SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-28428
AIRNET SYSTEMS, INC.
________________________________________________________
(Exact name of registrant as specified in its charter)
Ohio 31-1458309
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3939 International Gateway, Columbus, Ohio 43219
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(614) 237-9777
-----------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No _X_
Common Shares, $0.01 Par Value,
Outstanding as of August 8, 1996 - 12,317,835
-----------------------------
Index to Exhibits at page 21
Page 1 of 22 Pages.
<PAGE>
AIRNET SYSTEMS, INC.
10-Q Quarter Ended June 30, 1996
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Balance Sheets as of June 30, 1996 and
September 30, 1995 ............................................. 3
Condensed Statements of Operations for the three months
and the nine months ended June 30, 1996 and 1995 ............... 4
Condensed Statement of Changes in Shareholders' Equity
for the nine months ended June 30, 1996 ........................ 5
Condensed Statements of Cash Flows for the nine months
ended June 30, 1996 and 1995 ................................... 6
Notes to Financial Statements .................................. 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 14
PART II: OTHER INFORMATION
Items 1 through 6 ...................................................... 18
Signatures ............................................................. 20
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<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
<TABLE>
AIRNET SYSTEMS, INC.
CONDENSED BALANCE SHEETS
June 30, September 30,
1996 1995
------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash ........................................................ $ 15,225,044 $ 238,394
Accounts receivable:
Trade, net ................................................ 6,820,046 6,057,987
Shareholders, affiliates and employees .................... 89,944 303,490
Spare parts and supplies .................................... 4,434,639 3,932,956
Prepaid expenses ............................................ 3,598,953 2,195,115
Deferred tax asset .......................................... 271,730 --
------------ ------------
Total current assets .......................................... 30,440,356 12,727,942
Net property and equipment .................................... 34,099,841 32,833,612
Other assets:
Intangibles, net ............................................ 554,132 3,418,276
Deposits .................................................... 51,860 57,060
Deferred tax asset .......................................... 7,000,000 --
============ ============
Total assets .................................................. $ 72,146,189 $ 49,036,890
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 3,838,474 $ 3,937,894
Accrued expenses ............................................ 1,375,903 556,778
Salaries and related liabilities ............................ 1,252,822 1,605,619
Current portion of notes payable ............................ -- 5,565,706
------------ ------------
Total current liabilities ..................................... 6,467,199 11,665,997
Notes payable, less current portion (Note 5) .................. -- 13,662,633
Deferred tax liability ........................................ 2,295,000 --
Deferred compensation ......................................... -- 3,238,856
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
and no shares issued and outstanding ...................... -- --
Common stock, $.01 par value; 40,000,000 shares
authorized, 12,317,835 and 5,710,608 shares outstanding ... 123,178 57,106
Additional paid-in capital .................................. 76,248,800 349,534
Retained earnings (deficit) ................................. (12,987,988) 20,385,860
Notes receivable from shareholders .......................... -- (323,096)
------------ ------------
Total shareholders' equity .................................... 63,383,990 20,469,404
============ ============
Total liabilities and shareholders' equity .................... $ 72,146,189 $ 49,036,890
============ ============
See notes to financial statements
</TABLE>
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<PAGE>
<TABLE>
AIRNET SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Nine months ended
June 30 June 30
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Air transportation
Check delivery ...................................... $ 17,068,989 $15,390,684 $ 47,638,659 $43,350,782
Small package delivery .............................. 2,522,443 2,044,499 6,982,762 6,017,479
Fixed base operations ................................. 296,648 276,587 775,590 795,904
------------ ----------- ------------ -----------
Total revenues ........................................... 19,888,080 17,711,770 55,397,011 50,164,165
Costs and expenses
Air transportation .................................... 12,983,947 11,679,478 37,587,286 34,331,190
Fixed base operations ................................. 316,920 304,640 707,073 750,718
Selling, general and administrative ................... 2,795,226 3,431,589 8,881,212 9,292,014
------------ ----------- ------------ -----------
Total costs and expenses ................................. 16,096,093 15,415,707 47,175,571 44,373,922
