Southern Airways Annual Report 1974

SOUTHERN AIRWAYS, INC.
TAKES PLEASURE IN ANNOUNCING
A 1974 PROFIT OF
$3,482,000.
Financial and Operating Highlights
Years ended December 31 1974 1973 Gam(Loss)%
Passenger revenues $ 86,821,000.00 $65,949,000 00 31.6
Operatmg revenues $108,352,000.00 $84,609,000 00 28 1
Operatmg mcome $ 6,883,000.00 $ 1,489,000 00 3623
Net mcome $ 3,482,000.00 * $ 417,000 00* 7350
Primary earnings per share
includmg extraordmary
credit $ 2.19+ $ 0 23* 852 2
Yield per passenger mile $ 0.104 $ 0 091 14 3
In scheduled service
Revenue passenger miles 832,372,000 721,135,000 15.4
Available seat miles 1,618,776,000 1,643,569,000 ( 1.5)
Passenger load factor 51.4% 439% 17.1
Revenue passengers earned 2,940,000 2,494,000 17.9
Revenue plane miles flown 24,621,000 25,492,000 (3.4)
Number of employees 2,639 2,478 6.5
*Includes m 1974 the cumulative effect of an accountmg change wmch mcreased net
mcome by $565, 000- and m 1973 gams totalmg $1,968,000 from the sale of a1rcraft.
Amounts should be read m con111nctJon With Management's Dlscuss10n and Analys1s of
the Statement of Operat1ons begmmng on page 7 A and WI th Notes to Fmanc1al State-
ments begmnmg on page 20A.
Southern
General Office: Hartsfield Atlanta International Airport Atlanta, Georgia 30320 Phone 404/766-5321
rn
SOUTHERN AIRWAYS, INC . 1974 ANNUAL REPORT VOLUME 25 , NO .1
Grand Cayman s unset.
Answering 12.000 calls daily.
Vsi o s n Grand Cayman .
Fez/er wins 1974 Southern Open .
General Information
3 SOUTHERN REPORT
Frank W. Hulse makes his 25th
presentation to Southern
stockholders.
4 SOUTHERN BUSINESS
Results of 1974 are outlined and a
look at Southern's expectations
fo llo ws.
8 SOUTHERN TRAVEL
The Cayman Islands, in th e
Caribbean, offer an unusual
vacation.
Orlando, Florida, represents
vacation mag ic, for adults as well
as children.
Huntsville, Alabama, opens a new
civic center.
13 SOUTHERN NOTICES
14 SOUTHERN SPORTS
Tournament golf has come to
Columbu s, Georgia, and golf
careers are being lau nched.
16 SOUTHERN ROUTES
Special Section
SOUTHERN 10-K
A complete look is presented into
the operation and management
of a viable airline.
2A Business
4A Summary of Operations
7 A Management's Analysis
10A Pending Legal Proceedings
15A Report of Accountants
16A Financial Statements
20A Notes to Financial Statements
28A Schedules and Exhibits
SOUTHERN AIRWAYS, INC. GENERAL OFFICES: Hartsfield Atlanta International
Airport, Atlanta, Georgia COUNSEL: Bradley, Arant, Rose & White, Birmingham,
Alabama; Ballard & Beasley, Washington , D.C .. AUDITORS: Ernst & Ernst, Atlanta,
Georgia STOCK TRANSFER AGENT: Trust Company of Georgia, Atlanta, Georgia
ADVERTISING COUNSEL: McDonald & Little, Inc. , Atlanta, Georgia Designed
and printed by Stein Printing Co. , Atlanta, Georgia.
Directors
Ivan Allen, Jr., Chairman of the Board,
Ivan Allen Company, Atlanta, Georgia ;
Cecil A. Beasley, Jr., Partner, Ballard
& Beasley, Attorneys, Washington, D.C.;
George M. Gross, Vice President and
Associate General Manager, Southern
Airways, Inc.; Graydon Hall.Y., Executive
Vice President and General Manager,
Southern Airways, Inc.; F. Barton Har-
vey, Jr. , Partner, Alex. Brown & Sons,
Investment Bankers, Baltimore, Mary-
1 a nd ; Frank W. Hulse.Y. , President,
Southern Airways, Inc. ; Alton F. Irby,
Jr., Chairman of the Board, A. F. Irb y
& Company, Atlanta, Georgia; Henry
P. Johnston, Radio and Television Con-
sultant, Birmin gham , Alabama; G.
Gunby Jordan.Y., Chairman of the Board,
The Jordan Company, Columbus, Geor-
gia; Sartain Lanier, Chairman of the
Board, Oxford Industries, Inc., Atlanta,
Georgia; R. Eugene Orr, President, Orr
& Company, In c., Jacksonville, Florida ;
G. Frank Purvi s, Jr., Pres ident, Pan
American Life Insurance Company, New
Orleans, Louisiana; F. D. Schas t , Re-
tired Investment Counselor, Memphis,
Tennessee; Elton B. Stephens.Y., Chair-
man of the Board, EBSCO Industries,
Inc., Birmingham, Alabama; Richard
A. Trippeer , Jr ., Pres ident, Union
Planters National Bank, Memphis, Ten-
nessee; Wm. Bew White, Jr . .Y., Partner,
Bradley, Arant, Rose & White, Attor-
neys, Birmingham, Alabama.
Member of Executive Committee
tSenior Director
Officers
FrankW. Hulse, President; Graydon Hall,
Executive Vice President and General
Manager; George M. Gross, Vice Presi-
dent and Associate General Manager;
J. Kenneth Courtenay, Vice President-
Economic Regulations and Secretary;
A. L. Maxson, Vice President -Finance
and Treasurer; Victor C. Pruitt, Vice
President-Technical Services; T. M.
Shanahan, Vice President -Flight ;
Frank H. Wheeler, Vice President -
Sales and Services; Thomas A. Wiley,
Jr. , Vice President-Marketing; Ray W.
Burden, Assistant Treasurer; James H.
Ishee, Controller; J. Philip Day, Assistant
Vice President-System Planning; 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;
Mary C. Hayes, Assistant Secretary;
Wm. Bew White, Jr., Assistant Secretary.
COVER: Sunsets are colorful along Seven
Mile Beach on Grand Cayman Island. Aus-
tralian pines frame the setting.
Again this year, our Annual Report
includes the Form 10-K. a detailed
analysis of corporate activities
required to be filed annually with
the Securities and Exchange
Commission. Our inclusion of this
last year was widely accepted among
our stockholders and members of
the financial community. This
thorough method of reporting was
further recognized when our 1973
Report was selected the best
corporate report in the Southeast by a
chapter of the Advertising Federation
of America. It always has been our
practice to furnish our stockholders
and the public the most complete and
timely information possible. We will
continue to do so. -F. W H.
Frank W. Hulse
Report to Southern Stockholders
With a great deal of pride and personal
satisfaction, I am making this 25th report
to our stockholders.
Your Company now is in its second
quarter-century. We serve much of the
eastern-halfof the United States and into
the Caribbean. We have completed our
most successful year in terms of reve-
nues, profits, overall financial improve-
ment, route expansion, and growth on
our previously served routes.
Because of these improvements, we
have been able to pay the 1972 and 1973
diyidends on our preferred stock, sub-
stantially improve the position of our
employees, upgrade our ground facili-
ties, virtually complete a program for
refurbishing our jet fleet, and further
modernize our methods and systems
used in serving our customers.
Among all scheduled passenger air-
lines in the United States, our 1974 rate
of return on investment was the third
highest, corning within two-hundredths
of a per cent of second place.
A major contributor to this success is
the high level of efficiency and dedica-
tion displayed by our employees. Histor-
ically our employee output has been
among the highest in the industry. Our
improved position has enabled us to
recognize this output, and Southern
personnel enjoy excellent working con-
ditions, outstanding fringe benefits, and
realistic wages.
Having a substantial effect on our
future are route actions taken during
the past year by the Civil Aeronautics
Board.
One of the most important routes yet
awarded to Southern is for non-stop
service between Nashville, Tennessee,
and Detroit, Michigan.
Southern acquired international sta-
tus as a result of a temporary Civil
Aeronautics Board authorization to pro-
vide scheduled service between Miami,
Florida, and the Cayman Islands, Bri-
tish West Indies. We are seeking
permanent authority and are hopeful of
receiving it.
Because of good highways and large
airports nearby, service was discontin-
ued during 1974 at Anderson and Green-
wood , South Carolina , as well as
Shelbyville-Tullahoma and Crossville,
Tennessee. We will continue supporting
service to Natchez, Mississippi , through
an agreement with a third-level carrier.
We believe this arrangement will ade-
quately serve the area's needs.
During the first two months of 1975,
we have found it necessary to make
cost reductions and reduce schedules
to reflect current traffic levels. We ex-
pect these schedule changes to improve
load factor, but at the same time, pro-
vide our travelers with good frequency
and schedule times.
Among our major cost reduction areas
is our continuing effort to reduce fuel
consumption. Programs implemented in
1974 continue to produce highly desir-
able results.
We recognize that factors contributing
to high growth rates in traffic in 1974
will not carry into the current year. To
overcome present economic problems,
we are considering innovative fares,
new promotional plans, and a continued
upgrading of our service.
We have entered our second quarter-
century with the same optimism we ex-
pressed in 1949.
Respectfully,
3
4
Southern Business
Southern Airways' 1974 results are ana-
lyzed . Included is a report on the
airline's encouraging outlook.
Southern Airways, Inc . achieved
quarter-century status in 1974. Accom-
panying this were record earnings and
significant route awards that placed
Southern in additional profitable mar-
kets as well as giving the airline inter-
national standing.
Southern also earned a record net
profit of $3,482,000 for the year. The
Company's most profitable year previ-
ously had been 1972 with earnings of
$1,600,000. In 1973 , profits totaled
$417,000.
Revenues gained 28.1 per cent in
1974, to $108,352,000, compared with
$84,609,000 a year earlier. This was the
first time Southern exceeded the
$100,000,000 mark.
Of the 1974 profit, $565,000 resulted
from an accounting change, and $325,000
was contributed by an extraordinary
tax credit. The accounting change was
a "one time only" credit to convert
Southern from an accrual method of
accounting for jet engine overhauls to
an expense-as-incurred method. The
tax credit was the last of the net loss
carry-forward available.
Based on the Civil Aeronautics Board
accounting method, Southern's 1974
profit was equivalent to a 15.7 per cent
return on investment. This compares
with a 9.1 per cent return in 1973.
Profit per share in 1974 was $2.19 on
a primary basis and $1.40 fully diluted.
The common and common equivalent
shares used to determine primary and
fully diluted earnings per share were
1,598,882 and 2,913,090 respectively.
Revenues
Passenger revenues rose to $86,821,000
as a result of a 15.4 per cent gain in
revenue passenger miles flown (one
passenger flown one mile) and a 14.3
per cent increase in yield (revenue for
one passenger flown one mile). The
1974 yield of 10.4 cents established a
new high for Southern. Fare increases
contributed to an increase in yield, as
did the elimination of a number of dis-
count fares.
Passenger traffic during the first half
of 1974 was favorably affected by an
automobile gasoline shortage which di-
verted highway travel to the airlines.
A strong summer season further added
to passenger growth through the first
three quarters of the year.
Also contributing to revenue increases
was a record level of cargo sales amount-
ing to $5,136,000 for the year. This re-
sulted from increased sales emphasis on
this important income area.
Charter revenues were influenced by
125 flights to Canada, the Bahamas and
to the Cayman Islands in the British
West Indies. Southern developed
$6,908,000 in charter revenues, much of
which resulted from flights operating
at hours other than during scheduled
service.
Public service and other revenues
totaled $9,487,000.
Expenses
Despite the encouraging increases in
revenues, costs also increased at a rapid
rate. Total operating costs increased 22 .1
per cent in 1974, compared with 1973,
primarily because of a $6,155,000 rise
in fuel and a $6,574,000 increase in
wages and salaries. Operating cost per
available seat mile ( one seat available
for sale flown one mile) increased 21.6
per cent.
A major contributor to minimizing
cost increases was jet fuel savings that
resulted from improved flying techniques
and technological advancements. This
enabled Southern to conserve some
three million gallons of fuel in 1974.
Capital Expenditures
Capital spending in 1974 was limited to
$1,908,000, primarily representing
increases in aircraft spare parts and
ground support equipment. No aircraft
purchases were made in 1974, although
options were taken to acquire three 95-
passenger DC9-30 aircraft for delivery
in 1976. ThreeMartin404s were removed
from service. Southern's current fleet
level is 21 75-passenger DC9-10 aircraft,
four 95-passenger DC9-30s, and 11 40-
passenger Martin 404s.
Financial Position
The 1974 profit contributed to a strong
year-end cash position amounting
to $11,895,000. Investment ofthese funds
produced income of $578,000 during
the year.
Southern continued to improve its
corporate financial structure and re-
duce debt-to-equity ratio. Profits
changed a $1,406,000 retained earnings
deficit to a positive $1,827,000. Stock-
holders' equity gained $3,233,000. Fur-
ther improving the debt-to-equity ratio
in 1974 was debt repayment totaling
$7,951,000.
The 1972 and 1973 dividends due on
Series A and Series B preferred stock
were paid in December 1974. No action
has been taken on the 1974 dividend.
Through a secondary offering, the
166,667 shares of Series B Convertible
Preferred Stock were sold to more than
800 individual Southern employees.
These shares subsequently were con-
verted into common shares on December
31 , 1974. In addition to increasing
publicly held common shares and
eliminating an entire class of preferred
stock, this transaction increased the
number of employee stockholders to
more than one-third of Southern's em-
ployees. Total common stockholders in-
creased from 4,495 in December 1973
to 5,333 in December 1974.
Improved Services
Benefiting from its improved financial
position, Southern has made significant
progress in expanding and modernizing
facilities for serving customers.
At Memphis, Tennessee, Southern
has become the number two carrier
among 10. To accommodate the in-
creasing passenger demand, Southern
has acquired larger ticket counter space
and now occupies a total of 10 gates
with accompanying passenger waiting
areas. Currently, Memphis is second
only to Atlanta,~ Georgia, in number of
passengers boarded by the company.
