Southern Airways Annual Report 1978

-
Southern
Southern Airways, Inc.
1978 Annual Report

Southern
Southern Airways, Inc. is a certificated, scheduled
airline engaged in transportation of persons, property
and mail. The Company serves 18 states, the District
of Columbia, and the Cayman Islands in the British
West Indies.
Southern began scheduled service on June 10, 1949.
During 1978, the Company's aircraft flew almost 34
million miles, serving more than 4.1 million passengers.
Aircraft in service include 30 DC9 jetliners and eight
Metro 11 turboprops. Today, more than 98 per cent
of Southern's revenue passenger miles are generated
aboard DC9s.
Incorporated in the State of Delaware, Southern is
a publicly held corporation with more than 4,500
stockholders residing in 45 states and 10 foreign coun-
tries. The Company's stock is registered and traded
in the NASDAQ/Over-the-Counter market.
Southern is one of 10 "Local Service Carriers"
operating in interstate commerce to serve cities of
small and intermediate size as well as major metro-
politan areas. For rendering air services to small and
intermediate size communities that otherwise could
not sustain scheduled service, Southern receives public
service revenue (subsidy) from the Federal Government.
On the longer haul, more densely traveled routes,
where Southern competes with larger Trunk Carriers,
the Company does not receive a subsidy. Southern
fares and quality of service are competitive.
On February 22, 1979, the shareholders of Southern
voted to merge with North Central Airlines, Inc. Such
merger is subject to approval of certain creditors, the
Civil Aeronautics Board and the President of the
United States.
Southern is headquartered at Hartsfield Atlanta
International Airport where the Company's
Maintenance Base, Reservations Center, Training
Center and General Office are located.
About the Company
Market Price of Common Stock
Range of high and low bid and asked prices for the
Company's Common Stock:
Bid Price Asked Price
Year High Low High Low
1977
First Quarter .. . . . .. . 41/s 3 4 41/s
Second Quarter .. . .. 41/a 35/a 4 4
Third Quarter ....... 41/s 35/a 4 4
Fourth Quarter ...... 5 41/s 53
/a 4
1978
First Quarter ... . .... 61/a 5 7 53/a
Second Quarter .. . . . 8 63
/a 83/a 6
Third Quarter .... 16 75/a 17 8
Fourth Quarter .. . .. 13 7 14 83/4
1979
First Quarter through
February 26 . ... . 13 11 14 12
On July 12, 1978, the day immediately preceding pu blic
announcement of a proposed merger with North Central
Airlines, Inc., the closing bid and asked prices of Southern's
common stock were $8.00 and $8.375, respectively.
The foregoing prices do not represent actual transactions.
They represent prices between dealers and do not include
retail markup, markdown or commission . There have been
no active markets in the Company's convertible subordina-
ted debentures or warrants.
Contents
About the Company . . . . . . . . . . . . . . . . . . . . . . . . 1
Report to Stockholders . ..... .. . . . .. . ... . ... 2
Highlights .... . ... . ....... . .. .. . .......... 3
Management's Discussion of 1978
and 1977 Summary of Operations .... . .. .. .. 4-5
Report of Ernst & Ernst,
Independent Auditors . . . . . . . . . . . . . . . . . . . . . 6
Statements of Income . . . . . . . . . . . . . . . . . . . . . . 7
Balance Sheets . . . . .. . ... ... . ....... .. .. .. 8-9
Statements of Changes in Financial Position . ... 10
Statements of Stockholders' Equity ... .. .... . . 11
Notes to Financial Statements ..... .. .... . . 11 -18
Five-Year Operating and Financial Summary .... 19
Directors and Officers ... .... ... . .......... 20
Report to Stockholders
Clearly, the most significant event in 1978 was the
announcement in July of the proposed merger of
your Company and North Central Airlines, Inc.,
headquartered in Minneapolis, Minnesota. Upon
the approval of the merger, these strong, regional
carriers will become a coast-to-coast, national air
carrier of considerable strength and potential. The
new Company will be named Republic Airlines, Inc.
Republic will serve some 150 cities and will
generate an expected $700 million in revenue in its
first full year. By linking the two strong regional
systems over major connecting "bridge" routes,
many small and medium-size cities on both systems
will receive significantly improved, more frequent
single-carrier and single-plane service. This, in turn,
will generate additional revenue greater than for
each carrier separately. With corresponding cost
efficiencies, the profit potential will be enhanced.
The merger has been approved by the stock-
holders and directors of both companies and has
been recommended favorably by an administrative
law judge of the Civil Aeronautics Board. Consum-
mation of the merger now is awaiting final approval
of the Board and the President of the United States.
This action is expected by mid-year.
Upon completion of the merger, Southern's
stockholders will receive 2.1 shares of common
stock of North Central (Republic) for each share
of Southern common stock. The conversion ratio
on Southern's convertible debentures and the
exercise rights on Southern's warrants will be
amended to reflect the same exchange ratio.
In 1978, Southern earned $2.4 million, or $1.29
per share primary, on total revenues of $188.5
million. This compares with a profit of $9.3 million,
or $5.39 per share primary, in 1977 (after restatement
to comply with Financial Accounting Standards
Board Staternent No. 13, "Accounting for Leases")
on total revenues of $159.5 million. A $3.9 million
gain from an insurance settlement contributed to
1977 resu Its.
2
Although revenue passenger miles increased a
significant 27 .8 per cent in 1978, this was not
sufficient to overcome a four per cent decline in
revenue per passenger mile caused by the prolifera-
tion of discount fares and the inflationary effects
on costs, and still maintain 1977's profit margin.
A more thorough review of the financial results
is contained in Management's Discussion on the
fo 11 owing pages.
Southern and North Central, as wel I as the
travelling public, will all benefit substantially from
the merger. Together the two carriers can draw from
the strengths of the other to produce a new airline
stronger and better qualified to provide the best in
air transportation service and to compete effectively
in whatever regulatory environment the coming years
may bring.
Respectfully submitted,
Frank W. Hulse
Chair?
~~ffe~
Vice Chairman
/4-~~ In
George M. Gross
President
March 30, 1979
~
Highlights
Year ended December 31 1978
PASSENGER REVENUES $ 159,802,000
OPERATING REVENUES $ 188,512,000
OPERATING INCOME $ 7,706,000
NET INCOME $ 2,407,000*
PRIMARY EARNINGS PER SHARE $ 1.29*
REVENUE PER PASSENGER MILE $ 0.120
SCHEDULED SERVICE
REVENUE PASSENGER MILES 1,334,987,000
AVAILABLE SEAT MILES 2,449,402,000
PASSENGER LOAD FACTOR 54.5%
REVENUE PASSENGERS CARRIED 4,111,000
REVENUE PLANE MILES FLOWN 33,977,000
NUMBER OF EMPLOYEES
* Includes gain from sale of four engines which increased net income
by $660,000 (32 cents per share).
** Includes excess insurance proceeds horn the loss of a DC9 aircraft
which increased net income by 53,922,000 ($2 .26 per share). Also
includes prior years ' mail revenue which increased net income by
$500,000 (29 cents per share )
The Company's 1977 financial statements have been restated in
accordance with FASB Statem nt No 13. "Accounting for Leases" .