------------ ----------- ------------ -----------
Income from operations ................................... 3,791,987 2,296,063 8,221,440 5,790,243
Interest expense ......................................... 302,543 439,920 1,038,710 1,051,291
Offering related non-recurring expenses (Notes 2 and 3) .. 13,704,398 -- 13,704,398 --
------------ ----------- ------------ -----------
Income (loss) before income taxes ........................ (10,214,954) 1,856,143 (6,521,668) 4,738,952
Tax benefit from operations (Note 4)...................... (414,730) -- (414,730) --
Tax provision due to change in tax status (Note 4) ....... 2,438,000 -- 2,438,000 --
============ =========== ============ ===========
Net income (loss) ........................................ ($12,238,224) $ 1,856,143 ($ 8,544,938) $ 4,738,952
============ =========== ============ ===========
Pro forma information (Note 6):
Historical net income (loss) before taxes ............. ($10,214,954) $ 1,856,143 ($ 6,521,668) $ 4,738,952
Pro forma adjustments other than income taxes ......... 1,346,000 2,198,000 4,430,000 5,514,000
------------ ----------- ------------ -----------
Pro forma income (loss) before taxes .................. ($ 8,868,954) $ 4,054,143 ($ 2,091,668) $10,252,952
Pro forma tax provision on pro forma income
(loss) from operations (Note 4) .................... 910,833 1,621,657 3,621,747 4,101,181
============ =========== ============ ===========
Pro forma net income (loss) ........................... ($ 9,779,787) $ 2,432,486 ($ 5,713,415) $ 6,151,771
============ =========== ============ ===========
Pro forma earnings (loss) per share .................... ($ 1.02) $ .29 ($ .65) $ .74
============ =========== ============ ===========
Weighted average common shares outstanding ............. 9,598,399 8,361,359 8,772,201 8,361,359
============ =========== ============ ===========
See notes to financial statements
</TABLE>
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<PAGE>
<TABLE>
AIRNET SYSTEMS, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended June 30, 1996
(unaudited)
Common Stock Notes
----------------------------- Additional Receivable
Number of Paid-in Retained From
shares Amount Capital Earnings Shareholders Total
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 1, 1995 ................. 5,710,608 $ 57,106 $ 349,534 $ 20,385,860 ($ 323,096) $20,469,404
Net loss ................................ -- -- -- (8,544,938) -- (8,544,938)
Repayment of notes ...................... -- -- -- -- 323,096 323,096
Shareholder distributions ............... -- -- -- (2,807,806) -- (2,807,806)
Issuance of common stock,
net of IPO expenses (Note 2) ......... 6,440,000 64,400 82,951,380 -- -- 83,015,780
AAA distributions related to
termination of S Corp status (Note 2).. -- -- -- (21,000,000) -- (21,000,000)
Purchase of Donald Wright warrant
(Note 3) .............................. -- -- (29,901,785) -- -- (29,901,785)
Exercise of Jeff Wright warrant (Note 3). 167,227 1,672 (1,472) -- -- 200
Reclassification of undistributed
S Corp. retained earnings ............. -- -- 1,021,104 (1,021,104) -- --
Tax benefit related to cancellation
of Donald Wright warrant (Note 3) ..... -- -- 7,000,000 -- -- 7,000,000
Compensation expense related to
stock purchase agreements (Note 3) .... -- -- 14,830,039 -- -- 14,830,039
=========== ============ ============ ============ ============ ===========
Balance June 30, 1996 ................... 12,317,835 $ 123,178 $ 76,248,800 $(12,987,988) $ 0 $63,383,990
=========== ============ ============ ============ ============ ===========
See notes to financial statements
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</TABLE>
<PAGE>
<TABLE>
AIRNET SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
June 30
----------------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) ........................................... $(8,544,938) $4,738,952
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Offering related non-recurring, non-cash expenses
(Note 3) ............................................... 13,704,398 --
Depreciation and amortization ........................... 6,385,770 5,430,000
Amortization of intangibles ............................. 305,782 326,926
Deferred taxes .......................................... 2,023,270 --
Provision for losses on accounts receivable ............. 27,000 45,000
Deferred compensation ................................... 445,147 51,587
Loss (gain) on disposition of assets .................... (23,645) 17,157
Changes in operating assets and liabilities:
Accounts receivable ................................... (575,513) 422,017
Spare parts and supplies .............................. (501,683) (302,865)
Prepaid expenses ...................................... (1,403,838) (212,972)
Accounts payable ...................................... (99,420) 898,286
Accrued expenses ...................................... 819,125 3,937
Salaries and related liabilities ...................... (352,797) 170,952
Other, net ............................................ 5,200 49,100
----------- -----------
Net cash provided by operating activities ................... 12,213,858 11,638,077
Investing activities
Purchase of property and equipment - net .................... (7,628,354) (11,878,964)
----------- -----------
