CHICAGO Midway MON NEW YORK- NEWARK LaGuardia Airport WASHINGTON, D.C. CHARLESTON JACKSONVILLE Financial and Operating Highlights Southern Airways, Inc. Years ended December 31 , / Passenger revenues Operating revenues Operating income Net income Primary earnings per share including extraordinary credit Yield per passenger mile In scheduled service: Revenue passenger miles Available seat miles Passenger load factor Revenue passengers carried Revenue plane miles flown 1973 $ 65,949,000 $ 83,570,000 $ 1,489,000 $ 417,000* $ 0.23 $ 0.091 721,135,000 1,643,569,000 43.9% 2,494,000 25,492,000 1972 $ 52,052,000 $ 68,637,000 $ 2,893,000 $ 1,600,000 $ 1.06 $ 0.087 596,197,000 1,279,175,000 46.6% 2,101,000 20,844,000 Number of employees 2,493 2,084 *Includes gains totaling $1 ,968,000 from the sale of aircraft. The Front Cover 12 --1 ~ EMPHIS, TENN ./ Here , ~ Mississippi flows gently. 2. ST. LOUIS , MO. / Continuing as.the Gateway to the West.' 3. WASHINGTON , D.C. / A visitor's city, day or evening . 4. MIAMI BEACH , FLA./ America's playground - year-round. 5. SOUTHERN flies where the fun lies. 6. ATHENS, GA. / Football in Dixie: Georgia-Old Miss. 7. BILOXI , MISS. / Sun , Sand , Surf, Sailing. 8. MOBILE, ALA. / Trolling is exciting on Mobile Bay. 9. HUNTSVILLE, ALA. / A Space Center in a Space City. 10. ATLANTA, GA. / Football, Basketball, Hockey, Henry Aaron. 11 . COLUMBUS, GA. / Gary Player wins the Southern Open . 12. CHICAGO, ILL. / The Financial District: First National Bank of Chicago. Background/ATLANTA, GA. Contents Route Map/ inside front cover Financial Highlights/ page 3 Report to Stockholders/ page 4 Form 1 0-K / special insert Directors, Officers, and General Information/ inside back cover 3 I "The service we offer must be of superior quality . . . " - Frank W. Hulse 4 Report to Stockholders This year, we are expanding our annual report to include the most easily interpreted corporate analysis available-the Form 10-K, a document required to be filed annually with the Securities and Exchange Commission. Although Southern has always made this information available to those requesting it, we believe the many complexities facing the airline industry require broader explanations and interpretations than a conventional report normally provides. Additionally, we believe that stockholders, the financial comrnunity, and the customer public will benefit from this form of tactual reporting. The program announced a year ago to significantly increase and improve our service now has been completed . Our jet fleet has been expanded by more than 50 per cent and today more than 85 per cent of Southern's passengers are served with DC9 aircraft. The past year had a strong beginning - a healthy economic outlook prevailed . Passenger travel forecasts indicated continued growth, justifying our decision to add 13 DC9 aircraft. The growth trend held until mid-year when we observed a softening in travel patterns. By August, there was a definite decline. Although Southern's gains were well ahead of the previous year, we were behind in our projected expansion rate. Concurrent with the traffic decline was a rapidly increasing shortage of fuel with an uncertain outcome. As a result, we believed immediate action was necessary. Staffing reductions were made during September and October and schedules were revised effective October 28 and December 1. By the time the airline industry was faced with the full effect of the energy problem and the massive layoffs and major schedule reductions that followed, Southern had pared its schedules in orderly stages and minimum employee reductions were necessary. These schedule reductions, keeping us within limitations of fuel allotments and the reduced needs of our customers, led to our decision to withdraw from service four of the jets we had acquired earlier in the year. Sale results in profit When Southern entered an agreement in August 1972 to purchase the 13 DC9s, we recognized there would be a ready market for any of these aircraft that might prove surplus to our requirements. We were able to sell the four aircraft removed from our service at an aggregate profit of $1 ,968,000. This enabled us to offset what would otherwise have been a loss of $1 ,539,000 for the year 1973, producing a net profit of $417,000 after taxes. Even after reducing operations below the planned level, we generated record revenues of $83.6 million. Revenue passenger miles increased 21 per cent and reached a record 721 million . This was made possible by available seat miles rising 28.5 per cent to 1.6 billion, a new high. Another result of our jet expansion has been the continued reduction of our piston fleet . At the beginning of 1973, 13 Martin aircraft were being used and by May 197 4 only eight will be scheduled . As we have phased out these aircraft, we have found markets for them and they have been disposed of at a profit . With a current jet fleet totaling 24 DC9s, Southern has become the dominant carrier in new key markets. In Mobile, Ala., Southern has extended service to New York, N.Y., via Washington , D.C., and has expanded other Mobile service to become the primary carrier in that city. Memphis, Tenn ., now second only to Atlanta, Ga., in passenger boardings for Southern , has seen the Company emerge as the number two carrier among 10 airlines. In the Orlando-Miami, Fla., market, Southern leads in passengers carried . Nashville, Tenn ., has become a major focal point on the Southern system . At the same time, we have greatly improved our pattern of service to many other system points. More importantly, however, even with restrictions imposed as a result of fuel shortages and the corresponding rising fuel costs, we have maintained service adequacy throughout our system . This has been accomplished by scheduling to meet the demands of the cities and communities we serve. It is anticipated that our growth in the near future will occur primarily on our existing system . The Civil Aeronautics Board has indicated that no new routes will be awarded in the immediate future except in very unusual circumstances. In the meantime, we are diligently pursuing our applications currently pending before the Board including authority between Nashville and Detroit, as well as between Atlanta on the one hand and both Detroit and Cleveland on the other. Another matter of considerable importance emanating from the Civil Aeronautics Board is public service revenue. The Congress continues to recognize the importance of scheduled airline service to small communities, many of which could not justify such service without Federal subsidy. The Board has realistically acknowledged that a $2 million ransom paid by Southern in a hijacking in 1972 should be considered a necessary operating expense and should be reflected in the amount of public service revenue Southern receives in ensuing years, or until the funds are returned by the Republic of Cuba. The accounting treatment being accorded this item is explained on page 20A of the Form 10-K. Our efforts to recover this ransom from the Republic of Cuba continue and any payment received under the subsidy formula will be returned to the United States Government when the funds are recovered . As a result of this hijacking , security measures have been introduced throughout the airline industry and the Republic of Cuba has agreed to return subsequent hijackers for trial . Accordingly, no successful hijacking has occurred in the United States in more than a year, removing one of the most significant threats to a viable domestic airline system . Fuel shortage faced During 1973 we were still faced with the previously mentioned industry-wide fuel shortage. Localized fuel shortages were experienced from time to time at various cities on our system . Through the schedule reductions referred to previously and operating economies adopted by our flight division to conserve fuel , we were able to obtain sufficient fuel to cover our reduced needs. Our greatest problem today is inf lat ion led by accelerating fuel prices. The average price of jet fuel has soared from 11 .6 cents a gallon in January 1973 to approximately 21 cents in March 197 4. Each one cent a gallon increase costs Southern an additional $750,000 annually. Clearly, these costs could not be absorbed and Southern asked the Civil Aeronautics Board to approve a six per cent fuel surcharge. Other carriers asked for corresponding amounts and the Board acted quickly and wisely in approving a six per cent fuel surcharge to be effective April 16, 197 4. This will go far toward solving the immediate problem. Nevertheless, as contracts expire, fuel prices are expected to rise and, in turn , additional adjustments in fares may be necessary. The Board had earlier granted a five per cent fare increase New York City's Lincoln Center for an evening performance, Washington 's cherry blossoms during an afternoon stroll, or a fly-over view of Manhattan await business or pleasure travelers from Southern 's South. 7 effective December 1, 1973, to compensate the carriers for earlier fuel and other cost increases. The result of final Board orders in the Domestic Passenger Fare Investigation which requires adjustments in fares to become effective July 16, 197 4, has yet to be determined . Nevertheless, it appears there will be some increase of yields in short-haul markets where Southern provides the greatest amount of its service. Also contributing to the outlook for the year is greatly improved traffic, both present and anticipated . Some of this gain is attributed to maturity of routes under development over a long period . Obviously, our expansion during the past year has enabled us to improve ourselves and in turn our image in the eyes of the public. Our growth has attracted more pleasure travelers, a market that we were not previously able to penetrate. Certainly, we can attribute gains to more travelers turning to the airways and off the highways. While future availability of additional automotive gasoline may slow this trend , we expect to retain a large portion of this added traffic as more people become aware of the benefits of our services. Maintenance base under way Supporting our future growth will be a $25.6 million maintenance base and training facility located at Hartsfield Atlanta International Airport . Local airport expansion requires us to vacate present hangar and service buildings. Additionally, these facilities are inadequate to maintain our jet fleet effectively. The City of Atlanta is building the new facility and funding it with airport revenue bonds. Southern has a 30-year lease and an additional 20-year option on what we believe will be one of the most efficient facilities in the industry. The hangar will occupy 86,000 sq . ft . and can house four jet aircraft . Maintenance, supply, office, and related support areas will utilize an additional Teeing off on a Grand Hotel course at Point Clear, Ala., watching the sun set at Biloxi, Miss., dining on Gulf Coast seafood, or trying to catch it, is Southern 's way from Mobile Bay to Gulfport. 9 224,000 sq . ft . In addition to services now performed , we will have greater engine rebuilding capability, enabling us to substantially reduce outside support costs . Construction is scheduled to begin in mid-summer with occupancy early in 1976. Ground facilities improved Other physical improvements across our system , such as our modern terminal facilities in Birmingham , Ala., Jacksonville, Orlando, and Miami , Fla., New Orleans, La., and Pinebelt Regional Airport serving Laurel-Hattiesburg , Miss., are permitting us to offer greatly improved service and convenience to our passengers. This also is making a substantial impact in our program to heighten our public image. In this area, our new corporate identity program , implemented last year, has been highly successful. All of our newly-acquired aircraft now bear the new color scheme and our original jets are acquiring this as we refurbish them . The program has carried over to our ground equipment and airport facilities and has given us a very positive identity that has been well received by the public and a morale booster for our personnel . Because we are seeking a more varied passenger market than before and to improve public awareness of our service, we have selected a highly qualified advertising agency to direct our account . We expect them to inject a new creativity into our advertising and marketing concepts. The agency was selected from among more than 200 considered qualified . We are quick to realize, however, that the service we offer must be of superior quality to attract and retain public support. With this in mind , we have improved an already successful reservations system . More than 97 per cent of our passenger reservations calls now are answered in our Consolidated Reservations Office in Atlanta. Additional leased lines, greater Southern 's Florida extends from Miami Beach to the Panhandle, offering the serenity of Tallahassee's Wakulla Springs and the excited laughter emerging at Orlando 's Walt Disney World. 