AIRWAYS,/NC ANNUAL REP~RT- 1966 HERE'S OUR RECORD RESULTS AT A GLANCE Increase 1966 1965 (Decrease) Passengers 1,064,315 866,648 23 % Passenger Miles (000) . 203,342 163,484 24% Avg. Passenger Load 18.0 15.4 17 % Passenger Load Factor 48.8% 43.6% 12 % Commercial Revenues (000) . $1 7,513 $14,688 19 % Cash Flow (000) . $ 1,722 $ 1,632 6% Net Income (000) $ 860 $ 938 (8)% Stockholders' Equity (000) $ 4,979 $ 4,280 16 % Common Shares Outstanding 1,005,000 1,005,0001 Book Value Per Share . $ 4.95 $ 4.261 16 % Net Income Per Share . $ .86 $ .931 (8)% 1 Adju sted to reflect three-for-two stock split in May 1966 - SOUTHE~RWAYS.JNC YOUR PRESIDENT'S REPORT For the record, let me report an- other important year of growth and development at Southern. Aside from the fact that earnings were slightly lower than last year, new records were established in all areas. For the first time, we boarded a million pas- sengers in a single year- to be exact, 1,064,315 passengers. Net income was $859,743, contrasted with $937,- 975 for 1965. The company stock was split on a three for two basis. Cash dividends were increased by 20% to 16 per share on the new basis. Additional financin g was arranged by the sale of debentures and th rough the use of credit, to provide $25 million for the purchase of six Douglas DC-9 FanJETS, support equipment and spares. June 1st will open a new era for Southern Airways when five of our cities will receive jet schedules. A few days later, jet service wi II be extended to seven additional cities. By Sep- tember, three DC-9's will provide service to eighteen cities throughout our system. The Civil Aeronautics Board, in recent policy statements, has indi- cated that Southern and the other local airlines will be granted entry into certain high density, long-haul markets. To be prepared, we have filed a number of applications to connect our system with several such markets in variou s parts of the country. Indicative of new thinking at the CAB, was the approval of non- stop authority between Huntsville, Alabama and New Orleans, Louisiana which became effective June 1st. This was the most important change in our route structure for the year as it permitted the operation of 388 mile long non-stop flights. For 42 days during July and August, we were called upon to provide a substantial amount of extra service when five of the major airlines were grounded by a strike. Throughout this emergency, our employees worked far beyond the call of duty to ac- commodate the public. During this period, we made many new friends and gained valuable experience in the operation of longer flights both within our system and beyond its present boundaries. The Douglas DC-9 has been en- thusiastically received throughout the world and I am confident the Southland which we serve will be no exception. With a combination of the finest equipment available and friendly, efficient Southern person- nel, we have the greatest opportunity ever to provide expanded service for the public and in turn, to reward our stockholders and employees. I extend my sincere thanks to our stockholders, customers, friends and employees for the support given management over our eighteen year history. March 15, 1967 Frank W. Hulse President TREASURER - Earnings, Revenue, Financing THOMAS F. GROJEAN Your Company's 1966 net income totaled $859,743 or 86 per share com- pared to $937,975 or 93 per share in 1965. This slight reduction of 7 per share was accom- plished in spite of a significant reduc- tion in public service revenue (subsidy) and high first quarter costs resulting from unseasonal weather throughout much of the system. The 1966 rate of return before the investment tax credit is equal to the allowable maximum return of 11 per cent on recognized investment stipulated by the Civil Aeronautics Board. Any additional operating profit above that actually earned in 1966 would have been shared with the CAB under provisions of the subsidy formula. Cash flow (net income plus amortiza- tion and depreciation) was at the highest level in the Company's history, reaching a record $1 ,721,569, or $1.71 per share compared to the 1965 level of $1,631,- 661, or $1.62 per share. Commercial revenue (revenue exclud- ing public service revenue) increased 19 per cent to $17,513,123 up from the 1965 level of $14,688,462. Total revenue, CASH FLOW*AND NET INCOME CASH FLOW* NET INCOME *Net income plus amortization and depreciation SOUTHETRWAY.5,/NC affected by the reduction in public service revenue increased 11 per cent. The revenue yield per passenger mile was reduced 5 per cent as a result of Southern's increased use of promotional fares which offer significant savings to