Southern Airways Abbreviated Annual Report 1960

Southern Airways, Inc.
ABBREVJATED REPORT
TO STOCKHOLDERS, CUSTOMERS AND FRIENDS:
Final operating results for six months of 1959 and the year 1960 cannot be determined until
a permanent mail rate is established for the period from July 1, 1959 through December 31, 1960. For
this reason, your management has decided to present an abbreviated report at this time and to issue a
final report as soon as the results are known.
This report for 1960 is based upon your Company's year -end statement as audited by Ernst &
Ern s t . It reflects income received or accrued during 1960 . Mail rate revenues are those provided
under temporary rates and are subject to retroactive adjustment upon issuance of the final rate. The
t emporary rates reflect no profit element or payment for increased costs which Southern has incurred.
On this basis and subject to adjustment, losses for the year were $332,348 . Your management believes
these losses are in substantial part recoverable under the Federal Aviation Act.
Between June 5 and September 30, 1960, Southern's service was curtailed by a s t r ike of
pilot members of the Air Line Pilots Association. As a result of wide- spr ead and continued distribu-
tion of def amatory material by the Air Line Pilots Assoc iation thr oughout the Company' s entire ser -
vice area , the Company filed in the Superior Court of Fulton County , Georgia, on Apri l 27, 1961, a
libe l ac tion against ALPA. This suit i s premised upon attacks upon the qualificat i ons of Southern's
personnel and equipment.
Full service was resumed on September 30, 1960. Your Company's progress since the strike
is a tribute to the l oyal ty and self -sacrificing devotion of Southern's employees. The support given
to the Company by its stockholders has been outstanding. Tribute should also be paid to the under-
standing and sympathy of the traveling public who use your Company's services.
Flights are now operating with record on-time performance. Passenger and cargo loads are
substantially greater today than a year ago and load factors are equal to or better than the pre-
strike period of 1960. Unit expenses have been sharply reduced.
During 1960, new routes were opened between Nashville, Tennessee and New Orleans, Louisiana;
Mem~his, Tennessee and Tri-Cities, Tennessee/Virginia; Tri-Cities, Tennessee/Virginia and Huntsville,
Alabama; Memphis and New Orleans, and between Atlanta and New Orleans. Your Company expanded from 37
cities with 14,608 daily aircraft miles to 51 cities with 23,686 daily miles. Service was discontin-
ued at Boga l usa, Louisiarta because of insufficient traffic. The aircraft fleet was increased from 23
t o 26 DC-3 ' s.
Service to cities awarded your Company by the Civil Aeronautics Board in the Sout heast er n
Area Local Service Case where operations have not started, will b~ commenced as soon as a i rport and
navigational facilities are suitable at the cities. Further expansion has been recommended by the
Exa~iner for Southern in the form of a new route between Greenville, Columbia and Charleston and to
Myrtle Beach in South Carolina in the Piedmont Local Service Area Investigation which should finally
be decided in the latter part of the year. Although your management is pleased with this recommenda-
tion, it will pursue vigorously applications covering several additional routes in this proceeding.
Negotiations are again under way for new aircraft and this program will be given top prior-
ity. It is hoped new aircraft will shortly be in operation .
The long-awaited class mail rate for the Local Service Industry became effective on
January 1, 1961. Under this new mail rate formula, it is believed the Industry can enjoy higher
profits than at any time in its history while at the same time, providing better service for the
traveling public. Advance planning, more efficient scheduling and utilization of equipment, and
concentration of service where most needed are improvements which, among others, should result from
the new class mail rate. Highest profits in the Company's history are expected in 1961.
Respectfully yours,
I
.