11 The French Quarter of New Orleans, a pilgrimage in Columbus, Miss. , a home-place in the Bayous, street music during Mardi Gras: this is a Southern way of life. use of Wide Area Telephone Service (WATS) lines, and continued use of a computer that enables us to meet peak load staffing requirements has permitted us to greatly reduce answering time as well as the time needed to assist the calling customer. Similarly, we have continued to upgrade our inf light service and have remained innovative in serving on both short and long flights . Southern recognizes that travelers prefer a tasty snack to a hurriedly served meal . On the other hand , there are some long flights at other than meal times and the introduction of a wine tasting service has received countless comments and letters of praise. Good employee relations Our employment level has increased in the past year by 409 people to a new high of 2,493. Employee morale is higher than ever. We enjoy good labor relations and our people work in a pleasant environment , earning good pay and enjoying excellent fringe benefits. Another area in which we have been fortunate is the support offered by our Board of Directors. It is with deep sadness that I report the death on March 13, 197 4, of Alexander J . Brunini, a member of our Board of Directors since 1951 . Southern Airways and all of us who were privileged to know him have lost a valued friend who, not only as a member of the Board but also in every respect , contributed immeasurably to Southern 's success. He will be sorely missed . Because of our mandatory retirement age, Director Francis D. Schas has been elevated to senior director status. Fortunately, we will retain the 13 14 wisdom of his counsel. Mr. Schas has been a director for 14 years during which time he never missed a board meeting , truly indicative of the loyalty of our board members. This year Southern celebrates its 25th anniversary - June 10. In th~ past quarter-century we have emerged from a feeder airline with one flyable DC3 and 36 employees into a major factor in air travel throughout , from , and to the South . Southern competes favorably Today, we are competing with the largest air carriers in the United States in some of the most sophisticated air markets in the world . And , we are competing favorably. The experience we have gained and innovations we have implemented will go far toward our accomplishments in the future. The current outlook for 197 4 is favorable. Revenue passenger miles during the first three months of this year exceeded the similar 1973 period by 38 per cent on a 25 per cent increase in capacity. Although traffic may not continue to increase at this pace, as explained earlier, we expect to show significant gains over 1973. The continued dedication of our employees and the support given by the traveling public cause me at the beginning of our 26th year to be optimistic. It is with deep appreciation that I look back upon the support given Southern by its loyal employees and customers during the past quarter- century. Because of such support, it is with confidence that I look forward to your Company's future. April 8, 197 4 Southern 's F!ightMark and Chicago's Picasso: the Deep South is linked with the Windy City. ,... Frank W. Hulse President As filed with the Securities and Exchange Commission SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1973 Commission File Number 0-842 SOUTHERN AIRWAYS, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Hartsfield Atlanta International Airport Atlanta, Georgia (Address of principal executive offices) 58-0546353 (I. R. S. Employer Identification No.) 30320 (Zip Code) Registrant's telephone number, including area code: A.C. 404-766-5321 SECURITIES REGISTERED PURSUANT TO SECTION 12(h) OF THE ACT: TITLE OF EACH CLASS NONE NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (Par Value $2.00) (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES~ NO FORM 10-K Report for the Year Ended December 31, 1973 ITEM 1. Business Southern Airways, Inc. (the "Company") is engaged in scheduled air transportation of persons, property and mail, serving cities in the states of Alabama, Florida, Georgia, Illinois, Louisiana, Mississippi, Missouri, New Jersey, New York, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia pursuant to a permanent certificate of pub- lic convenience and necessity issued by the Civil Aeronautics Board (the "CAB"). The Com- pany is one of eight certificated scheduled airlines which operate in interstate commerce and serve cities of small and intermediate size as well as major metropolitan areas (hereinafter re- ferred to as the "Local Service Carriers"), as distinguished from the ten major domestic air- lines, herein referred to as "Trunk Carriers." In common with other Local Service Carriers, the Company receives a subsidy from the Federal Government for rendering service to small and intermediate size cities on its routes. There were no material changes in the Company's route structure during 1973. At December 31, 1973, the Company had a fleet consisting of twenty.:four Douglas DC-9 twin fanjet aircraft and fourteen Martin-404 piston-powered twin engine aircraft. Due to the uncertainty as to the long-term availability of sufficient fuel to carry out expanded schedules and a less-than-anticipated traffic growth rate in 1973, in November and December 1973, the Company sold, at a gain, four of the thirteen DC-9-14 jet aircraft purchased earlier in 1973 from another airline (see Item 3 and Note H of Notes to Financial Statements). Also, in late 1973, the Company-laid off 150 employees, including 42 pilots. At December 31, 1973, the Com- pany had 2,493 employees. 2A Effective December 27, 1973, the Federal Energy Office issued Mandatory Fuel Alloca- tion Regulations, which were implemented on January 15, 1974. These regulations provide that the Company, as a Local Service or Regional Air Carrier, is to receive an amount of fuel equal to 100 % of its base period consumption. The base period for aviation fuels is the corresponding month in calendar year 1972, or as may be adjusted by the Federal Energy Office. This alloca- tion, if obtainable, would be sufficient to enable the Company to provide the reduced level of schedules now programmed for 1974. While the Company presently has contracts for the sup- ply of its fuel requirements from major oil companies, which run through May 31, 1975, there can be no assurance that the Company will be able to obtain its required fuel in the future, or be able to obtain fuel at the prices provided for in its contracts. Gulf Oil Company has an- nounced that it does not intend to supply fuel pursuant to its existing contracts with various airlines, and will make sales in the future only at spot prices considerably in excess of the price per gallon the Company has been paying. Any reductions in fuel supplies and/ or in- creases in fuel prices could have a material adverse effect on the operations and earnings of the Company. The Company is subject to competition in varying degrees between all of the points served by it either by surface carriers or other air carriers. There are a number of Trunk Carriers op- erating over certain of the Company's route segments. All of these Trunk Carriers are substan- tially larger than the Company in size and financial resources and some use newer and larger aircraft over these route segments. The Company is also subject to competition over certain of its route segments from Local Service Carriers and from small aircraft operators such as "air taxi" services. The Company's traffic levels evidence a significant degree of seasonality, gener- ally reaching their highest levels in mid-summer and their lowest levels in mid-winter. Compliance with statutory requirements respecting environmental quality, and settlements of related actions, may necessitate significant capital outlays, may materially affect the earn- ings power of the airline industry and the Company and may cause material changes in the business. 3A ITEM 2. Summary of Operation~ STATEMENTS OF OPERATIONS The following statements of operations of Southern Airways, Inc. for the five years ended December 31, 1973 and the related statements of stockholders' equity for the same period have been examined by Ernst & Ernst, independent accountants, whose report thereon (which is sub- ject to the recovery of the hijacking payment as explained in Note B of Notes to Financial Statements) appears elsewhere in this Form 10-K Annual Report. These statements should be read in conjunction with the related financial statements and notes thereto included elsewhere in this Form 10-K Annual Report. Year Ended December 31, 1969 1970 1971 1972 1973 (In Thousands of Dollars Except Per Share Amounts) OPERATING REVENUES Passenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,050 Mail, express and freight . . . . . . . . . . . . . . . . . . . 2,163 Public service revenue (B) . . . . . . . . . . . . . . . . . 3,580 Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,358 Other operating revenues - net . . . . . . . . . . . . 684 OPERATING EXPENSES (J) Flying operations .......................... . Maintenance (F) (2) ....................... . Aircraft and traffic servicing ............. . Passenger service .......................... . Promotion and sales ....................... . General and administrative ................ . Depreciation and amortization (A) (F) (2) OPERATING INCOME (LOSS) ..... . OTHER DEDUCTIONS AND INCOME Interest on long-term debt - net of interest capitalized ( 4) ............... . Gain on disposal of aircraft (H) ........... . Miscellaneous deductions (income) - net (5) ..................... . INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY CREDIT ...... . INCOME TAXES (CREDIT) (A) (D) Current: Federal .................................. . State .................................... . Deferred (6) ............................... . Investment credit .......................... . 37,835 12,659 6,111 9,079 1,875 3,003 2,286 2,396 37,409 426 1,719 16 (1,309) ( 487) INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT . . . . . . . ( 822) TAX BENEFITS OF NET OPERATING LOSS CARRYFORWARD (D) ........... . NET INCOME (LOSS) .................. $( 822) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (7) Primary: Income (loss) before extraordinary credit .................... $( .80) Extraordinary credit .................... . Net income (loss) ........................ $( .80) Fully Diluted: Income before extraordinary credit ...... . Extraordinary credit .................... . Net income .............. .. .............. . RATIO OF INCOME TO FIX-ED CHARGES (8) . . . . . . . . . . . . . . . . . . . . .58 4A $37,187 2,866 4,823 3,835 736 49,447 18,072 9,045 11,351 2,661 4,274 3,192 2,632 51,227 (1,780) 1,789 ( 236) 1,553 (3,333) (3,333) $(3,333) $( 3.25) $ ( 3.25) .18 $45,302 3,090 6,974 4,067 901 60,334 20,950 10,808 13,523 3,774 4,774 3,461 2,637 59,927 407 1,678 23 1,701 (1,294) ( 235) ~ ) (1,059) $(1,059) $( 1.02) $( 1.02) .70 $52,052 3,531 7,138 4,839 1,077 68,637 22,431 11,890 15,433 4,343 5,304 3,784 2,559 65,744 2,893 1,362 ( 110) 1,252 1,641 762 81 ( 393) 450 1,191 409 $ 1,600 $ .77 .29 $ 1.06 $ .60 .20 $ .80 1.39 $65,949 4,320 6,814 5,358 1,129 83,570 26,227 15,171 20,009 5,678 6,713 4,610 3,673 82,081 1,489 3,083 (1,968) 55) 1,060 429 194 24 109) 109 320 97 $ 417 $ .15 .08 $ .23 1.07 NOTES TO STATEMENTS OF OPERATIONS ( 1) Alphabetical references ref er to the Notes to Financial Statements appearing elsewhere in this Report. (2) During 1970 the Company redetermined the estimated economic useful life of Martin- 404 aircraft and related equipment. (See Note A of Notes to Financial Statements). This change had the effect of increasing the provision for maintenance approximately $206,000, increasing the provision for depreciation approximately $74,000, and increasing the net loss approximately $280,000 ($.27 per share) for the year ended December 31, 1970. During 1970 the Company changed its pension plans from deposit administration plans to trustee self-administered plans, increased employee benefits payable under one plan, and changed actuarial assumptions used in computing pension costs. This change had the effect of decreasing pension costs and the net loss approximately $340,000 ($.33 per share) for the year ended December 31, 1970. (3) Pension expense, including amounts paid under a defined contribution plan, were as follows: 1969 $774,638 1970 $661,734 Year Ended December 31, 1971 $868,779 1972 $1,211,687 1973 $1,540,017 Effective July 1, 1972, the Company modified one of the plans to provide for improved benefits, with a related increase in annual pension expense of approximately $230,000. ( 4) Interest capitalized aggregated $102,894 in 1969 and $80,289 in 1973. Amounts in other years have been insignificant. ( 5) Includes, in 1970, insurance proceeds (net of applicable expenses) of $286,609 from loss of leased aircraft. (6) The Company has completed a previously planned change in the depreciation method and lives applicable to certain assets for income tax purposes. Because of these changes and the carry-forward of the 1971 operating loss, deferred taxes ($235,000) provided in a prior year. will not be paid and, accordingly, were recognized as an income tax credit in the Statement of Operations for 1971. (7) Primary earnings per share for the year ended December 31, 1973 were computed by dividing net income, after reduction for the preferred dividend requirement, by the weighted average number of common shares outstanding during the year - 1,314,016 shares. For the three years ended December 31, 1971 losses per share were computed by dividing net loss by the weighted average number of common shares outstanding each year - 1,024,871 (1969 and 1970) and 1,035,048 (1971). During these three loss years, there were no preferred dividend requirements. Common equivalent shares and adjust- ments resulting from their assumed exercise were excluded from the above computations since their inclusion would have increased earnings per share in 1973, and would have de- creased losses per share during the three years ended December 31, 1971. Primary earn- ings per share for the year ended December 31, 1972 were computed by dividing net income (adjusted as described below and reduced by the preferred dividend requirement) by the weighted average number of common shares and common equivalent shares out- standing during the year - a total of 1,439,517 shares. Common equivalent shares for 1972 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 and cancelled July 25, 1973) in excess of 20% of the number of common shares outstanding 5A ITEM 2. Summary of Operations - Continued at the end of 1972. rocee s from t e 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 year were assumed to have been applied to debt reduction and the related interest (net of income tax effect, where appli- cable) was added to income for purposes of the calculation. Primary earnings per share for 1973 would have been $.25 had the 24,772 shares of Series A Convertible Preferred Stock converted during the year and the $1,167,000 of 6 % Convertible Subordinated Debentures converted on October 1, 1973 been converted on January 1, 1973. Fully diluted earnings per share for the year ended December 31, 1972 were determined on the assumption that the weighted average number of common and common equivalent shares for that year was further increased from the beginning of the period by conver- sion of outstanding convertible debentures and convertible pref erred stocks and by exer- cise of the warrants for 126,000 shares issued prior to June 1, 1969 and cancelled July 25, 1973 - 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 de- bentures assumed converted and debt assumed to be retired from the proceeds of exer- cising the additional warrants was added to income for purposes of the calculation. The assumed conversion of convertible securities in years other than 1972 would not have been dilutive. (8) For purposes of this ratio: (a) income was determined before reduction for income taxes and fixed charges; (b) fixed charges comprise total interest expense, amortization of long-term debt expense, and one-third of the total rentals and landing fees. 6A ITEM 2. Summary of Operations - Continued STATEMENTS OF STOCKHOLDERS' EQUITY Five Years Ended December 31, 1973 Pref erred Stock Common $1 Par Value Stock Series A Series B $2 Par Value Balance, January 1, 1969 ................... $ $ $2,049,742 Net loss .................................. Balance, December 31, 1969 ................ 2,049,742 Net loss .... .......... . .. . ................ Balance, December 31, 1970 ............... . 2,049,742 Net loss .... . ............................. Preferred Stock sold ..................... 290,781 166,667 Common Stock issued upon conversion of Preferred Stock ......... (36,895) 73,790 Balance, December 31, 1971 ................ 253,886 166,667 2,123,532 Net income . ... ........................... Common Stock issued upon : Conversion of Preferred Stock ......... (63,783) 127,566 Conversion of $1,000,000 principal amount of 6 % Convertible Subordinated Debentures, less $53,692 def erred finance cost ................ 200,000 Conversion of $337,000 principal amount of 5 % Convertible Subordinated Debentures, less $8,144 deferred finance cost ......... 62,046 Exercise of stock purchase warrants .. 29,238 Balance, December 31, 1972 ................ 190,103 166,667 2,542,382 Net income ............................... Common Stock issued upon: Conversion of Preferred Stock ......... (24,772) 49,544 Conversion of $1,167,000 principal amount of 6 % Convertible Subordinated Debentures, less $54,876 deferred finance cost ................ 233,400 Balance, December 31, 1973 ................ $165,331 $166,667 $2,825,326 7A Other Retained Paid-In Earnings Capital (Deficit) $1,229,523 $ 1,790,484 ( 821,928) 1,229,523 968,556 (3,333,212) 1,229,523 (2,364,656) (1,058,784) 2,179,931 (36,895) 3,372,559 (3,423,440) 1,600,317 (63,783) 746,308 266,810 116,076 4,437,970 (1,823,123) 416,748 (24,772) 878,724 $5,291,922 $(1,406,375) ITEM 3. Properties Aircraft On December 31, 1973, the Company's fleet consisted of twenty-four DC-9 jet aircraft (including nine aircraft acquired in 1973) and fourteen Martin-404 piston aircraft. Some of the Company's aircraft are owned and some are leased. The Company is engaged in a program of permanently reducing the use of the Martin-404 aircraft. Aircraft removed from service have been sold or dismantled. The Company recently sold four of the thirteen DC-9-14 jet air- craft acquired by it during 1973 (see Note H of Notes to Financial Statements). The follow- ing table lists the aircraft owned and leased by the Company as of December 31, 1973: Type of Aircraft Owned DC-9-14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 DC-9-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 DC-9-31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 M-404 .................... . ........... 14 Average Age (Years) 7.5 6.5 4.7 24.0 Average Passenger Leased Age (Years) Capacity 5(b) 7.5 75 3(a) 5.7 75 3 (c) 4.4 95 40 (a) These aircraft are leased for 12-year terms ending in 1980 at an annual rental of ap- proximately $363,465 each. (b) These aircraft are leased under long-term leases terminating in 1979 at an annual rental of approximately $390,000 each. (c) One of these aircraft is leased for a 12-year term ending in 1981 at an annual rental of approximately $470,735. The remaining two aircraft were leased in June 1971 for 12- year terms ending in 1983, at annual rentals of approximately $605,538 each. All of the Company's aircraft, engines, propellers, and spare parts are mortgaged to col- lateralize notes payable to banks. All of the aircraft of the Company and other airborne equipment are in good condition, and are deemed appropriate and adequate for present operations. Other Property The general offices of the Company in the International Office Park adjacent to the Hartsfield Atlanta International Airport occupy 45,700 square feet of space at an annual rental of $164,000 under leases having between 2 and 5 years to run, and approximately 18,100 square feet in a nearby office building at a current annual rental of approximately $96,000. These facilities house the Company's general offices and reservations, communications and flight dispatch departments for the entire system. The Company leases various hangar and shop facilities at the Hartsfield Atlanta Inter- national Airport occupying approximately 140,542 square feet, plus adjacent land of approxi- mately 500,000 square feet, for annual rentals aggregating approximately $55,800. Most of the operational facilities at Atlanta are leased from the City of Atlanta, and the majority of the space leased is under agreements with from 1 to 20 years to run. On January 2, 1974, the Company entered into an agreement with the City of Atlanta to lease a 310,000 square-foot jet base and maintenance center to be constructed at the Hartsfield Atlanta International Airport. Estimated costs, annual rentals, and occupancy (rental com- mencement) dates are as follows : 8A Estimated Costs Land ................................ . ......... $ 1,506,285 Phase One Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7,511,000 Phase Two Facilities .......................... 16,608,000 $25,625,285 Estimated Annual Rental $ 120,503 545,665 1,214,120 $ 1,880,288 Approximate Occupancy (Rental Commencement) Dates January 2, 1974 October 1, 1975 April 1, 1976 Cost of the Phase One and Phase Two Facilities is to be financed by the City through the issuance of Airport Extension and Improvement Revenue Bonds. The lease extends for a period of 30 years from October 1, 1975 or the date of beneficial occupancy of the Phase One Facil- ities, whichever occurs first, and may be renewed at the Company's option for an additional term extending to January 1, 2024. The Company leases office and ticketing space at the different airports from which it operates, and in downtown locations in some of the cities which it serves. The aggregate an- nual rental for such facilities, including the premises and facilities at the Hartsfield Atlanta International Airport not related to the general operations of the Company, is approximately $1,037,000. The Company leases computer and message switching equipment at an annual rental of approximately $700,000 and has contracted to receive passenger reservations services through 1977. Charges for the reservations services exclusive of related computer and message switch- ing equipment rentals ($490,000 in 1973) is based upon the number of unduplicated passen- gers. The Company owns ramp, passenger service and ground communications equipment, shop tools and equipment, automobiles and trucks, furniture and fixtures and underground fuel storage facilities located at various airports. All the Company's ground equipment and other property is in good condition, and is deemed appropriate and adequate for present operations. ITEM 4. Parents and Subsidiaries The only person who owned of record or, to the best knowledge of the Company, owned beneficially more than 10% of the Common Stock of the Company as of December 31, 1973 was Frank W. Hulse, President and a Director, Hartsfield Atlanta International Airport, At- lanta, Georgia. On that date, Mr. Hulse and members of his immediate family owned of record and beneficially 144,164 shares or 10.2 % of the total shares of Common Stock outstanding. In addition, Mr. Hulse is a trustee and beneficiary of a pension trust of a company controlled by him which owned 2,000 shares or .1 % of the Common Stock, and 2,000 shares of Series A $0.36 Convertible Preferred Stock, representing 1.2 % of the outstanding Series A shares, with 2,000 Common Stock Purchase Warrants attached. Mrs. Hulse owns $1,000 of 5% % Convertible Subordinated Debentures of the Company. Mr. Hulse also owns 8,333 shares of Series A $0.36 Convertible Preferred Stock, representing 5.0 % of the outstanding Series A shares, with 8,333 Common Stock Purchase Warrants attached, and $661,000 of 6 % Con- vertible Subordinated Debentures convertible into 66,100 shares of Common Stock. As executor of the Estate of Richard A. Trippeer, Richard A. Trippeer, Jr., a Director of the Company, owned as of December 31, 1973, 26,505 shares of $0.36 Series A Convertible Preferred Stock or 16.0 % of the Company's outstanding Series A Convertible Preferred Stock. As of December 31, 1973, Mr. Trippeer also owned $661,000 of the Company's 6 % Converti- ble Subordinated Debentures convertible into 66,100 shares of Common Stock of the Company, and individually and as executor of the Estate of Richard A. Trippeer, owned 32,793 shares of Common Stock of the Company and $60,000 of the Company's 5% % Convertible Subordinated Debentures convertible into 5,524 shares of Common Stock of the Company. 