the traveling public. Also, during the strike against five trunk airlines the length of passengers' trips increased, re- su lting in lower revenue per mile. Healthy Trend Public service revenue (subsidy) is payment to the thirteen local service airlines for services they render to cities too small to support scheduled air serv- ice. Effective January 1, 1966, the Civil Aeronautics Board reduced the total amount of these funds to be paid in INVESTED CAPITAL STOCKHOLDERS' EQUITY LONG TERM DEBT CONVERTIBLE SUBORINATED DEBENTURES 1966 and implemented a new formula placing more emphasis on the actual needs of the in_ dividual airl_ines affected. A This resulted in a reduction over the. previou s year for Southern amounting to $658,240 or 12.7 per cent. Southern's dependency on public service revenue has progressively de- creased during the last five years from $10.32 per passenger to $4.27 per pas- senger in 1966. The public service reve- nue received in 1966 was only 20.6 per cent of total revenue as contrasted to 38.1 per cent five years ago. You can see this in more detail in the chart to the right. Service Increased Total expenses in 1966, including in- terest, increased 14 per cent to $20,635,- 385. The increase followed additional service; an 11.2 per cent increase in seat miles and a 12 per cent increase in passenger load factor. To improve serv- ice and increase revenues we continued upgrading service from DC-3 to Martin 404 aircraft which resulted in greater depreciation and interest expense. Consistent with our previous report- ing, the investment tax credit is deducted. from tax expense in the year it is gen- erated. In 1966 income taxes were re- duced $91 ,417 by investment tax credits compared to a $27,495 redu ction in 1965. $11.00 10.00 9.00 8.00 700 6.00 5.00 4.00 3.00 2.00 1.00 PUBLIC SERVICE REVENUE PER PASSENGER PUBLIC SERVICE REVENUE AS A % OF TOTAL REVENUE Financing Completed In order to provide a stronger finan- cial base to support future expansion, $5,000,000 was raised by your Company through sale of convertible subordinated debentures. These debentures are con- vertible into common stock at a price of $16 per share; 312,500 shares are re- served for such conversion. These were Asold on December 15, 1966, to a group Wof underwriters headed by Alex. Brown & Sons. The interest rate until conver- sion is 5 per cent. These debentures are due December 1, 1981 . SOUTHETRWAY.S",/NC To protect your interests, the conver- sion price was approximately 15 per cent .above the market price on the date the underwriting agreement was signed. Proceeds from the sale were imme- diately invested in certificates of deposit and are shown in the 1966 balance sheet as investments. (On January 3, 1967 $4,200,000 of these proceeds were ap- plied to required DC-9 predelivery de- posits.) On March 31, 1966 financing was completed for the acquisition of the three DC-9's then on order. A credit agreement with six commercial banks allowed the Company to borrow $12,- 155,000 until delivery of the third DC-9. As of December 31, 1966 $6,055,000 has been borrowed. Quarterly payments on $9,155,000 begin late in 1967 and ex- tend through 1975. Prepayments begin- ning in 1968 are due on the remaining $3,000,000 based upon earnings, with final maturity on December 31, 1975. Interest is payable at a rate per cent above the lead bank's prime rate. With the exercise of an option to purchase three additional DC-9 FanJETS, the above credit agreement was supple- mented on November 15, 1966, increas- ing the total number of banks to nine and providing for an additional $7,000,- 000. This additional sum is to be avail- able until the delivery of the last DC-9 which is expected in May, 1968. After final delivery, repayment of the addi- tional borrowing is on a quarterly basis through 1974. Interest is payable at a rate per cent above the lead bank's prime rate. In addition, the manufacturer is accepting $1,500,000 of notes matur- ing December 31, 1975 with an interest rate per cent above the prime rate charged by the lead bank in the credit agreement. These notes call fqr certain prepayments based on earnings. . Stockholders Benefited In May the stockholders approved a three-for-two stock split and increased the authorized number of shares to 2,000,000 from the previous 1,000,000, while reducing the par value from $3 to $2 per share. As a result of the re- duction in par value the amount of out- standing shares was increased from 670,000 to 1,005,000. The semi-annual dividends paid in 1966 were 20 per cent higher than the 1965 level, reaching a total of 16 per share, up from the 13.4 paid in 1965 (adjusted for the three-for-two stock