Southern Airways Annual Report 1975

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*zd O AM T|0
1974
$ 878,000
(652,000)
282,000
36,000
(250,000)
$ 294,000
The sums of current and deferred Federal income taxes
in 1975 and 1974 ($1,705,000 and $1,638,000 before
investment tax credit of $227,000 and $250,000 offsetting
deferred taxes) equal approximately 48 per cent (the
statutory Federal tax rate) of income before taxes after
deducting the state tax provision shown above.
Investment tax credit carryovers, which may be used to
offset Federal income taxes payable in future income
tax returns, aggregate approximately $837,000 and expire
in 1978 ($26,000), 1979 ($276,000), 19$0 ($220,000),
1981 ($123,000) and 1982 ($192,000). Approximately
$477,000 of this amount has been utilized as a reduction of
deferred taxes for financial reporting purposes.
Note E-Capital Stock and Options
The Series A Preferred Stock is convertible into common
stock on a share for share basis, can be redeemed at the
Company's option 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 163,781 shares outstanding
at December 31, 1975, including the dividend requirement
described below, aggregated $1,042,000 which is $878,000
more than the aggregate par value of such shares.
Each share of preferred stock is entitled to receive
annual dividends of $.36 per share cumulative only to the
extent of annual net profits. Payment of dividends is also
subject to the limitations prescribed by the Indenture
Agreements covering the 5-3/4% and 6-1/2% Convertible
Subordinated Debentures and to limitations contained
in the Credit Agreement (see Note C). The dividend
requirement on preferred shares at December 31, 1975,
aggregated $59,000, after reduction for the dividend of
$119,000 included in accrued expenses and paid to
shareholders on January 9, 1976.
Authorized common shares include 1,674,403 shares
and 1,675,053 shares reserved at December 31, 1975 and
1974, respectively, for issuance as follows:
1975 1974
For convertible securities conversions:
5-3/4% Convertible Subordinated
Debentures (Note C) 400,093 400,093
6-1/ 2% Convertible Subordinated
Debentures (Note C) 583,300 583,300
Series A Convertible Preferred Stock 163,781 164,431
1,147,174 1,147,824
For exercise of outstanding warrants at
$6 per share, issued with Series A
(290,562 shares) and Series B
(166,667 shares) Convertible
Preferred Stock 457,229 457,229
For options under Qualified Stock
Option Plan (45,000 shares) and
Employee Stock Option Plan
(25,000 shares) 70,000 70,000
1,674,403 1,675,053
At December 31, 1975, there were outstanding options
for 45,000 shares of common stock under the Company's
Qualified Stock Option Plan, of which 34,000 shares (at
$5.25 per share) expire in 1976, 4,000 shares (at $5.81
per share) expire in 1978, 3,000 shares (at $3.50 per
share) expire in 1979, and 4,000 shares (at $2.94 per
share) expire in 1980. Option transactions in 1974 and
1975 are summarized as follows:
Outstanding January 1, 1974
Granted
Expired
Outstanding December 31, 1974
Granted
Cancelled
Outstanding December 31, 1975
Number of
Shares
42,000
6,000
(4,000)
44,000
4,000
(3,000)
45,000
Option Price
Per Share Total
$5.25-$11.76 $246,000
3.50- 5.25 26,000
8.69- 11.76 (44,000)
3.50- 5.81 228,000
2.94 12,000
5.25- 5.81 (16,000)
$2.94-$ 5.81 $224,000
The Qualified Stock Option Plan expired on October 26,
1975, except for options which were outstanding at that date.
Options granted under the Plan are intended to
constitute "qualified stock options" as defined in Section
424 (b) ofthe Internal Revenue Code of 1954, as amended.
Options are exercisable at 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 1975 or 1974.
Options became exercisable as follows:
27
Notes to Financial Statements continued
Southern Airways, Inc. December 31, 1975
1975 1974
Number of Shares 12,667 12,000
Option Price:
$5.25-$5.81 $ 5.25
Per Share
Total $ 67,000 $63,000
Quoted Market Price
at Date Exercisable:
Per Share $2.88-$3.25 $ 3.50
Total $ 37,000 $42,000
Options for 35,333 shares (aggregating $186,000 at
option prices) and 24,000 shares (aggregating $126,000)
were exercisable at December 31, 1975 and 1974,
respectively.
