering and Maintenance
R. E. COSTELLO, Vice President, Traffic
E. R. DAHL, Secretary Treasurer
2
Matthew E. McCa1thy Davicl R. Grnce Rich a1d E. Lang
Ha11y S. White Jos eph Martin, Jr. Lloycl W Martin
Ian G. Thomson Max H. Wyman Robert Setrakian
C. A. Myhre James T. Kilbreth, Jr. R. E. Costello
Darrol G. Davison R. C. Couk E. R. Dahl
Matthew E. McCarthy, seated,
Pacific's Board Chairman
and Chief Executive Officer, with
William M. Allen, President of
The Boeing Company, after affixing
his signature to the agreement for
727 and 737 pure jet aircraft.
DEAR STOCKHOLDER: The year 1965 surpassed 1964, the previous high in gross revenues
and net operating earnings for Pacific Air Lines. Sharing proportionately in the general gains in
the aviation industry, your company's gross revenues were $14,684,589 in 1965, compared to
$13,446,890 in 1964. Net income in 1965 was $700,337, compared to $583,504 in the previous year,
which, on an adjusted share basis, represented $0.70 a share in 1965, compared with $0.62 a share
in 1964. The year 1965 was highlighted by major policy moves. After careful evaluation,
your company purchased four Boeing 737's for delivery in late 1967 and early 1968 and secured
options for four additional Boeing 737's. Two Boeing 727's were leased for delivery in June and
July 1966, and options for two additional 727's for delivery in early 1967 were obtained. Based on
present and projected traffic, we believe that the pure jet equipment under contract meets our needs
and provides adequate flexibility for growth potential. During 1965 a long term lease was negotiated
for 16 acres at San Francisco International Airport whereon our new, up-to-date administration
building and maintenance base will be completed in October 1966. Our computer installation (IBM
360) will be in operation in our new administration building in 1966, and much needed consolidation
of our personnel will be obtained. These acquisitions will entail personnel training and other intro-
ductory costs which will add to the 1966 operational expenses. In late 1965 the company's outstanding
4
convertible debentures were called and practically all were converted to capital stock, thus increasing
our net worth and eliminating interest and reserve requirements. Your company, recognizing in
1965 that aviation's expanding market and the addition of jet equipment would require an aggressive,
new marketing philosophy, reorganized its marketing department and new promotion programs are
underway . During the year, Mr. James T. Kilbreth, Jr., was appointed senior vice president in
charge of marketing, Mr. R. C. Couk was advanced to vice president in charge of flight operations
and Mr. Darrol G. Davison was advanced to vice president in charge of engineering and maintenance .
The Civil Aeronautics Board hearings in the transfer of United Air Lines' route in the San
Joaquin Valley to Pacific Air Lines were completed in 1965, and we are awaiting the Board's decision.
We believe that it will be favorable, and we anticipate a large passenger increase through this
transfer . Your company's relations with the unions representing our employees have continued
on a friendly, cooperative basis. In view of increasing competition and rising costs, it is pleasant to
acknowledge again the excellent
cooperation of stockholders, man-
agement, the staff and employees.
In behalf of the Board of Directors
5
Const1uction is underway for occupancy in Octobe1 of a new general office and .iet-age maintenance
base, including installation of IBM compute?' equipment for greate1 effi ciency.
