Southern Airways Annual Report 1972

Cover
There is a new addition
to the Southern skies and soon
the airline's entire
jet fleet will display this
contemporary design featuring a
new corporate symbol, the
Flight Mark. Whether
flying throughout, from or
to the Southeast,
Southern's jet fleet will
contribute to the
comfort, convenience and
pleasure of its
passengers.
,
Southern
Financial and Operating Highlights
Southern Airways, Inc.
Years ended December 31 , 1972 1971 Growth
Passenger revenues $ 52,052,000 $ 45,302,000 14.9%
Operating revenues $ 68,637,000 $ 60,334,000 13.8%
Operating income s 2,893,000 $ 407 ,000 610.8%
Net income (loss) $ 1,600,000* $ ( 1,059,000)
Primary earnings (loss) per share
including extraordinary credit $ 1.06* $ (1 .02)
Yield per passenger mile 8.7~ 8.6G: 1.2%
In scheduled service:
Revenue passenger miles 596,197,000 527,552,000 13.0%
Available seat miles 1,279,175,000 1,222,289,000 4.7%
Passenger load factor 46.6% 43.2% 7.9%
Revenue passengers carried 2,101,000 1,875,000 12.1%
Revenue plane miles flown 20,844,000 20,003,000 4.2%
Number of employees 2,084 1,994 4.5%
*This amount is exclusive of ransom money not yet returned by the Republic of Cuba.
In the event this is written off, it will result in a loss of $359,000 and $.30 per share.
Contents
System Routes Cover Foldout
Financial and Operating Highlights 1
President's Message 2
Answers for our Publics 3-18
Statement of Operations 19
Balance Sheet 20-21
Statement of Changes in Financial Position 22
Statement of Stockholders' Equity 23
Report of Independent Accountants 24
Notes to Financial Statements 24-29
Reaching the Public in 1973 30
Our Contributions to Good Citizenry 31
Southern's Directors and Officers 32
CHARLESTON
ILLUSTRATION BY TOM ALBIN
To our stockholders
2
Our Reports during the past five years have emphasized activities
that were strengthening the Company and contributing to growth
that was expected to materialize in the near future. Now, we can
report these activities have reached fruition , and this past year is
established as the most significant in our history. New highs were
attained in all areas as revenues reached $68.6 million and our
largest profit - $1 .6 million - resulted .
Factors contributing to this success include a greatly improved
economy, a tight reign on costs, expanded sales and maturing
markets, and an outstanding effort on the part of the employees who
comprise the "Southern family."
Nevertheless, the year had some problems, the most significant
of which was the hijacking of a Southern DC-9 in November. The
subsequent events were reported by news media throughout the
world . The skill and determination of our flight crew resulted in the
safe return of the passengers and aircraft. Ransom paid to insure
the safety of the passengers is expected to be ultimately returned
to the Company.
To insure continued growth, 13 additional DC-9s have been
acquired and the first four of these are now in service. This will
enable us to offer substantial improvements in service. This and
other significant events are explained further in this report.
Realizing that you are interested in our current operations,
expansion opportunities, and the related problems facing Southern
during 1973, we are departing from the usual annual report format.
This year, we have selected key points brought up most frequently
by the many publics we serve. In the pages following are answers
to the questions we hear most often.
April 30, 1973
Respectfully,
Frank W. Hulse
President
Answers for our publics
MR. HULSE: "The five of you have
been asked to participate in the
presentation of Southern's 1973
Report to Stockhold.
ers. We appreciate
your representing some of our most
important publics: our more than
6,000 stockholders, who own this
Company; the 2,575 loyal employees
who operate our Company; the banks
and other members of the financial
community on whom we depend for
capital; the news media, ever
responsible for keeping the public
aware of our successes - and
sometimes our failures; and certainly
the customer and general public
which is the reason we are in business
and on whom our existence depends.
"Before we open this discussion to
your questions, let me tell you some of
the things we are accomplishing at
Southern.
"Your Company has been returned
to operating profitability. Many factors
contributed to this. Revenues are the
highest in our history, and while
attaining this, we have beeri able to
control our expense levels and operate
with minimum overhead. Also, subsidy
received was consistent with the
needs of service to our small
communities which do not generate
a profitable level of passenger activity.
This is, of course, as it must be.
"We are acquiring 13 additional
DC-9 aircraft, bringing our jet total to
28, the second largest jet fleet in the
regional airline industry. This enables
us to decrease the number of Martin
404 planes operated. At the same
time, we are being asked by some why
we are not replacing the remaining
Martins with turbo-prop equipment.
This we have elected not to do as we
believe the turbo-prop equipment
available today offers our passengers
Southern serves five important publics and many representative questions
are answered in this Report.
no greater speed or comfort than our
Martin fleet. In fact, Southern is the
only regional carrier and is among
only three U.S. certificated carriers
not taking the intermediate step into
turbo-prop aircraft. For us, this has
been a wise decision as we will serve
more than 90 per cent of our
passengers with pure-jet aircraft by
the end of this year. At such time as
an economical small jet is marketed,
Southern will consider it as a Martin
replacement.
"Southern is seeing a change in the
pattern - and need - for scheduled
airline service in many Southeastern
cities. This area has few natural and
almost no man-made barriers. We
have neither the mountains of the
Northeast and Far West, nor the
deserts and plains of the West, nor
congested city life of the Upper East
Coast. In turn , excellent highways
make automobile travel to regional
airports or to large city airports a
logical substitution for short air hops.
The result is that many air travelers
on our system are taking advantage of
our flight frequencies at nearby, large
airports. This is resulting in the
suspension of service at some smaller
cities, contributing to a reduction in
subsidy, but without inconvenience to
local passengers who are often little
more than a half-hour drive from our
jet service with accompanying better
schedules.
"More of this change is expected
along the Southern system. Coupled
with some improved passenger
services that we are introducing, we
believe we will offer even more
convenience to the air traveler moving
throughout, from and to the
Southeast.
"Another change we are seeing is
in our Company employee mix.
Southern long has had a policy of
promoting from within when available
skills meet the job qualifications. This
practice encourages employee pride
and ensures opportunity for our
personnel. Because of our rapid
growth, however, we have gone into
the job market to fill some positions.
We have been fortunate in attracting
intelligent, qualified people who will
add to our senior management base
for further growth.
"Southern has redoubled its efforts
3
" ... in order to achieve the
appearance of a modern, progressive airline,
we are changing our look."
to increase job opportunities among
minorities. Although we seek job
qualification first, we have found
minority people with these
qualifications and we are hiring them .
"Another change very much in evi-
dence is our new identity program. In
order to achieve the appearance of a
modern, progressive, successful
airline, we are changing our look.
Remember, I said "look," not image.
Southern has become an airline in
step with the times and we want to
communicate the new Southern. To
do this, we have developed a new
corporate identity, the focal point
being the Flight Mark which has
become our corporate symbol. Our
flight and ground equipment is
appearing in modern colors and our
ticket and gate facilities, advertising ,
and printed material will contribute an
appearance of professionalism. We
will change to our new look as we
introduce our newly acquired aircraft,
purchase additional equipment, and
expand passenger facilities.
"As we see it, we have a three-fold
obligation : to provide a satisfactory,
reliable standard of service for our
customers, to operate as profitably as
possible for our stockholders, and to
offer our employees fair wages with
good working conditions. This
continues to be our aim for the
coming year.
"Now, I realize that each of you has
questions about these and other areas
of our performance. Inasmuch as we
at Southern work for our stock-
holders, and furthermore as she is
representative of our lady public, I
am asking her to begin the first
question."
STOCKHOLDER: "I am sure other
stockholders would add many
questions to those I have so I hope
these are representative of all
Southern stockholders. The first, and
certainly one of the most important
things I want to know, is why does
Southern need more jets when no
new routes have been received?"
MR. HULSE: "This is a question we
have been asked many times,
particularly by the financial
community. During the mid-1960s,
the Civil Aeronautics Board began a
program to strengthen the regional
airline industry. Basically, the plan
was to grant regional carriers new,
profitable, longer haul routes, using
profits therefrom to cross-subsidize
losses on service to smaller cities.