~
President
April 28, 1961
~
CURRENT ASSETS
Cash
Accounts receivable:
United States Government - for mail and
other transportation - Note A
Airline traffic and other receivables
Refundable federal taxes on income - estimated -
Note F
Maintenance and other operating supplies -
principally at average cost
Prepaid aircraft engine overhaul, insurance,
and other expenses
$ 525,145. 50
665 . 142. 59
TOTAL CURRENT ASSETS
INVESTMENTS AND OTHER ASSETS
PROPERTY AND EQUIPMENT - on the basis
of cost - Note B
Hanger (located on leased land)
Aircraft and related equipment
Other equipment
Improvements to rented property
Work in progress
Less allowances for depreciation and overhaul
DEFERRED CHARGES
Unamortized route extension and development costs
$ 145,624.82
2,394,643.82
413,554.27
112,995.82
77,287.66
$3,144,1 06.39
1.905.454.94
BALANCE SHEET
SOUTHERN AIRWAYS, INC.
December 31, 1960
LIABILITIES
CURRENT LIABILITIES
$ 219,494.01 Notes payable
Payments on long-term debt due within one year - Note B
Accounts payable
1,190,288.09
222,846.87
143,988.26
188.194.93
$1,964,812.-_16
43,456.60
1,238,651.45
120,211.70
$3,367,131.91
Airline traffic and other collections and
withholding as agents
Salaries, wages, and vacation pay
Accrued advertising, taxes, and other expenses
Air travel card deposits
Unearned transportation revenue
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT - Notes Band C
Notes payable to bank (less $330,000.00 due within
one year)
Installment purchase contracts (less $41,500.00
due within one year)
6% subordinated debentures due December 1, 1975
CAPITAL STOCK AND SURPLUS - Notes A, B, C, D, EJ and F
Capital stock:
Class A Stock, non-voting, par value $3.00 a share:
Authorized 200,000 shares - none issued
Common Stock, par value $3.00 a share:
Authorized - 550,000 shares
Issued - 285,244 shares
Installment payments by employees for
purchase of 1,156 shares
Paid-in surplus
Earned-surplus deficit (deduction*)
Contingent liabilities - Notes C, F, and I.
$ 15,000. 00-
5,625 . 00
188.500.00
$855,732.00
3,437.97
22,535 .98
192.566.05*
See Notes to Financial Statements.
J 102,000.00
371,500.00
841,541.00
713, 99'/. 71
235,991.48
93,711.57
63,750.00
46.375.25
$2,468,867.01
209,125.00
689.139.90
$3,367,131.91
STATEMENT OF SURPLUS
SOUTHERN AIRWAYS, INC.
Years ended December ~1, 1960, a~d 'tlecember 31, 1959
Year Ended December 31
1960 1959
PAID-IN SURPLUS
Paid-in surplus at beginning of year
Add:
$ 3,121.78 $ 3,121, 78
Excess of proceeds ($3.55 a share) over par
value ($3.00 a share) of 29,844 shares of
Common Stock issued to employees during
the year
Excess of proceeds ($4.00 a share) over par
value ($3.00 a share) of 3,000 shares of
Common Stock issued for acquisition
of ground equipment during the year
$16,414.20
3,000.00
$ 12,414.20
$ -0-
-0-
$ -0-
PAID-IN SURPLUS AT END OF YEAR $ 22,535.98 $ 3,121.78
EARNED-SURPLUS DEFICIT*
Earned surplus at beginning of year
Net income - loss** for the year - Note A
EARNED-SURPLUS DEFICIT* AT END OF YEAR
See Notes to Financial Statements.
ERNST & ERNST
FIRST NATIONAL BANK 8UIL0ING
$139,782.40
332,348. 45
$192,566.05*
$118,186.05
21,5%.35
$139,782,40
ACCOUNTANTS AV0 I TOAS
MANAOC.MEllfT SCAVICCS
ATLANTA 3, GA.
ornccs IN ""'NCIIJAL CITIES
ASSOCI.Aftj IN f0Rtl4N COUNTAll:I
Board of Directors
Southern Airways, Inc.
