Southern Airways Annual Report 1970

1970
Annual
Report
AIRWAYS,/NC

CHICAGOe
SOUTHTWAYS
NEW YORK LaGuardia
NEWARKe e
BRISTOL-KINGSPORT-
KNOXVILLE ~ JOHNSON CITY
e WASHINGTON, D.C.
ST. LOUISe
GREENVILLE
JACKSON

TUPELO
UNIVERSITY-
OXFORD
GREENWOOD
NASHVILLE

SHELBYVILLE-
TULLAHOMA
HUNTSVILLE-DECATUR
FLORENCE-
SHEFFIELD-
TUSCUMBIA
COLUMBUS


MONROE JACKSON-
MERIDIAN
VICKSBURG
LAOREL
\ATCHEZ HATTIESBURG MOBILE
BATON ROUGE
GULFPORT-
BILOXI
PASCAGOULA
NEW ORLEANS e :..:----------- EGLIN AFB
FT. WALTON BEACH
SELECTED OPERATING STATISTICS* 1970
Plane Miles (000) (all services) 18,580
Passengers 1,589,481
Passenger Miles (000) 430,736
Available Seat Miles (000) (all services) 1,228,373

CROSSVILLE
CHATTANOOGA

PANAMA CITY
1969
14,679
1,377,421
323,472
862,388
GREENVILLE-
SPARTANBURG
CHARLOTTE
e ATLANTA
GREENWOOD
ANDERSON

COLUMBIA
MOULTRIE-THOMASVILLE
VALDOSTA

CHARLESTON
JACKSONVILLE
ORLANDO
eMIAMI
1968 1967 1966
12,260 11,803 11 ,287
1,271 ,497 1,180,297 1,051,554
254,028 222,142 196,366
611,795 498,322 416,738
Passenger Load Factor 38.8% 42.4% 45.8% 45.9% 48.6%
Yield Per Passenger Mile $ .086 $ .087 $ .081 $ .077 $ .077
Average Passenger Fare $ 23.36 $ 20.33 $ 16.08 $ 14.49 $ 14.39
Average Passenger Load 25.2 24.3 22.3 19.4 18.0
Average Length of Passenger
Haul (miles) 271.0 234.8 199.8 188.2 186.7
Total Cost Per Available Seat
Mile ( all services) $ .043 $ .045 $ .049 $ .050 $ .049
*In scheduled service unle s otherwise specified.
SOUTHERN AIRWAYS, INC.
PRESIDENT'S REPORT
STOCKHOLDERS, CUSTOMERS, EMPLOYEES AND FRIENDS:
The airline industry suffered record losses during 1970 and, unfortunately, Sout_hern was no exception.
Its loss of $3,333,212 or $3.25 per share, was caused by depressed economic conditions, higher costs due
to inflation, and start-up expenses on new, long-haul services to Miami, Newark and Chicago. On the other
hand, our revenues reached all time highs. Revenue passenger miles were up 33.2 percent over 1969, and
total revenues were 30.7 percent above last year.
The growth enjoyed by Southern in 1970 was, by no means, universal in the industry. Indeed, I believe
this growth -- soundly based upon valuable long-haul route additions -- points the way to a better future
for your Company if the economy improves.
In late 1969, the Company began arranging a program to cover the financial requirements of expanding
the size of Southern's operations and to provide for slackening in the economic climate of areas which we
serve. This program is now in the final stage of completion and involves raising equity capital by offering
stock purchase rights to existing stockholders of the Company and to others. The members of the
Company's Board of Directors have agreed to purchase up to $1,500,000 of the stock to be offered and
tentative arrangements have been made to sell to others approximately $1,000,000 of the stock. A
registration statement was filed with the Securities and Exchange Commission on March 18, 1971 with
respect to the proposed offering of these securities.
The proposed financing program also involves deferring certain payments due by the Company in
1971 and 1972. The Company has reached a tentative agreement with the banks under its credit agree-
ment, as well as certain lessors of aircraft and certain other creditors, in which the creditors and lessors
would agree to defer payments due them totaling approximately $3,200,000, asset out in Note M to the
financial statements contained in this Annual Report.
Since January 31, 1971, the Company has not made certain payments to the aforementioned creditors
in anticipation of a portion of those payments being deferred under the proposed financing program.
The failure to pay those amounts when due constitutes defaults under the Company's long-term debt
and lease agreements. On October 1, 1970 the Company was not in compliance with the requirements
of its agreements with banks and lessors of aircraft, as explained in Note D to the financial statements,
which also constituted conditions of default under the terms of both issues of Convertible Subordinated
Debentures.
I hope that you will attend the reconvened Annual Meeting on Monday, May 3, 1971, which will be
held at 10:00 o'clock A.M. Eastern Daylight Time in the Scott Hudgens Building, Hapeville, Georgia.
Whether or not you plan to attend the meeting in person, please execute and return the enclosed proxy.
Respectfully Submitted,
Frank W. Hulse
President
March 30, 1971
SOUTHERN AIRWA VS, INC.
BALANCE SHEET
December 31, 1970 and 1969
ASSETS
CURRENT ASSETS
Cash ............................................. .