A total of 25,000 shares of common stock are reserved
for issuance to participating employees under an
Employees' Stock Option Plan (an employee stock
purchase plan as defined by Section 423(6) of the Internal
Revenue Code of 1954). This plan is currently inactive and
there are no participants.
The Company makes no charge to income with respect
to options.
Note F - Pension and Employee Stock
Ownership Plans
Pension expense was $2,379,000 in 1975 and $1,899,000
in 1974. Expense in 1975 includes $43,000 for the
Employee Stock Ownership Plan adopted during the year
(see Note A).
The Plans have been, or are presently being modified to
comply with the Employee Retirement Income Security
Financing Leases
Flight Maintenance
Equipment Center
1976 $ 5,901,000 $ 1,205,000
1977 5,901,000 2,534,000
1978 5,901,000 2,534,000
1979 4,924,000 2,534,000
1980 2,861,000 2,534,000
1981-1985 7,287,000 12,673,000
1986-1990 12,673,000
1991-1995 12,673,000
Remainder 24,712,000
$32,775,000 $74,072,000
28
Act of 1974. Compliance with the Act will have no
material effect on pension expense in future periods.
On October 1, 1975, the Company, under a negotiated
agreement, merged its two pilots' plans, one a defined
benefit plan and one a defined contribution plan, into a
single defined benefit plan.
Note G-Leases
Total rental expense for all leases amounted to:
Financing leases
(minimum rentals):
Flight equipment
Other financing leases
Other leases:
Minimum rentals
Contingent rentals
1975 1974
$4,991,000
2,132,000
1,912,000
639,000
$9,674,000
$4,748,000
1,705,000
1,093,000
443,000
$7,989,000
Contingent rentals for 1975consistofchargesof $437,000
for reservations services based upon the number of
unduplicated passengers in excess of a specified minimum
of $120,000 per annum and $202,000 for that portion of
the rental charges for a short-term leased aircraft which
was based on hours flown. In 1974 the contingent rentals
related solely to the reservations services. f:{entals
received from subleases are immaterial.
Future minimum rental commitments as of December
31, 1975, for all noncancelable leases and for the new
maintenance center at the Hartsfield Atlanta International
Airport are as follows:
Other
Financing Other
Leases Leases Total
$ 1,673,000 $1,109,000 $ 9,888,000
1,554,000 519,000 10,508,000
1,227,000 234,000 9,896,000
1,137,000 177,000 8,772,000
1,137,000 109,000 6,641,000
5,409,000 466,000 25,835,000
4,960,000 397,000 18,030,000
1,747,000 44,000 14,464,000
366,000 32,000 25,110,000
$19,210,000 $3,087,000 $129,144,000
Estimated costs, annual rentals and rental
commencement dates for the new maintenance center
are as follows:
Estimated
Cost
Land $ 1,506,000
Phase One Facilities 7,663,000
Phase Two Facilities 20,522,000
Annual
Rental
$ 120,000
641,000
1,773,000
Rental
Commencement
Dates
January 2, 1974
October 1, 1975
October 1, 1976
Cost of the facilities is being financed by the City of
Atlanta through the issuance of Airport Extension and
Improvement Revenue Bonds in the principal amounts
needed to provide monies for the estimated costs shown
above, which will be the City's maximum obligation. Cost of
improvements in excess of the estimated amount must be
borne by the Company. The lease extends to October 1,
2005, and may be renewed at the Company's option for
an additional term extending to January 1, 2024.
Most of the Company's other leases do not contain
formal renewal options. However, consistent with the
prevailing practice in the industry, leases with relatively
short terms are generally renegotiated and extended at the
conclusion of their terms and leases with relatively 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 noncapitalized financing
leases are:
Interest Rates Used
Weighted Average Range As of December 31,
1975 1974 1975 1974 1975 1974
Flight equipment 7.91% 7.45% 5.3%- 9.2% 5.3%- 8.7% $25,977,000 $22,020,000
Computer and message switching
equipment 14.01 12.64 7.5 -23.7 6.8 -23.7 622,000 1,102,000
Airport terminal facilities 5.50 6.34 2.9 7.5 2.9 - 7.5 7,264,000 5,001,000
General office, maintenance and
training facilities* 7.22 6.52 3.5 - 7.5 3.5 - 7.2 9,754,000 2,187,000
Miscellaneous ground egui12ment 6.12 6.19 5.1 - 6.8 4.6 - 6.8 9,000 17,000
* Includes land (1975 and 1974) and phase one facilities (1975) for new maintenance center.