Birmingham, Alabama
We have examined the balance sheet of Southern Airways, Inc. as
of December 31, 196o, and the related statements of income and surplus for
the yeor 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. We have made a similar examination of
the financi,al statements for the preceding )lear.
In our opinion, subject to the effect of any future retroactive
determination of mail compensation rates as explained in Note A to the
financial statements, the accompanying balance sheet and statements of
income and surplus present fairly the financial position of Southern
Airways, Inc. at December 31, 196o, and the results of its operations
for the year then ended, in conformity with generally a~cepted accounting
principles applied on a basis consistent with that of the preceding year.
Atlanta, Georgia
April 12, 1961
Certified Public Accountants
STATEMENT OF INCOME
SOUTHERN AIRWAYS, INC.
Years ended December 31, 196o, and December 31. 1959
OPERATING REVENUES
Passenger
Mail (principally subsidy from U.S.
Government) - Note A
Express, freight, and excess baggage
Charter
Service sales and other revenues - net
OPERATING EXPENSES
Flying operations
Maintenance
Passenger service
TOTAL OPERATING REVENUES
Air~raft and traffic servicing
Pro~otion and sales
General and administrative
Depreciation and amortization
TOTAL OPERATING EXPENSES
OTHER INCOME
OTHER DEDUCTIONS
,Interest - principally on long-term debt
Miscellaneous
INCOME-LOSS** BEFORE TAXES ON INCOME
TAXES ON INCOME
Estimated refundable taxes on income of
prior year, resulting from carry-back of loss
(provision for taxes on income* - 1959)
Less adjustment of prior years taxes
NET INCOME-LOSS** - Note A
Provision for depreciation and amortization of property
and overhaul of aircraft included above
*Indicates red figures.
Year Ended December 31
196o 1959
$3,587,325.63
3,207,120.57
201,571.04
10,095,50
26,146.53
$7,032,259,27
$2,198,368.87
1,498,766.26
373,263.78
2,114,525.66
622,509,48
452,138.32
316,365.27
$7,575,237.64
$ 543,678.37*
8,792.93
$3,247,747.01
2,630,994.15
184,759.95
46,979.00
27,924,74
$6,138,404,85
$1,850,839.87
1,196,569.01
304,378.60
1,705,646.68
489,748.63
350,454,97
187,682.23
$6,085,319.29
$ 53,084.86
4,321.92.
$ 534,885.44* $ 57,406.78
$ 34,292.38 $
2,017.50
$ 36,309.88 $
$ 571,195,32**$
$ 238,846,87 $
-0-
$ 238,846.87 $
$ 332,348,45**$
22,020.70
3,489.39
. 25,510.09
31,896.69
16,000.00*
5.699,66
10.300.34*
21,596.35
-----
$ 354,097,31 $ 239,258.37
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
SOUTHERN AI RWAYS, INC.
December 31 , 1960
Note A - The Company is engaged in air transporta ti on with res pect to persons,
property, and mail under authority of a Permanent Cert ~f i cate of Public Conven~ence and
Necessity issued by the Ci vil Aeronaut i cs Board effec ti ve Januar y 24 , 1956 , Since July
1 1959 the Company has been compensated for the tra nsportat i on of m
ail ( subsidy) under
a'tempo;ary rate which is subj ect to adjustment in a fut ure Civil Aeronauti cs Board pro-
ceeding to determine a final mail rate.
On March 16, 1961, on petition of the Companv, the Board granted,
retroactively to October 1, 1960, an i ncrease in the temporary r ate , because of increased
operations resulting from the implementat i on of servi ce on new r outes awarded by the
Board. The effect of this increase for the period from October 1, 1960 t o December 31 ,
1960, in the amount of $43,571.20, has been reflec t ed in t he accompanying f inancial
statements.
The f i nal amount of retroact ive subs i dy for the period from July 1,
1959 to December 31, 1960, and, therefore, the f i na l net income f or that per iod, will not
be determined until the Board establishes the permanent ma il ra te , which may be lower or
higher than the temporary rate.