These highlights should be read In con1unc1Ion with the Financial
Statements and Notes to the F1nanc1al Statements appearing
elsewhere in this report .
3,216
1977 %
s 130,828,000 22.1
s 1 5 9, 51 1 , 000 18.2
$ 9,260,000 (16.8)
$ 9,342,000** (74.2)
$ 5.39** (76.1)
$ 0.125 (4.0)
1,044,818,000 27.8
2,043,061,000 19.9
51 .1% 6.7
3,457,000 18.9
28,638,000 18.6
2,922 10.1
3
Management's Discussion of 1978 and 1977
Summary of Operations
Overview
Net income in 1978 was $2,407,000 ($1 .29 per
share), compared to net income of $9,342,000
($5 .39 per share) in 1977 after restatement to
comply with FASB Statement No. 13, "Accounting
for Leases", and $325,000 ( 1 7 cents per share)
in 1976. In each of the years significant traffic
growth was offset by increases in operating costs,
both from inflationary sources and the cost to provide
additional service to the public.
Capita I gains and items of a nonrecurring nature
added approximately $660,000 (32 cents per share)
to net income in 1978, $4,422,000 ($2.55 per share)
to 1977 and $145,000(nine cents per sha re)to 1976.
Exclusive of the effect of these items, net income
would have been approximately $1,747,000 (97
cents per share) in 1978, $4,920,000 ($2.84 per
share) in 1977, and $180,000 (eight cents per
share) in 1976.
Operating Revenues
Total operating revenues reached record levels of
$188,512,000 in 1978 and $159,511,000 in 1977,
up 18.2 per cent and 13.8 per cent, respectively,
compared with prior years.
Passenger revenues of $159,802,000 in 1978
represented a 22 .1 per cent gain over the prior year,
while the $130,828,000 in passenger revenues in
1977 reflected a 13.6 per cent gain over 1976.
4
Capacity, as measured by available seat miles
(ASMs), was increased by 14.6 per cent in 1978fol-
lowing a 5.7 per cent increase in 1977. These
increases were brought about by the addition of two
DC9 and one Metro aircraft in 1978 and alterations
to increase the capacity of existing DC9 aircraft
in 1978 and 1977.
Yield (revenue per passenger mile) increased from
11 . 7C in 1976 to 12.5C in 1977 and decreased to
12.0C in 1978. The improvements from 1976 to
1977 reflected certain fare increases throughout
the period and the elimination of certain discount
fares in 1976. The decrease in 1978 is a result of the
introduction of new discount fares early in the year.
Charter revenues decreased by $2,432,000 from
1977 to 1 978 due to the phasing out of the Com-
pany's charter operations to more profitably use the
aircraft in scheduled services. The Company antici-
pates flying very few charters in 1979.
Other revenues increased by $3,352,000 in 1978
and by $3,434,000 in 1977. Contract maintenance
revenues, airframe and engine work performed for
others initiated in 1978, contributed $2,683,000 to
other revenues. Freight revenue increased
$1,846,000 in 1978 and $2,477,000 in 1977 over
the previous years. Included in the 1977 increase
was $1,012,000of additional mail revenue received
by the Company under a Civil Aeronautics Board 's
order establishing permanent rates for the carriage
of mail for the period 1973 through 1976. (See Note
B of Notes to Fina ncia I Statements.)
Operating and Other Expenses
Operating expenses increased by $30,555,000 in
1978, following a $14,686,000 increase in 1977.
Labor costs increased $13,590,000 in 1978 and
$6,847,000 in 1977, as a result of increased
salaries and benefits. The total number of employees
at the end of 1978 was up considerably over prior
year-end levels because of the expansion of in-
house a ire raft engine ma i ntena nee, contract
maintenance for others, and a greater volume of
flying operations. There were 3,216 employees at
December 31, 1978, compared with 2,922 at
December 31, 1977, and 2,766 at December
31 , 1976.
The cost of aircraft fuels and oils increased by
$5,265,000 in 1978 and $4,917,000 in 1977 over
the previous year. Of these amounts, increased fuel
consumption accounted for $3,490,000 and
$939,000, respectively, while the balance of the
differences were caused by the increase in the unit
cost of fuel. Increased fuel consumption was a result
of increases in the number of aircraft flown on the
system.
Depreciation and amortization expense increased
by $2,230,000 in 1978 and $861,000 in 1977 over
the prior year due primarily to additional aircraft in
service and new facilities. The 1978 increase
resulted primarily from the introduction of the new
Metro aircraft in late 1977 and the purchase of two
additional DC9 -10 aircraft in 1978, while the 1977
increase was due pri ma ri ly to depreciation on the
newly purchased Metro aircraft, and depreciation
for a full year on two DC9-30 aircraft added in June
and August 1976.
Increases in other operating costs, such as outside
goods and services, commissions, and costs relating
to contract ma i ntena nee work performed for others
generally are reflective of the expanded operating '
levels and inflationary pressures.
As a result of increased debt to finance various
capital additions, along with significant increases in
!he prime interest rate during 1978, interest expense
increased $2,262,000 from 1977 and $2,218,000
from 1976.
Included in Miscellaneous Deductions (Income) in
1978 is a gain of $1,166,000 from the sale of four
engines. In 1977, this classification included the
ex_
cess of insurance proceeds over the purchase
price on the loss of an aircraft, amounting to
$5,823,000.
The increase in the effective tax rate from 1977
to 1978 was a result of the capitalization of certain
expenses in 1978 for tax purposes and greater
capital gains benefits in 1977 than in 1978.
Additionally, the tax rate in 1977 as compared to
the tax rate in 1978 was affected by the amount of
investment tax credit. The decrease in the effective
tax rate from 1 976 to 1 977 was a result of the more
favorable capital gain rate applied to income in 1977
relating to the excess i nsura nee proceeds on the loss
of an aircraft. (See Note E of Notes to Financial
Statements.)
5
REPORT OF ERNST & ERNST, Independent Auditors
Boa rd of Di rectors
Southern Airways, Inc.
Atlanta, Georgia
We have examined the balance sheets of Southern Airways, Inc. as of December 31, 1978 and 1977, 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 .
As discussed in Note E to the financial statements, the Company in 1978 amended the lease relating to its
maintenance base and training facility and capitalized the lease for income tax purposes. As a result, the
Company maybe entitled to reduce income taxes for 1975, 1976 and 1977 by approximately $800,000because
of investment tax credits related to the lease . Because of the technical issues involved the Internal Revenue
Service has not approved the Company's returns. Accordingly, no amounts have been included in the
accompanying financial statements to recognize the income arising from the investment tax credits that may
be realized upon the final resolution of this matter.
In our opinion, subject to the effects, if any, on thefina ncia I statements oft he ultimate resolution of the matter
discussed in the preceding paragraph, the financial statements referred to above present fairly the financial
position of Southern Airways, Inc. at December 31, 1978 and 1977, and the results of its operations and
changes in its financial position for the years then ended, in conformity with generally accepted accounting
principles applied on a consistent basis after restatement for the change, with which we concur, in the method
of accounting for leases as described in Note B to the Financial Statements.
Atlanta , Georgia
February 9, 1 979
Notice to Stockholders of Southern Airways, Inc.