Net cash used in investing activities ....................... (7,628,354) (11,878,964)
Financing activities
Proceeds from issuance of common stock ...................... 83,015,980 --
Proceeds from shareholder notes receivable .................. 323,096 41,287
Net proceeds (repayment) of borrowings under the
revolving credit facility ................................. (7,525,000) 1,025,000
Repayment of long-term debt ................................. (14,451,339) (7,984,281)
Proceeds from the issuance of long-term debt ................ 2,748,000 10,140,000
Distributions to shareholders ............................... (23,807,806) (3,235,610)
Purchase of Donald Wright warrant ........................... (29,901,785) --
----------- -----------
Net cash provided (used) in financing activities ............ 10,401,146 (13,604)
----------- -----------
Net increase (decrease) in cash ............................. 14,986,650 (254,491)
Cash at beginning of period ................................. 238,394 257,419
=========== ===========
Cash at end of period ....................................... $15,225,044 $ 2,928
=========== ===========
See notes to financial statements
</TABLE>
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<PAGE>
AIRNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
AirNet Systems, Inc. (the Company), formerly New Creations, Inc.,
operates a fully integrated national air transportation network which provides
delivery service for time-critical shipments for customers in the U.S. banking
industry and other industries. The Company also offers retail aviation fuel
sales and related ground services for customers in Columbus, Ohio. These
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with the September 30, 1995 financial
statements of AirNet Systems, Inc. contained in the prospectus dated May 30,
1996 relating to the Company's initial public offering.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results of interim
periods. Operating results for the nine months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the year ending
September 30, 1996.
2. Initial Public Offering
On May 29, 1996, the registration statement related to the Company's
initial public offering was declared effective by the SEC and its stock began
trading on the NASDAQ national market system on May 31, 1996. Pursuant to the
terms of the offering, on June 5, 1996, the Company issued 5,600,000 shares of
common stock which were sold at $14.00 per share.
On June 11, 1996, the over-allotment option in connection with the
offering was exercised, pursuant to which the Company issued an additional
840,000 shares at $14.00 per share. The net proceeds of the offering were
$83,848,800 before deducting expenses of $833,020.
-7-
<PAGE>
Prior to the public offering, the Company made $21,000,000 in
distributions to the S Corporation shareholders for undistributed earnings
associated with the Company's S Corporation status (referred to as AAA
distributions). These distributions were made through the Company's issuance
of promissory notes to such shareholders, which were subsequently paid off with
the offering proceeds.
3. Offering Related Transactions
Termination of Stock Purchase Agreements
On April 1, 1994, the Company entered into stock purchase agreements with
seven executive officers, in which these officers purchased an aggregate of
1,484,908 shares of common stock for an aggregate purchase price of $364,000,
paid through the delivery of promissory notes. Upon completion of the public
offering, the stock purchase agreements were terminated and the seven officers
repaid the balances due on the notes totaling approximately $283,856, which
resulted in a decrease in notes receivable and a corresponding increase in
cash.
In addition, as a result of the termination of the stock purchase
agreements, the Company incurred a non-recurring, non-cash charge of
$14,830,039, which increased paid-in capital. The charge is not tax deductible
and represents a portion of the $21,000,000 of AAA distributions to the seven
officers not previously recorded as compensation expense plus the difference
between the net offering price and the net book value of the 1,484,908 shares
of stock held by the officers at the termination date of the agreements. This
distribution of undistributed earnings to the former S Corporation
shareholders also eliminated a $1,654,328 deferred compensation liability
related to the stock purchase agreements and resulted in a non-recurring,
non-cash reduction of expense in the statement of operations.
Termination of Deferred Compensation Agreements
Prior to the offering, the Company entered into deferred compensation
agreements with certain executive officers, pursuant to which the Company was
obligated to pay these officers deferred compensation equal to a percentage of
the increase on the Company's net book value. Upon completion of the offering,
the officers agreed to terminate the agreements and forgave the remaining
balances totaling $2,029,675 due to them. This transaction resulted in a
decrease of the deferred compensation liability and a non-recurring, non-cash
reduction of expense in the statement of operations.
-8-
<PAGE>
Termination of the Wright Agreement and Purchase of Warrants
In 1988, the Company purchased Wright International Express, Inc. (WIE).