Accordingly, Southern was awarded
several major routes, opening
service to Washington, D.C. and
New York, N.Y. in September 1968,
to St. Louis, Mo. in July 1969, to
Tallahassee, Orlando, and Miami, Fla.
in February 1970, to Newark, N.J.
in March 1970 and to Chicago, Ill.
in April 1970.
"Simultaneously , route restrictions
within our existing system were
reduced , enabling us to offer service
between new combinations of city
points.
"Unfortunately, the timing was bad
as the nation, and particularly the
Southeast, was entering a long and
severe recession . Although Southern
did capture a large share of the new
markets, the size and growth of these
markets, together with older, subsidy-
eligible markets which were the
backbone of our system, were
curtailed by the recession. As a result ,
Southern suffered losses during the
period 1968 through 1971 . Capital
that would have been used to acquire
additional aircraft to develop the new
authority was consumed by those
losses.
"Even though Southern was unable
Southern 's highly competent pilot force
is supported by continuing programs for
maintaining high standards and skills.
5
"Our short haul business
was so good it was competing with our
long haul flights.,,
to obtain sufficient aircraft to
achieve the full market potential,
studies were made to define and
establish these markets. In other
words, we used this as a get ready
period for the time when we could
add more aircraft into these markets'.'
B ER: Obviously, Southern's
marketing studies justified the
addition of new aircraft. How did you
o ch this?"
MR. HULSE: "During the late Sixties
and even into 1970 and 1971, we
improved our techniques for
identifying factors which determine
traffic growth. One of the most
significant findings was that although
overall load factor on many flights was
in the area of 50 per cent, a short
segment of a given flight might have a
near-100 per cent load factor,
blocking the entire flight sequence to
our long haul passengers. Our short
haul business was so good it was
com peting with our long haul flights.
"Additionally, by early 1972, it was
clear that economic recovery had
enabled Southern to return to
profitability . Seats occupied were
catching up with seats available.
"We felt the return to profitability
would make possible new financing .
Used DC-9s, well suited to our system,
could be bought at extremely
attractive prices and availability was six
months compared with 18 months
for delivery of new equipment.
"Marketing studies were intensified
and specific benefits to be gained
from each additional aircraft were
determined, indicating that additional
jet aircraft could be utilized
profitably on our current system. We
were offered 13 DC-9s at an extremely
favorable price and it was evident that
these could be introduced
immediately-and profitably.
"Our findings were reinforced by
an independent analysis and research
firm . Their report recommended that
the expansion be implemented. With
this added assuredness, we began a
program that increases our jet fleet
by 87 per cent. "
NEWSMAN: 'We ran a story recently
about the details of the financing for
these airplanes, a $39 million loan.
What other avenues of financing did
you explore?"
MR. HULSE: "During the Fall of 1972
we determined that several financing
methods were available. Based on
this, we signed a letter of intent to
purchase the airplanes, which ,
together with related engines and
parts, resulted in a commitment of
$30 million. Our Fiscal management
considered several programs,
including stock issue, debentures,
various kinds of loans, and finally,
what proved to be the most advan-
tageous method -and the one we
selected - under which a group of
banks led by The First National Bank
of Chicago would make the loan, with
90 per cent of the $27 million needed
for aircraft acquisition guaranteed by
the Department of Transportation,
Federal Aviation Administration, under
a Federal law enacted to stimulate
growth within the regional airline
industry. (Southern's loan is the
largest of this kind yet made.)
"The $1 2 million above the amount
for aircraft will be used to reduce
existing debt, purchase equipment ,
and provide additional
working capital'.'
Some 3 million Southern passengers will
enjoy inflight service during the next 12
months. Stewardesses receive four weeks
of intensive training before they begin
their careers.
7
"Much of our present
maintenance facility ... is being taken
for airport expansion."
STOCKHOLDER: "Speaking of items
in the news, I see that Southern is
building a multi-million dollar
maintenance base in Atlanta. Is this
necessary, and if so, why build
">"
MR. HULSE: "Yes, it is necessary, and
there are several reasons for selecting
Atlanta.
"Much of our present maintenance
facility, located on airport property
owned by the City of Atlanta, is being
taken for airport expansion.
Additionally, these buildings cannot
satisfy our ultimate ne~ds, even if we
could retain them , as they do not
permit efficient maintenance of our
expanded fleet. In addition to more
functional space in the new facility, we
will be able to perform many money-
saving activities which are now
provided by outside firms.
"Accordingly, we discussed these
needs with several major cities on our
system and many of these made
proposals to build a maintenance base
to our specifications. Naturally, there
are many factors to consider, not the
least of which is our own employees.
"After an extensive study, the
conclusion was reached that Atlanta is
the most efficient and economical
location for the facility for a number
of reasons.
"It has taken years to develop our
outstanding maintenance staff. These
are highly qualified , well trained
people. Many are homeowners in the
Atlanta area and most have strong
family ties here. We determined that
as many as one-half of our
maintenance personnel would not be
willing to relocate. Another
consideration was the availability of
material suppliers and support
services; as a major airline city, Atlanta
has these. Another significant factor is
the routing of our equipment - Atlanta
is the operational hub of our route
system.
"This maintenance base will be
owned and paid for by the City of
Atlanta and will be built with little
capital outlay on our part. Southern
will lease it for a 30-year period. We
believe it will satisfy not only our
immediate needs but also will allow
the fleet expansion we anticipate for
further growth .
"The City of Atlanta has set aside
a 75-acre tract adjoining the airport's
newest runway. Construction is
scheduled to begin in early 197 4 with
completion near the end of 1975. The
cost is estimated at $18 million'.'
NEWSMAN: "In the preliminary
drawings shown when you released
the story on the maintenance base,
Southern specified work bays
capable of servicing a DC-10 or a
727-200. Does this mean you are
""'-'r!lltt?"
MR. HULSE: "Not at this time, but we
are planning for the future."
Maintenance functions are performed
in Atlanta and range from complete aircraft
overhaul to specific work on engines
and aircraft components.
9
"A collateral benefit of
our route system is that we can offer our
passengers direct flights ... "
NEWSMAN: "Southern has been
awarded a substantial number of new
routes in the past few years. Do you
feel you are likely to receive any
more routes in the near future?"
MR. HULSE: "Yes, it's true that we
have received some very high quality
route additions in the past five years.
Now that the national economy has
reversed its downward trend , we
believe service over these new routes
will generate substantial additional
traffic and revenues. This will enable
us to improve our financial position
so that other cities on our system can
enjoy improved service to distant
terminal points. For example,
Southern's extension to Chicago
permits our passengers in such
communities as Columbus, Miss. ,
Monroe, La. and Mobile, Ala. to utilize
direct through-plane jet service with
Chicago. Previously these
communities' traffic with Chicago was
provided only by connecting flights.
"There are still other communities
on our system which have not enjoyed
the benefits of our route extensions
and we will be concentrating on these.
A case in point is our application for
nonstop authority between Nashville
and Detroit. If successful, we will link
such presently served communities
as Nashville, Huntsville/Decatur,
Mobile and Gulfport/Biloxi with Detroit
by their first direct, single-plane
service. For Birmingham, this will
mean its first competitive service. Of
course, in the prime Nashville-Detroit
market, this backup type traffic will
enable us to provide a maximum of
Nashville-Detroit flight frequencies.
This was a principal factor in a CAB
Administrative Law Judge recom-
mending Southern over several
competing applicants.
"A collateral benefit of our route
system is that we can offer our
passengers direct flights between
many major points, without the need
of congested connections. Our
Columbus, Ga.-New York/ Newark
service eliminates a plane change in
Atlanta, as does the new Jacksonville-
Memphis schedule. Mobile's
Washington and New York service is
another example of the benefits of
direct, single-plane service."
EMPLOYEE: "We've been flying
charters throughout much of the
United States, to Canada and to the
Bahamas. Will we continue this
emphasis on charter flights?"