split) . The dividends paid on June 15 and December 15 represented the fourth and fifth cash dividends paid by your Com- pany since it began cash payments De- cember 15, 1964. The shares of common stock outstand- ing are held by more than 3900 stock- holders in 44 states and many foreign countries. Stockholders' equity increased 16 per cent in 1966 to the record level of $4,978,876, or $4.95 per share, from the 1965 level of $4,279,933, or $4.26 per share. This is a 2750/o increase over the value five years ago. DISTRIBUTION OF THE 1966 REVENUE DOLLAR SALES - Records, Expansion, Service GRAYDON HALL For the sales de- partment, 1966 was a year of intensi- fied effort and in- creased results. Service between high density mar- kets was expanded and longer flights scheduled, while continuing to maintain a good level of service in our inter- mediate cities. Significant passenger growth in 1966, shown in the chart, resulted in new rec- ords - for a single day, 4,317 on July 1; a single month, 98,516 in July; and for a single year, 1,064,315. And for the first time, your Company boarded a half-million passengers in less than six months, achieving this by June 28. Then on December 12, a serviceman on leave boarded Flight 175 in Colum- bia, S.C. to become our one millionth passenger of 1966-the first time this milestone has been reached in a single year. Not only were more passengers boarded in 1966 but also each passen- ger flew a greater distance. Our average length of haul rose to 187 miles and load factor reached 48.8 per cent, each a new record . Both passenger miles and available seat miles reached new highs. You can see the five-year comparison of these in the chart on your right. Empty Seats Filled Through expanded promotional fares, used by 229,475 passengers, your Com- pany produced $2,385,113 revenue, much of this from otherwise "empty" seats. Thousands of military standby passen- gers and countless college students with youth cards took advantage of the re- duced fares offered them . The Discover America program was actively promoted throughout the year and we became a participant in numerous tours to key touri st areas throughout the United States. SOUTHETWAYS.INC In 1966, Southern sold $10,270,834 in tickets on other airlines, and other air- lines in turn sold $7,512,203 in ti kets on Southern; an indication of the im- portan e your Company plays in th e plans of the nation's ai r trav lers when they vi it the Sou th. Air freight reached new highs during the year. Beginning in March, the Com- pany boarded over a million pounds a month and continued at this rate for the remainder of the year. Some stations boarded more air frei ght during the year than in the ight-year p riod since your Company began this service. To speed ground handling, additional loading and unloading equipment was installed at many stations. Credit Use Encouraged As a convenience to our passengers, a " Ticket By Mail" program was instituted, enabling passengers to receive their tickets by mail, with payment to be sent after receipt. And during the year, agree- ment was reached for use of three addi- tional credit card plans, Diner's Club, C & S National Bank and Carte Blanche. These are in addition to already ac- cepted American Express, th Universal Air Travel Card and Southern's own air travel card. Another promotion resulting in bene- ficial publicity and additional passengers was the selling of Atlanta Braves home 200,000,000 100,000,000 36.2% I - 1962 1964 PASSENGERS BOARDED* r~ % INCREASE OVER PRIOR YEAR "THESE FIGURES INCLUDE CHARTER game tickets. Southern's ticket counters offered this convenience in sixty cities to the many basebal I fans who flew Southern to the games. At the beginning of the year, a con- centrated public relations program was A commenced, taking the Southern story . to national as wel I as regional news media. At our annual sales meeting in April , the "New Southern Accent On Service" was introduced as the advertising theme to precede the DC-9 arrival and accom- pany its first year of operation. By Oc- tober, the new logotype, which you saw on the cover of this report, began ap- pearing; the ACCENT " S", the sign of a new Southern. The ACCENT "S" is becoming your Company's identity symbol. By the end of 1966 it began appearing in newspaper AVAILABLE SEAT MILES PASSENGER MILES CARGO REVENUE 11,500,000 AIRFREIGHT AIR EXPRESS AIR MAIL and magazine adve rti sing. Al I printed items used throu ghout the Company- literally millions of individual items- will bear the ACCENT " S". And, so will our aircraft. Department Expanded Plans were completed and imple- A mented for reorganization of the sales W