In New Orleans, Louisiana, Southern
recently relocated in a new terminal
wing. This permitted needed expansion
of ticket counters and gate areas. New
Orleans is Southern's third largest city,
based on passenger boardings.
Typical of the growth among smaller
cities on the Southern system is the
new terminal at Pine Belt Regional Air-
port serving Laurel and Hattiesburg,
Mississippi. Previously, separate ser-
vice was provided to each city. As a
result of the joint airport development,
the area now accommodates Southern's
DC9 aircraft. In turn, during the first
two months of 1975, the new regional
airport served 158.4 per cent more pas-
sengers than in the similar period in
1974 when separate airports were
operated.
Fort Walton Beach, Florida, a major
vacation destination on the Gulf of Mex-
ico, is provided air service at Eglin Air
Force Base. Terminal facilities long have
been inadequate to serve this growing
area. A modern terminal has been
opened, built on county-owned property
adjoining Eglin A.F.B. This now is among
the most functional and attractive facili-
ties on the Southern system.
A new terminal has been built at
Knoxville, Tennessee; and Southern oc-
cupies prime space, offering excellent
corporate identity and passenger
convenience.
Although Southern expects to move
in three years to a new terminal com-
plex at Hartsfield Atlanta International
Airport, substantial improvements have
been made in presently occupied facili-
ties, both in the area of passenger com-
fort and general appearance. Also, at
Hartsfield International, Southern soon
will occupy expanded freight facilities
that are expected to increase customer
use as well as improve handling
procedures.
In addition to airport improvements,
Southern has significantly upgraded the
level of service provided individual pas-
sengers. During the past two years,
Southern has operated one of the most
advanced computerized reservations
systems in the airline industry. Added
to this is an itinerary pricing and auto-
mated fare quotation system. Individual
passenger tickets are produced by com-
puter and printed in seven seconds. This
reduces delays for passengers and in-
creases employee efficiency.
This automation substantially de-
creases the time required to book a
reservation. Currently, reservations
agents answer incoming calls, on an
average, in less than 15 seconds. The
average time for handling each pas-
senger has been reduced to two and
one-half minutes.
A new advertising program, begun in
mid-1974, has been aimed at Southern's
sustaining market, the business traveler.
The new theme, "Nobody's Second Class
on Southern: was developed to com-
municate Southern's single class
service, the roomier seating arrange-
ment used on Southern aircraft, and the
overall upgrading of service and
facilities. Response to the campaign has
been strong.
Technological Expansion
As part of the continued program to
reduce costs and improve efficiency,
Southern expanded capability for in-
house repairs and fabrication of
support parts.
Further improving Southern's service
to its customers will be a $25,625,000
maintenance and training facility under
construction at Hartsfield Atlanta Inter-
national Airport. The project is funded
by City of Atlanta Airport Revenue 5
6
Detroit
means
Lions, Tifjers,
Pistons,
RedWinfjs,
and
Motor Cars
And if you 're considering a
visit, from anywhere in the
South, consider Southern
Airways . Southern 's DC9
flights leave a lot of time to
enjoy the sights and sounds
of Motown. And when you
are returning South, South-
ern operates the only non-
stop service to Nashvil le,
plus points beyond.
CITY OF DETROIT
THE MOTOR CITY
Southern Business continued
Bonds and Southern has leased the 45-
acre development for 30 years with a
20-year option.
The training center is scheduled for
occupancy in October 1975 and the
maintenance base will be completed by
August 1976.
Included in the facility is a jet engine
test cell that will be completed in Octo-
ber 1975. This will eliminate the need
to send engines to a testing facility in
Miami. Previously, this procedure re-
quired three days. Upon completion of
the facility, this work can be accom-
plished in Atlanta in five hours.
Expanded Routes
Contributing to the need for improve-
ment in ground and service facilities
have been recent route awards which
are expected to be major profit contribu-
tors in the future.
On December 4, 197 4, Southern imple-
mented service to Detroit, Michigan,
and to the Cayman Islands, B.W. I. The
Detroit route is expected to be one of
the most significant, in terms of profit,
yet received.
Southern had sought Nashville-Detroit
service for more than four years. Prior
to the route being awarded, this was the
largest major domestic city-pair market
without direct air service. Travel be-
tween these points previously required
a change of planes and more than three
hours travel time. Travelers now can be
accommodated on this non-stop route in
just over one hour.
In granting the route between Nash-
ville and Detroit, the Civil Aeronautics
Board called attention to Southern's
success in expanding service to St.
Louis, Missouri, and to Chicago, Illinois.
The Board determined that Southern
could benefit more passengers than
could other carriers seeking the route,
based on the number of cities Southern
serves south of Nashville.
The Cayman Islands entry is South-
ern ' s first scheduled service as an
international carrier and offers an op-
portunity to develop a kind of vacation
market not previously available to
Southern's customers.
Prior to starting scheduled service to
the isl ands, Southern operated more than
50 charter flights to the Cayman Islands
and this experience was highly valuable
in Southern's introducing service to this
group of Caribbean islands.
A city ticket office has been opened
in downtown George Town, the capital
city. This office, as well as the airport
operation, is run by Caymanians under
direction of a manager with long com-
pany experience.
Although operating under a tempor-
ary Civil Aeronautics Board authoriza-
tion, the company is seeking permanent
authority and believes it can make a
major contribution to the development
of tourism in the Cayman Islands ,
already recognized as a delightful vaca-
tion spot.
Another pattern of service expected
to be of major importance to the com-
pany is the entry into Chicago's O'Hare
Airport. This service began January 15,
1975, after a five-year effort to obtain
city authority to operate at the city-
owned airport.
Southern previously served only
Chicago's Midway Airport. Because of
the lack of connecting flights there,
Midway travel is limited virtually to
people going to and from Chicago.
O'Hare service now permits Southern's
passengers to connect to flights through-
out the United States as well as to inter-
national flights.
Southern's Outlook
While the long-term outlook for
Southern is encouraging, particularly
when considering the high quality route
awards of recent years, 1975 will be a
challenging year because of the poor
economic climate in which the company
must operate. Because of the overall de-
cline of available traffic that began in the
latter part of 1974, and has continued
into 1975, an eight per cent reduction
in staffing was instituted in January
1975. Schedules were reduced in Feb-
ruary to eliminate low load factor
flights, where the public's needs would
not be affected adversely.
Additional emphasis is being placed
upon the pleasure traveler, making this
market aware of the services provided
by Southern and making it easier to use
Southern when dependable transporta-
tion is sought.
Southern will remain competitive with
all fares. Currently being considered
are innovative fare proposals designed
to stimulate additional air travel. South-
ern serves many of the vacation and
travel spots of the eastern half of the
United States, as well as the Cayman
Islands, and these markets offer a large
development potential.
It is unlikely that the major boost in
air travel resulting from automotive
gasoline shortages in 1974 will be
repeated in 1975. Nevertheless, a
greater awareness of Southern as an
alternative means of transportation will
continue to attract passengers to the
company.
Expenses in 1975 will be subject to
inflationary pressures. Fuel prices will
be negotiated when current contracts
expire at mid-year. Wage increases will
be incurred. Increases in costs are ex-
pected to be offset by a combination of
greater efficiency, higher loads and fare
adjustments.
The company will in the future, as it
has in the past, participate in Civil
Aeronautics Board route proceedings
and aggressively pursue every oppor-
tunity to expand and upgrade the quality
of its route system.
Southern has put it all together, a
carefully operating, quickly reacting
company that remains responsive to the
needs and the attitudes of the public.
As a result, new customers are being
attracted and old ones retained. For
those who haven't seen the change. the
airline has its own response.
"If you haven't flown Southern lately,
you haven't flown Southern'.'
Southern 's people make Southern Airways.
Competent, dedicated, friendly men and
women work to provide reliable , convenient
passenger and cargo service.
In support of
this, Southern breaks ground. above right.
for a $25,625,000 maintenance base and
training center. Holding a drawing of the
facility are {1-r) Frank W Hulse, Victor
C. Pruitt, Graydon Hall. George M. Gross.
and Atlanta Mayor Maynard Jackson .
NO CHARTER IS
SECOND CLASS
ON SOUTHERN
At Southern Airways, we've got
an attitude toward charter flights
that you just won't find at most
other airlines.
We thoroughly enJoy them.
So our charters aren't pushed
off to some obscure department.
Instead, our Charter Department
makes up an integral part of our
corporate structure.
And that difference in attitude
can make all the difference in the
world to you and your group.
We've been in the charter
business for more than 20
years. In the millions of miles
we've flown all over the United
States, Canada, the Bahamas
and to the Cayman Islands,
we've served some of America's
largest corporations and
professional organizations,
many of the country's most
famous athletic teams and
thousands of successful
private events.
We're simply not going to give
you anything less than the finest
charter service you can get.
Telephone your local Southern
reservations number, or
(404) 767-0644.
-
Southern
7
8 lllustrat1on by Don Loehle
Southern Travel
the going is
and so is the staying
Southern serves vacationland. In 14
states, the District of Columbia and on
one grand island. From Broadway to
Pennsylvania Avenue, Miami Beach and
downtown George Town. Along the
Florida Panhandle and the man-made
beaches of Gulfport and Biloxi to the
French Quarter. Up the Mississippi to
Memphis and its Blues. And to swing-
ing St. Louis and lakeside Chicago. And
there is Motown and Music Town. And
a lot of America in between.
Southern Country.
Take the southern-most point. The
Cayman Islands. They are less than 500
miles south of Miami but they are out of
this world.
Here is a different kind of Caribbean
island. No neon, no garish night clubs,
no casinos, no hassle. Nothing but peace
and harmony.
Three islands make up the Cayman
Islands- Little Cayman, Cayman Brae
and Grand Cayman, the largest. Grand
Cayman is some kind of an island. A fun
place to visit and a fun place to get to.
Like flying there on Southern.
When you board in Miami for the
hour-plus flight , you settle down with
a glass of island punch. Then you select
from a choice of snacks. Such as lobster
tails, chicken with a sweet sauce, or a
medley of fruit. Plus complimentary
beverages.
And before you know it, you are clear-
ing imigration and being greeted by a
friendly taxi driver who speaks in a
patois of the Queen's English.
Welcome to Grand Cayman. Now,
you are ready to discover it.
In some respects, little has changed
since Christopher Columbus first
charted the island.
Grand Cayman is some 24 miles long,
from four to eight miles wide. The pop-
ulation approximates 12,000. Unemploy-
ment is unknown, everyone smiles, and
everyone is happy to have you in
residence.
About the only time anyone raises a
voice is to remind a tourist to drive on
the left side of the road.
This comes from the Cayman's asso-
ciation with England. The residents are
proud of their crown colony status, and
their political and cultural ties with the
Queen. The Union Jack forms part of
the Cayman flag and, while the currency
9
10
Southern Travel continued
Grand Cayman is an easy island to discover. Bikes w ith or w ithout motors are a favorite
means. A stop on every ride is the harbor in George Town where freighters tie up. Another
stop is Mariculture. Here, sea turtles are farmed in a controlled environment.
is Cayman, it pictures Queen Elizabeth.
Even so, most Cayman customs have
been localized. The islands have their
own distinctive history-and future.
The beginning came from volcanic erup-
tions which created the lava-like rock
that abounds and forms much of the
scenic coast line. The population came
from wrecked mariners, freed slaves,
expatriated Europeans, United Kingdom
emigrants and fortunate Americans.
Columbus found the islands full of
turtles and chose the name Las Tortugas
- the turtles. Later, Spanish maps intro-
duced the name Cayman, thought to
evolve from the lizards on the island.
The first visitors were sailors stock-
ing turtles as fresh meat. The first set-
tlers came in the mid-1650s. They are
thought to have been part of Oliver
Cromwell's forces in Jamaica.
England acquired the islands in a
1670 treaty. A 1713 treaty ending priva-
teering among England , France and
Spain caused the Caymans to become a
pirate haven. Edward Teach - Black-
beard- was a frequenter of the islands
after plundering throughout the
Caribbean.
While much of Cayman history is
based upon legend, it is authenticated
that land grants were made as early as
1734, with others following in 1741.
An event of major significance occur-
red in 1788 when 10 merchant vessels
wrecked off Grand Cayman. It is thought
the lead ship first struck a reef, then
fired a warning flare that was mis-
interpreted by the other captains. The
disaster was named Wreck of Ten Sails.
It is believed the island's tax-free
status came as a reward from the King
of England for the islanders' aid to the
shipwrecked crews. Today, there are no
income, property or inheritance taxes.
The population increased slowly. In
1802 a census indicated 933 residents,
one-half of which were slaves. A century
later the residents had increased to
5,000, of which 1,500 were thought to
be seamen.
Today, the Caymans continue to fur-
nish seamen to ships throughout the
world. Many men are away for a year or
more, returning by air for long vaca-
tions before rejoining ships in distant
ports.
The close affinity to the sea comes not
only from following the sea as a voca-
tion , but also the dependen cy upon
the sea as a contributor to the islands'
economy.
The Caymans produce little food and
almost no commodities. Thus, import is
vital, and sea and air routes support the
islanders' needs. As there are no deep-
water ports, only small freighters dock
at George Town, the capital city. Cruise
ships now call for brief visits, bringing
tourists in by launch for an afternoon
visit. Vacationers arrive by air. But it is
the sea that attracts these tourists to
the islands.
Grand Cayman is a water-lovers para-
dise. The beaches are wide and white.
The water varies from deep blues to
pastel greens. The diving and snorkel-
ing are unrivaled. Lobsters are found at
the end of a 12-foot dive and fishing on
boats, beaches or docks is plentiful
year-round.
This does not mean, however, that
Grand Cayman is only for the active. It
is the best do-nothing spot in the world.
The pace is slow. For those who want to
laze, comfortable hammocks sway easily
amid the Australian pines in front of
most hotels. The serenity is total.