MR. HULSE: "As you point out,
Southern's charter operation is
extensive not only in the area we
serve but also in the revenue it
provides. In fact, our charter sales'
contribution to profit is helping to
reduce our need for subsidy. We are
continuing charter emphasis and hope
to increase income from this area."
PASSENGER: "It appears Southern
will operate more jets over more
routes and will carry more
passengers, but what else does the
passenger have to look forward to?"
MR. HULSE: "I think we can
summarize passenger-oriented
improvements as better schedules
with more nonstop service, new
service between additional city pairs,
better reservations service, improved
snack and meal service and more
efficient ground service."
PASSENGER: "If you accomplish
that, Southern will have a new
appearance."
MR. HULSE: "Yes, and we are
determined to accomplish it, even if
not all at one time. Let's consider
schedules and more nonstop
service first .
"The first additional jet went into
service on April 1. By June 1, six will
be in use and all of the 13 additional
aircraft will be in service by the end
of 1973. In turn , on April 1 Southern
Southern 's highly trained technicians
provide virtually all support assistance
including refurbishing seats and carpets,
radio and avionics service, and
jet engine maintenance.
11
"Memphis and Mobile
have become key cities in our
expansion plans."
added additional nonstop service
between Mobile and Atlanta, first time
nonstop service between Mobile and
Washington , nonstop service between
Memphis and New Orleans and
between Memphis and Orlando, and
one stop service between Memphis
and Miami and between St. Louis and
New Orleans. Our June 1 schedule
adds new service between Jacksonville
and Memphis, Jacksonville and
Birmingham and Jacksonville and
Columbus, Ga. Additionally, we
are increasing New Orleans-Memphis-
Chicago and Memphis-New Orleans
frequencies.
"Another city receiving attention is
Nashville. Very recent new authority
permits us to schedule Atlanta-
Nashville nonstop service and later
this year we have plans for linking
Nashville by direct jet flights with points
in Alabama, Florida and Louisiana.
"Memphis and Mobile have become
key cities in our expansion plans. For
example, Southern boarded 106,000
passengers in Memphis in 1968,
increasing to more than 240,000 in
1972. We expect to increase this to
approximately 350,000 by the end of
1973. At the end of 1972 we had 18
jet flights daily in Memphis. At the
end of 1973 we will have 40 jet flights.
Memphis is becoming our major
connecting point for west-bound
travelers and this year we will become
the number two airline serving Memphis,
pushing hard for first place in 197 4.
"We are already first in Mobile in jet
departures and we expect a 90 per
cent gain in passengers this year.
Equally significant is that we are flying
these passengers greater distances
than before."
A modern reservations center in
Atlanta answers 90 percent of reservations
calls Customers in New York,
Chicago, St. Louis and many other cities
are answered in Atlanta.
13
" ... we have some of the
best inflight service in the regional
airline industry ... "
PASSENGER: "What effect will these
new jets have on routes served by
you M rtin 404s?"
MR. HULSE: "During the past years
we have gradually reduced the
number of Martins in our fleet. Two
years ago we had 24. By the end of
1973 we will have only ten in our
pattern of service. We have
accomplished this by substituting jets
on many of the high load factor
Martin flights. Ultimately, all Martins
will be replaced by either DC-9s or
some other modern jet powered
aircraft. 11
STOCKHOLDER: "You mentioned
improving reservations facilities. Is
this an expensive addition?"
MR. HULSE: "Fortunately, no. You
may recall , some three years ago we
entered into a lease agreement for a
computerized reservations system to
replace the method that we had
outgrown. The system selected neither
operated to our expectations nor did
it satisfy our requirements. To replace
this with the best system possible, all
available systems were considered .
Last Fall we implemented one of the
finest, most efficient reservations
networks in the airline industry. Again ,
we leased the computer support with
little capital outlay. It is sufficient to
meet our needs for many years. And ,
I will add , this was accomplished at a
favorable lease rate'.'
PASSENGER: "I .have noticed
significant improvement in your
reservations service. Is this
the reason?"
MR. HULSE: "This is part of the
reason , probably a major part. But,
there are other contributors. For
example, we have implemented close
control on our reservations center
staffing needs. Last year we installed
a small computer that determines
our staffing needs based on call
projections. This warns us when we
need to bring in more help. In turn , we
have a backup force of thoroughly
trained , competent part time
reservations agents who can be called
in on short notice. This enables us to
staff for normal requirements yet have
a ready reserve. As a result, our
answering time has been reduced
remarkably, yet our costs are being
kept in line."
BANKER: 'Will the improved inflight
meal service you mentioned justify
the additional expense of the
program?"
MR. HULSE: "The passenger
acceptance we have encountered
certainly proves the value of more
frequent snacks and tastier meals.
Interestingly, this has been introduced
without an increase in cost per
passenger. Although we have some of
the best inflight service in the regional
airline industry, we provide this at the
lowest cost per passenger. This has
been done by careful planning .
" For example, our serving trays,
table ware, and dishes were designed
not only as passenger pleasers but
also for being functional. Over a
year's time the saving is enormous.
"Much care goes into our food
selection. Several years ago we
introduced our French Quarter Wine
Basket. This includes a hearty roast
beef or turkey sandwich , a praline, on
some flights a piece of fruit, and a
bottle of premium imported wine. This
is served on many of our shorter
flights and we find that passengers
prefer this to a hurried meal. On the
other hand , we are now flying many
flights of more than one hour and this
enables us to serve a meal as we feel
it should be offered. On some flights
our meals include a choice of entree
accompanied by a selection of wines
served by the stewardesses, another
first in standard class service.
"Southern is the only airline offering
all early morning passengers either a
continental or a hot breakfast. 11
Responsive ground service -
before and after a flight - is a Southern
tradition. Competent, friendly personnel
contribute to passengers' convenience.
15
"We try to make
Southern a good place
to work."
EMPLOYEE: "Many of the points that
have been brought up here have
been discussed with Company
employees during the past few
weeks. I don't recall ever having so
much information about the operation
of the Company. Will this program
ti ?"
MR. HULSE: "Most certainly.
Management recognizes that all
employees must be informed and
trained . As a pilot, you are one of the
most skilled in the industry. You are
receiving the best recurrent training
possible and this will continue. In
addition, you will see continuing
programs to keep all Southern
employees aware of both goals and
problems. Training is receiving
significant attention, and this extends
to every job classification, beginning
with entry positions. Every ramp agent
receives 40 hours of classroom
instruction before putting on a
uniform. This makes a substantial
contribution to upgraded ground
service and on-time performance.
Reservations agents are schooled four
full weeks before they are assigned
duties. Our stewardesses are given
four weeks instruction , including both
classroom and inf light. And, every
employee is being introduced to
Southern through a new orientation
program designed to acquaint
newcomers to our methods and goals.
"We are continuing a management
seminar program for all supervisory
personnel. To date, almost 200 have
taken this excellent two week course.
We have seen positive results."
BANKER: "I realize that salaries are
of prime importance to your
employees, but so are other things.
How is Southern competing in the
fringe benefit area?"
MR. HULSE: "We try to make
Southern a good place to work. Our
employees generally agree that their
fringe benefits are among the best in
the airline industry, and in some areas
they lead the industry. We have
improved an already first rate group
insurance plan. Southern has a liberal
employee retirement program. We
offer high limits of Company-paid life
and accident insurance, optional
additional protection, and now have a
group program for buying automobile
and home insurance at substantial
savings. Our personnel are offered
generous vacations and holidays. We
have recently announced a tuition
participation program to stimulate
employees to increase their
education level. Many of our people
are attending college in the evening
and a great number of these are in
graduate programs."
EMPLOYEE: 'Other than the
maintenance base, is Southern
considering other facilities to make
us more functional and even to
improve working conditions?"
MR. HULSE: "Very definitely. We
anticipate that a new pilot and
mechanic training center will be
incorporated into the maintenance
base. This will enable us to provide
all flight and maintenance training
within Company facilities. As you
know, in addition to our maintenance
and training facilities, we occupy
office and support space in all or part
of five buildings around the Atlanta
airport. We have had several attractive
offers to combine this into one leased
property and this is being considered ."
EMPLOYEE: "Our ticketing and
ground service at several of the
larger cities we serve is still provided
by other carriers. Is this going to
change?"
MR. HULSE: "When we began serving
New York, Chicago, St. Louis, Miami
and Newark, it was impossible to get
counter space and gate areas to meet
our needs. Accordingly, we contracted
with various carriers and they have
been providing this service for us. We
recognize this as being far less
desirable than our own operations,
but the key has been getting space in
the terminals. We have worked out
very desirable arrangements at
Chicago and St. Louis and we are
preparing to open our own operations
at each of these cities. We are
continuing to look at other contract-
operated stations and will improve our
operations there when facilities are
available. Let me point out, this is not
an unusual situation as we have
provided ground services for a trunk
airline serving Atlanta. "
Southern flies not only people
but also "things," ranging from specialized
industrial cargo to family pets. A small
package delivery service. Lickety-Split,
provides fast service to small
item shippers.
17
" ... the best look
at Southern is aboard one
of our flights."
EMPLOYEE: "Is it true that we are
developing a new waste treatment
plan n Atlanta?"
MR. HULSE: "We have never shouted
about our contribution to an improved
environment. Nevertheless, we have
several environmental programs
underway. One of these is the waste
treatment plant you mentioned. It will
be a deterrent to both solid and liquid
waste entering streams adjoining the
Atlanta airport. This is being
developed in a joint effort with the
City of Atlanta and is scheduled for
operation by the end of this year.
Southern is spending in excess of
$300,000 for this badly needed
addition. In another area, we are 90
per cent complete in a program
retrofitting our jet engines to reduce
smoke and particulate matter. We
anticipate other programs to further
reduce engine emissions and noise.
Also we are a major participant in
landing and takeoff patterns that result
in reduced noise pollution levels over
residential areas.
"Let me summarize a few points.
Essentially, 1973 began a significant
era in Southern's history, but the real
change will not be recognized until
197 4. Then, we will have a full year's
results from our expanded fleet. Our
employee level will have grown more
than 25 per cent, compared with
1972, and revenues will have soared
to over $100 million, an increase
of more than 55 per cent.
Passenger travel on our
18
routes will increase 60 per cent
compared with 1972 levels. We will
have developed a strong identity in all
cities we serve and a reference to
Southern will be synonymous with
quality air service.
"The participation of each of you is
appreciated. Certainly, your questions
are representative of those we hear
most frequently. Regardless of the
in depth approach we take in any
discussion, the best look at Southern
is aboard one of our flights. I hope
those of you not in our employee
family will give us an opportunity to
show you how we are improving . We
want you to know that 'Southern is
going your way.' We hope you will
come our way."
bout this Report
The panel oh page 3, representing
Southern's many publics, includes
(left to right) William C. Henry, a vice
president of the Trust Company of
Georgia, Heyward Siddons of Stein
Printing Company who posed as the
newsman, Captain James E. Bass, a
Southern pilot for 22 years,
Mrs. Frances B. Ray, secretary to
Southern's president, and as the
customer, H. Roy Kaye of Stein
Printing Company where this report
was designed and produced. No
professional models were used in this
Report and all pictured are either
actual passengers photographed with
consent, or Southern employees. The
cover and most of the interior
photography is by Frank Garner.
Notice to Stockholders of
Southern Airways, Inc.
Any person who owns as of
December 31 of any year. or
subsequently acqwres 0Nnersh1p
either personally or as a trustee of
more than five per cent (5%} tn the
aggregate of any class of capital stock
or capital of Southern Airways Inc
shall file with the C1v1I Aeronautics
Board a report containmg the
tnformat1on reqwred by Part 245 12
of the Boards Economic Regulatt0ns
This report must be flied on or before
Apnl 1 of each year as to the capital
stock or capital owned as of
December 31 of the precedmg year
and tn the case of capital subsequently
acquired a report must be filed w1thtn
ten (1 OJ days after such acqws1t1on
unless such person has otherwise filed
with the C1v1I Aeronautics Board a
report covenng such acqws1tt0n or
ownership
Any bank or broker covered by this
provist0n, to the extent that it holds
shares as trustee on the last day of
any quarter of a calendar year shall
file with the Civil Aeronautics Board
withtn thirty (30) days after the end
of the quarter a report tn accordance
with the provisions of Part 245 14 of
the Board's Economic Regulatt0ns
Any person reqwred to report
pursuant to these provisions who
grants a secunty interest tn more than
five per cent {5%) of any class of the
capital stock or capital of an air earner
shall w1thtn thirty {30) days after
granttng such secunty interest. file
with the Ctv1I Aeronautics Board a
report contatntng the tnformatt0n
reqwred tn Part 245 15 of the
Economic Regulatt0ns
Any stockholder who believes that
he may be required to file such a
report may obtatn further tnformatt0n
by wnttng to the Director, Bureau of
Operattng Rights, Ctvil Aeronautics
Board, Washmgton, D C 20428
Statement of Operations
Southern Airways, Inc.
OPERATING REVENUES
Passenger . . ....... .
Mail, express and freight . . ....... .
Public service revenue ..
Charter .
Other operating revenues - net
OPERATING EXPENSES
Flying operations .............. .
Maintenance .
Aircraft and traffic servicing . ...... .
Passenger service ..
Promotion and sales .
Years Ended December 31 ,
General and administrative . . . . . . . . . . ............. .
Depreciation and amortization - Notes A and I ........... .
OPERATING INCOME
OTHER DEDUCTIONS (INCOME)
Interest on long-term debt .......... .
Miscellaneous deductions (income) - net
INCOME (LOSS) BEFORE INCOME TAXES
INCOME TAXES (CREDIT) - Note D
Current
Federal .
State ...
Deferred .
Investment credit .
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT .
TAX BENEFITS OF OPERATING LOSS CARRYFORWARD - Note D .
NET INCOME (LOSS) ......... .
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE - Note H
Primary
Income (loss) before extraordinary credit
Extraordinary credit .
Net income (loss) ................ .
Fully Diluted
Income (loss) before extraordinary credit .
Extraordinary credit ..
Net income (loss) ... .. ....... .
See Notes to Financial Statements.
...... . ..
........
. . . . . . . . . . . . . . .
. .
1972 1971
$52,052,394 $45 ,301,780
3,531,100 3,090,002
7,137,964 6,973,875
4,838,759 4,067,008
1,077,220 900,907
68,637,437 60,333,572
22,431,226 20,949,971
11,890,014 10,807,844
15,433,205 13,522,854
4,343,393 3,773,582
5,303,672 4,774,385
3,783,878 3,461,427
2,559,029 2,636,732
65,744,417 59,926,795
2,893,020 406,777
1,361,913 1,678,112
(109,460) 22,449
1,252,453 1,700,561
1,640,567 (1 ,293,784)
762,000
80,500
(235,000)
(393,000)
449,500 (235,000)
1,191,067 (1 ,058,784)
409,250
$ 1,600,317 $ (1 ,058,784)
$ .77 $ (1 .02)
.29
$ 1.06 $ (1 .02)
$ .60 $ (1 .02)
.20
$ .80 $ ( 1 .02)
19
Balance Sheet
Southern Airways, Inc.
ASSETS
CURRENT ASSETS
Cash and short-term investments ..
Accounts receivable
U.S. Government - Transportation and public
service revenue ..... .
Trade receivables, less allowance for doubtful
December 31 ,
accounts (1972 - $28,945; 1971 - $41 ,849) ....... .
Maintenance and operating supplies, at average
cost less allowance for obsolescence
(1972-$928,817; 1971 - $695,787) - Note A .
Prepaid expenses .......... .
Total Current Assets ..
OTHER ASSETS
Hijacking payment - Note B .................. .
Equipment purchase deposits ..... .
Miscellaneous ... . ............................... .
PROPERTY AND EQUIPMENT - on the basis of cost -
Notes A and C
Flight equipment ..... .
Other property and equipment
Less allowances for depreciation and maintenance ..
DEFERRED CHARGES - Note A
Unamortized preoperating, route extension
and development costs .................. .
Deferred lease costs . . . ...... .
Unamortized long-term debt expense .
20
1972
$ 5,744,808
2,127,449
5,341,247
7,468,696
1,885,545
824,001
15,923,050
2,000,000
416,840
109,290
2,526,130
26,766,370
3,822,489
30,588,859
13,601,677
16,987,182
417,918
188,560
452,977
1,059,455
$36,495,817
1971
$ 5,057,849
1,481 ,210
4,989,452
6,470,662
2,015,280
791 ,765
14,335,556
90,621
90,621
27,237,131
3,625,547
30,862,678
12,123,973
18,738,705
691 ,245
217,788
580,524
1,489,557
$34,654,439
LIABILITIES December 31,
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . .................... .
Collections and withholdings as agent
Salaries, wages and vacations .
Accrued interest payable .
Accrued taxes and other expense .
Air travel plan deposits
Current maturities of long-term debt - Note C . . . . . . . . . . . ...... .
Total Current Liabilities ..
LONG-TERM DEBT - Note C
Notes payable, less current maturities
Convertible subordinated debentures .
STOCKHOLDERS' EQUITY - Notes C and E
Preferred Stock, $1 par value, authorized 2,000,000
shares issuable in series:
Series A $.36 convertible-voting (liquidation value $6
per share plus cumulative dividend-aggregate of
$1 ,209,055 in 1972 and $1 ,523,316 in 1971) issued and
outstanding-190, 103 shares (1972) and 253,886
shares (1971). . ....... .
Series B $.36 convertible - non-voting (liquidation
value $6 per sham plus cumulative dividend -
aggregate of $1 ,060,002 in 1972 and $1 ,000,002
in 1971) issued and outstanding - 166,667 shares ....... . .... . .. .
Common Stock, $2 par value:
Authorized - 7,500,000 shares
Issued and outstanding-1 ,271 , 191 shares (1972)
and 1,061 ,766 shares (1971) ...
Other paid-in capital ........ .
Retained-earnings (deficit) ..... .
COMMITMENTS AND CONTINGENCIES-Note G
See Notes to Financial Statements.
$
1972
3,008,194
4,837,482
1,745,155
342,532
367,689
97,750
10,398,802
9,238,016
11,345,000
20,583,016
190,103
166,667
2,542,382
4,437,970
(1,823,123)
5,513,999
$36,495,817
$
1971
2,983,250
3,298,405
1,647,268
248,002
462,807
102,000
2,202,471
10,944,203
8,535,032
12,682,000
21 ,217,032
253,886
166,667
2,123,532
3,372,559
(3,423,440)
2,493,204
$34,654,439
21
Statement of Changes in Financial Position
Southern Airways, Inc.
FUNDS PROVIDED
From operations
Years ended December 31 ,
Income (loss) before extraordinary credit .....
Items not requiring outlay of working capital in current period
Depreciation . . . . ...... .. ... .
Increase in allowance for maintenance . . . . . . . . . . . . . . . ... . .. .
Amortization of deferred charges . ................. . .... .
Deferred income tax (credit) . . . . . . . . . . . .. .... . ...... . ...... .
Total from operations, exclusive of extraordinary credit.
Extraordinary credit ... .
Long-term borrowings ..
Sale of Pref erred Stock . .. ... . .
Exercise of Common Stock Purchase Warrants .
Conversions to Common Stock
Debentures ........... . . . .. .
Series A Preferred Stock .... .
Property and equipment sold or converted to lease,
less gain included above . . . . . . . . . . . . . . ..... . .... .
Refund of equipment purchase and lease deposits . .. ... . .. .... .
FUNDS USED
Additions to property and equipment .... .
Hijacking payment . . . . . . . . . . . .. .. ....... .
Equipment purchase and lease deposits . . . .. . ... . . .
Reduction of long-term notes payable .
Conversions to Common Stock
Debentures . . . . . . . . . . . . ...... .
Series A Preferred Stock . .
Increase in deferred charges .
Increase in other assets .
INCREASE IN WORKING CAPITAL .
Working capital at beginning of period .
WORKING CAPITAL AT END OF PERIOD
INCREASE (DECREASE) IN WORKING CAPITAL BY COMPONENTS
Cash and short-term investments .... .
Accounts receivable . . . . . . . . . . . . . . . . . . . .. . . . . ... .
Maintenance and operating supplies ..... ...... . ... .
Prepaid expenses . . . . . . . . . . . ........... . ........ . .. .
Accounts payable . . . . . . . . . . . . ... . . .
Collections and withholdings as agent . . . .. . . . .
Salaries, wages and vacations . . . . ..... .. . . . . .. . .. ... . .. .... . . . .. .
Accrued interest, taxes and other expenses . . . .
Air travel plan deposits . . . . . . . . . . . . . . . . . . . . . . . . . ... . .. .
Current maturities of long-term debt ...
INCREASE IN WORKING CAPITAL
See Notes to Financial Statements.
22
1972
$ 1,191,067
2,039,695
544,721
382,153
4,157,636
409,250
2,952,130
145,314
1,337,000
63,783
92,368
9,157,481
925,261
2,000,000
416,840
2,249,146
1,337,000
63,783
13,887
18,669
7,024,586
2,132,895
3,391,353
$ 5,524,248
$ 686,959
998,034
(129,735)
32,236
(24,944)
(1,539,077)
(97,887)
588
4,250
2,202,471
$ 2,132,895
1971
$ (1 ,058,784)
2,094,991
322,946
484,478
(235 ,000)
$
1,608,631
787,757
2,637,379
36,895
588,915
490,000
6,149,577
1,409,959
3,008,041
36,895
6,459
11 ,879
4,473,233
1,676,344
1,715,009
3,391 ,353
$ 2,383,503
(1 ,084,513)
373,621
282,946
807,803
(670,743)
(315 ,014)
280,782
6,375
(388,416)
$ 1,676,344
Statement of Stockholders' Equity
Southern Airways, Inc.
Years ended December 31 , 1972 and 1971
Balance, January 1, 1971 ........... . . ..... . . . ..
Net loss ..... ... ...... .. .......... .. . . ......
Preferred Stock sold .........................
Common Stock issued upon
Conversion of Preferred Stock ..... .........
Balance, December 31 , 1971 .... . ... . ......... . .
Net income ..................... . . . .... . ....
Common Stock issued upon:
Conversion of Preferred Stock ' '
........ '
..
Conversion of $1 ,000,000
principal amount of 6-1 /2%
Convertible Subordinated
Debentures, less $53,692 deferred
finance cost .......... . .. . ... . ... .. .. . .. .
Conversion of $337,000 principal
amount of 5-3/4% Convertible
Subordinated Debentures, less
$8,144 deferred finance cost ....... .. . .... .
Exercise of stock purchase warrants ..........
Balance, December 31, 1972 ...... . . . . . . .. .. ....
See Notes to Financial Statements.
Preferred Stock
$1 Par Value
Series A Series B
$ $
290,781 166,667
(36,895)
253,886 166,667
(63,783)
$190,103 $166,667
Common Other Retained-
Stock Paid-In Earnings
$2 Par Value Capital (Deficit)
$2,049,742 $1 ,229,523 $(2,364,656)
(1 ,058,784)
2,179,931
73,790 (36,895)
2,123,532 3,372,559 (3,423,440)
1,600,317
127,566 (63,783)
200,000 746,308
62,046 266,810
29,238 116,076
$2,542,382 $4,437,970 $(1 ,823, 123)
23
Notes to Financial Statements
December 31 , 1972
Report of
Independent Accountants
Board of Directors
Southern Airways, Inc.
Atlanta, Georgia
We have examined the balance sheet of
Southern Airways, Inc. as of December 31 , 1972
and 1971 , and the related statements of
operations, stockholders' equity, and changes in
financial position for the two years ended
December 31 , 1972. 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.
In our opinion, subject to the recovery of the
hijacking payment as explained in Note B to the
financial statements, the accompanying balance
sheet and statements of operations,
stockholders' equity, and changes in financial
position present fairly the financial position of
Southern Airways, Inc. at December 31, 1972 and
1971, and the results of its operations, changes
in stockholders' equity and changes in financial
position for the two years ended December 31,
1972, in conformity with generally accepted
accounting principles applied on a
consistent basis.
~1~
r:Jt~
Atlanta, Georgia
January 31, 1973, except
as to Note C as
to which the date is
February 28, 1973
24
NOTE A-SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PROPERTY, EQUIPMENT, DEPRECIATION , AND OB-
SOLESCENCE - 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, propellers,
communications equipment
Ground
M-404 DC-9 Equipment
and ratable parts . . (A) 1 5 years
Ground equipment . . . . . . . . . . . . 3-10 years
(A) Common depreciation point of December 31 , 1973.
At the time properties are retired , the amounts of cost
and allowances for depreciation and maintenance are
eliminated from the accounts. Profits and losses on dis-
posals of DC-9 flight equipment (exclusive of ratable parts)
are credited or charged to operations. Proceeds from the
disposal of DC-9 ratable parts and Martin 404 aircraft are
credited to the allowance for depreciation account. The
Company is engaged in a program of reducing the use of
the Martin 404 aircraft , the net investment in which
amounted to approximately $2,835,000 and $3,793,000
at December 31 , 1972 and 1971 , respectively.
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 .
A provision for obsolescence of the investment in minor
spare parts inventory for DC-9 aircraft is made at
an annual rate of 4% and for Martin 404 aircraft at a rate
sufficient to fully write off such investment by December
31 I
1973.
DEFERRED CHARGES - Expenditures for preoperat-
ing and route extension and development costs are de-
ferred 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 . De-
ferred charges associated with long-term debt are being
amortized over the lives of the financing arrangements.
INCOME TAXES- Taxes are provided at current tax
rates for all items included in the statement of operations
regardless of the years when such items are reported for
tax purposes.
The Company uses the flow-through method of ac-
counting for investment credit and the available invest-
ment credit is recognized to the extent it can be realized
or offset against current or deferred income taxes.
PENSION PLANS- The Company has several pension
plans, including a defined contribution plan, covering sub-
stantially all of its employees. There are no unfunded past
service costs. The Company's policy is to fund pension
costs accrued .
NOTE 8-HIJACKING PAYMENT
In November 1972, the Company paid $2 million in ran-
som in connection with the hijacking of one of its DC-9
aircraft. The aircraft, passengers and crew were returned
to the United States, but the ransom money has been re-
tained by the Republic of Cuba. Negotiations between
representatives of the Company and the Cuban govern-
ment are expected to result in the eventual return of the
funds, although there can be no assurance of the return .
The Company plans to continue to reflect the hijacking
payment as an asset until the funds are returned or there
is a determination that the funds will not be returned . Had
the ransom money been deemed non-recoverable and
written off as an extraordinary charge to income in 1972,
the Company would have suffered a net loss of $359,433
($. 30 per share) and stockholders' equity would have been
reduced to $3,554,249.
NOTE C-LONG-TERM DEBT
At December 31,
Notes payable to banks under
old credit agreement
(refinanced in 1 973)
Demand notes payable to
banks (refinanced in 1973)
Various notes payable under
deferral agreement. . . ...
Note payable to bank - other
Convertible Subordinated
Debentures
5-3/4%, due December
1, 1981 . . . . ......... .
6-1 /2%, with warrants
attached.due
November 1, 1983 .
Less amounts due within
one year .
1972 1971
$ 7,238,016 $ 8,091 ,413
2,000,000
2,135,257
510,833
4,345,000 4,682,000
7,000,000 8,000,000
20,583,016 23,419,503
2,202,471
$20,583,016 $21 ,217,032
On February 20, 1973, the Company entered into a
credit agreement ("New Credit Agreement") pursuant to
which certain banks will lend the Company amounts not
to exceed a total of $39,000,000 under the following com-
mitments:
(1 J The "A" Loan Commitment in an aggregate principal
amount of $27,000,000 to be used as 90 per cent of
the purchase price of flight equipment to be purchased
from Delta Air Lines, Inc. and others (see Note GJ.
All such aircraft, engines and spare parts will be
pledged as collateral on this indebtedness, which is
also 90 per cent guaranteed by the Federal Aviation
Administration. Borrowings under the "A" Commit-
ment through February 28, 1973, amounted
to $3,608,994.
(2) The "B'' Loan Commitment in an aggregate principal
amount of $10,000,000 to be used to repay existing
bank indebtedness under the old credit agreement
and the balance to be added to working capital. This
loan is collateralized by all other property of the Com-
pany. At February 28, 1973, the Company had
borrowed the full amount of the "B" Commitment
which was used to retire the outstanding debt under
the old credit agreement and the demand notes pay-
able, and the balance was added to working capital.
(3) The "C" Loan Commitment in an aggregate amount
of $2,000,000 to be reduced by $100,000 per quarter
beginning March 31 , 1973. Such Commitment will
also be reduced by recoveries of the hijacking pay-
ment discussed in Note B. At February 28, 1973, no
amounts had been borrowed under this Commitment.
Amounts borrowed under the "A" and "B" Commit-
ments on revolving credit notes may be converted to term
loan notes payable in quarterly installments beginning July
1, 1974, and May 1, 1974, respectively. The "A" and "B"
loan amounts bear interest at the lead bank's prime rate
(6-1 /4% at February 28, 1973) plus 1 % and 2-%, re-
spectively. Amounts borrowed under the "C" Commit-
ment are due in quarterly installments and bear interest
at 155% of the lead bank's prime rate. The Company has
agreed to pay a commitment fee of 1 /2 of 1 % per annum
on the daily average unused amount of the Credit Com-
mitment beginning December 29, 1972.
The 5-3/4% Convertible Subordinated Debentures due
December 1, 1981, are convertible (until maturity or prior
redemption) into Common Stock at $10.86 per share;
are subordinated, generally, to all existing and future in-
debtedness for borrowed money; are callable at premiums
ranging from 3-3/4% downward; and require annual sink-
ing 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 addi-
tional voluntary sinking fund payments equal to the re-
quired amount.
The 6-1 /2% Convertible Subordinated Debentures due
November 1. 1983, are convertible (until maturity or prior
25
Notes to Financial Statements (continued)
redemption) into Common Stock at $10 per share; are
issued in integral multiples of $1000 with an attached war-
rant for the purchase of 18 shares at $10 a share; are sub-
ordinated , generally, to all existing and future indebtedness
for borrowed money; are callable on or after November 1,
1973, at premiums ranging from 6-1 /2% downward ; and
require annual prepayments beginning November 1, 1978,
in an amount equal to 10% of the principal amount out-
standing 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.
The terms of the "Old Credit Agreement ," "New Credit
Agreement" and both issues of Convertible Subordinated
Debentures place certain requirements and restrictions
New Loan Commitment
Year "A" "B"
1973 $ $
1974 1,600,000 750,000
1975 3,200,000 1,000,000
1976 3,200,000 1,150,000
1977 3,200,000 1,200,000
Thereafter 15,800,000 5,900,000
Total $27,000,000 $10,000,000
upon , among other things , (a) working capital , (b)
indebtedness and lease obligations, (c) capital expendi-
tures, (d) net worth and (e) payments relating to capital
stock, including dividends (no amount was available for
the payment of dividends at December 31 , 1972).
Since the Company repaid in February 1973 the
amounts due under its old credit agreement and the
$2,000,000 of demand notes payable from proceeds of
the "B" Loan Commitment, current maturities of indebted-
ness at December 31 , 1972, have been determined in
accordance with terms of the "B'' Loan Commitment.
A summary of minimum principal payments applicable
to the "New Credit Agreement" (if all funds available are
borrowed) and both issues of Convertible Subordinated
Debentures is as follows:
"C"
$ 400,000
400,000
400,000
400,000
400,000
$ 2,000,000
Subordinated
Debentures
$
434,500
434,500
10,476,000
$11 ,345,000
Total
$ 400,000
2,750,000
4,600,000
5,184,500
5,234,500
32,176,000
$50,345,000
Prepayments equal to 25% of net income in excess of $1 ,500,000 plus 50% of net income in excess of $3,000,000 earned
in any fiscal year beginning January 1, 197 4, will be required under the "B'' Note. The above summary of minimum
principal payments does not reflect the possible effect of any such prepayment.
26
NOTED-INCOME TAXES
At December 31, 1972, operating loss carryforwards to
future periods for income tax purposes aggregate approxi-
mately $4,108,000 and expire in 1977 ($2,374,000) and
1978 ($1,734,000). The operating loss carryforward for
financial statement purposes at December 31, 1972, is
approximately $2,208,000. Investment credit carryovers,
which may be used to offset federal income tax payable
in future income tax returns, aggregate $1,287,000 and
expire in 1976 ($65,000), 1977 ($810,000), 1978
($64,000) and 1979 ($348,000).
The Company plans to change the depreciation method
and lives applicable to certain assets for income tax pur-
poses prior to the expiration of existing operating
loss carryforwards. Because of these changes and the
carryforward of the 1971 operating loss, 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 .
NOTE E-CAPITAL STOCK AND OPTIONS
The stockholders approved an amendment to the Com-
pany's charter in May 1971 to increase authorized Com-
mon Stock from 5,000,000 shares to 7,500,000 shares,
and to authorize 2,000,000 shares of $1 par value Pre-
ferred Stock in one or more series ; the terms of each
series of Preferred Stock to be determined by the
Board of Directors upon issuance .
The Series A and Series B Preferred Stock (authorized
in June 1971) is convertible into Common Stock on a share-
for-share basis, can be redeemed after July 1, 1976 at $6
per share plus accumulated dividends, and is entitled
upon liquidation to $6 per share plus accumulated divi-
dends. The liquidation preference for the 356,770 shares
outstanding at December 31 , 1972, including the divi-
dend requirement described below , aggregated
$2,269,057, which is $1,912,287 more than the aggregate
par value of such shares.
Each share of Preferred Stock is entitled to receive annual
dividends of $.36 per share, cumulative only to the extent
of annual net profits. Since the sh.ares were issued in 1971 ,
a loss year, no dividend had accumulated prior to Decem-
ber 31 , 1972. The annual dividend requirement on shares
outstanding at December 31 , 1972, aggregates $128,437.
Payment of dividends is subject to the limitations prescribed
by the indentures covering the 5-3/4% and 6-1 /2% Con-
vertible Subordinated Debentures and to limitations con-
tained in the old and new credit agreements (see Note C).
Authorized common shares include 2,110,092 shares
and 2,323, 1 25 shares reserved at December 31 , 1972 and
1971 , respectively, for issuance as follows:
For convertible securities
conversions
5-3/4% Convertible Sub-
ordinated Debentures
(Note C).
6-1/2% Convertible Sub-
ordinated Debentures
(Note C).
Series A Convertible
Preferred Stock ...
Series B Convertible
Preferred Stock.
For exercise of outstanding
warrants
At $10 per share (issued with
6-1 /2% Convertible
Subordinated Debentures -
Note C) . . ...... .
At $6 per share (issued with
Series A-290,562 shares
in 1972 and 290,781 in
1971 - and Series 8 -
166,667 shares
Convertible Preferred
Stock) .
For options under
Qualified Stock Option Plan
(45,000 shares) and
Employee Stock Option
Plan (25,000 shares) ..
1972 1971
400,093
700,000
190,103
166,667
1,456,863
126,000
457,229
583,229
70,000
2,110,092
431 ,124
800,000
253,886
166,667
1,651 ,677
144,000
457,448
601,448
70,000
2,323,125
27
Notes to Financial Statements (continued)
At December 31 , 1972, there were outstanding options
for 38,000 shares of Common Stock under the Company's
Qualified Stock Option Plan , of which options for 4,000
shares (at $8.69 to $11 . 76 per share) expire in 197 4 and
options for 34,000 shares (at $5.25 per share) expire in
1976. Option transactions during the two years ended
December 31 , 1972, are summarized as follows:
Outstanding , January
1, 1971 .......... . .
Granted .. .
Cancelled ..... .
Outstanding, December
31, 1971 .. ..
Granted ........ .
Expired ........ .
Cancelled .. .
Outstanding, December
31, 1972 .
Number Option Price
of Shares Per Share Total
9,000 $8.69-$19.18 $108,691
36,000 $5.25 189,000
(1,000) $11.76 (11 I
760)
44,000* $5.25-$19.18
1,000 $ 5.25
(1,000) $19.18
(6,000) $5.25-$13.75
285,931
5,250
(19,180)
(49,75 1)
38,000* $5 .25- $11 .76 $222,250
*Excludesoptionsfor4,000shares ( 1972) and 8,000 shares (19 71)
at $5.25 per share which become effective only after expiration
of previously issued options.
There were 7,000 shares and 1,000 shares, respectively,
available for future grant at December 31 , 1972 and 1971 .
Options granted under the Plan are intended to con-
stitute "qualified stock options" as defined in Section 424
(b) of the Internal Revenue Code of 1954, as amended .
Options are exercisable at not less than 1 00% of the fair
market value of the stock on the day of grant, terminate
not later than five years after date of grant, and are not
exercisable during the first 24 months after date of grant.
Each option is exercisable with respect to 1 / 3 of the
number of shares at any time after 24 months following
date of grant, with respect to an additional 1 /3 after
36 months, and with respect to the balance after 48
months. No options were exercised in 1972 or 1971 .
Options became exercisable during the years ended
December 31 , 1972 and 1971 , as follows:
Number of shares ... . ...... .
Option Price
Per Share .
Total ...
Quoted Market Price
at Date Exercisable
Per Share .
Total ........ . . .
28
1972 1971
2,000 2,998
$8.69-$11 .76 $8.69-$19.18
$21 ,403 $36,214
$6.38- $9.13 $4.13-$6.75
$15,336 $17,314
A total of 25,000 shares of Common Stock are reserved
for issuance to participating employees under an
Employees' Stock Option Plan (an employee stock pur-
chase plan as defined by Section 423 (b) of the Internal
Revenue Code of 1954 ). This plan is currently inactive
and there are no participants.
The Company makes no charge to income with respect
to options.
NOTE F-PENSION PLANS
Pension expense for the years ended December 31 ,
1972 and 1971 was $1 ,211 ,687 and $868 ,779 ,
respectively. Effective July 1, 1972, the Company modi-
fied one of the plans to provide for improved benefits, with
a related increase in annual pension expense of approxi-
mately $230,000.
NOTE G-COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with Delta
Air Lines, Inc. to purchase 13 used DC-9-14 jet aircraft, 4
spare engines and certain other spare parts and equip-
ment. The base price of each aircraft is $1 ,800,000, sub-
ject to certain adjustments. The total consideration , inclu-
ding all related parts and equipment to be purchased f ram
Delta and others is expected to approximate $30 million.
It is anticipated that delivery of the aircraft will be completed
by October 1, 1973. (See Note C for financing arrange-
ments.)
At December 31 , 1972, the Company was leasing eleven
DC-9 jet aircraft under leases expiring in 1979 through
1983 at a minimum annual rental of approximately
$4,722,000. The Company also leases certain office, ticket-
ing , hangar, computer and shop facilities with minimum
aggregate annual rentals of approximately $1 ,922,000
under various leases with expiration dates through 1992.
In November 1972, the Company entered into a new
five-year agreement to receive passenger reservations
services. At current traffic levels, the annual charge under
the agreement will approximate $600,000.
The Company is the defendant in a number of law suits.
In the opinion of management and legal counsel there is
adequate insurance coverage for such of those suits as
are being defended by the Company's insurance carriers.
In the opinion of management, the other suits will have no
material effect on the financial statements for 1972.
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 $55 ,000. In addi-
tion, upon his retirement, the Company has agreed to
pay $1 ,250 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 in the accompanying financial state-
ments for amounts to be paid under the terms of these
agreements.