department, including in many jobs and job titles a new word that w ill parallel Southern's entry into the jet age - SERVICE. New positions were created that wi 11 strengthen the department. More emphasis was given to long-range sales plannin g, sales promotion, field personnel training and community and civic affairs. Realignment of the field sales force was accomplished and city sales managers were established in eleven key market and geographic centers. Modernization of our Central Reserva- tions Office in Atlanta was commenced and by mid-year 1967 we will have direct computerized connections with all other airlines, established through hook-up with the sophisticated com- puter of a major trunk airline. Our Cen- tral Reservations Office, serving 16 high- density cities, in 1966 answered 1,008,- 548 telephone calls. This averaged 1.3 calls per passenger boarded in the cities served by this office. The advent of the new system will make this office eve'n more functional. Service Provided Our most serious problem during the year resulted from the strike again st five SOUTHETRWAYS.JNC trunk airlines. As a result of the strike our regular passengers traveling to and from the South had to curtail thei r travel and we we re deprived overn ight of a majo r source of bu siness. Sou thern immedi- ately augmented its existing schedule to provide as much service as possibl e to the cities on our system most seriously affected by the stri ke. Southern asked fo r and immediately received Civil Ae ro- nautics Boa rd emergency au th ori ty for non-stop service between majo r system cities, as we ll as fo r additional se rvice fro m th e nation's space ce nter, Hunts- vill e, Ala., to W ashington, D. C., St. Lo uis, Mo., Tai lahassee, Fl a. and O r- lando, Fla. Thi s re-scheduling eliminated potentially staggerin g passenger losses and enabled us to mee t previously pro- jected traffi c goals. During th e 42-day strike your Company was abl e to pro- vide a pub I ic servi ce to many cities th at would o th erw ise have been with out any scheduled airline transpo rtati on o r wh ich would have had only token fli ghts. At the same time, Southern proved its abil- ity to serve the " long-haul market. ' The immediate results achieved during the year interlaced with programs pl an- ned for the inauguration of jet-servi ce. Much of the anticipated success of 1967 will emanate from these efforts. Your Company's sales department has become o ri ented to FanJET thinking! ADMINISTRATIVE SERVICES- Applications, Information, Data The admin istrative servi cs depart- ment fil ed a num- ber of route appli - cation s during 1966, reque sting authority for J. KENNETH COURTENAY Southern to pro - vide service in new markets ideally suited fo r FanJET aircraft. Expansion was proposed to include New Yo rk, Washington, Dallas / Ft. W orth, Chi cago, Detroit, St. Louis, Louisvi lle, Ci ncinn at i, Green sbo ro / Hi gh Point/ Win ston-Salem, and Raleigh/ Durham. In addition, a new route was asked fo r al ong the Gulf Coast linking ou r opera- tions in Jacksonville w ith New Orleans and proposing to add Pensacola and Tall ahassee to our system. Hea rings were completed during the yea r on Southern's proposal to operate between M iami and Key W est and a CAB decision is ex- pected by mid-1967. Th e Company has on file other appli cations fo r a compre- hensive pattern of local service for the State of Fl o rida and these wou ld provide a li nk between our current operations and the Miami-Key West market. Capacity Doubled Du rin g the yea r, the memo ry capacity of our compu ter was doubled, substan- tially improving info rm ati on services provided to other Company depa rt- ments. One advancement now avai labl e to maintenance and enginee rin g is 13 w eeks advance pred iction of aircraft overhaul and parts requirements. This assures imp roved schedul ing and uti liza- ti on of skill s, toolin g and equipment. Your Company became the first local service airl ine to provide its own opera- tions research capabilities. With com- puter assistance, the operati ons research area constructs mathemati cal models of simulated operations in order to de- termine the optimum performance from parts and equipment investment. OPERATIONS- Flying, Equipment W. S. MAGILL, JR. Recognizing the changes in South- em's fleet, in prep- aration for the FanJET transition and the phasing out of DC-3 air- craft, a program was completed up- grading all Company pilots to Martin " Aristocrat" requirements. Preparations were made to advance senior flight per- sonnel to DC-9 service. The technical training department pro- vided over 20,000 hours of instruction. Company captains and first