Accounts Receivable:
U.S. Government:
Transportation and public service revenue - Note A .......... .
Refundable income taxes ................. .... ..... .. .
Trade receivables, less allowance for doubtful accounts
(1970 - $110,000; 1969 - $40,154) .................... .
Maintenance and operating supplies, at average
cost less allowance for obsolescence
(1970 - $513,170; 1969 - $279,420) ..................... .
Prepaid expense ...................................... .
Total Current Assets
OTHER ASSETS
Aircraft lease rental deposits - Note E ....................... .
Other ............................................. .
PROPERTY AND EQUIPMENT - on the basis of cost - Notes B, D and J
Flight equipment ..................................... .
Less allowances for depreciation and maintenance ............... .
Other property and equipment ............................ .
Less allowances for depreciation ......................... . . .
DEFERRED CHARGES - Note C
Unamortized preoperating, route extension
and development costs ............................... .
Deferred lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized long-term debt expense ........................ .
1970 1969
$ 2,674,346 $ 4,304,163
2,912,941 1,222,777
436,338
4,642,234 3,510,227
7,555,175 5,169,342
1,641,659 1,462,334
508,819 1,371,978
12,379,999 12,307,817
490,000 210,000
78,742 63,190
568,742 273,190
26,504,600 25,611,105
7,754,761 5,736,717
18,749,839 19,874,388
3,980,501 3,206,850
2,394,742 1,995,062
1,585,759 1,211,788
20,335,598 21,086,176
1,049,442 985,521
247,000 363,566
671,134 758,421
1,967,576 2,107,508
$35,251,915 $35,774,691
LIABILITIES
CURRENT LIABILITIES
Accounts payable ..................................... .
Amount due on engine purchase contract ..................... .
Collections and withholding as agents ........................ .
Salaries, wages and vacations ............................. .
Accrued interest payable ................................ .
Accrued taxes and other expense ........................... .
Air travel plan deposits ................................. .
Current maturities of long-term debt - Notes D and L ............ .
Total Current Liabilities
LONG-TERM DEBT- Note M
Notes payable, less current maturities - Notes D and L ............ .
Convertible subordinated debentures - Notes D and L ............ .
Other - Note E ...................................... .
DEFERRED TAXES ON INCOME - Note F
STOCKHOLDERS' EQUITY - Notes D and G
Common stock, $2 par value
Authorized - 5,000,000 shares
Issued and outstanding - 1,024,871 shares .................. .
Other paid-in capital . .................................. .
Retained earnings ( deficit) ............................... .
COMMITMENTS AND CONTINGENCIES - Note I
See Notes to Financial Statements.
$
1970 1969
3,573,753
637,300
2,627,662
1,332,254
455,676
535,915
108,375
2,741,555
12,012,490
8,917,816
12,682,000
490,000
22,089,816
235,000
2,049,742
1,229,523
(2,364,656)
914,609
$ 1,691,817
2,710,114
1,043,222
453,269
986,857
112,200
1,709,239
8,706,718
9,763,152
12,682,000
140,000
22,585,152
235,000
2,049,742
1,229,523
968,556
4,247,821
$35,251,915 $35,774,691
SOUTHERN AIRWAYS, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1970 and 1969
OPERA TING REVENUES
Passenger ................................... .
Mail, express and freight, ......................... .
Public service revenue - Note A ..................... .
Charter ..................... ....... ......... .
Other operating revenues - net
1
OPERA TING EXPENSES
Flying operations ............................... .
Maintenance . .- ............ . .................. .
Aircraft and traffic servicing ....................... .
Pa$senger service ............................... .
Promotion and sales ............................. .
General and administrative ......................... .
Amortization and provision for depreciation - Note B ...... .
OTHER DEDUCTIONS AND (INCOME)
Interest on long-term debt-net of interest capitalized ....... .
Insurance proceeds from loss of leased aircraft
net of applicable expenses ....................... .
Other (income), less miscellaneous deductions ........... .
(LOSS) BEFORE INCOME TAX CREDIT ...... .. ............ .
INCOME TAX CREDIT - Note F ......................... .
1970
$37,187,312
2,865,938
4,822,621
3,835,306
735,949
49,447,126
18,071 ,509
9,045,318
11,351,075
2,661,228
4,273,431
3,191,875
2,632,284
51,226,720
(1,779,594)
1,788,784
(286,609)
51 ,443
1,553,618
(3,333,212)
NET (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,333,212)
AVERAGESHARESOFCOMMONSTOCK
OUTSTANDING .. .......... ~ ................... .
NET (LOSS) PER SHARE OF COMMON STOCK - Note K . . . . . . . . $
1,024,871
(3.25)
See Notes to Financial Statements.
SOUTHERN AIRWAYS, INC.
STATEMENT OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1970 and 1969
1970
RETAINED EARNINGS, beginning of period . . . . . . . . . . . . . . . . . . $ 968,556
Net (Loss) for the period ............. .... .............. . (3,333,212)
RETAINED EARNINGS (DEFICIT), end of period $ (2,364,656)
See Notes to Financial Statements.