FINANCIAL HIGHLIGHTS
FINANCIAL
1965 1964
Total revenues $14,684,589 $13,446,890 9 o/o
Operating income $ 1,462,036 $ 1,291,343 13 %
-
Net earnings $ 700,337 $ 583,504 20 %
Earnings per share-based upon average number of
shares outstanding during the year . $ 0.70 $ 0.62 13 %
Long-term debt . $ 2,518,405 $ 4,980,253 49 o/o
Working capital . $ 837,833 $ 903,593 (7 % )
Stockholders' equity $ 6,237,502 $ 4,391,818 42 %
Shares outstanding at end of year. 1,186,580 978,598 21 o/o
Book value per share $ 5.26 $ 4.49 17 %
STATISTICAL
Revenue miles flown 6,302,180 5,766,794 9 o/o
Available seat miles ( 000) 261,311 239,802 9 o/o
Revenue passenger miles ( 000) 138,379 128,386 8 o/o
Revenue passengers 695,131 612,539 13 %
Passenger load factor . 53.0 o/o 53.5 %
Passenger revenues per passenger mile . 7.3 7.0 4 %
Number of airports served 30 30
Number of aircraft . 18 18
Number of employees at end of year . 802 768 4 %
7
"We Fly to the Nicest Places" is the theme
of an intensive nationwide sales p?'omotion campaign,
designed to encourage local residents and visito1s
to the West from all over the world to travel the
enti?'e Wonde?'land served by Pacific.
MONTEREY/CARMEL
HOLIDAY 3DAYS 2NIGHTS
YOSEMITE HOLIDAY
3 DAY TOUR FROM FRESNO
1 NIGHT in both Fresno and Yosemite
LAl<E TAHOE
HOLIDAY 3DAYS 2NIGHTS
RENO
HOLIDAY 3DAYS 2NIGHTS
OREGON HOLIDAY
3 DAYS 2 NIGHTS
LAl<E SHASTA
HOUSEBOAT HOLIDAY
BDAYS ?NIGHTS
GIANT REDWOODS
HOLIDAY 3DAYS 2NIGHTS
SAN FRANCISCO
HOLIDAY 3DAYS 2NIGHTS .
LOS ANGELES/
HOLLYWOOD HOLIDAY
3 DAYS 2 NIGHTS
Assets
CURRENT ASSETS:
Cash (including time deposits, 1965-
$1,000,000; 1964-$1,200,000)
Accounts receivable :
United States Government-
mail, passenger and other
Traffic and agents . . . . .
Miscellaneous, less allowance for
doubtful a,ccounts ( 1965 and 1964-$8,000)
Expendable parts and supplies, at
approximate cost, less reserves
Prepaid expenses . . . .
Total current assets
PROPERTY AND EQUIPMENT, at cost-pledged
under notes payable (Note 1) :
Flight equipment
Ground and other equipment
Less-Accumulated depreciation and amortization
Advance payments on flight equipment (Note 6)
OTHER ASSETS:
Unamortized debt discount and expense (Note 4)
Route extension and development expense, less amortization .
Preoperating cost of new flight equipment, less amortization
Other . . . . . . . . . . . . . . .
PACIFIC AIR LINES, INC.
DPcernber 31
1965 1964
$ 2,230,168 $ 2,198,215
614,807 563,883
475,396 423,823
60,270 66,231
545,745 678,457
193,222 102,184
4,119,608 4,032,793
11,780,154 11,722,732
1,124,358 1,145,726
12,904,512 12,868,458
5,296,604 4,451,345
7,607,908 8,417,113
288,855
7,896,763 8,417,113
14,632 127,007
120,323 38,510
65,977 46,743
48,006 5,971
248,938 218,231
$12,265,309 $12,668,137
BALANCE SHEET
Liabilities
CURRENT LIABILITIES:
Notes payable-current instalments (Note 1)
Accounts payable . . . . . .
Taxes collected or withheld from others
Accrued expenses
Unearned transportation revenue . .
Federal income taxes (Note 3) . . .
6 o/o convertible subordinated debentures,
redeemed in January, 1966 (Note 2)
Total current liabilities
LONG-TERM DEBT:
Notes payable to bank (Note 1) . . . . . . .
6 o/o convertible subordinated debentures (Note 2)
FEDERAL INCOME TAXES DEFERRED TO FUTURE YEARS
STOCKHOLDERS' EQUITY (Notes 1, 2 and 4):
Common stock :
Authorized, 40,000,000 shares of 50 par value per share
Outstanding, 1965-1,186,580; 1964-978,598 shares . .