There are no crowds. Tourism is not
crowd-oriented. It is soft-sell. You are
not urged to come; you are simply
promised a delightful vacation when
you do come. In turn, hotels are gen-
erally small , and many are run in a
casual but comfortable manner. Of
course, there are exceptions for those
seeking more opulence.
For maximum comfort and spacious-
ness, modern apartments and villas are
available by day, week or lifetime.
As with most Caribbean resorts, the
big season is between mid-December
and mid-April. But off-season visits are
just as pleasurable, and the prices are
even more so.
This is an easy island. Easy to get to
and easy to enjoy. The only hard thing
about Grand Cayman is leaving , and
Southern makes that as easy as possible.
Fish are abundant, as evidenced
by this 55-pounder.
Relaxation and fun
are yours in Orlando
There is more to Orlando, Florida, than a
mouse and a duck. Even though Walt Dis-
ney World remains the number one at-
traction, tourists flying into this Central
Florida resort city are within a short
rental car ride of events varying between
natural splendor and moon-soaring
rocketry.
Good hotels and motels with family-
attracting rates abound throughout the
area. As a city with a strong economy,
only partially dependent upon tourists,
Orlando offers good restaurants at
reasonable prices. The delightful year-
round climate completes a perfect
atmosphere.
Walt Disney World is not just for children .
Adults marvel at the intricate productions.
Although few tourists need an excuse
for an Orlando visit or stop-over, con-
ventions utilizing the area's excellent
meeting and activity centers are adding
another reason. Companies throughout
the country are choosing Orlando as a
place to meet and a place for wives and
children to play.
The attractions are many. Naturally,
Walt Disney World is a "must" on every-
one's list, and it is as much for adults as
for children. It takes at least two days to
grasp its wonders, and some visitors will
want to spend their entire stay here.
Another stop on the must-see list is
Ringling Bros. and Barnum & Bailey's
Circus World Showcase. The thrill of
the Big Top is enhanced by amazing
photographic feats that required pho-
tographers to become trapeze artists,
animal tamers, clowns and high wire
performers.
America the Beautifnl
The beauty still is natural in
the Great Smoky Mountains
National Park. And the bears
still roam wild.
This is America unspoiled .
Come for a hike or a week. Re-
gardless of the time you take, its
a visit that spans 200 years,
back to the way things were
when we became a nation.
THE SMOKY MOUNTAINS
Ask Dolly, Chet, or Minnie Pearl.
Nashville is the capital of the
finest home-style music ever
whomped up. The accommoda-
tions, restaurants and things to
see are as great as the music. If
you 're headed to Opry Land, for
business or pleasure, Southern
will get you to Nashville and
home. Nashville and Southern
go together like grits and gravy.
Like our three famous horsemen on Stone Mountain ,
Atlanta is marching forward . Forward as a leading fi-
nancial center. Forward as an important convention
city. Forward as the place for a family vacation .
Atlanta is served by Southern Airways to and from 53 cities.
11
12
Along Florida's Panhandle are
found the luckiest fishermen in
the world. Lucky because they
catch fish. Even luckier because
they catch them here.
Charter your own boat and crew, or
join the party headed for snapper
and grouper. Or, just buy a pole and
sit down under a bridge.
You'll be in luck when you fish
here. And when you swim, and play
golf, and just take it easy.
Fort Walton Beach
IN FLORIDA, ON THE GULF
Meetnsin
St.Louis
We're the gateway to the
West. And to the East. We
gave you the ice cream
cone, hotdogs and a taste
for beer. Now we've added
basics like jet airplanes,
shoes for the family and
Southern Airways.
It's easy to meet us.
In St. Louis
Southern Travel continued
Whether you watch the elephants or
ride them, dine on unique and exciting
food or munch on cotton candy, peanuts,
popcorn and pink lemonade, you will
feel part of the circus world.
Many of the Orlando area's attrac-
tions are water-oriented. Sea World is a
$20 million, 125-acre sea adventure
where visitors can hold real starfish in
their hands and pet and feed dolphins
and sea lions. There is a leaping two-ton
killer whale, sharks and exotic fish.
There are pearl divers and educational
graphics of sea animals. Save a day for
Sea World.
Cypress Gardens, one of Florida's old-
est and most famous attractions, offers
9,000 varieties of plants and flowers. A
world-famous daily water ski review in-
cludes Aquamaids in their graceful
water ballet. This attraction is less than
an hour from Orlando.
On the Atlantic, an hour from
Orlando, is Kennedy Space Center.
Here, public bus tours take visitors to
the launch pads where moon-bound
flights and Sky Lab launches made his-
tory. Free movies, science demonstra-
tions and exhibits complete the exciting
space displays.
Orlando and its surrounding area
offer something for everyone. Whether
you fly there as your final destination or
use a Southern stop-over fare en route to
and from Miami, visit Orlando. You will
see the mouse and the duck, and a lot
more too.
Consider Huntsville
for a convention
Sports and cultural activities in north
Alabama have received a boost through
the opening of the 270,000 square foot
Von Braun Civic Center in Huntsville.
The center is named after space
pioneer Dr. Wernher Von Braun, who
lived and worked in Huntsville for
almost 20 years. He headed the nation's
missile and space program.
The complex will provide 20,000
square feet of exhibit space, seats for
2,000 people, and 11 meeting rooms. A
concert hall seats 2,180 persons, and a
16,000 square foot area has been devel-
oped into a creative arts museum, gal-
lery and sales space.
The sports arena will be used as an
ice-skating rink when not booked for
spectator activities. Extensive cultural
activities, including concerts and the-
ater, will be presented; and it is expected
the complex will aid Huntsville in attract-
ing national and regional conventions.
Huntsville enjoys excellent air ser-
vice, making it accessible from all parts
of the country.
Southern currently provides flights
between Huntsville and such points as
St. Louis, Missouri; Detroit, Michigan;
Atlanta, Georgia; New Orleans, Louisi-
ana; and Miami, Florida, as well as
either direct or connecting flights to
all other points on Southern's system.
Huntsville , A labama, has opened the Von Braun Civic Center, certain
to become a cu ltu ra l and convention hub.
Jazz, Bines,
Hillh Steppin' Shoes
You find it all in New
Orleans. Music is mel-
low, cuisine is spicy, fun
is fast . Plan your next
convention here. In the
meantime, come see for
yourself.
NEW ORLEANS
and all that jazz
H there wasn't a
Miami
Beach
we would have
invented it.
GREATER MIAMI
CITY AND BEACH
Notice to Stockholders
of Southern Airways, Inc.
Any person who owns as of December
31 of any year, or subsequently acquires
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 Civil Aeronautics
Board a report containing the informa-
tion required by Part 245.12 of the
Board's Economic Regulations. This re-
port must be filed on or before April 1
of each year as to the capital stock or
capital owned as of December 31 of the
preceding year; and in the case of cap-
ital subsequently acquired, a report
must be filed within ten (10) days after
such acquisition, unless such person
has otherwise filed with the Civil Aero-
nautics Board a report covering such
acquisition or ownership.
Any bank or broker covered by this
provision, to the extent that it holds
shares as trustee on the last day of any
quarter of a calendar year, shall file
with the Civil Aeronautics Board 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 required to report pur-
suant to these provisions who grants a
security interest in more than five per
cent ( 5 % ) of any class of the capital
stock or capital of an air carrier, shall
within thirty (30) days after granting
such security interest, file with the Civil
Aeronautics Board a report containing
the information required 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
writing to the Director, Bureau of Op-
erating Rights, Civil Aeronautics Board,
Washington, D.C. 20428.
Equal Opportunity Policy
It is the policy and practice of Southern
Airways, Inc. to recruit, hire and
promote qualified applicants regardless
of their race, color, religion, sex, age,
national origin, or physical handicap.
To further this objective, the Com-
pany has established procedures to
insure that all personnel actions such
as compensation, benefits, transfers,
lay-offs, returns from lay-offs, Company
sponsored training, education, tuition
assistance, social and recreational pro-
grams, and all Company facilities are
administered without regard to race,
color, religion, sex, age, national origin,
or physical handicap.
SOUTHERN
SHIPS
TIREE WAYS
Fast
When shipments require speed,
speed them on Southern. Every
Southern flight can be an Air
Freight Flight, connecting to
cities throughout the world.
Faster
Southern Air Express assures
priority shipment between cities
on the Southern system. It gets
there when you want it there. In
fact, it flies as fast as it can.
Fastest
Small packages- or large ones
under 50 pounds - get special
treatment when shipped Swift.
Deliver to any Southern ticket
counter and pick up at the ticket
counter after arrival. All for $25,
anywhere on Southern's
domestic system. Arrangements
with other airlines extend this
service to more than 100
additional points.
,
Southern
13
14
Fitihtinl!
The Battle
of
Mobile Bay
This is one battle you can't
lose. Southern Airways jets
you here and then we try to
keep you here.
Our hospitality is exten-
sive. Fortunately, our sand
traps aren 't.
Mobile
PLUS A LOT OF FUN ON THE GULF
Southern Sports
The Southern Open
Where winning is just the beginning
The Southern Open is a career-boosting
kind of golf tournament. It has launched
some of golf's most noted players and it
has been a returning point for another.
Now, played each September at the
Green Island Country Club, Columbus,
Georgia, the $100,000 tournament has
grown to maturity under sponsorship
of the Columbus Chamber of Commerce
and Southern Airways.
The modern-day version becomes six
years old this fall. The beginning was
much earlier. It started in Atlanta,
Georgia, in 1919.
That year, the winner was Jim Barnes.
Barnes already had won the P.G.A.
championship in 1916, but his Southern
Open win was coupled with the 1919
P.G.A. title. In 1925, Barnes added the
British Open title, and these and his
other victories were recorded upon his
inclusion in the Golf Hall of Fame.
Another golfer almost used the 1919
Southern Open as a winning beginning.
Instead, he finished second to Barnes,
but this paved his way to titles includ-
ing the U.S. Amateur, U.S. Open, British
Amateur and British Open. This was
1930 and the Grand Slam. The golfer
was Bobby Jones, another Hall of Farner.
The Southern Open was played in
1922 in New Orleans, Louisiana, and it
was the first win for Gene Sarazen.
Again, the Southern Open led to the Hall
of Fame. En route, Sarazen added titles
including the 1922 and 1932 U.S. Open;
the P.G.A. in 1922, 1923 and 1933; the
British Open in 1932; and the Masters
in 1935.
The Southern Open slipped from rec-
ognition after 1923, and the event and
name reposed quietly until 1971.
Eyeing a major golf tournament as an
attraction for Columbus, local business
and civic leaders in 1970 organized the
Green Island Open Invitational, a
$60,000 tournament. Southern joined in
underwriting the event.
Mason Rudolph won the $12,000 first
prize, his first win since the Thunder-
bird, four years earlier.
Response to the 1970 tournament en-
couraged sponsors to raise the prize
money to $100,000. In turn, the name
was changed to Southern Open.
Lee Trevino, Jack Nicklaus, Bruce
Crampton and Charles Coody did not
play in the 1971 tournament. They
already were committed to the World
Series of Golf that same week. But,
other golf "names" were present, and
some who were to become more familiar.
Again, the Southern Open trophy
went to a player carding his first win. His
name was Johnny Miller. Miller and his
bride, Linda, took home a $20,000 pay
check. Columbus, Georgia, became his
starting point toward the Hall of Fame.
Dewitt Weaver became the first Geor-
gian to win the Southern Open, taking
the title in 1972. He picked up a title
that Bobby Jones missed. The win gave
Weaver a push toward golf winnings
now approaching a quarter-million
dollars.
The 1973 Southern Open marked
Gary Player's return to golf after sur-
gery and a lengthy convalescence.
There was no question that he was back
in his prime. His recovery had been
complete, and he won the Southern Open
before taking the 1974 Danny Thomas
Open, Masters, and British Open titles.
The Southern Open launched another
career in 1974. Forrest Fezler, with 1974
winnings of $90,000, and already a good
start in 1975, won his first tournament
at beautiful Green Island Country Club.
That is the kind of tournament the
Southern Open is. And because of this,
the pros like it. For those who need a
win, or those looking for a boost, the
challenge of the course that overlooks
the Chattahoochee River beckons them
to Columbus in September.
The pros become excited by the civic
pride among sponsors and spectators at
the Southern Open. There is a lot of
pride in saying about a future giant in
the game of golf, "I know him; I saw
him get his start at the Southern Open'.'
The 1975 Southern Open will be
played September 4, 5, 6, and 7. For
information about tickets or sponsor-
ships, write: Southern Open, P.O. Box
2056, Columbus, Georgia 31902.
Linda Mi ller and husband Johnny embrace
after he w ins the 1971 Southern Open . T his
was M iller's first professiona l win. Forrest
Fez /er carded his first victory in the 1974
event, placing his name on the permanent
trophy as well as on a $20,000 check. Rig ht.
Fez/er putts out on the fina l round as Bruce
Cra mpton looks on .
Memphis
In
June,
July,
August,
September,
October,
November,
December,
January,
February,
March,
April,
May
A good place
to live,
12 months
out of
the year.
MEMPHIS
An appropriate symbol for
the South 's industrial city.
Pride in craftsmanship
abounds in Birmingham.
That's why things are made
better in Birmingham. Your
product will be made better
here, too.
Birmingham
A plant site r,ght tor you
15
-
Southern
MISSOURI
OKLAHOMA ARKANSAS
nm
* Substitute service provided
by third-level carrier
Above, left to right
Washington, D.C. Jefferson Memorial
New York, N .Y. Times Square
Baton Rouge, La. State Capitol
Biloxi, Miss. Broadwater Beach Hotel
Jackson, Miss. City Hall
New Orleans, La. Mardi Gras
Below, left to right
Tuscaloosa, Ala. Bear Bryant
Memphis, Tenn. Growing rapidly
Atlanta, Ga. The Famous Street
Cayman Islands, B.W.I. Wonderful
Jacksonville, Fla. Rising skyline
Miami, Fla. Greyhound Racing
PENNSYLVANIA
MARYLAND
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, 1974
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 he
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 __
SOUTHERN AIRWAYS, INC.