In consideration for the agreement of WIE and Donald Wright not to compete
with the Company, the Company entered into the Wright Agreement. The Wright
Agreement, as amended, required annual payments tied to the cash flows and the
debt to equity ratio of the Company, to Donald Wright and certain designees.
In addition, the Company issued a warrant to Donald Wright to purchase
2,483,537 shares of common stock and a warrant to Jeffrey Wright (Donald
Wright's son) to purchase 167,227 shares of common stock. Both warrants were
exercisable upon the closing of a public offering. Upon the closing of the
public offering, the Company purchased the Donald Wright warrant for
$29,901,785 and canceled the warrant. Gerald G. Mercer, the Company's Chairman
and Chief Executive Officer, purchased the Jeffrey Wright warrant for
$2,013,413 and exercised it subsequent to the completion of the public
offering.
In connection with the repurchase and cancellation of the Donald Wright
Warrant and the corresponding tax treatment, the Company has recognized a
related tax benefit asset estimated to be approximately $7,000,000. The
benefit from this asset will be realized as cash savings by offsetting future
tax liabilities. The tax benefit will have no effect on the Company's current
or future statement of operations. The benefit has been reflected as additional
paid-in capital on the balance sheet.
Upon cancellation of the Donald Wright warrant, the Wright Agreement was
also terminated in its entirety and no further payments will be made. In
addition, the remaining net book value of a covenant not to compete totaling
$2,558,362, which was recorded at the inception of the Wright Agreement, was
written-off, resulting in a non-recurring, non-cash expense.
-9-
<PAGE>
Statement of Operations Impact of Offering Related Transactions
The following is a summary of the offering related transactions and their
effect on the statement of operations for the three and nine months ended June
30, 1996:
<TABLE>
Increase /
(Decrease) to
Income
-----------------
<S> <C>
Compensation expense related to the stock purchase agreements $(14,830,039)
Write-off of Wright Agreement covenant not to compete (2,558,362)
Elimination of deferred compensation liability related to the
stock purchase agreements 1,654,328
Elimination of the liability for the deferred compensation
agreements 2,029,675
=================
$(13,704,398)
=================
</TABLE>
4. Income Taxes and Pro forma Income Taxes
Prior to the Company's initial public offering, its income was taxed
under the provisions of Subchapter S of the Internal Revenue Code of 1986,
which provides that in lieu of corporate income taxes, the shareholders of the
S Corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for federal income tax has been
included in historical financial statements prior to May 31, 1996, the date of
the offering.
Upon completion of the initial public offering, the Company ceased to
qualify as an S Corporation and was subject to corporate income taxes. The
Company has recorded a current tax benefit of $414,730 related to its
operations since May 30, 1996, which includes the deductibility of the
$2,558,362 write-off of the Wright Agreement covenant not to compete. In
addition, the Company recorded an additional net tax liability of
approximately $2,438,000 resulting from the cumulative effect of deferred
income taxes attributable to its change in tax status (from an S Corporation
to a C Corporation). The differences between financial statement income and
taxable income relate primarily to differences from using the accrual basis
for financial reporting and cash basis for income tax reporting purposes and
the use of accelerated depreciation rates on property and equipment for tax
purposes.
-10-
<PAGE>
The pro forma income taxes represent the estimated income taxes that
would have been reported had the Company been subject to federal and state
income taxes for the entire period presented and incorporates the fact that of
the $13,704,398 offering related non-recurring expenses, only $2,558,362
is deductible for tax purposes.
5. Notes Payable and Long-term Debt
Prior to the initial public offering, the Company had various credit
arrangements with its primary lender, including term notes and an $8,000,000
revolving credit loan. The $18,999,512 balance outstanding on the credit
agreements at June 5, 1996, the closing date of the offering, was paid off.
Simultaneously with the closing of the offering, the Company entered into
a new credit agreement to replace the existing agreement. The new credit
agreement provides the Company with a $50,000,000, five year, unsecured
revolving credit facility. It bears interest at the Company's option of (a) an
agreed upon fixed rate or (b) a floating rate initially equal to (i) the
higher of .5% per annum over the Federal Funds rate or the bank's prime rate
or (ii) LIBOR plus a margin. The new agreement limits the availability of
funds to certain specified percentages of accounts receivable, inventory and
the wholesale value of aircraft and equipment. As of June 30, 1996, no
balances had been drawn on the new credit agreement.