Paid-in surplus . . . . . . . . . . . . . . . .
Earnings retained for use in the business, per accompanying statement
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
$
D ecember 31
1965
986,448
1,224,401
238,049
316,080
211,265
178,754
126,778
3,281,775
2,518,405
2,518,405
227,627
593,290
2,438,079
3,206,133
6,237,502
$
1964
1,053,448
1,013,550
173,267
352,443
202,492
334,000
3,129,200
3,605,353
1,374,900
4,980,253
166,866
489,299
1,396,723
2,505,796
4,391,818
$12,265,309 $12,668,137
10 11
STATEMENT OF EARNINGS
D ecembe1 31
Opera ting revenues : 1965 1964
Passenger. $10,134,450 $ 8,940,197
Mail. 266,622 233,271
Express, freight and excess baggage . 394,977 342,707
Other 193,857 236,565
10,989,906 9,752,740
Public service revenue. 3,694,683 3,694,150
Operating expenses:
14,684,589 13,446,890
Flying operations 3,364,356 3,101,332
Maintenance . 2,983,030 2,660,339
Passenger service 506,538 411,975
Aircraft and traffic servicing 3,038,357 2,807,546
Promotion and sales 1,316,260 1,369,331
General and administrative . 969,663 864,915
Depreciation . 1,016,967 902,654
Amortization of preoperating and route development costs 27,382 37,455
13,222,553 12,155,547
Operating income . 1,462,036 1,291,343
Other expenses :
Interest (less interest income, 1965-$64,465;
1964-$29,873) 258,718 354,818
Loss on disposition of assets. 8,398 27,165
Other 19,583 59,542
286,699 441,525
Income before federal income taxes . 1,175,337 849,818
Estimated federal income taxes (including $61,000 in 1965
and $56,000 in 1964 deferred to future years) (Note 3) 475,000 266,314
Net income for the year . 700,337 583,504
Excess of insurance proceeds over carrying value of aircraft
destroyed, net of income taxes of $123,983. 387,724
Earnings retained for use in the business :
Balance, beginning of year . 2,505,796 1,534,568
Balance, end of year (Note 1) . $ 3,206,133 $ 2,505,796
12
NOTES TO FINANCIAL STATEMENTS
NOTE 1-Notes payable:
5 % note payable in
monthly instal-
December 31
1965 1964
ments of $38,550
to April 1967 and
thereafter in monthly
instalments of
$5,550 to Feb. 1969 $ 754,690 $1,217,290
5 % note payable in
monthly instal-
ments of $43,654
to March 1971 .
6 % note paid in 1965
Less: Instalments due
within one year.
Instalments due
after one year .
2,750,163 3,274,011
167,500
$3,504,853 $4,658,801
986,448 1,053,448
$2,518,405 $3,605,353
The Company's turbo-prop aircraft and re-
lated spare parts are pledged as security
under chattel mortgages for the loans. The
Civil Aeronautics Board has guaranteed 90 %
of the principal amount and 100 % of the in-
terest on the 5 % loan.
Under the terms of the loan 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 main-
tain current assets at least equal to current
liabilities ( excluding the current portion of
notes payable) .
NOTE 2- Debentures:
On December 9, 1965, the Company called all
outstanding 6 % convertible subordinated
debentures for redemption at 105 % of the
principal amount. In accordance with the
terms of indenture agreement, the debentures
alternatively were convertible into common
stock of the Company at the conversion price
of $6.00 per share. As of December 31, 1965,
debentures in the principal amount of $579,-
700 were outstanding, of which $452,922 were
converted by January 5, 1966 into 75,487
shares of common stock and the remainder
redeemed on January 10, 1966. The redemp-
tions and conversions subsequent to the year
end have been reflected in the accompanying
financial statements, the debentures redeemed
being included in current liabilities and those
converted in common stock as if issued as of
December 31, 1965.