9A As of December 31, 1973, the Officers and Directors of the Company and their associates, as a group, owned beneficially 330,140 shares of Common Stock, representing 23.4% of the outstanding shares of Common Stock; 73,886 shares of Series A $0.36 Convertible Preferred Stock, representing 44. 7 % of the outstanding Series A, with 73,886 Common Stock Purchase Warrants attached; $169,000 principal amount of the 53/1, % Convertible Subordinated Deben- tures, representing 3.9% of the outstanding 53/4 % Debentures; and $4,436,000 principal amount of the 6% Convertible Subordinated Debentures, representing 76.1 % of the outstanding 6 % Debentures. The Company has no subsidiaries. ITEM 5. Pending Legal Proceedings On July 9, 1970, the United States Court of Appeals for the District of Columbia Circuit held unlawful the fare increase effective October 1, 1969 of some 6.35 % for all domestic sched- uled air carriers including the Company. Subsequently, several suits (in some of which the Company is a named defendant) were filed as class actions by individuals in California, Illi- nois, and the District of Columbia seeking "reparations" in the amount of the increased amount of the fares paid during the period October 1, 1969 to October 15, 1970 when new carrier tar- iffs became effective. These suits, consolidated for pretrial proceedings in the United States District Court for the Northern District of Illinois, Eastern Division, by the Judicial Panel on Multi-district Litigation, were stayed until further order of the Court pending decision by the CAB in a proceeding called Reasonableness of Passenger Fares Charged by Domestic Trunk- line and Local Service Carriers From October 1, 1969 Through October 14, 1970 as to the reasonableness of the fares during the period in question. On July 13, 1973, the CAB issued an order finding that fares in effect during the period at issue were not unjust or unreason- able. On December 10, 1973, the United States District Court for the Northern District of Illinois dismissed with prejudice the "reparations" suits as being moot in view of the CAB decision. Petitions for review of the CAB order have been filed in the U.S. Court of Appeals for the District of Columbia, and the dismissal of the "reparations" suits has been appealed to the United States Court of Appeals for the Seventh Circuit. The Company and nine other airlines are defendants in a class action suit brought in the United States District Court for the Central District of California. Plaintiffs seek to recover alleged overcharges resulting from the claimed improper calculation of interline fares, as well as exemplary damages. A motion has been made to consolidate this suit with all other similar actions pending in other federal courts. The Company, along with twenty-three other air cargo carriers and handlers serving the New York City area, is a party to a suit filed on February 10, 1971 in the Federal District Court for the Southern District of New York by Breen Air Freight, Ltd. and Mercury Air Freight, Inc., which alleges discrimination by defendants against the plaintiffs in restraint of trade and seeks trebel damages for alleged discrimination. The Company and twenty-three other air carriers have also been served with a similar complaint in an action in the same Court by Airfreight Haulage Co., Inc. The Company, along with nineteen other air carriers, is a defendant in a suit brought early in 1973 in the Supreme Court of the State of New York, New York County, by three travel agencies seeking injunctive and declaratory relief preventing the airlines from terminating their agency status and from asserting pecuniary liability against the agents with respect to certain airline tickets alleged to have been stolen from the premises of the plaintiffs and subse- quently accepted by defendants for air transportation. On October 18, 1973, the Appellate Divi- sion, First Department of the State of New York, affirmed the Supreme Court's ruling dis- lOA missing the suit and directing the parties to arbitrate the issue of whether the agency status of the three travel agencies should be dismissed. On July 11, 1973, J. H. Troutman and W. C. Troutman filed an action in Fulton County Superior Court, Fulton County, Georgia, against the City of Atlanta and nine scheduled airlines using the Hartsfield Atlanta International Airport, including the Company. The complaint al- leges that maintenance of the airport by the City and use of the airport by the airlines has caused damage to, diminution in value of, and loss of rental from their apartment complex lo- cated nearby, in the amount of $640,000. The complaint also seeks punitive damages in the amount of $100,000. On November 14, 1973, Frank W. Scroggins, Trustee in Bankruptcy for Air Transfer, Inc., filed suit against the Company, and the other carriers serving the Hartsfield Atlanta Inter- national Airport, along with Air Cargo, Inc. and Carolina Cartage, Inc., on the grounds that they had engaged in acts violating the anti-trust laws of the United States by keeping Air Transfer, Inc. from being able to fulfill contracts relating to domestic air freight at the At- lanta airport. Plaintiff seeks from the various defendants the sum of $450,000. On January 31, 1974, Charles V. Welden, Jr. filed a suit against the Company in the United States District Court for the Northern District of Alabama, Southern Division, in which he alleges that the Company refused him transportation on a flight from Birmingham to Mo- bile on January 21, 1974 alleging that he held a confirmed reservation and that the flight was full when he arrived at the airport and he was not furnished transportation. This plaintiff seeks to recover compensatory and punitive damages in the sum of $100,000. He further seeks to recover an additional $100,000 as compensatory and punitive damages for unjust discrimina- tion or undue or unreasonable prejudice or disadvantage, and finally seeks to recover an ad- ditional $100,000 of damages on the grounds that the representations of the defendant as to the confirmation of the reservation were false and known by the defendant to be false at the time made to the plaintiff. The Company filed its answer to this complaint on February 22, 197 4. The Company has been named as a defendant in a suit brought in November 1973 in the Los Angeles County Superior Court, State of California, against the Air Traffic Conference and its individual carrier members seeking punitive and actual damages for alleged interference with prospective and existing contractual relationships, intentional infliction of emotional dis- tress and trauma and deprivation of and interference with civil rights. The Air Transport Association, the Air Traffic Conference and most of its members, in- cluding the Company, are defendants in a suit brought in the United States District Court, Northern District of California, which seeks treble damages for alleged unlawful combina- tion and conspiracy to restrain and monopolize interstate commerce and an injunction pro- hibiting the suspension of plaintiffs as travel agencies. The Company's tax returns for 1968 and 1969 have been audited, but not yet reported upon, by the Internal Revenue Service. There have been no claims or adjustments proposed for any years subsequent to 1967 which would have any material effect on the Company's fi- nancial position or results of operations. The foregoing summary of litigation and similar matters as of February 7, 1974 does not include proceedings in which the Company is an applicant for additional route awards or industry-wide rate hearings to determine future rates for various classes of service to which the Company is also a party, nor does it include matters the defense of which is being handled by the Company's insurance carriers or by others pursuant to contractual agreements. In the opinion of management the foregoing suits will have no material effect on the Company's fi- nancial position as of December 31, 1973 or results of operations for the years then ended. llA ITEM 6. Increases and Decreases in Outstanding Equity Securities Preferred Stock Common $1 Par Value Stock Shares Outstanding, January 1, 1973 ...................... ...... . . Common Stock issued upon: Conversion of Preferred Stock, April 10 through October 30, 1973 ........................................... . Conversion of $1,167,000 principal amount of 6 % Convertible Subordinated Debentures on October 1, 1973 Shares Outstanding, December 31, 1973 ........... ... ........... . . Series A 190,103 ( 24,772) 165,331 ITEM 7. Approximate Number of Equity Security Holders Series B $2 Par Value 166,667 1,271,191 24,772 116,700 166,667 1,412,663 The following table sets forth the number of equity security holders of the registrant as of December 31, 1973. Title of Class Convertible Subordinated Debentures : Number of Record Holders 5 %, due December 1, 1981................................................................... 608 6 %, due November 1, 1983 ........................ :.......................................... 401 Convertible Preferred Stock: Series A, $.36 (Par value $1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 Series B, $.36 ( Par value $1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Common Stock (Par value $2.00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,495 Warrants: Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 Series B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 8. Executive Officers of the Registrant Name and Year First Elected Officer Frank W. Hulse (1943) Graydon Hall (1961) George M. Gross (1969) J. Kenneth Courtenay ( 1961) A. L. Maxson (1968) Victor C. Pruitt (1972) Frank H. Wheeler (1972) Thomas A. Wiley, Jr. (1967) Title President and Director Executive Vice President, General Manager & Director Vice President, Associate General Manager & Director Vice President-Economic Regulations and Secretary Vice President-Fiscal and Treasurer Vice President-Technical Services Vice President-Sales and Services Vice President-Marketing Age at December 31, 1973 61 52 47 46 38 50 33 47 There is no family relationship between any of the above officers. All executive officers are elected annually by the Board of Directors to serve until the next annual Board of Directors meeting held following the annual stockholders meeting on the first Monday of May of each year. There are no known arrangements or understandings between any executive officer and any other person pursuant to which any of the above-named persons was selected as an officer. 