N72DV President's Report To the Stockholders of Pacific Northern Airlines: Without exception, 1961 was a highly successful year of operations for Pacific Northern Airlines. Net earnings reflected a gain of 28 % over last year. Total revenues were the highest in the Company's his- tory, and new all-time records were established in every category of traffic. Substantial improvement was achieved in load factors, and revenue ton-miles of traffic per employee were 12 % higher than the peak productivity rate of any previous year. Pacific Northern's leading position among all of the airlines serving Alaska remained unchallenged. The Company's 1961 operating profit amounted to $667,000 after charges of $822,000 for depreciation and simifar non-cash items. Net earnings were $262,000 or 25 cents per share after income taxes of $343,000. Stockholder equity at the close of 1961 amounted to $3,532,000 or $3.31 per share, an increase of 8% during the year. Unquestionably the most significant achievement during 1961 was the successful completion of long term financing for Boeing 720 jet aircraft. The first plane will be delivered on March 23 and immediately assigned to flight crew training. The second plane will be available in the latter part of April and both will be in revenue service on the Com- pany's major routes beginning in May of 1962. The inauguration of PNA's jet services will coincide with the opening of the World's Fair in Seattle and there is every reason to believe that the Company's expanded services will be fully utilized from the outset by many of the four million out-of-state visitors who are expected to attend the exposition. On April 10, 1962, Pacific Northern will celebrate its 30th Anniversary. In the years ahead, I am confident that the Company's progress and prosperity will continue to match the dynamic growth of Alaska and the Pacific Northwest. March 13, 1962 PRESIDENT AND GENERAL MANAGER 1 2 The Year in Review: Financial Total revenues of $12.3 million in 1961 were 6% higher than last year. This year's net earnings of $261,814 were 28 % higher than the 1960 net profit of $205,193. Operating costs per ton-mile of revenue traffic were reduced from 60 in 1960 to 57 in 1961. These favorable financial results were achieved in the face of jet competition throughout 1961 on the Company's main route between Seattle and Anchorage. Traffic During 1961, revenue passengers totaled 147,000, an increase of 9% over last year. Revenue passenger miles were 123 million, a 5 % gain over 1960. Ton-miles of U. S. mail traffic reached 2.1 million, 32 % ahead of last year. Property ton-miles aggregated 5.4 million, an in- crease of 27 % over 1960. Total revenue ton-miles of traffic were 20.6 million in 1961, 13% ahead of the previous year. Load factors and productivity showed similar improvement. The Com- pany's plane load factor in system operations rose to 65 % in 1961 from 62 % the year before. Revenue ton-miles of traffic per employee increased from 29,649 in 1960 to 33,202 in 1961, a gain of 12% . PNA's load factor and productivity rate rank among the highest in the entire U. S. airline industry. Jet Financing During 1961, the Company completed its long-term financing of $11.4 million for the purchase of jet equipment. Approximately $4 million has been guaranteed by the Civil Aeronautics Board under the Guar- anty Loan Act. Bank loans comprise $8.5 million of the total financing, and private loans totaling $2.5 million were negotiated with other parties. In addition, $0.4 million of subordinated debentures were sold in a private offering. The debentures were issued with detachable stock purchase warrants entitling the holders to purchase 88,800 shares of Pacific Northern's common stock at a price of $4.50 per share. The warrants may be exercised at any time after November 10, 1962 and until November 10, 1971. Mail Rates During 1961, the Civil Aeronautics Board established new final mail rates for Pacific Northern's system operations. These rates will auto- matically become effective on May 1, 1962, coinciding with the inau- guration of jet services, and will supercede the final mail rates in effect prior to that date. The mail rate applicable to the first twelve months of jet operations was premised upon total operating revenues of $16.6 million, total operating expenses of $14.4 million, operating profit of $2,215,000, interest expense of $637,000, and net income of $742,000 after income taxes of $836,000. Cash flow (net income plus deprecia- tion) was projected at $2.4 million. These financial results were pre- dicated on 183 million revenue passenger miles and 30. 