NOTE 3-lnvestment tax credit:
The Company's provision for federal income
taxes charged against current income has
been reduced by investment tax credits of
$94,000 in 1965 and $153,000 in 1964 resulting
from acquisitions of qualified property.
13
Notes (Continued)
NOTE 4-Paid-in surplus:
Balance, December 31, 1964 $1,396,723
Excess of conversion price over
par value of common stock
issued upon conversion of 6 %
debentures (after deducting
unamortized debenture expense) :
132,495 shares issued upon con-
version in 1965 . 662,706
75,487 shares issued upon conver-
sion subsequent to December 31,
1965 (Note 2) .
Balance, December 31, 1965
NOTE 5- Pension plans:
378,650
$2,438,079
The Company has several pension plans for
pilots and other employees, all of which are
contributory except for the fixed benefit plan
for pilots. During 1965 earnings were charged
with $238,140 representing the Company's
share of current and past service pension
costs. As at December 31, 1965, unfunded past
service costs under the plans amounted to
$483,000 and will be funded over future years
at a rate which should accumulate sufficient
funds to meet pension obligations to em-
ployees as they retire.
NOTE 6-Commitments
and contingent liabilities:
As of December 31, 1965, the Company had
aggregate lease commitments of $3,650,000
14
payable as follows: 1966-$455,000; 1967-
$839,000; 1968-$523,000; 1969 through
1978-$1,033,000; and 1979 through 1990-
$800,000. These leases relate to land, terminal
facilities and aircraft and include the follow-
ing major lease commitments contracted in
1965 : (a) lease of two Boeing 727 jet aircraft
scheduled for delivery in mid-1966 and (b)
lease of certain land at the San Francisco
International Airport for a new maintenance
base and office building scheduled for occu-
pancy in 1966.
During 1965 the Company contracted for
the purchase of four Boeing 737 jet aircraft
at an approximate aggregate cost of $14,000,-
000, the aircraft being scheduled for delivery
in 1968. The Company is also committed under
the terms of the land lease at the San Fran-
cisco International Airport to construct not
less than $1,000,000 of improvements on or
before January 1, 1967. The Company has
long-term loan commitments to finance pur-
chase of the aircraft and construction of its
new airport facilities.
The Company has been named a defendant
in several lawsuits resulting from the crash
in May 1964 of one of its Fairchild F-27 turbo-
prop aircraft. In the opinion of Company offi-
cials any liability that may result from claims
for passenger fatality as a result of the crash
should be adequately covered by insurance.
PRICE WATERHOUSE & Co.
120 MONTGOMERY STREET
SAN FRANCISCO 94104
To the Board of Directors and Stockholders of
Pacific Air Lines, Inc.
March 15, 1966
In our opinion, the accompanying balance sheet and the related statement
of earnings present fairly the financial position of Pacific Air Lines, Inc.,
at December 31, 1965 and the results of its operations for the year, in
conformity with generally accepted accounting principles applied on a
basis consistent with that of the preceding year. Our examination of these
statements was made in accordance with generally accepted auditing
standards and accordingly included such tests of the accounting records
and such other auditing procedures as we considered necessary in the
circumstances. It was not practicable to obtain confirmation of
certain receivables from the United States Government by
direct correspondence, but we satisfied ourselves as to these amounts
by application of other auditing procg
/4,/
LL
,<.
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The Annual Meeting of shareholders will be held at the Mountain
Shadows Hotel, ScottsdaJe, Arizona, on June 6, 1966, 10 :00 a. m.
Stock Transfer Agents
Crocker-Citizens National Bank
79 New 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
15
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ROUTE APPLICATIONS 11111111111111111111111
'' In addition to Pacific's present service to Lake Tahoe your Company
is . awaiting decision by the Civil Aeronautics Board on its application
to fly non-stop between Lake Tahoe and all other points in California.