The present values were computed after reducing total
rental commitments, where required, by estimated or actual
amounts applicable to lessors' payments of taxes, insurance,
maintenance and other operating expenses.
If all financing leases had been capitalized and it was
assumed that the estimated present values were amortized
on a straight-line method over the terms of the leases and
that interest expense was accrued on the outstanding lease
obligations at the rates shown above, the increase in
expenses would have been as follows:
Rent expense- net
Amortization of leased property
Interest expense
Income taxes
1975
$(7,618,000)
5,109,000
2,920,000
(115,000)
$ 296,000
1974
$(6,048,000)
4,260,000
2,257,000
(131,000)
$ 338,000
To the extent that the increased expenses were not
offset by resultant increases in subsidy revenues and related
income taxes, which are indeterminable as to specific
amounts, net income would have been decreased.
Landing fees were $1,950,000 in 1975, after reduction
for the reimbursement by the City of Atlanta of $595,000
(see Note B), and $2,162,000 in 1974.
Note H-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
29
Notes to Financial Statements continued
Southern Airways, Inc. December 31, 1975
two DC9 (30 Series) aircraft valued at approximately
$8,000,000. (See Note C for related financing
arrangements.)
The Company is the defendant in a number of law suits.
In the opinion of management there is adequate insurance
coverage for such of those suits as are being defended by
the Company's insurance carriers. In the opinion of
management, the other suits will have no material effect
on the financial statements for 1975.
The Company has an employment agreement with its
Chairman of the Board providing for his employment 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. Provision for the amount due under the retirement
agreement is being made over a three year period
beginning in 1975.
In January 1976, the Company signed a letter of intent
to lease a new general office building under a capitalizable
lease obligation. This building will be constructed to the
Company's specifications. Estimated total cost of the
building is approximately $3,700,000.
Note I- Earnings per Share
Primary earnings per share 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 outstanding during each year-
1,765,168 shares in 1975 and 1,598,882 shares in 1974.
Common equivalent shares comprise that number of
common shares issuable upon exercise of stock options
and warrants in excess of 20 per cent of the number of
common shares outstanding at the end of each year.
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 each
year were assumed to have been applied to debt reduction
30
and the related interest, net of income tax effect, was
added to income for purposes of the calculation.
Fully diluted earnings per share were determined on
the assumption that the weighted average number of
common and common equivalent shares were further
increased from the beginning of each year by conversion
of outstanding convertible debentures and convertible
preferred stocks-a total of 2,912,407 shares in 1975 and
2,913,090 shares in 1974. These calculations also assume
no preferred dividend requirement, and interest, net of
income tax effect, related to the debentures assumed
converted was added to income for purposes of the
calculation.
Note J - Supplementary Information
Depreciation and amortization:
Depreciation of property and equipment
Amortization of def erred charges
Provision for inventory obsolescence
Deduct- amounts charged to
other accounts
Taxes, other than income taxes, charged to
operating expenses:
Payroll taxes
Fuel and oil taxes (a)
Property taxes
Sales and use taxes
Other
Rents:
Rental expense under leases- Note G
Portion of gross lease rentals not charged
to rent expense in accordance
with CAB classifications and
miscellaneous rentals- net
Advertising costs
1975 1974
$4,177,000 $3,840,000
388,000 546,000
202,000 113,000
4,767,000 4,499,000
133,000 102,000
$4,634,000 $4,397,000
$1,874,000 $1 ,785,000
723,000 237,000
652,000 427,000
360,000 333,000
-154,000 138,000
$3,763,000 $2,920,000
$9,674,000 $7,989,000
(73,000) (57,000)
$9,601,000 $7,932,000
$ 918,000 $1,189,000
There were no royalties or research and development costs.
{a) In January 1975, the Company changed its definition of items
classified as fuel taxes to comply with the Civil Aeronautics Board's
definition of fuel taxes. This change resulted in approximately
$500,000 being classified as fuel taxes in 1975, which had been
previously classified to other accounts.
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, 1975, and December 31,
1974, and the related statements of income, stockholders' equity and changes in financial position for the
years then ended. Our examinations were made in accordance with generally accepted auditing standards
and, accordingly, included such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the financial position of Southern
Airways, Inc. at December 31, 1975, and December 31, 1974, and the results of its operations and changes in
its financial position for the years then ended, in conformity with generally accepted accounting principles
consistently applied during the period subsequent to the change, with which we concur, made as of January 1,
1974, in the method of recording certain DC9 engine maintenance costs, as described in Note B of Notes to
Financial Statements.