12A All of the executive officers have been in the employ of the Company for more than five years, with the exception of Messrs. Pruitt and Wheeler. Mr. Pruitt joined the Company in 1969 after serving 28 years in the Air Force, where he attained the rank of Lieutenant Colonel and command pilot status and directed a major logis- tics and material activity. With the Company, he held positions as Director-Systems Planning, Assistant Vice President-Systems Planning and Assistant Vice President-Technical Services before being elected Vice President-Technical Services in May 1972. Mr. Wheeler held marketing supervision and corporate development positions with Hooker Chemical Company in New York before joining the Company as Assistant to the President in 1969. He subsequently became Director of Sales Development prior to being appointed to head the Company's Sales Department in 1970. He was elected Assistant Vice President-Sales in 1971 and became Vice President-Sales and Services in July 1972. All of the executive officers have served during their entire terms as officers in the ca- pacities indicated by their titles, with the exceptions of Messrs. Hall and Gross. Mr. Hall was Vice President-Sales and Senior Vice President prior to being elected to his current position in 1969. Mr. Gross headed the Company's Maintenance Division prior to becoming Vice President- Maintenance (now Technical Services) in 1969 and then Associate General Manager in 1970. ITEM 9. Indemnification of Directors and Officers Pursuant to the provisions of Section 145 of the General Corporation Law of the State of Delaware, every corporation created thereunder has the power to indemnify any and all of its Directors, officers, employees or agents, including former Directors or officers, against ex- penses, judgments, fines and amounts paid in settlement actually and reasonably incurred by any such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation. The Board of Directors of the Company on May 6, 1968 adopted a resolution authorizing the Company to reimburse or indemnify each past, present or future Director, of- ficer or employee of the Company, and each person who may have served, is serving or may serve as a Director, officer or employee of any other corporation at the request of the Com- pany because of the Company's interest in such corporation as a shareholder or creditor to the extent and in the method, and as authorized by Section 145 of said law, and providing that the standard of conduct for the Company's Directors, officers, employees or agents be the same as that set out in Section 145 of said law. This resolution is still in full force and effect. ITEM 10. Financial Statements and Exhibits (a) Financial Statements The following financial statements and schedules are filed as part of this report: Report of Independent Accountants Balance Sheets - December 31, 1973 and 1972 Statements of Operations - For the five years ended December 31, 1973 (included in Item 2) Statements of Stockholders' Equity - For the five years ended December 31, 1973 (included in Item 2) Statements of Changes in Financial Position - For the five years ended December 31, 1973 13A Notes to Financial Statements Schedule II - Amounts Receivable from Underwriters, Promoters, Directors, Officers, Employees, and Principal Holders of Equity Securities for the year ended Decem- ber 31, 1973 Schedule V - Property and Equipment for the years ended December 31, 1973 and 1972 Schedule VI - Allowances for Depreciation and Maintenance of Property and Equip- ment for the years ended December 31, 1973 and 1972 Schedule VII - Part B - Preoperating Expenses and Similar Deferrals for the years ended December 31, 1973 and 1972 Schedule XII - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1973 and 1972 All other schedules (Nos. I, III, IV, VIII, IX, X, XI, XIII, XIV, XV, XVI, XVII, XVIII and XIX) for which provision is made in the applicable regulation of the Securi- ties and Exchange Commission are not required under the related instructions or are inap- plicable, and therefore have been omitted. (b) Exhibits The following exhibits are filed as part of this report: 1. Computations of Earnings per Common and Common Equivalent Share. 2. Computation of Ratio of Income to Fixed Charges. Items 11 through 15, constituting Part II of the Form 10-K, have been omitted from this Report pursuant to the provisions of Instruction H to Form 10-K, since a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 will be filed within 120 days after the close of the fiscal year. SIGNATURES Pursuant to the requirements of Section 13 or 15 ( d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN AIRWAYS, INC. By A. L. Maxson, Vice President-Fiscal and Treasurer Dated: March 31, 197 4 14A REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Southern Airways, Inc. Atlanta, Georgia We have examined the balance sheets of Southern Airways, Inc. as of December 31, 1973, and December 31, 1972, the related statements of operations, stockholders' equity, and changes in financial position for the five years ended December 31, 1973, and the schedules listed in response to Item 10 (a). 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 aforementioned financial statements present fairly the finan- cial position of Southern Airways, Inc. at December 31, 1973, and December 31, 1972, and the results of its operations, changes in stockholders' equity, and changes in financial position for the five years ended December 31, 1973, in conformity with generally accepted accounting prin- ciples applied on a consistent basis. Further, it is our opinion, subject to the recovery of the aforementioned hijacking payment, that the accompanying schedules present fairly the infor- mation set forth therein in compliance with the applicable accounting regulations of the Secu- rities and Exchange Commission. Atlanta, Georgia February 25, 1974 ERNST & ERNST 15A SOUTHERN AIRWAYS, INC. BALANCE, SHEETS ASSETS December 31, 1973 1972 CURRENT ASSETS Cash, including short-term investments of $3,900,000 in 1972 - Note C ....... $ 8,068,694 Accounts receivable U. S. Government- Transportation and public service revenue 2,146,684 Trade receivables, less allowance for doubtful accounts (1973 - $99,682; 1972- $28,945 - Schedule XII) . . . . . . . . . . . . . . . . . . . . . . 7,132,492 9,279,176 Notes receivable - Sale of aircraft - Note H . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,845,895 Maintenance and operating supplies, at average cost less allowance for obsolescence (1973 - $1,165,589; 1972 - $928,817) - Note A (Schedule XII) ................................................... . 2,871,484 Prepaid expenses .......................................... . ................... ___ 7_ 2_ 7,~ 5_ 0_ 3_ Total Current Assets .............................................. . 25,792,752 OTHER ASSETS Hijacking payment- Note B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 Equipment purchase deposits .... . ............................................ . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,337 PROPERTY AND EQUIPMENT - on the basis of cost - Notes A, C, and F (Schedules V and VI) Flight equipment ..... . .... . ............................................... . Other property and equipment .......................... 2,198,337 51,108,291 4,829,154 55,937,445 Less allowances for depreciation and maintenance 19,470,533 ----'-- DEFERRED CHARGES- Note A (Schedule VII) Unamortized preoperating, route extension and development costs - Note I Deferred lease costs Unamortized long-term debt expense ......................................... . 16A 36,466,912 1,548,934 159,249 406,778 2,114,961 $66,572,962 $ 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 SOUTHERN AIRWAYS, INC. BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 1973 1972 CURRENT LIABILITIES Accounts Payable ....................................................... .... .. . $ 5,772,648 Collections and withholdings as agent ....................................... . 5,847,769 Salaries, wages and vacations ...... . ........................................ . 2,302,950 Accrued interest payable ..................................................... . 285,884 Accrued taxes and other expense ............................................ . 376,402 Air travel plan deposits . .................................................... . 92,649 Current maturities of long-term debt- Note C ............ . .... ............ . 6,950,770 21,629,072 Total Current Liabilities ......................................... -----''------'--- LONG-TERM DEBT - Note C Notes payable, less current maturities Convertible subordinated debentures ......................................... . DEFERRED CREDIT- Subsidy adjustment- Note B ............................. . 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 dividends - aggregate of $1,119,942 in 1973 and $1,209,055 in 1972) issued and outstanding -165,331 shares (1973) and 190,103 shares (1972) ....................................... . Series B $.36 convertible - non-voting (liquidation value $6 per share plus cumulative dividends - aggregate of $1,120,002 in 1973 and $1,060,002 in 1972) issued and outstanding -166,667 shares ............ . Common Stock, $2 par value: Authorized- 7,500,000 shares Issued and outstanding -1,412,663 shares (1973) and 1,271,191 shares (1972) ............................................. . Other paid-in capital ........................................................ . 27,523,019 10,178,000 37,701,019 200,000 165,331 166,667 2,825,326 5,291,922 (1,406,375) Retained-earnings (deficit) ................................................... _....:......_;:.___ 7,042,871 LEASES, COMMITMENTS AND CONTINGENCIES- Notes G and H $66,572,962 See Notes to Financial Statements. 17A $ 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 SOUTHERN AIRWAYS, INC. STATEMENTS OF CHANGES IN FINANCIAL POSITION Years Ended December 31, 1969 1970 1971 1972 1973 FUNDS PROVIDED From operations Income (loss) before extraordinary credit .. . $( 821,928) $ (3,333,212) $ (1,058,784) $ 1,191,067 $ 319,748 Items not requiring outlay of working capital in current period 2,160,358 2,090,915 2,094,991 2,039,695 3,193,436 Depreciation Increase in allowance for maintenance 49,356 519,349 322,946 544,721 1,705,604 Amortization of def erred charges ..................... 376,638 551,944 484,478 382,153 362,813 Deferred income tax ( credit) .. 235,000) Subsidy adjustment- Note B .. 200,000 Total from operations, exclusive of extraordinary credit ...................... 1,764,424 ( 171,004) 1,608,631 4,157,636 5,781,601 Extraordinary credit ................. 409,250 97,000 Long-term borrowings .. ...... ........ 140,000- 2,372,606 787,757 2,952,130 38,700,000 Sale of Preferred Stock .............. 2,637,379 Exercise of common stock purchase warrants ........................... 145,314 Conversions to Common Stock Debentures .......... ............... 1,337,000 1,167,000 Series A Preferred Stock ........... 36,895 63,783 24,772 Property and equipment sold or converted to lease, less gain included in operations .............. 219,784 274,976 588,915 92,368 8,771,567 Refund of equipment purchase and lease deposits ....................... 3,179,958 490,000 416,840 5,304,166 2,476,578 6,149,577 9,157,481 54,958,780 FUNDS USED Additions to property and equipment .. 6,363,077 2,134,662 1,409,959 925,261 33,150,337 Hijacking payment .................... 2,000,000 Equipment purchase and lease deposits ............................ 210,000 280,000 416,840 Reduction of long-term notes payable . 2,465,085 1,520,442 3,008,041 2,249,146 20,414,997 Conversions to Common Stock Debentures ....... .................. _ 1,337,000 1,167,000 Series A Preferred Stock .......... 36,895 63,783 24,772 Increase in deferred charges ......... 707,356 412,012 6,459 13,887 1,473,195 Increase in other assets ............. . 15,735 15,552 11,879 18,669 89,047 9,761,253 4,362,668 4,473,233 7,024,586 56,319,348 INCREASE (DECREASE) IN WORKING CAPITAL ..................... (4,457,087) (1,886,090) 1,676,344 2,132,895 (1,360,568) Working capital at beginning of year .. 8,058,186 3,601,099 1,715,009 3,391,353 5,524,248 WORKING CAPITAL AT END OF YEAR ..... $ 3,601,099 $ 1,715,009 $ 3,391,353 $ 5,524,248 l_!,163,680 INCREASE (DECREASE) IN WORKING CAPITAL BY COMPONENTS Cash and short term investments ... $(5,374,005) $(1,629,817) $ 2,383,503 $ 686,959 $ 2,323,886 Accounts and notes receivable ...... 877,996 2,385,833 (1,084,513) 998,034 6,656,375 Maintenance and operating supplies. 451,233 179,325 373,621 ( 129,735) 985,939 Prepaid expenses ................... 598,264 ( 863,159) 282,946 32,236 ( 96,498) Accounts payable ................... 370,520) (2,099,236) 807,803 24,944) (2,764,454) Collections and withholdings as agent .......................... ... ( 250,590) 82,452 ( 670,743) (1,539,077) (1,010,287) Salaries, wages and vacations ...... ( 221,056) 289,032) ( 315,014) ( 97,887) ( 557,795) Accrued interest, taxes and other expenses .......................... ( 281,334) 448,535 280,782 588 47,935 Air travel plan deposits ............ 425 3,825 6,375 4,250 5,101 Current maturities of long-term debt .............................. 112,500 104,816) 388,416) 2,202,471 (6,950,770) INCREASE (DECREASE) IN WORKING CAPITAL ............................... $( 4,457,087) $(1,886,090) $ 1,676,344 $ 2,132,895 $(1,360,568) See Notes to Financial Statements. 