FORM 10-K
Report for the Year Ended December 31, 1974
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, Michigan, Mississippir Missouri, New Jersey, New York, North Carolina, South
Carolina, Tennessee, Virginia, and the District of Columbia pursuant to a permanent cer-
tificate of public convenience and necessity issued by the Civil Aeronautics Board (the
"CAB"). In addition, under temporary authority granted by the CAB, the Company operates
a route between Miami, Florida and Grand Cayman Island, British West Indies. The Company
is one of nine certificated scheduled airlines which operate in interstate commerce and serve
cities of small and intermediate size as well as major metropolitan areas (hereinafter referred
to as the "Local Service Carriers"), as distinguished from the ten major domestic airlines,
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 domestic routes. At December 31, 197 4, the Company had a fleet
consisting of 25 Douglas DC9 twin-fanjet aircraft and 11 Martin 404 twin piston-engine
aircraft.
Service to Grand Cayman, the Company's only international route, began on December
4, 197 4. On this same date, the Company began operations over a newly-authorized route be-
tween Nashville, Tennessee and Detroit, Michigan. During the latter part of 1974, the City
of Chicago relaxed its ban against new leases at O'Hare Airport and granted the Company
permission to serve Chicago through that facility as well as through the Midway facility.
Service through O'Hare, which began on January 15, 1975, will result in the availability of
more connecting flights thap are available at Midway Airport through which the Company's
service to Chicago had previously been restricted. Except for the CAB approved termination
of service to four small locations, there were no other material changes in the Company's route
structure during 197 4.
During the last quarter of 197 4, both the airline industry and the Company experienced
softening in domestic traffic, which partially offset gains during the first three quarters of
the year. This trend is expected to continue at least through the first half of 1975, accentuating
the Company's usual seasonality pattern under which traffic levels normally bottom out in
mid-winter, after peaking in mid-summer. As a result, the Company laid off approximately
200 employees in early 1975. At December 31, 1974, prior to the layoff, the Company had 2,639
employees. Also, in January 1975, the Company leased one of its DC9 aircraft to a foreign car-
rier for a four-month period.
2A
The Mandatory Fuel Allocation Regulations, issued by the Federal Energy Office and
implemented on January 15, 1974, remain in effect until June 30, 1975, unless extended. Under
these regulations, the Company, as a Local Service or Regional Air Carrier, receives an amount
of fuel equal to 100 per cent 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. The Company has been given supplemental allocations for additional aircraft
acquired during 1973. This allocation will be sufficient to enable the Company to provide the
level of schedules presently programmed for 1975. The Company's contracts for the supply
of its fuel requirements from major oil companies run through May 31, 1975, and are ex-
pected to be renewed at that time, although at substantially higher prices. Any further re-
ductions in fuel supplies and/ or increases in fuel prices could have a material adverse effect
on the operations and earnings of the Company. Fuel prices approximately doubled during
1974 and the airline industry received fare relief in the form of a fuel-related increase of
6 per cent in April and a partially fuel related increase of 4 per cent in November. These
increases only partially off set rising fuel and other costs.
In addition to fuel conservation measures, it is possible that compliance with statutory
requirements related to environmental quality and settlements of related actions may neces-
sitate significant capital outlays, may materially affect the earning power of the airline in-
dustry and the Company and may cause material changes in the business.
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
operating over certain of the Company's route segments. All of these Trunk Carriers are sub-
stantially larger than the Company in size and financial resources and some use newer and
larger aircraft over these route segments. The Company also is subject to competition over
certain of its route segments from Local Service Carriers and from small aircraft operators
such as "air taxi" services.
The common stock of the Company is traded in the over-the-counter market. The range
of high, low, bid and asked prices during 1973 and 1974, as indicated by the National Quota-
tion Bureau, Inc., follows:
Bid Prices
Year
1973
High Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 %
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1974
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 %
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 %
5
4%
3%
2
Asked Prices
High Low
7
6
6
4
4
5%
5
5
5%
5
4
3
3
4
3%
3
The foregoing prices do not represent actual transactions. They represent prices between
dealers and do not include retail markup, mark-down or commission. There have been no
active markets in the Company's convertible preferred stocks, convertible subordinated deben-
tures, or warrants during 1973 or 1974. During the fourth quarter 1974, the Company de-
clared and paid dividends totaling 72 cents a share on its Series A and Series B Convertible
Preferred Stock. This payment represented dividends on these shares for the years 1972 and
1973 of 36 cents a share each year. No dividend has been declared on the preferred shares for
1974. The Company has paid no other dividends on any class of its capital stock since 1967.
3A
ITEM 2. Summary of Operations
STATEMENT OF OPERATIONS
The following statement of operations of Southern Airways, Inc. for the five years ended
December 31, 1974, has been examined by Ernst & Ernst, independent accountants, whose
report thereon (which is subject to any adjustments which may result from the recovery of
the hijacking payment as explained in Note B of Notes to Financial Statements and includes
an exception as to consistency with respect to the change in the method of recording certain
DC9 engine maintenance cost as described in Note E) appears elsewhere in this Form 10-K
Annual Report. Certain prior year amounts have been reclassified in this statement to con-
form with 1974 presentation. This statement should be read in conjunction with the related
financial statements and notes included elsewhere herein.
Year Ended December 31,
1970 1971 1972 1973 1974
(In Thousands of Dollars Except Per Share Amounts)
OPERATING REVENUES
Passenger .................................... .
Mail, express and freight .................... .
Public service revenue (A) . .... .. . .. . ... . . . . .
Charter ...................................... . .
Other ............ . ... . ....................... . .
OPERATING EXPENSES
Flying operations ............................ .
Maintenance (5) ........................... . . .
Aircraft and traffic servicing .. . ............ .
Passenger service ..................... .. ..... .
Promotion and sales ....................... . . .
General and administrative .................. .
Depreciation and amortization (A) (E) ..... .
Other ............... . ... .. .... . .............. .
OPERATING INCOME (LOSS) ....... .
OTHER DEDUCTIONS AND INCOME
Interest on long-term debt ( 3) ............ . . . .
Gain on disposal of aircraft ........ . ........ .
Miscellaneous deductions (income) - net . ... . .
INCOME (LOSS) BEFORE INCOME
TAXES.EXTRAORDINARY
TAX CREDIT AND ACCOUNTING
$37,187
2,866
4,823
3,835
1,697
50,408
18,072
9,045
11,351
2,661
4,274
3,192
2,632
961
52,188
( 1,780)
1,789
( 236)
1,553
CHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,333)
INCOME TAXES (CREDIT) (A) (4)
INCOME (LOSS) BEFORE
EXTRAORDINARY TAX CREDIT
AND ACCOUNTING CHANGE . . . . . . . (3,333)
TAX BENEFITS OF NET OPERATING
LOSS CARRYFORWARD ( 4) ............. . .. .
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (E) (5) ........... .. .. . .......... .
NET INCOME (LOSS) ......... . . . ... ... . $(3,333)
EARNINGS (LOSS) PER COMMON AND - - -
COMMON EQUIVALENT SHARE (6)
Primary:
Income (loss) before extraordinary
tax credit and accounting change . . . . . . . . . $ ( 3.25)
Extraordinary tax credit . ................. .
Cumulative effect of accounting change . .... .
Net income (loss) ........... . .............. $ ( 3.25)
Fully Diluted:
Income before extraordinary tax credit
and accounting change .................. .
Extraordinary tax credit .................. .
Cumulative effect of accounting change .... .
Net income ................................ .
RATIO OF INCOME TO
FIXED CHARGES (7) .. . . . . . . . . . . . . . .. . .. .. .13
RATIO OF INCOME TO FIXED CHARGES
AND PREFERRED DIVIDEND
REQUIREMENTS (7) . . . . . . .. . . . . . . . . . . . . . . . .13
4A
$45,302
3,090
6,974
4,067
1,827
61,260
20,950
10,808
13,523
3,774
4,774
3,461
2,637
926
60,853
407
1,678
23
(1,294)
~ )
(1,059)
$ ( 1.02)
.67
.67
$52,052
3,531
7,138
4,839
2,072
69,632
22,431
11,890
15,433
4,343
5,304
3,784
2,559
995
66,739
2,893
1,362
( 110)
1,252
1,641
450
1,191
409
$ .77
.29
$ 1.06
$ .60
.20
$ .80
1.42
1.36
$65,949
4,320
6,814
5,358
2,168
84,609
26,227
15,171
20,009
5,678
6,713
4,610
3,673
1,039
83,120
1,489
3,083
(1,968)
( 55)
1,060
429
109
320
97
$ .15
.08
1.08
1.05
$ 86,821
5,136
6,805
6,908
2,682
108,352
34,690
16,613
24,339
6,561
8,039
5,475
4,397
1,355
101,469
6,883
3,929
( 46)
( 577)
3,306
3,577 -<
985 -
2,592
325
565
$ 3,482
$ 1.64
.20
.35
$ 2.19
$ 1.10
.11
.19
$ 1.40
1.60
1.56
NOTES TO STATEMENT OF OPERATIONS
( 1) Alphabetical references ref er to the Notes to Financial Statements appearing elsewhere
in this Report.
(2) Pension expenses, including amounts paid under a defined contribution plan, were as
follows :
Year Ended December 31,
1970 1971 1972 1973 1974
$661,734 $868,779 $1,211,687 $1,540,017 $1,899,486
Effective July 1, 1972, and September 2, 1974, the Company modified the plans to pro-
vide for improved benefits, with related increases in annual pension expense of approxi-
mately $230,000 and $51,000, respectively. The Employee Retirement Income Act of 1974
will not have a material effect on pension cost in future periods.
(3) Net of interest capitalized, which in 1973 amounted to $80,289. Amounts capitalized in
other years have been insignificant.
( 4) Income taxes for the years 1972 through 197 4 are comprised as follows:
1972 1973 1974
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $762,000
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000
Deferred (net of applicable investment
tax credit of $250,000)
Federal ...................................... . ......... .
State ................................................... .
Investment tax credit (applicable to
current taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (393,000)
$450,000
$194,000
24,000
(109,000)
$109,000
$1,138,000
134,000
250,000
44,000
(581,000)"-
$ 985,000
Deferred income taxes result from timing differences in the recognition of revenue and
expense for tax and financial reporting purposes. The sources of those differences in 197 4
and the tax effect of each were as follows:
Accelerated depreciation used in prior years for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $878,000
Provision for inventory obsolescence for financial reporting purposes in
excess of cumulative allowed deductions for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (652,000)
Provision for Martin 404 overhaul overhead deducted for tax
purposes in prior years ..................................................................... .
Other ....... . .... . . . ... . .............................. . ...
Investment tax credit ....... .. . . ...... . . ........ . . ....... .... .... . . .............. . ............ .
282,000
36,000
(250,000)
$294,000
Current federal income taxes in 1972 ($762,000) and 1973 ($194,000) and the sum of
current and deferred federal income taxes in 1974 ($1,638,000 before investment tax
credit of $250,000 offsetting deferred taxes) equal approximately 48 % (the statutory
federal tax rate) of income before taxes after deducting the state tax provision shown
above.
Investment credit carryovers, which may be used to offset Federal income taxes payable
in future income tax returns, aggregate $1,341,000 and expire in 1977 ($589,000), 1978
($38,000) I
1979 ($307,000) I
1981 ($26,000) I
1982 ($38,000) I
1983 ($220,000) I
1984
($123,000).
The credit to deferred tax expense in 1971 ($235,000) reflects the reversal of deferred
taxes provided in a prior year. The re~ersal resulted from the determination in 1971
that, because of a change in the depreciation method and lives applicable to certain assets
for income tax purposes and the carryforward of the 1971 operating loss, the previously
provided deferred taxes would not be paid.
5A
NOTES TO STATEMENT OF OPERATIONS (Continued)
(5) DC9 engine maintenance costs would have increased (decreased) approximately $121,000,
($58,000), $49,000 and $150,000 for each of the four years ended December 31, 1973, re-
spectively, if the method of recording certain DC9 engine maintenance costs for 197 4 ( see
Note E of Notes to Financial Statements) had been followed in such periods.
To the extent increased or decreased expenses were not offset by resultant increases or
decreases in subsidy revenues and income taxes, which are indeterminable as to specific
amounts, net income would have been affected commensurately.
(6) Primary earnings per share for the years 1974 and 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 each year (1,598,882 in 1974 and 1,439,517 in 1972). Common equivalent
shares for 1974 and 1972 comprise that number of common shares issuable upon exer-
cise of stock options and warrants ( exclusive, in 1972, of warrants for 126,000 shares
issued prior to June 1, 1969, and cancelled July 25, 1973) in excess of 20 per cent of the
number of common shares outstanding at the end of 1974 and 1972. Proceeds from the
assumed exercise of the options and warrants in excess of the amount which would have
been required to purchase 20 per cent 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 applicable) was added to income
for purposes of the calculation. Primary earnings per share for the year 1973 were com-
puted 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 years 1971 and 1970, losses per share were computed by divid-
ing net loss by the weighted average number of common shares outstanding each year -
1,035,048 in 1971 and 1,024,871 in 1970. During these two loss years, there were no pre-
ferred dividend requirements. Common equivalent shares and adjustments resulting from
their assumed exercise were excluded from the 1973, 1971 and 1970 computations since
their inclusion would have increased earnings per share in 1973 and would have decreased
losses per share for 1971 and 1970.
Fully diluted earnings per share for the years 1974 and 1972 were determined on the
assumption that the weighted average number of common and common equivalent shares
for these years were further increased from the beginning of the period by conversion
of outstanding convertible debentures and convertible preferred stocks (and, in 1972, by
exercise of the warrants for 126,000 shares issued prior to J ~ne 1, 1969, and cancelled
July 25, 1973), a total of 2,913,090 shares in 1974 and 3,098,588 shares in 1972. These
calculations also assume no preferred dividend requirement, and interest (net of income
tax effect, where applicable) related to the debentures assumed converted and debt as-
sumed to be retired from proceeds of exercising the additional warrants was added to
income for purposes of the calculation. The assumed conversion of convertible securities
in years other than 1974 and 1972 would not have been dilutive.