NOTE H-EARNINGS (LOSS) PER SHARE
Primary earnings per share for the year ended Decem-
ber 31 , 1972, were computed by dividing net
income (adjusted as described below and reduced by the
preferred dividend requirement) by the weighted average
numberof common shares and common equivalent shares
outstanding during the year-a total of 1,439,517 shares.
Common equivalent shares comprise that number
of common shares issuable upon exercise of stock options
and warrants (exclusive of warrants for 126,000 shares
issued prior to June 1, 1969) in excess of 20% of the num-
ber of common shares outstanding at December
31 , 1972. Proceeds from the assumed exercise of the
options and warrants in excess of the amount which would
have been required to purchase 20% of the outstanding
Common Stock at the average market price during the
period were assumed to have been applied to debt reduc-
tion and the related interest (net of income tax effect,
where applicable) was added to income for purposes of
the calculation.
Fully diluted earnings per share for the year
ended December 31 , 1972, were determined on the
assumption that the weighted average number of com-
mon and common equivalent shares was further increased
from the beginning of the period by conversion of out-
standing convertible debentures and convertible preferred
stocks and by exercise of warrants issued prior to June
1, 1969 - a total of 3,098,588 shares. This calculation also
assumes no preferred dividend requirement , and interest
(net of income tax effect, where applicable) related to the
debentures assumed converted and debt assumed to be
retired from the exercise proceeds of the additional war-
rants was added to income for purposes of the cal-
culation .
For the year ended December 31 , 1971 , loss per share
was computed by dividing net loss by the weighted average
number of common shares outstanding (1 ,035 ,048
shares). Due to the loss, there was no preferred stock
dividend requirement and assumed conversion of con-
vertible securities or exercise of stock options or warrants
would not have increased the loss per share.
NOTE I-SUPPLEMENTARY INFORMATION
Depreciation and Amortization
Depreciation of property
and equipment .
Amortization of deferred
charges . . ...... .
Provision for inventory
obsolescence.
Deduct - Amounts charged to
other operating accounts ..
Taxes, other than income taxes,
charged to operating expenses
Payroll taxes
Fuel and oil taxes
Property taxes .
Sales and use taxes
Other .
Rents (including landing fees and
rental at airports served) .
Advertising costs .
1972 1971
$2,039,695 $2 ,094,991
382,153 484,478
233,030 182,617
2,654,878 2,762,086
95,849 125,354
$2,559,029 $2,636,732
$1 ,017,480 $ 804,765
176,755 161 ,003
340,800 327,568
166,254 130,412
103,528 95,020
$1 ,804,817 $1 ,518,768
$8,327,509 $7 ,610,311
$ 976,576 $1 ,102,715
There were no royalties or research and development costs.
29
Going your way
Southern's advertising effort is being
expanded for 1973 with emphasis on
destinations, frequency of service, and
a reminder that "Southern is going
your way."
Emphasis is being placed on
newspaper ads supported by prime
time radio, and in some cities,
television .
The aim is the business traveler who
frequents our system Monday through
Friday and who revels in our resort
attractions on the weekends.
Ads like this, 5 newspaper columns wide,
are appearing in New York and St. Louis,
~
going your way
Play Golf on the rut Coast
Southern G~~limel<u's
as lowas~gfor6days
Goffon 1
heGutt
7/ ~ GollandPlay
al the famous on MobtleBay
Broadwater Beach at 1
he
Hole! Grand H01
elnear
~ - Mobile
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tnl~lazlUf't'ICIII.IJU!,6mar$
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of7dayS6"'9tgC<O,,O,J
weie11..o ..... vec:,.,,,010,ill'S
,_
Newspapers throughout Southern's
system are carrying similar ads
in large format.
going your way
Non-stop
Chi~j)QO
St.Louis
New Orleans
I
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FlyYour WayCallS2576810f \"'()Ur T
ravel Agent
30
going your way. , , Southern
Southern is introducing a series of colorful posters depicting
key vacation destinations.
Television commercials are appearing in Birmingham, Jackson, Miss.;
Jacksonville, Memphis, Mobile, Nashville, Orlando, and other cities.
Being a good corporate neighbor is a
Southern goal and it means many
things. Like our people taking an
active part in civic work in the 67
cities we serve. Or our employee
contributions to more than a dozen
charitable organizations. Or a pilot
using his holiday to conduct a tour for
a group of youngsters who want to
see their first airplane. Or stewardesses
working with civic groups when they
need help in putting on a program to
raise money for some distraught
group. Or a secretary writing a
personal note to a little boy in
Yugoslavia and sending him the
airplane picture he asked for. Or
Southern flying a delicate box so an
eye transplant can be made
successfully. We do this. And more.
Thousands of children in Pennsylvania's
flood-wrought Wyoming Valley en/Qyed a
merrier Christmas thanks to a Southern
charter flight carrying gifts and we/I-wishers
from Mississippi's Gulf Coast.
Mobile's F. John Vandi!lion was presented
his own personal stewardess when he
became Southern's 2 millionth 1972
passenger, the first time this number has
been reached in a single year.
The Southern Open, played at Columbus, Ga. 's Green Island Country Club, is
becoming a major stop for golf's touring pros. Dewitt Weaver; 1972 winner, receives
his prize check from Southern President Frank W Hulse.
Captain William R Haas, left, recetVes a corporate resolution
from President Frank W Hulse acclaiming the skill and stamina
displayed during a 30-hour h11acking of a Southern OC-9, November
10-11, 1972 Captain Haas has been praised throughout the world
for his heroic efforts in bringing his passengers to safety
31
Directors and Officers
Southern 's $18 million maintenance base, to be completed in 1976, holds the attention
of this senior management group including [seated, left to right), George M. Gross,
J. W Godwin, Graydon Hall, Frank W Hulse, and [standing) Victor C. Pruitt, J. Kenneth
Courtenay, A. L. Maxson, TA. Wiley, Jr., and Frank H. Wheeler.
Directors
IVAN 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
32
R. EUGENE ORR
Orr & Company, Inc., Jacksonville, Florida
G. FRANK PURVIS, JR.
Pan American Life Insurance Company,
New Orleans, Louisiana
F. D. SCHAS
Bu Iii ngton-Schas, Inc.,
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
Executive Committee
FRANK W. HULSE
GRAYDON HALL
G. GUNBY JORDAN
ELTON B. STEPHENS
WM . BEW WHITE, JR.
Officers
FRANK W. HULSE
President
GRAYDON HALL
Executive Vice President
and General Manager
GEORGE M. GROSS
Vice President and
Associate General Manager
J. KENNETH COURTENAY
Vice President - Economic Regulations
and Secretary
J. W. GODWIN
Vice President - Flight Division
A. L. MAXSON
Vice President - Fiscal Division
and Treasurer
VICTOR C. PRUITT
Vice President - Technical Services
FRANK H. WHEELER
Vice President - Sales and Services
THOMAS A. WILEY , JR.
Vice President - Marketing
RAY W. BURDEN
Assistant Treasurer
JAMES H. ISHEE
Controller
OWEN L. McREE
Assistant Vice President -
Sales and Services
WILLIAM E. OAKES
Assistant Vice President-
Economic Research
J. R. PRICE
Assistant Vice President -
Contracts and Properties
DAVIDE. RUSSELL
Assistant Vice President -
Systems and Computer Services
CECIL A. BEASLEY, JR.
Assistant Secretary
MRS. MARY C. HAYES
Assistant Secretary
WM . BEW WHITE, JR.
Assistant Secretary
Going your way: the fun way
Southern
SOUTHERN AIRWAYS, INC. GENERAL OFFICES: Hartsfield Atlanta International Airport , Atlanta, Georgia COUNSEL: Bradley, Arant , Rose & White,
Birmingham , Alabama; Ballard & Beasley, Washington , D .C . AUDITORS: Ernst & Ernst, Atlant a. Georgia STOCK TRANSFER AGENT: Tru st Company of
Georgia, Atlanta, Georgia ADVERTISING COUNSEL: Harris & Weinstein Associates, Inc., Atlanta, Georgia Printed by Stein Printing Co., Atlanta, Georgia