officers un- derwent 10,270 hours of training, aver- aging 51 .3 hours per man. Each steward- ess received an average of 47.7 hours instruction, totaling 4,533 hours. Southern's executive training program offered to private and corporate aircraft pilots was extended, and, for the fourth consecutive year the Company was se- lected to provide a training service for classroom and flight instruction for FAA inspectors. Procurement plans were completed for a DC-9 procedures trainer, the actual size of the FanJET's cockpit. This sophis- ticated equipment will simulate normal, emergency, and radio navigation pro- cedures for use in qualifying our flight crews to fly the new aircraft. In addition to filling job vacancies resulting from normal industry turnover, your Company's personnel department selected 115 new employees for posi- tions created by expansion and growth, SOUTH_E+RWAYS,JNC much of which is attributed directly to our forthcoming FanJET service . Primary activity of the operations de- partment during 1966 centered around early stage preparation for our DC-9's. FanJET Pre-planning While the Douglas DC-9 FanJET is a sophisticated aircraft, it possesses many design features that simplify the r~- quired maintenance techniques. _ It Is ideally suited to our general operational and maintenance requirements, but your company found that its effectiveness on Southern's system would be optimized if certain modifications were made to the basic Douglas configuration. After thorough evaluation by our engineering department, these modifications were incorporated in the six aircraft being de- livered to your Company. Without ques- tion, our aircraft are being provided with the latest, most reliable equipment available, representing the most ad- vanced "state-of-the-art" in aircraft en- gine and equipment design. In addition to determination of the airplane's final configuration, selection was made for interior trim and decoration. Then began a very complex pre-delivery program. On January 27, 1966, the maintenance and engineering department submitted to the President the "DC-9 Technical Project"-detailed plans for all of the activities that are preceding our FanJET service. This synchronized schedule of activi- ties established the pattern for the entire company's technical efforts during 1966, assuring smooth and programed transi- tion to jet service. MAINTENANCE ENGINEERING - Preparation and Training GEORGE M. GROSS A program for the planning, pro- visioning , and management of in- ventories was in- stituted. Detailed evaluations were made of needed parts, components, tooling, test equipment, and system- wide ground handling equipment. The provisioning cycle was implemented and orders placed immediately upon com- pletion of each analysis; delivery times were often crucial. This action assured timely availability of critical items. More refined manual systems were A established for controlling . FanJET_ parts. and tooling. Care was exercised to insure that the manual systems were com- patible with the computerized inventory management system concurrently under development. Arrangements for pooling of parts with other airlines was com- pleted, and a DC-9 parts catalog and cross reference guide for Company use was published. As a result of this de- tailed approach, your Company effected a lower investment of approximately $300,000, relative to the original esti- mates which were based on the experi- ence of other airlines instituting similar aircraft service. An airplane reliability 'program was established, using advanced statistical methods, which will provide continuous measurement of the functional perform- ance of the DC-9 and its subsystems. Through this program we will be able to extend the life of costly components and refine our product improvement programs, thereby providing improved levels of service at lower cost. Data Developed The engineering department prepared data concerning DC-9 operations over our route system for flight, stations, and maintenance personnel. That your Com- pany was able to develop this data and corresponding instructions " in house", rather than buying it from larger carriers as others have done, is the result of preparation and competent staff build- ing programs in which we have been engaged over the past several years. In addition, engineering prepared the route application ; a very comprehensive docu- ment required by the Federal Aviation Agency which specifies in detail exactly how we will operate and maintain the airplane. Based on this document, plus our demonstration of actual flights over the system, the FAA will issue approval for our operation of the DC-9. Maintenance