Any person who owns, as of December 31 of any year, or subsequently acquired ownership, either personally or as a trustee, of more
than five per cent (5%) in the aggregate of any class of capital stock or capita l of Southern Airways, Inc. shall file with the Civil Aero -
nautics 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 capita l owned as of December 31 of the preceding year; and in t he
case of capital subsequently acquired, a report must be filed within ten (10) days after such acquisition, unless such person has other-
wise filed with the Civil Aeronautics Board a report covering such acquisition or ownership .
Any bank or broker covered by the provision, to the ex tent that it holds shares as trustee on the last day of any quarter of a calen -
dar 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 t~e capita l stock or capita l of an air carrier sha ll 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 Economics 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 .
6
Statements of Income
SOUTHERN AIRWAYS, INC.
Year ended December 31,
Operating Revenues
Passenger
Ma il, express and freight- Note B
Public service revenue- Note A
Charter
Other
Operating Expenses
Flying operations
Ma intenance
Aircraft and traffic servicing
Passenger service
Promotion and sales
General and administrative
Depreciation and amortization
Other
Operating Income
Other Deductions (Income)
Interest on long-term debt
Gain on involuntary conversion and disposal
of property-Note B
Miscellaneous deductions (income)-net
Income Before Income Taxes
Income taxes- Note E
Net Income
Net Income per Common and Common Equivalent Share - Note I
Primary
Fully diluted
See Notes to Financial Statements
1978
$159,802,000
$
$
$
10,180,000
4,327,000
7,162,000
7,041,000
188,512,000
60,059,000
22,603,000
42,652,000
10,962,000
16,716,000
9,916,000
12,900,000
4,998,000
180,806,000
7,706,000
6,905,000
(1,356,000)
(1,159,000)
4,390,000
3,316,000
909,000
2,407,000
1.29
.93
1977
(As Restated)
$130,828,000
9,325,000
5,220,000
9,594,000
4,544,000
159,511,000
50,540,000
20,962,000
36,078,000
8,566,000
12,894,000
8,182,000
10,670,000
2,359,000
150,251,000
9,260,000
4,643,000
(6,199,000)
(407,000)
(1,963,000)
11,223,000
1,881,000
$ 9,342,000
$ 5.39
$ 3.45
7
Balance Sheets
SOUTHERN AIRWAYS, INC.
Assets
Current Assets
Cash, including short-term investments of $5,263,000
in 1978 and $10,312,000 in 1977-Note C
Accounts receivable
U.S. Government-transportation and public
service revenue
Trade receivables, less allowance for doubtful
accounts (1978- $190,000; 1977- $179,000)
Maintenance and operating supplies, at average cost
less allowance for obsolescence ( 1978- $1,397,000;
1 977-$1 ,063,000)-Note A
Prepaid expenses
Total Current Assets
Property and Equipment-on the basis of cost-
Notes A, C, D, Hand L
Flight equipment, including purchase deposits
of $1,331,000 in 1978 and $3,390,000 in 1977
Other property and equipment
Less allowances for depreciation and maintenance
Deferred Charges and Other Assets
Deferred charges-Note A
Other assets
See Notes to Financial Statements
8
December 31,
1978 1977
$ 11,747,000
1,853,000
14,048,000
15,901,000
9,406,000
481,000
37,535,000
111,164,000
20,979,000
132, 143,000
51,490,000
80,653,000
1,893,000
489,000
2,382,000
$120,570,000
(As Restated)
$ 11,005,000
2,984,000
13,677,000
16,661 ,000
6,759,000
507,000
34,932,000
103,756,000
16,476,000
120,232,000
40,998,000
79,234,000
1,862,000
565,000
2,427,000
$116,593,000
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable
Salaries, wages and vacations
Accrued interest payable
Accrued income taxes
Accrued taxes and other expenses
Air traffic liability
Current maturities of long-term debt-Note C
Total Current Liabilities
Long-Term Debt, less current maturities-Note C
Notes payable and other
Convertible subordinated debentures
Deferred Credits-Note H
Stockholders' Equity-Notes C, D and F
Preferred Stock, authorized 2,000,000 shares,
issuable in series:
Series A, S.36 Convertible, S 1 par value, voting;
issued and outstanding-163,581 shares (1977)
Common Stock, $2 par value, authorized 7,500,000
shares, issued and outstanding 1,896,288 shares
(1978) and 1,581,080 shares (1977)
Other paid-in capital
Retained earnings
Leases, Commitments and Contingencies-Notes B, D and H
December 31,
1978 1977
(As Restated)
$ 6,657,000
5,514,000
1,036,000
2,039,000
4,792,000
10,313,000
8,329,000
38,680,000
50,300,000
7,270,000
57,570,000
644,000
3,793,000
5,981,000
13,902,000
23,676,000
$120,570,000
S 7,390,000
4,346,000
782,000
2,014,000
3,662,000
9,471,000
9,615,000
37,280,000
50,724,000
8,289,000
59,013,000
314,000
164,000
3,162,000
5,124,000
11,536,000
19,986,000
$116,593,000
9
Statements of Changes in Financial Position
SOUTHERN AIRWAYS, INC.
Year ended December 31,
Funds Provided
From operations
Net income
Items not requiring outlay of working capital
in current period:
Depreciation
Increase in allowance for maintenance
Amortization of deferred charges
Deferred credits and other liabilities
Tota I from operations
Issuance of long-term debt
Conversion of debentures to common stock
Preferred stock converted to common stock
Options and warrants exercised
Property and equipment dispositions, less gain
included in operations
Funds Used
Additions to property and equipment
Utilization of DC9 engine maintenance reserve
Reduction of long -term debt
Conversion of debentures to common stock
Preferred stock converted to common stock
Redemption of preferred stock
Increase in deferred charges and other assets
Dividends on preferred stock
Increase (Decrease) in Working Capital
Working capital (deficit) at beginning of period
Working Capital ( Deficit) at End of Period
Increase (Decrease) in Working Capital by Component
Cash and short-term investments
Accounts receivable
Maintenance and operating supplies
Pre pa id expenses
Trade accounts payable
Salaries, wages and vacations
Accrued interest, taxes, and other expenses
Air traffic I iabi I ity
Current maturities of long -term debt
Increase (Decrease) in Working Capital
See Notes to Financial Statements
10
1978
$ 2,407,000
12,412,000
11,000
377,000
330,000
15,537,000
33,555,000
1,051,000
159,000
321,000
2,623,000
53,246,000
16,000,000
465,000
33,947,000
1,051,000
159,000
25,000
355,000
41,000
52,043,000
1,203,000
(2,348,000)
$ (1,145,000)
$ 742,000
(760,000)
2,647,000
(26,000)
733,000
(1,168,000)
(1,409,000)
(842,000)
1,286,000
$ 1,203,000
1977
(As Restated)
$ 9,342,000
10,171 ,000
158,000
370,000
93,000
20,134,000
29,076,000
6,187,000
55,397,000
34,860,000
292,000
19,508,000
1,120,000
118,000
55,898,000
(501 ,000)
(1 ,847,000)
$( 2,348,000)
$ 2,874,000
3,466,000
753,000
(467,000)
(1 ,127,000)
(432,000)
(2,056,000)
(1 ,555,000)
(1,957,000)
$ (501 ,000)
Statements of Stockholders' Equity
SOUTHERN AIRWAYS, INC.