On March 7, 1961, the Board pl aced the Company, along with substantially
all other local service carr i ers, on a permanent class rate subsidy bas is as of January 1,
1961.
Note B - 5-1/4% notes payable to bank were paid on March 30, 1961, at which
time the Company borrowed a to t al of $880,000.00 from the bank on a 6% note payable (1)
in monthly installments of $25 , 000.00 for the f i r st 16 months with reduced monthly pay-
ments thereafter, and (2) one installment of $200 , 000.00 due no later than June JO , 1961.
All aircraft, engines, and r elated equ i pment (i nc ludi ng an y interest in t wo aircraft
pledged as security for inst al lment purchase cont racts) are pledged as secur ity for note
payable to bank.
In add i t i on, on March 30, 1961, t he Company borr owed- $300, 000.00 from
each of two suppliers, as evidenced by 6% notes due i n quar ter l y installments of
$12,500.00 each (subject to increase or decrease due t o ear nings or rece ipt of retro-
active mail pay) with the remain i ng ba l ance due Apr i l 30, 1964 , except that one supplier,
at its option, may accept shares of $3. 00 par va lue Corrrnon Stock (at $4. 00 a share) for
any unpaid balance at Deceraber 31 , 1963 . The Company has executed second mortgages on
the equipment pledged to t he bank to each of t he supplier s as collatera l . $500,000. 00 of
this borrowing i s subord i na t ed to the note payable to bank .
Each of the agreem
ents relati ng to notes payable to bank and suppliers
places certain restrictions upon, among other thi ngs, (1 ) net current asset s , (2) net
worth, and (J) redemption of the 6% subordinated debentur es ; the agreements permi t the
payment of cash dividends (or other payments re lati ng to capi ta l stock) t o the extent of
50% of net earnings after December 31, 1960 les s $25 ,000. 00 for each quarter . annual
period thereafter, provided other requi rements fo r the maintenance of net current assets
and net worth are al so met.
Two non-interest bearing installment contrac t s for the purchase of
aircraft (with remaining unpai d balances at December 31, 1960 of $47 , 125. 00) are due in
quarterly installments of $1 0,375.00 to December 31, 1961, wi th one installment of
$5,625.00 due January 15, 1962.
Note C - At December 31, 1960, the entire $300,000. 00 pri nci pal amount of 6%
debentures due on December 1, 1975, was fully subscribed and $188, 500. 00 had been ful ly
paid and issued. Subsequent to December 31, 1960, the remaining $111, 500. 00 wa s issued
to employees in exchange for 6% notes from the employees to be col l ect ed through pay roll
deductions over a period of not more than twelve months . On M
arch 31, 1961, the Company
sold these notes with a remaining unpaid balance of $62,609.45 to a bank with an ag r ee-
ment that the Company will repurchase any of these notes in the event of default.
These debentures are fuily subordinated to all i ndebtedness of the
Company for money borrowed, for acquisition of aircraft or other fl i ght equipment, or for
other indebtedness having a maturity date of more than one year; and are converti ble after
December 1, 1962 into IJ.00 par value Common Stock of the Company at conversion rates
ranging from $4.00 a share to December 1, 1965 to 110.00 a share at December 1, 1970. The
debentures are callable by the Company at rates varying from 105% of the principal amount
from date of issuance to 101% of the principal amount after December 31, 1970.
Note D - Re stricted opti ons to purchase Common Stock of the Company have been
granted to off ice rs as shown in the tabul ation below. While all of the op_
t i ons are
presently exer ci sable, none have been exerci sed.