18A SOUfflERN AffiWAYS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1973 Note A- Summary of Significant Accounting Policies PROPERTY, EQUIPMENT, DEPRECIATION AND OBSOLESCENCE 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. For DC-9 flight equipment the lives are 15 years (new equipment and rotable parts) and 10 years (used equipment), with a salvage value of 10 % ; for ground equipment, the lives range from 3 to 10 years. The Company is engaged in a program of permanently reducing the use of Martin-404 flight equipment. At December 31, 1973, the Company's investment in Martin-404 flight equipment is fully depreciated except for $571,000 related to engine overhauls, which will be charged to operations based on hours flown. At the time properties are retired, the amounts of costs and allowances for deprecia- tion and maintenance are eliminated from the accounts. Profits and losses on disposals of DC-9 flight equipment (exclusive of rotable parts) are credited or charged to operations. Proceeds from the disposal of DC-9 rotable parts are credited to the allowance for de- preciation account. Prior to December 31, 1973 proceeds from the disposal of Martin-404. flight equipment and rotable parts were credited to the allowance for depreciation ac- count; subsequent to this date, profits and losses on disposals will be credited or charged to operations. Expenditures for ordinary maintenance and repairs are charged to expense. Expen- ditures 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 % . DEFERRED CHARGES Expenditures for preoperating and route extension and development costs are de- f erred and are amortized over a period of five years from the dates operations of the routes are started (see Note I). Costs associated with obtaining leased DC-9 aircraft are being amortized over the lives of the leases. Deferred 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 op- erations regardless of the years when such items are reported for tax purposes. The Company uses the flow-through method of accounting for investment credit and the available investment credit is recognized to the extent it can be realized or offset against income taxes payable. PENSION PLANS The Company has several pension plans, including a defined contribution plan, cover- ing substantially all of its employees. There are no unfunded past service costs. The Com- pany's policy is to fund pension costs accrued. 19A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 Note B - Hijacking Payment In November 1972, the Company paid $2 million in ransom in connection with the hijack- ing of one of its DC-9 aircraft. The aircraft, passengers and crew were returned to the United States, but the ransom money has been retained by the Republic of Cuba. Negotiations between representatives of the Company and the Cuban government are expected to result in the even- tual return of the funds, although there can be no assurance of the return. The Company will 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 for that year. Effective July 1, 1973, the Civil Aeronautics Board implemented a subsidy revenue for- mula in which the $2 million ransom payment is recognized. The new formula will result in increased subsidy revenues; however, the Company must return to the Civil Aeronautics Board a proportionate amount of the increased subsidy funds if and when the ransom payment or any part thereof is returned. Accordingly, the estimated portion of subsidy payments subject to such return provision is being deferred until such time as the recoverability of the ransom payment is determined. Note C-Long-Term Debt At December 31, 1973 1972 Notes payable to banks under credit agreement dated February 20, 1973 "A" Loans, payable quarterly through 1982 ............................... $22,873,789 "B" Loans, payable quarterly through 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 "C" Loans, payable quarterly through 1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000 Notes payable under prior credit agreement (refinanced in 1973) ........................................................ . Demand notes payable to banks (refinanced in 1973) ......................... . Convertible Subordinated Debentures 5 %, due December 1, 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,345,000 6 %, due November 1, 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,833,000 44,651,789 Less Current Maturities (Includes $4,490,644 to be paid from proceeds of Notes Receivable - Sale of Aircraft - see Note H) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,950,770 $37,701,019 $ 7,238,016 2,000,000 4,345,000 7,000,000 20,583,016 $20,583,016 The "A" and "B" Loans bear interest at the lead bank's prime rate (9.9 % at December 31, 1973) plus 1 % and 2%, respectively, and are payable in quarterly installments beginning July 1, 1974 and May 1, 1974, respectively. Substantially all of the Company's assets are pledged as collateral under the terms of the credit agreement. Additionally, the "A" Loan is 90% guaran- teed by the Federal Aviation Administration. The "C" Loan bears interest at 155% of the lead bank's prime rate. In addition to quarterly reductions of $100,000, the "C" Loan will also be reduced by recoveries of the hijacking payment discussed in Note B. In connection with the credit agreement, the Company maintains average compensating balances, based on bank ledger balances adjusted for treasury tax contribution and uncollected 20A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 funds, equal to 15 o/o of the average of the "A" and "B" Loans outstanding. Based upon out- standing borrowings at December 31, 1973, the Company should maintain average compensat- ing balances of approximately $4,931,000, which stated in terms of the Company's book cash balances is approximately $4,019,000. The difference is attributable to average uncollected funds and float. During 1973, the Company maintained average compensating balances of ap- proximately $5,536,000, which was 103% of the average required amount. Compensating bal- ances are not restricted as to withdrawals, serve in some instances as compensation to the participating banks for their account handling function and other services, and additionally serve as part of the Company's minimum operating cash balances. The Company has a commitment to borrow, under certain conditions, $1,750,000, which ex- pires September 30, 1974. Amounts borrowed under this commitment will bear interest at 135 o/o of the prime rate and will be due September 30, 1975. The 5 o/o Convertible Subordinated Debentures due December 1, 1981 are convertible (until maturity or prior redemption) into Common Stock at $10.86 per share; are subordi- nated, generally, to all existing and future indebtedness for borrowed money; are callable at premiums ranging from 3.25 o/o downward; and require annual sinking fund payments begin- ning December 1, 1976 in an amount equal to 10 o/o of the principal amount outstanding at December 1, 1975. Also, the Company may make additional voluntary sinking fund payments equal to the required amount. The 6 o/o Convertible Subordinated Debentures due November 1, 1983 are convertible (until maturity or prior redemption) into Common Stock at $10 per share; 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% o/o downward; and require annual pre- payments 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 subse- quent to November 1, 1977. Also, the Company may make additional voluntary prepayments equal to the required amounts. The terms of the credit agreements and both issues of Convertible Subordinated Deben- tures place certain requirements and restrictions upon, among other things, (a) working cap- ital, (b) indebtedness and lease obligations, (c) capital expenditures, (d) net worth and (e) payments relating to capital stock, including dividends (no amount was available for the pay- ment of dividends at December 31, 1973 or 1972). A summary of minimum principal payments under the credit agreement loans and both issues of Convertible Subordinated Debentures is as follows: Credit Agreement Loans Convertible Subordinated Year "A" "B" "C" Debentures Total 1974 $ 5,250,770 $ 1,100,000 $ 600,000 $ $ 6,950,770 1975 2,220,252 1,000,000 600,000 3,820,252 1976 2,220,252 1,150,000 400,000 434,500 4,204,752 1977 2,220,252 1,200,000 434,500 3,854,752 1978 2,220,252 1,500,000 1,017,800 4,738,052 Thereafter 8,742,011 4,050,000 8,291,200 21,083,211 $22,873,789 $10,000,000 $1,600,000 $10,178,000 $44,651,789 21A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 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 after 1973 will be required under the "B" Note. The above summary of minimum principal payments does not reflect the possible effect of any such prepayment. Amounts due under the prior credit agreement and $2,000,000 of demand notes were re- paid in February 1973 from "B" Loan proceeds. Accordingly, current maturities of indebted- ness at December 31, 1972 were determined in accordance with the terms of the "B" Loan. Note D - Income Taxes At December 31, 1973, operating loss carryforwards to future periods for income tax pur- poses aggregate approximately $2,952,000 and expire in 1977 ($1,298,000) and 1978 ($1,654,- 000). The operating loss carryforward for financial statement purposes at December 31, 1973 is approximately $1,792,000. Investment credit carryovers, which may be used to offset fed- eral income taxes payable in future income tax returns, aggregate $1,508,000 and expire in 1976 ($66,000), 1977 ($810,000), 1978 ($38,000), 1979 ($310,000), 1981 ($26,000), 1982 ($38,000), and 1983 ($220,000). Note E - Capital Stock and Options The Series A and Series B Preferred Stock are 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 receive $6 per share plus accumulated dividends. The liqui- dation preference for the 331,998 shares outstanding at December 31, 1973, including the dividend requirements described below, aggregated $2,239,944, which is $1,907,946 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. The cumulative dividend requirements on shares outstanding at December 31, 1973 and 1972 aggregated $247,956 and $128,437, respec- tively. Payment of dividends is subject to the limitations prescribed by the indentures covering the 5. % and 61/2 % Convertible Subordinated Debentures and to limitations contained in the credit agreements (see Note C). Authorized common shares include 1,842,620 shares and 2,110,092 shares reserved at De- cember 31, 1973 and 1972, respectively, for issuance as follows: For convertible securities conversions: 5 % Convertible Subordinated Debentures (Note C) ......................... . 6 % Convertible Subordinated Debentures (Note C) ......................... . Series A Convertible Pref erred Stock ................ . ........................ . Series B Convertible Preferred Stock .......................................... . For exercise of outstanding warrants: At $10 per share, issuable with 6 % Convertible Subordinated Debentures - cancelled July 25, 1973 ....................................... . At $6 per share, issued with Series A (290,562 shares) and Series B (166,667 shares) Convertible Preferred Stock .................... . For options under Qualified Stock Option Plan (45,000 shares) and Employee Stock Option Plan (25,000 shares) ............................. . 22A 1973 400,093 583,300 165,331 166,667 1,315,391 457,229 457,229 70,000 1,842,620 1972 400,093 700,000 190,103 166,667 1,456,863 126,000 457,229 583,229 70,000 2,110,092 SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 At December 31, 1973, there were outstanding options for 42,000 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 1974, options for 33,000 shares (at $5.25 per share) expire in 1976 and options for 5,000 shares (at $5.81 per share) expire in 1978. Option trans- actions during the years ended December 31, 1972 and 1973 are summarized as follows: Outstanding, January 1, 1972 .................. . ................ . Granted ....................................................... . Expired .............................. . .......... . ............. Cancelled ...................................................... . Number of Shares 44,000* 1,000 ( 1,000) ( 6,000) Outstanding, December 31, 1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000* Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,000) Outstanding, December 31, 1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000* Option Price Per Share Total $5.25 - $19.18 $285,931 5.25 5,250 19.18 ( 19,180) 5.25 - 13. 