(7) For purpose of these ratios: (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 the interest element of rentals; and (c) related income
tax effects were added to pref erred dividend requirements.
6A
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE STATEMENT OF OPERATIONS
GENERAL - Operating income increased to $6,883,000 in 1974 following a decline to
$1,489,000 in 1973. Both the 197 4 turnabout and the 1973 decline were due in large measure
to the 1973 expansion of the jet fleet to 24 DC9 aircraft, an increase of nine. Unfortunately,
traffic softened during the last half of 1973, at the time the expanded fleet was becoming .
operational, thus preventing the Company from fully benefiting from the expansion in that
year. This expanded capability, however, enabled the Company to benefit from increased
traffic levels during the first half of 197 4, including traffic believed to have resulted from
the diversion of many automobile travelers to air travel as a result of the gasoline shortage.
The low operating income in 1973, combined with the $1,721,000 increase in interest expense
resulting from the financing of the fleet expansion, would have produced a net loss for 1973
had it not been for gains totaling $1,968,000 from the sale of four of the 13 DC9's originally
purchased. On the other hand, the increased operating income level in 197 4, together with the
"one-time" cumulative results of an accounting change totaling $565,000 ( explained in Note E
of the Notes to Financial Statements), enabled the Company to produce net income of
$3,482,000 after absorbing a further increase of $846,000 in interest expense. The 1974 in-
terest expense increase resulted primarily from having a full year at the increased loan levels,
as opposed to a partial year in 1973, together with increases in the prime interest rate. Net
income for 197 4 was further boosted by $578,000 in interest income from short term invest-
ments compared to $47,000 in 1973. In 1974 the Company completed utilization of its income
tax operating loss carryforwards. With the exception of certain state income taxes totaling
$41,000 in 1972 and $12,000 in 1973, the tax benefits of the carryforwards completely offset
the income tax provisions for those years. In 197 4 tax benefits of $325,000 were realized from
loss carryforwards for book purposes, which carryforwards were exhausted during the year.
For further information on income taxes and remaining investment tax credit carryovers,
see Note 4 to Statement of Operations.
OPERATING REVENUES - Operating revenues increased $23,743,000 in 1974 and
$14,977,000 in 1973 as a result of increases in traffic volume and yield. Revenue passenger
miles increased by 15 per cent in 197 4 and by 21 per cent in 1973. These increases in traffic
volume levels were due in large measure to the 1973 fleet expansion which increased available
seat miles by more than 27 per cent. Yields per passenger mile increased by 14.3 per cent
in 1974 following a 4.6 per cent increase in 1973. These increases can be attributed principally
to fare increases of 5 per cent in December 1973, 6 per cent in April 1974 and 4 per cent in
November 197 4; the implementation of a security charge in April 1973; and the restructuring
of discount fares in early 197 4. Because of discontinuance of service to four cities and a
recently revised subsidy formula, management estimates a decline of approximately $1,300,000
in public service revenues in 1975. The significant increase in other operating revenues in
1974 resulted from the sale of surplus spare parts and for services performed on aircraft
owned by others.
OPERATING EXPENSES - Operating expenses increased by $18,349,000 in 1974 fol-
lowing a $16,381,000 increase in 1973. The doubling of fuel prices in 1974 added approximately
$6,155,000 to 197 4 operating expenses. Labor costs, which constitute over 40 per cent of total
operating expenses, increased by $6,574,000 in 1974 and by $7,526,000 in 1973 as a result of
the expanded work force (the average number of employees increased by 9 percent in 1974
following a 16 percent increase in 1973) and increases in salaries .and benefits. This included
payroll tax increases of $329,000 in 197 4 and $439,000 in 1973. As a result, predominantly of
the fleet expansion, depreciation and amortization expense increased by $724,000 in 197 4
(including $277,000 in amortization of related preoperating expenses) and by $1,114,000 in
1973. Netted in the 197 4 depreciation increase is a reduction of $789,000 attributable to
7A
Martin 404 equipment which became fully depreciated at December 31, 1973. The 1974 and
1973 increases in operating expenses other than fuel, labor and depreciation aggregated ap-
proximately $4,900,000 and $7,750,000, respectively. These other increases, which are spread
throughout all categories of operating expenses, are due principally to the 1973 fleet expansion,
the increased traffic levels to which the fleet expansion contributed and to the continuing in-
flationary rise in the cost of outside goods and services.
ITEM 3. Properties
Aircraft
On December 31, 1974, the Company's fleet consisted of 25 DC9 jet aircraft (including
nine aircraft acquired in 1973) and 11 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 sold, in 1973, four of the 13 DC9-14 jet aircraft acquired in that
year. The following table lists the aircraft owned and leased by the Company as of December
31, 1974:
Type of Passenger Number of Aircraft Average
Aircraft Capacity Owned Leased Total Age (Years)
DC9 (10 Series) ................. 75 12 9(a) 21 8.1
DC9 (30 Series) ................. 95 1 3(b) 4 5.5
Martin 404 ....................... 40 11 11 25.0
(a) Three of these aircraft are leased for 12-year terms ending in 1980 at an annual rental
of approximately $363,465 each; five are leased under long-term leases terminating in
1979 at an annual rental of approximately $390,000 each, and one is leased through June
1976 at an annual rental of approximately $558,000.
(b) 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 as
collateral for 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 $166,000 under leases having between one and four years to run, and approximately
18,100 square feet in a nearby office building at a current annual rental of approximately
$117,000. These facilities house the Company's general offices and reservations, communica-
tions and flight dispatch departments for the entire system.
The Company leases various hangar and shop faclities at the Hartsfield Atlanta Inter-
national Airport occupying approximately 150,542 square feet, plus adjacent land of approxi-
mately 500,000 square feet, at annual rentals aggregating approximately $98,000.
On January 2, 1974, the Company entered into an agreement with the City of Atlanta,
Georgia, to lease a 310,000 square-foot maintenance base and training center to be con-
structed at the Hartsfield Atlanta International Airport. Estimated costs, annual rentals,
and occupancy (rental commencement) dates are as follows:
8A
ITEM 3. Properties - Continued
Land .......................................... .
Phase One Facilities .......................... .
Phase Two Facilities ......................... .
Estimated
Costs
$ 1,506,285
7,511,000
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
Facilities, whichever occurs first, and may be renewed at the Company's option for an ad-
ditional 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
annual 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 ap-
proximately $1,384,000.
On September 9, 1974, the Company entered into an agreement with the City of Atlanta
to lease approximately 39,760 square feet of cargo building space plus adjacent land of
approximately 2. 734 acres at the Atlanta Airport. The lease extends for a period of 15 years
after date of occupancy (approximately September 1, 1975) and may be cancelled by the
Company after the fifth and tenth years if the Company elects to lease space in another
facility expected to be constructed _
by the City of Atlanta in the future. Annual rental is
estimated at approximately $120,400. Under the agreement, the Company may sublease a
portion of the unused facility. If the Company subleases a portion of the premises, the esti-
mated annual rental will be reduced accordingly. The Company will occupy newly constructed
terminal and cargo facilities near Fort Walton Beach, Florida, in February 1975 under a lease
extending to February 1995 and providing for an annual rental of approximately $62,000.
The Company leases computer, message switching and automated ticketing equipment
at an annual rental of approximately $715,000 and has contracted to receive passenger reser-
vations services and automated ticketing and fare-quotation services through 1977 .. Charges
for the reservations services exclusive of related computer and message switching equipment
rentals ($563,000 in 1974) are based upon the number of unduplicated passengers. Charges
for the automated ticketing and fare-quotation services are $124,000 per year.
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
To the best knowledge of the Company no person owned beneficially more than 10 per cent
of the common stock of the Company as of December 31, 1974.
As of December 31, 197 4, the officers and directors of the Company and their associates,
as a group, owned beneficially 328,501 shares of common stock, representing 20.8 per cent
of the outstanding shares of common stock; 73,436 shares of Series A $0.36 Convertible Pre-
ferred Stock, representing 44. 7 per cent of the outstanding Series A, with 73,436 common stock
purchase warrants attached; $157,000 principal amount of the 5 % Convertible Subordin-
9A
ITEM 4. Parents and Subsidiaries - Continued
ated Debentures, representing 3.6 per cent of the outstanding 5 'fa debentures, and $4,431,500
principal amount of the 6 'fa Convertible Subordinated Debentures, representing 76 per cent
of the outstanding 6 'fa 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 per cent for all domestic
scheduled 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,
Illinois, 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 tariffs 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 pend-
ing decision by the CAB in a proceeding called Reasonableness of Passenger Fares Charged
by Domestic Trunkline 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 un-
just or unreasonable. On December 10, 1973, the United States District Court for the North-
ern 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 is a defendant in a suit brought in the Federal District Court for the South-
ern District of New York by Air Freight Haulage Co., Inc. against the Company and 23 other
named defendants. The complaint seeks unspecified treble damages for alleged violations of
antitrust laws including attempted monopolization of the trucking of air freight in the New
York metropolitan area.
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 air-
lines using the Hartsfield Atlanta International Airport, including the Company. The com-
plaint alleges 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
located 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
International Airport, along with Air Cargo, Inc. and Carolina Cartage, Inc., on the grounds
that they had engaged in acts violating the antitrust laws of the United States by keeping
Air Transfer, Inc. from being able to fulfill contracts relating to domestic air freight at the
Atlanta airport. Plaintiff seeks from the various defendants the sum of $450,000. On Decem-
ber 31, 1974, the Court granted judgment in favor of all defendants. However, a notice of
appeal was filed on January 24, 1975.
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
lOA
ITEM 5. Pending Legal Proceedings - Continued
to Mobile, Alabama, on January 21, 197 4, further alleging he held a confirmed reservation
and that the flight was full when he arrived at the airport and he was not furnished trans-
portation. This plaintiff seeks to recover compensatory and punitive damages in the sum of
$100,000. He further seeks to recover an additional $100,000 in compensatory and punitive
damages for unjust discrimination or undue or unreasonable prejudice or disadvantage, and
finally seeks to recover an additional $100,000 as damages on the grounds that the represen-
tations 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 trial of this matter has not
been held, and at the request of the judge, the plaintiff and the Company entered into settle-
ment negotiations; however, it appears that these negotiations will not resolve the matter.
The Air Transport Association of America, the Air Traffic Conference of America, and
20 carriers, including the Company, are defendants in a suit brought on November 20, 1974,
in the United States District Court for the District of Columbia by the Grueninger Travel
Service, Inc. The complaint seeks unspecified treble damages for alleged violations of Sections
1, 2 and 3 of the Sherman Act.
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 interfer-
ence with prospective and existing contractual relationships, intentional infliction of emo-
tional distress and trauma and deprivation of and intereference with civil rights.
On January 4, 197 4, Gulf Oil Corporation notified the Company that its contract with
the Company was withdrawn and future fuel deliveries would only be made on a spot price
basis. On April 3, 197 4, the Company filed an action in the Federal District Court for the
Northern District of Georgia, Atlanta Division, seeking a declaration that the Gulf Oil Com-
pany must specifically perform its contract. The Court has issued a preliminary injunction
under which Gulf Oil Company is required to continue to deliver fuel to the Company pur-
suant to the contract. While the outcome of this matter cannot be determined at this time,
the Company has provisions which it believes are adequate to cover any amounts that may be
due Gulf Oil Company.
The foregoing summary of litigation and similar matters as of January 29, 1975, 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 also is 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
financial position as of December 31, 1974, or results of operations for the years then ended.
ITEM 6. Increases and Decreases in Outstanding Equity
Shares Outstanding, January 1, 1974 ............................ .
Common Stock issued upon conversion of
Preferred Stock:
February 7 through December 23, 1974 ................... . .... .
December 31, 1974 .................................. . ....... .... .
Shares Outstanding, December 31, 1974 ......................... .
llA
Securities
Preferred Stock
$1 Par Value
Series A Series B
165,331 166,667
(900)
(166,667)
164,431
Common
Stock
$2 Par Value
1,412,663
900
166,667
1,580,230
ITEM 7. Approximate Number of Equity Security Holders
The following table sets forth the number of equity security holders of the registrant
as of December 31, 197 4.
Title of Class
Number of
Record Holders
Convertible Subordinated Debentures:
5 %, due December 1, 1981 .................................................
6 %, due November 1, 1983 ................................................
Convertible Preferred Stock, Series A, $.36 (Par Value $1) .....................
Common Stock (Par Value $2) ............................................... .
Warrants:
Series A ....................................................................
Series B ......................................................................
622
437
473
5,333
544
1
ITEM 8. Executive Officers of Registrant
Name and Year
First Elected
Executive Officer Title
Age at
December 31, 1974
Frank W. Hulse (1943)
Graydon Hall (1961)
George M. Gross (1965)
J. Kenneth Courtenay (1961)
A. L. Maxson (1968)
Victor C. Pruitt (1972)
Tilden M. Shanahan (1974)
Frank H. Wheeler (1972)
Thomas A. Wiley, Jr. (1967)
President and Director
Executive Vice President,
General Manager and Director
Vice President, Associate
General Manager and Director
Vice President - Economic
Regulations and Secretary
Vice President - Finance
and Treasurer
Vice President - Technical Services
Vice President - Flight
Vice President - Sales and Services
Vice President - Marketing
62
53
48
47
39
51
41
34
51
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 Direc-
tors 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 offi-
cers and any other person pursuant to which any of the above-named persons was selected
as an officer.
All of the executive officers have been in the employ of the Company for more than five
years and, with the exception of Messrs. Pruitt, Shanahan and Wheeler, each has served in
the capac~ty shown above for more than five years. Mr. Pruitt joined the Company in 1969
and held positions as Director - Systems Planning, Assistant Vice President - Systems Plan-
ning and Assistant Vice President - Technical Services before being elected Vice President -
Technical Services in May 1972. Mr. Shanahan joined the Company as a First Officer in 1960
and subsequently held positions as System Chief Pilot and Director - Flight Division before
becoming Vice President - Flight in 1974. Mr. Wheeler joined 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.