Atlanta, Georgia
February 13, 1976
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 information required by
Part 245.12 of the Board's Economic
Regulations. This report 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 capital subsequently acquired,
a report must be filed within ten ( 10) days
after such acquisition, unless such person
has otherwise filed with the Civil Aeronautics
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 pursuant
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 Operating 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 Company
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 programs, and all Company
facilities are administered without regard
to race, color; religion, sex, age, national
origin, or physical handicap.
31
Directors
Cecil A Beasley, Jr.
Assistant Secretary,
Southern Airways, Inc. and
Partner- Ballard & Beasley
(Attorneys) Washington, D.C.
George M. Gross
Executive Vice President and
General Manager,
Southern Airways, Inc.
Graydon Hall
President,
Southern Airways, Inc.
F. Barton Harvey, Jr.
Partner - Alex. Brown & Sons
(Investment Bankers)
Baltimore, Maryland
Frank W. Hulse
Chairman of the Board and
Chief Executive Officer
Southern Airways, Inc.
Alton F. Irby, Jr.
Chairman of the Board
Fred S. James & Company of
Georgia, Inc. {Insurance Agents
and Counselors)
Atlanta, Georgia
Henry P. Johnston
Radio and Television Consultant
Birmingham, Alabama
G. Gunby Jordan
Chairman of the Board
The Jordan Company (Construction)
Columbus, Georgia
Sartain Lanier**
Chairman of the Board
Oxford Industries, Inc. (Textile
Manufacturer)
Atlanta, Georgia
AL. Maxson
Vice President- Finance
and Treasurer,
Southern Airways, Inc.
R. Eugene Orr
President - Orr & Company, Inc.
(Mortgage Bankers)
Jacksonville, Florida
32
Directors, Officers, and General Information
G. Frank Purvis, Jr.
Chairman of the Board and Chief
Executive Officer- Pan American
Life Insurance Company
New Orleans, Louisiana
F. D. Schast
Retired Investment Counselor
Memphis, Tennessee
Elton B. Stephens
Chairman and Founder
EBSCO Industries, Inc.
(Diversified Multinational Sales
Corporation and Metals Manufacturing)
Birmingham, Alabama
Richard A Trip peer, Jr.
President - Union Planters
National Bank
Memphis, Tennessee
Wm. Bew White, Jr.
Assistant Secretary,
Southern Airways. Inc. and
Partner - Bradley, Arant, Rose & White
(Attorneys)
Birmingham, Alabama
Member of Executive Committee
Member of Audit Committee
t Senior Director
Officers
Frank W. Hulse
Chairman and Chief
Executive Officer
Graydon H all
President
George M. Gross
Executive Vice President
and General Manager
J. Kenneth Courtenay
Vice President - Economic
Regulations and Secretary
AL. Maxson
Vice President - Finance
and Treasurer
Owen L. McRee
Vice President - Customer Sales
and Services
J. R. Price
Vice President - Properties
Form 10-K
A copy of the Company's Annual Report
to the Securities and Exchange
Commission on Form 10-K is available to
the Company's securities holders, without
charge, on request to:
Mr. A L. Maxson
Vice President -Finance and Treasurer
Southern Airways, Inc.
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320
Victor C. Pruitt
Vice President -
Technical Services
T. M. Shanahan
Vice President - Flight
Thomas A Wiley, Jr.
Vice President - Marketing
Ray W. Burden
Assistant Treasurer
James H. Ishee
Assistant Treasurer and
Controller
J. Philip Day
Assistant Vice President-
System Planning
William E. Oakes
Assistant Vice President-
Economic Research
Cecil A Beasley, Jr.
Assistant Secretary
Mary C. H ayes
Assistant Secretary
Wm. Bew White, Jr.
Assistant Secretary
General Information
Southern Airways, Inc.
General Offices:
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320
Counsel
Bradley, Arant, Rose & White
Birmingham, Alabama
Ballard & Beasley
Washington, D.C.
Auditors
Ernst & Ernst
Atlanta, Georgia
Stock Transfer Agent
Trust Company Bank
Atlanta, Georgia
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Atlanta. Georgia
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Southern Airways, Inc. General Office: Hartsfield Atlanta International Airport Atlanta, Georgia 30320