7 million total ton-miles of revenue traffic during PNA's first twelve months of jet operations. Equipment and Services The Company's flight equipment during 1961 consisted of 7 Lockheed Constellations ( 5 owned and 2 leased) and 3 Douglas DC-3s. After the 2 Boeing 720 jets have been placed in service, the leases on the 2 L-7 49 aircraft will not be renewed and 2 of the Douglas aircraft will eventually be sold. The Boeing jets initially will be operated on the Seattle~ Anchorage nonstop route and on the Seattle-Ketchikan-Juneau route. Each B-720 will be equipped with 119 seats, 24 in the first class cabin and 95 in the tourist compartment. 3 4 PACIFIC NORTHERN AIRLINES~INC. (AN ALASKA CORPORATION) Balance Sheet, December 31, 1961 ASSETS Current assets: Cash Receivables: Traffic United States Government agencies (note 1) Other . Less allowance for doubtful receivables . Maintenance and operating supplies, at average cost . Less allowance for obsolescence Prepaid expenses, principally insurance Total current assets Investments, principally cash surrender value of life insurance Operating properties and equipment, at cost (notes 2 and 4): Assets Flight equipment $ 6,450,702 Ground equipment 727,422 Buildings and improvements to leased property . 152,369 Replacement parts for flight equipment 706,822 Construction work in progress, including advances thereon 3,609,222 $11,646,537 Deferred charges, net of amortization: Lease deposit Preoperating expenses - airport hangar building Other See accompanying notes to financial statements. $ 858,636 716,201 162,998 1,737,835 24,337 349,170 112,917 Allowances for depreciation, amortization and overhauls $ $ $ 3,927,101 534,547 126,376 310,335 4,898,359 7,000 37,865 2,915 $ 618,800 1,713,498 236,253 139,423 2,707,974 57,729 6,748,178 47,780 $ 9,561,661 LIABILITIES Current liabilities: Current installments on long-term debt (note 2) Accounts payable: Trade Airline traffic accounts Collections as agents Accrued wages, taxes, etc. Federal and state taxes on income, estimated Air travel plan deposits Unearned transportation revenue Total current liabilities Long-term debt, less current installments of $632,034 (note 2) Provision for deferred taxes on income (note 3) Stockholders' equity: Common stock - $1.00 par value per share. Authorized 2,000,000 shares; issued and outstanding 1,068,109 shares (note 2) Paid-in surplus - no change during 1961 Retained earnings, all of which are restricted . Contingent liabilities and commitments (notes 4 and 5) See accompanying notes to financial statements. $ 830,812 558,128 156,578 1,068,109 584,905 1,653,014 1,879,432 $ 632,034 1,545,518 361,853 140,194 31,875 132,691 2,844,165 2,921,238 263,812 3,532,446 $ 9,561,661 5 6 PACIFIC NORTHERN AIRLINES, INC. (AN ALASKA CORPORATION) Statement of Earnings and Retained Earnings Year ended December 31, 1961 Operating revenues: Passenger Mail ( note 1) Cargo and excess baggage Other operating revenues Total operating revenues Operating expenses: Flying operations Maintenance and repairs Aircraft and traffic servicing Passenger service . Promotion and sales General and administrative Depreciation, amortization and obsolescence provisions Operating profit. Non-operating expenses: Interest, net Other expenses, net, principally life insurance costs Federal and state taxes on income, estimated (note 3) Net earnings . Retained earnings, January 1, 1961 . Retained earnings, December 31, 1961 See accompanying notes to financial statements. $ 3,773,602 2,016,308 2,376,222 880,200 985,634 801,675 821,548 40,816 21,170 $ 7,704,775 2,889,430 1,562,218 165,643 12,322,066 11,655,189 666,877 61,986 604,891 343,077 261,814 1,617,618 $ 1,879,432 Notes to Financial Statements December 31, 1961 1. U.S. Mail Pay: See comments under "The Year in Review" 2. Jet Program and Long-Term Debt: The Company has contracted for the purchase of two Boeing 720 jet aircraft with total investment in such aircraft and related equipment estimated to be $11,423,036 of which $3,482,170 is reflected in con- struction in progress at December 31, 1961. Financing arrangements under the program and amounts borrowed thereunder at December 31, 1961 are as follows: Term loans from bank, payable monthly for ten years from time of borrowing ($200,000 estimated as due in 1962) Term notes to aircraft manufacturer, payable annually for ten years from time of delivery of second aircraft T erm notes to engine manufacturer, payable quarterly over seven years, repayment of each note commencing approximately six months after delivery of the related engine ($67,546 due in 1962 applicable to borrowings at December 31, 1961) Indebtedness subordinated to the above (except as to $500,000 of the term loans from bank) , payable in ten annual installments beginning November, 1962: Note to supplier . . . . . 