Preferred Stock Common Other
Paid-In
Capital
Balance January 1, 1977, as originally
reported
Effect of change in method of
accounting for leases-Note B
Balance January 1, 1977, as restated
Net income
Dividends on preferred stock
Balance December 31 , 1977
Net income
Dividends on preferred stock
Conversion and redemption
of preferred stock
Exercise of options and warrants
Conversion of $593,000 of 6-1 / 2%
Convertible Subordinated Debentures
(less $16,000 deferred finance costs)
Conversion of $458,000 of 5-3 / 4%
Convertible Subordinated Debentures
(less $5,000 deferred finance costs)
Balance December 31, 1978
See Notes to Financial Statements
Notes to Financial Statements
SOUTHERN AIRWAYS, INC.
December 31, 1978
Series A Stock Retained
Earnings
$1 Par Value $2 Par Value
$164,000
164,000
164,000
(164,000)
$
$3, 162,000 $5, 124,000 $ 4,796,000
(2,484,000)
3,162,000 5,124,000 2,312,000
9,342,000
(118,000)
3,162,000
318,000
110,000
119,000
84,000
5,124,000 11,536,000
2,407,000
(41 ,000)
(181 ,000)
211 ,000
458,000
369,000
$3,793,000 $5,981,000 $13,902,000
Note A-Summary of Significant Accounting Policies
Property, Equipment, Depreciation
and Obsolescence
Provisions for depreciation of property and equip-
ment are computed on the straight-line method
ca lculated to amortize the cost of the properties over
the ir estimated useful lives. For DC9 flight equip-
ment the life is 15 years (new equipment) and five
to 10 years (used equipment) and 10 years for
ratable parts, with a 10 per cent salvage value; for
Metro II flight equipment, the life is seven years
w ith a 10 per cent salvage value; for the general
office building the life is 30 years; for ground equip-
ment, the I ife ranges from three to 1 0 yea rs.
At the time properties are retired, the amounts of
costs and allowances for depreciation and mainte-
nance are eliminated from the accounts. Gains and
losses on disposals of flight equipment (exclusive of
ratable parts) are included in operations. Proceeds
from the disposal of ratable parts are credited to the
allowance for depreciation.
Expenditures for ordinary maintenance and
repairs are charged to expense. Expenditures for
major spare parts are capitalized and minor parts
are included in maintenance and operating supplies
and charged to expense as used.
A provision for obsolescence is made at an annual
rate of four per cent and six per cent for DC9 and
Metro II spare parts, respectively.
Deferred Charges
Expenditures for preoperati ng and route extension
and development costs are deferred and are amor-
tized over a five year period. Costs associated with
obtaining leased DC9 aircraft are amortized over the
term of the leases. Deferred charges associated with
long -term debt are amortized over the periods of the
financial arrangements.
11
Income Taxes
Income 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 cur-
rently payable or deferred.
Pension Plans
The Company has several pension plans covering
substantially all of its employees. There are noun-
funded past service costs. The Company's policy is
to fund pension costs accrued. At December 31,
1978, the assets of the pension fund exceeded the
actuarially computed value of vested benefits.
Employee Stock Ownership Plans
The Company has an Employee Stock Ownership
Plan (ESOP) and a Tax Reduction Act Stock Owner-
ship Plan (TRASOP) for certain of its employees. The
TRASOPwas established effective January 1, 1977.
The Company's contribution to the ESOP is deter-
mined annually at rates related to the base compen-
sation of active participants. The TRASOP is funded
by the additional one per cent investment tax credit
allowed for such plans.
Public Service Revenue
The Company receives public service revenue
from the Civil Aeronautics Board (CAB)for providing
service to small and intermediate-size cities on its
routes. Amounts received and recognized as reve-
nues are those paid for the period based on the
formula then in effect. Since July 1, 1978, the Com-
pany has been receiving subsidy under a temporary
rate in anticipation of a new subsidy rate which will
be adjusted retroactively to July 1, 1978, when the
rate is finalized . If the final rate, when determined,
follows the pattern the Board has in the past estab-
lished in determining final rates, the amount to be
received by the Company from the CAB as public
service revenue will not substantially differ from
the amount received under the temporary rate.
Note 8-Certain Significant Transactions and
Credits Affecting Operating Results
The Company sold four DC9 engines during 1978.
The gain on the sale was $1,166,000 ($660,000 or
32 cents per share primary after income taxes).
The Company's financial statements have been re-
stated to reflect the accounting for certain operating
leases entered into prior to January 1, 1 977, as
capital leases by recording assets and liabilities for
leased property and equipment in accordance with
FASS Statement No. 13, "Accounting for Leases".
The effect of this change is recorded as an adjust-
ment of beginning retained earnings for the year
1977. Net income for 1977 was increased by
$1,089,000 ($.63 per share primary).
12
On April 4, 1977, a DC9 aircraft was destroyed
during severe weather conditions near Atlanta ,
Georgia . A number of claims have been made and
are expected to be made against the Company for
loss of life, injury, and damage to property as a
result of this accident. In the opinion of manage-
ment, the claims are adequately covered by insur-
ance . Insurance proceeds in excess of the purchase
price of the leased aircraft and other related costs
were $5,823,000 ($3,922,000 or $2.26 per share
primary after income tax effect).
On December 29, 1977, the CAB issued an order
establishing temporary rates for the carriage of mail
during the period 1973through 1977 asa continuing
part of the Priority and Nonpriority Domestic Service
Mail Rates Investigation instituted in December
1970. Under the order, Southern received
$1 ,012,000 of additional mail revenue applicable to
the years 1973 through 1976, which is included in
mail, express and freight revenue for 1977. The
additional revenue had the effect of increasing net
income for 1977 by approximately $500,000 (29
cents per share primary). In November 1978, the
CAB issued a final order substantially confirming the
mail rates through 1977 and establishing a pro-
cedure for adjusting mail rates for cost increases for
years beginning with 1978. The final order had the
effect of increasing net income in 1978 by $54,000
(three cents per share primary).
Note C-Long-Term Debt
At December 31,
Notes payable to banks
under Credit Agreement
"A" Term Loans, payable
1978
quarterly through 1982 $ 8,742,000
"B" Revolving Loans,
payable quarterly
through 1985 3,000,000
"C" Term Loans, payable
quarterly through 1984 5,065,000
Other notes payable
Term note payable
quarterly through 1988 7,142,000
Term note payable
quarterly through 1987 9,957,000
Term notes payable
quarterly through 1986 5,813,000
Promissory notes
Convertible Subordinated
Debentures
5-3/ 4% due December
1, 1 981
6-1 / 2% due November
1, 1983
Capital lease obligations-
Note D
Less current maturities
3,016,000
5,047,000
18,117,000
65,899,000
8,329,000
1977
$10,962,000
4,000,000
6,029,000
7,303,000
10,752,000
2,516,000
3,474,000
5,833,000
17,759,000
68,628,000
9,615,000
$57,570,000 $59,013,000
Notes payable to banks under the Credit Agree-
ment bear interest at the lead bank's prime rate
( 11 -3/ 4 per cent at December 31, 1 978), pl us one
per cent ("A" and "C" Term Loans) and one and one
half per cent ("B" Revolving Loan) and are payable in
quarterly i nsta II ments. Substantially al I the
Company's assets not pledged as collateral under
the term notes described below are pledged as col -
lateral under the terms of the Credit Agreement.
Additionally, the "A" and "C" Term Loans are 90 per
cent guaranteed by the Federal Aviation
Administration .
In November 1978, the Company expanded the
" B" Revolving Loan commitment to a maximum of
$16 .5 million . The new "B" Revolving Loan requires
quarterly reductions in the comm itmentof $590,000
beginning February 1979 and continuing through
November 1, 1985. Additionally, reductions under
the new "B" Revolving Loan commitment are
required equal to 50 percent of net income in excess
of $4,000,000 earned in any fiscal year .
The term note due in 1988 is payable in forty
quarterly consecutive installments beginning May 1,
1978, plus interest at prime plus 2-1 / 2 per cent. The
Metroliner II flight equipment purchased with the
loan proceeds is pledged as collateral under the note.
The term note due in 1987 is composed of a Class
A Note ($1,003,000) and a Class B Note ($8,954,000),
both payable in forty quarterly installments with
interest at 10 per cent and 8-1 / 4 per cent, respec-
tively. The proceeds of the note were used to pur-
chase six DC9-10 aircraft previously leased . These
aircraft are pledged as collateral under the terms of
the Agreement . Additionally, the Class B Note is 90
per cent guaranteed by the Federal Aviation Ad-
ministration .
The term notes due in 1986 are payable in equal
quarterly installments, together with interest at the
rate of 11 per cent per year over an eight year term .
The notes are secured by a mortgage on three DC9
aircraft and three spare engines.
The promissory note of $2,516,000 at December
31, 1977, was refinanced as a portion of the "B"
Revolving Loan .
The 5-3/ 4 per cent Convertible Subordinated
Debentures due December 1, 1981 , are convertible
into Common Stock at $10.86 per share; are subordi-
nated, generally, to all existing and future indebted-
ness for borrowed money; are callable at premiums
currently ranging from three-fourths of one per cent
downward; and require annual sinking fund pay-
ments on December 1 of each year in an amount
equal to $435,000.
The 6-1 / 2 per cent Convertible Subordinated De-
bentures due November 1, 1 983, a re convertible into
Common Stock at $10 per share; are subordinated,
genera I ly, to al I existing and future indebtedness for
borrowed money; are callable at premiums ranging
from two per cent downward; and require annual
sinking fund payments which began November 1,
1978, in an amount equal to $583,000.
re terms of the Credit Agreement, the term note
due in 1987 and both issues of convertible sub-
ordinated debentures place certain requirements
and restrictions upon, among other things, (a)work-
ing capital, (b) indebtedness and lease obligations,
(c) capital expenditures, (d) net worth and (e) pay-
ments relating to capital stock, including dividends.
Retained earnings available for the payment of
dividends under the most restrictive requirement
amounted to approximately $2,950,000 at
December 31, 1 978.
In connection with the Credit Agreement, the
Company maintains average compensating
balances, based on bank ledger balances adjusted
for treasury tax contributions and uncollected
funds, eq ua I to the sum of 1 5 per cent of the average
daily balance outstanding of the "A" Loan, 20 per
cent of the average daily balance outstanding of the
"B" Revolving Loan, 10 per cent of the unused por-
tion of the "B" Revolving Loan Commitment, and
20 per cent of the average daily balance of the "C"
Loan outstanding. Based upon outstanding borrow-
ings at December 31, 1978, the Company should
maintain average compensating balances of approx-
imately $4,512,000 which stated in terms of the
Company's book cash balances is approximately
$2,668,000. The difference is attributable to
average uncollected funds and float. During 1978,
the Company maintained average compensating
balances of approximately $4,984,000. Compensat-
ing balances are not restricted as to withdrawals,
serve in some instances as compensation to the
participating banks for their account handling
function and other services, and additionally serve
as part of the Company's minimum operating cash
balances.
A summaryof minimum principal payments for the
five years ended December 31, 1983 applicable to
long-term debt including capital lease obligations, is
as follows:
1979
1980
1981
1982
1983
Thereafter
S 8,329,000
8,484,000
10,169,000
10,401,000
8,838,000
19,678,000
$65,899,000
Substantially all interest capitalized ($98,000 in
1978 and $116,000 in 1977) is related to cash
deposits for the purchase of aircraft and aircraft
modifications. If the Company did not have a policy
of capitalizing interest, net income would have been
reduced by $38,000 (2 cents per share primary) and
$57,000 (3 cents per share primary), in 1978 and
1977, respectively.
13
Note D- Leases
The Company leases flight equipment, its mainte -
nance and training center, its general office build-
ing, airport terminal space, and other property and
equipment.
The following is a summary of leased property
under capital leases included in property and equip-
ment at December 31, 1978 and 1977:
1978 1977
Flight equipment $21,116,000 S 19,973,000
Ground property and
equipment 8,936,000 7,198,000
30,052,000 27,171,000
Less accumulated
amortization 13,943,000 11 ,196,000
$16,109,000 S 15,975,000
Amortization of amounts capitalized as the cost of
property and equipment is included in depreciation
expense.
At December 31, 1978, future minimum rental
payments under capital leases and non-cancellable
operating leases that have initial or remaining terms
equal to or exceeding one year are as follows:
1979
1980
1981
1982
1983
Subsequent to 1983
Total minimum lease
payments
Amounts representing
interest
Present va I ue of future
minimum lease
payments
Operating
Leases
S 4,886,000 S
4,678,000
4,506,000
4,396,000
4,215,000
74,166,000
$96,847,000
Capital
Leases
4,169,000
3,824,000
3,453,000
3,324,000
2,847,000
14,658,000
32,275,000
14,158,000
S 1 8, 11 7,000
Rental expense included in operations for 1978
and 1977 was $6,055,000 and $5,653,000,
respectively. Contingent renta Is and renta Is re-
ceived from subleases are immaterial.
The Company has an agreement with the City of
Atlanta to lease passenger gates and other airport
facilities at a new terminal to be operational in late
1981 . The terms of the lease call for annual net
rental payments of approximately $2,000,000 over
a thirty year period.
14
-.
Note E-lncome Taxes
Income taxes are as follows:
Current:
1978
Federal $1,774,000
State 183,000
Investment tax credit (910,000)
1,047,000
Deferred:
Federal (124,000)
State (14,000)
Investment tax credit
(138,000)
$ 909,000
1977
$3,798,000
530,000
(2,217,000)
2,111 ,000
101 ,000
38,000
(369,000)
(230,000)
$1 ,881 ,000
Deferred income taxes result from timing differ-
ences in the recognition of expense for tax and
financial reporting purposes. The sources of these
differences and the tax effect of each are as follows :
1978 1977
Capita I ization of leases $ 98,000 $ 327,000
Accelerated
depreciation (84,000) (390,000)
Provision for inventory
obsolescence 38,000 295,000
Provision for
maintenance (39,000) (35,000)
Deferred compensation (140,000) (46,000)
Other (11,000) (12,000)
Investment tax credit (369,000)
$ (138,000) $ (230,000)
Differences between income taxes and amounts
derived by applying the statutory federal income
tax rate of 48 per cent to income before income taxes
are as follows :
1978 1977
Amount % Amount %
Computed at
statutory federa I
income tax rate
of 48 per cent $1,592,000 48 $5,387,000 48
State income
taxes, net of
federal income
tax benefit 86,000 3 295,000 3
Capital gains (84,000)
Investment tax
(2) (963,000) (9)
credit (910,000) (28) (2,586,000) (23)
Capitalizable
expenses 200,000 6
Other 25,000 0 (252,000) (2)
$ 909,000 27 S 1,881,000 17
During 1978, the Company amended its lease with
the City of Atlanta relating to its maintenance base
and training facilities. As a result of this amendment'
to the lease agreement, the Company amended its
1975 and 1976 tax returns and filed its 1977 tax
return reflecting the lease as a capitalized lease for
tax purposes. As a result of recording this lease for
tax purposes as a capitalized lease, the Company
reduced income taxes for 1975, 1976 and 1977 by
approximately $800,000 related to investment tax
credit on such assets. Representatives of the Internal
Revenue Service have indicated that claims arising
from the capitalization of these facilities involve
very technical issues and that they are not in a
position to approve the Company's returns.
Accordingly, no amounts have been included in
the accompanying financial statements for invest-
ment tax credit related to these assets and the
effect of capitalizing these facilities for tax
purposes.
Note F-Capital Stock and Options
Authorized common shares include shares
reserved for issuance as follows:
At December 31, 1978 1977
For convertible securities
conversions:
5-3/ 4% Convertible
Subordinated Debentures
(Note C) 277,680 319,853
6-1 / 2% Convertible
Subordinated Debentures
(Note C) 504,700 583,300
Series A Convertible
Preferred Stock 163,581
782,380 1,066,734
For exercise of outstanding
warrants at $6 per share,
issued with Convertible
Preferred Stock 407,622 457,229
For options under Qualified
Stock Option Plan (4,667
shares in 1978 and 11 ,000
shares in 1977) and
Employee Stock Option
Plan (25,000 shares) 29,667 36,000
1,219,669 1,559,963
At December 31, 1978, there were outstanding
options for 4,667 shares of Common Stock under the
Company's Qualified Stock Option Plan, of which
2,000 shares (at $3.50 per share) expire in 1979,
and 2,667 shares (at $2.94pershare)expire in 1980.
Option transactions during the two years ended
December 31, 1978 are summarized as follows:
Number
of Option Price
Shares Per Share Total
Outstanding January
1, 1977 and 1978
Exercised
Expired
Cancelled
11 ,000 $2.94-$5.81
(4,999) 2.94-5 .81
(1,000) 5.81
(334) 2.94
$46,000
(24,000)
(6,000)
(1 ,000)
Outstanding
December 31 ,
1978 4,667 $ 2.94- $ 3.50 $15,000
The Qualified Stock Option Plan expired on
October 26, 1975, except for options which were
outstanding at that date.
Options are exercisable at not less than 100 per
cent of the fair market va I ue of the stock on the
date of grant, terminate not later than five years
after date of grant, and a re 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 during
the year ended December 31, 1 977. Options for
4,999 shares of Common Stock were exercised
during the year ended December 31 , 1978. Options
became exercisable as follows:
Number of Shares
Option Price :
1978
2,333
1977
3,667
Per Share
Total
$2 .94-$3.50 $2 .94-$5 .81
Quoted Market Price at Date
Exercisable:
$7,000 $15,000
Per Share
Total
$6.00-$8.75 $3 .63-$4.50
$18,000 $15,000
Options for 3,778 shares (aggregating $12,000 at
option prices) and 7,333 shares (aggregating
$34,000 at option prices) were exercisable at
December 31, 1978 and December 31, 1977,
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(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 G-Pension, Employee Stock Ownership,
and Incentive Compensation Plans
Pension expense was $4,169,000 in 1978 and
$4,032,000 in 1977, including $358,000 in 1978
and $312,000 in 1977 applicable to the Employee
Stock Ownership Plan . The Company has an
15
incentive compensation plan under which approxi-
mately $46,000 and $410,000 were accrued in
1978 and 1977, respectively.
Note H-Other Commitments and Contingencies
On February 9, 1979, an Administrative Law
Judge of the Civi I Aeronautics Boa rd rendered a
decision approving the merger of the Company and
North Central Airlines, Inc. Under the Agreement
and Plan of Merger dated September 5, 1978, the
Company will be merged into North Central forming
a company to be called Republic Airlines, Inc. Based
on the adjusted net earnings of the Company for
1978, as defined in the Agreement, each share of
Common Stock of Southern will be converted into
two and one-tenth (2.1) shares of North Central.
Consummation of the merger is subject to a pprova I
of certain creditors of both companies, the approval
of the Civil Aeronautics Board and the President of
the United States.
The Company has an employmentagreementwith
its Chairman of the Board providing for his employ-
ment to December 31, 1979, at an annual salary of
not less than $90,000. In addition, upon his retire-
ment, the Company has agreed to pay $4,400 per
month to him for life, or not less than 180 months to
him and his lineal descendants in the event of his
death . Provision for the amount due under the retire-
ment agreement is being made over a five-year
period beginning in 1975.
The Company also has an employment agreement
with its President providing for his employment
through October 31, 1981 at an annual salary of not
less than $90,200. In addition, the agreement per-
mits him to take early retirement any time after
October 31, 1981 and receive additional retirement
income which with his benefit under the Southern
pension plan would equal the retirement benefits he
would have received had he worked until normal
retirement at age 65. Provision for the amount due
under the retirement agreement is being made over
a 37 month period beginning October 1, 1978. This
agreement terminates upon the effective date of
the proposed merger with North Central.
The Company has an agreement with its Vice
President and Assistant Secretary, under which he
will receive $30,000 per year until retirement in
1983 and thereafter will continue to receive such
amount through the Southern pension plan and a
supplemental retirement benefit payment. The
amount necessary to provide for the supplemental
retirement benefit was provided for in 1978.
Additionally, the Company has employment
agreements with five other officers which contem-
plate their continued employment by the Company
for periods ranging from three to nine years (until
16
each officer attains the age of 60) at an aggregate
annual compensation of $267,000. In the event the
proposed merger with North Central is completed,
these agreements are terminated.
The Company is the defendant in a number of law
suits. In the opinion of management there is ade-
quate insurance coverage for those suits that are
being defended by the Company's insurance
carriers . In the opinion of management, the other
suits are not material to the financial statements
for 1978.
The Company, in order to comply with the Aviation
Noise Abatement Policy of the Department of Trans-
portation, is required to modify 50 per cent of its DC9
aircraft by January 1, 1981, and have all these air-
craft modified by January 1, 1983. The estimated
cost to modify these aircraft is approximately
$5.6 million .
In October 1977, the Company signed an agree-
ment with McDonnell Douglas Corporation for the
purchase of four DC9-80 aircraft (with an option to
lease for a term of 14 years) at the approximate cost
of $64 million to be delivered in 1980. In May 1978,
the Company converted that agreement into an
agreement for the purchase of four new DC9 -30
aircraft (for delivery in the first quarter of 1980) and
an option for two DC9-80 aircraft (for delivery in
1982). On October 31, 1978, the Company assigned
to North Central Airlines, Inc. its agreement with
McDonnell Douglas Corporation for the four new
DC9-30 aircraft and its option on the DC9 -80 aircraft.
The Company currently has a lease commitment
for seven additional used DC9-10 aircraft (with an
option to purchase four of the seven) for a term of
seven years beginning in late 1979 at an annual
aggregate net rental of approximately $3,200,000.
Additionally, the Company committed to purchase
two currently-leased used DC9-10 aircraft at the
approximate cost of $4.8 million . The Company has
letters of credit from its lead bank totaling $2.6 mil -
lion relating to the purchase of these two aircraft.
Note I-Earnings per Share
Primary earnings per share for 1978 and 1977
were computed by dividing net income (adjusted as
described below and reduced by the preferred
dividend requirement of $41,000 and $59,000,
respectively) by the weighted average number of
common shares and common equivalent sha res
outstanding during each period (1,839,214 in 1978
and 1,732,923 in 1977). In 1978, common equiva -
lent shares comprised that number of shares issu -
able upon exercise of stock options and warrants
less the shares assumed repurchased from the
proceeds of the exercise at the average market
price for the period. In 1977, common equivalent
shares comprised that number of common shares
issuable upon exercise ofstockoptionsandwarrants
in excess of 20 percent of the number of com man
shares outstanding at the end ofthe period . Proceeds
from the assumed exercise of the options and
warrants, in excess of the amount which would have
bee n required to purchase 20 per cent of the out-
standing 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) was added to income for purposes
of the calculation .
If shares of preferred stock and debentures
converted into common stock during 1978 were
assumed converted at the beginning of the period,
primary earnings per common and common equival-
ent share would have been $1 .16 or a decrease
of 13 cents per share .
Note J-Supplementary Information
1978
Depreciation and
Amortization :
Depreciation of
property and
equipment $12,412,000
Amortization of
deferred charges 377,000
Provision for inventory
obsolescence 344,000
13,133,000
Deduct-amounts
charged to other
expense accounts 233,000
$12,900,000
1977
$10,171,000
370,000
240,000
10,781,000
111,000
$10,670,000
Fully diluted earnings per share for the years 1978
and 1977 were determined on the assumption that
the weighted average number of common and
common equivalent shares for these periods was
furth er increased from the beginning ofthe period by
conversion of outstanding convertible debentures
and convertible preferred stock (2,888,288 shares in
1978 and 2,799,826 shares in 1977). These calcula -
tions also assume no preferred dividend require -
ment, and interest (net of income tax effect) related
to the debentures assumed converted, was added to
income for purposes of the calculation .
Taxes, other than income
taxes, charged to
operating expenses:
Payroll taxes $ 3,131,000 $ 2,498,000
Fuel and oil taxes 1,183,000 1,036,000
Property taxes 1,136,000 865,000
Sales and use taxes 646,000 473,000
Other 232,000 178,000
$ 6,328,000 $ 5,050,000
Rental expense $ 6,055,000 $ 5,653,000
Advertising expense $ 2,419,000 $ 1,676,000
There were no royalties or research and develop-
ment costs.
Note K - Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the years ended December 31, 1978
and 1977:
Operating revenues
Operating expenses
Operating income (loss)
Net income (loss)
Net income (loss) per
common and common
equivalent share
Primary
Fully diluted
Mar.
31
$42,156
43,792
(1 ,636)
(1,592)
(1 .02)
(1 .02)
Three Months Ended
1978 1977
June
30
Sept.
30
Dec.
31
Mar.
31
June
30
(Thousands of dollars, except per share data)
$48,093 $49,760 $48,503 $36,794 $38,556
44,849 47,564 44,601 36,406 36,673
3,244 2,196 3,902 388 1,883
1,090 615 (a) 2,294 (b) (427) 4,950 (c)
.62
.42
.32(a)
.24(a)
1.13 (b}
.82(b)
(.28)
(.28)
2.86(C
}
1.80 (c)
Sept.
30
Dec.
31
$40,574 $43,587
37,550 39,622
3,024 3,965
1,934 2,885(d)
1 .12 1 .66 (d)
.72 1.06 (d)
The above quarterly results for 1977 have been restated in accordance with Financial Accounting Standards
Board Statement No. 13, "Accounting for Leases" . The increase in net income and net income per common and
common equivalent share resulting from the restatement was as follows :
17
Net income (000)
Net income per common and
common equivalent share
(primary)
Three Months Ended
1977
Mar. June Sept. Dec.
_]j__~_3_Q_ _31_
S 54 $654 S 65 $316
S.03 S.37 S.03 S.18
(a) Includes gain of $323,000 ($187,000 after
income taxes - 10 cents per share primary and
six cents per share fully diluted) from the sale
of a DC9 engine. See Note B.
(b) Includes gain of $843,000 ($473,000 after
income taxes - 26 cents per share primary and
16 cents per share fully diluted) from the sale
of three DC9 engines. See Note B.
(c) Includes excess insurance proceeds from the
loss of a DC9 aircraft which increased net
income by $3,922,000 ($2.26 per share pri-
mary and $1 .41 per share fully diluted). See
Note B.
(d) Includes mail revenue of $1,391 ,000
($682,000 after income taxes - 39 cents per
share primary and 25 cents per share fully
diluted) related to the period 1973 through
September 30, 1977. See Note B.
Quarterly earnings per share do not total earnings
per share for the year because the computation of
earnings per share for certain quarters did not
include common stock equivalents which were
included in the earnings per share computation
on an annual basis.
Equal Opportunity Policy
Note L- Replacement Cost of Property and
Equipment (Unaudited)
The Company has estimated certain replacement
cost information for flight equipment and other
property and equipment, and has presented this
information In its a nnua I report to the Securities and
Exchange Commission on Form 10-K, a copy of
which is available upon request . Form 10-K con -
tains specific information with respect to the
approximate replacement cost of flight equipment
and other property and equipment at December 31 ,
1978 and 1977, and the approximate effect which
replacement cost would have had on depreciation
expense for such years, as compiled in accordance
with the rules of the Commission . Replacing items
of property and equipment with assets having an
equivalent capacity has generally required a greater
capital investment than was required to purchase
the assets which are being replaced due to the cumu-
lative impact of inflation .
It is the policy and practice of Southern Airways, Inc., to recruit, hire, and promote those persons who are best qualified without re-
gard to their race , color, religion, sex, age (40-65), national origin, or physical or mental handicap, and not to discriminate against any
employee or applicant for employment because he/ she is a disabled veteran or Vietnam era veteran .
To further this objective, the Company has established procedures to insure that all personnel actions such as compensation, bene-
fits, transfers, lay-offs, returns from lay-off, 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 (40-65), national origin, physical
or mental handicap and will take into consideration those employees who are d isabled veterans or Vietnam era veterans.
These practices are designed and implemented to be in concert with the accepted standards and principles of equal opportunity
employment.
18
Five-Year Operating and Financial Summary
SOUTHERN AIRWAYS, INC.
1978 1977 1976 1975 1974
As Restated - (2) )
Summary of Operations
(In thousands, except per share amounts)
Operating revenues
Passenger $ 159,802 $ 130,828 $ 115,206 $ 95,666 $ 86,821
Charter 7,162 9,594 8,803 8,208 6,908
Pub I ic Service 4 ,327 5,220 5,723 5,961 6,805
Other 17,221 13,869 10,435 8,115 7,818
188,5 12 159,51,1 140,167 117,950 108,352
Operating expenses
Depreciation and amortization 12,900 10,670 9,809 8,287 7,917
Other 167,906 139,581 125,756 101 ,905 91 ,939
180,806 150,251 135,565 110,192 99,856
Operating income 7,706 9,260 4,602 7,758 8,496
Interest on long -term debt 6,905 4,643 4,687 4,755 5,923
Miscellaneous deductions (income)-net (2,515) (6,606) (514) (611 l (623)
Income before income taxes, extraordinary
tax credit and accounting change 3,316 11 ,223 429 3,614 3,196
Income taxes 909 1.881 104_ 985 860
Income before extraordinary tax credit
and accounting change 2,407 9,342 325 2,629 2,336
Tax benefits of net operat ing loss carryforward 185 800
Cumulative effect of accounting change 565
Net income $ 2,407 $ 9,342 $ 325 $ 2,814 $ 3,701
Earnings per common and common equiva lent share
Primary $ 1.29 $ 5.39 $ .17 $ 1.62 $ 2.33
Fully diluted $ .93 $ 3.45 $ .17 $ 1 .16 $ 1.47
Average number of common and common
equiva lent shares
Primary 1,839 1,733 1,581 1,765 1,599
Fully diluted 2,888 2,800 1,581 2,912 2,913
Financial Position-at year end
(In thousands, except per share amounts)
Current assets $ 37,535 $ 34,932 $ 28,307 $ 30,324 $ 27,214
Current liabiliti es 38,680 37,280 30,154 27,033 26,931
Property and equipment- net 80,653 79,234 60,598 57,541 56,182
Long -term debt (excluding current maturities)
Notes payable and other 50,300 50,724 40,138 42,306 42,032
Convertible subordinated debentures 7,270 8,289 9,307 9,743 10,178
Total stockholders' equity 23,676 19,986 10,762 10,496 7,801
Common stockholders equity (1) 23,676 19,005 9,720 9,454 6,755
Common stockholders' equity per common share 12.49 12.02 6.15 5.98 4 .28
Common shares outstanding 1,896 1,581 1,581 1,581 1,580
Operating Statistics
Scheduled services
Passengers carried (thousands) 4,111 3,457 3,245 2,935 2,940
Available seat miles (thousands) 2,449,402 2,043,061 1,926,166 1,688,633 1,618,776
Revenue passenger miles (thousands) 1,334,987 1,044,818 978,991 852,547 832,372
Passenger load factor 54.5% 51 .1 % 50.8% 50.5% 51.4%
Brea keven passenger load fa ctor 53 .2% 46.2% 50.6% 48.2% 49 .1%
Revenue per passenger $ 38.83 $ 37.80 $ 35.46 $ 32.55 $ 29.49
Revenue per passenger mile 12.0C 12.5C 11 . 7C 11 .2C 10.4C
Al I Services
Available seat miles (thousands) 2,625,064 2,290,839 2,167,198 1,906,443 1,803,177
Cost per seat mi le 6 .9C 6 .6C 6.3C 5.8C 5.5C
Number of em ployees at year end 3,216 2,922 2,766 2,519 2,639
(1)After deducting equity of preferred stockholders at $6 per outstanding preferred share plus cumulative dividends at the end of each
of the years 1974 through 1977. All shares of preferred stock were either converted to common or redeemed as of December 31,
1978. Annual dividends of $.36 per share ($.285 in 1978) have been paid on preferred shares for 197 4 through 1978. No cash
dividends on common stock have been paid since 1967.
(2) Restated to comply with F ASB Statement No. 13, "Accounting for Leases."
19
Directors and Officers
Directors
CECIL A. BEASLEY, JR.
Vice President and
Assistant Secretary
Southern Airways, Inc. and
Partner-Ballard, Beasley and Nelson
(Attorneys) Washington, D.C.
GEORGE M . GROSS
President
Southern Airways, Inc.
GRAYDON HALL*
Vice-Chairman of the
Board of Directors
Southern Airways, Inc.
F. BARTON HARVEY, JR.
Partner-Alex. Brown & Sons
(Investment Bankers)
Baltimore, Maryland
DAVID H. HUGHES
President and Chief Executive Officer
Hughes Supply, Inc.
(Manufacturer and Distributor of
Electrical and Plumbing Supplies)
Orlando, Florida
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
A. L. MAXSON
Vice President-Finance
and Treasurer
Southern Airways, Inc.
G. FRANK PURVIS, JR .* *
Chairman of the Board and Chief
Executive Officer-Pan American
Life Insurance Company
New Orleans, Louisiana
20
F.D. SCHAS+
Retired Investment Counselor
Memphis, Tennessee
EL TON B. STEPHENS*
Chairman and Founder
EBSCO Industries, Inc.
(Diversified Multinational Sales
Corporation and Metals
Manufacturing)
Birmingham, Alabama
RICHARD A. TRIPPEER, 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
FRANK M . YOUNG, Ill* *
Partner - North Haskell
Slaughter Young & Lewis
(Attorneys)
Birmingham, Alabama
Officers
FRANK W. HULSE
Chairman and Chief
Executive Officer
GRA YOON HALL
Vice Chairman of the
Board of Directors
GEORGE M . GROSS
President
CECIL A. BEASLEY, JR.
Vice President and
Assistant Secretary
J . KENNETH COURTENAY
Vice President-Economic
Regulations and Secretary
JAMES G. GODSMAN
Vice President-Customer
Sales and Service
A. L. MAXSON
Vice President-Finance
and Treasurer
J. R. PRICE
Vice President-Properties
VICTOR C. PRUITT
Vice President-
Technical Services
T. M . SHANAHAN
Vice President-Flight
THOMAS A. WILEY, JR.
Vice President-
Marketing
RAYW. BURDEN
Assistant Treasurer
GERALD N. COX
Assistant Vice President-
Personnel
J . PHILLIP DAY
Assistant Vice President-
System Planning
W. H. MACKINNON
Assistant Treasurer
WILLIAM E. OAKES
Assistant Vice President-
Economic Research
MARY C. HA YES
Assistant Secretary
Wm . BEW WHITE, JR.
Assistant Secretary
* Member of Executive Committee
* * Member of Audit Committee
+Senior Director
General Information
Counsel
Bradley, Arant, Rose & White
Birmingham , Alabama
Ballard, Beasley and Nelson
Washington, D.C.
Auditors
Ernst & Ernst
Atlanta, Georgia
Stock Transfer Agent
Trust Company Bank
Atlanta , Georgia
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 lnt'I Airport
Atlanta , Georgia 30320
,,
Southern
Southern Airways, Inc.
General Office
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320