6. Pro Forma Information
Pro Forma Statements of Operations Adjustments
The pro forma statements of operations information presents the pro
forma effects on the historical financial information reflecting certain
transactions as if they had occurred on October 1, 1994 and 1995. The
following adjustments have been reflected in the pro forma statements of
operations:
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<PAGE>
<TABLE>
Three Three Nine Nine
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
The elimination of interest expense
related to the debt repaid $303,000 $ 440,000 $1,039,000 $1,051,000
The elimination of payments under the
Wright Agreement 150,000 533,000 751,000 1,614,000
The elimination of amortization
expense related to the covenant not to
compete asset write-off 42,000 63,000 169,000 190,000
The elimination of deferred
compensation expense for certain key
employees 32,000 84,000 135,000 233,000
Reduction of compensation expense
for executive officers based on new
employment agreements 127,000 421,000 347,000 756,000
The elimination of employee stock
purchase agreement expense for certain
key employees 692,000 657,000 1,989,000 1,670,000
============ ============ =========== ============
Total pro forma adjustments other
than income taxes $1,346,000 $ 2,198,000 $4,430,000 $5,514,000
============ ============ =========== ============
</TABLE>
Pro Forma Earnings (Loss) Per Share
Pro forma earnings (loss) per share amounts for all periods included in
this filing prior to the completion of the initial public offering in May,
1996 are based on the weighted average number of shares of common
stock outstanding during the periods, including the effect of the 2,483,537
and 167,227 shares related to the Donald Wright and Jeffrey Wright
warrants, respectively.
Supplemental pro forma earnings (loss) per share would have been ($.93) and
$.25 for the three months ended June 30, 1996 and 1995, respectively, and
($.57) and $.63 for the nine months ended June 30, 1996 and 1995,
respectively, based on the weighted average number of shares of common
stock outstanding during the period, plus the number of shares used to repay
debt.
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<PAGE>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
*Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995*
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q are forwarded looking
statements which involve risks and uncertainties, including but not limited
to, potential regulatory changes by the Federal Aviation Administration or the
Federal Reserve, adverse weather conditions, technological advances and
increases in the use of electronic funds transfers as well as other economic,
competitive and governmental factors affecting the Company's markets, prices
and other facets of its operations.
Results of Operations
Comparisons of nine months ended June 30, 1996 and 1995
Revenues. Revenues for the nine months ended June 30, 1996 were $55.4
million, an increase of $5.2 million, or 10.4%, compared to $50.2 million for
the nine months ended June 30, 1995. Of this increase, $0.7 million was due to
two additional days of operations during the nine months ended June 30, 1996,
$1.5 million was due to price increases and the remainder was due to a higher
level of business activity and the benefits of the elimination of the federal
excise tax. Revenues from check delivery for the nine months ended June 30,
1996 were $47.6 million, an increase of $4.2 million, or 9.9%, compared to
$43.4 million for the nine months ended June 30, 1995. Revenues from small
package delivery for the nine months ended June 30, 1996 were $7.0 million, an
increase of $1.0 million, or 16.0%, compared to $6.0 million for the nine
months ended June 30, 1995.
Air transportation expenses. Air transportation expenses were $37.6
million for the nine months ended June 30, 1996, an increase of $3.3 million,
or 9.5%, from $34.3 million for the nine months ended June 30, 1995. Increases
were attributed to the two additional days of operation, the increase in
insurance, maintenance and depreciation costs associated with operating
additional aircraft, increased fuel expenses due to additional flying
time, increased fuel prices and taxes on fuel, increased courier expenses
associated with increased business, and increased office and hangar rental
expense due to a June, 1995 expansion of the Company's facilities and a
July, 1995 rent increase. These increases were offset by a decrease in aircraft
rental expense as a result of the Company's decision to acquire rather than
lease aircraft.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $8.9 million for the nine months ended June 30,
1996, a decrease of $0.4 million, or 4.4%, from $9.3 million for the nine
months ended June 30, 1995. The decrease was primarily the result of the
restructuring of executive compensation expenses in conjunction with the
initial public offering, including the termination of the employee stock
purchase agreements. Also in conjunction with the initial public offering, the
Wright Agreement was terminated. As a result of the termination, all payments
under the agreement and amortization expense associated with the covenant not
to compete ceased at May 30, 1996.