75 ( 49,751) 5.25- 11.76 5.81 5.25 5.25 - 11.76 222,250 29,050 ( 5,250) $246,050 *Excludes options for 4,000 shares at $5.25 per share which become effective only after ex- piration of previously issued options. There were 3,000 shares and 7,000 shares, respectively, available for future grant at De- cember 31, 1973 and 1972. Options granted under the Plan are intended to constitute "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 100 % of the fair market value of the stock on the date of grant, terminate not later than five years after date of grant, and are not exercisable during the first twenty-four months after date of grant. Each option is exercisable with respect to 1/a of the number of shares at any time after 24 months following date of grant, with respect to an additional 1/a after 36 months, and with respect to the balance after 48 months. No options were exercised in 1973 or 1972. Options became exercisable during the years ended Decem- ber 31, 1973 and 1972 as follows: 1973 1972 Number of Shares ............................................................. . 12,336 2,000 Option Price: Per Share .................................................................... . Total ........................................................................ $5.25 - $11. 76 $8.69 - $11. 76 72,363 21,403 Quoted Market Price at Date Exercisable: Per Share .......................... . ..... . ................................... . 3.00 - 6.00 6.38 - 9.13 Total ......................................................................... . 39,430 15,336 Options for 15,000 shares (aggregating $101,500 at option prices) and 2,668 shares (aggregat- ing $29,181) were exercisable at December 31, 1973 and 1972, respectively. A total of 25,000 shares of Common Stock are reserved for issuance to participating em- ployees under an Employees' Stock Option Plan (an employee stock purchase 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. 23A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 Note F-1974 Accounting Change Because of the increased size of its jet fleet, together with changes in engine maintenance technology which permit a progressive maintenance program, the Company will change its method of recording certain maintenance costs of DC-9 engines, effective January 1, 1974, to the method of charging all such costs to operations as incurred. In 1973 and prior years, the Company followed the "built-in-overhaul" method of providing airworthiness reserves for certain maintenance costs of DC-9 engines. Under this method, the estimated cost of certain specified maintenance operations was segregated from those engine costs to be depreciated over the estimated useful life of the engine. A related maintenance reserve was then accumu- lated through regular charges to operations based upon hours used. The reserve was reduced when charges were incurred applicable to the maintenance operations provided for. A similar method was used for leased engines. The cumulative effect of this change will result in a credit to the statement of operations for 197 4 of $565,000. Note G - Leases Total rental expense for all leases amounted to: 1973 Financing leases (minimum rentals): Flight equipment ..................................... .......... ...... .... . $4,759,488 Other financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,227,425 Landing fees (contingent rentals) . .. . . . .. . . . . .. .. . .. . .. . . .. .. .. .. . .. . . . . . . . 1,838,376 Other leases : Minimum rentals .......................... ..... .................... ..... . Contingent rentals ....................................................... . 975,173 370,910 $9,171,372 1972 $4,751,999 902,529 1,489,145 729,480 460,672 $8,333,825 Contingent rentals, other than landing fees, relate principally to charges for reserva- tion services based upon the number of unduplicated passengers in excess (since November 12, 1972) of a specified minimum of $120,000 per annum. Rentals received from subleases are immaterial. Future minimum rental commitments as of December 31, 1973 for all non-cancelable leases and for the proposed new maintenance center at the Hartsfield Atlanta International Airport are as follows : 1974 ..................... . 1975 ..................... . 1976 ..................... . 1977 ..................... . 1978 .......... . .......... . 1979-1983 ............... . 1984-1988 ............... . 1989-1993 ............... . Remainder . . ............ . Flight Equipment $ 4,722,208 4,722,208 4,722,208 4,722,208 4,722,208 9,359,926 $32,970,966 Financing Leases Proposed Maintenance Center $ 120,503 256,919 1,576,761 1,880,288 1,880,288 9,401,440 9,401,440 9,401,440 22,093,381 $56,012,460 24A Other Financing Leases $ 1,336,983 1,264,028 1,029,199 898,444 610,681 2,740,340 2,406,648 1,440,198 392,670 $12,119,191 Other Leases Total $ 434,602 $ 6,614,296 363,117 6,606,272 229,212 7,557,380 162,243 7,663,183 49,323 7,262,500 45,683 21,547,389 1,716 11,809,803 886 10,842,524 22,486,051 $1,286,781 $102,389,398 SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 The Company's rental obligations for the proposed new maintenance center, under its lease agreement with the City of Atlanta dated January 2, 1974, commences upon the earlier of the dates of beneficial occupancy or the dates shown below. Estimated costs, annual rentals, and rental commencement dates are as follows: Estimated Cost Land ................... . .............. . ..... $ 1,506,285 Phase One Facilities . . . .. . . . . .. . . .. .. . . . . . . . 7,511,000 Phase Two Facilities . . . . . . . . . . . . . . . . . . . . . . . . 16,608,000 $25,625,285 Estimated Annual Rental $ 120,503 545,665 1,214,120 $1,880,288 Approximate Rental Commencement Dat~ January 2, 1974 October 1, 1975 April 1, 1976 Cost of the Phase One and Phase Two Facilities is to be financed by the City through the issuance of Airport Extention and Improvement Revenue Bonds in the principal amounts needed to provide monies for the estimated costs shown above, which will be the City's maxi- mum obligation. Cost of improvements in excess of the estimated amount must be borne by the Company. The lease extends for a period of 30 years from October 1, 1975, or the date of beneficial occupancy of the Phase One Facilities, whichever occurs first, and may be renewed at the Company's option for an additional term extending to January 1, 2024. Most of the Company's other leases do not contain formal renewal options. However, consistent with the prevailing practice in the industry, leases with relatively short terms are generally renegotiated and extended at the conclusion of their terms, and leases with rela- tively long terms generally provide for renegotiation of their provisions at specified intervals throughout their terms. The estimated present values of the net fixed minimum rental commitments for all non- capitalized financing leases are: Flight equipment ...................... . Computer and message switching equipment ........................... . Airport terminal facilities ............. . General office and maintenance facilities ............................. . Miscellaneous ground equipment ...... . Interest Rates Used Weighted Average 7.45% 11.89 5.09 5.02 6.22 Range 5.3%- 8.7% 6.8 -23.7 2.9 - 7.5 3.5 - 6.3 4.6 -10.0 As of December 31, 1973 1972 $25,021,221 $27,813,997 1,557,437 1,702,633 3,028,358 2,287,915 793,352 581,415 24,643 37,794 The present values were computed after reducing total rental commitments, where required, by estimated or actual amounts applicable to lessors' payments of taxes, insurance, maintenance and other operating expenses. If all financing leases had been capitalized and it was assumed that the estimated present values were amortized on a straight-line basis over the terms of the leases and that interest expense was accrued on the outstanding lease obligations at the rates shown above, cost and expenses for the years 1973 and 1972 would have been increased by $623,000 and $769,- 000, respectively; and, to the extent that such increased costs and expenses were not offset by resultant increases in subsidy revenues, which are indeterminable as to specific amounts, net income would have been decreased commensurately. The amounts included in the above com- 25A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STAT' EMENTS (Continued) DECEMBER 31, 1973 putation for amortization of leased property and interest expense were $4,038,000 and $2,265,- 000 in 1973 and $3,693,000 and $2,325,000 in 1972, respectively. Note H - Other Commitments and Contingencies In November and December 1973, the Company sold four of the thirteen DC-9-14 aircraft acquired earlier in the year from another airline. The gains on the sales aggregated $1,967,- 630. Notes receivable in the accompanying balance sheet reflect the present value at Decem- ber 31, 1973 ($4,845,895) of a non-interest bearing note ($4,930,000, collected in February 1974) which was received as partial consideration for the two aircraft sold December 27, 1973. $4,490,644 of the proceeds of this note are being applied to payment of notes payable to banks under terms of the Company's Credit Agreement (see Note C). The sales agreement related to the December sale provides that the Company will indemnify the purchaser against loss to the extent of $350,000 in the event the third party to which the purchaser resold the aircraft should default in payment to the purchaser. Reference is made to Item 5 of this Report "Pending Legal Proceedings," for information applicable to litigation. The Company has an employment agreement with its Presi~ent providing for his em- ployment to September 12, 1977 at an annual salary of not less than $55,000. In addition, 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 provision has been made in the accompanying financial statements for amounts to be paid under the terms of these agreements. Nate I - Deferred Preoperating Costs During 1973, the Company deferred certain training and other costs aggregating ap- proximately $1,383,000 related to implementation of services of nine additional jet aircraft ac- quired during the year. These costs are being amortized over a five-year period. 26A SOUTHERN AIRWAYS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 1973 Note J -Supplementary Information 1973 Depreciation and Amortization (Schedules VI and VII): Depreciation of property and equipment .................................... $ 3,193,436 Amortization of def erred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,813 Provision for inventory obsolescence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,772 3,793,021 Deduct-Amounts charged to other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,584 $ 3,673,437 Taxes, other than income taxes, charged to operating expenses: Payroll taxes ........................................................ . ....... $ 1,456,401 150,423 360,000 243,980 127,028 Fuel and oil taxes .......................................................... . Property taxes ..................................... . ........................ . Sales and use taxes .................................................... . .... . Other .......................... . ............................................ . $ 2,337,832 Rents and Landing Fees: Rental expense under leases and landing fees (Note G) .................... $ 9,171,372 Portion of gross lease rentals not charged to rent expense in accordance with CAB classifications and miscellaneous rentals, net . . . . . . . . . . . . . . . . . . ( 98,118) $ 9,073,254 Advertising Costs .............................................................. $ 1,248,202 There were no royalties or research and development costs. 27A 1972 $ 2,039,695 382,153 233,030 2,654,878 95,849 $ 2,559,029 $ 1,017,480 176,755 340,800 166,254 103,528 $ 1,804,817 $ 8,333,825 ( 6,316) $ 8,327,509 $ 976,576 SOUTHERN AIRWAYS, INC. SCHEDULE II - AMOUNTS RECEIVABLE FROM UNDERWRITERS, PROMOTERS, DIRECTORS, OFFICERS, EMPLOYEES, AND PRINCIPAL HOLDERS OF EQUITY SECURITIES Column A ColumnB Column C Column D Balance at Deductions Name of Beginning Amounts Debtor of Period Additions Collected Year Ended December 31, 1973 SO ADO Venture .............. $ $60,637 $60,537 Column E Balance at End of Period $ Represents expenses paid by the Company in connection with a secondary offering of Company's securities to stockholders of the Company as of June 22, 1973. Such amounts were repaid to the Company by the selling group at the conclusion of the offering period. SCHEDULE V - PROPERTY AND EQUIPMENT Column A Classification Column B Balance at Beginning of Period Flight Equipment ........ . $27,237,131 Ground Equipment . . . . . . . . 3,625,547 $30,862,678 Flight Equipment ......... $26,766,370 Ground Equipment . . . . . . . . 