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
12A
ITEM 9. Indemnification of Directors and Officers - Continued
of its directors, officers, employees or agents, including former directors, or officers, against
expenses, 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 persons 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 resolu-
tion authorizing the Company to reimburse or indemnify each past, present, or future director,
officer 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 Sheet - December 31, 1974 and 1973
Statement of Operations - For the five years ended December 31, 197 4 (included in
Item 2)
Statement of Stockholders' Equity - For the five years ended December 31, 197 4
Statement of Changes in Financial Position - For the five years ended December 31,
1974
Notes to Financial Statements
Schedule II - Amounts Receivable from Underwriters, Promoters, Directors, Offi-
cers, Employees, and Principal Holders of Equity Securities for the year ended
December 31, 1973
Schedule V - Property and Equipment for the years ended December 31, 1974 and
1973
Schedule VI - Allowances for Depreciation and Maintenance of Property and Equip-
ment for the years ended December 31, 1974 and 1973
Schedule VII - Part B - Preoperating Expenses and Similar Deferrals for the years
ended December 31, 1974 and 1973
Schedule XII - Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 197 4 and 1973
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
inapplicable, and therefore have been omitted.
13A
ITEM 10. Financial Statements and Exhibits - Continued
(b) Exhibits
The following exhibits are filed as part of this report:
1. Computation of Earnings per Common and Common Equivalent Share.
2. Computation of (a) Ratio of Income to Fixed Charges and (b) Ratio of Income
to Fixed Charges and Preferred Dividend Requirements.
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-Finance and Treasurer
Dated: March 7, 1975
14A
REPORT OF INDEPENDENT' ACCOUNTANTS
Board of Directors
Southern Airways, Inc.
Atlanta, Georgia
We have examined the balance sheet of Southern Airways, Inc. as of December 31, 197 4,
and December 31, 1973, the related statements of operations, stockholders' equity and changes
in financial position for the five years ended December 31, 1974, 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.
As discussed in Note B to the financial statements, in 1972 the Company made a ransom
payment of $2,000,000 in connection with the hijacking of an aircraft. The amount paid has
been retained by the Republic of Cuba. The Company is attempting recovery of the ransom;
however, there can be no assurance of its return.
In our opinion, subject to any adjustments which may result from the recovery of the hi-
jacking payment discussed in the preceding paragraph, the financial statements referred to
above present fairly the financial position of Southern Airways, Inc. at December 31, 197 4,
and December 31, 1973, and the results of its operations and changes in its financial position
for the five years ended December 31, 197 4, in conformity with generally accepted accounting
principles consistently applied during the period except for the change, with which we concur,
in the method of recording certain DC9 engine maintenance costs as described in Note E to the
financial statements. Further, it is our opinion, subject to any adjustments which may result
from the recovery of the aforementioned hijacking payment, that the accompanying schedules
present fairly the information set forth therein in compliance with the applicable accounting
regulations of the Securities and Exchange Commission.
Atlanta, Georgia
January 29, 1975
15A
ERNST & ERNST
SOUTHERN AIRWAYS, INC.
BALANCE SHEET
ASSETS
December 31,
1974 1973
CURRENT ASSETS
Cash, including short-term investments of $8,900,000 in 1974 - Note C $11,895,001
Accounts receivable
U. S. Government - transportation and public service revenue . . . . . . . . . . . . 1,826,140
Trade receivables, less allowance for doubtful accounts
(1974 - $98,935; 1973 - $99,682 - Schedule XII) . . . . . . . . . . . . . . . . . . . . . . . . 8,148,314
Notes receivable - sale of aircraft
Maintenance and operating supplies, at average cost less allowance
for obsolescence (1974 - $1,319,134 ; 1973 - $1,165,589) -
Note A ( Schedule XII) ............................................ . ....... .
Prepaid expenses ............................................................. .
Total Current Assets . : ........................................... .
OTHER ASSETS
9,974,454
4,576,614
768,107
27,214,176
Hijacking payment- Note B . . . .. .. . .. .. . . . . . . . . . . . . . .. . . . . . . . . . . . .. . . . . . . . . . 2,000,000
Equipment purchase deposits - Note G ...................................... .
Miscellaneous ................................................................ .
PROPERTY AND EQUIPMENT - on the basis of cost -
Notes A, C, and E (Schedules V and VI)
Flight equipment .......................................................... .
Other property and equipment ............................................. .
Less allowances for depreciation and maintenance ........................ .
DEFERRED CHARGES - Note A (Schedule VII)
Unamortized preoperating, route extension and development costs
Def erred lease costs .......................................................... .
Unamortized long-term debt expense ......................................... .
16A
200,000
228,055
2,428,055
50,651,758
5,392,261
56,044,019
19,629,808
36,414,211
1,117,075
129,938
352,466
1,599,479
$67,655,921
$ 8,068,694
2,146,684
7,132,492
9,279,176
4,845,895
2,871,484
727,503
25,792,752
2,000,000
198,337
2,198,337
51,108,291
4,829,154
55,937,445
19,470,533
36,466,912
1,548,934
159,249
406,778
2,114,961
$66,572,962
SOUTHERN AIRWAYS, INC.
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1974 1973
CURRENT LIABILITIES
Accounts Payable ............................................................ . $ 7,504,632
Collections and withholdings as agent ....... ................................ . 7,236,997
Salaries, wages and vacations . ............................................... . 3,163,182
Accrued interest payable .................................................... . 956,140
Accrued taxes and other expense ...... ...... ..................... . .......... . 837,149
Air travel plan deposits ........... ..... ...................................... . 86,275
Current maturities of long-term debt - Note C ............................... . 3,836,252
Total Current Liabilities ......................................... .
----'--
23,620,627
LONG-TERM DEBT - Note C
Notes payable, less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,686,767
Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,178,000
DEFERRED CREDITS
Subsidy adjustment- Note B
Deferred income taxes ....................................................... .
STOCKHOLDERS' EQUITY - Notes C and D
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 $1,046,105 in 1974 and
$1,119,942 in 1973), issued and outstanding 164,431 shares
(1974) and 165,331 shares (1973) ....................................... .
Series B $.36 convertible - non-voting (liquidation value $6 per share in
1973 plus cumulative dividends - aggregate of $60,000 in 1974 and
$1,120,002 in 1973) , issued and outstanding 166,667 shares in 1973 -
Note D .................................................................. .
Common Stock, $2 par value, authorized 7,500,000 shares, issued and
32,864,767
600,000
294,000
894,000
164,431
outstanding 1,580,230 shares (1974) and 1,412,663 shares (1973) . . . . . . . . . . 3,160,460
Other paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,124,355
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,827,281
10,276,527
LEASES, COMMITMENTS AND CONTINGENCIES - Notes F and G
$67,655,921
See Notes to Financial Statements.
17A
$ 5,772,648
5,847,769
2,302,950
285,884
376,402
92,649
6,950,770
21,629,072
27,523,019
10,178,000
37,701,019
200,000
200,000
165,331
166,667
2,825,326
5,291,922
(1,406,375)
7,042,871
$66,572,962
SOUTHERN AIRWAYS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Five Years Ended December 31, 197 4
Preferred Stock
$1 Par Value
Series A
Balance, January 1, 1970 .. .. ... $
Net loss . ......... . .... . . .. ... . ----
Balance, December 31, 1970 . ... .
Net loss ... . . .. .... . ..... .. .. .
Preferred stock sold . . . . . . . . . . 290,781
Common stock issued upon
conversion of preferred
stock . . . . . . . . . . . . . . . . . . . . . . (36,895)
Balance, December 31, 1971 . . . . . 253,886
Net income ................. . .
Common stock issued upon
conversion of pref erred
stock . . . . . . . . . . . . . . . . . . . . . . (63,783)
Conversion of $1,000,000
principal amount of 6 %
Convertible Subordinated
Debentures, less $53,692
deferred finance cost
Conversion of $337,000
principal amount of
5 % Convertible
Subordinated Debentures,
less $8,144 deferred
finance cost ....... .. . .. . .. .
Exercise of stock
purchase warrants .. . ..... . ----
Balance, December 31, 1972 . . . . . 190,103
Net income .................. .
Common stock issued upon
conversion of preferred
stock . . . . . . . . . . . . . . . . . . . . . . (24,772)
Conversion of $1,167,000
principal amount of 6 %
Convertible Subordinated
Debentures, less $54,876
def erred finance cost ... . . . . ----
Balance, December 31, 1973 .. ... 165,331
Net income .................. .
Dividends on preferred
stock ($.72 per share) ..... .
Common stock issued upon
conversion of pref erred
stock . . . . . . . . . . . . . . . . . . . . . . . . (900)
Balance, December 31, 1974 ..... $164,431
See Notes to Financial Statements.
Series B
$
166,667
166,667
166,667
166,667
(166,667)
$
18A
Common
Stock
$2 Par Value
$2,049,742
2,049,742
73,790
2,123,532
127,566
200,000
62,046
29,238
2,542,382
49,544
233,400
2,825,326
335,134
$3,160,460
Other
Paid-In
Capital
$1,229,523
1,229,523
2,179,931
(36,895)
3,372,559
(63,783)
746,308
266,810
116,076
4,437,970
(24,772)
878,724
5,291,922
(167,567)
$5,124,355
Retained
Earnings
(Deficit)
$ 968,556
(3,333,212)
(2,364,656)
(1,058,784)
(3,423,440)
1,600,317
(1,823,123)
416,748
(1,406,375)
3,481,691
( 248,035)
$ 1,827,281
SOUTHERN AIRWAYS, INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
Years Ended December 31,
19'70 1971 1972 1973 1974
FUNDS PROVIDED
From operations
Income (loss) before
extraordinary tax credit and
accounting change ............... $(3,333,212) $(1,058,784) $ 1,191,067 $ 319,748 $ 2,591,261
Items not requiring outlay of
working capital in current period
Depreciation ................... 2,090,915 2,094,991 2,039,695 3,193,436 3,840,039
Increase (decrease)
in allowance for
maintenance ................. 519,349 322,946 544,721 1,705,604 (84,644)
Amortization of deferred
charges ...................... 551,944 484,478 382,153 362,813 546,261
Deferred income tax (credit) .. (235,000) 294,000
Subsidy adjustment-Note B .. 200,000 400,000
Total from operations
exclusive of extra-
ordinary tax credit (171,004) 1,608,631 4,157,636 5,781,601 7,586,917
Extraordinary tax credit ........... 409,250 97,000 325,055
Total from operations ..... (171,004) 1,608,631 4,566,886 5,878,601 7,911,972
Long-term borrowings ................ 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
Preferred stock .................... 36,895 63,783 24,772 167,567
Property and equipment sold
or converted to lease, less
gain included in operations 274,976 588,915 92,368 8,771,567 521,357
Refund of equipment purchase
and lease deposits .................. 490,000 416,840
2,476,578 6,149,577 9,157,481 54,958,780 8,600,896
FUNDS USED
Additions to property and equipment .. 2,134,662 1,409,959 925,261 33,150,337 1,907,691
Utilization of DC9 engine maintenance
reserve ................. ............ 1,750,984
Hijacking payment ................... 2,000,000
Equipment purchase and lease
deposits ............................ 280,000 416,840 200,000
Reduction of long-term
notes payable ...................... 1,520,442 3,008,041 2,249,146 20,414,997 4,836,252
Dividends on preferred stock ......... 248,035
Conversions to common stock:
Debentures ..... 1,337,000 1,167,000
Pref erred stock 36,895 63,783 24,772 167,567
Increase in def erred charges ......... 412,012 6,459 13,887 1,473,195 30,779
Increase in other assets ............... 15,552 11,879 18,669 89,047 29,719
4,362,668 4,473,233 7,024,586 56,319,348 9,171,027
INCREASE (DECREASE) IN
WORKING CAPITAL .................... (1,886,090) 1,676,344 2,132,895 (1,360,568) (570,131)
Working capital at beginning
of year ............................. 3,601,099 1,715,009 3,391,353 5,524,248 4,163,680
WORKING CAPITAL AT END OF
YEAR .................................. $ 1,715,009 $ 3,391,353 $ 5,524,248 $ 4,163,680 $ 3,593,549
19A
SOUTHERN AIRWAYS, INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION (Continued)
Years Ended December 31,
1970 1971 1972 1973
INCREASE (DECREASE) IN
WORKING CAPITAL BY
COMPONENT
Cash and short term investments .. $ (1,629,817) $ 2,383,503 $ 686,959
Accounts and notes receivable ...... 2,385,833 (1,084,513) 998,034
Maintenance and operating supplies. 179,325 373,621 (129,735)
Prepaid expenses .................. (863,159) 282,946 32,236
Accounts payable .................. (2,099,236) 807,803 (24,944)
Collections and withholdings
as agent .............. ... ........ 82,452 (670,743) (1,539,077)
Salaries, wages and vacations ..... (289,032) (315,014) (97,887)
Accrued interest, taxes
and other expenses .... ... ....... 448,535 280,782 588
Air travel plan deposits ............ 3,825 6,375 4,250
Current maturities of long-
(104,816) (388,416) 2,202,471
term debt ........................
INCREASE (DECREASE) IN
WORKING CAPITAL .............. .... . . $(1,886,090) $ 1,676,344 $ 2,132,895
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1974
Note A-Summary of Significant Accounting Policies
PROPERTY, EQUIPMENT, DEPRECIATION AND OBSOLESCENCE
$ 2,323,886
6,656,375
985,939
(96,498)
(2,764,454)
(1,010,287)
(557,795)
47,935
5,101
(6,950,770)
$ (1,360,568)
19'74
$ 3,826,307
(4,150,617)
1,705,130
40,604
(1,731,984)
(1,389,228)
(860,232)
(1,131,003)
6,374
3,114,518
$ (570,131)
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
life. For DC9 flight equipment the life is 15 years (new equipment and rotable parts) and
10 years (used equipment), with a salvage value of 10 per cent; for ground equipment,
the life ranges 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, 197 4, the Company's investment in Martin 404
flight equipment is fully depreciated except for $486,000 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 DC9 flight equipment ( exclusive of rotable parts) are credited or charged to opera-
tions. Proceeds from the disposal of DC9 rotable parts are credited to the allowance for
depreciation 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
account; subsequent to that date, profits and losses on disposals are included in opera-
tions.