Preparation Concurrently with the engineering A work, the maintenance department be- W gan preparation of programs to provide detailed work specifications, defining each maintenance task to be performed on the airplane and its components. Many special tools and test equipment were manufactured within our shops. We began modification of existing main- tenance facilities to accommodate the SOUTHETRWA>S,/NC DC-9. We began preparation for fueling the .aircraft, provided for administration of the manufacturers' warranties, and es- tablished programs of quality assurance at Dou glas' factory. Experienced South- ern maintenance and inspection person- nel have been on-site with each aircraft, from the beginning of the manufacturing process, to insure that our quality stand- ards are met and that any deviations requiring our decision are handled promptly. To augment its present work force, during 1966 the maintenance depart- ment added thirty new employees, en- abling senior employees to be elevated to greater responsibilities. Extensive Training Early in the year, the maintenance de- partment began training programs for the employees who would be directly involved with the day-to-day mainte- nance of the new aircraft. From our own instructors we selected the most ex- perienced and knowledgeable, and these men were given special DC-9 training at Douglas Aircraft Company's plant in Long Beach, California, and at plants of the manufacturers who are supplying the engines and major component parts for the aircraft. Under the direction of this group, training manuals were prepared for our maintenance and ground person- nel - over a million sheets of printed materials went into the hundreds of copies of this manual, all printed in your Company's print shop. Our continuing detailed training is being conducted by this highly qualified group. Additionally, over 40 selected super- visors and mechanics were given exten- sive training at Douglas', at the com- ponent system manufacturers' and at the engine manufacturer's plants. Many men received a month or more of such in- struction, in addition to that afforded by our own extensive program . Once the aircraft is in operation the real measure of success of these pro- grams will be evident. It is believed that every contingency has been pro- vided for. Commencement of FanJET service is being awaited with a great deal of satisfaction. 8 SOUTHERN AIRWAYS INC ASSETS CURRENT ASSETS Cash Certificates of deposit - at cost and accrued interest Accounts receivable : U. S. Government - for transporta tion and public service - Note A Airline traffic and other receivables . Maintenance and other operating supplies - principally at average cost, less allowances of $179,621 in 1966 and $143,107 in 1965 for obsolescence Prepaid expenses . Total Current Assets INVESTMENTS AND OTHER ASSETS- Note F PROPERTY AND EQUIPMENT - Note B Cost: 1966 1965 Flight Equipment $9,844,375 8,077,526 Ground Property and Equipment $2,176,477 1,729,783 Less allowances for depreciation and maintenance: 1966 3,442,955 1,144,926 1965 3,200,786 965,240 Deposits on new equipment- Note F . DEFERRED CHARGES Unamortized preoperating , route extension, and development costs Unamortized long-term debt expense . . Dec. 31, 1966 $ $ $ 3,661 ,329 212,447 1,171,422 1,706,973 2,878,395 750,161 74,852 $ 7,577,184 4,814,555 $12,020,852 4,587,881 7,432,971 524,573 $ 7,957,544 $ 272,297 229,370 $ 501 ,667 $20,850,950 Dec. 31, 1965 $ 1,817,155 1,900,994 $ 1,070,610 1,629,793 $ 2,700,403 507,966 162,767 $ 7,089,285 29,339 $ 9,807,309 4,166,026 5,641 ,283 150,000 $ 5,791,283 $ $ 40,700 17,642 58,342 $12,968,249 BALANCE SHEET LIABILITIES CURRENT LIABILITIES Accounts payable and accrued expenses: Trade accounts . . . . . . . Collections and withholding as agents Salaries, wages, and vacation pay . . Accrued taxes, advertising, and other expenses Unearned transportation revenue . . . . . . . . Air travel plan deposits . . . . . . . . . . . Estimated federal and state taxes on income - Note E Current maturities of lo ng-term debt - Note B . Total Current Liabilities LONG-TERM DEBT (exclusive of current maturities) - Note B Notes payable to banks . . . . . 5 % Convertible Subordinated Debentures . . . STOCKHOLDERS' EQUITY - Notes A, B, and C Common Stock, par value $2 a share: Authorized - 2,000,000 shares Issued - 1,005,000 shares Other paid-in capital Retained ea rnings . COMMITMENTS - Note F See Notes to Financial Statements. Dec. 31, 1966 $ 1,536,164 1,805,156 565,084 281,202 $ 4,187,606 39,135 114,725 475,608 312,500 $ 5,129,574 $ 5,742,500 5,000,000 $10,742,500 $ 2,010,000 525,246 2,443,630 $ 4,978,876 $20,850,950 Dec. 31, 1965 $ 896,345 1,310,987 492,250 302,679 $ 3,002,261 35,125 105,400 715,530 550,000 $ 4,408,316 $ 4,280,000 $ 4,280,000 $ 2,010,000 525,246 1,744,687 $ 4,279,933 $12,968,249 9 10 SOUTHERN AIRWAYS, INC. STATEMENT OF INCOME AND RETAINED EARNINGS Years ended December 3'1, 1966 and O PERATING REVENU ES Passenge r and excess baggage Mail, express, and freight .. Public servi e revenue - Not A Charter . O ther operating revenues - net . OPERA Tl NG EXPENSES Flying operations . M ain tenance Aircraft and traffic serv icing Passenger servi ce . Promotion and sales . General and administrative Am ortization and provision fo r depreciati on O TH ER DED UCTI O NS AN D INCOME December 31, 1965 1966 $15,183,956 1,397,345 4,540,945 518,951 412,871 $22,054,068 $ 6,116,730 4,492,599 5,506,885 926,301 1,518,177 1,005,671 861,826 $20,428,189 $ 1,625,879 Inte rest on long-te rm debt - net of interest cap italized $ 250,038 O ther income, less miscellaneous deductions 42,842 $ 207,196 $ 1,418,683 TAXES ON INCOME - No te E 595,485 $ 823,198 PRO FIT FROM D ISPOSA L OF PROPERTY Less app li cable income taxes 36,545 NET INCOME $ 859,743 RETA INED EA RNINGS Retai ned earnings at begi nning of yea r -1 ,744,687 $ 2,604,430 Cash dividends paid (1966 - $.16 per share; 1965 - $.134 per share) 160,800 Retained earnin gs at end of yea r $ 2,443,630 See Notes to Financial ~tatem enl~. SOUTHERN AIRWAYS, INC. STATEMENT OF SOURCE AND APPLICATION OF FUNDS YEA R ENDED DECEMBER 31 , 1966 FUNDS PRO VIDED BY Net income . . . . . Add items not requiring the outlay of fund s: Provision fo r depreciation . . . . . . Amo rtization of deferred charges Increase in long-term debt . . . . . . . . . . Decrease in miscellaneous investments and other asse ts Total Funds Provided . . . . . . FUNDS APPLI ED TO DC-9 jet aircraft program - No te F: Equipment and spares . . . . . Equipment purchase deposits . . Certi fica tes of deposit held fo r equipment purchases Preoperating expenses . . . . . . . . Net increase in other property and equipment Payment of cash dividends ($ .16 per share) Increase in deferred fin ance and other costs Total Funds App lied . . DECREASE IN WORKING CAPITAL . . . WORKING CAPITAL, DECEMBER 31, 1965 WORKING CAPITAL, DECEMBER 31, 1966 $ 859,743 803,765 53,659 $1,599,210 374,573 4,800,000 251,392 1965 $12,723,017 1,160,467 5,199,185 507,663 297,315 $19,887,647 $ 5,385,499 4,037,161 4,798,675 822,371 1,395,025 879,776 693,686 $18,012,193 $ $ $ $ $ $ $ $ 1,875,454 213,779 52,660 161 ,119 1,714,335 803,300 911 ,035 26,940 937,975 940,712 1,878,687 134,000 1,744,687 $1,717,167 6,462,500 14,784 $ 8,194,451 $ 7,025,175 996,243 160,800 245,592 $ 8,427,810 $( 233,359) 2,680,969 $ 2,447,610 SOUTHERN A I RWAYS, INC. NOTES TO FINANCIAL STATEMENTS Note A- During the eighteen-month period ended Decem- ber 31, 1960, the Company received public service revenue under a temporary rate which is subject to adjustment upon determination by the Civil Aeronautics Board of a final rate for that period. In the opinion of management, such final determination by the Board will not result in a reduction in public service revenue for that period, and may result in additional public service revenue for that period and for subsequent years in amounts which are not presently determinable. Since January 1, 1961, the Company has received public service revenue under a Class Rate which provides for profit- sharing refunds when stipulated returns on investment are exceed d. The Civil Aeronautics Board has completed audits for the years 1961 through 1964, and adequate provision has previously been made for the required refunds for those years. In the opinion of management, the amounts stated for public service revenue for the years 1965 and 1966 will not be significantly affected upon final determination by the Civil Aeronautics Board. Note B - The notes payable to banks (for which all aircraft, engines, and related equipment are pledged as collateral), together with additional borrowings of $14,600,000 for which the Company has commitments, will be payable generally in installments extending through 1975. The interest rate (6% at December 31, 1966) is of 1% above the lead bank's prime rate. The 5% Convertible Subordinated Debentures due De- cember 1, 1981, are convertible (until maturity or prior redemption) into Common Stock at $16.00 per share; are sub- ordinated, generally, to all existing and future indebtedness for borrowed money; are callable on or after June 1, 1968, at premiums ranging from 5.75% downward; require annual sinking fund payments beginning December 1, 1976, in an amount equal to 10% of the principal amount outstanding at December 1, 1975, with additional