Date Granted
May 2, 1955
March 4, 1960
~
10 ,000
.J..Q...j_QQ
TOTAL 20 ,500
Option Price
14.675
4.40
Date of Expiration
May 1, 1965
December 27, 1962
Note E - In December 1960, the Company's employees completed payment on 29,844
shares of the Company's $3.00 par va l ue Common Stock, out of a total of 31,000 shares
offered to employees in January 1958 on a pay roll deducti on plan at $J.25 a share plus
interest . Upon issuance of the 29 ,844 shares i n December 1960, the Corrrnon Stock account
was credi t ed wi th the par value of the shares ($89,532 .00) and the balance of the proceeds
( $16 ,414 .20) was credited to pai d-in surpl us. Subsequent t o December 31, 1960, t he
remaining 1,1 56 shares became fully pai d and wer e i ssued on the same basis.
Note F - Representatives of the I nt ernal Revenue Service have examined the
Company 's income tax returns for the years 1955 t hrough 1958 and have proposed adjust-
ments , re l at i ng principally to depreciat ion rates, which after application of operating
l osses of subsequent years , would r esu lt i n addit i onal taxes on income of approximately
$40,000. 00. The Company i s protes t ing t he proposed adjus tments with the Appellate
Division of the Internal Revenue Service, and no provi s ion has been made for any
addi t ional taxes wh i ch may be fina lly de termined f or t hes e years.
Note G - During the year s 1956 , 1959, and 196o the Company adopted employee
r etirement plans for a major port ion of its employees. The cost to the Company of
these pl ans amounted to $67 ,651 .37 for t he year ended December 31, 196o; however, it
is not poss ible at this time to reasonably es t imate t he amount of future annual costs
of these plans .
Note H - The Company has leased t hree DC-3 aircraft until June 1961 at an
aggregate basic monthly rental of $9 ,000. 00. The Company has the option to purchase
any or all of these aircraft during t he t erms of the leases.
Note I - On June 5, 1960 , the pilots of the Company, the majority of whom were
member s of Airline Pilots Associat i on International, a labor union, went on strike.
Because of a failure to agree on t he issues i nvolved, the Company has employed other
pilots and has resumed full operati ons, i ncluding additional routes awarded by the
Civi l Aeronauti cs Board during t he year.
At December 31, 196o, there was pending in the Federal District
Court at Atlanta , Georgia a sui t for involuntary bankruptcy filed against the Company
by two striking pilots and one company of which a third striking pilot is an officer.
Subsequent to December 31 , 196o, t he su i t has been dismis sed by the Referee in
Bankrupt cy and the dismissa l has been upheld by the Federal District Court.
A Petit i on has been f i led by the Air Line Pilots Association Inter-
nati onal with the Civil Aeronautics Board at Washington, D. C. alleging that the Company
has failed to bar gain in good fa i t h with that uni on and requesting suspension or revoca-
t i on of the Company ' s Certificate of Public Convenience and Necessity. The Company denies
t hi s allegation. Hearings have been held before an examiner of the Civil Aeronautics
Boar d and the matter is now befor e him f or recommendation to the Board. The attorney for
the Bureau of Enforcement of t he Civ i l Aeronaut ics Board by Brief has recommended to the
examiner t hat the action be dismissed.
The Air Line Pi lots Association International has filed in the Federal
Dis trict Court at Nashvi l le, Tennessee a petition alleging that the Company has failed
to bargain in good faith and seek i ng damages in the amount of $1,000,000.00 and rein-
statement of the striking pi lot s. No date has been set for a hearing on this petition;
however, it is the opinion of Counsel for the Company that the Company has a sound
defense to the case .
Forty- eight of the str i king pilots have filed actions in the
Superior Court of Fulton County , Georgia alleging t hat the Company failed to supply the
pl'ainti ffs wi th descriptions of var i ous pension plans and asking damages at the rate of
$50. 00 a day in each of nine sui t s and $100.00 a day in each of the remaining suits
from various dates in August 1960. The Company denies any liability in connection with
these suits.
Fifty- one of t he striking pilots have filed suits in the Superior
Court of Fulton County , Georgia r equesting that the Company pay to each of them
vacation benefits earned dur i ng the calendar year 1959. The Company has not yet filed
answers to these suits .