3,822,489 $30,688,869 Column C Additions at Cost Column D Retirements Column E Other Changes- Add (Deduct)- Describe Year Ended December 31, 1972 $ 723,266 201,995 $ 925,261 $ 1,194,027 5,053 $ 1,199,080 $ $ Year Ended December 31, 1973 $34,540,698 (A) 1,025,341 $35,565,939 $10,198,677 (A) 18,676 $10,217,353 $ $ Column F Balance at End of Period $26,766,370 3,822,489 $30,588,859 $51,108,291 4,829,154 $55,937,445 (A) See Note H of Notes to Financial Statements regarding DC-9 aircraft purchased and sold during 1973. 28A Column A Description SOUTHERN AIRWAYS, INC. SCHEDULE VI-ALLOWANCES FOR DEPRECIATION AND MAINTENANCE OF PROPERTY AND EQUIPMENT Column B Column C Column D Column E Additions Balance at Charged to Other Changes Beginning Costs and Add (Deduct) - of Period Expenses Retirements Describe Year Ended December 31, 1972 Column F Balance at End of Period Flight Equipment ............ $ 9,333,934 $1,762,689 2,623,272(A) 277,006 $1,103,584 3,128 $(2,078,551) (B) $10,537,760 Ground Equipment . . . . . . . . . . . 2,790,039 $12,123,973 $4,662,967 $1,106,712 $(2,078,551) 3,063,917 $13,601,677 Year Ended December 31, 1973 Flight Equipment ....... . .... $10,537,760 Ground Equipment . . . . . . . . . . . 3,063,917 $13,601,677 $3,020,102 3,300,894 (A) 173,334 $6,494,330 (A) Provision for airframe and engine overhauls. (B) Expenditures for airframe and engine overhauls. $1,429,811 15,975 $1,445,786 $ (1,595,290) (B) $16,249,257 2,415,602 (C) $ 820,312 3,221,276 $19,470,533 (C) Estimated accumulated maintenance cost at date of acquisition applicable to used engines acquired during 1973 representing hours consumed on such engines by prior owner. 29A SOUTHERN AIRWAYS, INC. SCHEDULE vn - PART B - PRE-OPERATING EXPENSES AND SIMILAR DEFERRALS Column A Description Unamortized preoperating, route extension and Column B Balance at Beginning of Period development costs . . .............. $ 691,245 Deferred lease costs .... .. .... . ..... 217,788 Unamortized long-term debt expense .. ... .. ............... 580,524 $1,489,557 Unamortized preoperating, route extension and development costs ..... .. . ... . . . .. $ 417,918 Deferred lease costs ................ 188,660 Unamortized long-term debt expense .. .. .. . ~ .................. 452,977 $1,059,455 Column C Additions at Cost -Describe Column D Deductions Charged to Charged to Costs and Other Accounts Expenses -Describe Year Ended December 31, 1972 $ 12,979 $286,306 $ 29,228 908 66,619 61,836(B) $ 13,887 $382,153 (A) $ 61,836 Year Ended December 31, 1973 $1,418,184( C) $287,168 $ 29,311 55,011 46,334 54,876(B) $1,473,195 $362,813(A) $ 54,876 (A) Amortization is credited directly to the asset and charged to operations as follows: 1972 Depreciation and amortization .......... . . ~ . . ............................ . $286,306 Flying operations ........ . .................. .. ... . .... .. ........ . . .. ..... . 28,006 Aircraft and traffic servicing ................. .. ............... . ......... . 1,222 Interest on long-term debt .................. . . .. . . ..... . .. . ..... . .... .. . . . 66,619 $382,153 (B) Amount applicable to debentures converted, charged to Other Paid-In Capital. (C) See Note I of Notes to Financial Statements. Column E, Other Changes, has been omitted since there were no other changes. Column F Balance at Close of Period $ 417,918 188,560 452,977 $1,059,455 $1,548,934 159,249 406,778 $2,114,961 1973 $287,168 28,089 1,222 46,334 $362,813 SCHEDULE XII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Column A Column B Column C Column D Additions Balance at Charged Beginning to Costs and Deductions Description of Period Expenses -Describe Year Ended December 31, 1972 Allowance for doubtful accounts ........................ $ 41,849 $ 78,050 $ 90,954 (A) Allowance for obsolescence - maintenance and operating supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695,787 233,030 Year Ended December 31, 1973 Allowance for doubtful accounts .......... ... ............ $ 28,945 $138,400 $ 67,663 (A) Allowance for obsolescence- maintenance and opera ting supp lies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 928,817 236,772 (A) Bad debts written off, net of recoveries. 30A Column E Balance at End of Period $ 28,945 928,817 $ 99,682 1,165,589 EXHIBIT 1 SOUTHERN AIRWAYS, INC. COMPUTATIONS OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (This Exhibit should be read in conjunction with Note (7) to the Statements of Operations) Year Ended December 31, 1973: Regular computation: Income Before Extraordinary Credit Income amounts . ..................... . ...................... . $ 319,748 Pref erred dividend requirement .... . ....... . ........ .. ....... . 119,519 Available for common ................. . .. . ................... . $ 200,229 Divide by weighted average number of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314,016 Per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . = $=== 1= 52 Extraordinary Net Credit Income $ 97,000 $ 416,748 119,519 $ 97,000 $ 297,229 1,314,016 1,314,016 $ .074 $ .226 Pro forma computation, reflecting primary earnings per share as if Series A Convertible Pref erred stock converted during 1973 and $1,167,000 of 6 % Convertible Subordinated Debentures converted on October 1, 1973 had been converted on January 1, 1973: Amount available for common from above . . . ....................... . .. . ...... .. ....... . .... . . $ 297,229 Add - Interest applicable to debentures converted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,891 $ 354,120 Divide by common shares outstanding at December 31, 1973 ( equal to weighted average if all conversions had occurred as of January 1, 1973) .................................................... . ............... . 1,412,663 .251 Per share ........................................ . ..... . ...................................... $ ====== Year Ended December 31, 1972: Amounts Primary Net income .......... .. ............ . . . ........... . ............. . ................ . $ 1,600,317 Imputed interest related to: Options and warrants issued since June 1, 1969 . . .......................... . 58,760 Warrants issued prior to June 1, 1969 .......... . .......................... . 6 % Convertible Subordinated Debentures .............................. . . 5 % Convertible Subordinated Debentures ............................... . 58,760 Preferred dividend requirement .. . ........................................... . ( 128,437) Amounts for "Net" Computations .................................... (A) $ 1,530,640 Extraordinary tax credit ........................... . ......................... . 409,250 Tax effect of imputed interest above at 25% ...... . .......................... . 14,690 Amounts for "Extraordinary" Computations ............ .. ........ . .. (B) $ 423,940 Amounts for "''Before" Computations .................. . .............. (C) $ 1,106,700 Shares Common shares . .... . == .................................................. . 1,194,426 Pref erred shares .. . ....................... . .................................... . Options and warrants issued since June 1, 1969 .............. . ................ . . 245,091 Warrants issued prior to June 1, 1969 ................. . ..... .. .... .. .. . .. . ... . . . 6 % Convertible Subordinated Debentures .... . .... . ...... . . . ........ ... .... . . . 5 % Convertible Subordinated Debentures .................................... . (D) 1,439,517 Per Share Before extraordinary credit (C) Extraordinary credit ( B) Net income (A) Computational Notes: (D) (D) (D) ....................... . .............. $ ...................................... $ .77 .29 ===== Fully Diluted $ 1,600,317 58,760 81,900 482,084 260,645 883,389 $ 2,483,706 409,250 220,847 (a) $ 630,097 $ 1,853,609 $ $ 1,194,426 374,004 245,091 (b) 126,000 741,667 417,400 3,098,588 .60 .20 .80 (a) Rate used (25%) is approximate overall effective tax rate after reduction for investment credit. (b) Total shares issuable upon exercise (499,329), less 20 % of common shares outstanding at December 31, 1972 (254,238). Years Ended December 31, 1969, 1970 and 1971: 1969 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 821,938) Divide by weighted average number of common shares ... .. . . .. . 1,024,871 Loss per share $( .80) 31A 1970 $(3,333,212) 1,024,871 $( 3.25) 1971 $(1,058,784) 1,035,048 $( 1.02) EXHIBIT 2 SOUTHERN AIRWAYS, INC. COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES (This Exhibit should he read in conjunction with Note (8) to the Statements of Operations) Years Ended December 31, 1969 1970 1971 1972 1973 Income: Net income (loss) .......... . . . ... $( 821,928) $(3,333,212) $(1,058,784) $ 1,600,317 $ 416,748 Income taxes (credit) ( 486,961) 449,500 109,000 Tax benefits of operating loss carryforward ............ . . ( 409,250) 97,000) Deferred Income Tax (credit) ... ( 235,000) Fixed charges ( see below) ....... 3,091,394 4,050,556 4,311,639 4,204,224 6,154,142 Income .. . ......... . ...... . $ 1,782,505 $ 717,344 $ 3,017,855 $ 5,844,791 $ 6,582,890 Fixed charges : Interest expense ............ . . . ... $ 1,719,541 $ 1,788,784 $ 1,678,112 $ 1,361,913 $ 3,083,390 Amortization of deferred debt expenses .......... .... .... 90,709 93,026 99,293 66,475 46,334 One-third of rentals paid: Rentals and landing fees, as reflected in Note J of Notes to Financial Statements ................ .. 3,847,277 6,512,753 7,610,311 8,327,509 9,073,254 X 1 /2 X X X X One-third of rentals and landing fees . .. .. . ..... . . 1,281,144 2,168,746 2,534,234 2,775,836 3,024,418 Fixed Charges . . . .. .... . ... $ 3,091,394 $ 4,050,556 $ 4,311,639 $ 4,204,224 $ 6,154,142 Ratio of income to fixed charges ... .58 .18 .70 1.39 1.07 32A Notice to Stockholders of Southern Airways, Inc. Any person who owns as of December 31 of any year or subsequently acqwres ownership either personally or as a trustee of more than five per cent (5%) in the aggregate of any class of capital stock or capital of Southern Airways Inc. shall file with the Ctvil Aeronautics Board a report contatntng the tnformation reqwred by Part 245 12 of the Board's Economic Regulations. This report must be flled on or before Apnl 1 of each year as to the capital stock or capital owned as of December 31 of the precedtng year and tn the case of capital subsequently acqwred, a report must be filed wJthin ten (1 OJ days after such acqwsJt1on, unless such person has otherwise Nied with the Civil Aeronautics Board a report covenng such acqu1sitt0n or ownership Any bank or broker covered by this prov1s1on. to the extent that 1t holds shares as trustee on the last day of any quarter of a calendar year. shall file with the C1v1I Aeronautics Board within thirty (30) days after the end of the quarter, a report in accordance with the provisions of Part 245 14 of the Board's Economic Regulations Any person reqwred to report pursuant to these provisJOns who grants a security interest in more than five per cent (5%) of any class of the capita/ stock or capital of an a,r carrier, shall within thirty (30) days after granting such secunty interest, flle with the C1v1l Aeronautics Board a report containing the information reqwred in Part 245 15 of the Economic Regulations Any stockholder who believes that he may be required to file such a report may obtain further information by wnting to the Director, Bureau of Operating Rights. Civil Aeronautics Board, Washington, D. C 20428 The Back Cover There is more to an airline than places and planes. Southern adds people. People who please passengers. And enjoy doing so. These people make the Southern way the pleasant way. Directors and Officers Directors IVAN ALLEN , JR. Ivan Allen Company, Atlanta, Georgia CECIL A. BEASLEY, JR. Ballard & Beasley, Washington , D.C. 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 Sou thern Airways, Inc., Birmingham, Alabama AL TON F. IRBY, JR. A. F. Irby & Company, Atlanta, Georgia HENRY P. JOHNSTON Radio and Television Consultant, Birmingham , Alabama G. GUNBYJORDAN 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* Retired Investment Counselor 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 *Semor Director Executive Committee FRANK W. HULSE GRAYDON HALL G. GUNBY JORDAN EL TON B. STEPHENS WM . BEW WHITE, JR. General Information 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 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 CECIL A. BEASLEY, JR . Assistant Secretary MRS. MARY C. HAYES Assistant Secretary WM . BEW WH ITE, JR. Assistant Secretary SOUTH E RN AIRWAY S, INC. 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 : McDonald & Little, Inc., Atlanta, Georgia Printed by Stein Printing Co., Atlanta, Georgia Southern