voluntary sinking fund payments equal to the mandatory amount. The agreements relating to the notes payable and to th e 5% Convertible Subordinated Debentures place certain re- quirements and restrictions upon, among other things, (1) net current assets, (2) net worth, (3) capital expenditures, and (4) payments relating to capital stock, including dividends. The Company has met all of these requirements, and ap- proximately $304,000 of retained earnings were free of such restrictions at December 31, 1966. Note C- In 1966, the authorized Common Stock of the Company was increased to 2,000,000 shares; the par value per share was reduced from $3 to $2; and a three-for-two stock split was effected. For comparative purposes, 1965 figures have been revised to give effect to the split. Under terms of a Qualified Stock Option Plan approved by the Board of Directors in 1965, options (exercisable one- third each year beginning in October, 1967) were outstanding at December 31, 1966 for the purchase of 37,500 shares of Common Stock of the Company at a price of $10.162/J per share, and an additional 7,500 shares were reserved for op- tions which may be granted under the Plan. An option for the purchase of 3,000 shares was cancelled during the year. In addition, 312,500 shares of Common Stock are reserved for issuance upon conversion of the 5% Convertible Sub- ordinated Debentures. Note D - The cost to the Company of its employees re- tirement plans amounted to $636,635 for the year ended December 31, 1966 and the unfunded past service liability at that date totaled approximately $670,000. Note E - In accordance with the policy of reflecting the in- vestment tax credit in income in the year in which it arises, the provision for income taxes for the years 1966 and 1965 includes investment tax credit of $91,417 and $27,495, respectively. Note F - At December 31, 1966, the Company had on order six DC-9 jet aircraft and related spares scheduled for delivery in 1967 and 1968, which represents a commitment of ap- proximately $21,520,000 in excess of the related deposits (See Note B) . Certificates of deposit in the amount of $4,800,000 (the net proceeds from the sale of the 5% Convertible Subordinated Debentures) are held for payments required during the first half of 1967 under the DC-9 purchase con- tract and are classified as non-current investments. 11 SOUTHETKWA>S,/NC GENERAL OFFICES Atlanta Airport, Atlanta, Georgia COUNSEL : Bradley, Arant, Rose & White, Birmingham, Alabama Ballard & Beasley, Washington, D. C. AUDITOR : Ernst & Ernst, Atlanta, Georgia STOCK TRANSFE R AGENT: Tru st Company of Georgia, At lanta, Georgia - \/ERTISING COUNSEL: Harris & ~ einstein A ssociates, Inc., Atlanta, Georgia SOUTHETRWAYS.JNC EXECUTIVE COMMITTEE Frank W. Hulse G. Gunby Jordan W. B. White, Jr. OFFICERS Frank W . Hulse President Graydon Hall Vice Pre ident- Sales W. S. Magill, Jr. Graydon Hall Elton B. Stephens Vice President-Operation J. Kenneth Courtenay Vice President-Administrative Services and Secreta ry George M . Gross Vice President- Maintenance and Engineering Ike F. Jones Vice President Thomas F. Grojean Treasurer W. Bayne Grubb Assistant Vice President-Flight Operations Thomas A. Wiley, Jr. Assistant Vice President- Sales Everett L. Martin Assistant Vice President- Personnel Ray W . Burden Assistant Treasurer A. L. Maxso n Controller Mrs. Mary C. Hayes Assistant Secretary Ceci l A. Beasley, Jr. Assistant Secretary W . B. White, Jr. Assistant Secretary DIRECTORS Cecil A. Beasley, Jr. Ballard & Beasley, Washington, D.C. Edward U. Beneke The Beneke Corporation, Columbus, Mississippi Alexander J. Brunini Brunini, Everett, Grantham & Quin Vicksburg, Mississippi Graydon Hall Southern Airways, Inc., Atlanta, Georgia F. Barton Harvey, Jr. Alex. Brown & Sons, Baltimore, Maryland Frank W . Hulse Southern Airways, Inc., Birmingham, Alabama Alton F. Irby, Jr. Irb y-Adams-Cates Co., Atlanta, Georgia Henry P. Johnston Radio and Television Consultant Birmingham, Alabama G. Gunby Jordan The Jordan Company, Columbus, Georgia Sartain Lanier Oxford Manufacturing Co., Inc., Atlanta, Georgia R. Eu gene Orr Knight, Orr & Company, Inc., Jacksonville, Florida G. Frank Purvis Pan American Life In surance Co., New Orleans, Louisiana Francis D . Schas Bullington-Schas & Co., Memphis, Tennessee Elton B. Stephens EBSCO Industries, Inc., Birmingham, Alabama Richard A. Trippeer Trippeer Organizations, Inc., Memphis, Tennessee W . B. White, Jr. Bradley, Arant, Rose & White, Birmingham, Alabama Gen . Ralph H. Wooten (Honorary Director) United States Air Force, Retired, Memphis, Tennessee SOUTHE~WAYS,/NC General Offices : Atlanta Airport Atlanta, Georgia 30320