-13-
<PAGE>
Offering related non-recurring expenses. In connection with the initial
public offering, effective May 30, 1996, the Company incurred several
non-recurring, non-cash charges which reduced the income for the nine months
ended June 30, 1996 by $13.7 million. The charges to income include $14.8
million of expense related to the portion of AAA distributions to certain
executives not previously recorded as compensation expense, plus the
difference between the net offering price and the net book value per share of
common stock held by the executives under stock purchase agreements and a $2.6
million write-off of an intangible covenant not to compete asset related to
the Wright Agreement. The charges were off-set by a non-recurring, non-cash
increase to net income as a result of the termination and forgiveness of
deferred compensation liabilities totaling $3.7 million.
Income taxes. The Company operated as an S Corporation under the Internal
Revenue Code from 1988 until it elected to terminate its S Corporation status
on May 30, 1996. The Company recorded a net tax liability of $2.4 million as a
result of the cumulative effect of this change in tax status. In addition, the
Company recorded a $0.4 million tax benefit in the nine months ended June 30,
1996 related to the current tax expense on operating income since May 30,
1996, offset by the favorable tax effect of the write-off of the $2.6 million
Wright Agreement covenant not to compete.
Pro forma information. The following is a summary of adjusted pro forma
earnings per share, excluding the effects of the $13.7 million non-cash,
non-recurring expenses and the $2.4 million deferred tax liability. In
addition, the calculation assumes shares outstanding as if the shares
issued in the initial public offering were outstanding as of the beginning of
the periods.
Nine Months
Ended June 30
-------------------
1996 1995
------ ------
(000's omitted)
Pro forma net income (loss) ($ 5,713) $ 6,152
Effects of elimination of offering
related non-recurring expenses,
net of tax 12,681 -
------- -------
Adjusted pro forma net income $ 6,968 $ 6,152
======= =======
Adjusted pro forma earnings per share $ .57 $ .50
======= =======
Pro forma shares outstanding 12,318 12,318
======= =======
-14-
<PAGE>
Comparisons of three months ended June 30, 1996 and 1995
Revenues. Revenues for the three months ended June 30, 1996 were $19.9
million, an increase of $2.2 million, or 12.3%, compared to $17.7 million for
the three months ended June 30, 1995. Of the increase, approximately $.5
million was due to price increases and the remainder was due to a higher level
of business activity and the benefits of the elimination of the federal excise
tax. Revenues from check delivery for the three months ended June 30, 1996
were $17.1 million, an increase of $1.7 million, or 10.9%, compared to $15.4
million for the three months ended June 30, 1995. Revenues from small package
delivery for the three months ended June 30, 1996 were $2.5 million, an
increase of $.5 million, or 23.4%, compared to $2.0 million for the three
months ended June 30, 1995.
Air transportation expenses. Air transportation expenses were $13.0
million for the three months ended June 30, 1996, an increase of $1.3 million,
or 11.1%, from $11.7 million for the three months ended June 30, 1995.
Increases were attributed to the increased business activity and the increase
in insurance, maintenance and depreciation costs associated with operating
additional aircraft, increased fuel prices and taxes on fuel, as well as
increased courier expenses associated with increased business.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.8 million for the three months ended June 30,
1996, a decrease of $0.6 million, or 18.5%, from $3.4 million for the three
months ended June 30, 1995. The decrease is a result of the restructuring of
executive compensation expenses in conjunction with the initial public
offering, including the termination of the employee stock purchase agreements.
Also in conjunction with the initial public offering, the Wright Agreement was
terminated. As a result of the termination, all payments under the agreement
and amortization expense associated with the covenant not to compete ceased at
May 30, 1996. These decreases were offset by an increase in consulting costs
associated with the restructuring of compensation and employee stock option
plans.
Interest expense. Interest expense was $0.3 million for the three months
ended June 30, 1996, an decrease of $0.1 million, or 31.2%, compared to $0.4
million for the three months ended June 30, 1995. Borrowings were used
primarily for capital resources. The decrease in expense is a result of the
repayment of all debt in early June 1996, with the proceeds from the initial
public offering.
-15-
<PAGE>
Offering related non-recurring expenses. In connection with the initial
public offering, effective May 30, 1996, the Company incurred several
non-recurring, non-cash charges which reduced the income for the quarter ended
June 30, 1996 by $13.7 million. The charges to income include $14.8 million of
expense related to the portion of AAA distributions to certain executives not
previously recorded as compensation expense, plus the difference between the
net offering price and the net book value per share of common stock held by
the executives under stock purchase agreements and a $2.6 million write-off of
an intangible covenant not to compete asset related to the Wright Agreement.
The charges were off-set by a non-recurring, non-cash increase to net income
as a result of the termination and forgiveness of deferred compensation
liabilities totaling $3.7 million.
Income taxes. The Company operated as an S Corporation under the Internal
Revenue Code from 1988 until it elected to terminate its S Corporation status
on May 30, 1996. The Company recorded a net tax liability of $2.4 million as a
result of the cumulative effect of this change in tax status. In addition, the
Company recorded a $0.4 million tax benefit in the three months ended June 30,
1996 related to the current tax expense on operating income since May 30,
1996, offset by the favorable tax effect of the write-off of the $2.6 million
Wright Agreement covenant not to compete.
Pro forma information. The following is a summary of adjusted pro forma
earnings per share, excluding the effects of the $13.7 million non-cash,
non-recurring expenses and the $2.4 million deferred tax liability. In
addition, the calculation assumes shares outstanding as if the shares
issued in the initial public offering were outstanding as of the beginning of
the periods.
Three Months
Ended June 30
-------------------
1996 1995
------ ------
(000's omitted)
Pro forma net income (loss) ($ 9,780) $ 2,432
Effects of elimination of offering
related non-recurring expenses,
net of tax 12,681 -
------- -------
Adjusted pro forma net income $ 2,901 $ 2,432
======= =======
Adjusted pro forma earnings per share $ .24 $ .20
======= =======
Pro forma shares outstanding 12,318 12,318
======= =======
-16-
<PAGE>
Liquidity and Capital Resources
General. Historically, the Company's principal sources of liquidity have
come from internally generated funds and credit arrangements. On June 5,
1996, the Company successfully completed an initial public offering in which
5.6 million shares were issued at $14.00 per share. On June 11, 1996,
the Company's underwriters fully exercised their over-allotment option
which resulted in the Company issuing an additional 840,000 shares, also at
$14.00 per share. Total proceeds, net of expenses, were $83.0 million. Prior
to the public offering, the Company made $21.0 million in distributions to
the S Corporation shareholders for undistributed earnings associated with
the Company's S Corporation status. These distributions were made through
the Company's issuance of promissory notes to such shareholders, which
were subsequently paid off with the offering proceeds. The following
is a summary of the use of the offering proceeds:
(in 000's)
Public offering proceeds, net of expenses ..................... $82,951
Use of Proceeds:
Repayment of debt ............................................. (19,000)
Distribution to shareholders for
undistributed earnings associated
with an S Corporation status .................................. (21,000)
Costs associated with the purchase and
cancellation of the Donald Wright warrant ..................... (29,902)
------------
Net increase in cash from offering proceeds ................... $13,049
============
Current Credit Arrangements. Simultaneously with the closing of the
offering, the Company entered into a new credit agreement to replace an
existing agreement. The new credit agreement provides the Company with a $50
million, five year, unsecured revolving credit facility. The new credit
agreement limits the availability of funds to certain specified percentages of
accounts receivable, inventory and the wholesale value of aircraft and
equipment. There were no borrowing under the new credit agreement at June 30,
1996.
Capital expenditures. Capital expenditures totaled $7.6 million for the
nine months ended June 30, 1996. This compared with $11.9 million for the same
period in 1995. The Company anticipates capital expenditures will total $12.0
million in fiscal 1996. Expenditures were for flight equipment, delivery
vehicles and facility improvements. The Company anticipates it will continue
to acquire flight equipment as necessary to maintain growth and continue
offering quality service to its customers.
Subsequent to the end of the quarter, the Company signed a letter of
intent to acquire a regional air courier for $3.0 million. If a final
agreement is reached, the acquisition will not only add to the Company's
revenue base, but will add ten new cities and 5,000 additional air miles each
day to the current network and is expected to provide earnings accretion as
early as fiscal 1997.
Cash flow from operating activities. For the nine months ended June
30, 1996, net cash provided by operating activities was $12.2 million due to
operating income before non-recurring, non-cash expenses of $7.2 million.
The Company anticipates that operating cash and capital expenditure
requirements will be funded by cash flow from operations and bank borrowings.
-17-
<PAGE>
AIRNET SYSTEMS, INC.
Part II - Other Information
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities. Not Applicable
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not
Applicable
Item 5. Other Information. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description
Exhibit 4 Form of Amendment to Employee Stock
Purchase Agreement, dated as of May 2,
1996, between the Company and each of
Glenn M. Miller, Charles A. Renusch,
Eric P. Roy, Guy S. King, Lincoln L.