Expenditures for ordinary maintenance and repairs are charged to expense. Expendi-
tures for major spare parts are capitalized and minor parts are recorded in inventory
accounts and charged to expense as used.
20A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 197 4
A provision for obsolescence of the investment in minor spare parts inventory for
DC9 aircraft is made at an annual rate of 4 per cent.
DEFERRED CHARGES
Expenditures for preoperating and route extension and development costs are de-
ferred and are amortized over a period of five years from the dates operations of the
routes are started. Costs associated with obtaining leased DC9 aircraft are being amor-
tized 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
operations regardless of the years when such items are reported for tax purposes.
The Company uses the flow-through method of accounting for investment tax credit,
and available investment tax credit is recognized to the extent it can be realized or offset
against income taxes currently payable or deferred.
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. At December 31, 197 4, the pension fund
assets exceeded the actuarially computed value of vested benefits for all plans.
PUBLIC SERVICE REVENUE
The Company receives public service revenue from the CAB for providing service
to small and intermediate-size cities on its routes. Amounts received and recognized as
revenues are those paid for the period based on the formula then in effect.
Note B - Hijacking Payment
In November 1972, the Company paid $2 million in ransom in connection with the hijack-
ing of one of its DC9 aircraft. This ransom has been retained by the Republic of Cuba. Nego-
tiations between representatives of the Company and the Cuban government are expected to
result in the eventual 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.
Effective July 1, 1973, the CAB implemented a subsidy revenue formula in which the
$2 million ransom payment is recognized. This formula, which is amended periodically, has
resulted in increased subsidy revenues; however, the Company must return to the CAB 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 r~coverability of the ransom
payment is determined.
21A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1974
Note C - Long-Term Debt
At December 31,
1974 1973
Notes payable to banks under credit
agreement dated February 20, 1973
"A" Loans, payable quarterly through 1982 ........................... . $17,623,019 $22,873,789
"B" Loans, payable quarterly through 1979 ........................... . 8,900,000 10,000,000
"C" Loans, payable quarterly through 1977 ........................... . 1,600,000
Convertible Subordinated Debentures
5 % due December 1, 1981 .............................................. . 4,345,000 4,345,000
6 % due November 1, 1983 .............................................. . 5,833,000 5,833,000
36,701,019 44,651,789
Less Current Maturities .................................................. . 3,836,252 6,950,770
$32,864,767 $37,701,019
The "A" and "B" Loans bear interest at the lead bank's prime rate (10.25 per cent at
December 31, 1974) plus 1 per cent and 2 per cent, respectively, and are payable in quarterly
installments. Substantially all of the Company's assets are pledged as collateral under the
terms of the credit agreement. Additionally, the "A" Loan is 90 per cent guaranteed by the
Federal Aviation Administration.
In connection with the credit agreement, the Company maintains average compensating
balances, based on bank ledger balances adjusted for treasury tax contribution and uncollected
funds, equal to 15 per cent of the average of the "A" and "B" Loans outstanding. Based upon
outstanding borrowings at December 31, 197 4, the Company should maintain average com-
pensating balances of approximately $5,253,000, which stated in terms of the Company's
book cash balances is approximately $3,594,000. The difference is attributa~le to average
uncollected funds and float. During 197 4, the Company maintained average compensating
balances of approximately $5,719,000. Compensating balances are not restricted as to with-
drawals, 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 mini-
mum operating cash balances.
Under its "C" Loan Commitment, the Company may borrow from the First National
Bank of Chicago up to a maximum of $790,356. This commitment will be reduced by $100,000
at March 31, 1975, and at the end of each succeeding calendar quarter. The commitment is
further reduced by any direct or indirect recovery of the hijack ransom payment (See Note
B). The "C" loans bear interest at 155 per cent of the bank's prime rate.
The 5 % Convertible Subordinated Debentures due December 1, 1981, are convertible
(until maturity or prior redemption) into common stock at $10.86 per share; are sub-
ordinated, generally, to all existing and future indebtedness for borrowed money; are callable
at premiums ranging from 2.75 per cent downward; and require annual sinking fund pay-
ments beginning December 1, 1976, in an amount equal to 10 per cent 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 % 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 at prem-
22A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1974
iums ranging from 6 per cent downward; and require annual prepayments beginning No-
vember 1, 1978, in an amount equal to 10 per cent of the principal amount outstanding at
November 1, 1977, less credit for principal amount converted or called subsequent to Novem-
ber 1, 1977. Also, the Company may make 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. Retained earnings available for the
payment of dividends at December 31, 1974, under the most restricted requirement, amounted
to approximately $150,000.
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" Debentures Total
1975 $ 2,220,252 $1,616,000 $ $ 3,836,252
1976 2,220,252 1,150,000 434,500 3,804,752
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
1979 2,220,252 3,434,000 1,017,800 6,672,052
Thereafter 6,521,759 7,273,400 13,795,159
$17,623,019 $8,900,000 $10,178,000 $36,701,019
Prepayments equal to 25 per cent of net income in excess of $1,500,000 plus 50 per cent
of net income in excess of $3,000,000 earned in any fiscal year is required under the "B"
Loan. Prepayments due in 1975 under this provision of $616,000 are reflected in the above
summary for that year.
Note D- Capital Stock and Options
The Series A Preferred Stock is convertible into common stock on a share for share basis,
can be redeemed after July 1, 1976, at $6 per share plus accumulated dividends and is
entitled upon liquidation to receive $6 per share plus accumulated dividends. The liquidation
preference for the 164,431 shares outstanding at December 31, 197 4, including the dividend
requirement described below, aggregated $1,046,105 which is $881,674 more than the aggregate
par value of such shares. All 166,667 shares of Series B $.36 Preferred Stock were converted
to common stock, $2 par value, on December 31, 197 4, on a share for share basis.
Each share of preferred stock is entitled to receive annual dividends of 36 cents per share
cumulative only to the extent of annual net profits. Payment of dividends is also subject to
the limitations prescribed by the Indenture Agreements covering the 53
;(1
o/o and 6 o/o Con-
vertible Subordinated Debentures and to limitations contained in Credit Agreements (See
Note C). The dividend requirement on preferred shares at December 31, 1974, aggregated
$119,519, including $60,000 of dividends on Series B converted on December 31, 197 4.
Authorized common shares include 1,675,053 shares and 1,842,620 shares reserved at
December 31, 197 4 and 1973, respectively, for issuance as follows:
23A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1974
For convertible securities conversions:
5 % Convertible Subordinated Debentures (Note C) ... . ... .. . . . . . .. . .... . .. .
6 % Convertible Subordinated Debentures (Note C) . . . ....... . ... ...... .. .. .
Series A Convertible Preferred Stock ........ . ....... . . . .. . . . ... . ...... . .. .... .
Series B Convertible Preferred Stock ..... ... ....... . ... .. ..... . . ... .... ... .. . .
For exercise of outstanding warrants at $6 per share,
issued with Series A (290,562 shares) and Series B
1974
400,093
583,300
164,431
1,147,824
(166,667 shares) Convertible Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,229
For options under Qualified Stock Option Plan (45,000
shares) and Employee Stock Option Plan (25,000 shares) .... ... , . . . . . . . . . . . . . 70,000
1,675,063
1973
400,093
583,300
165,331
166,667
1,315,391
457,229
70,000
1,842,620
At December 31, 197 4, there were outstanding options for 44,000 shares of common stock
under the Company's Qualified Stock Option Plan, of which 36,000 shares (at $5.25 per share)
expire in 1976, 5,000 shares (at $5.81 per share) expire in 1978 and 3,000 shares (at $3.50
per share) expire in 1979. Option transactions during the years ended December 31, 1973
and 197 4, are summarized as follows:
Number of
Shares
Outstanding, January 1, 1973 . . . ... . ..... . . .. ...... . . .. .. . . .... . . 38,000
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,000)
Outstanding December 31, 1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,000)
Outstanding December 31, 1974 ................. .. .. .. .. . .. .... . . 44,000
Option Price
Per Share Total
$5.25 - $11. 76 $222,250
5.81 29,050
5.25 (5,250)
5.25 - 11.76 246,050
3.50 - 5.25 26,250
8.69 - 11.76 (43,750)
3.50 - 5.81 $228,550
There were 1,000 shares and 3,000 shares, respectively, available for future grant at
December 31, 1974 and 1973.
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 ;;it not less than 100 per cent 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 24 months after date of grant. Each option is exercisable with respect to one-third
of the number of shares at any time after 24 months following date of grant, with respect to
an additional one-third after 36 months, and with respect to the balance after 48 months. No
options were exercised in 1974 or 1973. O_
ptions became exercisable during 1974 and 1973, as
follows:
1974
Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Option Price:
Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.25
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,000
Quoted Market Price at Date Exercisable:
1973
12,336
$5.25 - $11. 76
$ 72,363
Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.50 $3.00 - $6.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,000 $ 39,430
Options for 24,000 shares (aggregating $126,000 at option prices) and 15,000 shares (ag-
gregating $101,500) were exercisable at December 31, 1974 and 1973, respectively.
24A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1974
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.
Note E -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 changed its method
of recording certain maintenance costs of DC9 engines, effective January 1, 197 4, to the
method of charging all such costs to operations as incurred. In 1973 and prior years, the Com-
pany followed the "built-in-overhaul" method of providing airworthiness reserves for certain
maintenance costs of DC9 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 accumulated
through regular charges to operations based upon hours used. The reserve was reduced when
charges were incurred applicable to the provided maintenance operations. A similar method
was used for leased engines. The cumulative effect of this change ($565,000) is reflected as
a credit in the statement of operations for 1974. (See Note 5 to Statement of Operations.)
Note F - Leases
Total rental expense for all leases amounted to:
1974 1973
Financing leases (minimum rentals):
Flight equipment ........................................................ . $4,748,204 $4,759,488
Other financing leases ................................................... . 1,704,876 1,227,425
Other leases :
Minimum rentals ........................................................ . 1,093,002 975,173
Contingent rentals ........................................................ . 442,708 370,910
$7,988,790 $7,332,996
Contingent rentals relate principally to charges for reservation services based upon the num-
ber of unduplicated passengers in excess of a specified minimum of $120,000 per annum.
Rentals received from subleases are immaterial.
Future minimum rental commitments as of December 31, 197 4, for all non-cancelable
leases and for the new maintenance center at the Hartsfield Atlanta International Airport are
as follows:
Financing Leases
Other
Flight Maintenance Financing Other
Equipment Center Leases Leases Total
1975 ...................... $ 4,722,208 $ 256,919 $ 1,635,191 $1,114,906 $ 7,729,224
1976 ...................... 4,722,208 1,576,761 1,429,645 644,269 8,372,883
1977 ...................... 4,722,208 1,880,288 1,300,238 191,271 8,094,005
1978 ...................... 4,722,208 1,880,288 976,089 69,865 7,648,450
1979 ...................... 3,745,111 1,880,288 888,739 34,006 6,548,144
1980-1984 ................ 5,614,815 9,401,440 4,232,843 87,430 19,336,528
1985-1989 ................ 9,401,440 3,820,196 17,800 13,239,436
1990-1994 ................ 9,401,440 1,857,691 11,259,131
Remainder ............... 20,213,093 271,702 20,484,795
$28,248,758 $55,891,957 $16,412,334 $2,159,547 $102,712,596
25A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 197 4
Under a lease agreement with the City of Atlanta dated January 2, 1974, the Company's
rental obligation for land acquired for the new maintenance center began on January 2, 1974,
and its rental obligation for the facilities under construction will begin on 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
Annual
Rental
$ 120,503
545,665
1,214,120
$1,880,288
Approximate 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 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 re-
newed 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, con-
sistent 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 term.
The estimated present values of the net fixed minimum rental commitments for all non-
capitalized financing leases are:
Interest Rates Used
Weighted Average Range
Flight equipment . ...... .
Computer and message
switching equipment ...
Airport terminal
facilities ............. . .
General office and
maintenance facilities
(includes land for new
maintenance center in
1974
7.45%
12.64
6.34
1974) . . . . . . . . . . . . . . .. . . 6.52
Miscellaneous ground
1973 1974 1973
7.45% 5.3%~ 8.7% 5.3%- 8.7%
11.89 6.8 -23.7 6.8 -23.7
5.09 2.9 - 7.5 2.9 - 7.5
5.02 3.5 - 7.2 3.5 - 6.3
As of December 31,
1974 1973
-- --
$22,019,882 $25,021,221
1,102,165
5,000,676
2,186,730
1,557,437
3,028,358
793,352
equipment . . . . . . . . . . . . . 6.19 6.22 4.6 - 6.8 4.6 -10.0 16,724 24,643
The present values were computed after reducing total rental commitments, where required,
by estimated or actual amounts applicable to lessors' payments of taxes, insurance, main-
tenance 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 method over the terms of the leases and that interest
expense was accrued on the outstanding lease obligations at the rates shown above, the in-
crease in expenses would have been as follows:
26A
SOUTHERN AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1974
1974
Rent expense - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,048,000)
Amortization of leased property . . . . . . . . . . . . . . . . . . . . . . 4,260,000
Interest expense ...................................... 2,257,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,000)
Increase in expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 338,000
1973
$(5,680,000)
4,038,000
2,265,000
$ 623,000
To the extent that the increased expenses were not off set by resultant increases in subsidy
revenues and related income taxes, which are indeterminable as to specific amounts, net in-
come would have been decreased commensurately.
Landing fees were $2,161,912 in 197 4 and $1,838,376 in 1973.
Note G-Other Commitments and Contingencies
In connection with the sale of two aircraft in 1973, the Company agreed to 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.
The Company has commitments for the acquisition of three used DC9-30 aircraft valued
at approximately $12,000,000. The Company is currently negotiating the financing of these
aircraft. These aircraft are expected to be placed into service in mid-1976.
The Company has an employment agreement with its President 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 $2,000 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 agree-
ments.
Reference is made to Item 5 of this Report "Pending Legal Proceedings," for informa-
tion applicable to litigation.
Note H - Supplementary Information
1974 1973
Depreciation and Amortization (Schedules VI and VII) :
Depreciation of property and equipment .................................... . $3,840,039 $3,193,436
Amortization of deferred charges ........................................... . 546,261 362,813
Provision for inventory obsolescence ......................................... . 113,371 236,772
4,499,671 3,793,021
Deduct- Amounts charged to other accounts ............................... . 102,690 119,584
$4,396,981 $3,673,437
Taxes, other than income taxes, charged to operating expenses:
Payroll taxes ................................................................ .
Fuel and oil taxes ............................................................ .
$1,785,487 $1,456,401
237,223 150,423
Property taxes ............................................................... .
Sales and use taxes .......................................................... .
427,000 360,000
332,555 243,980
Other ......................................................................... . 137,584 127,028
$2,919,849 $2,337,832
Rents:
Rental expense under leases (Note F) ....................................... . $7,988,790 $7,332,996
Portion of gross lease rentals not charged to rent expense in
accordance with CAB classifications and miscellaneous rentals,
net ...................................... (57,280) (98,118)
$7,931,510 $7,234,878
Advertising Costs .............................................................. . $1,188,635 $1,248,202
====
There were no royalties or research and development costs.
27A
SOUTHERN AIRWAYS, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM UNDERWRITERS,
PROMOTERS, DIRECTORS, OFFICERS, EMPLOYEES, AND
PRINCIPAL HOLDERS OF EQUITY SECURITIES
Column A
Name of
Debtor
ColumnB
Balance at
Beginning
of Period
Column C
Additions
Year Ended December 31, 1973
SOADO Venture ................... $ $60,537
ColumnD
Deductions
Amounts
Collected
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
ColumnB
Balance at
Beginning
of Period
Column C ColumnD
Additions Retirements
Year Ended December 31, 1973
Flight Equipment ......... $26,766,370 $34,540,598(A) $10,198,677(A)
Ground Equipment 3,822,489 1,025,341 18,676
$30,588,859 $35,565,939 $10,217,353
Year Ended December 31, 1974
Flight Equipment ......... $51,108,291 $ 1,078,297 $ 1,573,360
Ground Equipment 4,829,154 829,394 266,287
$55,937,445 $ 1,907,691 $ 1,839,647
Column E
Other
Changes-
Add
(Deduct)-
Describe
$
$
$ 38,530(B)
$ 38,530
Column F
Balance at
End
of Period
$51,108,291
4,829,154
$55,937,445
$50,651,758
5,392,261
$56,044,019
(A) Principally, the purchase of 13 DC9 aircraft and subsequent sale of four DC9 aircraft in 1973.
(B) Purchase of Martin 404 parts for fully-depreciated Martin 404 aircraft. See contra item in Schedule VI.
28A
SOUTHERN AIRWAYS, INC.
SCHEDULE VI-ALLOWANCES FOR DEPRECIATION AND
MAINTENANCE OF PROPERTY AND EQUIPMENT
Column A Column B Column C Column D Column E
Additions Other Changes
Balance at Charged to Add
Beginning Cost and (Deduct)-
Description of Period Expenses Retirements Describe
Year Ended December 31, 1973
Flight Equipment ......... $10,537,760 $ 3,020,102 $ 1,429,811 $(1,595,290) (B)
3,300,894(A) 2,415,602 (C)
Ground Equipment ........ 3,063,917 173,334 15,975
$13,601,677 $ 6,494,330 $ 1,445,786 $ 820,312
Year Ended December 31, 1974
Flight Equipment ......... $16,249,257 ,p 3,342,097 $ 814,320 $(3,177,534) (D)
570,984(A)
Ground Equipment 3,221,276 497,942 259,894
$19,470,533 $ 4,411,023 $ 1,074,214 $(3,177,534)
(A) Provision for airframe and engine overhauls.
(B) Expenditures for airframe and engine overhauls.
Column F
Balance at
End
of Period
$16,249,257
3,221,276
$19,470,533
$16,170,484
3,459,324
$19,629,808
(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.
( D) Composed of the following:
E xpenditures for engine overhauls ......................................................... .
Utilization of maintenance reserve described at (C) above ................................. .
Write off due to accounting change, Note E ............................................... .
Reserve requirement on parts purchased for fully-depreciated
Martin 404 aircraft. See contra item in Schedule V ........ . ......... ..... ... . .......... .
29A
$ (655,629)
(1,750,984)
(809,451)
38,530
$(3,177,534)
SOUTHERN AIRWAYS, INC.
SCHEDULE VII-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 ................ $ 417,918
188,560
Deferred lease costs ............... .
Unamortized long-term
debt expense .. . ...... ........... .
Unamortized preoperating,
route extension and
452,977
$1,059,455
development costs .... ........ .... $1,548,934
Deferred lease costs . . . . . . . . . . . . . . . . 159,249
Unamortized long-term debt
expense . . . . . . . . . . . . . . . . . . . . . . . . . . 406,778
$2,114,961
Column C
Additions
at Cost
-Describe
ColumnD
Deductions
Charged to Charged to
Costs and Other Accounts
Expenses -Describe
Year Ended December 31, 1973
$1,418,184 $287,168 $
29,311
55,011 46,334 54,876(B)
$1,473,195 $362,813(A) $ 54,876
Year Ended December 31, 1974
$ 30,779
$ 30,779
$462,638
29,311
54,312
$546,261
$
$
(A) Amortization is credited directly to the asset and charged to operations as follows:
1973
Depreciation and amortization ............... ....... .... ................ .
Flying operations ....................................................... .
Aircraft and traffic servicing .......................................... .
Interest on long-term debt ..................................... ......... .
$287,168
28,089
1,222
46,334
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __ _
$362,813
(B) Amount applicable to debentures converted, charged to Other Paid-In Capital.
Column E, Other Changes, has been omitted as there were no other changes.
Column F
Balance at
Close of
Period
$1,548,934
159,249
406,778
$2,114,961
$1,117,075
129,938
352,466
$1,599,479
1974
$445,291
28,089
1,222
54,312
17,347
$546,261
SCHEDULE XII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A
Description
Column B
Balance at
Beginning
of Period
Column C
Additions
Charged
to Costs and
Expenses
Year Ended December 31, 1973
Allowance for doubtful accounts . . . . . . . . . . . $ 28,945 $138,400
Allowance for obsolescence - maintenance
and operating supplies .................. $ 928,817 $236,772 (B)
Year Ended December 31, 1974
Allowance for doubtful accounts . . . . . . . . . . $ 99,682 $102,000
Allowance for obsolescence - maintenance
and operating supplies ................... $1,165,589 $153,545 (B)
(A) Bad debts written off, net of recoveries.
( B) Comprises the following:
Provision for inventory obsolescence ..................................... .
Allowance required for parts purchased for
fully depreciated Martin 404 equipment ............................... .
30A
Column D Column E
Balance at
Other End of
-Describe Period
$ (67,663) (A) $ 99,682
$ $1,165,589
$ (102,747) (A) $ 98,935
$ $1,319,134
1973 1974
$ 236,772 $ 113,371
40,174
$ 236,772 $ 153,545
EXHIBIT 1
SOUTHERN AIRWAYS, INC.
COMPUTATIONS OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(This Exhibit should be read in conjunction with Note (6) to the Statement of Operations)
Years Ended December 31, 1974 and 1972:
1974 1972
Fully Fully
Amounts Primary Diluted Primary Diluted
Net income before Extraordinary Credit and
Accounting Change ............... . ................ $3,481,691 $3,481,691 $1,600,317 $1,600,317
Imputed interest (less related income tax
effect at 28% in 1974) related to: (a)
Options and Warrants issued since June 1, 1969 . 152,937 152,937 58,760 58,760
Warrants issued prior to June 1, 1969
(cancelled July 25, 1973) ...................... 81,900
6 % Convertible Subordinated Debentures 272,984 482,084
5 , % Convertible Subordinated Debentures ..... 179,883 260,645
152,937 605,804 58,760 883,389
Preferred dividend requirement .................... (119,519) (128,437)
Adjusted Net Income ..... ................... (A) $3,515,109 $4,087,495 $1,530,640 $2,483,706
Extraordinary tax credit (less related
income tax effect of imputed interest
at 25% in 1972) (a) ........................ (B) 325,055 325,055 423,940 630,097
Accounting Change ............................ ( C) 565,375 565,375
Adjusted income before extraordinary
credit and accounting change .............. (D) $2,624,679 $3,197,065 $1,106,700 $1,853,609
Shares
Common shares 1,413,825 1,413,825 1,194,426 1,194,426
Preferred shares ..................................... 330,816 374,004
Options and warrants issued since June 1, 1969 ...... 185,057 (b) 185,057(b) 245,091(c) 245,091(c)
Warrants issued prior to June 1, 1969
(cancelled July 25, 1973) .......................... 126,000
6% Subordinated Debentures ...................... 583,300 741,667
5% Subordinated Debentures ...................... 400,092 417,400
(E) 1,598,882 2,913,090 1,439,517 3,098,588
Per Share
Before extraordinary credit and accounting
change (D) (E) ................................ $ 1.64 $ 1.10 $ .77 $ .60
Extraordinary credit (B) (E) ................... .20 .11 .29 .20
Accounting change (C) (E) ...................... .35 .19
Net income (A) (E) ............................. $ 2.19 $ 1.40 $ 1.06 $ .80
Computational Notes:
(a) Rates used are approximate overall effective tax rate each year after reduction for investment tax credit.
(b) Total shares issuable upon exercise (501,103), less 2oc1<, of common shares outstanding at December 31,
1974 (316,046).
( c) Total shares issuable upon exercise (499,329), less 20 % of common shares outstanding at December 31,
1972 (254,238).
Year Ended December 31, 1973:
Income
Before
Extraordinary
Credit
Income amounts .................................................. $ 319,748
Preferred dividend requirement . .. . .. . . . . . . .. . . .. . . . .. . . . . . . . . . .. 119,519
Available for common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,229
Divide by weighted average number of common shares .......... . 1,314,016
.152
Per share ......................................................... $
::::::====
31A
Extraordinary Net
Credit Income
$ 97,000 $ 416,748
119,519
$ 97,000 $ 297,229
1,314,016 1,314,016
$ .074 $ .226
EXHIBIT 2
SOUTHERN AIRWAYS, INC.
COMPUTATION OF (a) RATIO OF INCOME TO FIXED CHARGES AND
(b) RATIO OF INCOME TO FIXED CHARGES AND PREFERRED
DIVIDEND REQUIREMENTS
(This Exhibit should be read in conjunction with Note (7) to the Statements of Operations)
Years Ended December 31,
1970 1971 1972 1973 1974
Income:
Net income (loss) .......... $(3,333,212) $(1,058,784) $ 1,600,317 $ 416,748 $ 3,481,691
Income taxes ................ 449,500 109,000 985,000
Cumulative effect of
accounting change ........ 565,375)
Tax benefits of operating
loss carryforward ......... 409,250) 97,000) 325,000)
Deferred Income
Tax ( credit) .. ........... ( 235,000) 294,000
Fixed charges ............... 3,814,849 3,946,060 3,919,179 5,620,919 6,479,066
Income ............... $ 481,637 $ 2,652,276 $ 5,559,746 $ 6,049,667 $10,349,382
Fixed charges :
Interest expense ............ $ 1,788,784 $ 1,678,112 $ 1,361,913 $ 3,083,390 $ 3,929,321
Amortization of deferred
debt expenses ............. 93,026 99,293 66,475 46,334 51,190
Interest element of rentals .. 1,933,039 2,168,655 2,490,791 2,491,195 2,498,555
Total fixed charges ... 3,814,849 3,946,060 3,919,179 5,620,919 6,479,066
Pref erred dividend
requirement and related
income tax effect ......... 160,456 149,399 152,984
Total fixed charges
and preferred
dividend
requirements ........ $ 3,814,849 $ 3,946,060 $ 4,079,635 $ 5,770,318 $ 6,632,050
Ratio of income to
fixed charges ............. .13 .67 1.42 1.08 1.60
Ratio of income to fixed
charges and preferred
dividend requirements .13 .67 1.36 1.05 1.56
32A
That's right, Mayor Daley's toddlin ' town has been
sung about in more ways and for more reasons than
just about any big town . Big , bluff and blustering ,
Chicago is the cog that makes the Midwest move,
the kind of town most businessmen , conventioneers
and pleasure-seekers will visit sooner or later.
Mostly sooner.
When your plans call for the Windy City, come the
Southern route. Southern has non-stop and direct
service to both O'Hare and Midway airports. And
you 'll appreciate Southern 's democratic approach
to in-flight DC9 comfort. Nobody's Second Class
on Southern .
So whether you 're headed for the Loop or the
North Shore , the Merchandise Mart or the First
National Plaza, fly Southern
Airways. It's your kind of air-
Ch1cago
line for your kind of town .
the dream's on ns.
Just about everything has been written
and said about those paradise islands of
the Caribbean. Their splendid isolation,
blinding white beaches, colorful flora;
their quaint little restaurants and out-of-
the-way shops; their laughing people
with their odd customs and gentle ways.
In truth, that was the way things were
until a great tidal wave of tourists washed
away most of the isolation and replaced
the romance and other-world feeling with
casinos, Fifth Avenue boutiques, haughty
waiters, and high prices.
But not in the Cayman Islands.
This outpost in the British West Indies
retains the peace and serenity of an
earlier, less-hectic time. The largest
island, Grand Cayman, offers the visitor
the chance to unwind in natural,
untouched surroundings. It's colorful,
scenic, different. The snorkeling's great,
the fishing plentiful, the residents far
from restless. It's as if you 'd been
suddenly transported to one of the other
Caribbean resorts as it was 20 years ago.
When every island was only an island.
THE CAYMAN ISLANDS
For rates and travel information contact your travel agent
or Southern Airways, United States Flag Carrier
to the Cayman Islands.