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.