Rutter, Kendall W. Wright and William R.
Sumser (each separate amendment is
substantially identical in all respects).
Incorporated herein by reference to
Exhibit 4.15 to the Company's Amendment
No. 1 to Form S-1 Registration Statement
(Registration No. 333-3092) filed on
May 7, 1996 ("Amendment No. 1 to Form S-1")
Exhibit 10.1 Form of Amendment to Deferred
Compensation Agreement, dated as of
May 2, 1996, between the Company and each
of Messrs. Miller, Renusch, Roy, King,
Rutter, Wright and Sumser (each separate
amendment is substantially identical in
all respects). Incorporated herein by
reference to Exhibit 10.9 to Amendment
No. 1 to Form S-1.
Exhibit 10.2 Form of Loan Agreement, dated as of
May ___, 1996, among the Company, the
banks listed therein and NBD Bank, as
agent. Incorporated herein by reference
to Exhibit 10.14 to the Company's
Amendment No. 2 to Form S-1 Registration
Statement) (Registration No. 333-3092)
filed on May 24, 1996
-18-
<PAGE>
Exhibit 10.3 AirNet Systems, Inc. 1996 Incentive Stock
Plan. Incorporated herein by reference
to Exhibit 10.10 to Amendment No. 1
Exhibit 27 Financial Data Schedule (Page 22)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the Quarter ended
June 30, 1996.
-19-
<PAGE>
Signatures
Pursuant to the requirements 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.
AIRNET SYSTEMS, INC.
Dated: August 13, 1996 By: /s/ Eric P. Roy
_____________________________________
Eric P. Roy, Executive Vice President
(Duly Authorized Officer)
(Principal Finanicial Officer)
-20-
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page No.
4 Form of Amendment to Employee Stock Purchase N/A
Agreement, dated as of May 2, 1996, between
the Company and each of Glenn M. Miller,
Charles A. Renusch, Eric P. Roy, Guy S. King,
Lincoln L. Rutter, Kendall W. Wright and
William R. Sumser (each separate amendment is
substantially identical in all respects).
Incorporated herein by reference to Exhibit
4.15 to the Company's Amendment No. 1 to
Form S-1 Registration Statement (Registration
No. 333-3092) filed on May 7, 1996
("Amendment No. 1 to Form S-1")
10.1 Form of Amendment to Deferred Compensation N/A
Agreement, dated as of May 2, 1996, between
the Company and each of Messrs. Miller,
Renusch, Roy, King, Rutter, Wright and Sumser
(each separate amendment is substantially
identical in all respects). Incorporated
herein by reference to Exhibit 10.9 to
Amendment No. 1 to Form S-1.
10.2 Form of Loan Agreement, dated as of May ___, N/A
1996, among the Company, the banks listed
therein and NBD Bank, as agent. Incorporated
herein by reference to Exhibit 10.14 to the
Company's Amendment No. 2 to Form S-1
Registration Statement )(Registration
No. 333-3092) filed on May 24, 1996
10.3 AirNet Systems, Inc. 1996 Incentive Stock N/A
Plan. Incorporated herein by reference to
Exhibit 10.10 to Amendment No. 1
27 Financial Data Schedule Page 22
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
AirNet Systems, Inc.'s Quarterly Report on Form 10-Q for the nine month period
ended June 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,225,044
<SECURITIES> 0
<RECEIVABLES> 6,945,837
<ALLOWANCES> 35,847
<INVENTORY> 4,434,639
<CURRENT-ASSETS> 30,440,356
<PP&E> 73,393,233
<DEPRECIATION> 39,293,392
<TOTAL-ASSETS> 72,146,189
<CURRENT-LIABILITIES> 6,467,199
<BONDS> 0
0
0
<COMMON> 123,178
<OTHER-SE> 63,260,812
<TOTAL-LIABILITY-AND-EQUITY> 72,146,189
<SALES> 775,590
<TOTAL-REVENUES> 55,397,011
<CGS> 707,073
<TOTAL-COSTS> 38,294,359
<OTHER-EXPENSES> 22,585,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,038,710
<INCOME-PRETAX> (6,521,668)
<INCOME-TAX> 2,023,270
<INCOME-CONTINUING> (8,544,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,544,938)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> 0
</TABLE>