1969
$28,050,097
2,163,178
3,579,639
3,358,146
$
$
684,448
37,835,508
12,659,124
6,110,720
9,078,742
1,875,449
3,002,821
2,286,399
2,395,905
37,409,160
426,348
1,719,541
15,695
1,735,237
(1,308,889)
486 961
(821,928)
1,024,87 1
(.80)
1969
$ 1,790,484
(821,928)
$ 968,556
SOUTHERN AIRWAYS, INC.
STATEMENT OF CHANGES IN WORKING CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1970 and 1969
SOURCE OF WORKING CAPITAL
From operations:
Net (loss) ................................. .
Non-cash items
Provision for depreciation ..................... .
Provision for airframe and engine overhaul ........... .
Amortization of deferred charges ................. .
Total From Operations
Additional long-term borrowing ..................... .
Proceeds from sale of property and equipment,
less gain included in net (loss) .............. . ...... .
Refund of equipment purchase deposits ............... .
APPLICATION OF WORKING CAPITAL
Additions to property and equipment ................. .
Expenditures for airframe and engine overhaul ........... .
Amounts transferred to current maturities of long-term debt .. .
Deposits on leased aircraft ......................... .
Increase in deferred charges ....................... .
Increase in other assets ........... .. ............. .
(DECREASE) IN WORKING CAPITAL .............. .
Working capital at beginning of year ................. .
WORKING CAPITAL AT END OF YEAR ............. .
CHANGES IN COMPONENTS OF WORKING CAPITAL
Increase (decrease) in working capital assets
Cash ..................................... .
Certificates of deposit ......................... .
Accounts receivable ........................... .
Maintenance and operating supplies ................. .
Prepaid expenses ............................. .
Increase (decrease) in working capital liabilities
Accounts payable ............................. .
Amount due on engine purchase contract ............. .
Collection and withholding as agents ................. .
Salaries, wages and vacations ..................... .
Accrued interest, taxes and Qther expenses ....... ...... .
Air travel plan deposits ......................... .
Current maturities of long-term debt ................. .
(DECREASE) IN WORKING CAPITAL .......... .... .
See Notes to Financial Statements.
1970
$ (3,333,212)
2,090,915
1,728,630
551 ,944
1,038,277
1,952,606
274,976
3,265,859
2,134,662
1,209,281
2,447,942
280,000
412,012
15,552
6,499,449
(3,233,590)
3,601,099
$ 367,509
$ (1,629,817)
2,385,833
179,325
(863,159)
72,182
1,881,936
637,300
(82,452)
289,032
(448,535)
(3,825)
1,032,316
3,305,772
$(3,233,590)
1969
$ (821,928)
2,160,358
1,251,043
376,638
2,966,111
140,000
219,784
3,179,958
6,505,853
6,363,077
1,201,687
2,465,085
210,000
707,356
15,735
10,962,940
(4,457,087)
8,058,186
$ 3,601,099
$ 160,311
(5,534,316)
877,996
451,233
598,264
(3,446,512)
370,520
250,590
221,056
281,334
(425)
(112,500)
1,010,575
$( 4,457,087)
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1970
NOTE A - SUBSIDY
For the period August 1, 1970 through June 30,
1971, Southern and the other local service carriers are
receiving Public Service Revenues (subsidy) based upon a
new formula (Class Rate V) which significantly increases
the level of subsidy otherwise payable to the carriers
under the old formula (Class Rate IV-A), from the
$36 300 000 actually paid the carriers in 1969 to an
ann~al r;te of approximately $60,000,000. This rate will
require an additional appropriation of approximately
$8,000,000 in order for the Civil Aeronautics Board to
have sufficient funds to pay this new rate through June
30, 1971. It is expected that Congress will make these
additional funds available to the CAB.
Under the new formula, the Company has accrued
subsidy for the period August 1, 1970 through December
31, 1970 in the-amount of $2,863,444, as contrasted to
the amount which would have been payable to the
Company under the old formula of $1,378,799, resulting
in total Public Service Revenues of $4,822,621 for the
year ended December 31, 1970. The new Class Rate V
Subsidy Formula, which is based on the service being pro-
vided to small communities during May, 1970, is esti-
mated to produce subsidy for the Company at an annual
rate of about $6,800,000.
NOTE B - PROPERTY, EQUIPMENT,
DEPRECIATION, MAINTENANCE AND REPAIRS
Provisions for depreciation of property and equipment
are computed on the straight-line method calculated to
amortize the cost of the properties over their estimated
useful lives. Reference is made to Note J regarding
changes in accounting applicable to depreciation and
repairs and maintenance. Estimated useful lives are as
follows:
Airframes, engines, pro-
pellers, communications
equipment and rotable
M-404
parts (A)
Ground equipment
DC-9
15 years
Ground
Equipment
3-10 years
(A) Common depreciation point of December 31, 1973
Based upon a review during 1970 of the useful life of
the Martin 404 aircraft, the Company believes that the
economic useful lives of those aircraft will be essentially
exhausted by the end of 1973. Prior to 1970, these air-
craft and related capitalized spares were being depreciated
over a seven-year period which would result in all air-
frames being reduced to a salvage value by the end of
1973, and would result in significant undepreciated
balances in overhaul and spare parts accounts at that time.
Accordingly, in order to more properly match expenses of
the Martin fleet with revenues obtained therewith, the
Company has adopted, effective as of the beginning of
1970, a common depreciation and amortization point of
December 31, 1973, for the complete write-off of the
Company's investment in Martin aircraft, which at
December 31, 1970 amounted to $4,365,000. At Decem-
ber 31 1970 five Martin aircraft had been withdrawn
from s;rvice ~nd will be sold or used in maintaining the
remaining Martin aircraft in an airworthy condition. Any
proceeds from the sale of these aircraft will be credited to
the allowance for depreciation.
Expenditures for ordinary maintenance and repairs are
charged to expense. Expenditures for major spare parts
are capitalized and minor parts are recorded in inventory
accounts and charged to expense as used.
Residual amounts of property and equipment are not
eliminated from the accounts until the items are retired.
At the time properties are retired, the amounts of cost
and allowance for depreciation and maintenance are
eliminated from the accounts. Profits and losses on dis-
posals of flight equipment ( exclusive of rotable parts) are
credited or charged to operations. Proceeds from the
disposal of rotable parts are credited to the allowance for
depreciation account.
NOTE C - DEFERRED CHARGES
Expenditures for preoperating and route extension
and development costs are deferred and are amortized
over a period of five years from the dates operations of
the routes are started.
Costs associated with obtaining leased DC-9 aircraft
are being amortized over the lives of the leases.
Expenditures associated with obtaining long-term debt
are being amortized over the life of the financing
arrangements.
NOTED - LONG-TERM DEBT
Long-term debt at December 31, 1970 and December
31, 1969 is summarized as follows:
December 31
1970 1969
Notes payable to banks in
quarterly installments
through 197 6 ( 1 )( 5)( 6) $5,392,500 $6,255,000
.
Notes payable to banks
due December 31, 1975
(1) (5) (6) (7) 3,000,000 3,000,000
Notes payable to banks in
quarterly installments
through 1974 (2) (5) (6) 1,695,652 2,217,39 1
Note payable to bank due
December 31, 1971 through
January 31, 1973 (5) (8) 613,000
Notes payable to fuel
supplier due December 31,
1971(9) 250,780
10% notes payable to lessor
due January 31, 1971 315,000
6% note due in monthly in-
stallments to October 1975 392,439
5% Convertible Sub-
ordinated Debentures due
December 1, 1981 (3)(6) 4,682,000 4,682,000
6% Convertible Sub-
ordinated Debentures with
warrants attached due
November 1, 1983 (4) (6) 8,000,000 8,000,000
Other - Note E 490,000 140,000
24,831,371 24,294,391
Less current maturities 2,741,555 1,709,239
$22,089,816 $22,585,152
(1) The interest rate is of 1 % above the lead bank's
prime rate.
(2) The interest rate is of 1 % above the lead bank's
prime rate.
(3) The 5% Convertible Subordinated Debentures
due December 1, 1981, are convertible (until
maturity or prior redimption) in to Common
Stock at $ 16 per share (see Note G) are sub-
ordinated, generally, to all existing and future in-
debtedness for borrowed money; are callable at
premiums ranging from 4.75% downward; and
require annu~l sinking fund payments beginning
December 1, 1976, in an amount equal to 10%of
the principal amount outstanding at December 1,
1975. Also, the Company may make additional
voluntary sinking fund payments equal to the
required amount.
( 4) The 6% Convertible Subordinated Debentures
due November 1, 1983, are convertible (until
maturity or prior redemption) into Common
Stock at $16 per share (see Note G); are issued in
integral multiples of $1,000 with a warrant for the
purchase of 18 shares at $16 a share attached; are
subordinated, generally, to all existing and future
indebtedness for borrowed money; are callable on
or after November 1, 1973, at premiums ranging
from 6.5% downward; and require annual prepay-
ments beginning November 1, 1978, in an amount
equal to 10% of the principal amount outstanding
at November 1, 1977, less credit for principal
amount converted or called subsequent to Novem-
ber 1, 1977. Also, the Company may make addi-
tional voluntary prepayments equal to the
required amount.
(5) All aircraft, engines and related equipment are
pledged as collateral on this indebtedness.
(6) The agreements relating to these notes payable
and both issues of Convertible Subordinated
Debentures place certain requirements and restric-
tions upon, among other things, (a) net current
assets, (b) indebtedness and lease obligations, ( c)
net worth, (d) capital expenditures, and (e) pay-
ments relating to capital stock including dividends.
On October 1, 1970 and December 31, 1970, the
Company did not comply with these requirements
with respect to net current assets and indebtedness
and lease obligations which are also conditions of
default under the terms of its long-term aircraft
lease agreements. The Company plans to obtain an
amendmenc to its agreements with creditor banks
and lessors of aircraft to enable compliance with
these requirements and restrictions.
(7) Prepayments are required equal to 25% of the first
$1,000,000 of net income of the Company, plus
35% of the net income in excess of $1,000,000 for
the 12 month period ending the preceding
December 31.
(8) This note is payable in quarterly installments com-
mencing December 31, 1971, with a final payment
on January 31, 1973. It bears interest at the rate
of 9% and is guaranteed by McDonnell Douglas
Corporation. It is subordinated in certain aspects
to the notes payable due through 1976 and the
notes payable through 197 4. Payment of this note
is collateralized by a second mortgage on the DC-9
flight equipment.
(9) These notes payable bear interest at 8% to 9%
and are in some respects subordinated to the notes
payable due through 1976 and the notes payable
due through 1974.
Minimum aggregate principal payments on long-term debt
for the next five years are as follows:
Year Amount
1971 $2,741,555
1972 1,970,780
1973 1,605,579
1974 1,117,489
1975 3,950,229
NOTE E - OTHER NOTES PAY ABLE
Other notes payable represent six month notes
payable, with interest at 10%, to a lessor for security
deposits on aircraft leased under renewable six month
leases. Since the Company plans to renew the leases ap-
plicable to these planes and continue to renew these notes
as they mature, the deposits on leased aircraft have been
included in other assets and the notes payable have been
included as other long-term debt in the accompanying
financial statements. The amounts for 1969 have been
reclassified from current assets and current liabilities.
NOTE F - INCOME TAXES
The loss for income tax purposes for 1969 and 1970
exceeds the loss shown in the Statement of Operations
because of certain expenses deferred for financial state-
ments and additional depreciation to be claimed for
income tax purposes. Depreciation for financial state-
ments is computed on the straight line method, but
certain assets are depreciated on accelerated methods for
NOTE G - COMMON STOCK AND
OTHER PAID-IN CAPITAL
In May, 1 %9, the charter of the Company was
amended to increase the authorized capital of the
Company from 2,000,000 shares of $2 par value Common
Stock to 5,000,000 shares of $2 par value Common
Stock.
income tax purposes. Because of the aforementioned
differences in treatment of certain items for income tax
purposes, there is a net operating loss carryforward to
future years for income tax purposes of approximately
$5 ,850,000 at December 31, 1970, which expires in 1974
($970,000) and 1975 ($4,880,000). Net operating loss
carryforward for financial statement purposes at Decem-
ber 31, 1970, was approximately $3,300,000.
The Company use~ the flow-through method of
accounting for investment credit and the available invest-
ment credit is recognized to the extent that it can be
realized or off set against current or deferred income taxes.
Investment credit realized as a reduction of deferred
income taxes amounted to approximately $207,000 at
December 31, 1970.
Investment credit carryover at December 31, 1970,
for use in offsetting federal income taxes in future income
tax returns amounted to approximately $1,220,000 and
expires in 1976 ($65,000), 1977 ($810,000), 1978
($37,000), and 1979 ($308,000).
This change constitutes the only change in Common
Stock and other paid-in capital for the two years ended
December 31, 1970.
At December 31, 1970 and December 31, 1969,
1,006,625 shares of Common Stock of the Company were
reserved as follows: Shares Reserved
December 31
1970 1969
Qualified Stock Option Plan approved by Board of Directors in 1965 :
Exercisable one-third each year beginning in 1969 at a
price of $19 .18 per share
Exercisable one-third each year beginning in 1970 at a
price of $13.75 per share
Exercisable one-third each year beginning in 1971 at
prices ranging from $8.69 to $11.76 per share
Currently exercisable at a price of $10.16-2/3
per share
Shares available for additional options
which may be granted under the Plan
Employee Stock Option Plan approved by Board of Directors in 1967:
Exercisable in June, 1970 at a price of $11.52 per share
Shares available for options which may be granted
under the Plan
Shares reserved for conversion of 5%
Convertible Subordinated Debentures
Shares reserved for conversion of 6%
Convertible Subordinated Debentures
Shares reserved for sale pursuant to stock purchase warrants
issued with 6% Convertible Subordinated Debentures at a price
of $16 per share
TOTAL
1,000
900
7,100
36,000
45,000
25,000
25,000
292,625
500,000
144,000
1,006,625
1,000
900
7,100
33,750
2,250
45 ,000
1,833
23,167
25,000
292,625
500,000
144,000
1,006,625
Data with respect to stock options outstanding at December 31, 1970 and December 31, 1969 is summarized as follows:
December 31, 1970 December 31, 1969
Year of Number of Option and Market Number of Option and Market
Grant Shares Price Per Share Total Shares Price Per Sh are Total
1965 $ $ 33,750 $10.16- 2/3 $343,123
1967 1,000 19.18 19,180 2,833 11.52 - 19.18 40,296
1968 900 13.75 12,375 900 13.75 12,375
1969 7,100 8.69 - 11.76 77,136 7,100 8.69 - 11.76 77,136
9,000 $108,691 44,583 $472,930
The options generally become exercisable in three annual installments beginning two years after date of grant and expire
five years after date of grant. During the five years ended December 31, 1970, no options were exercised and options became
exercisable as follows:
Quoted Market Price At
Number of Option Price Date Exercisable
Exercisable Shares Per Share Total Per Share Total
1967 11 ,250 $10.16- 2/3 $114,381 $14.50 $163,125
1968 11 ,250 10.16- 2/3 114,381 13.875 156,094
1969 11 ,583 10.16- 2/3 - 19.18 120,768 11.50 - 11.625 133,250
1970 2,466 11.52 - 19.18 31,628 5.50 - 6.375 15,375
$381,158 $467,844
Upon exercise of the option, the amount received in excess of the par value of the stock is credited to other paid-in
capital and no charge is made to income.
NOTE H - PENSION PLANS
The Company has several pension plans, including a
defined contribution plan, covering substantially all of its
employees. During 1970, the Company changed its plans
from deposit administration plans to trustee self-
administered plans, increased employee benefits payable
under one of these plans, and changed the actuarial
as~umptions used in computing pension costs (See Note
J). Total pension expense, including amounts paid under a
defined contribution plan, for the two years ended
December 31 , 1970 and 1969 was $661,734 and
$774,638, respectively. As a result of changing actuarial
assumptions, pension plan assets were sufficient to cover
the unfunded past service costs - of approximately
$519,000 as reported at December 31, 1969. The
Company's policy is to fund pension cost accrued. At
December 31 , 1970, the total of the pension funds
exceeded the actuarially computed value of vested
benefits.
NOTE I - COMMITMENTS AND CONTINGENCIES
At December 31 , 1970, the Company was leasing four
DC-9 jet aircraft under leases expiring in 1980 and 1981,
at a minimum annual rental of $1,561,129 ; seven DC-9 jet
aircraft under six month leases, which assuming the air-
craft are retained for a full year, would result in rentals of
$2,903,000 in 1971; and a communications system lease
expiring in 1977 with a minimum rental of $79,000. The
Company also leases certain office, ticketing, hangar and
shop facilities with minimum aggregate annual rentals of
approximately $1 ,220,000 under various leases with
expiration dates through 1988.
In November 1970, a DC-9 jet aircraft leased by the
Company was involved in an accident, in which all pas-
sengers and crew members were killed, while on a charter
flight to Huntington, West Virginia. Claims may be made
against the Company for damage to property and loss of
life as a result of this accident, and in the opinion of the
Company, all potential claims are adequately covered by
insurance. There is pending in the United States Circuit
Court of Appeals for the District of Columbia Circuit
cases brought by certain unsuccessful applicants before
the CAB who attacked the Board's extension of the
Company's system from Tallahassee to Orlando and
Miami, from Memphis to Chicago, from Memphis to St.
Louis, and one-stop authority between St. Louis and New
Orleans. In the opinion of management and legal counsel
of the Company, the final settlement of all of these
matters will have no material effect on the financial
position or operations of the Company.
The Company has an employment agreement with its
President providing for his employment to September 12,
1977 at an annual salary of not less than $48,500. In
addition, upon his retirement the Company has agreed to
pay $833 per month to him for life, or in the event of his
death, to his lineal descendants for 180 months. No pro-
vision has been made in1
the accompanying financial state-
ments for amounts to be paid under the terms of these
agreements.
NOTE J - CHANGES IN ACCOUNTING
During 1969, the Company redetermined the
economic useful life of cylinders used in Martin 404 air-
craft and reduced the useful life of these assets from seven
years to three years. This change had the effect of in-
creasing the provisions for depreciation approximately
$153,000 and $146,000 for the years ended December
31, 1969 and December 31, 1970, respectively, and in-
creasing the net loss approximately $98,000 ($.10 per
share) and $146,000 ($.14 per share) for the years ended
December 31, 1969 and December 31, 1970, respectively.
The Company has consistently followed the policy of
providing for DC-9 engine overhaul based on hours of
service. Based upon a review of its maintenance program
applicable to DC-9 engines, the Company reduced the rate
from $12.50 per hour to $7 .50 per hour effective Jan-
uary, 1969. This change had the effect of reducing the
provisions for maintenance approximately $205,000 and
$45,000 for the years ended December 31, 1969, and
Decrease (increase) in net loss:
December 31, 1970, respectively, and decreasing the net
loss approximately $131,000 ($ .13 per share) and
$45,000 ($.04 per share) for the years ended December
31, 1969 and December 31, 1970, respectively.
During 1970 the Company redetermined the esti-
mated economic useful life of Martin 404 aircraft and
related equipment (See Note B). This change had the
effect of increasing the provision for maintenance approx-
imately $206,000 and increasing the provision for depre-
ciation approximately $74,000, which resulted in an
increase in the net loss for 1970 of approximately
$280,000 ($.27 per share).
During 1970, the Company changed actuarial assump-
tions used in computing pension costs (See Note H). This
change had the effect of decreasing pension cost and the
net loss approximately $340,000 ($.33 per share).
A summary of the decrease (increase) in the net loss
for 1970 and 1969 resulting from these changes is as
follows:
1970 1969
Change in useful life of cylinders used in Martin 404 aircraft
Change in rate for providing for DC-9 engine overhaul
Change in useful life of Martin 404 aircraft and
$( 146,000)
45,000
$( 98,000)
131,000
related equipment
Change in actuarial assumptions used in computing
pension costs
DECREASE (INCREASE) IN NET LOSS
Decrease (increase) in net loss per Common Share
NOTE K - LOSS PER COMMON SHARE
Net loss per common share was computed by dividing
the net loss by the weighted average number of shares of
Common Stock outstanding. Conversion of debentures
and exercise of warrants would not have increased the net
loss per common share.
NOTE L - SUBSEQUENT EVENTS
In January and February 1971, the Company did not
(1) make payments of $612,500 due under the terms of
its agreement with creditor banks, (2) repay notes of
$315,000 due to a lessor, and (3) make lease payments of
$358,923 due under the terms of its long-term lease
agreements.
NOTE M - PROPOSED FINANCING ARRANGEMENTS
The Company proposes to enter into an agreement
in 1971 with creditor banks, lessors of aircraft and
suppliers (Creditors) for the deferral of certain principal
and rental payments due in 1971 and 1972. Principal pay-
ments of $1,254,185 (originally due $612,500 in 1971
and $641,685 in 1972) due to creditor banks will be
deferred and paid in three equal installments in October,
November and December, 1973, and payment of a note
payable to a lessor in the amount of $315,000 will be
( 280,000)
340,000
$( 41,000)
$( .04)
$ 33,000
$ .03
deferred to December 31, 1972. In addition, a certain fuel
supplier will agree to accept notes in the amount of
$330,000 due in three equal installments in September,
October and November, 1972, for a portion of fuel de-
liveries to be made in March and April, 1971 ($220,000)
and March, 1972 ($110,000), an engine supplier will
accept notes amounting to $420,000 due in three equal
installments in September, October and November, 1972,
and aircraft lease payments of $893,000 ( originally due
$568,000 in 1971 and $325,000 in 1972) will be deferred
and paid in three equal installments in April, May and
June, 1973. This agreement will be contingent upon the
Company's obtaining proceeds of at least $2,500,000
from the sale of its equity securities.
In addition, the Company proposes that creditor
banks and lessors amend their agreements with the
Company to enable the Company to be in compliance
with all terms and provisions of these agreements. Under
the most restrictive terms of these proposed amendments,
the Company will be in default with all creditors if ( 1) the
cumulative net loss for 1971 exceeds $2,500,000 or the
net loss for any one month during 1971 exceeds
$1,000,000 or (2) the cumulative net loss for 1972
exceeds $1,000,000 or the net loss for any one month
during 1972 exceeds $750,000.
NOTE N - SUPPLEMENTARY PROFIT AND LOSS INFORMATION
Provision for Depreciation-
Operating Expenses
Other
Provision for Airframe and Engine Overhaul - Operating Expenses
Amortization-
Operating Expenses
Other
Obsolescence - Operating Expenses
Taxes other than Income Taxes Charged to Operating Expenses -
Payroll
Fuel and Oil
Property
Sales and Use
Other
Rents (including landing fees and rental of airports served)
SOUTH~RWAYS
1970
$2,090,915
$2,090,915
$1,728,630
$ 331,367
220,577
$ 551,944
$ 210,002
$ 640,629
216,261
233,500
91,698
65,469
$1,247,557
$6,512,753
1969
$2,129,330
31,028
$2,160,358
$1,251,043
$ 205,837
170,801
$ 376,638
$ 60,738
$ 621,309
354,954
150,000
78,199
26,404
$1,230,866
$3,847,277
Board of Directors
Southern Airways, Inc.
Atlanta, Georgia
REPORT OF INDEPENDENT ACCOUNT ANTS
We have examined the balance sheets of Southern Airways, Inc. as of December 31, 1970, and December 31, 1969, and
the related statements of operations, retained earnings ( deficit) and changes in working capital for the years then ended. Our
examinations were 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.
During 1969, the Company reduced the economic life of cylinders used in Martin 404 aircraft and decreased the provision
for overhaul applicable to DC-9 engines. During 1970, the Company changed the economic useful life of its Martin 404
aircraft and related equipment and changed the actuarial assumptions used in computing pension costs. These changes, with
which we concur, as discussed in Note J of Notes to Financial Statements, had the effect of decreasing the net loss
approximately $33,000 ($ .03 per share) for the year ended December 31, 1969, and increasing the net loss approximately
$41,000 ($.04 per share) for the year ended December 31 , 1970.
As reflected in the accompanying financial statements, the Company had net losses of $821,928 and $3,333,212 in 1969
and 1970, and had a retained-earning deficit of $2,364,656 at December 31, 1970. As explained in item 6 of Note D of Notes
to Financial Statements, the Company is not in compliance with the requirements and restrictions of its agreements with
creditor banks and lessors of aircraft which also constitutes conditions of default under the terms of both issues of
Convertible Subordinated Debentures. In addition, as indicated in Note L of Notes to Financial Statements, in January and
February 1971, the Company did not (1) make payments of $612,500 due under terms of its a~reement with creditor banks,
(2) repay notes of $315,000 due to a lessor, and (3) make lease payments of $358,923 due under the terms of its long-term
lease agreements.