6-% subordinated debentures Total borrowings arranged $ 8,460,001 950,000 1,513,035 100,000 400,000 $11,423,036 Borrowings at December 31, 1961 $1,150,000 ( 1 ) 950,000 ( 1 ) 630,431 100,000 400,000 $3,230,431 ( 1 ) Interim financing to be converted to long-term indebtedness. See comments under "Jet Financing" for stock options applicable to the 6-% subordinated debentures. Other long-term debt of the Company at December 31, 1961, totaling $322,841, consisted of: (a) $307,288 chattel mortgage notes to bank, secured by substantially all of the Company's present flight equip- ment, all due in 1962, and (b) a $15,553 note payable to vendor with payment due based on purchases - $7,200 estimated as payable in 7 a 1962. Among other provisions, certain of the documents covering the Company's long-term borrowings require that the Company shall maintain specified amounts of working capital and shall not declare or pay any dividends or purchase, redeem or otherwise acquire for value any of its capital stock. 3. Deferred Income Taxes: The deferred income tax liability arismg from differences (relating principally to depreciation, overhaul and obsolescence reserves) be- tween book and taxable income has been provided for in the estimated amount of $263,812 of which $124,415 pertained to and was charged against operations of the year 1961, with the remainder having been provided for by accrual in prior years and by crediting to the deferred liability account tax refunds arising from such differences. 4. Long-term Leases: Minimum annual rentals payable under leases expmng more than three years from December 31, 1961 are $66,360. Under its fifty-year ground lease with the Port of Seattle, the Company is obligated to construct an airport hangar building by June 1, 1963 at a mm1mum cost of $1,000,000. 5. Retirement Plans: The costs charged to operating expense in 1961 totaled $200,364, of which $19,068 was for past service benefits. At December 31, 1961, the remaining unfunded past service cost amounted to approximately $253,000. P EAT , MARWICK , MITC H ELL & Co. The Board of Directors CERTIFIED PUBLI C A CCOUNTANTS STUART BUILDING SEATTLE l. WASH JNGTON ACCOUNTANTS ' REPO RT Pacific Northern Airlines , Inc .: We have examined the balance sheet of Pacific Northern Airlines, Inc . as of December 31, 1961 and the related statement of earnings and retained earnings for the year then ended . Our examination 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 confirm amounts due from certain United States Government agencies by communication with them, but we satisfied ourselves as to these amounts by means of other auditing procedures . In our opinion , the accompanying balance sheet and statement of earnings and retained earnings present fairly the financial position of Pacific Northern Airlines , Inc . at December 31, 1961 and the resul ts of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year . Seattle , Washington March 13 , 1962 Directors: G. P . O'GRADY, Washington, D. C. J . A. CUNNINGHAM, Seattle, Washington PAUL PORZELT, New York, New York R. A. ROW AN, Los Angeles, California M . B. KIRKPATRICK, Anchorage, Alaska C. W . NELSON, Seattle, Washington A. G. WOODLEY, Seattle, Washington Officers: A.G. WOODLEY President and General Manager H . A. OLSEN Vice President - Traffic and Sales J . A. CUNNINGHAM Vice President - Operations J . H . FOSTER Vice President - Engineering and Maintenance FELIX AUBUCHON Vice President - Alaska Operations T . D. STUART Vice President - Industrial Relations C. W . NELSON Secretary-Treasurer M . E. DIAMOND Assistant Secretary D. B.HART Assistant Secretary PACIFIC NORTHERN AIRLINES, INC. GENERAL COUNSEL G. P . O'GRADY, 1625 EYE STREET N .W., WASHINGTON, D. C. GENERAL OFFICES 400 NORTON BUILDING, SEATTLE, WASHINGTON CITY TICKET OFFICES PORTLAND, SEATTLE, KETCHIKAN, JUNEAU, CORDOVA, ANCHORAGE, KENAI, HOMER, KODIAK, KING SALMON, YAKUTAT AUDITORS PEAT, MARWICK, MITCHELL & CO. TRANSFER AGENT BANKERS TRUST COMPANY, NEW YORK, NEW YORK REGISTRAR MANUFACTURERS TRUST COMPANY, NEW YORK, NEW YORK COMMON STOCK LISTED AMERICAN STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE