Southern Airways Annual Report 1971

SOUTHERN AIRWAYS, INC.
1971 ANNUAL REPORT
CHICAG08
KNOXVILLE

BRISTOL-KINGSPORT-
JOHNSON CITY
NEW YORK LaGuardia
NEWARKe e
e WASHINGTON, D.C
.
STLOUIS.
NASHVILLE

GREENVILLE- CHARLOTTE
MEMPHISe
GREENVILLE
JACKSON

TUPELO
UNIVERSITY
OXFORD
SHELBYVILLE-
TULLAHOMA
CROSSVILLE
HUNTSVILLE-DECATUR
CHATTANOOGA
FLORENCE-
SHEFHELD-
TUSCUMBIA
COLUMBtJ3 -
(West Pomt)
(Starkville)
TUSCALOOSA
GADSDEN

ANNISTON
BIRMINGHAM
GREENWOOD
MONROE JACKSON
MERIDIAN MONTGOMERY
BATON ROUGE
VICKSBURG
LAUREL
\ATCHEZ HATTIESBURG
GULFPORT
BILOXI
MOBILE
PASCAGOULA
DOTHAN
SPARTANBURG
GREENWOOD
ANDERSON
ATHENS
ATLANTA

CQLUMBIA
COLUMBUS
ALBANY

MOULTRIE-THOMASVILLE
VALDOSTA

CHARLESTON
TALLAHASSEE
JACKSONVILLE
NEW ORLEANS e
EGLIN AFB
(Fort Walton Beach)
SELECTED OPERATING STATISTICS* 1971
Plane Miles (000) (all services) 20,003
Passengers 1,875,205
Passenger Miles (000) 527,552
Available Seat Miles (000)(all services) 1,336,982

PANAMA CITY
1970
18,580
1,589,481
430,736
1,228,373
Passenger Load Factor 43.2% 38.8%
Yield Per Passenger Mile $ .086 $ .086
Average Passenger Fare $ 24.11 $ 23.36
Average Passenger Load 28.3 25.2
Average Length of Passenger
Haul (Miles) 281.3 271.0
Total Cost Per Available Seat
Mile ( all services) $ .046 $ .043
*In scheduled service unless otherwise specified.
ORLANDO
.MIAMI
1969 1968 1967
14,679 12,260 11,803
1,377,421 1,271,497 1,180.297
323,472 254,028 222,142
862,388 611,795 498,322
42.4% 45.8% 45.9%
$ .087 $ .081 $ .077
$ 20.33 $ 16.08 $ 14.49
24.3 22.3 19.4
234.8 199.8 188.2
$ .045 $ .049 $ .050
Stockholders, Customers,
Employees and Friends:
During the immediate past years, your management has
worked to strengthen the Company for the long term. As a
result of this program, we have seen our revenues rise from
$22,054,000 in 1966 to $60,334,000 in 1971. Our system
has been expanded into New York, Washington, Miami,
Chicago and St. Louis. Cities now on Southern Airways'
system generate one-third of the nation's airline passengers.
Expansion during the recent period of depressed airline
traffic was expensive for your Company, but it has enabled
Sou them to build a strong base for future earnings.
With the improvement in economic conditions during
1971, we flew a record 527,552,000 revenue passenger miles,
an increase of 22.5 per cent over 1970. This 22.5 per cent
increase in revenue passenger miles was accomplished with
only a 10 per cent increase in capacity, that is, available seat
miles. During the same period we upgraded our service by the
replacement of two 75-passenger DC-9's with two
95-passenger stretched DC-9's and expanded jet service into
other communities.
Although Southern's recovery during the year was
substantial, resulting in an operating profit of $407,000, this
was not sufficient to offset nonoperating expenses of
$1,701,000 which, after reduction for deferred income tax
credit, resulted in a loss of $1,059,000 for the year.
Nevertheless, this result was a major improvement over the
1970 loss of $3,333,000.
We were saddened by the untimely death in early
January of Richard A. Trippeer, a long-time Director from.
Memphis, Tennessee. Over the years, he had been one of our
staunchest supporters. He has been replaced by Richard A.
Trippeer, Jr., a capable, seasoned young businessman, also of
Memphis.
I should like to take this opportunity to express my
appreciation to our employees and to all our supporters who
have stood by us during the recent difficult economic times. I
am confident that we have now established a firm foundation
and that our prospects for the future are indeed bright.
Respectfully yours,
Frank W. Hulse
President
SOUTHERN AIRWAYS, INC.
BALANCE SHEET
DECEMBER 31, 1
_
971 and 1970
1971
ASSETS
CURRENT ASSETS
Cash and short-term investments - Note D . . . . . . . . . . . . . . . . . . . . . $ 5,057,849
Accounts Receivable:
U.S. Government -
Transportation and public service revenue - Note A . . . . . . . . . . . 1,481,210
Trade receivables, less allowance for doubtful
accounts (1971 - $41,849; 1970 - $110,000) . . . . . . . . . . . . . . 4,989,452
Maintenance and operating supplies, at average
cost less allowance for obsolescence
{1971 - $695,787; 1970 - $513,170) ..................... .
Prepaid expense ...................................... .
Total Current Assets
OTHER ASSETS (Including aircraft lease deposits of
$490,000 at December 31, 1970) ...................... .
PROPERTY AND EQUIPMENT - on the basis of cost - Notes Band D
Flight equipment ..................................... .
Less allowances for depreciation and maintenance ............... .
Other property and equipment ............................ .
Less allowance for depreciation ............................ .
DEFERRED CHARGES - Note C
Unamortized preoperating, route extension
and development costs ............................... .
Deferred lease costs ................................... .
Unamortized long-term debt expense ........................ .
-2-
6,470,662
2,015,280
791,765
14,335,556
90,621
27,237,131
9,333,934
17,903,197
3,625,547
2,790,039
835,508
18,738,705
691,245
217,788
580,524
1,489,557
$34,654,439
1970
$ 2,674,346
2,912,941
4,642,234
7,555,I 75
1,641,659
508,819
12,379,999
568,742
26,504,600
7,754,761
18,749,839
3,980,501
2,394,742
I ,585,759
20,335 ,598
1,049,442
247,000
671,134
1,967,576
LIABILITIES
CURRENT LIABILITIES
Accounts payable ..................................... .
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 - Note D ........... .
Total Current Liabilities
LONG-TERM DEBT - Note D
Notes payable, less current maturities ........................ .
Convertible subordinated debentures ....................... , .
DEFERRED TAXES ON INCOME - Note E ............... ...... .
STOCKHOLDERS' EQUITY - Notes D and F
Preferred Stock, $1 par value, authorized 2,000,000
shares issuable in series:
Series A $.36 convertible - voting (liquidation value
$6 per share - aggregate of$ 1,523,316 at
December 31, 1971) issued and outstanding -
253,886 shares at December 31, 1971 ................. .
Series B $.36 convertible - non-voting (liquidation
value $6 per share - aggregate of $1,000,002
at December 31, 1971) issued and outstanding -
166,667 shares at December 31, 1971 ......... , ....... .
Common Stock, $2 par value:
Authorized shares - 7,500,000 in 1971 and 5,000,000 in 1970
Issued and outstanding - 1,061,766 shares at
December 31, 1971 and 1,024,871 shares at
December 31, 1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other paid-in capital ................................... .
Retained-earnings (Deficit) ................................ .
COMMITMENTS AND CONTINGENCIES- Note H
See Notes to Financial Statements.
-3-
1971
$ 2,983,250
3,298,405
1,647,268
248,002
462,807
102,000
212021471
1029442203
8,535,032
1226821000
2122171032
253,886
166,667
2,123,532
3,372,559
(3,423,440)
2,493,204
$34,654,439
1970
$ 3,79 I ,053
2,627,662
1,332,254
455,676
535,915
108,37.S
11
8142
055
1026642990
10,755,316
122
682poo
23!4372316
235,000
2,049,742
1,229,523
(2,364,656)
914.609
$35,251,915
SOUTHERN AIRWAYS, INC.
ST A TEMENT OF OPERA TIO NS
FOR THE YEARS ENDED DECEMBER 31, 1971 and 1970
OPERATING REVENUES
Passenger ...................................... .
Mail, express and freight ............................ .
Public service revenue - Note A ....................... .
Charter ........................................ .
Other operating revenues - net ........................ .
OPERA TING EXPENSES
Flying operations ................................. .
Maintenance ...... ... ........................... .
Aircraft and traffic servicing .......................... .
Passenger 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 deductions less miscellaneous income ............... .
(LOSS) BEFORE INCOME TAX CREDIT ................ .
DEFERRED INCOME TAX CREDIT - Note E ................... .
NET {LOSS) .................................... .
AVERAGE SHARES OF COMMON STOCK OUTSTANDING
NET (LOSS) PER SHARE OF COMMON STOCK - Note I
See Notes to Financial Statements.
-4-
1971
$45,301,780
3,090,002
6,973,875
4,067,008
9001907
60,333,572
20,949,971
10,807,844
13,522,854
3,313,744
4,774,385
3,921,265
226361732
5929262795
406,777
1,678,112
221449
1,700,561
(1,293,784)
2351000
$ (l !058!784)
1,035,048
$ (1.02)
1970
$37,187,312
2,865,938
4,822,621
3,835,306
7351949
49,447,126
18,071,509
9,045,318
11,351,075
2,661,228
4,273,431
3,191,875
226321284
5122262720
(1,779,594)
1,788,784
(286,609)
51 443
1,5532
6 I 8
(3,333,212)
${323332212)
1,024,871
$ (3.25)
SOUTHERN AIRWAYS, INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1971 and 1970
SOURCE OF WORKING CAPITAL
From operations:
Net (loss) ........................... .
Items not requiring outlay of working capital in current period:
Provision for depreciation ....... .
Provision for airframe and engine overhaul
Amortization of deferred charges .....
Deferred income tax credit
Total From Operations ......... .
Additional long-term borrowing ......... .
Sale of Series A and B Preferred Stock - Note F ..
Conversion of Series A Preferred Stock to Common Stock
Net carrying amount of property converted to a lease
Proceeds from sale of property and equipment,
less gain included in net (loss) . . . . . . . . . . .
APPLICATION OF WORKING CAPITAL
Additions to property and equipment
Expenditures for airframe and engine overhaul
Reductions of long-term debt ........ .
Conversion of Series A Preferred Stock to Common Stock
Deposits on leased aircraft
Increase in deferred charges
Increase in other assets . .
INCREASE (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 and short-term investments
Accounts receivable ....... .
Maintenance and operating supplies
Prepaid expenses . . . . . . . . . .
Increase (decrease) in working capital liabilities:
Accounts payable ............ .
Collection and withholding as agents
Salaries, wages and vacations ...... .
Accrued interest, taxes and other expenses
Ait travel plan deposits . . . ....
Current maturities of long-term debt
INCREASE (DECREASE) IN WORKING CAPITAL
See Notes to Financial Statements.
-5-
1971
$ ( 1.058,784)
2,094,99)
2,039.344
484,478
(235,000)
$
3,325,029
787,757
2,637,379
36.895
5 I 9,166
69,749
7,375,975
1,409,959
1,716,398
3,008,041
36.895
(490,000)
6,459
111879
5,699,631
1,676,344
1,715,009
3,391,353
$ 2,383,503
(1,084,513)
373,621
282,946
1,955,557
(807,803)
670,743
315,014
(280,782)
(6,375)
388,416
279,213
$ 1,676,344
1970
$ (3,333,212)
2,090,915
1,728,630
55 J ,944
1,038,277
2,372,606
274,976
3,685,859
2,134,662
1,209,281
1,520,442
280,000
412,012
151552
5,571.,949
(C886,090)
3!601 p99
$ 1,715,009
$ ( I ,629 ,817)
2,385,833
179,325
(863,159)
72,182
2,099,236
(82,452)
289,032
(448,535)
(3,825)
104,816
1,958,272
$ (1,886,090)
SOUTHERN AIRWAYS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1971 and 1970
Preferred Stock
Series A
Par Value $1.00 a Share
Shares Amount
Balance, January 1, 1970
Net (loss) for the year ended December 31, 1970
Balance, December 31, 1970
Issuance of 290,781 shares of Series A $.36
Convertible Preferred Stock with detachable
warrants to purchase 290,781 shares of $2.00
par value Common Stock at $6.00 a share, less
related expenses of $107,309 - Note F 290,781 $ 290,781
Issuance of 166,667 shares of Series B $.36
Convertible Preferred Stock with detachable
warrants to purchase 166,667 shares of $2.00
par value Common Stock at $6.00 a share -
Note F
Issuance of 36,895 shares of Common Stock upon
conversion of 36,895 shares of Series A
Preferred Stock (36,895) (36,895)
Net (loss) for the year ended December 31, 1971
Balance, December 31, 1971 253,886 $ 253,886
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1971
NOTE A - PUBLIC SERVICE REVENUE
Series B
Par Value $1.00 a Share
Shares Amount
166,667 $ 166,667
166,667 $ 166,667
Public service revenues recorded for the period July 1, 1971, to December 31, 1971, are based upon the rate in effect for
the year ended June 30, 1971. The rate for the period July 1, 1971, through June 30, 1972, has not been determined by the
Civil Aeronautics Board and, therefore, amounts recorded in the last six months of 1971 are subject to adjustment upon final
determination.
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. Estimated useful lives are as follows:
Airframes, engines, pro-
pellers, communications
equipment and rotable
M-404
parts (A)
Ground equipment
Ground
DC-9 Equipment
15 years
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 these aircraft will be essentially exhausted by the end of 1973. The Company's net investment in Martin
-6-
Common Stock
Other Retained-
Par Value $2.00 a Share Paid-In Earnings
Shares Amount Capital (Deficit) Total
1,024,871 $ 2,049,742 $ 1,229,523 $ 968,556 $ 4,247,821
{323332212} (323331212}
1,024,871 2,049,742 1,229,523 (2,364,656) 914,609
1,346,596 1,637,377
833,335 1,000,002
36,895 73,790 (36,895)
(1,058,784} (1,058,784}
1,061,766 $ 2,123,532 $ 3,372,559 $ (3,423,440) $ 2,493,204
aircraft amounted to $3,793,000 and $4,365,000 at December 31, 1971 and 1970, respectively. At December 31, 1971,
seven Martin aircraft had been withdrawn from service; one had been sold and the remaining six will be sold or used in
maintaining the remaining Martin aircraft in an airworthy condition. Any proceeds from the sale of these aircraft are 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 disposals of flight equipment (exclusive of rotable parts) are credited or charged to operations.
Proceeds from the disposal of rotable parts are credited to tpe 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 is as follows at December 31, 1971 and 1970:
Notes payable to banks in quarterly installments
through 1976 (1)(2) (3)(4)
Notes payable to banks, due December 31, 1975
( 1 )(2)(3)( 4)( 5)
Notes payable to banks in quarterly installments
through 197 4 ( 1 )(2) (3)( 4)
-7-
1971
$ 4,530,000
3,000,000
1,173,913
1970
$ 5,392,500
3,000,000
1,695,652
(l}
Note payable to bank in equal quarterly installments
to January 1973 ( 4)( 6)
Notes payable to lessor, due December 31, 1972 ( l)
Note payable to vendor in equal installments in
October and November 1972 (I)
Notes payable to bank for deferred lease payments
in equal installments in April, May and June
l 973 (1)
Notes payable to fuel supplier in September 1972 ( 1)
Notes payable to lessor due in equal installments in
Apnl, May and June 1973 (1)
8% to 9% notes payable to fuel supplier due in
December 1971
6% notes payable due in monthly installments to
Oc~ober 1975
Other notes payable
5% Convertible Subordinated Debentures due
December 1, 1981 (3). (7)
6% Convertible Subordinated Debentures with
warrants attached, due November 1, 1983 (3) (8)
Less current maturities (1)
1971
510,833
315,000
420,000
433,757
220,000
134,000
4,682,000
8,ooopoo
23,419,503
2,202,471
$21,217,032
1970
613,000
315,000
420,000
250,780
392,439
490,000
4,682,000
8,000,000
25,251,371
1,814,055
$23,437,316
In May, 1971, effective as of February J, 1971, the Company entered into a deferral agreement with creditor banks,
lessors of aircraft, a fuel supplier and an equipment vendor (Creditors) for the deferral of certain principal and rental
payments due in 1971 and 1972. Principal payments of $1,254,184 toriginally due $612,500 in 1971 and $641,684 in
1972) due to creditor banks were deferred and will be paid in three installments in October, November and December,
1973; payment of a note payable to a lessor in the amount of $315,000 was deferred to December 31, 1972, and
$420,000 due on an engine purchase contract was deferred and will be paid in two equal monthly installments in
October and November, 1972. In addition, a fuel supplier agreed to accept notes in the amount of $330,000 due in
September, 1972, for fuel deliveries which were made in April and May, 1971 ($220,000) and will be made in March,
I 972 ($110,000} and aircraft lease payments of $275,000 ( originally due $134,000 in 1971 and $141,000 in 1972) have
been deferred and will be paid in three installments in April, May and June, 1973. The Company also entered into an
agreement with a bank for loans of $617,794 to be used for lease payments (originally due $433,756 in 1971 and
$184,038 in 1972) and these notes will be paid in three equal installments in April, May and June, 1973.
Under the terms of the agreement with Creditors, the Company will make deposits in a "Revolving Cash Collateral
Account" consisting of (1) amounts equal to the deferred payments on the original due date of such payments, and (2)
cash in excess of projected requirements for a sixty day period as defined in the agreement. The Company may withdraw
funds from this collateral account based upon their projected cash needs for the next sixty days. At December 31, 1971,
the balance of the account was $2,670,604, consisting of cash ($46,604) and short-term investments, and was pledged as
collateral for indebtedness due to Creditors participating in the Deferral Agreement.
The interest rates on these deferred payments are: creditor banks at 2% above the prime rate, but not less than 7%
(7% at December 31, 1971 ): deferred lease payments at 9%; note payable to bank for deferred lease payments at 2%
above the bank's prime rate, but not less than 7% (7% at December 11, 1971); and notes payable to fuel supplier,
equipment vendor and another lessor at 10%.
Prepayments on the deferred amounts are required in amounts equal to net income for the twelve month period
ending the preceding December 31, and after such deferred amounts have been paid, the balance is to be applied to the
prepayment requirement outlined in (5) below. See other restrictions outlined in (3) below.
(2) Based on the agreement with Creditors which became effective May 28, 1971, the interest rate, retroactively to February
1, 1971, is of 1 % above the lead bank's prime rate, except while the deferral program continues the interest rate is 1 %
above the lead bank's prime rate ( 6% at December 31-, 1971). Scheduled payments actually deferred under the program
will bear interest at 2% above the lead bank's prime rate, but not less than 7%.
(3) Under the terms of the amendment of the agreement with creditor banks and the Deferral Agreement, both of which are
dated as of February 1, 1971, the creditor banks amended their agreements with the Company to waive all events of
default (at December 31, 1970, the Company did not comply with certain requirements with respect to working capital,
indebtedness and lease obligations and on February 28, 1971, also did not comply with requirements with respect to
minimum net worth, which were also conditions of default under the terms of a long-term aircraft lease agreement)
which may have existed prior to execution of the amendment, and the restrictive covenants applicable to such
agreements were revised. The terms of the Deferral Agreement and both issues of Convertible Subordinated Debentures
place certain requireI11ents and restrictions upon, among other things, (a) working capital, (b) indebtedness and lease
obligations, (c) net worth, (d) capital expenditures, (e) losses from operations and (f) payments relating to Capital Stock,
including dividends (no amounts were available for such payments at December 31, 1971 or 1970). Under the most
restrictive terms of these agreements, the Company will be in default with all creditors if (1) the cumulative net loss for
-8-
1972 exceeds $1,600,000 or the net loss for any one month during 1972 exceeds $750,000 or (2) the cumulative net loss
for the first three months of 1973 exceeds $550,000; or additional losses are incurred thereafter.
( 4) All aircraft, engines and related equipment are pledged as collateral on this indebtedness.
(5) 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 $1,000,000 for the twelve month period ending the preceding December 31, after certain deferred
payments have been made as described in (1) above.
(6) This note is payable in quarterly installments commencing December 31, 1971, with a final payment on January 31,
1973. It bears interest at the rate of 9% and is guaranteed by McDonnell Douglas Corporation. It is subordinated in
certain aspects to the notes payable due through 1976 and the notes payable due through 1974. Payment of this note is
collateralized by a second mortgage on the DC-9 flight equipment.
(7) The 5% Convertible Subordinated Debentures due December 1, 1981, are convertible (until maturity or prior
redemption) into Common Stock at$ 10.86 per share (see Note F); are subordinated, generally, to all existing and future
indebtedness for borrowed money; are callable at premiums ranging from 4% downward; and require annual sinking
fund payments beginning December 1, 1976, in an amount equal to 10% of the principal amount outstanding at
December I, 1975. Also, the Company may make additional voluntary sinking fund payments equal to the required
amount.
(8) The 6% Convertible Subordinated Debentures due November 1, 1983, are convertible (until maturity or prior
redemption) into Common Stock at $ 10 per share (see Note F); are issued in integral multiples of $1,000 with an
attached warrant for the purchase of 18 shares at$ 10 a share (see Note F); 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%
downward; and require annual prepayments 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 November
1, 1977. Also, the Company may make additional voluntary prepayments equal to the required amount.
NOTE E - INCOME TAXES
The loss for income tax purposes for 1970 and 1971 varies from the loss shown in the Statement of Operations because
of timing differences related to public service revenue payments, certain expenses deferred for financial statements purposes,
and the use of accelerated depreciation applicable to certain assets. At December 31, 1971, there is a net operating loss
carryforward to future years for income tax purposes of approximately $7,557,000, which expires in 1974 ($970,000), 1975
($4,880,000) and 1976 ($1,707,000). The net operating loss carryforward for financial statement purposes at December 31,
1971, is approximately $3,573,000.
The Company will change the depreciation method and lives applicable to certain assets for tax purposes in its 1971 tax
returns. Because of these changes and the carryforward of the 1971 operating loss described above, deferred taxes ($235,000)
provided in prior years will not be paid and, accordingly, have been recognized as an income tax credit in the Statement of
Operations for 1971.
- The Company uses the flow-through method of accounting for investment credit and the available investment credit is
recognized to the extent that it can be realized or offset against current or deferred income taxes. Investment credit carryover
at December 31, 1971, for use in off setting federal income tax in future income tax returns amounted to approximately
$1,246,000 and expires in 1976 ($65,000), 1977 ($810,000), 1978 ($37,000), 1979 ($308,000), and 1981 ($26,000).
NOTE F - CHANGES IN CAPITAL
The stockholders approved an amendment to the Company's charter in May 1971, to increase the authorized $2 par
value Common Stock from 5,000,000 shares to 7,500,000 shares, and to authorize 2,000,000 shares of $1 par value Preferred
Stock in one or more series; the terms of each series of Preferred Stock to be determined by the Board of Directors upon
issuance.
In June 1971, the Board of Directors authorized the issuance of up to 1,350,000 shares of $ .36 Convertible Preferred
Stock, Series A and 200,000 shares of$ .36 Convertible Preferred Stock, Series B. Each share of Convertible Preferred Stock
is entitled to a $.36 cumulative dividend if earned during the year, subject to the dividend restrictions of the Convertible
Subordinated Debentures (see Note D). No dividends have accumulated at December 31, 1971. The Preferred Stock is
convertible into one share of Common Stock at $6 per share; is entitled upon liquidation to $6 per share; and can be
redeemed after July 1, 1976, at $6 per share. The Series A Stock is voting and the Series B Stock is non-voting.
During 1971, 290,781 Series A Units and 166,667 Series B Units were sold. Each Unit consisted of one share of Series A
or Series B Convertible Preferred Stock, respectively, with a detachable warrant to purchase one share of Common Stock at
$6 per share through July 1, 1981.
At December 31, 1971 and 1970, there were 2,323,125 shares and 1,006,625 shares of Common Stock of the Company
reserved as follows:
(Continues next page)
-9-
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
Exercisable one-third each year beginning in 1973 at
a price of $5 .25 per share
Shares available for additional options
which may be granted under the Plan
Shares available for options which may be granted
under the Employee Stock Option Plan approved by
Board of Directors in 1967
Shares reserved for conversion of 5 %
Convertible Subordinated Debentures (1)
Shares reserved for conversion of 6%
Convertible Subordinated Debentures (2)
Shares reserved for sale pursuant to stock purchase warrants
issued with 6% Convertible Subordinated Debentures at a
price of $10 per share (2)
Shares reserved for conversion of Preferred Stock:
Series A
Series B
Shares reserved for sale pursuant to stock purchase
warrants issued with the Preferred Stocks at a
price of $6 per share:
Series A
Series B
TOTAL
1971
1,000
900
6,100
36,000
1,000
45,000
25,000
431,124
800,000
144,000
253,886
166,667
290,781
166,667
2,323,125
1970
1,000
900
7,100
36,000
45,000
25,000
292,625
500,000
144,000
1,006,625
(1) Pollo.wing the sale of 290,781 Series A Units to stockholders, employees, and a supplier and taking into consideration
the 166,667 Series B Units sold, the conversion price of the 5% Convertible Subordinated Debentures was reduced
from $ 16 per share to $ 10.86 per share.
(2) As additional consideration for the holders of the 6% Convertible Subordinated Debentures who purchased the
166,667 Series B Units, the conversion price of the Deb en tu res and the exercise price of the stock purchase warrants
attached were each reduced from $16 per share to $10 per share.
Data with respect to stock options outstanding at December 31, 1971 and 1970, is summarized as follows:
December 31, 1971 December 31, 1970
Year of Number of Option and Market Number of Option and Market
Grant Shares Price Per Share Total Shares Price Per Share Total
1967 1,000 (a) $19.18 $ 19,180 1,000 $19.18 $ 19,180
1968 900 (a) 13.75 12,375 900 13.75 12,375
1969 6,100 (a) 8.69 - 11.76 65,376 7,100 8.69 - 11.76 77,136
1971 36,000 5.25 189,000
44,000 $285,931 9,000 $108,691
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, 1971, no options were exercised and options became
exercisable as follows:
- 10-
Quoted Market Price at
Option Price Date Exercisable
Number of
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 ,~83 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
1971 2,998 8.69 - 19.18 362214 4.125 - 6.75 l 7 2314
$417,372 $485,158
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.
(a) The Company has granted options to purchase 8,000 shares of Common Stock, exercisable at $5 .25 per share, to become
effective after the expiration of presently outstanding options.
NOTE G - 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 assumptions used in computing pension costs.
Total pension expense, including amounts paid under a defined contribution plan, for the years ended December 31, 1971
and 1970, was $868,779 and $661,734, respectively. Pension plan assets were sufficient to cover the unfunded past service
costs at December 31, 1971. The Company's policy is to fund pension cost accrued.
NOTE H - COMMITMENTS AND CONTINGENCIES
At December 31, 1971, the Company was leasing eleven DC-9 jet aircraft under leases expiring in 1979 through 1983, at
a minimum annual rental of $4,722,208. The Company also leases certain office, ticketing, hangar, computer and shop
facilities with minimum aggregate annual rentals of approximately $1,622,000 under various leases with expiration dates
through 1992.
The Company has a five year agreement to receive passenger reservation service at an estimated annual charge of
approximately $500,000.
In November 1970, a DC-9 jet aircraft leased by the Company was involved in an accident, in which all passengers 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.
The United States Court of Appeals for the District of Columbia remanded to the Civil Aeronautics Board The Southern
Airways, Inc. Route Realignment Investigation. At issue before the Board in this remanded case, now in progress, is extension
of the Company's system to Miami/Ft. Lauderdale via Tallahassee and Orlando as well as Memphis-Miami and
Atlanta-Nashville non-stop authority. A Board examiner has recommended that this Florida extension and the two non-stop
authorizations be granted on a permanent basis to the Company. He also recommended non-stop authority for another carrier
in the Memphis-Miami market. The examiner's recommendations are being reviewed by the Board. Meanwhile, the Company
will continue to operate the Florida service in question pursuant to temporary Board authority.
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 provision has been made in the
accompanying financial statements for amounts to be paid under the terms of these agreements.
NOTE I - 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. Assumed conversion of debentures and Preferred Stocks, and exercise of warrants would not increase the
net loss per common share.
(Notes continue next page.)
-11 -
NOTE J - SUPPLEMENTARY PROFIT AND LOSS INFORMATION
Provision for Depreciation - Operating Expenses
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 at airports served)
There were no management fees, service contract fees or royalties.
- 12-
1971
$2,094,991
$2,039,344
$ 359,124
125,354
$ 484,478
$ 182,617
$ 804,765
161,003
327,568
130,412
951020
$1,518,768
$7,610,311
1970
$2,090,915
$1,728,630
$ 331,3q7
220,577
$ 551,944
$ 210,002
$ 640,629
216,261
233,500
91,698
65,469
$1,247,557
$6,512,753
Board of Directors
Southern Airways, Inc.
Atlanta, Georgia
REPORT OF INDEPENDENT ACCOUNTANTS
We have examined the balance sheets of Southern Airways, Inc. as of December 31, 1971 and 1970, and the related
statements of operations, stockholders' equity, and changes in financial position for the two years ended December 31, 1971.
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.
As reflected in the accompanying financial statements, the Company had net losses of $1,058,784 and $3,333,212 in
1971 and 1970, respectively, and had a retained-earnings deficit of $3,423,440 at December 31, 1971. As explained in items
(1) and (3) of Note D, in May 1971 the Company obtained an amendment to its agreement with creditor banks. dated as of
February 1, 1971, providing for the deferral of certain principal payments and a waiver of all events of default which may
have existed prior to the execution of the amendment. The terms of the agreements place certain requirements and
restrictions upon, among other things, (a) working capital, (b) indebtedness and lease obligations, (c) net worth, (d) capital
expenditures, (e) losses from operations and (f) payments relating to capital stock, including dividends. With respect to the
provision applicable to losses from operations, the Company will be in default with all creditors if (1) the cumulative net loss
for 1972 exceeds $1,600,000 or the net loss for any one month.during 1972 exceeds $750,000 or(2) the cumulative net loss
for the first three months of 1973 exceeds $550,000, or additional losses are incurred thereafter. The Company's
continuation as a going concern is dependent upon its ability to develop future profitable operations, which currently
contemplates receiving public service revenue in the future at a level not substantially below the level presently being
received. As discussed in Note A, the Company is presently receiving public service revenue on a temporary rate which is
subject to adjustment.
In our opinion, subject to the ability of the Company to attain profitable operations and any adjustments which may
result from the final settlement of public service revenue as discussed in the preceding paragraph, the accompanying balance
sheets and statements of operations, stockholders' equity, and changes in financial position present fairly the financial
position of Southern Airways, Inc. at December 31, 1971 and 1970, and the results of its operations, changes in
stockholders' equity and changes in financial position for the two years ended December 31, 1971, in conformity with
generally accepted accounting principles applied on a consistent basis.
Atlanta, Georgia
February 28, 1972
ERNST & ERNST
SOUTH~RWAYS
GENERAL OFFICES
Hartsfield Atlanta International 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
Notice to Stockholders of
Southern Airways, Inc.
Under a 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 per cent 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 preceding year
and within 10 days of the acquisition,
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
required to file such a report may
obtain further information by writing
to the Director, Bureau of Operating
Rights, Civil Aeronautics Board, Wash-
ington, D.C. 20428.
OFFICERS
FRANK W. HULSE
President
GRAYDON HALL
Executive Vice President
and General Manager
GEORGE M. GROSS
Vice President and
Associate General Manager
J. KENNETH CO UR TENA Y
Vice President-Economic
Regulations and Secretary
A. L. MAXSON
Vice President-Fiscal
and Treasurer
VICTOR C. PRUITT
Vice President-
Technical Services
THOMAS A. WILEY, JR.
Vice President-Marketing
J. W. GODWIN
Assistant Vice President-
Flight
OWEN L. McREE
Assistant Vice President-
Personnel
WILLIAM E. OAKES
Assistant Vice President-
Economic Research
J. R. PRICE
Assistant Vice Pr,esident-
Contracts and Properties
DAVIDE. RUSSELL
Assistant Vice President-
Systems and Computer Services
FRANK H. WHEELER
Assistant Vice President-
Sales and Services
JAMES H. ISHEE
Controller
RAY W. BURDEN
Assistant Treasurer
MRS. MARY C. HA YES
Assistant Secretary
CECIL A. BEASLEY, Jr.
Assistant Secretary
WM. BEW WHITE, JR.
Assistant Secretary
EXECUTIVE COMMITTEE
FRANK W. HULSE
GRAYDON HALL
G. GUNBY JORDAN
ELTON B. STEPHENS
WM. BEW WHITE, JR.
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
Southern 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.
A. F. Irby & 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, JR.
R. A. Trippeer, Inc.
Memphis, Tennessee
WM. BEW WHITE, JR.
Bradley, Arant, Rose & White
Birmingham, Alabama