The Company's continuation as a going concern is dependent upon (1) its ability to develop future profitable operations,
which contemplates receiving public service revenue in the future based upon the new formula (Class Rate V) as discussed in
Note A of Notes to Financial Statements, (2) obtaining amendments to its agreements with creditor banks, lessors of aircraft
and suppliers providing for the deferral of approximately $3,200,000 of payments due in 1971 and 1972,(3) obtaining
proceeds of $2,500,000 from the sale of its equity securities, and ( 4) the creditor banks and Convertible Subordinated
Debenture holders not accelerating maturity of the Company's indebtedness to them. Reference is made to Note M of Notes
to Financial Statement.
s for information regarding the Company's proposed financing arrangements.
Because of the materiality of the matters discussed in the preceding paragraphs and the uncertainty of their resolution, we
are unable to and do not express an opinion on the aforementioned financial statements as of or for the years ended
December 31, 1970 and December 31, 1969.
Atlanta, Georgia
February 10, 1971 except as to Note L
as to which the date is February 24, 1971,
and Note M as to which the date is
March 30, 1971.
EXECUTIVE COMMITTEE
FRANK W. HULSE
G. GUNBY JORDAN
W. B. WHITE, JR.
GRAYDON HALL
ELTON B. STEPHENS
DIRECTORS
IV AN ALLEN, JR.
Ivan Allen Company
Atlanta, Georgia
CECIL A. BEASLEY, JR.
Ballard & Beasley
Washington, D. C.
ALEXANDER J. BRUNINI
Brunini, Everett, Grantham & Quin
Vicksburg, Mississippi
GEORGE M. GROSS
Sou them Airways, Inc.
Atlanta , Georgia
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.
Irby-Adams-Cates Company
Atlanta, Georgia
HENRY P. JOHNSTON
Radio and Television Consultant
Birmingham, Alabama
G. GUNBY JORDAN
The Jordan Company
Columbus, Georgia
SARTAIN LANIER
Oxford Industries, Inc.
Atlanta, Georgia
R. EUGENE ORR
Orr & Company, Inc.
Jacksonville, Florida
G. FRANK PURVIS, JR.
Pan American Life Insurance Company
New Orleans, Louisiana
F. D. SCHAS
Bullington-Schas & Company
Memphis, Tennessee
ELTON B. STEPHENS
EBSCO Industries, Inc.
Birmingham, Alabama
RICHARD A. TRIPPEER
R. A. Trippeer, Inc.
Memphis, Tennessee
W. B. WHITE, JR.
Bradley, Arant , Rose & White
Birmingham, Alabama
OFFICERS
FRANK W. HULSE, President
GRAYDON HALL
Executive Vice President-
General Manager
GEORGE M. GROSS
Vice President-Associate
General Manager
W. S. MAGILL, JR.
Senior Vice President
Industry and Government Affairs
J. KENNETH COURTENAY
Vice President-Economic
Regulations and Secretary
RICHARD N. HARBOTTLE
Vice President-Technical Services
W. BAYNE GRUBB
Vice President-
Flight Operations
THOMAS A. WILEY, JR.
Vice President-
Sales and Marketing
JOHN J. JANISCH
Vice President-
Customer Services
A. L. MAXSON
Vice President -
Fiscal and Treasurer
RICHARD K. ROBINSON
Controller
WILLIAM E. OAKES
Assistant Vice President
Economic Research
J. R. PRICE
Assistant Vice President-
Contracts and Properties
VICTOR C. PRUITT
Assistant Vice President-
System Planning
DAVIDE. RUSSELL
Assistant Vice President-
Systems and Computer Services
ARNOLD D. WINHAM
Assistant Vice President-
Marketing Administration
A.D. YAWN
Assistant Vice President-
Agency and Pleasure Sales
RAY W. BURDEN
Assistant Treasurer
MRS. MARY C. HAYES
Assistant Secretary
CECIL A. BEASLEY, JR.
Assistant Secretary
W. B. WHITE, JR.
Assistant Secretary
Notice to Stockholders of
Southern Airways, Inc.
Under a new rule adopted by the Civil
Aeronautics Board in July 1970, any
person who owns as of December 31 of
any year or acquires ownership, either
beneficially or as a trustee, of more than
five percent of any class of capital stock
of an air carrier shall file with the CAB
a report containing information required
by Subpart B of Part 245.13 of the
Board's Economic Regulations. This
report must be filed with the Civil
Aeronautics Board on or before April 1
of each year as to capital stock or capital
owned as of December 31 of the preced-
ing year and within 10 days of the acqui-
sition, unless such person has otherwise
filed with the CAB a report covering such
acquisition or ownership. Any stock-
holder who believes that he may be re-
quired to file such a report may obtain
further information by writing to the
Director, Bureau of Operating Rights,
Civil Aeronautics Board, Washington, D.C.
20428.
GENERAL OFFICES
Atlanta Airport
Atlanta, Georgia
COUNSEL
Bradley, Arant , Rose & White
Birmingham, Alabama
Ballard & Beasley
Washington, D. C.
AUDITORS
Ernst & Ernst
Atlanta, Georgia
STOCK TRANSFER AGENT
Trust Company of Georgia
Atlanta, Georgia
ADVERTISING COUNSEL
Harris & Weinstein Associates, Inc.
Atlanta, Georgia
AIRWAYS,/NC
General Office: Atlanta Airport, Atlanta, Georgia 30320